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 first wrote on Sony in mid-2017 noting that <a href="https://www.smartkarma.com/insights/sony-has-got-its-mojo-back-super-slomo-acoustic-surfaces-and-the-world-s-fastest-internet" target="_blank" rel="noopener">Sony Has Got Its Mojo Back: Super Slomo, Acoustic Surfaces, and the World’s Fastest Internet</a> as we felt that Kazuo Hirai’s efforts to restore the company’s innovative culture were starting to bear fruit in a lot of niche areas. In the more than three years since, Sony has built on this momentum and is firing on all cylinders moving into the launch of the PS5 which we believe will be a key driver of the company’s long-term value. While this is hardly a non-consensus opinion, we feel the market may not quite appreciate the degree of potential market share gains hinted at by subtle developments and choices on design. We discuss these and the valuation case below.

We first wrote on Sony in mid-2017 noting that Sony Has Got Its Mojo Back: Super Slomo, Acoustic Surfaces, and the World’s Fastest Internet as we felt that Kazuo Hirai’s efforts to restore the company’s innovative culture were starting to bear fruit in a lot of niche areas. In the more than three years since, Sony has built on this momentum and is firing on all cylinders moving into the launch of the PS5 which we believe will be a key driver of the company’s long-term value. While this is hardly a non-consensus opinion, we feel the market may not quite appreciate the degree of potential market share gains hinted at by subtle developments and choices on design. We discuss these and the valuation case below.

2021 High Conviction – Sony’s Year of the PS5

As with other FA names, Keyence benefitted from strong demand from China in 2Q which propelled a YoY increase in overseas revenue even as the domestic market dropped almost 20%. Nevertheless, rates of decline the US and Europe were not as steep in 2Q and the company’s earnings call also suggested a positive outlook

As with other FA names, Keyence benefitted from strong demand from China in 2Q which propelled a YoY increase in overseas revenue even as the domestic market dropped almost 20%. Nevertheless, rates of decline the US and Europe were not as steep in 2Q and the company’s earnings call also suggested a positive outlook

Prior to Yaskawa’s 1Q results back in July we noted that consensus looked light for the quarter and we felt that it was also too light for both 2Q and the full year. In the end our sales estimate for 1Q of ¥98.4bn was too high as developed markets disappointed more than we expected but OP of ¥6.2bn was close to our estimate of ¥6.7bn with much of the gap explained by the sales miss and our estimate was certainly a lot closer than consensus’ ¥3.7bn estimate. At the time we projected ¥5.3bn in OP for 2Q while consensus was at ¥3.4bn. We also suggested that full year OP could be as high as double consensus’ ¥16.6bn estimate at the time. With 2Q coming in at ¥7.1bn in OP thanks to strong robotics sales we believe consensus, which has since moved its OP estimate up to ¥24.4bn for the full year is still behind the curve… as usual. The question is whether the market has left any room for upside as we believe that while the sell-side is overly conservative, the implied profits based on valuations being granted to the company by the market, are excessively optimistic.

Prior to Yaskawa’s 1Q results back in July we noted that consensus looked light for the quarter and we felt that it was also too light for both 2Q and the full year. In the end our sales estimate for 1Q of ¥98.4bn was too high as developed markets disappointed more than we expected but OP of ¥6.2bn was close to our estimate of ¥6.7bn with much of the gap explained by the sales miss and our estimate was certainly a lot closer than consensus’ ¥3.7bn estimate. At the time we projected ¥5.3bn in OP for 2Q while consensus was at ¥3.4bn. We also suggested that full year OP could be as high as double consensus’ ¥16.6bn estimate at the time. With 2Q coming in at ¥7.1bn in OP thanks to strong robotics sales we believe consensus, which has since moved its OP estimate up to ¥24.4bn for the full year is still behind the curve… as usual. The question is whether the market has left any room for upside as we believe that while the sell-side is overly conservative, the implied profits based on valuations being granted to the company by the market, are excessively optimistic.

