'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Quantitative Analysis

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/342/original/2020-03-11_11-02-32.png?1583892183" class="editor-image img-responsive" data-smartkarma-image-id="122342"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/590/original/2020-03-12_07-42-03.png?1583966536" class="editor-image img-responsive" data-smartkarma-image-id="122590"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>CUMULATIVE CASH FLOWS</strong> - In this third and final of our series on Japanese companies that might be compromised as the <em>Covid-19 recession</em> unfolds,  we shall look at <strong>Cumulative Cash Flows</strong>. Our cash flow model is derived from the disclosed Balance Sheets and Statements of Comprehensive Income and balances to zero for every company for every comparable period. Variations in disclosure between the audited annual <em>yuho</em> and unaudited quarterly <em>kessan tanshin</em> reports, notably when the company is reporting under the weaker IFRS standard can result in unavoidable quarter-to-quarter variations. Consequently, our analysis will focus on year-on-year changes as of the most recent quarterly disclosure irrespective of fiscal year-end.  Our review will cover six principal cash flow metrics:-</p><ul>
<li>
<strong>Operating Cash Flow</strong> - Operating Cash Flow comprises all cash flow items relating to transactions with customers and suppliers except inventory cash flows.</li>
<li>
<strong>Investing Cash Flow</strong> - Investing Cash Flow comprises cash flow to or from Fixed Assets and Inventories. Unlike GAAP Cash Flows Statements, It does not include investments in financial assets.</li>
<li>
<strong>Inventory Cash Flow</strong> - A sub-set of Investing Cash Flow, inventory Cash Flow is the change in Inventory on the Balance Sheet. </li>
<li>
<strong>Free Cash Flow</strong> - Free Cash Flow the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow.</li>
<li>
<strong>Financing Cash Flow</strong> - Financing Cash Flow comprises Debt &amp; Lease Liabilities, Investments and the taxation that is allocated to Financing Cash Flow. Debt &amp; Lease Liabilities includes changes in Short and Long-Term Debt and Lease Liabilities and Interest and Bond Issuance Expenses.' Investments' includes Interest &amp; Dividend Income, Purchases and Sales of Securities, Loans, Gains and Losses on Marketable Securities and Equity Earnings.</li>
<li><p><strong>Change in Cash - </strong>Change in Cash is the sum of Free Cash Flow, Financing Cash Flow and Shareholder Cash Flow after including Minorities &amp; Adjustments. </p></li>
</ul><p><strong>EXCLUDED</strong> - Four companies have been excluded from our review as they have substantial financial subsidiaries - <a href="https://www.smartkarma.com/entities/z-holdings-corp" target="_blank" data-smartkarma-citation="entities:19603:1" rel="noopener">Z Holdings (4689 JP)</a>, <a href="https://www.smartkarma.com/entities/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten (4755 JP)</a>, <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony (6758 JP)</a>, <a href="https://www.smartkarma.com/entities/japan-post-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:359:1" rel="noopener">Japan Post (6178 JP)</a> which distort their balance sheets. We have also excluded companies with a current market cap below ¥50b, although some exceptions have been made for abnormally large movements, such as those in <a href="https://www.smartkarma.com/entities/japan-display-inc" target="_blank" data-smartkarma-citation="entities:8280:1" rel="noopener">Japan Display (6740 JP).</a></p><p><strong><a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba (6502 JP)</a></strong>-  As an example of our analysis, Toshiba has seen the largest reduction in Cash as a percentage of market value over the last twelve months of any large-cap Japanese company. Toshiba's cash balance has declined by ¥1.4 trillion since peaking in 2019-Q2 - 114% of the current market cap. 70% of the cash generated between 2018-Q4 and 2019-Q2 has been allocated to share repurchases, dividends and cash reduction. The company's net cash remains at a healthy 51% of market value and 43% of Shareholders' Equity; however, Cumulative Operating Cash Flow will fall below zero in the current quarter. There are few additional reductions in Fixed Assets and Inventories that can be sustained without irreparable damage. <strong>The logic of buying back shares in an entity that has negative residual returns is not clear to us. Despite the potential for a TOPIX re-inclusion 'bounce', fundamentally the stock should be avoided.</strong></p><div class="content-highlight"><p>In the <strong>DETAIL </strong>Section below, we shall look at the top (or bottom) thirty large-cap companies on each of the metric above scaled by market capitalisation. </p></div>

