'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/000/121/977/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><p style="text-align: left;"><strong>ALTMAN'S Z-SCORE</strong> - 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%.</p><p style="text-align: left;"><strong>APPLICATION TO JAPAN</strong> - 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. </p><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"><p>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 <em>Covid-19 recession</em>. The first focused on the<strong><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></strong>, while a forthcoming Insight will look at <strong>Cumulative Cash Flows.</strong></p></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

Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

Equity Bottom-Up

<p>The speed and scope of Hitachi Ltd.'s restructuring and new business development are impressive. This quarter alone (October - December 2019), the company has announced:</p><ol>
<li>The sale of its majority stake in Hitachi Chemical; the resolution of its dispute with MHI, which includes handing over its stake in Mitsubishi Hitachi Power Systems (MHPS); and the planned sale of its diagnostic imaging business to FUJIFILM. For more detail, see <a href="https://www.smartkarma.com/insights/showa-denko-pays-big-money-for-hitachi-chem-4217" target="_blank" data-smartkarma-citation="insights:35354" rel="noopener">Showa Denko Pays BIG MONEY for Hitachi Chem (4217)</a> by Travis Lundy.</li>
<li>New railway contracts in France, the UK, Canada and the United Arab Emirates, furthering the development of a globally competitive railway systems business.</li>
<li>The formation of a joint venture with Honda combining Hitachi Automotive Systems and three Honda group companies, which should add more than ¥700 billion to consolidated sales.</li>
</ol><p>This process should continue with the acquisition of 80.1% of ABB's power grid business in the first half of 2020 - without, in our estimation, putting undue strain on Hitachi Ltd.'s balance sheet. </p><p>The outlook for sales and operating profit is more problematic. Management continues to guide for an 8.2% decline in consolidated sales and a 9.3% decline in operating profit in FY Mar-20, implying year-on-year declines of 10.2% and 5.5%, respectively, in 2H. </p><p>It is widely assumed that the operating environment will improve next year, but there is not much evidence for this yet. However, management is rationalizing the company, positioning it to take advantage of new growth markets, and turning it into a more focused investment opportunity. Our view of Hitachi Ltd's long-term prospects remains positive.</p>

The speed and scope of Hitachi Ltd.'s restructuring and new business development are impressive. This quarter alone (October - December 2019), the company has announced:
The sale of its majority stake in Hitachi Chemical; the resolution of its dispute with MHI, which includes handing over its stake in Mitsubishi Hitachi Power Systems (MHPS); and the planned sale of its diagnostic imaging business to FUJIFILM. For more detail, see Showa Denko Pays BIG MONEY for Hitachi Chem (4217) by Travis Lundy.
New railway contracts in France, the UK, Canada and the United Arab Emirates, furthering the development of a globally competitive railway systems business.
The formation of a joint venture with Honda combining Hitachi Automotive Systems and three Honda group companies, which should add more than ¥700 billion to consolidated sales.
This process should continue with the acquisition of 80.1% of ABB's power grid business in the first half of 2020 - without, in our estimation, putting undue strain on Hitachi Ltd.'s balance sheet. The outlook for sales and operating profit is more problematic. Management continues to guide for an 8.2% decline in consolidated sales and a 9.3% decline in operating profit in FY Mar-20, implying year-on-year declines of 10.2% and 5.5%, respectively, in 2H. It is widely assumed that the operating environment will improve next year, but there is not much evidence for this yet. However, management is rationalizing the company, positioning it to take advantage of new growth markets, and turning it into a more focused investment opportunity. Our view of Hitachi Ltd's long-term prospects remains positive.

Hitachi Ltd. (6501 JP): Rapid & Effective Restructuring

Asian Insight Provider - Actionable ideas, CrossASEAN Research

Henry Soediarko

Asian Insight Provider - Actionable ideas

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

<div>Investors are hopeful that the US-China Trade issues will be resolved soon, driving the share price up by almost 100% YTD when in reality, every time an agreement has been "<strong>reached</strong>" either China or the US had gone back on their words, causing the said agreement to falter, again. Midea's valuation has increased proportionately to the earnings growth with the exception of August this year but it has since caught up. </div>
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<div class="content-caption">source: Capital IQ</div>
<div>Post-acquisition of Toshiba Appliances, <a href="https://www.smartkarma.com/entities/midea-group-co-ltd-a" target="_blank" data-smartkarma-citation="entities:16185:1" rel="noopener">Midea Group Co Ltd A (000333 CH)</a> enjoyed a strong revenue growth and caused the PEG ratio to be below 1, indicating undervaluation for a growth stock. Meanwhile, there has been no notable improvement in the margins and debt to equity level remains the same. </div>
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<p><em><strong>For Growth Investors: </strong></em>it has performed much better than many other stocks in light of the volatilities and now the hope for trade deal has been more realistic thus the aggressive buying should soon fade out. Recently, the PEG ratio has hit 1 and with the modest growth prospect, the PEG ratio will be higher thus it will be considered expensive for growth investors. </p>
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<strong>Lock in the +90%</strong> return while possible and wait for the contribution from the Robotics division to be sizeable enough before rushing to own Midea stock again. </div>
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<strong><em>For Value Investors: </em></strong>the stock is unlikely to experience such a massive sell-off given it is still one of the largest household appliances globally and its five year PBR ratio ranged from 2.5x to 5.5x at the highest. In the event that the share price falls hard and Midea trades at below book value, value investors should rush to seek ownership in Midea. Currently, the stock is trading at 3.89 PBR. </div>
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Investors are hopeful that the US-China Trade issues will be resolved soon, driving the share price up by almost 100% YTD when in reality, every time an agreement has been "reached" either China or the US had gone back on their words, causing the said agreement to falter, again. Midea's valuation has increased proportionately to the earnings growth with the exception of August this year but it has since caught up. 




source: Capital IQ
Post-acquisition of Toshiba Appliances, Midea Group Co Ltd A (000333 CH) enjoyed a strong revenue growth and caused the PEG ratio to be below 1, indicating undervaluation for a growth stock. Meanwhile, there has been no notable improvement in the margins and debt to equity level remains the same. 


