Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

China Logistics Property Holdings / Event-Driven

China Logistics Property Holdings (1589 HK)

In Game Of Ports: China's "Suez Blockage" Disruption, I discussed Yantian International Container Terminals (YICT), operating at around 20% capacity amid stringent COVID-19 prevention and restriction measures.
YICT forms part of the third busiest gateway in the world.

Source: World Shipping Council
The good news is that YICT is back to normal operations as of yesterday. 
That appears to be all the good news. 

The Backlog
"Normal" does not, in this instance, mean standard operating procedures immediately resume. There still remains the yet-to-be serviced queue of ships to be unloaded and discharged, in tandem with the cargo backlog to be exported from Asia.

Lars Jensen, the CEO and Partner of Sea Intelligence Consulting, provides his back-of-the-napkin numbers as to when this backlog of boxes would be cleared.
YICT handled 13.3mn TEUs in 2020, or 36,400 TEUs/day.
YICT has officially operated at 30% capacity over the past month, or a shortfall of ~25,500 TEUs/day.
Multiply that by 30 days to get a rough number of 765,000 TEUs impacted.
IICT handled a record of 45,800 TEUs/day in August 2020. So at peak operating capabilities, the backlog could be cleared in 17 days (765,000/45,800).
HOWEVER, we need to factor in normal cargo flow as more cargo arrives to feed demand in both the US and Europe. Assume 36,400 TEUs/day, which leaves 9,400 TEUs/day of excess to chip away at the backlog - implying 82 days (765,000/9,400) to clear.
Those numbers are pretty simplified.  Q3 peak season will be well underway for Xmas.

It could be argued that the diversion of cargo will lessen the backlog, however, diversion has been ongoing in recent weeks, which in turn is causing operational efficiencies at those ports, and the general flow of cargo.



The Die Had Already Been Cast

When Covid first took hold, the fallout from Asia was unknown, as was the impact on factory output. This resulted in carriers canceling sailings. It is estimated some shipping companies cut capacity by ~20% around the spring of last year.
Then people stuck at home in the US and elsewhere started buying stuff. Lots of it. Both the Port of Los Angeles and Port of Long Beach, the first and second-largest in the US, recently set new cargo handling records. US Census Bureau also indicates the ratio between inventory sizes and sales for the US retailers declined to a new historical low in April. 

This surge in demand created a bottleneck, resulting in unloading time for containers actually exceeding the time it took the ship to sail across the Pacific. Ports are physically overwhelmed getting the containers off ships, and trucks and rail to clear the port.
Suez compounded matters.  The  Suez Canal got blocked 3 months ago on the 23rd of March. Ships sailing from Asia to Europe were rerouted around Africa, and in turn, some ports were omitted on the return legs. Specific data suggests delays of up to 2 months for certain cargo that was expected to be loaded and shipped, meaning the knock-on effect from the Suze blockage still lingers in the system. 

And it's not just the US that is congested.  Just this week Maersk stopped its AE7 service from calling in on Hamburg on account of congestion and exceptional waiting times, and will discharge cargo in Bremerhaven over the next month. Hapag-Lloyd has temporarily suspended its eastbound call in Rotterdam on its FE4 service to Asia due to congestion. Platts said the Port of Liverpool in the UK suffers congestion due to understaffing, an IT outage, and a high density of stock. Re-routing to other European ports is a bigger issue than say re-routing from Yantian to Nansha in Guangdong province, on account of different customs and duties imposed. 


Maersk also reports reliability issues in Australia and New Zealand due to berth congestion.

All of this has an accordion or squeeze box effect. A two-week delay in the US will have result in a two-week delay on the return leg, which may well be following a ship that itself may also have been delayed. This could lead to the carrier canceling the ship an exporter was expecting to load its goods onto, forcing that customers to seek a replacement elsewhere, at a cost. 
When the Yantian backlog is gradually cleared, what will be the knock-on effect? 
And there is a lack of containers. Apart from ships being delayed, and anchored, waiting to be unloaded in the US and Europe, a lot of these containers don't make the return leg to Asia. According to FreightWaves, import volume from China into the US via ocean shipping is up 54% year-on-year, whereas exports are up by 4.4%.   Ideally, carriers need to carry more empty containers.


The Indices

The China (Export) Containerized Freight Index (CCFI) recorded its ninth consecutive weekly increase, and is now up 200% from a year ago, and 36% since mid-April, subsequent to which the Suez blockage occurred, followed by the Yantian slowdown. 
The CCFI is a composite index. Separate trade routes are up even more - the contract index for Asia-North Europe is up 310% compared to last year – more than quadrupling from a year ago.