Source • Japan AnalyticsCUMULATIVE CASH FLOWS - In this third and final of our series on Japanese companies that might be compromised as the Covid-19 recession unfolds,  we shall look at Cumulative Cash Flows. Our cash flow model is derived from the disclosed Balance Sheets and Statements of Comprehensive Income and balances to zero for every company for every comparable period. Variations in disclosure between the audited annual yuho and unaudited quarterly kessan tanshin reports, notably when the company is reporting under the weaker IFRS standard can result in unavoidable quarter-to-quarter variations. Consequently, our analysis will focus on year-on-year changes as of the most recent quarterly disclosure irrespective of fiscal year-end.  Our review will cover six principal cash flow metrics:-

Operating Cash Flow - Operating Cash Flow comprises all cash flow items relating to transactions with customers and suppliers except inventory cash flows.

Investing Cash Flow - Investing Cash Flow comprises cash flow to or from Fixed Assets and Inventories. Unlike GAAP Cash Flows Statements, It does not include investments in financial assets.

Inventory Cash Flow - A sub-set of Investing Cash Flow, inventory Cash Flow is the change in Inventory on the Balance Sheet. 

Free Cash Flow - Free Cash Flow the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow.

Financing Cash Flow - Financing Cash Flow comprises Debt &amp; Lease Liabilities, Investments and the taxation that is allocated to Financing Cash Flow. Debt &amp; Lease Liabilities includes changes in Short and Long-Term Debt and Lease Liabilities and Interest and Bond Issuance Expenses.' Investments' includes Interest &amp; Dividend Income, Purchases and Sales of Securities, Loans, Gains and Losses on Marketable Securities and Equity Earnings.
Change in Cash - Change in Cash is the sum of Free Cash Flow, Financing Cash Flow and Shareholder Cash Flow after including Minorities &amp; Adjustments. 
EXCLUDED - Four companies have been excluded from our review as they have substantial financial subsidiaries - Z Holdings (4689 JP), Rakuten (4755 JP), Sony (6758 JP), Japan Post (6178 JP) which distort their balance sheets. We have also excluded companies with a current market cap below ¥50b, although some exceptions have been made for abnormally large movements, such as those in Japan Display (6740 JP).Toshiba (6502 JP)-  As an example of our analysis, Toshiba has seen the largest reduction in Cash as a percentage of market value over the last twelve months of any large-cap Japanese company. Toshiba's cash balance has declined by ¥1.4 trillion since peaking in 2019-Q2 - 114% of the current market cap. 70% of the cash generated between 2018-Q4 and 2019-Q2 has been allocated to share repurchases, dividends and cash reduction. The company's net cash remains at a healthy 51% of market value and 43% of Shareholders' Equity; however, Cumulative Operating Cash Flow will fall below zero in the current quarter. There are few additional reductions in Fixed Assets and Inventories that can be sustained without irreparable damage. The logic of buying back shares in an entity that has negative residual returns is not clear to us. Despite the potential for a TOPIX re-inclusion 'bounce', fundamentally the stock should be avoided.In the DETAIL Section below, we shall look at the top (or bottom) thirty large-cap companies on each of the metric above scaled by market capitalisation. 

