'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.

Event-Driven

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/157/903/original/2020-09-09_10-14-19.png?1599614088" class="editor-image img-responsive" data-smartkarma-image-id="157903"></figure><div class="content-caption">Source for all charts: Japan Analytics</div>LISTED RESTAURANTS - Japan currently has 102 listed restaurant companies with an aggregate market value of ¥4.9 trillion, representing 2.6% of all listed companies and 0.9% of total market value. Only thirteen companies are capitalised at over ¥100 billion, and forty-one have a market value of less than ¥10 billion. The Sector is ripe for consolidation and COVID-19 should provide a catalyst for an acceleration of the process.  Both <a href="https://www.smartkarma.com/entities/create-restaurants-holdings-inc" target="_blank" data-smartkarma-citation="entities:11513:1" rel="noopener">create restaurants (3387 JP)</a>, and <a href="https://www.smartkarma.com/entities/colowide-co-ltd" target="_blank" data-smartkarma-citation="entities:13967:1" rel="noopener">Colowide (7616 JP)</a> have positioned themselves as consolidators, but have become highly leveraged in the process.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/157/917/original/File%202020-09-09%2010%2025%2051.jpeg?1599614981" class="editor-image img-responsive" data-smartkarma-image-id="157917"></figure>Also, the Sector is highly fragmented and segmented by type of food and concept. Only nineteen companies can be deemed 'diversified'. Furthermore, there are only five listed take-out/delivery specialists, of which <a href="https://www.smartkarma.com/entities/ride-on-express-co-ltd" target="_blank" data-smartkarma-citation="entities:2812:1" rel="noopener">Ride On Express (6082 JP)</a> has been the best performer. Overall, the Sector has declined by 3.6% over one year and by 3.2% over three months - a third quartile performance. Colowide's 31% rise over the last month has pushed the Sector into fourth place amongst our thirty market Sectors, fueled by the apparent success of the tender offer for <a href="https://www.smartkarma.com/entities/ootoya-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:7329:1" rel="noopener">OOTOYA (2705 JP)</a>.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/157/928/original/2020-09-09_10-38-37.png?1599615530" class="editor-image img-responsive" data-smartkarma-image-id="157928"></figure>YUTAI KEN - One important consideration for investors to note is the widespread practice of offering kabunushi yutai-ken. In addition to dividends, shareholders are sent coupons that can be redeemed at most of the company's restaurants. Many specialist publications review such programs and offer stock recommendations based on the yutai-yield. As a result, restaurant companies in Japan have some of the highest shareholder counts among listed companies. As coupon-customers normally top-up their spending, this practice helps provide a basic level of cash flow but is a costly exercise to administer. However, there is the added benefit of limiting the number of shares for shorting.<a href="https://www.smartkarma.com/entities/yoshinoya-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:14630:1" rel="noopener"></a>100,000+ CLUB - <a href="https://www.smartkarma.com/entities/yoshinoya-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:14630:1" rel="noopener">Yoshinoya (9861 JP)</a>, <a href="https://www.smartkarma.com/entities/atom-corp" target="_blank" data-smartkarma-citation="entities:12420:1" rel="noopener">Atom (7412 JP)</a>, <a href="https://www.smartkarma.com/entities/zensho-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:4586:1" rel="noopener">Zensho (7550 JP)</a>, <a href="https://www.smartkarma.com/entities/kappa-create-co-ltd" target="_blank" data-smartkarma-citation="entities:19456:1" rel="noopener">Kappa Create (7421 JP)</a>, <a href="https://www.smartkarma.com/entities/komeda-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:24019:1" rel="noopener">Komeda (3543 JP)</a>, and <a href="https://www.smartkarma.com/entities/create-restaurants-holdings-inc" target="_blank" data-smartkarma-citation="entities:11513:1" rel="noopener">create (3387 JP)</a> are all in the top-fifty listed companies ranked by the number of shareholders. All exceed 100,000 shareholders -  beef-bowl chain Yoshiniya has 308,265 exceeding <a href="https://www.smartkarma.com/entities/mitsui-co-ltd" target="_blank" data-smartkarma-citation="entities:20799:1" rel="noopener">Mitsui (8031 JP)</a> which has twenty-four times the capitalisation.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/157/942/original/2020-09-09_11-15-31.png?1599617746" class="editor-image img-responsive" data-smartkarma-image-id="157942"></figure>In this DETAIL below, we shall review Colowide's long-term performance, returns and valuation and offer a view on the prospects for further consolidation. The Colowide group currently comprises of two listed chains - <a href="https://www.smartkarma.com/entities/kappa-create-co-ltd" target="_blank" data-smartkarma-citation="entities:19456:1" rel="noopener">Kappa Create (7421 JP)</a> and <a href="https://www.smartkarma.com/entities/atom-corp" target="_blank" data-smartkarma-citation="entities:12420:1" rel="noopener">Atom (7412 JP)</a> and the franchise chain Reins International which also operates in Asia and the US.

