Global Automotive Stocks/EV Focus/Event Driven, SC Capital

SC Capital

SC Capital has over 20 years' experience covering the global automotive industry both on the Sell Side (UBS & Morgan Stanley) and Buy Side (Och-Ziff), along with a wealth of industry contacts. 

Current focus is on electric vehicle stocks & their supply chains. Aim is to identify the winners and losers from a long/short perspective. This includes close coverage of legacy automakers as well.  

From time to time. we cover opportunistic events with stocks in the manufacturing sector, food & beverage, healthcare and tech, where we also have coverage experience.

Global Automotive Stocks/EV Focus/Event Driven

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Over 22 years covering Japanese equities on both the sell side and the buy side. 

Bottom-up Japan Equities Research

Event-Driven

<ul><li>Sharp (6753) may not be the most interesting short anymore simply because the cost of shorting is too expensive and there appears to be little risk of any earnings misses over the next several quarters. If anything, guidance for FY3/19--scheduled for release on April 27th--could be extremely bullish. </li><li>The Street is currently forecasting FY3/19 OP for Sharp at Y103bn, but the company could guide for Y110bn and aim for Y120bn. This would be 17% above consensus and put the stock on a PER of 22.5x, which isn't cheap, but it's not as outrageously overpriced as the consensus PER of 27x.</li><li>The reason this could happen is that Sharp's medium-term plan calls for OP of Y150bn in FY3/20, so unless they downgrade this plan, they're somewhat obliged to guide for somewhere between FY3/18's target of Y93bn and FY3/20's Y150bn, which could be around Y120bn. They might initially guide for between Y105bn to Y110bn (we see Y110bn as achievable per our analysis below), but this is still above consensus and not a catalyst for the stock to go down.</li><li>There are several reasons why somewhere close to this number could be achieved (namely 50% of Sharp's profits are comprised of household appliances and smartphones, which should see strong growth in FY3/19), but let's first look at the bad news, which has gotten the stock so heavily shorted.</li><li>The main source of bearishness over Sharp's stock at the moment includes Sharp having lost its contracts with Apple to supply both 3D sensor modules and LCDs for the iPhone 9 this year. Sharp says that none of this will hit profits too hard as it was all low-margin business to begin with (more details below). </li><li>But there are some positives that the Street has yet to highlight, mainly Sharp's home appliance business, which produces most of its products overseas, yet sells 60% of them in Japan. With the stronger yen, this business should be much more profitable in FY3/19 and currently makes up roughly 25% of total OP. None of the analysts on the Street even mention this point in recent reports.</li><li>The current short interest in Sharp is 27m shares, or 20 days of average daily trading volume, with 95% of the borrowed stock being utilized, according to several of the major stock loan desks we've queried. If the investors who have shorted this much of Sharp's stock expect a negative catalyst in the next quarterly results, they may have to wait a bit longer. Which is why Sharp may not be the best short at the moment.</li><li>Our gut feeling with Sharp is much like that with Nissan Motor (7201). Ever since Renault's management took the helm at Nissan, the company's cost structure came down and things became more efficient. But more importantly, the number of earnings disappointments dropped dramatically, even when industry conditions pointed towards weak earnings. To us, it sometimes felt like results were almost "magical" in the face of adversity. And this is what it's starting to feel like with Hon Hai's management of Sharp. </li></ul>

Sharp (6753) may not be the most interesting short anymore simply because the cost of shorting is too expensive and there appears to be little risk of any earnings misses over the next several quarters. If anything, guidance for FY3/19--scheduled for release on April 27th--could be extremely bullish. The Street is currently forecasting FY3/19 OP for Sharp at Y103bn, but the company could guide for Y110bn and aim for Y120bn. This would be 17% above consensus and put the stock on a PER of 22.5x, which isn't cheap, but it's not as outrageously overpriced as the consensus PER of 27x.The reason this could happen is that Sharp's medium-term plan calls for OP of Y150bn in FY3/20, so unless they downgrade this plan, they're somewhat obliged to guide for somewhere between FY3/18's target of Y93bn and FY3/20's Y150bn, which could be around Y120bn. They might initially guide for between Y105bn to Y110bn (we see Y110bn as achievable per our analysis below), but this is still above consensus and not a catalyst for the stock to go down.There are several reasons why somewhere close to this number could be achieved (namely 50% of Sharp's profits are comprised of household appliances and smartphones, which should see strong growth in FY3/19), but let's first look at the bad news, which has gotten the stock so heavily shorted.The main source of bearishness over Sharp's stock at the moment includes Sharp having lost its contracts with Apple to supply both 3D sensor modules and LCDs for the iPhone 9 this year. Sharp says that none of this will hit profits too hard as it was all low-margin business to begin with (more details below). But there are some positives that the Street has yet to highlight, mainly Sharp's home appliance business, which produces most of its products overseas, yet sells 60% of them in Japan. With the stronger yen, this business should be much more profitable in FY3/19 and currently makes up roughly 25% of total OP. None of the analysts on the Street even mention this point in recent reports.The current short interest in Sharp is 27m shares, or 20 days of average daily trading volume, with 95% of the borrowed stock being utilized, according to several of the major stock loan desks we've queried. If the investors who have shorted this much of Sharp's stock expect a negative catalyst in the next quarterly results, they may have to wait a bit longer. Which is why Sharp may not be the best short at the moment.Our gut feeling with Sharp is much like that with Nissan Motor (7201). Ever since Renault's management took the helm at Nissan, the company's cost structure came down and things became more efficient. But more importantly, the number of earnings disappointments dropped dramatically, even when industry conditions pointed towards weak earnings. To us, it sometimes felt like results were almost "magical" in the face of adversity. And this is what it's starting to feel like with Hon Hai's management of Sharp. 

Sharp May Not Be the Best Short for Awhile

Sharp Corp

Sharp May Not Be the Best Short for Awhile