'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

• RELATIVE PRICE SCORE • <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/090/226/original/2019-06-13_16-47-07.png?1560412038" class="editor-image img-responsive" data-smartkarma-image-id="90226"></figure><div class="content-caption">Source: Japan Analytics</div>INTRODUCTION - The Relative Price Score (RPS) is a measure of stock price performance relative to TOPIX calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices. As all companies are thus on a comparable scale, 'Overbought' and 'Oversold' outliers and changes in scoring can reveal short-term and longer-term trading opportunities. Company outlier thresholds are set at +4 &amp; -2 and equate to the top and bottom first-to-second percentiles of historical observations from which mean reversion takes a matter of months. RPS outliers with a Score of greater than 10.0 are rare outside of the 2000 tech 'bubble'. <a href="https://www.smartkarma.com/entities/goldwin-inc" target="_blank" data-smartkarma-citation="entities:410:1">Goldwin (8111 JP)</a> has the distinction of being one of only two large-cap RPS 'ten-baggers' since that time.This insight updates our list of Overbought and Oversold companies, reviews the best and worst performing companies in terms of RPS over the last three months and adds some specific comments on stocks on each category.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/090/196/original/2019-06-13_11-15-27.png?1560392157" class="editor-image img-responsive" data-smartkarma-image-id="90196"></figure><div class="content-caption">Source: Japan Analytics</div>STATISTICS - Currently, of the 3,832 listed companies for which daily RPS data is available, 94 companies are 'Overbought', and 131 are 'Oversold' - 2.5% and 3.4%, respectively of the total. For the 758 companies with a market capitalisation of over ¥100b, there are 50 'Overbought' and 18 'Oversold' companies, 6.6% and 5.0%, respectively. As noted the companion Insight, <a href="https://www.smartkarma.com/insights/japan-june-relative-price-scores-market-sectors-peer-groups-more-of-the-same" target="_blank" data-smartkarma-citation="insights:30323">🇯🇵 Japan • June Relative Price Scores: Market, Sectors &amp; Peer Groups - More of The Same</a>, these numbers and percentages are unusual and were last seen in the Japanese market in 2000. <hr>• RELATIVE PRICE SCORE TOPS •<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/090/202/original/2019-06-13_13-06-49.png?1560398835" class="editor-image img-responsive" data-smartkarma-image-id="90202"></figure><div class="content-caption">Source: Japan Analytics</div>RPS 'TOPS' - In the last two years, 444 companies have achieved an RPS of '4' or more and the average Overbought 'persistence' is 43 days. 1.4% of the total of 1.29 million traded stock days were by companies with an RPS of over 4. For companies with a market capitalisation higher than ¥100b, the numbers are 96 companies and 75 days - demonstrating the superior persistence of large capitalisation companies in this regard. Some examples of RPS mean reversion in the last three months have been <a href="https://www.smartkarma.com/entities/descente-ltd" target="_blank" data-smartkarma-citation="entities:8225:1">Descente (8114 JP)</a>, <a href="https://www.smartkarma.com/entities/alfresa-holdings-corp" target="_blank" data-smartkarma-citation="entities:10610:1">Alfresa (2784 JP)</a>, <a href="https://www.smartkarma.com/entities/320" target="_blank" data-smartkarma-citation="entities:320:1">FamilyMart Uny (8028 JP)</a>, <a href="https://www.smartkarma.com/entities/kikkoman-corp" target="_blank" data-smartkarma-citation="entities:11720:1">Kikkoman (2801 JP)</a>, <a href="https://www.smartkarma.com/entities/kobayashi-pharmaceutical-co" target="_blank" data-smartkarma-citation="entities:14930:1">Kobayashi Pharmaceutical (4967 JP)</a>, and <a href="https://www.smartkarma.com/entities/eiken-chemical-co-ltd" target="_blank" data-smartkarma-citation="entities:12675:1">Eiken Chemical (4549 JP)</a>.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/090/201/original/2019-06-13_13-04-38.png?1560398780" class="editor-image img-responsive" data-smartkarma-image-id="90201"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/090/203/original/2019-06-13_13-08-46.png?1560398945" class="editor-image img-responsive" data-smartkarma-image-id="90203"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/090/204/original/2019-06-13_13-09-37.png?1560399049" class="editor-image img-responsive" data-smartkarma-image-id="90204"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/090/205/original/2019-06-13_13-12-01.png?1560399142" class="editor-image img-responsive" data-smartkarma-image-id="90205"></figure><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/090/316/original/2019-06-15_19-45-47.png?1560595558" class="editor-image img-responsive" data-smartkarma-image-id="90316"></figure>Source: Japan Analytics
</div>RPS 'BOTTOMS' - 372 companies have seen their RPS fall to '-2' or below in the last two years, and the average Oversold 'persistence' is 61 days. 1.5% of the total of 1.29 million traded stock days were by companies with an RPS of less than -2.  For larger capitalisation companies, the numbers are 85 companies and 89 days. A recent example of positive RPS mean reversion is <a href="https://www.smartkarma.com/entities/k-o-energy-group-inc" target="_blank" data-smartkarma-citation="entities:17701:1">K&amp;O Energy (1663 JP)</a>.<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/090/207/original/2019-06-13_13-14-03.png?1560399270" class="editor-image img-responsive" data-smartkarma-image-id="90207"></figure>Source: Japan Analytics
</div><div class="content-highlight">In the DETAIL section below, we list the current very overbought (RPS&gt;5), too late to buy (RPS &gt;4&lt;5) and oversold (RPS &lt;-2) stocks as well as the most substantial three-month positive and negative changes in RPS.</div>

