'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. 

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/18379" target="_blank" data-smartkarma-citation="entities:18379:1">ZOZO (3092 JP)</a>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/254/original/2019-01-11_07-07-55.png?1547158094" class="editor-image img-responsive" data-smartkarma-image-id="75254"></figure>
<div style="text-align: center;" class="content-caption">Source: Japan Analytics</div>
ONWARD AND OUT - <a href="https://www.smartkarma.com/entities/18379" target="_blank" data-smartkarma-citation="entities:18379:1">ZOZO (3092 JP)</a>, formerly Start Today, has been the sixth-most-traded large capitalisation stock over the last ten trading days after <a href="https://www.smartkarma.com/entities/14502" target="_blank" data-smartkarma-citation="entities:14502:1">Benefit One (2412 JP)</a>, <a href="https://www.smartkarma.com/entities/14750" target="_blank" data-smartkarma-citation="entities:14750:1">Rizap (2928 JP)</a>, <a href="https://www.smartkarma.com/entities/11747" target="_blank" data-smartkarma-citation="entities:11747:1">Takeda Pharmaceutical (4502 JP)</a>, <a href="https://www.smartkarma.com/entities/7611" target="_blank" data-smartkarma-citation="entities:7611:1">Hoshizaki (6465 JP)</a>, and <a href="https://www.smartkarma.com/entities/8467" target="_blank" data-smartkarma-citation="entities:8467:1">Workman Co Ltd (7564 JP)</a>. According to Nikkei XTECH, on 25th December apparel maker <a href="https://www.smartkarma.com/entities/11370" target="_blank" data-smartkarma-citation="entities:11370:1">Onward (8016 JP)</a> suspended selling of its products on ZOZOTOWN and will leave the platform altogether. Although Onward products are estimated to account for less than 3% of total transactions on the site, there are concerns that other apparel makers will follow suit as a result of the emerging direct competition on the site from ZOZO's private label. Since reaching our 4.0 'Overbought' threshold on 9th July 2018, ZOZO shares have corrected by 57% - the worst performance of any large cap from that date - as concerns mounted over the private brand strategy and the behaviour of CEO Yusaku Maezawa.  Since bottoming on 4th January, the shares have risen by 18% following positive comments from the CEO about sales over the New Year holiday period.    
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/074/908/original/2019-01-08_11-30-36.png?1546914652" class="editor-image img-responsive" data-smartkarma-image-id="74908"></figure>
PRIVATE-LABEL STRETCH GOALS- The 'teething problems' of ZOZO entering the private-label apparel business have been well-documented by <a href="https://www.smartkarma.com/profiles/2415" target="_blank" data-smartkarma-citation="accounts:2415">Michael Causton</a> in a recent <a href="https://www.smartkarma.com/insights/zozo-teething-problems-for-private-brand-and-signs-of-hubris" target="_blank" data-smartkarma-citation="insights:26266">Insight</a> on Smartkarma. Michael rightly questions the feasibility of the company scaling a ¥200b apparel business within the next three years while targeting an additional incremental ¥400b in e-commerce revenue, particularly as it has taken ZOZO twenty years to reach the first ¥100b in annual revenues. In the DETAIL section below, we shall examine ZOZO's current and possible future financial condition as it strives to become one of the top-ten global fashion retailers. 
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/261/original/2019-01-11_07-22-02.png?1547158945" class="editor-image img-responsive" data-smartkarma-image-id="75261"></figure>
'ZOSO' &amp; THE STAIRWAY TO HEAVEN - In addition to some notable purchases of modern art at record-breaking prices, CEO Maezawa also last year booked himself on Space X's first flight to the moon. With apologies, the lyrics of the peerless song from Led Zeppelin's untitled fourth album - known by fans as 'Zoso' after the symbol designed by Jimmy Page for the inner sleeve - come to mind:- 
There's a lad(y) who's sure All that glitters is gold And (s)he's buying a stairway to heaven When(s)he gets there (s)he knows If the stores are all closed With a word (s)he can get what (s)he came for.

