Japan Specialist

Mark Chadwick

Equity Bottom-Up

<ul>
<li>The new four-year medium-term strategy that lays out a realistic route to greater profitability and growth.</li>
<li>The stock has been trading below book value for years</li>
<li>Buying back 10% of outstanding shares will give investors confidence </li>
</ul>


The new four-year medium-term strategy that lays out a realistic route to greater profitability and growth.
The stock has been trading below book value for years
Buying back 10% of outstanding shares will give investors confidence 


Nikon (7731) | Focusing on the 4 Year View

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<ul>
<li>
<a href="https://www.smartkarma.com/entities/nikon-corp" target="_blank" data-smartkarma-citation="entities:7117:1" rel="noopener">Nikon Corp (7731 JP)</a> today announced a Very Large Buyback. This is the third buyback it has announced since spring 2019. The first was short. The next two big.</li>
<li>The company also announced a new <a href="https://www.nikon.com/about/ir/management/midtermbusiness/pdf/2022/0407e_all.pdf" target="_blank" rel="noopener">Medium-Term Management Plan for FY2022-2025</a> today in which they reiterated their existing Shareholder Return Policy of 40+% payout of stable dividends and opportunistic buybacks. </li>
<li>It's a decent div, and the buyback is for 6-7% of shares out, but it could do better. The company is hugely cash- and securities holdings-rich. It should do better.</li>
</ul>



Nikon Corp (7731 JP) today announced a Very Large Buyback. This is the third buyback it has announced since spring 2019. The first was short. The next two big.
The company also announced a new Medium-Term Management Plan for FY2022-2025 today in which they reiterated their existing Shareholder Return Policy of 40+% payout of stable dividends and opportunistic buybacks. 
It's a decent div, and the buyback is for 6-7% of shares out, but it could do better. The company is hugely cash- and securities holdings-rich. It should do better.


BIG Nikon (7731) Buyback - OK But Should Do Better

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

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.

<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/176/175/original/2020-12-03_05-39-01.png?1606941555" class="editor-image img-responsive" data-smartkarma-image-id="176175"></figure><div class="content-caption">Source for all charts &amp; tables: Japan Analytics </div></section><div>FOUR QUADRANTS PICKS - Our recent series of Insights covering companies that are extreme outliers in our Relative Price Score/Results &amp; Revision Score matrix has featured the following seven companies:-  </div><div>
<ul style="list-style-type: disc;">
<li>
CONTRARIAN BUYS - <a href="https://www.smartkarma.com/entities/nikon-corp" target="_blank" data-smartkarma-citation="entities:7117:1" rel="noopener">Nikon (7731 JP)</a>, <a href="https://www.smartkarma.com/entities/fuji-media-holdings-inc" target="_blank" data-smartkarma-citation="entities:3191:1" rel="noopener">Fuji Media (4676 JP)</a>, <a href="https://www.smartkarma.com/entities/east-japan-railway-co" target="_blank" data-smartkarma-citation="entities:14271:1" rel="noopener">East Japan Railway (9020 JP)</a> </li>
<li>
CONTRARIAN SELLS - <a href="https://www.smartkarma.com/entities/m3-inc" target="_blank" data-smartkarma-citation="entities:13316:1" rel="noopener">M3 (2413 JP)</a>, <a href="https://www.smartkarma.com/entities/disco-corp" target="_blank" data-smartkarma-citation="entities:15817:1" rel="noopener">DISCO (6146 JP)</a> </li>
<li>
TURNAROUND BUYS - <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a> </li>
<li>
EX-GROWTH SELLS - <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" data-smartkarma-citation="entities:12933:1" rel="noopener">Kao  (4452 JP)</a> </li>
</ul>
2021 HIGH CONVICTION COLLECTION - For Smartkarma's '2021 High Conviction Collection' we have chosen one of the seven to be our selection. Given the lack of short ideas so far - only two and both in the US - our pick, <a href="https://www.smartkarma.com/entities/m3-inc" target="_blank" data-smartkarma-citation="entities:13316:1" rel="noopener">M3 (2413 JP)</a>, is the first Asian, and first Japanese, 'short' to join the Collection.
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/176/209/original/2020-12-03_10-35-14.png?1606959327" class="editor-image img-responsive" data-smartkarma-image-id="176209"></figure></section><a href="https://www.smartkarma.com/entities/m3-inc" target="_blank" data-smartkarma-citation="entities:13316:1" rel="noopener">M3</a>- M3 is the most extreme outlier of the seven stocks we have featured and was recommended as a 'Suga Growth Long in our Smartkarma Original - <a href="https://www.smartkarma.com/insights/japan-in-the-suga-era-policy-priorities-suga-stocks" target="_blank" data-smartkarma-citation="insights:43773" rel="noopener">Japan in the Suga Era - Policy Priorities &amp; 'Suga Stocks'</a>. Since then the stock has appreciated by 40% and by 10% since we published <a href="https://www.smartkarma.com/insights/japan-four-quadrants-contrarian-sells" target="_blank" data-smartkarma-citation="insights:45725" rel="noopener">Contrarian Sells</a>, adding almost ¥2 trillion in market value M3 is Japan's fifteenth largest company with a market value of ¥6.4 trillion, despite having only ¥144 billion in trailing revenues, ¥43 billion in trailing operating income, and just ¥18 billion in trailing CITC. While valuations may be less of a concern in the momentum-driven post-COVID era, we have highlighted several areas of concern regarding the company's margin-diluting diversification, that suggest that M3's tripling in value seen in 2020 will not be repeated. M3 is our 2021 'High Conviction Sell'      
</div>

