Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Bottom-Up

<ul>
<li>
<strong>We believe SK Materials is the biggest winner from SK Group's efforts to vertically integrate the sourcing of semiconductor-related gases and materials.</strong> After the political feud between Japan and South Korea in the summer of 2019, SK Group has determined that it reduce risks associated with relying too much on the Japanese suppliers on various semiconductor materials. As such, over the next several years, SK Materials will play a key role in the entire SK Group's increasing vertical integration of numerous semiconductor materials.</li>
<li><p><strong>Valuation</strong> - The valuation levels of SK Materials have been wide-ranging in the past four years. The P/E range has been from 10.2x to 18.6x in the past four years. The P/B multiples have ranged 2.2x to 4.7x in the past four years. Currently, it is trading at 3.6x P/B, using its book value of 489 billion won at the end of 3Q19. The consensus currently estimates the company's equity to be 634 billion won at the end of 2020, which would be a 30% increase in equity from the end of 3Q19. <strong>If we apply the same P/B multiple of 3.6x and apply to next year's book value, the would suggest an implied market cap of 2.3 trillion won or 216,402 won per share (30% higher than current levels).</strong></p></li>
<li>
<strong>Tuck-In Acquisitions of Attractive Industrial Gases and Materials Businesses</strong> - Since 2016, SK Materials has made several acquisitions &amp; JVs including the acquisition of SKC Airgas (2016), SK Showa Denko (2017), Hanyu Chemical (2019), and Kumho Petrochem's photoresist business (2020). These tuck-in acquisitions have added to the company's revenues and the company has been able to maintain high operating margins. From 2015 to 2019, SK Materials generated an average operating margin of 30%, which is one of the highest among Korean companies with more than $1 billion in market cap.</li>
</ul>



We believe SK Materials is the biggest winner from SK Group's efforts to vertically integrate the sourcing of semiconductor-related gases and materials. After the political feud between Japan and South Korea in the summer of 2019, SK Group has determined that it reduce risks associated with relying too much on the Japanese suppliers on various semiconductor materials. As such, over the next several years, SK Materials will play a key role in the entire SK Group's increasing vertical integration of numerous semiconductor materials.
Valuation - The valuation levels of SK Materials have been wide-ranging in the past four years. The P/E range has been from 10.2x to 18.6x in the past four years. The P/B multiples have ranged 2.2x to 4.7x in the past four years. Currently, it is trading at 3.6x P/B, using its book value of 489 billion won at the end of 3Q19. The consensus currently estimates the company's equity to be 634 billion won at the end of 2020, which would be a 30% increase in equity from the end of 3Q19. If we apply the same P/B multiple of 3.6x and apply to next year's book value, the would suggest an implied market cap of 2.3 trillion won or 216,402 won per share (30% higher than current levels).

Tuck-In Acquisitions of Attractive Industrial Gases and Materials Businesses - Since 2016, SK Materials has made several acquisitions &amp; JVs including the acquisition of SKC Airgas (2016), SK Showa Denko (2017), Hanyu Chemical (2019), and Kumho Petrochem's photoresist business (2020). These tuck-in acquisitions have added to the company's revenues and the company has been able to maintain high operating margins. From 2015 to 2019, SK Materials generated an average operating margin of 30%, which is one of the highest among Korean companies with more than $1 billion in market cap.


SK Materials - The Biggest Winner from SK Group's Vertical Integration of Semiconductor Materials

'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. 

