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

Shiseido is scheduled to release its 2Q19 earnings on 8th August 2019. All other Japanese cosmetic companies have already reported their results and most of them had a relatively weak quarter when compared to the last 2-3 years. This was mainly down to the relatively weaker demand in the domestic market especially in product categories such as UV care, Shampoo and Milky Lotions.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/048/original/1.PNG?1565158215" class="editor-image img-responsive" data-smartkarma-image-id="95048"></figure><div class="content-caption">Source: Truedata POS</div>

Shiseido is scheduled to release its 2Q19 earnings on 8th August 2019. All other Japanese cosmetic companies have already reported their results and most of them had a relatively weak quarter when compared to the last 2-3 years. This was mainly down to the relatively weaker demand in the domestic market especially in product categories such as UV care, Shampoo and Milky Lotions.Source: Truedata POS

Shiseido: POS Alternative Data Report - 2Q19 Earnings

Our analysis of Truedata POS sales of FANCL’s Nutritional Supplements business indicates a 23% YoY growth in 1QFY03/20. A big part of this growth came from new products such as Naishi Support and Nyosan Support. The seasoned products such as Calolimit showed signs of a slowdown on a QoQ basis. However, the growth was still positive for Calolimit in YoY terms.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/094/489/original/1.PNG?1564461970" class="editor-image img-responsive" data-smartkarma-image-id="94489"></figure><div class="content-caption">Source: Truedata POS</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/094/490/original/2.PNG?1564461984" class="editor-image img-responsive" data-smartkarma-image-id="94490"></figure><div class="content-caption">Source: Truedata POS</div>We have used our analysis of POS data to forecast the 1QFY03/20 revenues for the Nutritional Supplements business. Our POS data covers about 4% of FANCL’s Nutritional Supplements Business’ domestic revenue, thus improving the reliability of our forecasts. We have used a linear regression to forecast the segment revenues from POS data and it indicates a YoY growth rate in the high-teens range for 1QFY03/20.

Our analysis of Truedata POS sales of FANCL’s Nutritional Supplements business indicates a 23% YoY growth in 1QFY03/20. A big part of this growth came from new products such as Naishi Support and Nyosan Support. The seasoned products such as Calolimit showed signs of a slowdown on a QoQ basis. However, the growth was still positive for Calolimit in YoY terms.Source: Truedata POSSource: Truedata POSWe have used our analysis of POS data to forecast the 1QFY03/20 revenues for the Nutritional Supplements business. Our POS data covers about 4% of FANCL’s Nutritional Supplements Business’ domestic revenue, thus improving the reliability of our forecasts. We have used a linear regression to forecast the segment revenues from POS data and it indicates a YoY growth rate in the high-teens range for 1QFY03/20.

FANCL: Truedata POS Alternative Data Report: Robust Growth in 1QFY03/20 Via New Products

Kao is a well-known Japanese conglomerate involved in various business activities ranging from FMCG products to chemicals. The company operates in five main segments which include the cosmetics business, hair care and skin care business, human health care business, fabric and home care business and the chemical business. The human health care segment is a key segment for Kao as it accounted for an average of 18.4% and 16.4% of Kao’s revenues and operating profits respectively in the past five years. The human health care business segment is centred around two main brands, the Merries diapers and Laurier sanitary napkins. Merries diapers account for about 50% of segment’s revenues and it is one of the biggest brands at Kao’s disposal. The main markets for Merries diapers include China, Japan and Indonesia. However, the company believes that about 50% of its sales in Japan are taken back to China to resell through unofficial e-commerce channels.

Kao is a well-known Japanese conglomerate involved in various business activities ranging from FMCG products to chemicals. The company operates in five main segments which include the cosmetics business, hair care and skin care business, human health care business, fabric and home care business and the chemical business. The human health care segment is a key segment for Kao as it accounted for an average of 18.4% and 16.4% of Kao’s revenues and operating profits respectively in the past five years. The human health care business segment is centred around two main brands, the Merries diapers and Laurier sanitary napkins. Merries diapers account for about 50% of segment’s revenues and it is one of the biggest brands at Kao’s disposal. The main markets for Merries diapers include China, Japan and Indonesia. However, the company believes that about 50% of its sales in Japan are taken back to China to resell through unofficial e-commerce channels.