Source for all charts: Japan AnalyticsLISTED RESTAURANTS - Japan currently has 102 listed restaurant companies with an aggregate market value of ¥4.9 trillion, representing 2.6% of all listed companies and 0.9% of total market value. Only thirteen companies are capitalised at over ¥100 billion, and forty-one have a market value of less than ¥10 billion. The Sector is ripe for consolidation and COVID-19 should provide a catalyst for an acceleration of the process.  Both create restaurants (3387 JP), and Colowide (7616 JP) have positioned themselves as consolidators, but have become highly leveraged in the process.Also, the Sector is highly fragmented and segmented by type of food and concept. Only nineteen companies can be deemed 'diversified'. Furthermore, there are only five listed take-out/delivery specialists, of which Ride On Express (6082 JP) has been the best performer. Overall, the Sector has declined by 3.6% over one year and by 3.2% over three months - a third quartile performance. Colowide's 31% rise over the last month has pushed the Sector into fourth place amongst our thirty market Sectors, fueled by the apparent success of the tender offer for OOTOYA (2705 JP).YUTAI KEN - One important consideration for investors to note is the widespread practice of offering kabunushi yutai-ken. In addition to dividends, shareholders are sent coupons that can be redeemed at most of the company's restaurants. Many specialist publications review such programs and offer stock recommendations based on the yutai-yield. As a result, restaurant companies in Japan have some of the highest shareholder counts among listed companies. As coupon-customers normally top-up their spending, this practice helps provide a basic level of cash flow but is a costly exercise to administer. However, there is the added benefit of limiting the number of shares for shorting.100,000+ CLUB - Yoshinoya (9861 JP), Atom (7412 JP), Zensho (7550 JP), Kappa Create (7421 JP), Komeda (3543 JP), and create (3387 JP) are all in the top-fifty listed companies ranked by the number of shareholders. All exceed 100,000 shareholders -  beef-bowl chain Yoshiniya has 308,265 exceeding Mitsui (8031 JP) which has twenty-four times the capitalisation.In this DETAIL below, we shall review Colowide's long-term performance, returns and valuation and offer a view on the prospects for further consolidation. The Colowide group currently comprises of two listed chains - Kappa Create (7421 JP) and Atom (7412 JP) and the franchise chain Reins International which also operates in Asia and the US.

🇯🇵 Japan • Colowide (7616 JP) - A Bite Too Far

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

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Japanese Restaurant Chain Amalgamator <a href="https://www.smartkarma.com/entities/colowide-co-ltd" target="_blank" data-smartkarma-citation="entities:13967:1" rel="noopener">Colowide Co Ltd (7616 JP)</a> purchased stakes in <a href="https://www.smartkarma.com/entities/ootoya-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:7329:1" rel="noopener">OOTOYA Holdings (2705 JP)</a> last autumn from two founding family members who wanted to sell. They they purchased a small number of shares in the market. That got them to just over 19%. Colowide approached Ootoya to see if they could join together as Colowide has by purchasing 50+% stakes in <a href="https://www.smartkarma.com/entities/atom-corp" target="_blank" data-smartkarma-citation="entities:12420:1" rel="noopener">Atom Corp (7412 JP)</a> and <a href="https://www.smartkarma.com/entities/kappa-create-co-ltd" target="_blank" data-smartkarma-citation="entities:19456:1" rel="noopener">Kappa Create (7421 JP)</a> and REINS International (formerly known as Rex Holdings, purchased from Advantage Partners in 2012 and 2015). Ootoya has a particular shtick, which is well different than other chains in Japan. This is the founding ethos and it is clear as clear can be on their homepage.<table class="table table-striped"><tbody>
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<h3>Real Food. Ootoya</h3>


Our motto is "Japanese meals"
The way our mothers and their mothers before them
who thinking of their children's health
worked hard in the kitchen,
we take customer orders, one dish at a time,
and prepare the food right there. 
That has always been important to us.



