Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

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.

Event-Driven

The <a href="https://www.ft.com/content/89efb01d-b5f9-427b-b779-b118cd4383f0" target="_blank" rel="noopener">FT has an article</a> out saying that the Japanese government had directed some initial feelers towards Honda and Nissan raising the possibility of a merger between the two companies. This is not especially surprising to us and we had touted the possibility earlier this year as being more plausible than it would appear on the surface. According to the FT, the idea was rather roundly shot down by both sides. This too is not particularly surprising, but we believe that while now is not the ideal time for a merger, it is one of the few options which could help the companies regain vigour… if done correctly, which will be difficult.

The FT has an article out saying that the Japanese government had directed some initial feelers towards Honda and Nissan raising the possibility of a merger between the two companies. This is not especially surprising to us and we had touted the possibility earlier this year as being more plausible than it would appear on the surface. According to the FT, the idea was rather roundly shot down by both sides. This too is not particularly surprising, but we believe that while now is not the ideal time for a merger, it is one of the few options which could help the companies regain vigour… if done correctly, which will be difficult.

Equity Bottom-Up

Following the unveiling of the Leader-Follower strategy for the Alliance, Nissan reported FY03/20 results today with OP undershooting its +¥85.0bn target to hit -¥40.5bn and a further ¥603bn in restructuring expenses being booked on top of that. While the numbers were poor, they were expectedly poor and if anything, the large restructuring charge simply makes it easier to put up more respectable numbers next FY. The financial condition was also concern but FCF turned positive on a quarterly basis and the company took pains to repeatedly tress that it had ample liquidity.

Following the unveiling of the Leader-Follower strategy for the Alliance, Nissan reported FY03/20 results today with OP undershooting its +¥85.0bn target to hit -¥40.5bn and a further ¥603bn in restructuring expenses being booked on top of that. While the numbers were poor, they were expectedly poor and if anything, the large restructuring charge simply makes it easier to put up more respectable numbers next FY. The financial condition was also concern but FCF turned positive on a quarterly basis and the company took pains to repeatedly tress that it had ample liquidity.

Nissan – Leader Following Into 20% Capacity Cuts

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Les Echos, the French media outlet with probably the most access to Bercy when it comes to <a href="https://www.smartkarma.com/entities/renault-sa" target="_blank" data-smartkarma-citation="entities:21536:1" rel="noopener">Renault SA (RNO FP)</a>/government/Alliance news, but also occasionally seen as the avenue for floating trial balloons, <a href="https://www.lesechos.fr/industrie-services/automobile/exclusif-renault-le-scenario-dune-entree-de-mitsubishi-corp-au-capital-sur-la-table-1189255" target="_blank" rel="noopener">reports</a> this morning that among the possible methods for putting the Alliance back on track would be to have <a href="https://www.smartkarma.com/entities/mitsubishi-corp" target="_blank" data-smartkarma-citation="entities:20668:1" rel="noopener">Mitsubishi Corp (8058 JP)</a> buy a 10% stake in Renault. 
This is quite along the lines of what I have long suggested for the past couple of years. There are good reasons for this. One is that <a href="https://www.smartkarma.com/entities/nissan-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:72:1" rel="noopener">Nissan Motor (7201 JP)</a>'s 15% stake in Renault doesn't vote.  Another is that Mitsubishi Corp was effectively banished from control of <a href="https://www.smartkarma.com/entities/mitsubishi-motors-corp" target="_blank" data-smartkarma-citation="entities:794:1" rel="noopener">Mitsubishi Motors (7211 JP)</a> in 2016 after the third major scandal in 15 years practically necessitated a governance rescue. At the time, I proposed it would be Nissan and sure enough...
The goal here would be to effectively increase Japanese capital control of Renault so that there would be more seats on the board who could act against French state (l'APE) whim, and who could, in a pinch, sell a block to Nissan so Nissan would own 25% and allow them to block Renault's voting rights in Nissan. For Renault it would give them a different large holder near but not in the Alliance. 
Renault shares jumped 7% in the five minutes after the article came out. The shares still trade at a tiny fraction of book value. 
What remains odd is that Nissan - Renault's partner and the more profitable carmaker over the past nearly 20 years since the Renault capital injection into Nissan - still can't vote its shares. But an outside Japanese trading company would buy 10% and make it all better because they had voting rights? I think this is an interesting step in the right direction, but not all the way there by any stretch. 
<div class="content-highlight">
There is one relatively easy technical construction of capital holding that Renault could undertake to make life easier all around. It would not require Renault selling Nissan shares cheaply, and it would not require anyone to put up any more capital. Renault would keep the economic interest in its full stake, but doing this would get Nissan the vote on its Renault shares, making the entire Alliance cross-holding construct much more equitable.
I remain surprised they have not done so yet. 
As it is, I think the idea of MitCorp buying 10% of Renault is an interesting step in the right direction, but it is not all the way there by any stretch.
The OTHER step noted above would be all the way there.
</div>
As always, more below the fold.