Source for all charts &amp; tables: Japan Analytics FOUR QUADRANTS PICKS - Our recent series of Insights covering companies that are extreme outliers in our Relative Price Score/Results &amp; Revision Score matrix has featured the following seven companies:-  


CONTRARIAN BUYS - Nikon (7731 JP), Fuji Media (4676 JP), East Japan Railway (9020 JP) 

CONTRARIAN SELLS - M3 (2413 JP), DISCO (6146 JP) 

TURNAROUND BUYS - Softbank Corp (9434 JP) 

EX-GROWTH SELLS - Kao  (4452 JP) 

2021 HIGH CONVICTION COLLECTION - For Smartkarma's '2021 High Conviction Collection' we have chosen one of the seven to be our selection. Given the lack of short ideas so far - only two and both in the US - our pick, M3 (2413 JP), is the first Asian, and first Japanese, 'short' to join the Collection.
M3- M3 is the most extreme outlier of the seven stocks we have featured and was recommended as a 'Suga Growth Long in our Smartkarma Original - Japan in the Suga Era - Policy Priorities &amp; 'Suga Stocks'. Since then the stock has appreciated by 40% and by 10% since we published Contrarian Sells, adding almost ¥2 trillion in market value M3 is Japan's fifteenth largest company with a market value of ¥6.4 trillion, despite having only ¥144 billion in trailing revenues, ¥43 billion in trailing operating income, and just ¥18 billion in trailing CITC. While valuations may be less of a concern in the momentum-driven post-COVID era, we have highlighted several areas of concern regarding the company's margin-diluting diversification, that suggest that M3's tripling in value seen in 2020 will not be repeated. M3 is our 2021 'High Conviction Sell'      


2021 High Conviction 🇯🇵 Sell M3 (2413 JP)

Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

In <a href="https://www.smartkarma.com/insights/japan-four-quadrants-contrarian-buys" target="_blank" data-smartkarma-citation="insights:45688" rel="noopener">🇯🇵 JAPAN • Four Quadrants - Contrarian Buys</a> , Campbell Gunn notes that Nikon is now the most attractive Negative Enterprise Value (NEV) play in Japan with a theoretical upside well into triple digits. This Insight follows up with an analysis of the company's financial position and post-restructuring earnings potential.Sales began to rebound from the COVID collapse in 2Q with the recovery of camera demand in China and the resumption of lithography tool installations. Impairment charges, inventory disposals and write-downs, reduction of the workforce and other cost cutting should lead to smaller losses in 2H and profits in FY Mar-22. If recovery is not derailed by the pandemic, we estimate that net profit could reach two-thirds of its previous peak by FY Mar-23, resulting in ROE of 8%.<a href="https://www.smartkarma.com/insights/japan-four-quadrants-contrarian-buys" target="_blank" data-smartkarma-citation="insights:45688" rel="noopener"></a>The share price has dropped to 0.5x book value assuming a ¥50 billion net loss this fiscal year. The dividend has been cut in half, resulting in a yield of 2.9%. We expect management to restore the dividend as soon as possible.If the company generates the profit we are forecasting for FY Mar-22, projected valuations would be at the bottom of their historical ranges. Management has been proactive in restructuring, but a push from activists would not hurt.

In 🇯🇵 JAPAN • Four Quadrants - Contrarian Buys , Campbell Gunn notes that Nikon is now the most attractive Negative Enterprise Value (NEV) play in Japan with a theoretical upside well into triple digits. This Insight follows up with an analysis of the company's financial position and post-restructuring earnings potential.Sales began to rebound from the COVID collapse in 2Q with the recovery of camera demand in China and the resumption of lithography tool installations. Impairment charges, inventory disposals and write-downs, reduction of the workforce and other cost cutting should lead to smaller losses in 2H and profits in FY Mar-22. If recovery is not derailed by the pandemic, we estimate that net profit could reach two-thirds of its previous peak by FY Mar-23, resulting in ROE of 8%.The share price has dropped to 0.5x book value assuming a ¥50 billion net loss this fiscal year. The dividend has been cut in half, resulting in a yield of 2.9%. We expect management to restore the dividend as soon as possible.If the company generates the profit we are forecasting for FY Mar-22, projected valuations would be at the bottom of their historical ranges. Management has been proactive in restructuring, but a push from activists would not hurt. 