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 3: Cumulative Cash Flow

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

<div><p>The short notional in the market for the data released 10 March is US$24.94bn (up by US$1.92bn excluding FX movements) with the largest short positions in <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a>, <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a>,<span style="color: #0b0114;"><a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1:1">Canon Inc (7751 JP)</a> and <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a>.  </span></p></div><div><p>Most shorted stocks as a percentage of free float are <a href="https://www.smartkarma.com/entities/anritsu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:3700:1">Anritsu Corp (6754 JP)</a>, <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a>, <a href="https://www.smartkarma.com/entities/aruhi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:26072:1">Aruhi Corp (7198 JP)</a> and <a href="https://www.smartkarma.com/entities/tokai-carbon-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9145:1">Tokai Carbon (5301 JP)</a> while the stocks with the highest days to cover are <a href="https://www.smartkarma.com/entities/vital-ksk-holdings-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:7398:1">Vital Ksk Holdings (3151 JP)</a>, <a href="https://www.smartkarma.com/entities/aruhi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:26072:1"></a><a href="https://www.smartkarma.com/entities/katakura-industries-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:2007:1">Katakura Industries (3001 JP)</a>, <a href="https://www.smartkarma.com/entities/j-trust-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:20246:1">J Trust Co Ltd (8508 JP)</a> and <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a>. </p></div><div><p>The largest increases in short notional over the week were <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1:1">Canon Inc (7751 JP)</a>, <a href="https://www.smartkarma.com/entities/shiseido-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5718:1">Shiseido Co Ltd (4911 JP)</a> and <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:12933:1">Kao Corp (4452 JP)</a> while shorts were covered in <a href="https://www.smartkarma.com/entities/tokai-carbon-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9145:1">Tokai Carbon (5301 JP)</a>, <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a>, <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-gr" target="_blank" rel="noopener" data-smartkarma-citation="entities:217:1">Sumitomo Mitsui Financial (8316 JP)</a> and <a href="https://www.smartkarma.com/entities/fuji-heavy-industries-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5439:1">Subaru Corp (7270 JP)</a>.   <a href="https://www.smartkarma.com/entities/fuji-heavy-industries-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5439:1"></a></p></div><div><p>Sectorally, short positions increased in Consumer Discretionary (US$649m), Consumer Staples (US$522m) and Information Technology (US$368m), while shorts were covered in Financials (US$56m) and Health Care (US$26m).</p></div>

The short notional in the market for the data released 10 March is US$24.94bn (up by US$1.92bn excluding FX movements) with the largest short positions in Itochu Corp (8001 JP), Toyota Motor (7203 JP),Fast Retailing (9983 JP), Canon Inc (7751 JP) and Taiyo Yuden (6976 JP).  Most shorted stocks as a percentage of free float are Anritsu Corp (6754 JP), Taiyo Yuden (6976 JP), Aruhi Corp (7198 JP) and Tokai Carbon (5301 JP) while the stocks with the highest days to cover are Vital Ksk Holdings (3151 JP), Katakura Industries (3001 JP), J Trust Co Ltd (8508 JP) and Itochu Corp (8001 JP). The largest increases in short notional over the week were Fast Retailing (9983 JP), Canon Inc (7751 JP), Shiseido Co Ltd (4911 JP) and Kao Corp (4452 JP) while shorts were covered in Tokai Carbon (5301 JP), Itochu Corp (8001 JP), Sumitomo Mitsui Financial (8316 JP) and Subaru Corp (7270 JP).   Sectorally, short positions increased in Consumer Discretionary (US$649m), Consumer Staples (US$522m) and Information Technology (US$368m), while shorts were covered in Financials (US$56m) and Health Care (US$26m).

Spike in Shorts on Consumer Discretionary and Staples - Fast Retailing, Shiseido, Kao, FamilyMart

