'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.

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/005/original/2020-04-02_06-04-47.png?1585775193" class="editor-image img-responsive" data-smartkarma-image-id="126005"></figure><div class="content-caption">Source • Japan Analytics</div>WEDNESDAY 1ST APRIL - The fallout in the financial Sectors continued on Wednesday with <a href="https://www.smartkarma.com/entities/dai-ichi-life-insurance" target="_blank" data-smartkarma-citation="entities:1109:1" rel="noopener">Dai Ichi Life Insurance (8750 JP)</a>halving its Ordinary Profit forecast and almost dipping into a net loss. The ¥209 billon worth of revisions relates to market value adjustments at Frontier Life and a decline in the share price of equity affiliate <a href="https://www.smartkarma.com/entities/janus-henderson-group-plc" target="_blank" data-smartkarma-citation="entities:26077:1" rel="noopener">Janus Henderson (JHG US)</a>. The dividend remains unchanged. Of the sixteen revisions and five results announced, our positive/negative scoring ratio was 4:10 for revisions and 2:3 for results.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/006/original/File%202020-04-01%2020%2015%2017.jpeg?1585775842" class="editor-image img-responsive" data-smartkarma-image-id="126006"></figure><div class="content-caption">Source • NHK</div>MASKING THE PROBLEM - Despite calls from medical experts and widespread rumours of stricter measures, the Abe Government has limited its response to extending school closures for another month and sending every household two washable cloth masks. Mask wearing and social distancing are suddenly now rife in political circles. Unfortunately, so are some xenophobic comments. In a similar vein, <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>  has stopped receiving airmail to be sent to 126 countries and any mail to a further 27.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/023/original/2020-04-02_07-13-19.png?1585779225" class="editor-image img-responsive" data-smartkarma-image-id="126023"></figure><div class="content-caption">Source • Japan Analytics</div>MARKETS - The BoJ's market intervention was only half that of the previous four, however, was still over 4% of TOPIX Value Traded.  We continue to recommend hitting their bid and waiting for the absolute value opportunity.

Source • Japan AnalyticsWEDNESDAY 1ST APRIL - The fallout in the financial Sectors continued on Wednesday with Dai Ichi Life Insurance (8750 JP)halving its Ordinary Profit forecast and almost dipping into a net loss. The ¥209 billon worth of revisions relates to market value adjustments at Frontier Life and a decline in the share price of equity affiliate Janus Henderson (JHG US). The dividend remains unchanged. Of the sixteen revisions and five results announced, our positive/negative scoring ratio was 4:10 for revisions and 2:3 for results.Source • NHKMASKING THE PROBLEM - Despite calls from medical experts and widespread rumours of stricter measures, the Abe Government has limited its response to extending school closures for another month and sending every household two washable cloth masks. Mask wearing and social distancing are suddenly now rife in political circles. Unfortunately, so are some xenophobic comments. In a similar vein, Japan Post (6178 JP)  has stopped receiving airmail to be sent to 126 countries and any mail to a further 27.Source • Japan AnalyticsMARKETS - The BoJ's market intervention was only half that of the previous four, however, was still over 4% of TOPIX Value Traded.  We continue to recommend hitting their bid and waiting for the absolute value opportunity.

🇯🇵 JAPAN • Revisions & Results Update 1st April - Masking the Problem

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Quantitative Analysis

This is the next in a series of JAPAN DELTA insights regarding historical, recent, and forward flow dynamics of Japan equities. The first in this series was <a href="https://www.smartkarma.com/insights/japan-delta-i-the-boj-ups-etf-buying" target="_blank" data-smartkarma-citation="insights:37528" rel="noopener">JAPAN DELTA I - The BOJ Ups ETF Buying</a>.<div>The TSE (now JPX) historically releases the data of <a href="http://www.jpx.co.jp/english/markets/statistics-equities/investor-type/index.html" target="_blank" rel="noopener">Trading by Type of Investors</a> on a weekly basis, by volume and by value. In that data set, the TSE tells you what the gross buys and sells and net flows are: </div><div><ul>
<li>All flows are first divided between proprietary and agency flows. </li>
<li>Gross customer flows are then separated into four major categories: trading by individuals, trading by foreigners, trading by institutions, and trading on behalf of other securities firms without seats on the exchange. </li>
<li>Institutions are separated between financial institutions (life and non-life insurers, banks, trust banks, other) and corporations (business corporations, other non-financials (which includes govt bodies acting directly (like the MoF)), and investment trusts).</li>
</ul></div><div>
In terms of actual trading flow, if one measures the gross flows...
<ul>
<li>
Individuals and Foreign Investors regularly make up 80-90% of trading volume by customers.</li>
<li>In terms of the absolute value of the net trading (summing up absolute values of nets), Individuals and Foreigners have a long-term average of 30% and 35% of summed nets of the 'customer' category. Trust Banks are about 15%. Investment Trusts and Businesses are ~5-7% each. The remainder is City Banks and Life Insurers, who trade relatively little.</li>
<li>
Corporations conduct IPOs (and Offerings) and buy back shares but only the buybacks show up in the TSE data. That means they are almost always - over a certain average period - net buyers. </li>
<li>That means on a net basis, Everybody Other Than Corporates is a net seller over time because for the past 15 years, buybacks are larger than IPOs and Offerings, and the IPOs and Offerings are not included in the TSE data.</li>
</ul>
The above means, with virtual mathematical certainty, that over time, Foreigners and Individuals will end up doing the bulk of their buying from and selling to each other unless the trading volume splits change reasonably dramatically. The question is whether the buying and selling Foreigners and Individuals do with each other has a pattern. 
Indeed, it does. Much more below the fold. 
</div>

