Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

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

Japanese convenience store chain <a href="https://www.smartkarma.com/entities/lawson-inc" target="_blank" data-smartkarma-citation="entities:1040:1" rel="noopener">Lawson Inc (2651 JP)</a> holds the lead among foreign-owned convenience store chains and the fifth place overall in the Chinese convenience store market. As of August 2020, Lawson had around 2,854 convenience stores in China.It was <a href="https://asia.nikkei.com/Business/Retail/Lawson-tests-next-step-of-convenience-store-evolution-in-China" target="_blank" rel="noopener">reported</a> yesterday that Lawson’s Chinese business is on track to post its first operating profit this fiscal year after a string of losses.

Japanese convenience store chain Lawson Inc (2651 JP) holds the lead among foreign-owned convenience store chains and the fifth place overall in the Chinese convenience store market. As of August 2020, Lawson had around 2,854 convenience stores in China.It was reported yesterday that Lawson’s Chinese business is on track to post its first operating profit this fiscal year after a string of losses.

Lawson’s China Business: Turning Profitable, Though Years Away From a Significant Contribution

Event-Driven

<a href="https://www.smartkarma.com/entities/seven-i-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:1041:1" rel="noopener">Seven &amp; I Holdings (3382 JP)</a>, the largest convenience store chain in America, announced last month (02/08/2020) that they have agreed to acquire Marathon Petroleum’s Speedway petrol stations business for $21 billion, five months after the initial deal was put on hold in the midst of the coronavirus crisis.Seven &amp; I’s share price hit a new five year low of <a target="_blank">¥3,052 </a>per share immediately following the announcement, falling 5.6% from the March 2020 COVID-19 sell off low of ¥3,232 per share.The share price has since increased 9.1% from the five-year low level and currently trades 3.0% above the March 2020 COVID-19 sell off low level. Moreover, Seven &amp; I is currently trading at 6.46x consensus FY+2 EV/OP and 11.83x FY+2 PE, 9% and 1% above the respective five-year low multiples. Although these low multiples could be somewhat misleading as it excludes the impact of the Speedway acquisition, our adjusted FY+2 EV/OP multiples are still 7.6-16.9% lower than Seven &amp; I’s past five year median multiple.

Seven &amp; I Holdings (3382 JP), the largest convenience store chain in America, announced last month (02/08/2020) that they have agreed to acquire Marathon Petroleum’s Speedway petrol stations business for $21 billion, five months after the initial deal was put on hold in the midst of the coronavirus crisis.Seven &amp; I’s share price hit a new five year low of ¥3,052 per share immediately following the announcement, falling 5.6% from the March 2020 COVID-19 sell off low of ¥3,232 per share.The share price has since increased 9.1% from the five-year low level and currently trades 3.0% above the March 2020 COVID-19 sell off low level. Moreover, Seven &amp; I is currently trading at 6.46x consensus FY+2 EV/OP and 11.83x FY+2 PE, 9% and 1% above the respective five-year low multiples. Although these low multiples could be somewhat misleading as it excludes the impact of the Speedway acquisition, our adjusted FY+2 EV/OP multiples are still 7.6-16.9% lower than Seven &amp; I’s past five year median multiple.

Speedway Acquisition: Buy the Dip as Valuation Falls Near Five-Year Low

Expert on Japan Retail and Consumer Markets, JapanConsuming

Michael Causton

Expert on Japan Retail and Consumer Markets

Real Insight on Japanese Consumer Markets

JapanConsuming

JapanConsuming is a specialist research firm producing intelligence on Japanese retail and consumer markets. Founded in 2000, JapanConsuming has become the leading provider of insights on Japanese retailers and consumer trends to retailers, brands, government agencies and investors. As well as a highly regarded monthly report on the market, JapanConsuming produces in-depth reports on retail sectors, seminars on key trends and telephone consulting to investors on trends and retailers.

JapanConsuming was founded by Michael Causton and Roy Larke. 