ZOZO (3092 JP)

Source: Japan Analytics
ONWARD AND OUT - ZOZO (3092 JP), formerly Start Today, has been the sixth-most-traded large capitalisation stock over the last ten trading days after Benefit One (2412 JP), Rizap (2928 JP), Takeda Pharmaceutical (4502 JP), Hoshizaki (6465 JP), and Workman Co Ltd (7564 JP). According to Nikkei XTECH, on 25th December apparel maker Onward (8016 JP) suspended selling of its products on ZOZOTOWN and will leave the platform altogether. Although Onward products are estimated to account for less than 3% of total transactions on the site, there are concerns that other apparel makers will follow suit as a result of the emerging direct competition on the site from ZOZO's private label. Since reaching our 4.0 'Overbought' threshold on 9th July 2018, ZOZO shares have corrected by 57% - the worst performance of any large cap from that date - as concerns mounted over the private brand strategy and the behaviour of CEO Yusaku Maezawa.  Since bottoming on 4th January, the shares have risen by 18% following positive comments from the CEO about sales over the New Year holiday period.    

PRIVATE-LABEL STRETCH GOALS- The 'teething problems' of ZOZO entering the private-label apparel business have been well-documented by Michael Causton in a recent Insight on Smartkarma. Michael rightly questions the feasibility of the company scaling a ¥200b apparel business within the next three years while targeting an additional incremental ¥400b in e-commerce revenue, particularly as it has taken ZOZO twenty years to reach the first ¥100b in annual revenues. In the DETAIL section below, we shall examine ZOZO's current and possible future financial condition as it strives to become one of the top-ten global fashion retailers. 

'ZOSO' &amp; THE STAIRWAY TO HEAVEN - In addition to some notable purchases of modern art at record-breaking prices, CEO Maezawa also last year booked himself on Space X's first flight to the moon. With apologies, the lyrics of the peerless song from Led Zeppelin's untitled fourth album - known by fans as 'Zoso' after the symbol designed by Jimmy Page for the inner sleeve - come to mind:- 
There's a lad(y) who's sure All that glitters is gold And (s)he's buying a stairway to heaven When(s)he gets there (s)he knows If the stores are all closed With a word (s)he can get what (s)he came for.

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. 

While <a href="https://www.smartkarma.com/entities/14750" target="_blank" data-smartkarma-citation="entities:14750:1">Rizap Group (2928 JP)</a> has seen its share price crash and its CEO bow in apology after profit warnings and a plan to radically cut back on M&amp;A, <a href="https://www.smartkarma.com/entities/13185" target="_blank" data-smartkarma-citation="entities:13185:1">Jeans Mate Corp (7448 JP)</a>, which Rizap acquired last year, has quickly moved to modernise stores. It has just replaced its Shibuya store with a new concept called JEM that could mean the end of the Jeans Mate name altogether and posted its first operating profit in years. While many of Rizap's acquisitions were dubious, Jeans Mate is one business that could be turned around into a modestly successful casual apparel retailer.

While Rizap Group (2928 JP) has seen its share price crash and its CEO bow in apology after profit warnings and a plan to radically cut back on M&amp;A, Jeans Mate Corp (7448 JP), which Rizap acquired last year, has quickly moved to modernise stores. It has just replaced its Shibuya store with a new concept called JEM that could mean the end of the Jeans Mate name altogether and posted its first operating profit in years. While many of Rizap's acquisitions were dubious, Jeans Mate is one business that could be turned around into a modestly successful casual apparel retailer.

