Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<a href="https://www.smartkarma.com/entities/toyota-industries-corp" target="_blank" data-smartkarma-citation="entities:4500:1" rel="noopener">Toyota Industries (6201 JP)</a> is up 24% in the past three months compared to ~5% for 8.5%-held <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" data-smartkarma-citation="entities:73:1" rel="noopener">Toyota Motor (7203 JP)</a> and ~6% for the TOPIX.
As a result, the implied stub is at levels only (briefly) surpassed in 2H17 and 1Q2018.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/164/055/original/image_67435027051602142877061.png?1602142878" class="editor-image img-responsive" data-smartkarma-image-id="164055"></figure>
<div class="content-caption">Source: CapIQ. Lines for 6201 &amp; 7203 are base 100 from 10 years ago</div>
The stub expansion is likely driven by demand for materials handling equipment, such as forklifts, which have been on a progressive growth trail recently. TICO is a global leader in forklifts and shares of <a href="https://www.smartkarma.com/entities/kion-group-ag" target="_blank" data-smartkarma-citation="entities:21659:1" rel="noopener">KION Group AG (KGX GR)</a>, a key competitor, are up 36%/85% in the past three/six months.
Yet a closer inspection of earnings does not support TICO's recent outperformance - unless the market is assigning a significantly high valuation for the stub ops. I think the recent movement in TICO is unwarranted, and recommend an unwind trade.
As always, more below the fold.

Toyota Industries (6201 JP) is up 24% in the past three months compared to ~5% for 8.5%-held Toyota Motor (7203 JP) and ~6% for the TOPIX.
As a result, the implied stub is at levels only (briefly) surpassed in 2H17 and 1Q2018.

Source: CapIQ. Lines for 6201 &amp; 7203 are base 100 from 10 years ago
The stub expansion is likely driven by demand for materials handling equipment, such as forklifts, which have been on a progressive growth trail recently. TICO is a global leader in forklifts and shares of KION Group AG (KGX GR), a key competitor, are up 36%/85% in the past three/six months.
Yet a closer inspection of earnings does not support TICO's recent outperformance - unless the market is assigning a significantly high valuation for the stub ops. I think the recent movement in TICO is unwarranted, and recommend an unwind trade.
As always, more below the fold. 

Toyota Industries (6201 JP): Trading Rich Vs Toyota Motors

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

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.

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/033/original/2020-09-15_10-23-17.png?1600133037" class="editor-image img-responsive" data-smartkarma-image-id="159033"></figure><div class="content-caption">Source for all charts &amp; tables: Japan Analytics</div>THE BUFFETT TRADE - Much has already written on <a href="https://www.smartkarma.com/entities/berkshire-hathaway-inc-cl-b" target="_blank" data-smartkarma-citation="entities:8635:1" rel="noopener">Berkshire Hathaway</a>'s purchase of stakes in Japan's sogo shosha, including on this <a href="https://www.smartkarma.com/insights/a-quick-look-at-the-buffet-trade-and-the-most-obvious-follow-ons" target="_blank" data-smartkarma-citation="insights:43125" rel="noopener">platform</a>. The Japanese trading houses have a long and proud tradition and continue to attract the best talent from at home and abroad. In many respects, they have similarities with BH given their long-term approach to investing and focus on free cash flow generation. The differences are as striking, particularly the exposure to commodities and Asia, and the implications for both BH and Japan are profound.In this DETAIL section, we examine: -<ul>
<li>the macro 'logic' driving these investments,</li>
<li>a more appropriate analytical and valuation methodology for these companies</li>
<li>the historically most-correlated peer groups and companies from both a technical and fundamental perspective if this trade were to be applied more broadly to the Japanese market. </li>
</ul><div class="content-highlight">We can summarise our approach to understanding the rationale behind the Buffett trade in the chart below. The sogo shosha are, in aggregate, significant generators of Residual Comprehensive Income, particularly relative to their current market valuations. Priced at a historically low 0.93x book, Japan's trading houses are one of the world's better deep value trades.</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/053/original/2020-09-15_13-42-01.png?1600144936" class="editor-image img-responsive" data-smartkarma-image-id="159053"></figure>