• RELATIVE PRICE SCORE • Source: Japan AnalyticsINTRODUCTION - The Relative Price Score (RPS) is a measure of stock price performance relative to TOPIX calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices. As all companies are thus on a comparable scale, 'Overbought' and 'Oversold' outliers and changes in scoring can reveal short-term and longer-term trading opportunities. Company outlier thresholds are set at +4 &amp; -2 and equate to the top and bottom first-to-second percentiles of historical observations from which mean reversion takes a matter of months. RPS outliers with a Score of greater than 10.0 are rare outside of the 2000 tech 'bubble'. Goldwin (8111 JP) has the distinction of being one of only two large-cap RPS 'ten-baggers' since that time.This insight updates our list of Overbought and Oversold companies, reviews the best and worst performing companies in terms of RPS over the last three months and adds some specific comments on stocks on each category.Source: Japan AnalyticsSTATISTICS - Currently, of the 3,832 listed companies for which daily RPS data is available, 94 companies are 'Overbought', and 131 are 'Oversold' - 2.5% and 3.4%, respectively of the total. For the 758 companies with a market capitalisation of over ¥100b, there are 50 'Overbought' and 18 'Oversold' companies, 6.6% and 5.0%, respectively. As noted the companion Insight, 🇯🇵 Japan • June Relative Price Scores: Market, Sectors &amp; Peer Groups - More of The Same, these numbers and percentages are unusual and were last seen in the Japanese market in 2000. • RELATIVE PRICE SCORE TOPS •Source: Japan AnalyticsRPS 'TOPS' - In the last two years, 444 companies have achieved an RPS of '4' or more and the average Overbought 'persistence' is 43 days. 1.4% of the total of 1.29 million traded stock days were by companies with an RPS of over 4. For companies with a market capitalisation higher than ¥100b, the numbers are 96 companies and 75 days - demonstrating the superior persistence of large capitalisation companies in this regard. Some examples of RPS mean reversion in the last three months have been Descente (8114 JP), Alfresa (2784 JP), FamilyMart Uny (8028 JP), Kikkoman (2801 JP), Kobayashi Pharmaceutical (4967 JP), and Eiken Chemical (4549 JP).  
Source: Japan Analytics
RPS 'BOTTOMS' - 372 companies have seen their RPS fall to '-2' or below in the last two years, and the average Oversold 'persistence' is 61 days. 1.5% of the total of 1.29 million traded stock days were by companies with an RPS of less than -2.  For larger capitalisation companies, the numbers are 85 companies and 89 days. A recent example of positive RPS mean reversion is K&amp;O Energy (1663 JP).
Source: Japan Analytics
In the DETAIL section below, we list the current very overbought (RPS&gt;5), too late to buy (RPS &gt;4&lt;5) and oversold (RPS &lt;-2) stocks as well as the most substantial three-month positive and negative changes in RPS.