Source: SSE


The World Container Index eked out its largest increase since its 2012 inception. The rates from Shanghai to Los Angeles increased 34% in the past week, to $8,548/FFE (Forty Foot container Equivalent unit) from $6,358/FFE. From Shanghai to New York, the weekly increase was 39%, from $8,017/FFE to $11,180/FFE.


Source: World Container Index, Lars Jensen

There are no indications that the rates are about to level off.


Contracts

Ocean container rates are either fixed-rates (“contract rates”), or variable-rates (“spot rates”).  If you are a large player like Walmart or Target, you're probably on a Tier-1 contract, meaning you need 10,000+ TEUs annually or roughly 200 TEUs per week.
On the 21st of June, Mitsui Osk Lines (9104 JP) published a revision to its H1 (Apr-Sep) forecast, raising Net Profit Forecast by 240% because container business profits from its One Ocean Network affiliate are vastly above expectations . This comes 7 weeks after the company made its original forecast for the fiscal year. They did not revise H2 at all, meaning the guidance is a stale number still. Other companies are likely to see similar effects, depending on their split of contract vs spot.
Transpacific contracts show no sign of abating, with carriers asking ~$17,000 per 40ft container for US east coast ports, a 1,000% increase year on year. US$20,000 appears within reach.
Not surprisingly, carriers are increasingly leaning towards spot versus contract given the current trajectory. Data is difficult to come by but I understand spot rates now exceed 50% of containers on ships, up from the teens a few years ago.
To this, based on Xeneta's data, the gap between contract and spot is widening on the Asia-Europe trade, and often exceeds US$10,000/FFE, when comparing the spot rates of small shippers compared to contract rates with large shippers. This suggests smaller import/export players are getting the short end of the stick.
Also, entering into contracts is not a water-tight guarantee you will move your cargo. Reportedly shippers are being forced to pay additional surcharges over and above contracted box prices to move goods.


Blank Sailings

A liner service is allocated a certain number of days to complete a full rotation covering all the ports of call on a schedule. When a ship does not call at one or more of its scheduled intermediate ports - due to weather issues, strikes, or what transpired at YICT - it is called a blank sailing or void sailing from these ports. This avoids the congestion and knock-on waiting time.

project44 estimates container lines blanked 298 sailings globally between 1 – 15 June with a combined vessel capacity of over 3m TEUs. This is a 300% increase in one month. The disruption at YICT did not cause all of these bank sailings, but the vast majority.

There are also planned blank sailings, wherein a ship is simply taken out of a group loop to reduce capacity on certain trade routes.  For example, if a shipping company has eight ships plying a particular transpacific route in a loop formation, if a blank sailing does occur, that liner may opt to put that ship at the back of the loop, so as to not disrupt the natural flow of capacity.  That is also removing (temporarily) supply from the system.
You can observe this by looking at the number of vessels laid up outside Yantian and other congested ports which are primary source ports (rather than destination ports). 


Alliances

The three large alliances account for 80-85% of the shipping market and include all of the top 10 container lines.
2M was formed by the two world leaders in the sector, the Ap Moller - Maersk A/S (MAERSKA DC) and the Italian-Mediterranean Mediterranean Shipping Company (MSC);
The Ocean Alliance formed by COSCO Shipping Holdings Co., Ltd (H) (1919 HK) (together with OOCL), France's CMA CGM, and Evergreen Marine Corp (2603 TT), which are the third, fourth, and seventh largest in the sector;
And THE Alliance formed by Hapag-Lloyd AG (HLAG GR),  Japan's Ocean Network Express (ONE), and Yang Ming Marine Transport (2609 TT), who are the fifth, sixth, and eighth companies in the market.
Ships are getting larger on average. But given tight margins, these massive ships often need to be at ~90% capacity in the past in order to keep these carriers in the black.
With box spot prices skyrocketing, accusations of a cartel are being fielded. That's probably a stretch - given any vessel that can be used, is probably being used. Arguably, the current supply/demand situation is out of the hands of carriers.
Carriers could keep a fixed price and simply reject some shippers (customers). But we are not seeing this.
But as and when box spot prices do eventually level off, expect those accusations to become louder.  To what degree can carriers enforce higher contractual rates once the market normalises?