Source for all charts &amp; tables: Japan AnalyticsTHE BUFFETT TRADE - Much has already written on Berkshire Hathaway's purchase of stakes in Japan's sogo shosha, including on this platform. The Japanese trading houses have a long and proud tradition and continue to attract the best talent from at home and abroad. In many respects, they have similarities with BH given their long-term approach to investing and focus on free cash flow generation. The differences are as striking, particularly the exposure to commodities and Asia, and the implications for both BH and Japan are profound.In this DETAIL section, we examine: -
the macro 'logic' driving these investments,
a more appropriate analytical and valuation methodology for these companies
the historically most-correlated peer groups and companies from both a technical and fundamental perspective if this trade were to be applied more broadly to the Japanese market. 
We can summarise our approach to understanding the rationale behind the Buffett trade in the chart below. The sogo shosha are, in aggregate, significant generators of Residual Comprehensive Income, particularly relative to their current market valuations. Priced at a historically low 0.93x book, Japan's trading houses are one of the world's better deep value trades.

🇯🇵 JAPAN • Analysing The "Buffett Trade", Valuing the Sogo Shosha & The Return of Asian Inflation

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/153/689/original/2020-08-20_08-32-43.png?1597879991" class="editor-image img-responsive" data-smartkarma-image-id="153689"></figure><div class="content-caption">All charts sourced from Japan Analytics.</div>BRUTAL - The summer earnings 'season' reflected the broadening impact of COVID-19 on the Japanese and world economies, however, in terms of profit decline, the pace is more moderate than in the previous quarter. Japanese corporates are starting to engage in aggressive cost controls. As a result, an with no signs of virus abating or a vaccine being readily available, earnings will continue to decline in the current quarter. We have yet to reach a low point in this earnings cycle. Many companies delayed making initial forecasts for the current year. As that deficiency is gradually remedied, earnings forecasts are leading trailing results to the downside. The 'gap' for operating profits is ¥5.7 trillion, or 13%. A similar percentage fall applies to net income. Operating income is forecast to be 41% below the peak level of 2019; for net income, the decline is 57%. The aggregate forecast operating margin of 4.8%% is 294 bps lower than the peak, while the forecast net margin is 318 bps lower at 2.67%. If achieved, this outcome will exceed that of the 2008/9 financial crisis when the aggregate was negative. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/153/694/original/2020-08-20_09-02-34.png?1597881766" class="editor-image img-responsive" data-smartkarma-image-id="153694"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/153/695/original/2020-08-20_09-03-07.png?1597881801" class="editor-image img-responsive" data-smartkarma-image-id="153695"></figure>TTM RESULTS &amp; FORECASTS - Using trailing-twelve-month data to smooth out the seasonality in earnings, TTM operating income is 29% lower year-on-year on a 6% decline in sales. Running the same comparison using published forecasts, operating profit expectations are 40% lower than a year ago and revenues 10% lower.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/153/727/original/2020-08-20_10-57-21.png?1597888653" class="editor-image img-responsive" data-smartkarma-image-id="153727"></figure>DAMN THE TORPEDOES - Our scoring methodology tracks all quarterly results since 2003 and every annual and interim forecast made since 2013. The lines above represent the cap-weighted aggregates of those scores overlayed with the daily series for TOPIX. Other than the three years before the advent of 'Abenomics' and the last six months, the directional correlation is clear.  Mr Market, supported by the BoJ and Federal Reserve, is 'banking' on a sharp and sustained recovery over the next two quarters. <div class="content-highlight">In the DETAIL section below, we shall review the actual results and initial and revised forecasts by Sector and highlight the best and worst-performing companies by one-quarter revenue and margin changes. We shall also review our Results and Revision Scoring for the market, Sectors and Companies.</div>

All charts sourced from Japan Analytics.BRUTAL - The summer earnings 'season' reflected the broadening impact of COVID-19 on the Japanese and world economies, however, in terms of profit decline, the pace is more moderate than in the previous quarter. Japanese corporates are starting to engage in aggressive cost controls. As a result, an with no signs of virus abating or a vaccine being readily available, earnings will continue to decline in the current quarter. We have yet to reach a low point in this earnings cycle. Many companies delayed making initial forecasts for the current year. As that deficiency is gradually remedied, earnings forecasts are leading trailing results to the downside. The 'gap' for operating profits is ¥5.7 trillion, or 13%. A similar percentage fall applies to net income. Operating income is forecast to be 41% below the peak level of 2019; for net income, the decline is 57%. The aggregate forecast operating margin of 4.8%% is 294 bps lower than the peak, while the forecast net margin is 318 bps lower at 2.67%. If achieved, this outcome will exceed that of the 2008/9 financial crisis when the aggregate was negative. TTM RESULTS &amp; FORECASTS - Using trailing-twelve-month data to smooth out the seasonality in earnings, TTM operating income is 29% lower year-on-year on a 6% decline in sales. Running the same comparison using published forecasts, operating profit expectations are 40% lower than a year ago and revenues 10% lower.DAMN THE TORPEDOES - Our scoring methodology tracks all quarterly results since 2003 and every annual and interim forecast made since 2013. The lines above represent the cap-weighted aggregates of those scores overlayed with the daily series for TOPIX. Other than the three years before the advent of 'Abenomics' and the last six months, the directional correlation is clear.  Mr Market, supported by the BoJ and Federal Reserve, is 'banking' on a sharp and sustained recovery over the next two quarters. In the DETAIL section below, we shall review the actual results and initial and revised forecasts by Sector and highlight the best and worst-performing companies by one-quarter revenue and margin changes. We shall also review our Results and Revision Scoring for the market, Sectors and Companies.

