Equity Analyst

Gervin Gayan

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

The Boeing Company, together with its subsidiaries, develops, produces, and markets commercial jet aircraft, as well as provides related support services to the commercial airline industry worldwide.  The Company also researches, develops, produces, modifies, and supports information, space, and defense systems, including military aircraft, helicopters and space and missile systems.

Boeing 737 Max Vs Airbus A320neo 
The increase in the oil price and price competition between airline operators (especially in the case of short- distance flights) has highlighted the need for the latest generation of fuel-efficient aircraft. Therefore, narrow bodies (single-aisle) commercial aircraft are increasingly playing a vital role in the commercial aircraft market (currently 65% -70% of the commercial aircraft order backlog is from single aisles) with Boeing’s 737 Max and Airbus’ A320neo dominating that market. 
Asia/Pacific and Europe are the top two regions for A320neo aircraft on order, while 737MAX orders are higher in North America. 
Globally, there are about 4,361 Neos on order versus 3,356 MAXs. There are more Neos than MAXs in service in Asia Pacific, Europe and Latin America, but the reverse is true in North America, the Middle East and Africa (where order numbers are low).
There are 1,665 A320neo orders and 1,582 737MAX orders with no specified region. This is either because the operating airline has not been disclosed, or because the orders are for lessors, with no operator yet identified.
The 737-order backlog currently stands at around 9 years. The backlog has only 200 orders for older models, while 95% of the order backlog comprises the 737 MAX series. The A320 backlog is 12 years (based on 2017 delivery numbers and current outstanding orders). Increases in production rates could help to ease the backlog, but problems with engine delivery work against this. The aircraft integrate specially designed next-generation engines which are built by Pratt and Whitney and CFM international (a JV between GE and Safran Aircraft Engines). 
<table class="table table-striped">
<tbody>
<tr>
<td style="text-align: center;">
Family
</td>
<td style="text-align: center;">
Old Generation
</td>
<td style="text-align: center;">
New Generation
</td>
</tr>
<tr>
<td rowspan="2" style="text-align: center;">

Boeing 737
</td>
<td style="text-align: center;">
CFM56-7B
</td>
<td rowspan="2" style="text-align: center;">
CFM LEAP 1B
</td>
</tr>
<tr>
<td style="text-align: center;">
PW6000A
</td>
</tr>
<tr>
<td rowspan="2" style="text-align: center;">

Airbus A320
</td>
<td style="text-align: center;">
CFM56-5B
</td>
<td style="text-align: center;">
CFM LEAP 1A
</td>
</tr>
<tr>
<td style="text-align: center;">
IAE V2500
</td>
<td style="text-align: center;">
PW1000G
</td>
</tr>
</tbody>
</table>
<div class="content-remarks">
Source: Company Disclosure
</div>
PW1000G Vs CFM LEAP 1A
<table class="table table-striped">
<tbody>
<tr>
<td style="text-align: center;">
PARAMETER
</td>
<td style="text-align: center;">
CFM LEAP 1A
</td>
<td style="text-align: center;">
PW1000G
</td>
</tr>
<tr>
<td>
Thrust
</td>
<td style="text-align: center;">
Up to 32,900 lbs
</td>
<td style="text-align: center;">
24,000-33,000 lbs (120.1 kN)
</td>
</tr>
<tr>
<td>
Bypass ratio
</td>
<td style="text-align: center;">
11:1
</td>
<td style="text-align: center;">
12:1
</td>
</tr>
<tr>
<td>
Architecture (stage count)
</td>
<td style="text-align: center;">
1-3-10-2-7
</td>
<td style="text-align: center;">
1-G-3-8-2-3
</td>
</tr>
<tr>
<td>
Fan diameter
</td>
<td style="text-align: center;">
78 inches (1981 mm)
</td>
<td style="text-align: center;">
81 inches (2057mm)
</td>
</tr>
<tr>
<td>
Overall length
</td>
<td style="text-align: center;">
3,400mm (estimated)
</td>
<td style="text-align: center;">
3,800mm (estimated)
</td>
</tr>
<tr>
<td>
High pressure spool RPM (N2)
</td>
<td style="text-align: center;">
15,000 (estimated)
</td>
<td style="text-align: center;">
18,000-20,000 (estimated)
</td>
</tr>
<tr>
<td>
Low pressure spool RM (N1)
</td>
<td style="text-align: center;">
4,500 (estimated)
</td>
<td style="text-align: center;">
10,500 (estimated)
</td>
</tr>
<tr>
<td>
Fan RPM
</td>
<td style="text-align: center;">
4,500 (estimated)
</td>
<td style="text-align: center;">
3,500 (estimated)
</td>
</tr>
<tr>
<td>
Overall pressure ratio
</td>
<td style="text-align: center;">
40:1
</td>
<td style="text-align: center;">
Unknown
</td>
</tr>
<tr>
<td>
Engine weight
</td>
<td style="text-align: center;">
Unknown
</td>
<td style="text-align: center;">
Unknown
</td>
</tr>
</tbody>
</table>
<div class="content-remarks">
Source: Company Disclosure
</div>