This is the next in a series of JAPAN DELTA insights regarding historical, recent, and forward flow dynamics of Japan equities. The first in this series was JAPAN DELTA I - The BOJ Ups ETF Buying.The TSE (now JPX) historically releases the data of Trading by Type of Investors on a weekly basis, by volume and by value. In that data set, the TSE tells you what the gross buys and sells and net flows are: 
All flows are first divided between proprietary and agency flows. 
Gross customer flows are then separated into four major categories: trading by individuals, trading by foreigners, trading by institutions, and trading on behalf of other securities firms without seats on the exchange. 
Institutions are separated between financial institutions (life and non-life insurers, banks, trust banks, other) and corporations (business corporations, other non-financials (which includes govt bodies acting directly (like the MoF)), and investment trusts).

In terms of actual trading flow, if one measures the gross flows...


Individuals and Foreign Investors regularly make up 80-90% of trading volume by customers.
In terms of the absolute value of the net trading (summing up absolute values of nets), Individuals and Foreigners have a long-term average of 30% and 35% of summed nets of the 'customer' category. Trust Banks are about 15%. Investment Trusts and Businesses are ~5-7% each. The remainder is City Banks and Life Insurers, who trade relatively little.

Corporations conduct IPOs (and Offerings) and buy back shares but only the buybacks show up in the TSE data. That means they are almost always - over a certain average period - net buyers. 
That means on a net basis, Everybody Other Than Corporates is a net seller over time because for the past 15 years, buybacks are larger than IPOs and Offerings, and the IPOs and Offerings are not included in the TSE data.

The above means, with virtual mathematical certainty, that over time, Foreigners and Individuals will end up doing the bulk of their buying from and selling to each other unless the trading volume splits change reasonably dramatically. The question is whether the buying and selling Foreigners and Individuals do with each other has a pattern. 
Indeed, it does. Much more below the fold. 


JAPAN DELTA II - Foreigners And Trust Banks a WildCard

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. 