In order for us to get closer to that feeling a mother has, preparing for her family... We wash and prepare vegetables, at the shop
We shave the dried bonito, making soup stock, at the shop
We carefully make pickles and marinade in the shop
We grill, simmer, and cook, at the shop.
We make good food by making the effort.




</td>
</tr>
</tbody></table>Ootoya has one brand. It makes "home-cooked food", on the spot, and that is its claim to fame. It has approximately 340 restaurants as of the end of May, across all locations, run by the company or by franchisees.Colowide runs, or owns 50% of companies which run, a total of nearly 50 different brands across 2700 restaurants ranging from Karubi, "hamburg steak", sushi, cooked seafood, tonkatsu, Italian, French, Spanish, pizza, yakitori, several "regional food" specialty chains, shabu shabu, Freshness Burger, Wolfgang Puck, and others. They even have a new steak grill and deli food restaurant in Tokyo called "The Dad Bod." Colowide's revenue is, not unexpectedly with 8x the storecount, about 10x higher than Ootoya's. Colowide tries to run things efficiently, and so tends to run things wherever possible with centralized kitchen hubs feeding pre-prepared dishes and content to the for finishing at restaurant kitchens. For more on the differing natures of Ootoya and Colowide, please refer to <a href="https://www.smartkarma.com/profiles/mio-kato-cfa" target="_blank" data-smartkarma-citation="accounts:713" rel="noopener">Mio Kato, CFA</a>'s writeup in <a href="https://www.smartkarma.com/insights/ootoya-the-order-may-be-delivered-but-it-could-leave-a-bad-taste-in-colowide-s-mouth" target="_blank" data-smartkarma-citation="insights:41123" rel="noopener">Ootoya – The Order May Be Delivered but It Could Leave a Bad Taste in Colowide’s Mouth</a>. There is nothing I disagree with there. The Colowide model did not appeal to Ootoya management when Colowide approached the firm, so negotiations went nowhere. Colowide made overtures to Ootoya shareholders, proposing that Ootoya become a subsidiary, before the shareholder meeting starting in April, and their proposals got soundly defeated at the AGM at the end of June 2020. Crushed, in fact. In response, Colowide launched a hostile tender offer to go from 19.2% to 51% of shares out. Ootoya's <a href="https://contents.xj-storage.jp/xcontents/AS00928/c8abc4ef/889c/4d35/ac82/8151f88b2ce9/140120200709460175.pdf" target="_blank" rel="noopener">initial response</a> said the Tender Offer was launched without warning, and proposes to make Ootoya a subsidiary despite the fact that it's proposals suffered a resounding defeat just two weeks ago. Ootoya will separately release an official Target Opinion. This is due 10 days from the Colowide announcement. I expect it to declare opposition to this hostile Tender Offer but I do not see what Ootoya can do. Ootoya is being priced expensively here. And that is in the middle of a pandemic which is causing the firm to burn cash. It is not clear who might rescue Ootoya from a buyer who wants to change the entire ethos of the Ootoya brand.  More below the fold, with charts, and of course, Ye Olde Arb Grids.

Japanese Restaurant Chain Amalgamator Colowide Co Ltd (7616 JP) purchased stakes in OOTOYA Holdings (2705 JP) last autumn from two founding family members who wanted to sell. They they purchased a small number of shares in the market. That got them to just over 19%. Colowide approached Ootoya to see if they could join together as Colowide has by purchasing 50+% stakes in Atom Corp (7412 JP) and Kappa Create (7421 JP) and REINS International (formerly known as Rex Holdings, purchased from Advantage Partners in 2012 and 2015). Ootoya has a particular shtick, which is well different than other chains in Japan. This is the founding ethos and it is clear as clear can be on their homepage.









Real Food. Ootoya


Our motto is "Japanese meals"
The way our mothers and their mothers before them
who thinking of their children's health
worked hard in the kitchen,
we take customer orders, one dish at a time,
and prepare the food right there. 
That has always been important to us.



