Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<ul>
<li>Silchester has written letters to four Japanese regional banks where they hold large stakes asking for higher dividends and payout ratios. It has proposed a special div AGM agenda item.</li>
<li>
<a href="https://www.smartkarma.com/entities/bank-of-iwate-ltd" target="_blank" data-smartkarma-citation="entities:6171:1" rel="noopener">Bank Of Iwate (8345 JP)</a> is nearly 40% held by cross-holders and government-affiliated entities, and Real World Float is less than 50%. Winning at the AGM is tough.</li>
<li>The collection of banks is mixed. But this one is cheap. Cheap as chips. Or cheaper.</li>
</ul>


Silchester has written letters to four Japanese regional banks where they hold large stakes asking for higher dividends and payout ratios. It has proposed a special div AGM agenda item.

Bank Of Iwate (8345 JP) is nearly 40% held by cross-holders and government-affiliated entities, and Real World Float is less than 50%. Winning at the AGM is tough.
The collection of banks is mixed. But this one is cheap. Cheap as chips. Or cheaper.


JAPAN ACTIVISM: Silchester Goes After Bk of Iwate - Cheaper Than Chips

Equity L/S Analyst | Forensic Accounting | India, Yellowstone Equity

Ankit Agrawal, CFA

Equity L/S Analyst | Forensic Accounting | India

Quantitative Analysis

<div>
<p>In this Smartkarma Original, we bring to you a quantitative approach for identifying Asian companies that are likely to raise/cut buyback. Applying this approach to a universe of 920+ companies listed across Asia helped us identify 40+ and 50+ companies that have a high likelihood of raising and cutting buybacks, respectively, over the next five years.</p>
</div>
<div>
<div>
<div class="content-highlight">
<p><strong>What's Original?</strong></p>
<ul style="list-style-type: disc;">
<li>We have two separate models, one for forecasting Buyback Raise and the other for Buyback Cut.</li>
<li>Our back test results are very encouraging with &gt;85% hit rate for our Buyback Raise model and &gt;94% hit rate for our Buyback Cut model.</li>
<li>For our Buyback Raise model, we differentiate from other quantitative buyback models by incorporating competing uses of cash like inorganic acquisitions through “Goodwill as % of Total Assets” parameter. Based on our analysis, we have also determined that, contrary to usual perception, any dividend payout is not a competing use of cash vs buyback but a healthy sign of capital return discipline and have incorporated it accordingly in our model. We also use long-term ROE vs growth trends to filter companies where the cash levels maybe low but the capability to do buyback with time can grow significantly. At the same time, we ensure to weed off very high growth companies that may have high re-investment needs through our carefully selected threshold for the "Long-term Revenue CAGR" parameter. </li>
</ul>
</div>
</div>
</div>
<div>
<h3>Insight Flow</h3>
</div>
<div>
<ul style="list-style-type: disc;">
<li>Live Dashboard</li>
<li> Methodology
<ul style="list-style-type: circle;">
<li>Buyback Raise Model</li>
<li>Buyback Cut Model</li>
</ul>
</li>
<li>Universe</li>
<li>Back Test Results
<ul style="list-style-type: circle;">
<li>Buyback Raise Model</li>
<li>Buyback Cut Model</li>
</ul>
</li>
<li>Model Results
<ul style="list-style-type: circle;">
<li>Summary Statistics</li>
<li>Companies with High Probability of Buyback Raise</li>
<li>Companies with High Probability of Buyback Cut</li>
</ul>
</li>
<li>Buyback Timing</li>
<li>Model Risks &amp; Limitations</li>
<li>Conclusion</li>
</ul>
</div>


In this Smartkarma Original, we bring to you a quantitative approach for identifying Asian companies that are likely to raise/cut buyback. Applying this approach to a universe of 920+ companies listed across Asia helped us identify 40+ and 50+ companies that have a high likelihood of raising and cutting buybacks, respectively, over the next five years.




What's Original?

We have two separate models, one for forecasting Buyback Raise and the other for Buyback Cut.
Our back test results are very encouraging with &gt;85% hit rate for our Buyback Raise model and &gt;94% hit rate for our Buyback Cut model.
For our Buyback Raise model, we differentiate from other quantitative buyback models by incorporating competing uses of cash like inorganic acquisitions through “Goodwill as % of Total Assets” parameter. Based on our analysis, we have also determined that, contrary to usual perception, any dividend payout is not a competing use of cash vs buyback but a healthy sign of capital return discipline and have incorporated it accordingly in our model. We also use long-term ROE vs growth trends to filter companies where the cash levels maybe low but the capability to do buyback with time can grow significantly. At the same time, we ensure to weed off very high growth companies that may have high re-investment needs through our carefully selected threshold for the "Long-term Revenue CAGR" parameter. 





Insight Flow



Live Dashboard
 Methodology

Buyback Raise Model
Buyback Cut Model


Universe
Back Test Results

Buyback Raise Model
Buyback Cut Model


Model Results

Summary Statistics
Companies with High Probability of Buyback Raise
Companies with High Probability of Buyback Cut


Buyback Timing
Model Risks &amp; Limitations
Conclusion



Asia Buyback Forecasting | Which Companies Are Likely to Raise/Cut Buybacks?

'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/000/121/977/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

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

<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

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)

JAPAN ACTIVISM: Silchester Goes After Bk of Iwate - Cheaper Than Chips

Bank of Iwate is the smallest (so far) of Silchester Int'l Investors' regional bank AGM proposal letters. It owns 11%. This one is tough too, but...

Travis Lundy

Asia Buyback Forecasting | Which Companies Are Likely to Raise/Cut Buybacks?

A predictive quantitative model for Asian companies to help determine which companies are likely to raise/cut buybacks in future.

Ankit Agrawal, CFA

🇯🇵 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

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

Price Gauge

52-week Range

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