Filling The Void

American Shipper reported a 5,060-TEUs was chartered at $135,000/day per day for 45-90 days. Alphaliner subsequently reported that the 4,506-TEUs was chartered for two months at $125,000/day.
MPC Container also reported it just chartered out a 2,800-TEUs vessel at above $100,000/day for 65 to 80 days. That ship, built in 2008, was bought for US$8mn. The charter alone covers that $8mn cost.
If we assume that last ship is put into the transpacific route, you're looking at ~US$3,000/FFE for the round trip, at ~80 days. And that's just the vessel cost. There will be all the other costs added on top - fuel, etc. So with spot rates at US$7,000/FFE, the chartering company is probably still making decent coin.
The flipside is that this vessel was probably plying a regional route. By taking that volume out of the equation, that regional route cost will then be hit. 


Chassis

To get an idea of the contagion effect at work here, there is currently a shortage of chassis in the US. These are the truck beds a container is placed on.
As a guide, chassis have a normal turnaround time (say 80% of chassis) of 11 days or less. That number is down to 60%. That means the ports are struggling to clear containers, resulting in a build of containers at the ports. Shippers then occur fees for storage, not to mention the delay in picking up their containers. The return of those empty containers is similarly compounded.
This week, the US International Trade Commission applied anti-dumping duties on CIMC's chassis. Ironically, this only exacerbates the shortage of chassis in the system.


What Else? How About Vessel Collisions



This video show's the Hamburg Süd vessel Cap San Antonio sustaining damage after colliding with a pier in Santos.
At ~10,000TEUs and ~50% of the weekly capacity between  East Coast South America to North Europe, taking this ship out of the loop will impact this trade route.

Again, this serves to illustrate factors that could aggravate an already existing stretched logistic situation. 





Where to Invest?

The shipping liners are making money hand over fist. 
Container manufacturers
Warehouse operators
Chassis manufacturers - although no pure listed players as far as I'm aware.


Shipping Liners

I still like COSCO Shipping Holdings Co., Ltd (H) (1919 HK) here.


        



Trading Comps


Mkt Cap (USDm)


PER (E)


EV/EBITDA (E)


P/B



Hapag-Lloyd Aktiengesellschaft
39,752
8.2x
7.0x
4.8x


A.P. Møller - Mærsk A/S
54,484
5.8x
4.1x
1.8x


DSV Panalpina A/S
52,810
37.0x
21.1x
6.8x


Kuehne + Nagel International AG
41,586
33.3x
15.7x
15.3x


Atlas Corp.
3,545
10.9x
8.6x
1.0x


COSCO SHIPPING Holdings Co., Ltd.
46,062
3.9x
5.2x
6.8x


Nippon Yusen Kabushiki Kaisha
8,576
2.8x
10.2x
1.5x


Kawasaki Kisen Kaisha, Ltd.
3,281
2.1x
20.1x
1.7x


Mitsui O.S.K. Lines, Ltd.
5,643
3.0x
15.9x
1.1x


Yang Ming Marine Transport Corporation
17,728
4.6x
3.7x
14.0x


Evergreen Marine Corporation (Taiwan) Ltd.
28,609
6.0x
4.8x
8.5x


Max
54,484
37.0x
21.1x
15.3x


Median
28,609
5.8x
8.6x
4.8x


Min 
3,281
2.1x
3.7x
1.0x


Mean
27,461
10.7x
10.6x
5.8x


Source: CapIQ



 

      



Trading Comps


One-Mth


Three-Mth


Six-Mth


One-YR



Hapag-Lloyd Aktiengesellschaft
19%
49%
119%
291%


A.P. Møller - Mærsk A/S
5%
27%
29%
153%


DSV Panalpina A/S
-1%
24%
44%
102%


Kuehne + Nagel International AG
2%
22%
54%
113%


Atlas Corp.
6%
1%
36%
97%


COSCO SHIPPING Holdings Co., Ltd.
28%
104%
133%
739%


Nippon Yusen Kabushiki Kaisha
22%
37%
116%
256%


Kawasaki Kisen Kaisha, Ltd.
31%
49%
76%
247%


Mitsui O.S.K. Lines, Ltd.
14%
24%
51%
160%


Yang Ming Marine Transport Corporation
54%
360%
561%
2367%


Evergreen Marine Corporation (Taiwan) Ltd.
84%
278%
374%
1460%


Max
84%
360%
561%
2367%


Median
19%
37%
76%
247%


Min 
-1%
1%
29%
97%


Mean
24%
88%
145%
544%



Source: CapIQ 




Containers

The three key Chinese container manufacturing companies are China International Marine Cntnrs Gp (2039 HK), Singamas Container Hldgs (716 HK), and unlisted CXIC.
Container manufacturing accounts for around 23%/33% of CIMC's revs/NPBT. So not a clean player. A mentioned above, it also makes chassis.
And Singamas is tiny - around US$200mn market cap.