In order for us to get closer to that feeling a mother has, preparing for her family...  We wash and prepare vegetables, at the shop
We shave the dried bonito, making soup stock, at the shop
We carefully make pickles and marinade in the shop
We grill, simmer, and cook, at the shop.
We make good food by making the effort.






Ootoya has one brand. It makes "home-cooked food", on the spot, and that is its claim to fame. It has approximately 340 restaurants as of the end of May, across all locations, run by the company or by franchisees.Colowide runs, or owns 50% of companies which run, a total of nearly 50 different brands across 2700 restaurants ranging from Karubi, "hamburg steak", sushi, cooked seafood, tonkatsu, Italian, French, Spanish, pizza, yakitori, several "regional food" specialty chains, shabu shabu, Freshness Burger, Wolfgang Puck, and others. They even have a new steak grill and deli food restaurant in Tokyo called "The Dad Bod." Colowide's revenue is, not unexpectedly with 8x the storecount, about 10x higher than Ootoya's. Colowide tries to run things efficiently, and so tends to run things wherever possible with centralized kitchen hubs feeding pre-prepared dishes and content to the for finishing at restaurant kitchens. For more on the differing natures of Ootoya and Colowide, please refer to Mio Kato, CFA's writeup in Ootoya – The Order May Be Delivered but It Could Leave a Bad Taste in Colowide’s Mouth. There is nothing I disagree with there. The Colowide model did not appeal to Ootoya management when Colowide approached the firm, so negotiations went nowhere. Colowide made overtures to Ootoya shareholders, proposing that Ootoya become a subsidiary, before the shareholder meeting starting in April, and their proposals got soundly defeated at the AGM at the end of June 2020. Crushed, in fact. In response, Colowide launched a hostile tender offer to go from 19.2% to 51% of shares out. Ootoya's initial response said the Tender Offer was launched without warning, and proposes to make Ootoya a subsidiary despite the fact that it's proposals suffered a resounding defeat just two weeks ago. Ootoya will separately release an official Target Opinion. This is due 10 days from the Colowide announcement. I expect it to declare opposition to this hostile Tender Offer but I do not see what Ootoya can do. Ootoya is being priced expensively here. And that is in the middle of a pandemic which is causing the firm to burn cash. It is not clear who might rescue Ootoya from a buyer who wants to change the entire ethos of the Ootoya brand.  More below the fold, with charts, and of course, Ye Olde Arb Grids.

Colowide Partial Tender for Ootoya Is a Sell

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Equity Bottom-Up

Following up on <a href="https://www.smartkarma.com/profiles/campbell-gunn" target="_blank" data-smartkarma-citation="accounts:2531" rel="noopener">Campbell Gunn</a>’s excellent <a href="https://www.smartkarma.com/insights/japan-who-s-swimming-naked-part-2-altman-z-score" target="_blank" rel="noopener">work</a> on screening for potentially distressed companies in the deteriorating economic environment, we decided to look closer at Colowide. The company did not show up on the audit screen but featured prominently on the Altman Z-score screen. We discuss why and detail our concerns regarding the company below.

Following up on Campbell Gunn’s excellent work on screening for potentially distressed companies in the deteriorating economic environment, we decided to look closer at Colowide. The company did not show up on the audit screen but featured prominently on the Altman Z-score screen. We discuss why and detail our concerns regarding the company below.

Colowide – Swimming Naked into the Covid Sea

Japan

ATOM CORPORATION operates revolving sushi restaurant chain known as Atom Boy. The Company also has BBQ and pork cutlet restaurants and started Italian food business.  The Company operates its own restaurants and also has franchise in Aichi, Fukui,and Ishikawa prefectures.

Atom Corp (7412 JP)

🇯🇵 Japan • Colowide (7616 JP) - A Bite Too Far

LISTED RESTAURANTS

Campbell Gunn

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

BRUTAL - The summer earnings 'season' reflected the broadening impact of COVID-19 on the Japanese and world economies, however, in terms of profit...

Campbell Gunn

Colowide Partial Tender for Ootoya Is a Sell

Japanese Restaurant Chain Amalgamator Colowide Co Ltd (7616 JP) purchased stakes in OOTOYA Holdings (2705 JP) last autumn from two founding family...

Travis Lundy

Colowide – Swimming Naked into the Covid Sea

Following up on Campbell Gunn’s excellent work on screening for potentially distressed companies in the deteriorating economic environment, we...

Mio Kato