Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

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

With 36.7% YoY growth in 1Q21, cosmetics exports continue to drive the recovery of the Japanese cosmetics sector. However, the out-of-control COVID-19 situation in the domestic market continues to offset the resurgence of exports with 19.9% YoY decline in January and February 2021.The earnings season of the Japanese cosmetics commenced yesterday with <a href="https://www.smartkarma.com/entities/pola-orbis-holdings-inc" target="_blank" data-smartkarma-citation="entities:2287:1" rel="noopener">Pola Orbis Holdings (4927 JP)</a> generating a modest 0.6% YoY revenue growth in 1Q21, the company’s first YoY revenue growth since June 2018. <a href="https://www.smartkarma.com/entities/kose-corp" target="_blank" data-smartkarma-citation="entities:18009:1" rel="noopener">Kose Corp (4922 JP)</a> reports tomorrow (30th April 2021).Before earnings go into full swing with <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" data-smartkarma-citation="entities:12933:1" rel="noopener">Kao Corp (4452 JP)</a>, <a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl Corp (4921 JP)</a> and <a href="https://www.smartkarma.com/entities/shiseido-company-limited" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido Company (4911 JP)</a> scheduled to report on 7th, 10th and 12th of May 2021 respectively, we analyze the 1Q21 cosmetic industry statistics, using the monthly data released by the Ministry of Economy, Trade and Industry (METI) and the Ministry of Finance.

With 36.7% YoY growth in 1Q21, cosmetics exports continue to drive the recovery of the Japanese cosmetics sector. However, the out-of-control COVID-19 situation in the domestic market continues to offset the resurgence of exports with 19.9% YoY decline in January and February 2021.The earnings season of the Japanese cosmetics commenced yesterday with Pola Orbis Holdings (4927 JP) generating a modest 0.6% YoY revenue growth in 1Q21, the company’s first YoY revenue growth since June 2018. Kose Corp (4922 JP) reports tomorrow (30th April 2021).Before earnings go into full swing with Kao Corp (4452 JP), Fancl Corp (4921 JP) and Shiseido Company (4911 JP) scheduled to report on 7th, 10th and 12th of May 2021 respectively, we analyze the 1Q21 cosmetic industry statistics, using the monthly data released by the Ministry of Economy, Trade and Industry (METI) and the Ministry of Finance.

Japanese Cosmetics Industry: 1Q21 Statistics Update

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Thematic (Sector/Industry)

GAMING PAYABLES - As part of the fallout from Greensill Capital's collapse, much has been made of the risks involved in supply chain finance and the accounting treatment of payables that can be used to 'flatter' balance sheets that are often overloaded with debt. As @matt_levineobserved yesterday:-<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/193/505/original/2021-03-11_10-33-14.png?1615426510" class="editor-image img-responsive" data-smartkarma-image-id="193505"></figure></section>APPLYING THE 'DUMB RULE OF THUMB' TO JAPAN - Accordingly, we have applied a simple screen to our universe of 3,689 Japanse companies with the following criteria:<ol>
<li>Market Cap, ex Treasury Stock,&gt; ¥100 billion (672 companies)</li>
<li> Last Quarter Payable Days &gt; -100 (93 companies)</li>
<li>1-Year change in Average Days Payable &gt; -25 (7 companies)</li>
</ol>We have excluded <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/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>, and <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> from the screening due to their consolidation of financial subsidiaries. The results are in the DETAIL section below; however, the TTM Working Capital Day chart for the largest of the seven by market cap is below. It's 'owner' should be no surprise to followers of the Greensill saga.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/193/508/original/2021-03-11_11-04-24.png?1615428279" class="editor-image img-responsive" data-smartkarma-image-id="193508"></figure></section><div class="content-caption">Source for all charts &amp; tables: Japan Analytics</div>