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/429/original/2020-02-12_12-29-56.png?1581478227" class="editor-image img-responsive" data-smartkarma-image-id="117429"></figure>
<div class="content-caption">Source • Japan Analytics</div>
<p><strong><a href="https://www.smartkarma.com/entities/taiyo-nippon-sanso-corp" target="_blank" data-smartkarma-citation="entities:15756:1" rel="noopener">TAIYO NIPPON SANSO (4091 JP)</a> -</strong> TNS, itself a three-way merger between Nippon Sanso, Taiyo Sanso and Toyo Sanso, has been one of Japan's more globally acquisitive companies in recent years. The company has bought businesses from Linde (North America), Praxair (Europe) and Air Liquide (USA), Air Products (Thailand) while buying businesses outright or majority stakes in India, Australia, Singapore, Thailand. From  2014, TNS became a consolidated subsidiary of <a href="https://www.smartkarma.com/entities/mitsubishi-chemical-holdings" target="_blank" data-smartkarma-citation="entities:12781:1" rel="noopener">Mitsubishi Chemical (4188 JP),</a> a stake that represents 44% of Mitsubishi Chemical's current market value. </p>
<p><strong>HIGH-PRESSURE PERFORMER -</strong> TNS shares have been one of the best-performing stocks in the Chemicals Sector in Japan since 2012, rising by 554% and reaching a daily closing high of ¥2,665 on 15th November 2019. Although no longer Overbought and having moved in a  narrow range since July 2019, TNS shares are still trading at the elevated levels commensurate with a high-growth company.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/424/original/2020-02-12_12-16-41.png?1581477424" class="editor-image img-responsive" data-smartkarma-image-id="117424"></figure>
<div class="content-caption">Source • Japan Analytics</div>
<p><strong>TRULY GLOBAL</strong> - The domestic gas business is now only 42% of revenues and 29% of Operating Income, with the business spread geographically between the US (25%/25%), Europe (20%.28%), and Asia-Pacific (13%/11.9). Gas margins are higher overseas (10%/15%/10%) than in Japan 7.5%, which has been one of the drivers of the expansion abroad. </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/430/original/File%202020-02-12%2011%2051%2021.jpeg?1581478650" class="editor-image img-responsive" data-smartkarma-image-id="117430"></figure>
<div class="content-caption">Source • Company</div>
<p><strong>MOSTLY GAS</strong> - Although TNS has four main business lines, the non-Industrial Gas businesses are related to the application of gas technologies and products in fields related to electronics, medical care and energy. The exception is the THERMOS stainless steel vacuum flasks and thermal cookers business which commands margins of over 30% but is only 3% of sales.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/431/original/File%202020-02-12%2012%2042%2011.jpeg?1581479106" class="editor-image img-responsive" data-smartkarma-image-id="117431"></figure>
<div class="content-caption">Source • Company</div>
<p><strong>HOLDCO</strong> - In October this year, the company will transition to a holding company and change its name to Nippon Sanso Holdings as outlined above. The aim is to devolve more decision-making authority to the regions/business groups.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/458/original/2020-02-12_11-59-45.png?1581481488" class="editor-image img-responsive" data-smartkarma-image-id="117458"></figure>
<div class="content-caption">Source • Japan Analytics</div>
<p><strong>DOWNWARD REVISION</strong> - On 5th February, TNS announced a downward revision of Revenue, Operating Income and Net Income of 4%, 7% and 6%, respectively, due to weak performance in the domestic Gas and Thermos divisions and one-off costs relating to Nippon Ekitan. These revisions are the first downward revisions by the company in six years and will likely be followed by a cautious outlook for FY2021 at the full-year results announcement in May.</p>
<p><strong>AVOID/SELL</strong> - Although now more diversified, TNS remains primarily exposed to developed manufacturing economies and has yet to prove it can earn a positive residual return on its newly acquired assets. The company has attracted a premium valuation but has, so far, yet to justify investors' confidence. Shielded by the majority ownership of Mitsubishi Chemicals, there is little pressure than can be exerted on management to focus on returns rather than scale for scale's sake. <strong>We consider a TTM EV/OP ratio of 21.4 times excessive for a -1.5% return and recommend avoiding or selling TNS ahead of the upcoming cyclical downturn.</strong></p>


Source • Japan Analytics
TAIYO NIPPON SANSO (4091 JP) - TNS, itself a three-way merger between Nippon Sanso, Taiyo Sanso and Toyo Sanso, has been one of Japan's more globally acquisitive companies in recent years. The company has bought businesses from Linde (North America), Praxair (Europe) and Air Liquide (USA), Air Products (Thailand) while buying businesses outright or majority stakes in India, Australia, Singapore, Thailand. From  2014, TNS became a consolidated subsidiary of Mitsubishi Chemical (4188 JP), a stake that represents 44% of Mitsubishi Chemical's current market value. 
HIGH-PRESSURE PERFORMER - TNS shares have been one of the best-performing stocks in the Chemicals Sector in Japan since 2012, rising by 554% and reaching a daily closing high of ¥2,665 on 15th November 2019. Although no longer Overbought and having moved in a  narrow range since July 2019, TNS shares are still trading at the elevated levels commensurate with a high-growth company.

Source • Japan Analytics
TRULY GLOBAL - The domestic gas business is now only 42% of revenues and 29% of Operating Income, with the business spread geographically between the US (25%/25%), Europe (20%.28%), and Asia-Pacific (13%/11.9). Gas margins are higher overseas (10%/15%/10%) than in Japan 7.5%, which has been one of the drivers of the expansion abroad. 