Merries Baby Diaper Business: Struggles to Continue Despite Company Remarks a Quick Turnaround

Equity Capital Markets

Shinnihonseiyaku Co Ltd / Equity Capital Markets

Towards the end of May 2019, Shinnihonseiyaku filed for an IPO on the mothers board of the Tokyo stock exchange. The primary offering is very small in this IPO and most of the shares sold through this offering are from the existing shareholders.Based on the given price range for the stock, Shinnihonseiyaku Co.Ltd would be valued in the range of ¥20-23bn in EV, which implies a FY2018 EV/EBIT range of 8.1-9.1x. The multiples seem cheap considering what the peers in the Japanese cosmetics industry are trading at currently and the fact that the returns on capital are higher than the peers makes it attractive on the surface. However, we see significant red flags that may affect the company's returns over the medium to long term.<table class="table table-striped"><tbody>
<tr>
<td>IPO Details</td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td>Book Building</td>
<td colspan="3">From 2019/06/11 to 2019/06/17</td>
</tr>
<tr>
<td>Offer</td>
<td colspan="3">From 2019/06/19 to 2019/06/24</td>
</tr>
<tr>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td>Selling Shareholders</td>
<td>4,570,000</td>
<td></td>
<td></td>
</tr>
<tr>
<td>Overallotment Option</td>
<td>730,000</td>
<td></td>
<td></td>
</tr>
<tr>
<td>New Issue</td>
<td>300,000</td>
<td></td>
<td></td>
</tr>
<tr>
<td>Existing Shares</td>
<td>20,581,300</td>
<td></td>
<td></td>
</tr>
<tr>
<td>Shares Outstanding Post IPO</td>
<td>20,881,300</td>
<td></td>
<td></td>
</tr>
<tr>
<td></td>
<td>Low</td>
<td>High</td>
<td></td>
</tr>
<tr>
<td>Price Range</td>
<td>1,350</td>
<td>1,470</td>
<td></td>
</tr>
<tr>
<td>Expected Market Cap - in ¥m</td>
<td>28,190</td>
<td>30,696</td>
<td></td>
</tr>
<tr>
<td>Expected EV - in ¥m</td>
<td>20,121</td>
<td>22,596</td>
<td></td>
</tr>
<tr><td colspan="4">*based on March 2019 debt and cash and IPO proceeds</td></tr>
<tr>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td>Implied Multiples- FY2018 </td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td>EV/Sales</td>
<td>0.6x</td>
<td>0.7x</td>
<td></td>
</tr>
<tr>
<td>EV/EBIT</td>
<td>8.1x</td>
<td>9.1x</td>
<td></td>
</tr>
<tr>
<td>P/E</td>
<td>16.1x</td>
<td>17.5x</td>
<td></td>
</tr>
</tbody></table>Source: Company Disclosures

Towards the end of May 2019, Shinnihonseiyaku filed for an IPO on the mothers board of the Tokyo stock exchange. The primary offering is very small in this IPO and most of the shares sold through this offering are from the existing shareholders.Based on the given price range for the stock, Shinnihonseiyaku Co.Ltd would be valued in the range of ¥20-23bn in EV, which implies a FY2018 EV/EBIT range of 8.1-9.1x. The multiples seem cheap considering what the peers in the Japanese cosmetics industry are trading at currently and the fact that the returns on capital are higher than the peers makes it attractive on the surface. However, we see significant red flags that may affect the company's returns over the medium to long term.