🇯🇵 Japan • Relative Price Scores - Overbought & Oversold Companies - June 2019

• RELATIVE PRICE SCORE •The Relative Price Score (RPS) is a measure of stock price performance relative to TOPIX calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices. As all companies are put on a comparable scale, 'Overbought' and 'Oversold' outliers and changes in scoring can reveal short-term and longer-term trading opportunities. Company data is cap-weight-aggregated into 328 Peer Group and 30 Sector Relative Price Scores. Outlier thresholds are set at +4 &amp; -2 for Companies, +3 &amp; -1.5 for Peer Groups and +2 and -1 for Sectors. These thresholds equate with the top and bottom first-to-second percentiles of historical observations from which mean reversion normally takes only a few months.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/981/original/2019-06-10_17-53-34.png?1560156828" class="editor-image img-responsive" data-smartkarma-image-id="89981"></figure><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/982/original/2019-06-10_17-58-02.png?1560157092" class="editor-image img-responsive" data-smartkarma-image-id="89982"></figure>Source: Japan Analytics
</div>OUTLIER TRENDS - In the past, increases in the percentage of companies that are either Overbought or Oversold has been a useful indicator of market trends with a rising number of Overbought outliers being bullish and an increasing number of Oversold outliers being bearish and the crossovers between the numbers of each offering market timing signals.  TECH BUBBLE PLAYBOOK - The current situation where both sets of outliers are rising has only occurred once before in the last 30 years - in 1999/2000 shortly before the peak of the 'tech bubble'. We attribute some of the market's distortions to the Bank of Japan's market activities and the increase in algorithmic trading. Whatever the cause, repeating the 2000 tech bubble playbook is unlikely to end well. NEGATIVE 'SPREADS' - On a daily closing basis, the Oversold outlier percentage is currently 3.31%, having peaked at 3.51% on 17th May. The Overbought outlier percentage peaked at 2.52% on 27th May and is now at 2.37%. The negative 'spread' is currently -0.94%, having reached -1.22% on 14th May compared to -1.34 on December 25th 2018, and -1.26 on 29th January. In this distorted and polarised market, the winners keep on winning, and the losers keep on losing.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/985/original/2019-06-10_18-46-51.png?1560160026" class="editor-image img-responsive" data-smartkarma-image-id="89985"></figure><div class="content-caption">Source: Japan Analytics</div>MARKET TIMING - Using the crossover from Net Overbought to Net Oversold as a market timing indicator over the last two decades has produced reasonably good results.  The most recent monthly closing signal was generated in January when the total market value was ¥634t, 1.9% above the current level.<hr>• SECTORS •<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/987/original/2019-06-10_19-30-41.png?1560162668" class="editor-image img-responsive" data-smartkarma-image-id="89987"></figure><div class="content-caption">Source: Japan Analytics</div>SECTOR 28-YEAR TIMELINE - The 28-year Sector Relative Price Score Timeline chronicles the periodic extremes of both Overbought and Oversold Sectors. Only seventeen Sectors have been Overbought during this period for a total of 546 months of which half were before 2001. The average Overbought persistence is 4.3 months or 3.4 months excluding the Internet Sector.  Only fourteen Sectors have been Oversold since 1992 for a total of 243 months of which 55% were before 2001. The average Oversold persistence is 5.7 months although this has risen to 7.5 months since 2001. Currently, five Sectors are Overbought - Consumer Services, Information Technology, Healthcare Other Consumer Products, and Healthcare -  and two Sectors are Oversold - Banks and Utilities.    <div class="content-highlight">In the DETAIL section below, we provide an update on recent Sector and Peer Group trends and make some specific recommendations. A second Insight will follow looking at the Relative Price Scores for Companies. </div>