Boeing 737 Max Vs Airbus A320neo 
The increase in the oil price and price competition between airline operators (especially in the case of short- distance flights) has highlighted the need for the latest generation of fuel-efficient aircraft. Therefore, narrow bodies (single-aisle) commercial aircraft are increasingly playing a vital role in the commercial aircraft market (currently 65% -70% of the commercial aircraft order backlog is from single aisles) with Boeing’s 737 Max and Airbus’ A320neo dominating that market. 
Asia/Pacific and Europe are the top two regions for A320neo aircraft on order, while 737MAX orders are higher in North America. 
Globally, there are about 4,361 Neos on order versus 3,356 MAXs. There are more Neos than MAXs in service in Asia Pacific, Europe and Latin America, but the reverse is true in North America, the Middle East and Africa (where order numbers are low).
There are 1,665 A320neo orders and 1,582 737MAX orders with no specified region. This is either because the operating airline has not been disclosed, or because the orders are for lessors, with no operator yet identified.
The 737-order backlog currently stands at around 9 years. The backlog has only 200 orders for older models, while 95% of the order backlog comprises the 737 MAX series. The A320 backlog is 12 years (based on 2017 delivery numbers and current outstanding orders). Increases in production rates could help to ease the backlog, but problems with engine delivery work against this. The aircraft integrate specially designed next-generation engines which are built by Pratt and Whitney and CFM international (a JV between GE and Safran Aircraft Engines). 




Family


Old Generation


New Generation





Boeing 737


CFM56-7B


CFM LEAP 1B




PW6000A





Airbus A320


CFM56-5B


CFM LEAP 1A




IAE V2500


PW1000G





Source: Company Disclosure

PW1000G Vs CFM LEAP 1A




PARAMETER


CFM LEAP 1A


PW1000G




Thrust


Up to 32,900 lbs


24,000-33,000 lbs (120.1 kN)




Bypass ratio


11:1


12:1




Architecture (stage count)


1-3-10-2-7


1-G-3-8-2-3




Fan diameter


78 inches (1981 mm)


81 inches (2057mm)




Overall length


3,400mm (estimated)


3,800mm (estimated)




High pressure spool RPM (N2)


15,000 (estimated)


18,000-20,000 (estimated)




Low pressure spool RM (N1)


4,500 (estimated)


10,500 (estimated)




Fan RPM


4,500 (estimated)


3,500 (estimated)




Overall pressure ratio


40:1


Unknown




Engine weight


Unknown


Unknown





Source: Company Disclosure


737 MAX & A320neo Production Targets Will Probably Not Be Achieved Due to LEAP Engine Shortage

Mitsubishi Heavy Industries / Equity Bottom-Up

Mitsubishi Heavy Industries, Ltd. is a comprehensive heavy machinery maker. The Company manufactures machinery, ships, turbines and engines, prime movers, aircrafts, and machine parts for military and commercial use.  Mitsubishi Heavy Industries also researches and develops nuclear power plants.