<div><p>The short notional in the market for the data released 3 March is US$24.60bn (up by US$388mm excluding FX movements) with the largest short positions in <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a>, <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a>, <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a>, <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1:1">Canon Inc (7751 JP)</a> and <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a>. </p></div><div><p>Most shorted stocks as a percentage of free float are <a href="https://www.smartkarma.com/entities/anritsu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:3700:1">Anritsu Corp (6754 JP)</a>, <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a>, <a href="https://www.smartkarma.com/entities/aruhi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:26072:1">Aruhi Corp (7198 JP)</a> and <a href="https://www.smartkarma.com/entities/tokai-carbon-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9145:1">Tokai Carbon (5301 JP)</a> while the stocks with the highest days to cover are <a href="https://www.smartkarma.com/entities/vital-ksk-holdings-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:7398:1">Vital Ksk Holdings (3151 JP)</a>, <a href="https://www.smartkarma.com/entities/aruhi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:26072:1"></a><a href="https://www.smartkarma.com/entities/katakura-industries-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:2007:1">Katakura Industries (3001 JP)</a>, <a href="https://www.smartkarma.com/entities/j-trust-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:20246:1">J Trust Co Ltd (8508 JP)</a> and <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a>. </p></div><div><p>The largest increases in short notional over the week were <a href="https://www.smartkarma.com/entities/tdk-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18847:1">TDK Corp (6762 JP)</a>, <a href="https://www.smartkarma.com/entities/peptidream-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:13514:1">Peptidream Inc (4587 JP)</a>, <a href="https://www.smartkarma.com/entities/t-d-holdings-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:3431:1">T&amp;D Holdings (8795 JP)</a> and <a href="https://www.smartkarma.com/entities/minebea-mitsumi-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:5032:1">Minebea Mitsumi (6479 JP)</a> while shorts were covered in <a href="https://www.smartkarma.com/entities/fuji-heavy-industries-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5439:1">Subaru Corp (7270 JP)</a>, <a href="https://www.smartkarma.com/entities/m3-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:13316:1">M3 Inc (2413 JP)</a>, <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a> and <a href="https://www.smartkarma.com/entities/advantest-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18107:1">Advantest Corp (6857 JP)</a>.   </p></div><div><p>Sectorally, short positions increased in Industrials (US$194m), Information Technology (US$63m) and Materials (US$54m), while shorts were covered in Real Estate (US$35m) and Health Care (US$19m).</p></div>

The short notional in the market for the data released 3 March is US$24.60bn (up by US$388mm excluding FX movements) with the largest short positions in Itochu Corp (8001 JP), Toyota Motor (7203 JP), Taiyo Yuden (6976 JP), Canon Inc (7751 JP) and Fast Retailing (9983 JP). Most shorted stocks as a percentage of free float are Anritsu Corp (6754 JP), Taiyo Yuden (6976 JP), Aruhi Corp (7198 JP) and Tokai Carbon (5301 JP) while the stocks with the highest days to cover are Vital Ksk Holdings (3151 JP), Katakura Industries (3001 JP), J Trust Co Ltd (8508 JP) and Itochu Corp (8001 JP). The largest increases in short notional over the week were TDK Corp (6762 JP), Peptidream Inc (4587 JP), T&amp;D Holdings (8795 JP) and Minebea Mitsumi (6479 JP) while shorts were covered in Subaru Corp (7270 JP), M3 Inc (2413 JP), Fast Retailing (9983 JP) and Advantest Corp (6857 JP).   Sectorally, short positions increased in Industrials (US$194m), Information Technology (US$63m) and Materials (US$54m), while shorts were covered in Real Estate (US$35m) and Health Care (US$19m).

Japan - Small Caps and Micro Caps With High Short Interest Free Fall

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Hitachi Construction Machinery / Event-Driven

<p>With a relatively full slate of large value takeovers in Developed Asia in the past year - often by parents but also by buyout funds - and the availability of significant credit to finance such takeovers, this Smartkarma Original insight looks at what constitutes an attractive target for takeover, and seeks to construct a framework for screening and filtering companies for further study. </p>
<p>The filtering is conducted across two basic measures which seek to answer two basic questions:</p>
<ol>
<li>What might supply look like?</li>
<li>What might demand look like?</li>
</ol>
<p>The first basic problem with creating such filters is that on the Supply side, using databases to determine whether a controlling shareholder <em>wants</em> to sell is almost a lost cause from the beginning. But the exercise throws up some interesting case studies, and it is important to understand why such screening could lead to interesting results. </p>
<p>On the demand side, it is a difficult and complicated exercise because financial data moves around, shifting through time and relative price because competitors also shift in time and price. A clear example of a company which might have been "relatively" attractive vs peers a month ago might not be after the market ructions at the end of February 2020 when this was written. Prices were, of course, lower, which means that a good screening process is dynamic, both in relative and absolute measures. It is also somewhat difficult to create a one-size-fits-all screen for attractive targets because in certain countries, certain industries (telecom, airlines, social infrastructure, defence) are covered by foreign ownership limits, other industries (banks, brokers, insurers) rarely see leveraged buyouts, and takeovers in other industries (Chinese homebuilders) are, for lack of a better word, simply off the table at certain times.</p>
<p>In addition, there are lots of ways in which companies might present themselves as attractive targets. If someone controls a company, and wants to sell it cheaply, there are lots of potential buyers who will fall all over themselves to get in line to buy it. But companies can be attractive targets because of the potential for changing profit metrics and multiples through restructuring, asset reorganisation, industry reorganisation, or simply waiting for the cycle to change. </p>
<p>Using valuation metrics with a cutoff line can be challenging because common multiples such as PER, PCFR, PBR, EV/EBITDA may ignore significant value available from longer-term securities holdings, non-operating real estate assets which are not managed in optimal fashion, etc. </p>
<p>In short, screening can only go so far. But we try.</p>
<p>At the end, we take a brief look at 10 companies from Developed Asia which show up as a result of our screening efforts. The resulting list is dominated by Japanese companies because some of the companies which show up from other countries fit the "no-go" categories above (airlines, financial companies, defence technology subject to foreign ownership limits, Chinese homebuilders subject to skepticism, etc.). Some are also clearly Emerging Asia businesses with Developed Asia listings. Screening for Emerging Asia got a few companies which are high on anyone's target list, including one which saw an unsolicited takeover approach earlier this week (end-Feb 2020), and another which has been in acquisition mode for years. </p>
<p>We find the thinking process and screening technology has thrown up some <em>previously less-than-obvious</em> candidates which deserve further work.</p>