🇯🇵 JAPAN • IT’S A WRAP - Summer 2020 Results & Revisions Review

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/139/255/original/2020-06-11_08-36-54.png?1591832240" class="editor-image img-responsive" data-smartkarma-image-id="139255"></figure><div class="content-caption">Source: Japan Analytics</div>STRESS TESTS - This Insight is the first in a series that will use a variety of standard and less-frequently used 'stress-tests' to look through the current euphoria and assess where business risk is concentrated among larger Japanese companies. According to Tokyo Shoko Research, 171 listed Japanese firms have raised nearly ¥10 trillion in new funds to weather COVID-19.ALTMAN Z-SCORES - The first Insight will update our earlier Who's<a href="https://www.smartkarma.com/insights/japan-who-s-swimming-naked-part-2-altman-z-score" target="_blank" data-smartkarma-citation="insights:37316" rel="noopener"> Swimming Naked?</a> Insight and focus on the Altman Z-Score as updated for the most recent quarterly results for both manufacturing and non-manufacturing companies.  In each category, ee will look at both the companies that are below Altman's 'distress' levels and those companies that have the most significant negative deviation from their seven-year average score. Only six of the bottom-thirty manufacturing and five of the bottom-thirty manufacturing companies have outperformed over one year. Many are already Oversold and offer potential value opportunities -as with <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> which is now as distressed as when Carlos Ghosn first arrived.  QUASI-FINANCIAL FIRMS - The Z-Score methodology does not work for financial firms. Accordingly, five non-financial companies which have significant financial subsidiaries -  <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/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/japan-post-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:359:1" rel="noopener">Japan Post (6178 JP)</a>, <a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a> and <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony (6758 JP)</a>- have been excluded from this analysis.

Source: Japan AnalyticsSTRESS TESTS - This Insight is the first in a series that will use a variety of standard and less-frequently used 'stress-tests' to look through the current euphoria and assess where business risk is concentrated among larger Japanese companies. According to Tokyo Shoko Research, 171 listed Japanese firms have raised nearly ¥10 trillion in new funds to weather COVID-19.ALTMAN Z-SCORES - The first Insight will update our earlier Who's Swimming Naked? Insight and focus on the Altman Z-Score as updated for the most recent quarterly results for both manufacturing and non-manufacturing companies.  In each category, ee will look at both the companies that are below Altman's 'distress' levels and those companies that have the most significant negative deviation from their seven-year average score. Only six of the bottom-thirty manufacturing and five of the bottom-thirty manufacturing companies have outperformed over one year. Many are already Oversold and offer potential value opportunities -as with Nissan Motor (7201 JP) which is now as distressed as when Carlos Ghosn first arrived.  QUASI-FINANCIAL FIRMS - The Z-Score methodology does not work for financial firms. Accordingly, five non-financial companies which have significant financial subsidiaries -  Rakuten (4755 JP), Z Holdings (4689 JP), Japan Post (6178 JP), Softbank Group (9984 JP) and Sony (6758 JP)- have been excluded from this analysis. 