1QFY19 Results Were Better, Mostly Due to the Turnaround in the Power System Segment 
Despite MHI posting flat YoY revenue of JPY906bn in 1QFY18, its OP improved to JPY31.4bn  (from JPY6.4bn in 1QFY17). However, MHI’s operating loss widened to JPY12.1bn in the Aircraft, Defence &amp; Space segment (from a JPY6.8bn loss in 1QFY17), while in the Power System segment OP improved to JPY26.8bn (the same period last year witnessed a small loss).
<table class="table table-striped">
<tbody>
<tr>
<td rowspan="2">
                 In JPYbn
</td>
<td colspan="2" style="text-align: center;">
Order Received
</td>
<td colspan="2" style="text-align: center;">
Net Sales
</td>
<td colspan="2" style="text-align: center;">
OP
</td>
</tr>
<tr>
<td style="text-align: center;">
1QFY18
</td>
<td style="text-align: center;">
1QFY19
</td>
<td style="text-align: center;">
1QFY18
</td>
<td style="text-align: center;">
1QFY19
</td>
<td style="text-align: center;">
1QFY18
</td>
<td style="text-align: center;">
1QFY19
</td>
</tr>
<tr>
<td>
Power Systems
</td>
<td style="text-align: center;">
226.8
</td>
<td style="text-align: center;">
194.4
</td>
<td style="text-align: center;">
295.1
</td>
<td style="text-align: center;">
316.6
</td>
<td style="text-align: center;">
-1.7
</td>
<td style="text-align: center;">
25.1
</td>
</tr>
<tr>
<td>
Industry &amp; Infrastructure
</td>
<td style="text-align: center;">
384.6
</td>
<td style="text-align: center;">
434
</td>
<td style="text-align: center;">
437.9
</td>
<td style="text-align: center;">
445.2
</td>
<td style="text-align: center;">
12.0
</td>
<td style="text-align: center;">
14.8
</td>
</tr>
<tr>
<td>
Aircraft, Defense &amp; Space
</td>
<td style="text-align: center;">
90.1
</td>
<td style="text-align: center;">
85.1
</td>
<td style="text-align: center;">
170.6
</td>
<td style="text-align: center;">
150.6
</td>
<td style="text-align: center;">
-6.8
</td>
<td style="text-align: center;">
-12.1
</td>
</tr>
<tr>
<td>
Others
</td>
<td style="text-align: center;">
31.9
</td>
<td style="text-align: center;">
18.6
</td>
<td style="text-align: center;">
31.6
</td>
<td style="text-align: center;">
17.8
</td>
<td style="text-align: center;">
2.0
</td>
<td style="text-align: center;">
2.7
</td>
</tr>
<tr>
<td>
Eliminations or Corporate
</td>
<td style="text-align: center;">
-31.7
</td>
<td style="text-align: center;">
-25.1
</td>
<td style="text-align: center;">
-32.2
</td>
<td style="text-align: center;">
-24.3
</td>
<td style="text-align: center;">
1.0
</td>
<td style="text-align: center;">
0.7
</td>
</tr>
<tr>
<td>
Total
</td>
<td style="text-align: center;">
701.9
</td>
<td style="text-align: center;">
707.1
</td>
<td style="text-align: center;">
903.2
</td>
<td style="text-align: center;">
906.1
</td>
<td style="text-align: center;">
6.4
</td>
<td style="text-align: center;">
31.4
</td>
</tr>
</tbody>
</table>
<div class="content-remarks">
Source: Company Disclosures
</div>

1QFY19 Results Were Better, Mostly Due to the Turnaround in the Power System Segment 
Despite MHI posting flat YoY revenue of JPY906bn in 1QFY18, its OP improved to JPY31.4bn  (from JPY6.4bn in 1QFY17). However, MHI’s operating loss widened to JPY12.1bn in the Aircraft, Defence &amp; Space segment (from a JPY6.8bn loss in 1QFY17), while in the Power System segment OP improved to JPY26.8bn (the same period last year witnessed a small loss).




                 In JPYbn


Order Received


Net Sales


OP




1QFY18


1QFY19


1QFY18


1QFY19


1QFY18


1QFY19




Power Systems


226.8


194.4


295.1


316.6


-1.7


25.1




Industry &amp; Infrastructure


384.6


434


437.9


445.2


12.0


14.8




Aircraft, Defense &amp; Space


90.1


85.1


170.6


150.6


-6.8


-12.1




Others


31.9


18.6


31.6


17.8


2.0


2.7




Eliminations or Corporate


-31.7


-25.1


-32.2


-24.3


1.0


0.7




Total


701.9


707.1


903.2


906.1


6.4


31.4





Source: Company Disclosures


MHI (JP 7011): Declining Orders and Widening Aircraft Loss Could Miss Guidance

Mitsui E&S Holdings Co., Ltd. engineers, builds, and repairs ships.  The Company also manufactures industrial machinery and equipment and builds power plants.  Mitsui Engineering & Shipbuilding also operates information systems services and real estate business.

Few Positives on MES 
<ul>
<li>Restructuring in Shipbuilding segment improving the cost structure to the point where breakeven is becoming visible</li>
<li>The potential for a recovery in shipbuilding demand in the medium term driven by tightening environmental regulations</li>
<li>A return to breakeven in the engineering segment</li>
<li>New orders for MODEC from a recovery in oil and gas investments</li>
</ul>

Few Positives on MES 

Restructuring in Shipbuilding segment improving the cost structure to the point where breakeven is becoming visible
The potential for a recovery in shipbuilding demand in the medium term driven by tightening environmental regulations
A return to breakeven in the engineering segment
New orders for MODEC from a recovery in oil and gas investments


Divestments in Ship Building, Improvement in Engineering and Outperforming MODEC to Drive Upside

DMG MORI CO., LTD. manufactures and markets machine tools and related products. The Company's product line includes numerical control (NC) and high-speed precision lathes, horizontal and vertical machining centers (MCs), and other stationary machine tools capable of performing various tasks.