Quantitative Analysis

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/073/556/original/Update.png?1545212207" class="editor-image img-responsive" data-smartkarma-image-id="73556"></figure>
<div class="content-caption">Source: Japan Analytics</div>
JAPAN CORPORATE CASH FLOW UPDATE - This insight updates our previous Insight <a href="https://www.smartkarma.com/insights/japan-quarterly-cash-flow-update-yen-weakens-normal-service-resumed" target="_blank" data-smartkarma-citation="insights:23357">Yen Weakens &gt; Normal Service Resumed</a> with data from all of the most quarterly reports filed last month. Our aggregate cash flow model reformulated cash flows into eight categories which sum to Change in Cash - Free Cash Flow (Operating Cash Flow less Investing Cash Flow), Financing Cash Flow, Shareholder Cash Flow (Equity Cash Flow and Dividend Cash Flow) and Minorities. In the last three months, Japan's non-financial companies generated ¥12.1t in Operating Cash Flow while investing ¥9.2t - the largest quarterly amount of capex since 2016-Q4.  Of the total ¥2.9t in Free Cash Flow, 65% was returned to shareholders of which half was in the form of reductions in equity - an improving and welcome trend which we covered in an earlier <a href="https://www.smartkarma.com/insights/japan-share-buybacks-less-than-meets-the-eye" target="_blank" data-smartkarma-citation="insights:22599">Insight</a>. After a ¥0.8t increase in debt and a ¥0.3t increase in Minorities Cash Flow, aggregate cash rose by ¥2.2t for the quarter. Since 2011-Q4, 58% of the ¥102.7t in cumulative FCF has been allocated to shareholders and 40% to cash, leaving considerable room for improvement in the relative size of these ratios.
SECTORS &amp; STOCKS - In the DETAIL below, we also look at sector cash flow trends and provide brief comments on some of the most significant changes in individual cash flows over the last three months including <a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">Softbank Group (9984 JP)</a>, <a href="https://www.smartkarma.com/entities/3548" target="_blank" data-smartkarma-citation="entities:3548:1">Kawasaki Kisen Kaisha (9107 JP)</a>, <a href="https://www.smartkarma.com/entities/2818" target="_blank" data-smartkarma-citation="entities:2818:1">Hanwa (8078 JP)</a>, <a href="https://www.smartkarma.com/entities/19550" target="_blank" data-smartkarma-citation="entities:19550:1">Open House (3288 JP)</a>, <a href="https://www.smartkarma.com/entities/26074" target="_blank" data-smartkarma-citation="entities:26074:1">Macnica Fuji Electronics (3132 JP)</a>, and <a href="https://www.smartkarma.com/entities/13747" target="_blank" data-smartkarma-citation="entities:13747:1">Digital Garage (4819 JP)</a>.


Source: Japan Analytics
JAPAN CORPORATE CASH FLOW UPDATE - This insight updates our previous Insight Yen Weakens &gt; Normal Service Resumed with data from all of the most quarterly reports filed last month. Our aggregate cash flow model reformulated cash flows into eight categories which sum to Change in Cash - Free Cash Flow (Operating Cash Flow less Investing Cash Flow), Financing Cash Flow, Shareholder Cash Flow (Equity Cash Flow and Dividend Cash Flow) and Minorities. In the last three months, Japan's non-financial companies generated ¥12.1t in Operating Cash Flow while investing ¥9.2t - the largest quarterly amount of capex since 2016-Q4.  Of the total ¥2.9t in Free Cash Flow, 65% was returned to shareholders of which half was in the form of reductions in equity - an improving and welcome trend which we covered in an earlier Insight. After a ¥0.8t increase in debt and a ¥0.3t increase in Minorities Cash Flow, aggregate cash rose by ¥2.2t for the quarter. Since 2011-Q4, 58% of the ¥102.7t in cumulative FCF has been allocated to shareholders and 40% to cash, leaving considerable room for improvement in the relative size of these ratios.
SECTORS &amp; STOCKS - In the DETAIL below, we also look at sector cash flow trends and provide brief comments on some of the most significant changes in individual cash flows over the last three months including Softbank Group (9984 JP), Kawasaki Kisen Kaisha (9107 JP), Hanwa (8078 JP), Open House (3288 JP), Macnica Fuji Electronics (3132 JP), and Digital Garage (4819 JP).

Japan: The 2018-Q3 Cash Flow Stakes - Runners, Riders & Red Flags

<a href="https://www.smartkarma.com/entities/18379" target="_blank" data-smartkarma-citation="entities:18379:1">ZOZO (3092 JP)</a> has been losing a bit of its shine of late, with its stock price plummeting and its CEO being hammered in the press and social media for profligate spending on art and trips to the moon, and for only turning up to work three days a week.
More importantly, its private brand business is off to a bumpy start, a problem when Zozo expects it to account for 30% of sales in three years time.
Analysts have focused on the failure of the Zozosuit, but this was always more of a marketing gimmick and will soon be superseded by mobile-only measuring systems. The real challenge is being able to produce a measured semi-bespoke apparel service on time, of a good quality and at a reasonable price. Given Zozo's supply chain support and early start, it could still lead on this.
Nevertheless building a ¥200 billion apparel business in three years remains highly questionable; Zozo has stumbled at the launch, and no one has built such a large apparel concern so quickly in Japanese retail history.
Zozo will continue to grow in tandem with the growth in apparel e-commerce, but its target of ¥700 billion in revenues in three years remains in doubt leaving us bearish about the short-term.
More important than achieving its targets is whether Zozo can manage to build a solid foundation for a scalable private brand-based business. If Zozo succeeds, then the long-term prospects for Zozo as an integrated apparel brand rather than a merchant mall could be bright.