• RELATIVE PRICE SCORE •The Relative Price Score (RPS) is a measure of stock price performance relative to TOPIX calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices. As all companies are put on a comparable scale, 'Overbought' and 'Oversold' outliers and changes in scoring can reveal short-term and longer-term trading opportunities. Company data is cap-weight-aggregated into 328 Peer Group and 30 Sector Relative Price Scores. Outlier thresholds are set at +4 &amp; -2 for Companies, +3 &amp; -1.5 for Peer Groups and +2 and -1 for Sectors. These thresholds equate with the top and bottom first-to-second percentiles of historical observations from which mean reversion normally takes only a few months.
Source: Japan Analytics
OUTLIER TRENDS - In the past, increases in the percentage of companies that are either Overbought or Oversold has been a useful indicator of market trends with a rising number of Overbought outliers being bullish and an increasing number of Oversold outliers being bearish and the crossovers between the numbers of each offering market timing signals.  TECH BUBBLE PLAYBOOK - The current situation where both sets of outliers are rising has only occurred once before in the last 30 years - in 1999/2000 shortly before the peak of the 'tech bubble'. We attribute some of the market's distortions to the Bank of Japan's market activities and the increase in algorithmic trading. Whatever the cause, repeating the 2000 tech bubble playbook is unlikely to end well. NEGATIVE 'SPREADS' - On a daily closing basis, the Oversold outlier percentage is currently 3.31%, having peaked at 3.51% on 17th May. The Overbought outlier percentage peaked at 2.52% on 27th May and is now at 2.37%. The negative 'spread' is currently -0.94%, having reached -1.22% on 14th May compared to -1.34 on December 25th 2018, and -1.26 on 29th January. In this distorted and polarised market, the winners keep on winning, and the losers keep on losing.  Source: Japan AnalyticsMARKET TIMING - Using the crossover from Net Overbought to Net Oversold as a market timing indicator over the last two decades has produced reasonably good results.  The most recent monthly closing signal was generated in January when the total market value was ¥634t, 1.9% above the current level.• SECTORS •Source: Japan AnalyticsSECTOR 28-YEAR TIMELINE - The 28-year Sector Relative Price Score Timeline chronicles the periodic extremes of both Overbought and Oversold Sectors. Only seventeen Sectors have been Overbought during this period for a total of 546 months of which half were before 2001. The average Overbought persistence is 4.3 months or 3.4 months excluding the Internet Sector.  Only fourteen Sectors have been Oversold since 1992 for a total of 243 months of which 55% were before 2001. The average Oversold persistence is 5.7 months although this has risen to 7.5 months since 2001. Currently, five Sectors are Overbought - Consumer Services, Information Technology, Healthcare Other Consumer Products, and Healthcare -  and two Sectors are Oversold - Banks and Utilities.    In the DETAIL section below, we provide an update on recent Sector and Peer Group trends and make some specific recommendations. A second Insight will follow looking at the Relative Price Scores for Companies. 

🇯🇵 Japan • June Relative Price Scores: Market, Sectors & Peer Groups - More of The Same

INTRODUCTION - Following on from our review of Spring Market  &amp; Sector Aggregates &amp; Scores <a href="https://www.smartkarma.com/insights/japan-spring-results-revisions-market-sector-aggregates-scores-2nd-quarter" target="_blank" data-smartkarma-citation="insights:29938">Insight</a>, this Insight will cover the cap-weighted Results &amp; Revision Scores for the 328 Peer Groups that comprise our 30 Sectors and provide greater depth to our analysis of current business trends.  Peer Group definitions reflect both standard SIC/GICS classifications as well as local market conventions. The number of constituents and market capitalisation for each Peer Group varies widely. A full list of the Peer Groups within each sector is provided below. As an appetiser, the charts below show the top and bottom ten Peer Groups ranked by Results &amp; Revision Score.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/088/989/original/2019-05-28_11-43-58.png?1559011506" class="editor-image img-responsive" data-smartkarma-image-id="88989"></figure><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/088/991/original/2019-05-28_11-46-04.png?1559011726" class="editor-image img-responsive" data-smartkarma-image-id="88991"></figure>Source: Japan Analytics
</div><div class="content-highlight">In the DETAIL section below, we list the top and bottom twenty Peer Groups ranked by Results &amp; Revision Score and the top and bottom twenty most-changed over the last three months as well the most optimistic and most pessimistic.  </div>

INTRODUCTION - Following on from our review of Spring Market  &amp; Sector Aggregates &amp; Scores Insight, this Insight will cover the cap-weighted Results &amp; Revision Scores for the 328 Peer Groups that comprise our 30 Sectors and provide greater depth to our analysis of current business trends.  Peer Group definitions reflect both standard SIC/GICS classifications as well as local market conventions. The number of constituents and market capitalisation for each Peer Group varies widely. A full list of the Peer Groups within each sector is provided below. As an appetiser, the charts below show the top and bottom ten Peer Groups ranked by Results &amp; Revision Score.
Source: Japan Analytics
In the DETAIL section below, we list the top and bottom twenty Peer Groups ranked by Results &amp; Revision Score and the top and bottom twenty most-changed over the last three months as well the most optimistic and most pessimistic.  