Warehousing

When Global Logistics Properties, the logistic giant and largest operator of warehouse space in China, was privatised in 2017, Prologis Inc (PLD US) and Goodman Group (GMG AU) were cited as GLP's closest peers at the time
As discussed in CLPH (1589 HK): Free Float Breached As JD.com Bumps Stake, China Logistics Property Holdings (1589 HK) has also been in the news recently over possible interest from JD.com Inc. (9618 HK).
Separately, Kerry Logistics Network (636 HK)'s independent shareholders approved last month the sale of its Hong Kong and Taiwan warehouse businesses to Kerry Holdings. See  Kerry Logistics (636 HK): SF Holdings' Pre-Conditional Partial Offer. That looks to be a fortuitous transaction for Kery Holdings.



"Squeezebox" is a slang term for accordion.



Squeeze Box: The Port Congestion Contagion

Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Tracking Traffic

Focusing on Asian logistics, transportation, and travel companies

Equity Capital Markets

ZIM Integrated Shipping Services / Equity Capital Markets

ZIM Integrated Shipping Services (ZIM US)

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</section>
Israel's ZIM Integrated Shipping Services (proposed ticker ZIM US) has filed documents to launch an IPO in the US. Media reports have speculated the container shipping company hopes to raise at least US$100 mn in the deal; some reports say ZIM could try to raise US$300 mn or more.
The objective of this note is to provide some context for the company and the global container shipping industry. After all, it has been over two decades since a global container ship operator has traded in the US (<a href="https://www.smartkarma.com/entities/matson-inc" target="_blank" data-smartkarma-citation="entities:6335:1" rel="noopener">Matson Inc (MATX US)</a> focuses on niche domestic US markets, generally).
ZIM is a small player in global container shipping, and contrary to its claims the company mainly operates in highly competitive segments. Its "asset-light" model is unusual, but it represents a double-edged sword: chartering in the majority of its capacity offers flexibility, but it also means operating costs may rise in tandem with freight rates over the cycle, limiting margin expansion. 
Fortunately, Europe and Asia offer several direct comps for ZIM, including <a href="https://www.smartkarma.com/entities/ap-moeller-maersk-a-s" target="_blank" data-smartkarma-citation="entities:22428:1" rel="noopener">AP Moeller - Maersk A/S (MAERSKB DC)</a> of Denmark and <a href="https://www.smartkarma.com/entities/evergreen-marine-corp-ltd" target="_blank" data-smartkarma-citation="entities:15428:1" rel="noopener">Evergreen Marine Corp (2603 TT)</a> of Taiwan. These two companies -- both of them far larger than ZIM, and more profitable over the cycle -- will serve as useful benchmarks once ZIM and its bankers announce details regarding deal size and pricing.




Israel's ZIM Integrated Shipping Services (proposed ticker ZIM US) has filed documents to launch an IPO in the US. Media reports have speculated the container shipping company hopes to raise at least US$100 mn in the deal; some reports say ZIM could try to raise US$300 mn or more.
The objective of this note is to provide some context for the company and the global container shipping industry. After all, it has been over two decades since a global container ship operator has traded in the US (Matson Inc (MATX US) focuses on niche domestic US markets, generally).
ZIM is a small player in global container shipping, and contrary to its claims the company mainly operates in highly competitive segments. Its "asset-light" model is unusual, but it represents a double-edged sword: chartering in the majority of its capacity offers flexibility, but it also means operating costs may rise in tandem with freight rates over the cycle, limiting margin expansion. 
Fortunately, Europe and Asia offer several direct comps for ZIM, including AP Moeller - Maersk A/S (MAERSKB DC) of Denmark and Evergreen Marine Corp (2603 TT) of Taiwan. These two companies -- both of them far larger than ZIM, and more profitable over the cycle -- will serve as useful benchmarks once ZIM and its bankers announce details regarding deal size and pricing. 

Planned ZIM IPO: Opportunistic Listing Near Cycle Peak for Minor Industry Player

Equity Bottom-Up

Our research suggests average container rates rose by 6% in September, boosted by improved Transpacific volumes. While inbound to US demand appears strong through October, estimates from the Port of LA suggest early November will see a modest YoY decline in throughput. 
Bunker (ship fuel) prices remain below year-ago levels and carrier profitability in Q3 (and early Q4) likely remains high compared to 2019. Germany's <a href="https://www.smartkarma.com/entities/hapag-lloyd-ag" target="_blank" data-smartkarma-citation="entities:21649:1" rel="noopener">Hapag-Lloyd AG (HLAG GR)</a> lifted full-year guidance this week, reflecting confidence in near-term market conditions. 
After almost tripling earlier in 2020 on a combination of strong demand and limited capacity, it appears air cargo pricing for key Asian carriers has moderated compared versus peak levels in Q2. 
While current conditions appear buoyant, we believe the sharpest YoY improvements in profitability for container carriers (and air cargo) are probably already behind us.