Thematic (Sector/Industry)

At least until the Covid-19 crisis hit Japan in January, the majority of retailers were gearing up to announce yet another really good year of financial results for FY2019-20.
Even with the crisis, results were generally better than for FY2018 – although there are big variations by sector.
Those differences are more or less what we’ve come to expect, with traditional formats like department stores continuing to struggle, while those formats that have adopted modern management are doing well.
The following is an in-depth review of Japan's retail sector, providing:
<ul>
<li>An overview of consumer demand and retail performance</li>
<li>Format by format reviews showing growth and profit performance across all the main formats: convenience stores, supermarkets, GMS, consumer electronics, drugstores, homecentres, department stores, apparel, home and other specialty  formats.</li>
<li>Rankings:
<ul>
<li>Market share and size by sector/format</li>
<li>By sales for all retailers with sales over ¥250 billion</li>
<li>By gross and operating margins, split by format and category.</li>
</ul>
</li>
</ul>
As this is an in-depth insight, the review is split into two parts to make it easier to read.  This is Part II which provides snapshot reviews of each format/sector. <a href="https://www.smartkarma.com/insights/the-japan-retail-review-winners-and-losers-in-japanese-retailing-part-i" target="_blank" rel="noopener">Part I, which provides a quick overview of all retailing, can be read here</a>.

At least until the Covid-19 crisis hit Japan in January, the majority of retailers were gearing up to announce yet another really good year of financial results for FY2019-20.
Even with the crisis, results were generally better than for FY2018 – although there are big variations by sector.
Those differences are more or less what we’ve come to expect, with traditional formats like department stores continuing to struggle, while those formats that have adopted modern management are doing well.
The following is an in-depth review of Japan's retail sector, providing:

An overview of consumer demand and retail performance
Format by format reviews showing growth and profit performance across all the main formats: convenience stores, supermarkets, GMS, consumer electronics, drugstores, homecentres, department stores, apparel, home and other specialty  formats.
Rankings:

Market share and size by sector/format
By sales for all retailers with sales over ¥250 billion
By gross and operating margins, split by format and category.



As this is an in-depth insight, the review is split into two parts to make it easier to read.  This is Part II which provides snapshot reviews of each format/sector. Part I, which provides a quick overview of all retailing, can be read here.

Japan Retail Review 2019-20 Part II: A Sector by Sector Review of Winners and Losers

<a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" data-smartkarma-citation="entities:18448:1" rel="noopener">Itochu Corp (8001 JP)</a> has completed its buyout of Familymart (see <a href="https://www.smartkarma.com/profiles/travis-lundy" target="_blank" data-smartkarma-citation="accounts:25" rel="noopener">Travis Lundy's</a> insights <a href="https://www.smartkarma.com/insights/itochu-gets-the-famima-hunnypot-and-now-things-get-funky" target="_blank" rel="noopener">here</a>, <a href="https://www.smartkarma.com/insights/itochu-haz-opinionz-about-familymart" target="_blank" rel="noopener">here</a>, <a href="https://www.smartkarma.com/insights/japan-needs-more-cowbell" target="_blank" rel="noopener">here</a> and <a href="https://www.smartkarma.com/insights/the-amended-familymart-document-is-a-must-read-for-investor-stewards" target="_blank" rel="noopener">here</a>). Itochu has clearly taken full advantage of a depressed Familymart share price and an opportunity for the trading house to begin more adventurous diversification of the convenience store business.
This will include moving into more types of food format, including its nascent hybrid store collaborations with supermarkets and drugstores and an upcoming push into e-commerce, but will also mean more integration with Itochu's food wholesale business – which when combined is bigger than that of its arch rival, <a href="https://www.smartkarma.com/entities/mitsubishi-corp" target="_blank" data-smartkarma-citation="entities:20668:1" rel="noopener">Mitsubishi Corp (8058 JP).</a>
Mitsubishi and Itochu have been playing catch-up with each other for the last two decades in a race to build Japan's first integrated food wholesale-retail businesses.
Now that Itochu has succeeded in its bid, the question remains whether Mitsubishi will now look to consolidate its own food retail assets like <a href="https://www.smartkarma.com/entities/lawson-inc" target="_blank" data-smartkarma-citation="entities:1040:1" rel="noopener">Lawson Inc (2651 JP)</a> and <a href="https://www.smartkarma.com/entities/life-corp" target="_blank" data-smartkarma-citation="entities:1743:1" rel="noopener">Life Corp (8194 JP).</a>