🇯🇵 JAPAN • Spring Results & Revision Scores - Peer Groups

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Event-Driven

After market close <a href="https://www.smartkarma.com/entities/15756" target="_blank" data-smartkarma-citation="entities:15756:1">Taiyo Nippon Sanso Corp (4091 JP)</a> announced that it would acquire substantially all of the European business of  <a href="https://www.smartkarma.com/entities/2139" target="_blank" data-smartkarma-citation="entities:2139:1">Praxair Inc (PX US)</a> as part of efforts to divest assets to gain European approval for its merger with <a href="https://www.smartkarma.com/entities/21668" target="_blank" data-smartkarma-citation="entities:21668:1">Linde AG (LIN GR)</a>. The acquisition provides Taiyo Nippon Sanso with immediate scale in the European market where it previously lacked a presence. With this move the company will see overseas contribution to revenue surge above 50% as the European operations will be…

After market close Taiyo Nippon Sanso Corp (4091 JP) announced that it would acquire substantially all of the European business of  Praxair Inc (PX US) as part of efforts to divest assets to gain European approval for its merger with Linde AG (LIN GR). The acquisition provides Taiyo Nippon Sanso with immediate scale in the European market where it previously lacked a presence. With this move the company will see overseas contribution to revenue surge above 50% as the European operations will be…

Taiyo Nippon Sanso: Acquisition of Praxair's European Business Will Tax Balance Sheet

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/15459" target="_blank" data-smartkarma-citation="entities:15459:1">Iwatani Corp (8088 JP)</a> is an Osaka-based small cap of JPY206bn market cap with a daily trading value of around JPY500m that we consider to have significant long term potential.The company's main business involves the import, wholesale and retail of LPG under the Marui Gas brand, but it is also involved in the industrial gas business including air separation gases as well as hydrogen, helium, argon and CO2. 88% of consolidated OP is generated by these businesses but as a wholesaler, the company is involved in a wide variety of areas, running the gamut from shatter resistance films for OLED phones to titanium to frozen foods, often at the behest of existing customers.OP has grown steadily at a CAGR of 11% between FY03/02 and FY03/17 as the ageing society in Japan has led to small LPG retailers selling out to companies such as Iwatani (the largest domestic wholesaler and retailer of LPG) and the company's foresight in establishing itself as the first and only supplier of hydrogen in liquefied form helped it raise its market share from 35% in 2004 to 70% in 2017. The company's financial strength has also increased as net D/E has fallen from 398% in FY03/02 to 61% in the most recent quarter and operating cash flow has doubled since 2002. Taking 3 year periods to smooth out volatility, the three year period to FY03/02 saw a cumulative JPY40.7bn in operating cash flow and JPY10.4bn in FCF while the three year period to FY03/17 saw cumulative operating cash flow of JPY116.3bn and FCF of JPY45.1bn.Looking forward, we believe profitability growth should accelerate in both the LPG business as well as in industrial gases. We believe the strengthened balance sheet and growing cash flow should allow the company to accelerate consolidation in the retail space for LPG thanks to a ready built pipeline of about 3,200 companies retailing its Marui Gas product. Despite being the largest retailer, serving 880k households, the company's share is just 3.5% so saturation is not an issue and the retailers of its gas serve a total of 3.1m households.In the industrial gas business, various projections have domestic hydrogen use expanding from 400m Nm3 (about 36k tons by weight) to 4-9bn Nm3 (360-810k tons) in 2025 and 78-130bn Nm3 (7-12m tons) by 2050. The majority of this demand is slated for power generation purposes (about half) with about 30% for household and industrial fuel cell and the remainder for FCVs. We believe the power generation demand is likely to come through as we are at the cusp of commercialisation of mixed hydrogen/natural gas turbines such as those developed by <a href="https://www.smartkarma.com/entities/8790" target="_blank" data-smartkarma-citation="entities:8790:1">Kawasaki Heavy Industries (7012 JP)</a>.Growth from the LPG segment is likely to be steady and we expect volumes to continue growing steadily by at least 3% per year. This should have a more significant impact on OP however as margins in retail are several times those in wholesale. Our estimates suggest that OP for the segment is likely to continue growing at a double digit CAGR for the foreseeable future though in the short term, LPG import prices can have an impact on profitability. In the Industrial Gases &amp; Machinery segment, we estimate that about 8.5% of the JPY166bn in revenue was generated by hydrogen sales. Hydrogen volumes are forecast to grow 10-22.5x by 2025 and more than 200x by 2050 though prices are expected to fall by 60-80% over these time periods. While we consider these forecasts to be optimistic, they do imply that the domestic hydrogen market could grow from JPY26.8bn in 2017 to JPY160-360bn by 2025 - a 25-38% CAGR.Valuations are also very reasonable. Iwatani trades at 10.5x FY03/19 consensus PE (we believe OP could be 20% above consensus) and 10.8x EV/OP. Peers are trading at multiples of about 20x PE and 15x EV/OP suggesting very healthy upside for the stock, particularly if our above consensus estimates prove accurate.