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/123/035/original/2020-03-15_07-07-04.png?1584223644" class="editor-image img-responsive" data-smartkarma-image-id="123035"></figure><div class="content-caption">Source • Japan Analytics</div>RELATIVE VALUE - Since the recent peak of December 17th, the TOPIX Index has fallen by 28% in 56 trading days. The -0.57% daily average rate of decline over the last three months has only been exceeded on 32 of the 10,142 days since March 1979, eight of which occurred in 1990, with the balance in 2008. From the January 23rd 2018 peak of 1,911, the index has fallen by 34% and is within 3% of our target (expressed in terms of Total Market Value ex REITs) outlined in our <a href="https://www.smartkarma.com/insights/japan-market-update-opportunity-knocks" target="_blank" data-smartkarma-citation="insights:37049" rel="noopener">Opportunity Knocks?</a> Insight published on 1st March. The market is also within 5% of the TOPIX low of 1,196 of 12th February 2016, which we expect will provide some short-term support. Although Japan and many other developed world economies are now in recession, markets do not fall in a straight line forever. Japanese equities now offer attractive relative value and should outperform over the coming months.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/123/034/original/2020-03-15_06-53-01.png?1584222882" class="editor-image img-responsive" data-smartkarma-image-id="123034"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/123/036/original/2020-03-15_07-18-49.png?1584224347" class="editor-image img-responsive" data-smartkarma-image-id="123036"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/123/037/original/2020-03-15_07-23-55.png?1584224666" class="editor-image img-responsive" data-smartkarma-image-id="123037"></figure><div class="content-caption">Source • Japan Analytics</div>IT'S DIFFERENT THIS TIME - Most bear markets in Japan have coincided with periods of Yen strength, including the 29% 2015/16 decline when the currency strengthened by 19%. Repeating the rate of decline analysis above, in US dollar terms there have only been four days in the last twenty-eight years with worse 56-day rates of decline - all in October 2008. All four days provided fearless investors with excellent medium-term gains. Although this increase in market volatility may be less welcome for international investors in Japanese equities, the impact of the Covid-19 recession on the Japanese economy will be more muted. Also, the 48% collapse in the oil price year-to-date will help offset the negative impact of the October 2019 increase in the consumption tax and the decline in export sales in Europe. Lastly, we would suggest that the much-derided net cash that Japanese corporates 'hoard' for rainy days such as these, should delay the need for increases in credit lines. Our recent series of Insights on<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"> Who’s Swimming Naked?</a> cover those companies to which this does not apply. Overall, for Japan at least, it is different this time.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/123/039/original/File%202020-03-15%203%2024%2020.jpeg?1584225464" class="editor-image img-responsive" data-smartkarma-image-id="123039"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/123/040/original/File%202020-03-15%203%2026%2031.jpeg?1584225508" class="editor-image img-responsive" data-smartkarma-image-id="123040"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/123/041/original/File%202020-03-15%207%2044%2021.jpeg?1584225894" class="editor-image img-responsive" data-smartkarma-image-id="123041"></figure><div class="content-caption">Source • Max Roser, Hannah Ritchie and Esteban Ortiz-Ospina (2020) - "Coronavirus Disease (COVID-19) – Research and Statistics". Published online at OurWorldInData.org. Retrieved from: 'https://ourworldindata.org/coronavirus' [Online Resource]</div>CONTAINING COVID - According to <a href="https://ourworldindata.org/coronavirus" target="_blank" rel="noopener">data</a> from the peerless Global Change Data Lab at Oxford University, Japan has, (except for the unfortunate passengers and crew on the Diamond Princess cruise ship), managed to contain Covid-19 better than any other large nation. While, there is some scepticism that this outcome could be a result of under-testing to avoid cancellation of the Olympic Games; nevertheless, the recorded cases fatality rate in a country with an above-average age profile is surprisingly low.  Currently, the daily increase in active Covid-19 cases in Japan is less than one hundred and was only seventeen on March 15th. The cumulative number of confirmed Covid-19 fatalities is 24, of which two occurred yesterday. The confirmed number of cases per 100,000 population is 0.65, which compares with 19.5 in South Korea, 16.5 in Italy and 12 in Iran. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/123/038/original/2020-03-15_07-34-05.png?1584225268" class="editor-image img-responsive" data-smartkarma-image-id="123038"></figure><div class="content-caption">Source • oann.com</div>KEEP CALM AND CARRY ON - Last night's press conference by Prime Minister Abe was in stark contrast to the sombre tone to those of Prime Minister Johnson of the United Kingdom and the tragicomic ramblings of the US President. Having received the legislative powers to declare a state of emergency, Abe declined at this stage to invoke any social restrictions beyond the already-announced school closures. As in the UK, sporting authorities are cancelling events or holding them sine populo. Japan's long obsession with cleanliness, the culture of bowing as a greeting and readiness to conform have served to 'flatten the curve'. The increased focus on such practices has also resulted in a very low incidence of seasonal influenza this year. Japan also has significantly lower levels of air pollution compared to China, Iran and northern Italy, a  factor that has become a factor in fatality rates, especially amongst the elderly. Although internal travel and restaurant patronage have sharply declined in Japan, shops are open and are well-stocked (except for now-rationed paper products) and 'free movement' with slightly-greater-than-normal social distancing is the norm. Whatever the motivations may be regarding the Olympics and Abe's legacy, Japan is unwilling to force the economy into the economic depression that would be the result of prolonged lockdown. A COVID-19 WORLD - This 'keep-calm-carry-on' model of a Covid-19-prevalent world (as is also seen in Singapore and Taiwan) will eventually have to be applied globally. These countries rapid transition to the new 'Covid-19 world' should result in better short-term outcomes for these economies.  The UK is currently being criticised for attempting to follow a version of this model, and may eventually have to go against the advice of its epidemiologists. Fortunately, for now, the general public are giving the UK government the benefit of the doubt. There will be a sharp divergence in the medium-term economic outlooks for countries taking these two 'paths' with those that are over-reacting paying a heavy price. While this does not bode well for the Eurozone, East Asia, including Japan, should emerge in better shape in this new 'viral' world.      <div class="content-highlight">In the DETAIL section below, we shall review a number of our favourite market indicators, recent sector performance and make some recommendations as to how to harness this once-in-a-decade opportunity to buy high-quality Japanese companies at attractive prices.</div>