With a relatively full slate of large value takeovers in Developed Asia in the past year - often by parents but also by buyout funds - and the availability of significant credit to finance such takeovers, this Smartkarma Original insight looks at what constitutes an attractive target for takeover, and seeks to construct a framework for screening and filtering companies for further study. 
The filtering is conducted across two basic measures which seek to answer two basic questions:

What might supply look like?
What might demand look like?

The first basic problem with creating such filters is that on the Supply side, using databases to determine whether a controlling shareholder wants to sell is almost a lost cause from the beginning. But the exercise throws up some interesting case studies, and it is important to understand why such screening could lead to interesting results. 
On the demand side, it is a difficult and complicated exercise because financial data moves around, shifting through time and relative price because competitors also shift in time and price. A clear example of a company which might have been "relatively" attractive vs peers a month ago might not be after the market ructions at the end of February 2020 when this was written. Prices were, of course, lower, which means that a good screening process is dynamic, both in relative and absolute measures. It is also somewhat difficult to create a one-size-fits-all screen for attractive targets because in certain countries, certain industries (telecom, airlines, social infrastructure, defence) are covered by foreign ownership limits, other industries (banks, brokers, insurers) rarely see leveraged buyouts, and takeovers in other industries (Chinese homebuilders) are, for lack of a better word, simply off the table at certain times.
In addition, there are lots of ways in which companies might present themselves as attractive targets. If someone controls a company, and wants to sell it cheaply, there are lots of potential buyers who will fall all over themselves to get in line to buy it. But companies can be attractive targets because of the potential for changing profit metrics and multiples through restructuring, asset reorganisation, industry reorganisation, or simply waiting for the cycle to change. 
Using valuation metrics with a cutoff line can be challenging because common multiples such as PER, PCFR, PBR, EV/EBITDA may ignore significant value available from longer-term securities holdings, non-operating real estate assets which are not managed in optimal fashion, etc. 
In short, screening can only go so far. But we try.
At the end, we take a brief look at 10 companies from Developed Asia which show up as a result of our screening efforts. The resulting list is dominated by Japanese companies because some of the companies which show up from other countries fit the "no-go" categories above (airlines, financial companies, defence technology subject to foreign ownership limits, Chinese homebuilders subject to skepticism, etc.). Some are also clearly Emerging Asia businesses with Developed Asia listings. Screening for Emerging Asia got a few companies which are high on anyone's target list, including one which saw an unsolicited takeover approach earlier this week (end-Feb 2020), and another which has been in acquisition mode for years. 
We find the thinking process and screening technology has thrown up some previously less-than-obvious candidates which deserve further work.