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Event-Driven

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/033/original/2020-09-15_10-23-17.png?1600133037" class="editor-image img-responsive" data-smartkarma-image-id="159033"></figure><div class="content-caption">Source for all charts &amp; tables: Japan Analytics</div>THE BUFFETT TRADE - Much has already written on <a href="https://www.smartkarma.com/entities/berkshire-hathaway-inc-cl-b" target="_blank" data-smartkarma-citation="entities:8635:1" rel="noopener">Berkshire Hathaway</a>'s purchase of stakes in Japan's sogo shosha, including on this <a href="https://www.smartkarma.com/insights/a-quick-look-at-the-buffet-trade-and-the-most-obvious-follow-ons" target="_blank" data-smartkarma-citation="insights:43125" rel="noopener">platform</a>. The Japanese trading houses have a long and proud tradition and continue to attract the best talent from at home and abroad. In many respects, they have similarities with BH given their long-term approach to investing and focus on free cash flow generation. The differences are as striking, particularly the exposure to commodities and Asia, and the implications for both BH and Japan are profound.In this DETAIL section, we examine: -<ul>
<li>the macro 'logic' driving these investments,</li>
<li>a more appropriate analytical and valuation methodology for these companies</li>
<li>the historically most-correlated peer groups and companies from both a technical and fundamental perspective if this trade were to be applied more broadly to the Japanese market. </li>
</ul><div class="content-highlight">We can summarise our approach to understanding the rationale behind the Buffett trade in the chart below. The sogo shosha are, in aggregate, significant generators of Residual Comprehensive Income, particularly relative to their current market valuations. Priced at a historically low 0.93x book, Japan's trading houses are one of the world's better deep value trades.</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/053/original/2020-09-15_13-42-01.png?1600144936" class="editor-image img-responsive" data-smartkarma-image-id="159053"></figure>

Source for all charts &amp; tables: Japan AnalyticsTHE BUFFETT TRADE - Much has already written on Berkshire Hathaway's purchase of stakes in Japan's sogo shosha, including on this platform. The Japanese trading houses have a long and proud tradition and continue to attract the best talent from at home and abroad. In many respects, they have similarities with BH given their long-term approach to investing and focus on free cash flow generation. The differences are as striking, particularly the exposure to commodities and Asia, and the implications for both BH and Japan are profound.In this DETAIL section, we examine: -
the macro 'logic' driving these investments,
a more appropriate analytical and valuation methodology for these companies
the historically most-correlated peer groups and companies from both a technical and fundamental perspective if this trade were to be applied more broadly to the Japanese market. 
We can summarise our approach to understanding the rationale behind the Buffett trade in the chart below. The sogo shosha are, in aggregate, significant generators of Residual Comprehensive Income, particularly relative to their current market valuations. Priced at a historically low 0.93x book, Japan's trading houses are one of the world's better deep value trades.

🇯🇵 JAPAN • Analysing The "Buffett Trade", Valuing the Sogo Shosha & The Return of Asian Inflation

Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

We asked Keyence about the impact of COVID-19 on their business. They were not terribly helpful.<ul>
<li>Management expects market conditions to revert to pre-COVID normal as the economy recovers. They see no material change in their business mix, growth drivers or competition. </li>
<li>Their business in China began to recover in the three months to June. Sales in all other regions were down, although activity has picked up recently with the easing of travel restrictions.</li>
<li>As usual, they provided no guidance. </li>
</ul>The share price is sticking near the all-time high reached a month ago. Valuations suggest profit taking is in order. So do economic factors. It took three years for operating profit to recover from the Lehman Shock.

We asked Keyence about the impact of COVID-19 on their business. They were not terribly helpful.
Management expects market conditions to revert to pre-COVID normal as the economy recovers. They see no material change in their business mix, growth drivers or competition. 
Their business in China began to recover in the three months to June. Sales in all other regions were down, although activity has picked up recently with the easing of travel restrictions.
As usual, they provided no guidance. 
The share price is sticking near the all-time high reached a month ago. Valuations suggest profit taking is in order. So do economic factors. It took three years for operating profit to recover from the Lehman Shock.

Japan

KEYENCE CORPORATION develops, manufactures, and sells sensors and measuring instruments used for factory automation (FA) and high technology hobby products. The Company's products include fiber optic sensors, photoelectric sensors, programmable logic controllers (PLC), laser scan micrometers, bar code readers, and radio-controlled model cars.

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Keyence Corp (6861 JP)

2021 High Conviction – Sony’s Year of the PS5

Sony is a key name investors should be focusing on in 2021 as we believe the company has outlined an excellent path to ensuring PS5 dominance and...

Mio Kato

Keyence – Recovery Inbound

China drove an improvement in Keyence's 2Q results just like its competitors. We continue to prefer the name vs. peers but that does not mean the...

Mio Kato

Yaskawa – Bad Reaction to Good Results

Prior to Yaskawa’s 1Q results back in July we noted that consensus looked light for the quarter and we felt that it was also too light for both 2Q...

Mio Kato

🇯🇵 JAPAN • Analysing The "Buffett Trade", Valuing the Sogo Shosha & The Return of Asian Inflation

THE BUFFETT TRADE - Much has written on $ber

Campbell Gunn

Keyence (6861 JP): Back to the Future?

xxx xxx Keyence expects market conditions to revert to normal as the economy recovers.But that wouldn’t put a time frame on that and, since it’s...

Scott Foster

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