Les Echos, the French media outlet with probably the most access to Bercy when it comes to Renault SA (RNO FP)/government/Alliance news, but also occasionally seen as the avenue for floating trial balloons, reports this morning that among the possible methods for putting the Alliance back on track would be to have Mitsubishi Corp (8058 JP) buy a 10% stake in Renault. 
This is quite along the lines of what I have long suggested for the past couple of years. There are good reasons for this. One is that Nissan Motor (7201 JP)'s 15% stake in Renault doesn't vote.  Another is that Mitsubishi Corp was effectively banished from control of Mitsubishi Motors (7211 JP) in 2016 after the third major scandal in 15 years practically necessitated a governance rescue. At the time, I proposed it would be Nissan and sure enough...
The goal here would be to effectively increase Japanese capital control of Renault so that there would be more seats on the board who could act against French state (l'APE) whim, and who could, in a pinch, sell a block to Nissan so Nissan would own 25% and allow them to block Renault's voting rights in Nissan. For Renault it would give them a different large holder near but not in the Alliance. 
Renault shares jumped 7% in the five minutes after the article came out. The shares still trade at a tiny fraction of book value. 
What remains odd is that Nissan - Renault's partner and the more profitable carmaker over the past nearly 20 years since the Renault capital injection into Nissan - still can't vote its shares. But an outside Japanese trading company would buy 10% and make it all better because they had voting rights? I think this is an interesting step in the right direction, but not all the way there by any stretch. 

There is one relatively easy technical construction of capital holding that Renault could undertake to make life easier all around. It would not require Renault selling Nissan shares cheaply, and it would not require anyone to put up any more capital. Renault would keep the economic interest in its full stake, but doing this would get Nissan the vote on its Renault shares, making the entire Alliance cross-holding construct much more equitable.
I remain surprised they have not done so yet. 
As it is, I think the idea of MitCorp buying 10% of Renault is an interesting step in the right direction, but it is not all the way there by any stretch.
The OTHER step noted above would be all the way there.

As always, more below the fold.

Renault-Nissan-MitMot Alliance: MitCorp to Buy 10% of Renault? There's An Easier Way

'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/000/121/977/original/2020-03-09_14-29-36.png?1583731808" class="editor-image img-responsive" data-smartkarma-image-id="121977"></figure><div class="content-caption">Source • Stoxx.com</div>ALTMAN'S Z-SCORE - Dr Edward Altman's Z-Score has been in use for over 50 years as a statistical model to calculate the probability of bankruptcy which built on the work of William Beaver and R.A. Fisher. Altman's original article (attached below) was published in the September 1968 issue of the Journal of Finance when he was an assistant professor of finance at NYU Stern.  The 'classic' Z-Score sampled publically-traded manufacturing companies. Later versions were formulated for private companies, non-manufacturing companies and emerging markets.  The model is between 80% and 90% accurate in predicting bankruptcy one year ahead of the event, while the rate of false positives has been between 15% and 20%.APPLICATION TO JAPAN - We have been using Altman Z-Scores in Japan since the mid-1980s. We have found the Scores to be reasonably predictive, as has been confirmed by several academic papers, including  <a href="https://www.semanticscholar.org/paper/A-Model-of-Bankruptcy-Prediction%3A-Calibration-of/5565168f75b578ba28115ef314acbdd387f82483" target="_blank" rel="noopener">Gurau (2013)</a>. The persistence of a large number of 'zombie' companies supported by banks or keiretsu 'relatives' has, however, reduced the overall 'hit' rate for larger listed companies. The following charts show a timeline of the Altman Z-Score and Market Capitalisation for several memorable Japanese corporate bankruptcies. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/005/original/2020-03-09_15-53-11.png?1583736804" class="editor-image img-responsive" data-smartkarma-image-id="122005"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/006/original/2020-03-09_15-54-52.png?1583736903" class="editor-image img-responsive" data-smartkarma-image-id="122006"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/007/original/2020-03-09_15-56-58.png?1583737032" class="editor-image img-responsive" data-smartkarma-image-id="122007"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/009/original/2020-03-09_15-59-08.png?1583737161" class="editor-image img-responsive" data-smartkarma-image-id="122009"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/011/original/2020-03-09_16-03-28.png?1583737425" class="editor-image img-responsive" data-smartkarma-image-id="122011"></figure><div class="content-caption">Source • Japan Analytics</div><div class="content-highlight">This Insight is the second part of a three-part series attempting to highlight those Japanese companies that at the highest risk from the 2020 Covid-19 recession. The first focused on the<a href="https://www.smartkarma.com/insights/japan-who-s-swimming-naked-part-1-audit-score" target="_blank" data-smartkarma-citation="insights:37265" rel="noopener">Audit Score</a>, while a forthcoming Insight will look at Cumulative Cash Flows.</div>

