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.

Equity Bottom-Up

We spoke to Chiyoda this morning to get more detail on the impact of COVID lockdowns on the various projects that the company is managing across the world. The impact was exceedingly limited till the end of the March quarter but there are some risks to be aware of.

We spoke to Chiyoda this morning to get more detail on the impact of COVID lockdowns on the various projects that the company is managing across the world. The impact was exceedingly limited till the end of the March quarter but there are some risks to be aware of.

Chiyoda – Direct COVID Impact Limited but Order Flow Recovery Waits on Crude Prices

At the lunch break Chiyoda reported results which were mixed and skewed slightly negative due to a ¥10.2bn forex loss which hurt its already weak equity position. The shares sold off as much as 6.8% vs. the lunch close in the afternoon session but recovered slightly and still finished the day up 3.5%. We go through the details below.

At the lunch break Chiyoda reported results which were mixed and skewed slightly negative due to a ¥10.2bn forex loss which hurt its already weak equity position. The shares sold off as much as 6.8% vs. the lunch close in the afternoon session but recovered slightly and still finished the day up 3.5%. We go through the details below.

Chiyoda – Gross Margin Disappoints but SG&A Control Continues

'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>CUMULATIVE 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:-<ul>
<li>
Operating Cash Flow - Operating Cash Flow comprises all cash flow items relating to transactions with customers and suppliers except inventory cash flows.</li>
<li>
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.</li>
<li>
Inventory Cash Flow - A sub-set of Investing Cash Flow, inventory Cash Flow is the change in Inventory on the Balance Sheet. </li>
<li>
Free Cash Flow - Free Cash Flow the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow.</li>
<li>
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.</li>
<li>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. </li>
</ul>EXCLUDED - 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><a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba (6502 JP)</a>-  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.<div class="content-highlight">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. </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

Event-Driven

Chiyoda has been on something of a tear, up 54% since the 21st of January. We visited the company yesterday to assess whether there were sufficient catalyst to maintain this trend of outperformance. Details below.

Chiyoda has been on something of a tear, up 54% since the 21st of January. We visited the company yesterday to assess whether there were sufficient catalyst to maintain this trend of outperformance. Details below.

Chiyoda – Qatar the Short-Term Catalyst, Pref Share Buyback the Long-Term Catalyst

Following its upward revision to FY guidance, raising OP guidance from ¥19bn to ¥25bn, CP guidance from ¥12bn to ¥20bn and NP guidance from ¥6bn to ¥15bn, Chiyoda delivered results for the 9M period that were roughly in line with FY guidance. OP was ¥24.5bn, CP ¥20.9bn and NP ¥16.9bn. While risks of delays in 4Q are not completely zero, we believe they are low and that the probability of a further beat of new guidance is significant.

Following its upward revision to FY guidance, raising OP guidance from ¥19bn to ¥25bn, CP guidance from ¥12bn to ¥20bn and NP guidance from ¥6bn to ¥15bn, Chiyoda delivered results for the 9M period that were roughly in line with FY guidance. OP was ¥24.5bn, CP ¥20.9bn and NP ¥16.9bn. While risks of delays in 4Q are not completely zero, we believe they are low and that the probability of a further beat of new guidance is significant.

Chiyoda – Profitability Improvement Looking More Sustainable

Japan

CHIYODA CORPORATION constructs, inspects, and maintains industrial plants around the world.  Those plants include oil refinery, petrochemical, food, and pharmaceutical plants.  The Company also provides comprehensive engineering services for such as energy saving, factory automation (FA), and environmental preservation for water treatment and soil purification.

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Chiyoda Corp (6366 JP)

Chiyoda – Direct COVID Impact Limited but Order Flow Recovery Waits on Crude Prices

We spoke to Chiyoda this morning to get more detail on the impact of COVID lockdowns on the various projects that the company is managing across...

Mio Kato

Chiyoda – Gross Margin Disappoints but SG&A Control Continues

At the lunch break Chiyoda reported results which were mixed and skewed slightly negative due to a ¥10.2bn forex loss which hurt its already weak...

Mio Kato

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

CUMULATIVE CASH FLOWS - In this third and final of our series on Japanese companies that might be compromised as the Covid-19 recession unfolds, ...

Campbell Gunn

Chiyoda – Profitability Improvement Looking More Sustainable

Following its upward revision to FY guidance, raising OP guidance from ¥19bn to ¥25bn, CP guidance from ¥12bn to ¥20bn and NP guidance from ¥6bn to...

Mio Kato

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Chiyoda – Direct COVID Impact Limited but Order Flow Recovery Waits on Crude Prices

We spoke to Chiyoda this morning to get more detail on the impact of COVID lockdowns on the various projects that the company is managing across...

Mio Kato

Chiyoda – Gross Margin Disappoints but SG&A Control Continues

At the lunch break Chiyoda reported results which were mixed and skewed slightly negative due to a ¥10.2bn forex loss which hurt its already weak...

Mio Kato

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

CUMULATIVE CASH FLOWS - In this third and final of our series on Japanese companies that might be compromised as the Covid-19 recession unfolds, ...

Campbell Gunn

Chiyoda – Qatar the Short-Term Catalyst, Pref Share Buyback the Long-Term Catalyst

Chiyoda has been on something of a tear, up 54% since the 21st of January. We visited the company yesterday to assess whether there were sufficient...

Mio Kato

Chiyoda – Profitability Improvement Looking More Sustainable

Following its upward revision to FY guidance, raising OP guidance from ¥19bn to ¥25bn, CP guidance from ¥12bn to ¥20bn and NP guidance from ¥6bn to...

Mio Kato