GAMING PAYABLES - As part of the fallout from Greensill Capital's collapse, much has been made of the risks involved in supply chain finance and the accounting treatment of payables that can be used to 'flatter' balance sheets that are often overloaded with debt. As @matt_levineobserved yesterday:-APPLYING THE 'DUMB RULE OF THUMB' TO JAPAN - Accordingly, we have applied a simple screen to our universe of 3,689 Japanse companies with the following criteria:
Market Cap, ex Treasury Stock,&gt; ¥100 billion (672 companies)
 Last Quarter Payable Days &gt; -100 (93 companies)
1-Year change in Average Days Payable &gt; -25 (7 companies)
We have excluded Sony (6758 JP), Z Holdings (4689 JP), Rakuten (4755 JP), and Japan Post (6178 JP) from the screening due to their consolidation of financial subsidiaries. The results are in the DETAIL section below; however, the TTM Working Capital Day chart for the largest of the seven by market cap is below. It's 'owner' should be no surprise to followers of the Greensill saga.Source for all charts &amp; tables: Japan Analytics

🇯🇵 JAPAN • Greensill, Gaming Payables & The Seven Samurai of Supply Chain Finance

Best World International / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/best-world-international-ltd" target="_blank" data-smartkarma-citation="entities:4600:1" rel="noopener">Best World International (BEST SP)</a> is a Singapore based manufacturer, distributor and a retailor of skincare, personal care and nutritional supplement brands such as Avance, Optrimax, Foodphilo, Margaret Dabbs, DR’s Secret, Miraglo, PentaLab and Bare Feet.
SGX suspended trading of Best World shares in May 2019, following a news article and a short seller report alleging the company of fabricating sales of its China operations. SGX also called for an independent review and it was completed in July last year. The company is currently cooperating with SGX to resolve the issue but the timeline for a possible lifting of the trading suspension remains unclear.
It’s been two years since the initial allegation, yet there are too many unknown variables. At bare minimum, we expect Best World’s robust revenue and OP growth to get hampered over the next few years as the company is forced to do a number of changes to the business model, internal controls and corporate governance measures.

Best World International (BEST SP) is a Singapore based manufacturer, distributor and a retailor of skincare, personal care and nutritional supplement brands such as Avance, Optrimax, Foodphilo, Margaret Dabbs, DR’s Secret, Miraglo, PentaLab and Bare Feet.
SGX suspended trading of Best World shares in May 2019, following a news article and a short seller report alleging the company of fabricating sales of its China operations. SGX also called for an independent review and it was completed in July last year. The company is currently cooperating with SGX to resolve the issue but the timeline for a possible lifting of the trading suspension remains unclear.
It’s been two years since the initial allegation, yet there are too many unknown variables. At bare minimum, we expect Best World’s robust revenue and OP growth to get hampered over the next few years as the company is forced to do a number of changes to the business model, internal controls and corporate governance measures.

Best World International: The End Is Not Yet In Sight

On the back of the optimism over revenue growth from the Chinese cosmetics market, Japanese cosmetics companies with significant exposure to the Chinese cosmetics market (<a href="https://www.smartkarma.com/entities/shiseido-company-limited" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido Company (4911 JP)</a> and <a href="https://www.smartkarma.com/entities/kose-corp" target="_blank" data-smartkarma-citation="entities:18009:1" rel="noopener">Kose Corp (4922 JP)</a>) had a stellar rally and outperformed Topix by 12.2% and 6.3% respectively, since the most recent quarterly earnings.As a result, Kose’s consensus FY+2 EV/OP multiple has reached a new high of 33.4x, compared to the past five-year median of 15.1x.Meanwhile the Kao/Kose price ratio stands at 0.4, which is 12% below the 90-day average ratio and in line with minus two times the standard deviation of the 90-day average ratio, making <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" data-smartkarma-citation="entities:12933:1" rel="noopener">Kao Corp (4452 JP)</a> a hedge on the long side to a short Kose trade.