IPO Details





Book Building
From 2019/06/11 to 2019/06/17


Offer
From 2019/06/19 to 2019/06/24








Selling Shareholders
4,570,000




Overallotment Option
730,000




New Issue
300,000




Existing Shares
20,581,300




Shares Outstanding Post IPO
20,881,300





Low
High



Price Range
1,350
1,470



Expected Market Cap - in ¥m
28,190
30,696



Expected EV - in ¥m
20,121
22,596


*based on March 2019 debt and cash and IPO proceeds







Implied Multiples- FY2018 





EV/Sales
0.6x
0.7x



EV/EBIT
8.1x
9.1x



P/E
16.1x
17.5x


Source: Company Disclosures

Shinnihonseiyaku IPO: Perfect One, Not So Perfect Afterall

'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

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/325/original/2019-06-01_09-16-25.png?1559348196" class="editor-image img-responsive" data-smartkarma-image-id="89325"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/326/original/2019-06-01_09-19-21.png?1559348371" class="editor-image img-responsive" data-smartkarma-image-id="89326"></figure>Source: Japan Analytics
</div>INAUSPICIOUS - Since the beginning of the Reiwa era (令和時代), Japanese equities have fallen by 6.1% and have seen only six 'up' days out of the nineteen trading days so far. The strength of the Yen has cut that decline to -3.2% for the minority of foreign investors that are unhedged. The Bank of Japan has purchased ETFs on ten days in the new era including on each of the last three trading sessions - the largest such intervention this calendar year.  Having reached a new five-month low, a decisive low above that of December 25th is required. The market took only two trading days to descend from the current level to that 2018 low, and a fall of 6.7% from Friday's close would breach that level. For the time being, it pays to be net short.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/329/original/2019-06-01_10-10-41.png?1559351453" class="editor-image img-responsive" data-smartkarma-image-id="89329"></figure><div class="content-caption">Source: Japan Analytics</div>CURRENCY RISK? - Much has been made of recent ¥3 move in the US$/JP¥ cross rate in May. The one-year rate of change has been the key driver of the Japanese earnings cycle and, in turn, the market. A rate of ¥108 held through the summer would equate with a breach of the December low and a rate of ¥90 by year-end would be consistent with the low of February 2016 - a 14% decline from the current index level.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/330/original/2019-06-01_10-14-50.png?1559351702" class="editor-image img-responsive" data-smartkarma-image-id="89330"></figure><div class="content-caption">Source: Japan Analytics</div>RSI - The five-day Relative Strength Index could well be in single digits on Monday, which would be the second-most oversold level this year. A short-term recovery can be expected later in the week. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/331/original/2019-06-01_10-28-00.png?1559352497" class="editor-image img-responsive" data-smartkarma-image-id="89331"></figure><div class="content-caption">Source: Japan Analytics</div>TORAKU - The Toraku advance-decline is also back in Oversold territory, but well above the December 2018 low, suggesting further downside to a new cycle low.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/333/original/2019-06-01_10-38-19.png?1559353116" class="editor-image img-responsive" data-smartkarma-image-id="89333"></figure><div class="content-caption">Source: Japan Analytics</div>HIGHS - LOWS - The 'spread' between New Highs and New Lows is negative, but has yet to reach the most recent peak of 14th May of -549 and is well above the December 2018 low of -2,741. A spread of at least -1,000 is needed to confirm a new cycle low.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/332/original/2019-06-01_10-32-11.png?1559352742" class="editor-image img-responsive" data-smartkarma-image-id="89332"></figure><div class="content-caption">Source: Japan Analytics</div>VOLUME SCORE TIMELINE - Volumes remains concentrated in the Internet, Information Technology, REITs, Electrical Equipment, and Energy Sectors, the Materials,  Restaurants, and Multi-Industry Sectors are the volume laggards.<div class="content-highlight">In the DETAIL section below, we will review Sector performance, scores and valuation, Company Results &amp; Revisions and stock performance over the previous two weeks, as well as adding some brief comments on <a href="https://www.smartkarma.com/entities/kikkoman-corp" target="_blank" data-smartkarma-citation="entities:11720:1">Kikkoman (2801 JP)</a>, <a href="https://www.smartkarma.com/entities/inpex-corp" target="_blank" data-smartkarma-citation="entities:20665:1">Inpex (1605 JP)</a>, <a href="https://www.smartkarma.com/entities/keyence-corp" target="_blank" data-smartkarma-citation="entities:3077:1">Keyence (6861 JP)</a>, <a href="https://www.smartkarma.com/entities/leopalace21-corp" target="_blank" data-smartkarma-citation="entities:8244:1">Leopalace21 (8848 JP)</a>, and <a href="https://www.smartkarma.com/entities/dentsu-inc" target="_blank" data-smartkarma-citation="entities:12434:1">Dentsu (4324 JP)</a>.     </div>