ZOZO (3092 JP) has been losing a bit of its shine of late, with its stock price plummeting and its CEO being hammered in the press and social media for profligate spending on art and trips to the moon, and for only turning up to work three days a week.
More importantly, its private brand business is off to a bumpy start, a problem when Zozo expects it to account for 30% of sales in three years time.
Analysts have focused on the failure of the Zozosuit, but this was always more of a marketing gimmick and will soon be superseded by mobile-only measuring systems. The real challenge is being able to produce a measured semi-bespoke apparel service on time, of a good quality and at a reasonable price. Given Zozo's supply chain support and early start, it could still lead on this.
Nevertheless building a ¥200 billion apparel business in three years remains highly questionable; Zozo has stumbled at the launch, and no one has built such a large apparel concern so quickly in Japanese retail history.
Zozo will continue to grow in tandem with the growth in apparel e-commerce, but its target of ¥700 billion in revenues in three years remains in doubt leaving us bearish about the short-term.
More important than achieving its targets is whether Zozo can manage to build a solid foundation for a scalable private brand-based business. If Zozo succeeds, then the long-term prospects for Zozo as an integrated apparel brand rather than a merchant mall could be bright.

Zozo: Teething Problems for Private Brand and Signs of Hubris

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

A comment from a Smartkarma client prompted me to dig through this. It was an interesting comment suggesting the high weight Nikkei 225 names, or high weight-low float names were getting squeezed by BOJ buying or by a short squeeze on the short basket which had been proposed by a number of sellside brokers after the BOJ dropped its Nikkei 225 buying. The likelihood and nature of the change in Nikkei 225 buying by the BOJ was most recently discussed in the insights below:
<table class="table table-striped">
<tbody>
<tr>
<td colspan="3">
<h2>Insights This Past Summer on BOJ ETF Buying and Nikkei 225</h2>
</td>
</tr>
<tr>
<td>Date</td>
<td>Before/After BOJ</td>
<td>Title of Insight</td>
</tr>
<tr>
<td>19-Jul-2018</td>
<td>Before</td>
<td><a href="https://www.smartkarma.com/insights/japan-passive-boj-heading-for-trouble-with-nikkei-225" target="_blank" data-smartkarma-citation="insights:21980">JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225</a></td>
</tr>
<tr>
<td>23-Jul-2018</td>
<td>Before</td>
<td><a href="https://www.smartkarma.com/insights/japan-passive-the-nikkei-225-baskets-if-boj-changes" target="_blank" data-smartkarma-citation="insights:22367">JAPAN PASSIVE:  The Nikkei 225 Baskets if BOJ Changes</a></td>
</tr>
<tr>
<td>27-Jul-2018</td>
<td>Before</td>
<td><a href="https://www.smartkarma.com/insights/japan-passive-boj-to-buy-less-nikkei-225-highly-likely" target="_blank" data-smartkarma-citation="insights:22484">JAPAN PASSIVE - BOJ To Buy Less Nikkei 225? Highly Likely</a></td>
</tr>
<tr>
<td>31-Jul-2018</td>
<td>After</td>
<td><a href="https://www.smartkarma.com/insights/japan-passive-dovish-meeting-boj-to-buy-less-nikkei-225" target="_blank" data-smartkarma-citation="insights:22617">JAPAN PASSIVE - Dovish Meeting; BOJ to Buy Less Nikkei 225</a></td>
</tr>
</tbody>
</table>
However, the BOJ and Nikkei 225 story has been a deceased equine I have been belabouring for 2+ years.
Of course, the trigger for many people's suggestions of a trade was the decision by the BOJ on 31 July to lower its annual rate of purchases of ETFs in the grouping of the TOPIX, Nikkei 225, and JPX Nikkei 400 basket which was seeing total buys of ¥3.0trln a year (in addition to the ¥2.7trln on TOPIX alone) to ¥1.5trln, raising and lifting the portion of "only TOPIX" to ¥4.2trln. That meant the total to be bought in Nikkei would drop from about ¥1.3-1.4trln to about half that, and JPX Nikkei 400 saw its portion of BOJ ETF buys drop to very low single digit percentages, with TOPIX taking about 85% of total buys from there on.
As described in numerous insights on Smartkarma dating back a few years, it is to be noted that the "float" on several Japanese stocks in the Nikkei 225 is not really "float" and Real World Float is much smaller. In some cases single digit percentages of the shares outstanding.
Many of us have watched the 70+% performance since end-August for <a href="https://www.smartkarma.com/entities/320" target="_blank" data-smartkarma-citation="entities:320:1">Familymart Uny Holdings (8028 JP)</a> - one of my favored names to get heavily sold should the Nikkei 225 actually change its weighting methodology as I proposed earlier this year. It has been the avatar for high weight low-float names in the Nikkei 225.
So I tested the idea. The results were somewhat surprising.