Source • Japan AnalyticsRELATIVE VALUE - Since the recent peak of December 17th, the TOPIX Index has fallen by 28% in 56 trading days. The -0.57% daily average rate of decline over the last three months has only been exceeded on 32 of the 10,142 days since March 1979, eight of which occurred in 1990, with the balance in 2008. From the January 23rd 2018 peak of 1,911, the index has fallen by 34% and is within 3% of our target (expressed in terms of Total Market Value ex REITs) outlined in our Opportunity Knocks? Insight published on 1st March. The market is also within 5% of the TOPIX low of 1,196 of 12th February 2016, which we expect will provide some short-term support. Although Japan and many other developed world economies are now in recession, markets do not fall in a straight line forever. Japanese equities now offer attractive relative value and should outperform over the coming months.Source • Japan AnalyticsIT'S DIFFERENT THIS TIME - Most bear markets in Japan have coincided with periods of Yen strength, including the 29% 2015/16 decline when the currency strengthened by 19%. Repeating the rate of decline analysis above, in US dollar terms there have only been four days in the last twenty-eight years with worse 56-day rates of decline - all in October 2008. All four days provided fearless investors with excellent medium-term gains. Although this increase in market volatility may be less welcome for international investors in Japanese equities, the impact of the Covid-19 recession on the Japanese economy will be more muted. Also, the 48% collapse in the oil price year-to-date will help offset the negative impact of the October 2019 increase in the consumption tax and the decline in export sales in Europe. Lastly, we would suggest that the much-derided net cash that Japanese corporates 'hoard' for rainy days such as these, should delay the need for increases in credit lines. Our recent series of Insights on Who’s Swimming Naked? cover those companies to which this does not apply. Overall, for Japan at least, it is different this time.Source • Max Roser, Hannah Ritchie and Esteban Ortiz-Ospina (2020) - "Coronavirus Disease (COVID-19) – Research and Statistics". Published online at OurWorldInData.org. Retrieved from: 'https://ourworldindata.org/coronavirus' [Online Resource]CONTAINING COVID - According to data from the peerless Global Change Data Lab at Oxford University, Japan has, (except for the unfortunate passengers and crew on the Diamond Princess cruise ship), managed to contain Covid-19 better than any other large nation. While, there is some scepticism that this outcome could be a result of under-testing to avoid cancellation of the Olympic Games; nevertheless, the recorded cases fatality rate in a country with an above-average age profile is surprisingly low.  Currently, the daily increase in active Covid-19 cases in Japan is less than one hundred and was only seventeen on March 15th. The cumulative number of confirmed Covid-19 fatalities is 24, of which two occurred yesterday. The confirmed number of cases per 100,000 population is 0.65, which compares with 19.5 in South Korea, 16.5 in Italy and 12 in Iran. Source • oann.comKEEP CALM AND CARRY ON - Last night's press conference by Prime Minister Abe was in stark contrast to the sombre tone to those of Prime Minister Johnson of the United Kingdom and the tragicomic ramblings of the US President. Having received the legislative powers to declare a state of emergency, Abe declined at this stage to invoke any social restrictions beyond the already-announced school closures. As in the UK, sporting authorities are cancelling events or holding them sine populo. Japan's long obsession with cleanliness, the culture of bowing as a greeting and readiness to conform have served to 'flatten the curve'. The increased focus on such practices has also resulted in a very low incidence of seasonal influenza this year. Japan also has significantly lower levels of air pollution compared to China, Iran and northern Italy, a  factor that has become a factor in fatality rates, especially amongst the elderly. Although internal travel and restaurant patronage have sharply declined in Japan, shops are open and are well-stocked (except for now-rationed paper products) and 'free movement' with slightly-greater-than-normal social distancing is the norm. Whatever the motivations may be regarding the Olympics and Abe's legacy, Japan is unwilling to force the economy into the economic depression that would be the result of prolonged lockdown. A COVID-19 WORLD - This 'keep-calm-carry-on' model of a Covid-19-prevalent world (as is also seen in Singapore and Taiwan) will eventually have to be applied globally. These countries rapid transition to the new 'Covid-19 world' should result in better short-term outcomes for these economies.  The UK is currently being criticised for attempting to follow a version of this model, and may eventually have to go against the advice of its epidemiologists. Fortunately, for now, the general public are giving the UK government the benefit of the doubt. There will be a sharp divergence in the medium-term economic outlooks for countries taking these two 'paths' with those that are over-reacting paying a heavy price. While this does not bode well for the Eurozone, East Asia, including Japan, should emerge in better shape in this new 'viral' world.      In the DETAIL section below, we shall review a number of our favourite market indicators, recent sector performance and make some recommendations as to how to harness this once-in-a-decade opportunity to buy high-quality Japanese companies at attractive prices.

🇯🇵 JAPAN MARKET UPDATE • Relative Value: Short-Term Buy On Japanese Equities

<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

<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

Japan

Japan Post Holdings Co. Ltd. operates post stations, banks, and insurance business. The Company offers letters and goods transportation services, stamp sales, deposits, loans, and insurance products.

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Japan Post Holdings (6178 JP)

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