<div><p>The short notional in the market for the data released 25 February is US$25.03bn (up by US$955mm excluding FX movements) with the largest short positions in <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a>, <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a>, <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a>, <a href="https://www.smartkarma.com/entities/fuji-heavy-industries-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5439:1">Subaru Corp (7270 JP)</a> and <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1:1">Canon Inc (7751 JP)</a>.</p></div><div><p>Most shorted stocks as a percentage of free float are <a href="https://www.smartkarma.com/entities/anritsu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:3700:1">Anritsu Corp (6754 JP)</a>, <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a>, <a href="https://www.smartkarma.com/entities/aruhi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:26072:1">Aruhi Corp (7198 JP)</a> and <a href="https://www.smartkarma.com/entities/tokai-carbon-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9145:1">Tokai Carbon (5301 JP)</a> while the stocks with the highest days to cover are <a href="https://www.smartkarma.com/entities/vital-ksk-holdings-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:7398:1">Vital Ksk Holdings (3151 JP)</a>, <a href="https://www.smartkarma.com/entities/aruhi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:26072:1"></a><a href="https://www.smartkarma.com/entities/katakura-industries-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:2007:1">Katakura Industries (3001 JP)</a>, <a href="https://www.smartkarma.com/entities/j-trust-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:20246:1">J Trust Co Ltd (8508 JP)</a> and <a href="https://www.smartkarma.com/entities/dcm-holdings-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:13042:1">Dcm Holdings (3050 JP)</a>. <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1"></a></p></div><div><p>The largest increases in short notional over the week were <a href="https://www.smartkarma.com/entities/seven-i-holdings-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:1041:1">Seven &amp; I Holdings (3382 JP)</a>, <a href="https://www.smartkarma.com/entities/shionogi-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:19535:1">Shionogi &amp; Co (4507 JP)</a>, <a href="https://www.smartkarma.com/entities/fuji-heavy-industries-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5439:1">Subaru Corp (7270 JP)</a> and <a href="https://www.smartkarma.com/entities/advantest-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18107:1">Advantest Corp (6857 JP)</a> while shorts were covered in <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a>, <a href="https://www.smartkarma.com/entities/fanuc-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:752:1">Fanuc Corp (6954 JP)</a>, <a href="https://www.smartkarma.com/entities/m3-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:13316:1">M3 Inc (2413 JP)</a> and <a href="https://www.smartkarma.com/entities/tokai-carbon-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9145:1">Tokai Carbon (5301 JP)</a>.  <a href="https://www.smartkarma.com/entities/square-enix-holdings-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:15003:1"></a></p></div><div><p>Sectorally, short positions increased in Consumer Staples (US$283m), Consumer Discretionary (US$273m) and Health Care (US$112m).</p></div>

The short notional in the market for the data released 25 February is US$25.03bn (up by US$955mm excluding FX movements) with the largest short positions in Itochu Corp (8001 JP), Toyota Motor (7203 JP), Taiyo Yuden (6976 JP), Subaru Corp (7270 JP) and Canon Inc (7751 JP).Most shorted stocks as a percentage of free float are Anritsu Corp (6754 JP), Taiyo Yuden (6976 JP), Aruhi Corp (7198 JP) and Tokai Carbon (5301 JP) while the stocks with the highest days to cover are Vital Ksk Holdings (3151 JP), Katakura Industries (3001 JP), J Trust Co Ltd (8508 JP) and Dcm Holdings (3050 JP). The largest increases in short notional over the week were Seven &amp; I Holdings (3382 JP), Shionogi &amp; Co (4507 JP), Subaru Corp (7270 JP) and Advantest Corp (6857 JP) while shorts were covered in Taiyo Yuden (6976 JP), Fanuc Corp (6954 JP), M3 Inc (2413 JP) and Tokai Carbon (5301 JP).  Sectorally, short positions increased in Consumer Staples (US$283m), Consumer Discretionary (US$273m) and Health Care (US$112m).

Japan - Big Increase in Shorts Led by Consumer Staples and Consumer Discretionary Names

Japan

ITOCHU Corporation is a general trading firm handling textiles, wood, machinery, metals, food, chemicals, construction materials, commodities, and energy related products such as oil and gas. The Company operates around the world. Itochu diversifies by operating in satellite communication and data communication businesses.

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Itochu Corp (8001 JP)

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