Nikon (7731): Japan's Best NEV Opportunity

Nikon is likely to hit rock-bottom this quarter due to weak sales and losses caused by COVID-19 and costs related to restructuring. Depending on choices made regarding cuts to SG&amp;A and R&amp;D expenses, the company could lose another 6% of its equity. In FY Mar-20, equity declined by 12%.At ¥924 (June 25 close), the share price has dropped 34% since January and is down more than 60% from its January 2018 peak. This is 0.6x book value at the end of Mar-20, suggesting that further losses of this magnitude have been discounted. But given the degree of economic uncertainty, the March 13 low of ¥845 could be retested.As Campbell Gunn pointed out in <a href="https://www.smartkarma.com/insights/japan-stress-tests-part-2-operating-cash-flow-accruals" target="_blank" data-smartkarma-citation="insights:40321" rel="noopener">🇯🇵 JAPAN - Stress Tests Part 2 - Operating Cash Flow &amp; Accruals</a>, Nikon's Relative Price Score as calculated by Japan Analytics has yet to enter Oversold territory. But since 1993, it never has. That having been said, the growth drivers that supported the company in the past - cameras, lenses and lithography equipment - now appear to have little long-term growth potential beyond a rebound from COVID-19.That leaves Industrial Products and Healthcare, which account for only 22% of sales and are just getting off the ground in terms of new products and technologies.  Industrial products are at the bottom of the demand cycle. Healthcare has yet to turn a profit. The emergence of a "New Nikon" led by optics-based materials processing and bioscience is a long-term proposition.On the positive side, a considerable amount of restructuring has already been done. Personnel and other expenses have been reduced, asset values written down and the share count reduced. As sales and profits recover from the current debacle, the operating margin and ROE should head back toward 10%.Projected valuations 2 -3 years out (less than 10x earnings and 5x cash flow) look attractive enough to justify a 50% rebound in the share price.

Nikon is likely to hit rock-bottom this quarter due to weak sales and losses caused by COVID-19 and costs related to restructuring. Depending on choices made regarding cuts to SG&amp;A and R&amp;D expenses, the company could lose another 6% of its equity. In FY Mar-20, equity declined by 12%.At ¥924 (June 25 close), the share price has dropped 34% since January and is down more than 60% from its January 2018 peak. This is 0.6x book value at the end of Mar-20, suggesting that further losses of this magnitude have been discounted. But given the degree of economic uncertainty, the March 13 low of ¥845 could be retested.As Campbell Gunn pointed out in 🇯🇵 JAPAN - Stress Tests Part 2 - Operating Cash Flow &amp; Accruals, Nikon's Relative Price Score as calculated by Japan Analytics has yet to enter Oversold territory. But since 1993, it never has. That having been said, the growth drivers that supported the company in the past - cameras, lenses and lithography equipment - now appear to have little long-term growth potential beyond a rebound from COVID-19.That leaves Industrial Products and Healthcare, which account for only 22% of sales and are just getting off the ground in terms of new products and technologies.  Industrial products are at the bottom of the demand cycle. Healthcare has yet to turn a profit. The emergence of a "New Nikon" led by optics-based materials processing and bioscience is a long-term proposition.On the positive side, a considerable amount of restructuring has already been done. Personnel and other expenses have been reduced, asset values written down and the share count reduced. As sales and profits recover from the current debacle, the operating margin and ROE should head back toward 10%.Projected valuations 2 -3 years out (less than 10x earnings and 5x cash flow) look attractive enough to justify a 50% rebound in the share price. 

Nikon (7731 JP): 50% Upside from Rock Bottom

Japan

NIKON CORPORATION manufactures and sells cameras, lenses, semiconductor-related equipment, eyeglasses, microscopes, and measuring instruments.

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Nikon Corp (7731 JP)

Nikon (7731) | Focusing on the 4 Year View

Nikon is shifting its focus from continuous restructuring to growth. The newly announced large stock buy-back should give investors confidence in...

Mark Chadwick

BIG Nikon (7731) Buyback - OK But Should Do Better

Nikon (7731) today announced a 9.8% buyback. Given prices, it is more like 6-7%, but that is a similar portion of Eligible ADV for a year. But the...

Travis Lundy

2021 High Conviction 🇯🇵 Sell M3 (2413 JP)

2021 HIGH CONVICTION COLLECTION - For Smartkarma's '2021 High Conviction Collection' we have chosen one of our seven RPS/RRS outliers to be our...

Campbell Gunn

Nikon (7731): Japan's Best NEV Opportunity

The best Negative Enterprise Value opportunity in Japan. Down to 0.5x book value while recovery from the COVID collapse and restructuring point to...

Scott Foster

Nikon (7731 JP): 50% Upside from Rock Bottom

Nikon is likely to hit rock-bottom this quarter due to weak sales and losses caused by COVID-19 and costs related to restructuring. Depending on...

Scott Foster

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