A comment from a Smartkarma client prompted me to dig through this. It was an interesting comment suggesting the high weight Nikkei 225 names, or high weight-low float names were getting squeezed by BOJ buying or by a short squeeze on the short basket which had been proposed by a number of sellside brokers after the BOJ dropped its Nikkei 225 buying. The likelihood and nature of the change in Nikkei 225 buying by the BOJ was most recently discussed in the insights below:




Insights This Past Summer on BOJ ETF Buying and Nikkei 225



Date
Before/After BOJ
Title of Insight


19-Jul-2018
Before
JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225


23-Jul-2018
Before
JAPAN PASSIVE:  The Nikkei 225 Baskets if BOJ Changes


27-Jul-2018
Before
JAPAN PASSIVE - BOJ To Buy Less Nikkei 225? Highly Likely


31-Jul-2018
After
JAPAN PASSIVE - Dovish Meeting; BOJ to Buy Less Nikkei 225



However, the BOJ and Nikkei 225 story has been a deceased equine I have been belabouring for 2+ years.
Of course, the trigger for many people's suggestions of a trade was the decision by the BOJ on 31 July to lower its annual rate of purchases of ETFs in the grouping of the TOPIX, Nikkei 225, and JPX Nikkei 400 basket which was seeing total buys of ¥3.0trln a year (in addition to the ¥2.7trln on TOPIX alone) to ¥1.5trln, raising and lifting the portion of "only TOPIX" to ¥4.2trln. That meant the total to be bought in Nikkei would drop from about ¥1.3-1.4trln to about half that, and JPX Nikkei 400 saw its portion of BOJ ETF buys drop to very low single digit percentages, with TOPIX taking about 85% of total buys from there on.
As described in numerous insights on Smartkarma dating back a few years, it is to be noted that the "float" on several Japanese stocks in the Nikkei 225 is not really "float" and Real World Float is much smaller. In some cases single digit percentages of the shares outstanding.
Many of us have watched the 70+% performance since end-August for Familymart Uny Holdings (8028 JP) - one of my favored names to get heavily sold should the Nikkei 225 actually change its weighting methodology as I proposed earlier this year. It has been the avatar for high weight low-float names in the Nikkei 225.
So I tested the idea. The results were somewhat surprising.

Is It a Nikkei BOJ Squeeze on Nikkei 225 Low Float Names? Or Just FamilyMart Being FamilyMart?

Japan

FAST RETAILING CO., LTD. operates a chain of clothing stores, UNIQLO, throughout Japan and in other markets overseas including UK, China, Hong Kong, South Korea, US, France, Singapore and Russia.  The Company designs, manufactures, and retails its own line of casual clothing.

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Fast Retailing (9983 JP)

ZOZO - Buying a Stairway to Heaven

ZOZO (3092 JP) ONWARD AND OUT - ZOZO (3092 JP), formerly Start Today, has been the sixth-most-traded large capitalisation stock over the last...

Campbell Gunn

Jeans Mate Posts a Profit at Last

While Rizap Group (2928 JP) has seen its share price crash and its CEO bow in apology after profit warnings and a plan to radically cut back on...

Michael Causton

Japan: The 2018-Q3 Cash Flow Stakes - Runners, Riders & Red Flags

JAPAN CORPORATE CASH FLOW UPDATE - This insight updates our previous Insight Yen Weakens > Normal Service Resumed with data from all of the...

Campbell Gunn

Zozo: Teething Problems for Private Brand and Signs of Hubris

ZOZO (3092 JP) has been losing a bit of its shine of late, with its stock price plummeting and its CEO being hammered in the press and social media...

Michael Causton

Is It a Nikkei BOJ Squeeze on Nikkei 225 Low Float Names? Or Just FamilyMart Being FamilyMart?

A comment from a Smartkarma client prompted me to dig through this. It was an interesting comment suggesting the high weight Nikkei 225 names,...

Travis Lundy

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