Company’s 1HFY18 Results 
<a href="https://www.smartkarma.com/entities/11125" target="_blank" data-smartkarma-citation="entities:11125:1">Dmg Mori Co Ltd (6141 JP)</a> posted revenue of JPY266.1bn (+24% YoY) and OP improved sharply to JPY15.8bn (from JPY9bn in 1HFY17) in 1HFY18. The company’s profitability has improved mostly due to the increase in sales volume and a positive impact from forex in 1HFY18.
Positive Orders Prompted DMG to Revise their FY2018 Guidance
<table class="table table-striped">
<tbody>
<tr>
<td>
JPYbn
</td>
<td style="text-align: center;">
Order Intake
</td>
<td style="text-align: center;">
Revenue
</td>
<td style="text-align: center;">
OP
</td>
</tr>
<tr>
<td>
Initial Forecast
</td>
<td style="text-align: center;">
450
</td>
<td style="text-align: center;">
450
</td>
<td style="text-align: center;">
35
</td>
</tr>
<tr>
<td>
1QFY2018
</td>
<td style="text-align: center;">
470
</td>
<td style="text-align: center;">
450
</td>
<td style="text-align: center;">
35
</td>
</tr>
<tr>
<td>
1HFY2018
</td>
<td style="text-align: center;">
480
</td>
<td style="text-align: center;">
470
</td>
<td style="text-align: center;">
38
</td>
</tr>
</tbody>
</table>
<div style="text-align: left;" class="content-caption">Source: Company Disclosures </div>
<div class="content-caption">

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/060/667/original/DMG4.PNG?1534311192" class="editor-image img-responsive" data-smartkarma-image-id="60667"></figure>
<div style="text-align: left;" class="content-caption">Source: Company Disclosures</div>


 
</div>

Company’s 1HFY18 Results 
Dmg Mori Co Ltd (6141 JP) posted revenue of JPY266.1bn (+24% YoY) and OP improved sharply to JPY15.8bn (from JPY9bn in 1HFY17) in 1HFY18. The company’s profitability has improved mostly due to the increase in sales volume and a positive impact from forex in 1HFY18.
Positive Orders Prompted DMG to Revise their FY2018 Guidance




JPYbn


Order Intake


Revenue


OP




Initial Forecast


450


450


35




1QFY2018


470


450


35




1HFY2018


480


470


38




Source: Company Disclosures 



Source: Company Disclosures


 


DMG Mori (6141 JP): Improvement in Bottom-Line Could Break Its Short-Term Downtrend

OKUMA Corporation manufactures machine tools and other industrial machinery. The Company produces computerized numerically controlled (CNC) machine tools including lathes, machining centers (MCs), grinders, and drilling machines.

Company’s 1QFY18 Results 
<a href="https://www.smartkarma.com/entities/6688" target="_blank" data-smartkarma-citation="entities:6688:1">Okuma Corp (6103 JP)</a>’s revenue increased to JPY48.7bn (+32% YoY) and OP improved sharply to JPY5.9bn (from JPY3.3bn in 1QFY18) in 1QFY19.  
Geographic Revenue Breakdown in 1QFY19
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/060/089/original/Ok.png?1533756190" class="editor-image img-responsive" data-smartkarma-image-id="60089"></figure>
<div class="content-remarks">
Source: Company Disclosures
</div>
<table class="table table-striped">
<tbody>
<tr>
<td rowspan="2" style="text-align: center; width: 136px;">
 
In JPYm
</td>
<td colspan="2" style="text-align: center; width: 168px;">
1QFY18
</td>
<td colspan="2" style="text-align: center; width: 168.2px;">
1QFY19
</td>
<td rowspan="2" style="text-align: center; width: 135.8px;">