Source • Company
MOSTLY GAS - Although TNS has four main business lines, the non-Industrial Gas businesses are related to the application of gas technologies and products in fields related to electronics, medical care and energy. The exception is the THERMOS stainless steel vacuum flasks and thermal cookers business which commands margins of over 30% but is only 3% of sales.

Source • Company
HOLDCO - In October this year, the company will transition to a holding company and change its name to Nippon Sanso Holdings as outlined above. The aim is to devolve more decision-making authority to the regions/business groups.

Source • Japan Analytics
DOWNWARD REVISION - On 5th February, TNS announced a downward revision of Revenue, Operating Income and Net Income of 4%, 7% and 6%, respectively, due to weak performance in the domestic Gas and Thermos divisions and one-off costs relating to Nippon Ekitan. These revisions are the first downward revisions by the company in six years and will likely be followed by a cautious outlook for FY2021 at the full-year results announcement in May.
AVOID/SELL - Although now more diversified, TNS remains primarily exposed to developed manufacturing economies and has yet to prove it can earn a positive residual return on its newly acquired assets. The company has attracted a premium valuation but has, so far, yet to justify investors' confidence. Shielded by the majority ownership of Mitsubishi Chemicals, there is little pressure than can be exerted on management to focus on returns rather than scale for scale's sake. We consider a TTM EV/OP ratio of 21.4 times excessive for a -1.5% return and recommend avoiding or selling TNS ahead of the upcoming cyclical downturn.

4091🇯🇵 Taiyo Nippon Sanso - High-Pressure • High-Stakes

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/531/original/2020-02-06_03-39-10.png?1580933731" class="editor-image img-responsive" data-smartkarma-image-id="116531"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>5TH FEBRUARY ROUNDUP</strong> - Wednesday saw 171 Results and 65 Forecast/Revision announcements. The Results Score set another new three-year low losing 16bps to reach 0.35, while the Forecast/Revision Score shed 7bps to reach 0.08. The sogo shosha trading company results were weak, with the exception of <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" data-smartkarma-citation="entities:18448:1" rel="noopener">Itochu (8001 JP)</a>. Amongst large caps, <a href="https://www.smartkarma.com/entities/marubeni-corp" target="_blank" data-smartkarma-citation="entities:7463:1" rel="noopener">Marubeni (8002 JP)</a> and <a href="https://www.smartkarma.com/entities/dena-co-ltd" target="_blank" data-smartkarma-citation="entities:747:1" rel="noopener">DeNA(2432 JP)</a> had Operating Losses, while <a href="https://www.smartkarma.com/entities/mazda-motor-corp" target="_blank" data-smartkarma-citation="entities:20528:1" rel="noopener">Mazda Motor (7261 JP)</a>, <a href="https://www.smartkarma.com/entities/fujikura-ltd" target="_blank" data-smartkarma-citation="entities:10768:1" rel="noopener">Fujikura (5803 JP)</a>, <a href="https://www.smartkarma.com/entities/daicel-corp" target="_blank" data-smartkarma-citation="entities:10533:1" rel="noopener">Daicel (4202 JP)</a>, and <a href="https://www.smartkarma.com/entities/furukawa-electric-co-ltd" target="_blank" data-smartkarma-citation="entities:5193:1" rel="noopener">Furukawa Electric (5801 JP)</a> saw steep quarterly year-on-year OP declines. Amongst the 'winners' were <a href="https://www.smartkarma.com/entities/square-enix-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:15003:1" rel="noopener">Square Enix (9684 JP)</a>, and <a href="https://www.smartkarma.com/entities/rengo-co-ltd" target="_blank" data-smartkarma-citation="entities:20278:1" rel="noopener">Rengo (3941 JP)</a>.</p><hr><p style="text-align: center;"><strong>• SECTOR TIMELINE •</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/532/original/2020-02-06_03-42-28.png?1580934310" class="editor-image img-responsive" data-smartkarma-image-id="116532"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>SECTOR TIMELINE</strong> - The <strong>Wholesale</strong> Sector was the largest loser yesterday with <a href="https://www.smartkarma.com/entities/mitsubishi-corp" target="_blank" data-smartkarma-citation="entities:20668:1" rel="noopener">Mitsubishi (8058 JP)</a> and <a href="https://www.smartkarma.com/entities/kanematsu-corp" target="_blank" data-smartkarma-citation="entities:5810:1" rel="noopener">Kanematsu (8020 JP)</a> joining Marubeni in posting poor results. <a href="https://www.smartkarma.com/entities/taiyo-nippon-sanso-corp" target="_blank" data-smartkarma-citation="entities:15756:1" rel="noopener">Taiyo Nippon Sanso (4091 JP)</a> slowing momentum and downward revision saw the <strong>Chemical</strong> Sector move lower again. <a href="https://www.smartkarma.com/entities/agc-inc" target="_blank" data-smartkarma-citation="entities:2167:1" rel="noopener">AGC (5201 JP)</a> initial forecast for FY2020 helped the <strong>Other Materials</strong> Sector recover some ground. </p>