Source: Japan Analytics
INAUSPICIOUS - Since the beginning of the Reiwa era (令和時代), Japanese equities have fallen by 6.1% and have seen only six 'up' days out of the nineteen trading days so far. The strength of the Yen has cut that decline to -3.2% for the minority of foreign investors that are unhedged. The Bank of Japan has purchased ETFs on ten days in the new era including on each of the last three trading sessions - the largest such intervention this calendar year.  Having reached a new five-month low, a decisive low above that of December 25th is required. The market took only two trading days to descend from the current level to that 2018 low, and a fall of 6.7% from Friday's close would breach that level. For the time being, it pays to be net short.  Source: Japan AnalyticsCURRENCY RISK? - Much has been made of recent ¥3 move in the US$/JP¥ cross rate in May. The one-year rate of change has been the key driver of the Japanese earnings cycle and, in turn, the market. A rate of ¥108 held through the summer would equate with a breach of the December low and a rate of ¥90 by year-end would be consistent with the low of February 2016 - a 14% decline from the current index level.  Source: Japan AnalyticsRSI - The five-day Relative Strength Index could well be in single digits on Monday, which would be the second-most oversold level this year. A short-term recovery can be expected later in the week. Source: Japan AnalyticsTORAKU - The Toraku advance-decline is also back in Oversold territory, but well above the December 2018 low, suggesting further downside to a new cycle low.Source: Japan AnalyticsHIGHS - LOWS - The 'spread' between New Highs and New Lows is negative, but has yet to reach the most recent peak of 14th May of -549 and is well above the December 2018 low of -2,741. A spread of at least -1,000 is needed to confirm a new cycle low.Source: Japan AnalyticsVOLUME SCORE TIMELINE - Volumes remains concentrated in the Internet, Information Technology, REITs, Electrical Equipment, and Energy Sectors, the Materials,  Restaurants, and Multi-Industry Sectors are the volume laggards.In the DETAIL section below, we will review Sector performance, scores and valuation, Company Results &amp; Revisions and stock performance over the previous two weeks, as well as adding some brief comments on Kikkoman (2801 JP), Inpex (1605 JP), Keyence (6861 JP), Leopalace21 (8848 JP), and Dentsu (4324 JP).     

🇯🇵 JAPAN • Market Update - Retesting the Low

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)

Shiseido: POS Alternative Data Report - 2Q19 Earnings

Shiseido is scheduled to release its 2Q19 earnings on 8th August 2019. All other Japanese cosmetic companies have already reported their results...

Oshadhi Kumarasiri

FANCL: Truedata POS Alternative Data Report: Robust Growth in 1QFY03/20 Via New Products

Our analysis of Truedata POS sales of FANCL’s Nutritional Supplements business indicates a 23% YoY growth in 1QFY03/20. A big part of this growth...

Oshadhi Kumarasiri

Merries Baby Diaper Business: Struggles to Continue Despite Company Remarks a Quick Turnaround

Kao is a well-known Japanese conglomerate involved in various business activities ranging from FMCG products to chemicals. The company operates in...

Oshadhi Kumarasiri

Shinnihonseiyaku IPO: Perfect One, Not So Perfect Afterall

Towards the end of May 2019, Shinnihonseiyaku filed for an IPO on the mothers board of the Tokyo stock exchange. The primary offering is very small...

Oshadhi Kumarasiri

🇯🇵 JAPAN • Market Update - Retesting the Low

INAUSPICIOUS - Since the beginning of the Reiwa era (令和時代), Japanese equities have fallen by 6.1% and have seen only six 'up' days out of the...

Campbell Gunn

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