🇯🇵 JAPAN - Stress Tests Part 1 - Altman Z-Scores

Travis Lundy

Quantitative Analysis

The JPX yesterday made a brief <a href="https://www.jpx.co.jp/news/1030/20200324-02.html" target="_blank" rel="noopener">release</a>, only in Japanese, warning about the effect of coronavirus on dividends. It was not tongue in cheek. It has some very important possible effects.It referred to a Justice Ministry <a href="http://www.moj.go.jp/MINJI/minji07_00021.html" target="_blank" rel="noopener">warning</a> released at the end of February and updated on 13 March where it noted the rules about dividends and Annual Meetings.  Normally I would provide the TSE statement (linked above) below with a best efforts translation but the announcement basically ignores the main point which investors need to take away. What it does say:<ol>
<li>The law (Article 296, Paragraph 1 of the Companies Act) says Annual Meetings should be held at the time period noted in a company's Articles of Incorporation. It does not say it must be within three months of the end of the fiscal year.</li>
<li>If it cannot be held within that time, which is deemed normal, it should be held within a reasonable period after that time. </li>
</ol>All that sounds very procedural and mechanical. It is. But it still doesn't get to the point in the Justice Ministry notice. <h2>THAT POINT INVESTORS SHOULD TAKE AWAY IS THAT...</h2>The point is that the Annual Meeting is held to vote on directors and other matters of importance. For some companies, there is a vote on dividends (for other companies the Board of Directors is empowered to decide dividends on its own). Article 124, Paragraph 2 of the Companies Act stipulates that the only matters which may be decided at an Annual Meeting are those for which the Record Date falls within the three months preceding the Annual Meeting. If the Annual Meeting must get delayed, and that requires a new record date, Article 124 Paragraph 3 specifies that a Company must give two weeks' notice for the setting of the new record date.<div class="content-highlight">THE UPSHOT:   If a company has to delay its Annual Meeting beyond the end of June, and has to approve the dividend at the Annual Meeting through a vote of shareholders, if the Annual Meeting is delayed beyond 30 June, then the record date for the Annual Meeting - including the record date for voting on the dividend - will be later than 31 March. </div>I have been watching the tape since the end of February and so far I have not seen any delays for an Annual Meeting for companies with a fiscal period ending December, January, or February as could have been the case, or any delay of an Extraordinary General Meeting. But it is a risk. And you may not know about it until later. A company could announce in April or May that it is delaying its June Annual Shareholder Meeting to July, and a new record date will exist for the Annual Meeting and for the dividend. Discussion of a few of the knock-on effects continues below.

The JPX yesterday made a brief release, only in Japanese, warning about the effect of coronavirus on dividends. It was not tongue in cheek. It has some very important possible effects.It referred to a Justice Ministry warning released at the end of February and updated on 13 March where it noted the rules about dividends and Annual Meetings.  Normally I would provide the TSE statement (linked above) below with a best efforts translation but the announcement basically ignores the main point which investors need to take away. What it does say:
The law (Article 296, Paragraph 1 of the Companies Act) says Annual Meetings should be held at the time period noted in a company's Articles of Incorporation. It does not say it must be within three months of the end of the fiscal year.
If it cannot be held within that time, which is deemed normal, it should be held within a reasonable period after that time. 
All that sounds very procedural and mechanical. It is. But it still doesn't get to the point in the Justice Ministry notice. THAT POINT INVESTORS SHOULD TAKE AWAY IS THAT...The point is that the Annual Meeting is held to vote on directors and other matters of importance. For some companies, there is a vote on dividends (for other companies the Board of Directors is empowered to decide dividends on its own). Article 124, Paragraph 2 of the Companies Act stipulates that the only matters which may be decided at an Annual Meeting are those for which the Record Date falls within the three months preceding the Annual Meeting. If the Annual Meeting must get delayed, and that requires a new record date, Article 124 Paragraph 3 specifies that a Company must give two weeks' notice for the setting of the new record date.THE UPSHOT:   If a company has to delay its Annual Meeting beyond the end of June, and has to approve the dividend at the Annual Meeting through a vote of shareholders, if the Annual Meeting is delayed beyond 30 June, then the record date for the Annual Meeting - including the record date for voting on the dividend - will be later than 31 March. I have been watching the tape since the end of February and so far I have not seen any delays for an Annual Meeting for companies with a fiscal period ending December, January, or February as could have been the case, or any delay of an Extraordinary General Meeting. But it is a risk. And you may not know about it until later. A company could announce in April or May that it is delaying its June Annual Shareholder Meeting to July, and a new record date will exist for the Annual Meeting and for the dividend. Discussion of a few of the knock-on effects continues below.

JAPAN DELTA VI - Dividend Delay Risk In The Time of Coronavirus?

Japan

TOYOTA INDUSTRIES CORPORATION, a member of the Toyota Motor Group, assembles motor vehicles and manufactures automotive parts such as engines and air conditioner compressors.  The Company also produces industrial equipment and textile machinery as well as electronic devices such as computer modems and power inverters.

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Toyota Industries (6201 JP)