Source • Japan Analytics5TH FEBRUARY ROUNDUP - Wednesday saw 171 Results and 65 Forecast/Revision announcements. The Results Score set another new three-year low losing 16bps to reach 0.35, while the Forecast/Revision Score shed 7bps to reach 0.08. The sogo shosha trading company results were weak, with the exception of Itochu (8001 JP). Amongst large caps, Marubeni (8002 JP) and DeNA(2432 JP) had Operating Losses, while Mazda Motor (7261 JP), Fujikura (5803 JP), Daicel (4202 JP), and Furukawa Electric (5801 JP) saw steep quarterly year-on-year OP declines. Amongst the 'winners' were Square Enix (9684 JP), and Rengo (3941 JP).• SECTOR TIMELINE •Source • Japan AnalyticsSECTOR TIMELINE - The Wholesale Sector was the largest loser yesterday with Mitsubishi (8058 JP) and Kanematsu (8020 JP) joining Marubeni in posting poor results. Taiyo Nippon Sanso (4091 JP) slowing momentum and downward revision saw the Chemical Sector move lower again. AGC (5201 JP) initial forecast for FY2020 helped the Other Materials Sector recover some ground. 

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 5th February ▲5201 4202 6269 ▼4091 9987 6869

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 Capital Markets

<p>When Air Water initially announced its secondary, we suggested that it would take a significant discount to get us interested. This was partly due to the degree of dilution and partly due to relatively stretched valuations on an EV/OP basis. With the stock price down 16% from the undisturbed price and the offering set to price tomorrow, we find the deal looking a lot more constructive now.</p>

When Air Water initially announced its secondary, we suggested that it would take a significant discount to get us interested. This was partly due to the degree of dilution and partly due to relatively stretched valuations on an EV/OP basis. With the stock price down 16% from the undisturbed price and the offering set to price tomorrow, we find the deal looking a lot more constructive now.

Air Water – Share Price Fall Has Gotten Us Interested

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/106/452/original/2019-11-17_11-54-09.png?1573959284" class="editor-image img-responsive" data-smartkarma-image-id="106452"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>4TH DOWN AND A FEW MORE TO GO</strong> - The latest quarterly results are now, with the exception of three large insurance companies are currently in the market and, to loosely paraphrase the under-rated Jesse Winchester's second album title, this is the fourth straight 'down' quarter with the prospect a few more to come. Operating Income has declined by 7.8% and Net Income by 18.8%, taking margins to 6.9% and 4.6%, respectively - declines of 84bps and 122bps. The market has celebrated these new two-year lows by rising to new two-year highs, leaving some to wonder what they are missing, other than yet more central bank liquidity. The trailing-twelve-month (TTM) price-earnings ratio is now 17 times, the highest since 5th February 2018, ten trading days after the long-term market peak.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/106/458/original/2019-11-17_12-49-55.png?1573962614" class="editor-image img-responsive" data-smartkarma-image-id="106458"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/106/459/original/2019-11-17_13-10-47.png?1573963867" class="editor-image img-responsive" data-smartkarma-image-id="106459"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>THE EARNINGS CYCLE HAS YET TO BOTTOM</strong> -  Our Results &amp; Forecast/Revision Score data series cover the last sixteen years of quarterly earnings and eleven years of forecasts and revisions and measure both results and forecasts but also their momentum, providing a better correlation with the market direction than past earnings.   The Forecast/Revision Score leads the Results Score by several months, and the market leads or lags depending on monetary and liquidity conditions. Although both Scores recovered in the last five days of results announcements, the Forecast/Revision Score of 0.45 reached on 8th November is the lowest such score in ten years and is suggesting that earnings have yet to bottom.</p><div class="content-highlight"><p><strong>WISHFUL THINKING? - The 'gap' between market expectations and actual and forecast earnings momentum is now wider than at any time since late 2014, shortly before the market peak of May 2015. Is this foresight or just wishful thinking? We tend to the latter interpretation.</strong></p></div><p><strong>In the DETAIL section below, we shall provide a full breakdown of the results and revisions announcements by Sector, Peer Group and company and offer brief comments on several recommended buys and sells.</strong></p>