Revenue YoY
</td>
<td rowspan="2" style="text-align: center; width: 91px;">
 
OP YoY
</td>
</tr>
<tr>
<td style="text-align: center; width: 97px;">
Revenue
</td>
<td style="text-align: center; width: 71px;">
OP
</td>
<td style="text-align: center; width: 97px;">
Revenue
</td>
<td style="text-align: center; width: 71.2px;">
OP
</td>
</tr>
<tr>
<td style="width: 136px;">
Japan
</td>
<td style="text-align: center; width: 97px;">
31,364
</td>
<td style="text-align: center; width: 71px;">
2,471
</td>
<td style="text-align: center; width: 97px;">
39,202
</td>
<td style="text-align: center; width: 71.2px;">
3,777
</td>
<td style="text-align: center; width: 135.8px;">
25%
</td>
<td style="text-align: center; width: 91px;">
53%
</td>
</tr>
<tr>
<td style="width: 136px;">
The Americas
</td>
<td style="text-align: center; width: 97px;">
9,796
</td>
<td style="text-align: center; width: 71px;">
289
</td>
<td style="text-align: center; width: 97px;">
13,902
</td>
<td style="text-align: center; width: 71.2px;">
966
</td>
<td style="text-align: center; width: 135.8px;">
42%
</td>
<td style="text-align: center; width: 91px;">
234%
</td>
</tr>
<tr>
<td style="width: 136px;">
Asia-Pacific
</td>
<td style="text-align: center; width: 97px;">
6,312
</td>
<td style="text-align: center; width: 71px;">
89
</td>
<td style="text-align: center; width: 97px;">
7,754
</td>
<td style="text-align: center; width: 71.2px;">
420
</td>
<td style="text-align: center; width: 135.8px;">
23%
</td>
<td style="text-align: center; width: 91px;">
372%
</td>
</tr>
<tr>
<td style="width: 136px;">
Europe
</td>
<td style="text-align: center; width: 97px;">
4,555
</td>
<td style="text-align: center; width: 71px;">
277
</td>
<td style="text-align: center; width: 97px;">
5,736
</td>
<td style="text-align: center; width: 71.2px;">
488
</td>
<td style="text-align: center; width: 135.8px;">
26%
</td>
<td style="text-align: center; width: 91px;">
76%
</td>
</tr>
<tr>
<td style="width: 136px;">
Intersegment
</td>
<td style="text-align: center; width: 97px;">
-15,235
</td>
<td style="text-align: center; width: 71px;">
152
</td>
<td style="text-align: center; width: 97px;">
-17,889
</td>
<td style="text-align: center; width: 71.2px;">
335
</td>
<td style="text-align: center; width: 135.8px;">
17%
</td>
<td style="text-align: center; width: 91px;">
120%
</td>
</tr>
<tr>
<td style="width: 136px;">
Total
</td>
<td style="text-align: center; width: 97px;">
36,792
</td>
<td style="text-align: center; width: 71px;">
3,278
</td>
<td style="text-align: center; width: 97px;">
48,705
</td>
<td style="text-align: center; width: 71.2px;">
5,986
</td>
<td style="text-align: center; width: 135.8px;">
32%
</td>
<td style="text-align: center; width: 91px;">
83%
</td>
</tr>
</tbody>
</table>
<div class="content-remarks">
Source: Company Disclosures 
</div>
<ul>
<li>Domestic sales grew by 25% YoY due to the demand growth in automobiles and semiconductor manufacturing equipment.</li>
<li>In the US: Revenue grew by 42% YoY due to demand increase in the automobile and aircraft-related industries.</li>
<li>In Europe: Okuma increased their revenue mostly due to order increases from the automobile and aircraft sectors.</li>
<li>In Asia/Emerging Markets: Chinese demand from the electrical and precision machinery industries declined while the demand from automobiles and general machinery remain steady.</li>
</ul>

Company’s 1QFY18 Results 
Okuma Corp (6103 JP)’s revenue increased to JPY48.7bn (+32% YoY) and OP improved sharply to JPY5.9bn (from JPY3.3bn in 1QFY18) in 1QFY19.  
Geographic Revenue Breakdown in 1QFY19


Source: Company Disclosures





 
In JPYm


1QFY18


1QFY19



Revenue YoY


 
OP YoY




Revenue


OP


Revenue


OP




Japan


31,364


2,471


39,202


3,777


25%


53%




The Americas


9,796


289


13,902


966


42%


234%




Asia-Pacific


6,312


89


7,754


420


23%


372%




Europe


4,555


277


5,736


488


26%


76%




Intersegment


-15,235


152


-17,889


335


17%


120%




Total


36,792


3,278


48,705


5,986


32%


83%





Source: Company Disclosures 


Domestic sales grew by 25% YoY due to the demand growth in automobiles and semiconductor manufacturing equipment.
In the US: Revenue grew by 42% YoY due to demand increase in the automobile and aircraft-related industries.
In Europe: Okuma increased their revenue mostly due to order increases from the automobile and aircraft sectors.
In Asia/Emerging Markets: Chinese demand from the electrical and precision machinery industries declined while the demand from automobiles and general machinery remain steady.


Okuma (6103 JP): Focus on Operational Efficiency and Market Penetration

Analyst at LightStream Research covering Asian equities, along with thematic research.