Source • Stoxx.comALTMAN'S Z-SCORE - Dr Edward Altman's Z-Score has been in use for over 50 years as a statistical model to calculate the probability of bankruptcy which built on the work of William Beaver and R.A. Fisher. Altman's original article (attached below) was published in the September 1968 issue of the Journal of Finance when he was an assistant professor of finance at NYU Stern.  The 'classic' Z-Score sampled publically-traded manufacturing companies. Later versions were formulated for private companies, non-manufacturing companies and emerging markets.  The model is between 80% and 90% accurate in predicting bankruptcy one year ahead of the event, while the rate of false positives has been between 15% and 20%.APPLICATION TO JAPAN - We have been using Altman Z-Scores in Japan since the mid-1980s. We have found the Scores to be reasonably predictive, as has been confirmed by several academic papers, including  Gurau (2013). The persistence of a large number of 'zombie' companies supported by banks or keiretsu 'relatives' has, however, reduced the overall 'hit' rate for larger listed companies. The following charts show a timeline of the Altman Z-Score and Market Capitalisation for several memorable Japanese corporate bankruptcies. Source • Japan AnalyticsThis Insight is the second part of a three-part series attempting to highlight those Japanese companies that at the highest risk from the 2020 Covid-19 recession. The first focused on theAudit Score, while a forthcoming Insight will look at Cumulative Cash Flows.

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 2: Altman Z-Score

Several pieces of news have broken regarding Nissan and its alliance partner Renault, pointing to a rebalancing of cross shareholdings, a friendlier future and potentially the invitation of FCA into the alliance.<ul>
<li>Nissan’s new CEO, COO and deputy COO appointments are generally pro-Renault with both Makoto Uchida and Ashwani Gupta having experience working at Renault and alliance member firms.</li>
<li>The leak that Renault is looking to oust CEO Thierry Bollore, who is reportedly not thought of positively in the Nissan camp, also lays the table for a cross shareholding rebalance.</li>
<li>The “whistle-blower” in the Ghosn case, Hari Nada, has seen his role diminished after he prominently featured in a list of executives who had engaged in varying degrees of misconduct.</li>
<li>In combination, the moves point to a true cleaning of the house from the Ghosn era and set the stage for a fresh path forward for both Nissan and Renault.</li>
</ul>

Several pieces of news have broken regarding Nissan and its alliance partner Renault, pointing to a rebalancing of cross shareholdings, a friendlier future and potentially the invitation of FCA into the alliance.
Nissan’s new CEO, COO and deputy COO appointments are generally pro-Renault with both Makoto Uchida and Ashwani Gupta having experience working at Renault and alliance member firms.
The leak that Renault is looking to oust CEO Thierry Bollore, who is reportedly not thought of positively in the Nissan camp, also lays the table for a cross shareholding rebalance.
The “whistle-blower” in the Ghosn case, Hari Nada, has seen his role diminished after he prominently featured in a list of executives who had engaged in varying degrees of misconduct.
In combination, the moves point to a true cleaning of the house from the Ghosn era and set the stage for a fresh path forward for both Nissan and Renault.


Nissan: Alliance Leadership Changes Point to Renault Stake Reduction but Revival of Alliance

France

Renault SA designs, manufactures, markets, and repairs passenger cars and light commercial vehicles. The Company also provides financing and service solutions, including credit for new and used vehicles.

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Renault SA (RNO FP)

Revisiting Our Nissan-Honda Merger Idea

The FT has an article out saying that the Japanese government had directed some initial feelers towards Honda and Nissan raising the possibility of...

Mio Kato

Nissan – Leader Following Into 20% Capacity Cuts

Following the unveiling of the Leader-Follower strategy for the Alliance, Nissan reported FY03/20 results today with OP undershooting its +¥85.0bn...

Mio Kato

Renault-Nissan-MitMot Alliance: MitCorp to Buy 10% of Renault? There's An Easier Way

Les Echos, the French media outlet with probably the most access to Bercy when it comes to Renault SA (RNO FP)/government/Alliance news, but also...

Travis Lundy

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 2: Altman Z-Score

ALTMAN'S Z-SCORE - Dr Edward Altman's Z-Score has been in use for over 50 years as a statistical model to calculate the probability of bankruptcy...

Campbell Gunn

Nissan: Alliance Leadership Changes Point to Renault Stake Reduction but Revival of Alliance

Several pieces of news have broken regarding Nissan and its alliance partner Renault, pointing to a rebalancing of cross shareholdings, a...

Mio Kato

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