Our research suggests average container rates rose by 6% in September, boosted by improved Transpacific volumes. While inbound to US demand appears strong through October, estimates from the Port of LA suggest early November will see a modest YoY decline in throughput. 
Bunker (ship fuel) prices remain below year-ago levels and carrier profitability in Q3 (and early Q4) likely remains high compared to 2019. Germany's Hapag-Lloyd AG (HLAG GR) lifted full-year guidance this week, reflecting confidence in near-term market conditions. 
After almost tripling earlier in 2020 on a combination of strong demand and limited capacity, it appears air cargo pricing for key Asian carriers has moderated compared versus peak levels in Q2. 
While current conditions appear buoyant, we believe the sharpest YoY improvements in profitability for container carriers (and air cargo) are probably already behind us. 

TRACKING TRAFFIC/Containers & Air Cargo: Box Rates Firm | LA Down in Nov? | Air Cargo Pricing Eases

'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/000/122/342/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

Independent and original Asian investment research

Aletheia Capital

Aletheia Capital (HK) Ltd. (previously known as Asianomics) combines the extensive knowledge of its experienced team with technology and regulatory changes to disrupt Global Markets business in Asia. The firm is completely independent with no conflicts of interest either on Investment Banking advisory or Capital Markets execution.

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/114/303/original/BANNER-CARGO-FINAL.png?1579444685" class="editor-image img-responsive" data-smartkarma-image-id="114303"></figure>In H119, container shipping rates in the key Transpacific Eastbound tradelane held up well despite tepid demand, as fleet expansion in most of 2019 was modest and some peak season (Q3) demand was probably pulled forward to avoid the threat of new tariffs on Chinese goods moving to the US.But it appears key Transpacific Eastbound rates have been declining since late Q3 or early Q4, and we believe profitability probably peaked in Q3 for most carriers. The measures we track suggest average rates declined by 4-5% YoY in November and December. With Transpacific Eastbound under pressure and fuel prices still high, we believe near-term earnings are likely to decline for most container shipping companies. Despite optimism about the potential for improved trade relations between the US and China, we would avoid the segment for now.

In H119, container shipping rates in the key Transpacific Eastbound tradelane held up well despite tepid demand, as fleet expansion in most of 2019 was modest and some peak season (Q3) demand was probably pulled forward to avoid the threat of new tariffs on Chinese goods moving to the US.But it appears key Transpacific Eastbound rates have been declining since late Q3 or early Q4, and we believe profitability probably peaked in Q3 for most carriers. The measures we track suggest average rates declined by 4-5% YoY in November and December. With Transpacific Eastbound under pressure and fuel prices still high, we believe near-term earnings are likely to decline for most container shipping companies. Despite optimism about the potential for improved trade relations between the US and China, we would avoid the segment for now.

TRACKING TRAFFIC/Containers & Air Cargo: For Most Box Carriers, Profitability Likely Already Peaked

Japan

Mitsui O.S.K. Lines, Ltd. provides marine transportation, warehousing, and cargo handling services.  The Company operates container ship, specialized carrier, oil tankers, and ferry.  Items transported include coal, iron ore, grain, logs, aluminum, cement, industrial salt, copper ore, wood chips, paper products, chemical products, gasoline and other petroleum products, LPG, and other cargoes.

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Mitsui O.S.K. Lines (9104 JP)

Squeeze Box: The Port Congestion Contagion

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ZIM is pursuing an IPO in the US as the container shipping cycle is approaching a peak. In this note we attempt to give investors context that...

Tracking Traffic

TRACKING TRAFFIC/Containers & Air Cargo: Box Rates Firm | LA Down in Nov? | Air Cargo Pricing Eases

Container volumes and pricing firmed in September, and fuel prices remain relatively low, but trading conditions are unlikely to improve much from...

Tracking Traffic

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 3: Cumulative Cash Flow

CUMULATIVE CASH FLOWS - In this third and final of our series on Japanese companies that might be compromised as the Covid-19 recession unfolds, ...

Campbell Gunn

TRACKING TRAFFIC/Containers & Air Cargo: For Most Box Carriers, Profitability Likely Already Peaked

In H119, container shipping rates in the key Transpacific Eastbound tradelane held up well despite tepid demand, as fleet expansion in most of 2019...

Daniel Hellberg

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