Itochu Corp (8001 JP) has completed its buyout of Familymart (see Travis Lundy's insights here, here, here and here). Itochu has clearly taken full advantage of a depressed Familymart share price and an opportunity for the trading house to begin more adventurous diversification of the convenience store business.
This will include moving into more types of food format, including its nascent hybrid store collaborations with supermarkets and drugstores and an upcoming push into e-commerce, but will also mean more integration with Itochu's food wholesale business – which when combined is bigger than that of its arch rival, Mitsubishi Corp (8058 JP).
Mitsubishi and Itochu have been playing catch-up with each other for the last two decades in a race to build Japan's first integrated food wholesale-retail businesses.
Now that Itochu has succeeded in its bid, the question remains whether Mitsubishi will now look to consolidate its own food retail assets like Lawson Inc (2651 JP) and Life Corp (8194 JP).

Familymart: What's Next? And Will Mitsubishi React?

Regardless of the performance disparity between Nikkei and Topix during August 2020, which favoured <a href="https://www.smartkarma.com/entities/lawson-inc" target="_blank" data-smartkarma-citation="entities:1040:1" rel="noopener">Lawson Inc (2651 JP)</a>, <a href="https://www.smartkarma.com/entities/seven-i-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:1041:1" rel="noopener">Seven &amp; I Holdings (3382 JP)</a> outperformed Lawson by 10 percentage points after the announcement of the acquisition of Marathon Petroleum’s Speedway petrol stations business.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/156/397/original/1.png?1598953777" class="editor-image img-responsive" data-smartkarma-image-id="156397"></figure>Previously, we suggested <a href="https://www.smartkarma.com/insights/japan-convenience-store-pair-trade-long-lawson-short-seven-i" target="_blank" rel="noopener">Long Lawson/​Short Seven &amp; I</a> in June 2020 and yielded 10% market-neutral returns as the price ratio declined to minus two times the standard deviation of the 90-day average ratio.The recent divergence in share price performance between Seven &amp; I and Lawson has created a similar opportunity. However, we feel the tables have turned and the risk rewards of a long-short pair trade is currently not as attractive as it appears on the surface.

Regardless of the performance disparity between Nikkei and Topix during August 2020, which favoured Lawson Inc (2651 JP), Seven &amp; I Holdings (3382 JP) outperformed Lawson by 10 percentage points after the announcement of the acquisition of Marathon Petroleum’s Speedway petrol stations business.Previously, we suggested Long Lawson/​Short Seven &amp; I in June 2020 and yielded 10% market-neutral returns as the price ratio declined to minus two times the standard deviation of the 90-day average ratio.The recent divergence in share price performance between Seven &amp; I and Lawson has created a similar opportunity. However, we feel the tables have turned and the risk rewards of a long-short pair trade is currently not as attractive as it appears on the surface.

Japan

LAWSON, INC. operates a chain of convenience stores in Japan. The Company sells a variety of products including fast food, beverages, snacks, magazines, newspapers, and sundry goods.

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Lawson Inc (2651 JP)

Lawson’s China Business: Turning Profitable, Though Years Away From a Significant Contribution

Japanese convenience store chain Lawson holds the lead among foreign-owned convenience store chains and the fifth place overall in the Chinese...

Oshadhi Kumarasiri

Speedway Acquisition: Buy the Dip as Valuation Falls Near Five-Year Low

$seven & i, the largest convenience store chain in America, announced last month (02/08/2020) that they have agreed to acquire Marathon...

Oshadhi Kumarasiri

Japan Retail Review 2019-20 Part II: A Sector by Sector Review of Winners and Losers

At least until the Covid-19 crisis hit Japan in January, the majority of retailers were gearing up to announce yet another really good year of...

Michael Causton

Familymart: What's Next? And Will Mitsubishi React?

Itochu initiated a buyout for an additional 10% of Familymart shares over the summer. The move is widely seen as Itochu taking full advantage of a...

Michael Causton

Seven & I/Lawson: Pair Trade Idea

Regardless of the performance disparity between Nikkei and Topix during August 2020, which favoured Lawson, Seven & I outperformed Lawson by 10pp.

Oshadhi Kumarasiri

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