Source: Japan Analytics4TH DOWN AND A FEW MORE TO GO - The latest quarterly results are now, with the exception of three large insurance companies are currently in the market and, to loosely paraphrase the under-rated Jesse Winchester's second album title, this is the fourth straight 'down' quarter with the prospect a few more to come. Operating Income has declined by 7.8% and Net Income by 18.8%, taking margins to 6.9% and 4.6%, respectively - declines of 84bps and 122bps. The market has celebrated these new two-year lows by rising to new two-year highs, leaving some to wonder what they are missing, other than yet more central bank liquidity. The trailing-twelve-month (TTM) price-earnings ratio is now 17 times, the highest since 5th February 2018, ten trading days after the long-term market peak.Source: Japan AnalyticsTHE EARNINGS CYCLE HAS YET TO BOTTOM -  Our Results &amp; Forecast/Revision Score data series cover the last sixteen years of quarterly earnings and eleven years of forecasts and revisions and measure both results and forecasts but also their momentum, providing a better correlation with the market direction than past earnings.   The Forecast/Revision Score leads the Results Score by several months, and the market leads or lags depending on monetary and liquidity conditions. Although both Scores recovered in the last five days of results announcements, the Forecast/Revision Score of 0.45 reached on 8th November is the lowest such score in ten years and is suggesting that earnings have yet to bottom.WISHFUL THINKING? - The 'gap' between market expectations and actual and forecast earnings momentum is now wider than at any time since late 2014, shortly before the market peak of May 2015. Is this foresight or just wishful thinking? We tend to the latter interpretation.In the DETAIL section below, we shall provide a full breakdown of the results and revisions announcements by Sector, Peer Group and company and offer brief comments on several recommended buys and sells.

🇯🇵 Japan • Results & Revisions Review - Wishful Thinking

Japan

Nippon Sanso Holdings produces various kinds of industrial gases including oxygen, argon, and nitrogen.  The Company also manufactures frozen foods and thermos.

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Nippon Sanso Holdings (4091 JP)

SK Materials - The Biggest Winner from SK Group's Vertical Integration of Semiconductor Materials

We believe SK Materials is the biggest winner from SK Group's efforts to vertically integrate the sourcing of semiconductor-related gases and...

Douglas Kim

4091🇯🇵 Taiyo Nippon Sanso - High-Pressure • High-Stakes

TAIYO NIPPON SANSO (4091 JP) - TNS, itself a three-way merger between Nippon Sanso, Taiyo Sanso and Toyo Sanso, has been one of Japan's more...

Campbell Gunn

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 5th February ▲5201 4202 6269 ▼4091 9987 6869

5TH FEBRUARY ROUNDUP - Wednesday saw 171 Results and 65 Forecast/Revision announcements. The Results Score set another new three-year low losing...

Campbell Gunn

🇯🇵 Japan • Results & Revisions Review - Wishful Thinking

4TH DOWN AND A FEW MORE TO GO - The latest quarterly results are now, with the exception of three large insurance companies are currently in the...

Campbell Gunn

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52-week Range

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SK Materials - The Biggest Winner from SK Group's Vertical Integration of Semiconductor Materials

We believe SK Materials is the biggest winner from SK Group's efforts to vertically integrate the sourcing of semiconductor-related gases and...

Douglas Kim

4091🇯🇵 Taiyo Nippon Sanso - High-Pressure • High-Stakes

TAIYO NIPPON SANSO (4091 JP) - TNS, itself a three-way merger between Nippon Sanso, Taiyo Sanso and Toyo Sanso, has been one of Japan's more...

Campbell Gunn

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 5th February ▲5201 4202 6269 ▼4091 9987 6869

5TH FEBRUARY ROUNDUP - Wednesday saw 171 Results and 65 Forecast/Revision announcements. The Results Score set another new three-year low losing...

Campbell Gunn

Air Water – Share Price Fall Has Gotten Us Interested

When Air Water initially announced its secondary, we suggested that it would take a significant discount to get us interested. This was partly due...

Mio Kato

🇯🇵 Japan • Results & Revisions Review - Wishful Thinking

4TH DOWN AND A FEW MORE TO GO - The latest quarterly results are now, with the exception of three large insurance companies are currently in the...

Campbell Gunn