On the back of the optimism over revenue growth from the Chinese cosmetics market, Japanese cosmetics companies with significant exposure to the Chinese cosmetics market (Shiseido Company (4911 JP) and Kose Corp (4922 JP)) had a stellar rally and outperformed Topix by 12.2% and 6.3% respectively, since the most recent quarterly earnings.As a result, Kose’s consensus FY+2 EV/OP multiple has reached a new high of 33.4x, compared to the past five-year median of 15.1x.Meanwhile the Kao/Kose price ratio stands at 0.4, which is 12% below the 90-day average ratio and in line with minus two times the standard deviation of the 90-day average ratio, making Kao Corp (4452 JP) a hedge on the long side to a short Kose trade.

<ul>
<li>
<a href="https://www.smartkarma.com/entities/shiseido-company-limited" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido Company (4911 JP)</a> delivered strong 4Q20 results yesterday with revenue and operating profit surpassing consensus estimates by ¥5.1bn and ¥19.5bn respectively.</li>
<li>The company’s revenue declined 6.2% YoY in 4Q20, compared to 17.1%, 34.4% and 16.3% in 1Q20, 2Q20 and 3Q20 respectively.</li>
<li>Shiseido made an operating profit of ¥6.1bn in the seasonally weak 4th quarter compared to the consensus operating loss estimate of ¥13.4bn.</li>
<li>The company’s October and November 2020 performance was above its expectations as the China business performed exceptionally well during the singles day sales period. However, the momentum decelerated from December 2020 onwards due to the resurgence of COVID-19 in Japan and the rest of the world.</li>
<li>Nonetheless, the share price rallied over 16% during the last couple of weeks on news regarding the disposal of the personal care business.</li>
</ul>



Shiseido Company (4911 JP) delivered strong 4Q20 results yesterday with revenue and operating profit surpassing consensus estimates by ¥5.1bn and ¥19.5bn respectively.
The company’s revenue declined 6.2% YoY in 4Q20, compared to 17.1%, 34.4% and 16.3% in 1Q20, 2Q20 and 3Q20 respectively.
Shiseido made an operating profit of ¥6.1bn in the seasonally weak 4th quarter compared to the consensus operating loss estimate of ¥13.4bn.
The company’s October and November 2020 performance was above its expectations as the China business performed exceptionally well during the singles day sales period. However, the momentum decelerated from December 2020 onwards due to the resurgence of COVID-19 in Japan and the rest of the world.
Nonetheless, the share price rallied over 16% during the last couple of weeks on news regarding the disposal of the personal care business.


Japan

Kao Corporation is a manufacturer of household and chemical products. The company produces cosmetics, laundry and cleaning products, hygiene products, fatty chemicals, edible oils, and specialty chemicals.

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Kao Corp (4452 JP)

Japanese Cosmetics Industry: 1Q21 Statistics Update

With 36.7% YoY growth in 1Q21, cosmetics exports continue to drive the recovery of the Japanese cosmetics sector. However, the out-of-control COVID...

Oshadhi Kumarasiri

🇯🇵 JAPAN • Greensill, Gaming Payables & The Seven Samurai of Supply Chain Finance

As part of the fallout from Greensill Capital's collapse, much has been made of the risks involved in supply chain finance and the accounting...

Campbell Gunn

Best World International: The End Is Not Yet In Sight

SGX suspended trading of Best World shares in May 2019, following a news article and a short seller report alleging the company of fabricating...

Oshadhi Kumarasiri

Kose: At a New EV/OP Peak

On the back of the optimism over revenue growth from the Chinese cosmetics market, Japanese cosmetics companies with significant exposure to the...

Oshadhi Kumarasiri

Shiseido: Lowballing 2021 Guidance

Previously, we questioned whether Shiseido is playing safe or departing from cost discipline as we felt that that the 4Q20 OP estimate was too low...

Oshadhi Kumarasiri

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