For Growth Investors: it has performed much better than many other stocks in light of the volatilities and now the hope for trade deal has been more realistic thus the aggressive buying should soon fade out. Recently, the PEG ratio has hit 1 and with the modest growth prospect, the PEG ratio will be higher thus it will be considered expensive for growth investors. 


Lock in the +90% return while possible and wait for the contribution from the Robotics division to be sizeable enough before rushing to own Midea stock again. 



For Value Investors: the stock is unlikely to experience such a massive sell-off given it is still one of the largest household appliances globally and its five year PBR ratio ranged from 2.5x to 5.5x at the highest. In the event that the share price falls hard and Midea trades at below book value, value investors should rush to seek ownership in Midea. Currently, the stock is trading at 3.89 PBR. 


Midea (000333): Sell and Wait for the Robot

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.

Event-Driven

<p>As <a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba Corp (6502 JP)</a> comes towards the end of its large year-long buyback (the company disclosed that it had purchased 85% of the value allocated by the end of Aug), we examine the prospects for the stock compared to its peers given that the end of the buyback and looming move to a net debt position could push investors to reassess the stock.</p>

As Toshiba Corp (6502 JP) comes towards the end of its large year-long buyback (the company disclosed that it had purchased 85% of the value allocated by the end of Aug), we examine the prospects for the stock compared to its peers given that the end of the buyback and looming move to a net debt position could push investors to reassess the stock.

Toshiba: Approaching the End of the Buyback and the End of Net Cash

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

<p>A Wall Street Journal article out Friday night Asia time has a scoop. </p><p>Apparently, talks to change the structure of the Renault-Nissan Alliance started soon after the Fiat-Renault talks broke down, and have been tightly confined to a small group of executives and lawyers on either side. The WSJ says it has seen emails (dated 12 July). One of these suggests that <a href="https://www.smartkarma.com/entities/nissan-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:72:1" rel="noopener">Nissan Motor (7201 JP)</a> Independent Director and former METI bureaucrat Masakazu Toyoda has suggested <a href="https://www.smartkarma.com/entities/renault-sa" target="_blank" data-smartkarma-citation="entities:21536:1" rel="noopener">Renault SA (RNO FP)</a> and Nissan sell down their stakes in each other to relieve a burden and be able to invest in new ventures. The article suggests that an initial MOU could be in place by September (with possible action this year), but also suggests that a new Nissan-Renault Alliance JV would need to be established to get this past the French state. </p><p>The goal implicit in external understanding and most likely <em>explicit</em> in the negotiations is that this would be a quid pro quo for Nissan supporting a tie-up between Renault and <a href="https://www.smartkarma.com/entities/fiat-chrysler-automobiles-nv-450a5959-12ec-4109-9f93-ac825170905f" target="_blank" data-smartkarma-citation="entities:27920:1" rel="noopener">Fiat Chrysler Automobiles NV (FCA IM)</a>. </p><p>I think one can expect imminent French state denials. And I think one can probably ignore them. </p><p>This article comes at an interesting time. </p>

A Wall Street Journal article out Friday night Asia time has a scoop. Apparently, talks to change the structure of the Renault-Nissan Alliance started soon after the Fiat-Renault talks broke down, and have been tightly confined to a small group of executives and lawyers on either side. The WSJ says it has seen emails (dated 12 July). One of these suggests that Nissan Motor (7201 JP) Independent Director and former METI bureaucrat Masakazu Toyoda has suggested Renault SA (RNO FP) and Nissan sell down their stakes in each other to relieve a burden and be able to invest in new ventures. The article suggests that an initial MOU could be in place by September (with possible action this year), but also suggests that a new Nissan-Renault Alliance JV would need to be established to get this past the French state. The goal implicit in external understanding and most likely explicit in the negotiations is that this would be a quid pro quo for Nissan supporting a tie-up between Renault and Fiat Chrysler Automobiles NV (FCA IM). I think one can expect imminent French state denials. And I think one can probably ignore them. This article comes at an interesting time. 

Nissan-Renault-FCA:  Working Toward Completing the Circle?

Japan

Mitsubishi Heavy Industries, Ltd. is a comprehensive heavy machinery maker. The Company manufactures machinery, ships, turbines and engines, prime movers, aircrafts, and machine parts for military and commercial use.  Mitsubishi Heavy Industries also researches and develops nuclear power plants.

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Mitsubishi Heavy Industries (7011 JP)

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 2: Altman Z-Score

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...

Campbell Gunn

Hitachi Ltd. (6501 JP): Rapid & Effective Restructuring

The speed and scope of Hitachi Ltd.'s restructuring and new business development are impressive. This quarter alone (October - December 2019), the...

Scott Foster

Midea (000333): Sell and Wait for the Robot

Investors are hopeful that the US-China Trade issues will be resolved soon, driving the share price up by almost 100% YTD when in reality, every...

Henry Soediarko

Toshiba: Approaching the End of the Buyback and the End of Net Cash

As Toshiba Corp (6502 JP) comes towards the end of its large year-long buyback (the company disclosed that it had purchased 85% of the value...

Mio Kato

Nissan-Renault-FCA: Working Toward Completing the Circle?

A Wall Street Journal article out Friday night Asia time has a scoop. Apparently, talks to change the structure of the Renault-Nissan Alliance...

Travis Lundy

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