Iwatani Corp (8088 JP) is an Osaka-based small cap of JPY206bn market cap with a daily trading value of around JPY500m that we consider to have significant long term potential.The company's main business involves the import, wholesale and retail of LPG under the Marui Gas brand, but it is also involved in the industrial gas business including air separation gases as well as hydrogen, helium, argon and CO2. 88% of consolidated OP is generated by these businesses but as a wholesaler, the company is involved in a wide variety of areas, running the gamut from shatter resistance films for OLED phones to titanium to frozen foods, often at the behest of existing customers.OP has grown steadily at a CAGR of 11% between FY03/02 and FY03/17 as the ageing society in Japan has led to small LPG retailers selling out to companies such as Iwatani (the largest domestic wholesaler and retailer of LPG) and the company's foresight in establishing itself as the first and only supplier of hydrogen in liquefied form helped it raise its market share from 35% in 2004 to 70% in 2017. The company's financial strength has also increased as net D/E has fallen from 398% in FY03/02 to 61% in the most recent quarter and operating cash flow has doubled since 2002. Taking 3 year periods to smooth out volatility, the three year period to FY03/02 saw a cumulative JPY40.7bn in operating cash flow and JPY10.4bn in FCF while the three year period to FY03/17 saw cumulative operating cash flow of JPY116.3bn and FCF of JPY45.1bn.Looking forward, we believe profitability growth should accelerate in both the LPG business as well as in industrial gases. We believe the strengthened balance sheet and growing cash flow should allow the company to accelerate consolidation in the retail space for LPG thanks to a ready built pipeline of about 3,200 companies retailing its Marui Gas product. Despite being the largest retailer, serving 880k households, the company's share is just 3.5% so saturation is not an issue and the retailers of its gas serve a total of 3.1m households.In the industrial gas business, various projections have domestic hydrogen use expanding from 400m Nm3 (about 36k tons by weight) to 4-9bn Nm3 (360-810k tons) in 2025 and 78-130bn Nm3 (7-12m tons) by 2050. The majority of this demand is slated for power generation purposes (about half) with about 30% for household and industrial fuel cell and the remainder for FCVs. We believe the power generation demand is likely to come through as we are at the cusp of commercialisation of mixed hydrogen/natural gas turbines such as those developed by Kawasaki Heavy Industries (7012 JP).Growth from the LPG segment is likely to be steady and we expect volumes to continue growing steadily by at least 3% per year. This should have a more significant impact on OP however as margins in retail are several times those in wholesale. Our estimates suggest that OP for the segment is likely to continue growing at a double digit CAGR for the foreseeable future though in the short term, LPG import prices can have an impact on profitability. In the Industrial Gases &amp; Machinery segment, we estimate that about 8.5% of the JPY166bn in revenue was generated by hydrogen sales. Hydrogen volumes are forecast to grow 10-22.5x by 2025 and more than 200x by 2050 though prices are expected to fall by 60-80% over these time periods. While we consider these forecasts to be optimistic, they do imply that the domestic hydrogen market could grow from JPY26.8bn in 2017 to JPY160-360bn by 2025 - a 25-38% CAGR.Valuations are also very reasonable. Iwatani trades at 10.5x FY03/19 consensus PE (we believe OP could be 20% above consensus) and 10.8x EV/OP. Peers are trading at multiples of about 20x PE and 15x EV/OP suggesting very healthy upside for the stock, particularly if our above consensus estimates prove accurate.

Iwatani: The Unsexy Ageing Demographic Play with a Pinch of Hydrogen Economy and a Dash of 10x PE

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 • Relative Price Scores - Overbought & Oversold Companies - June 2019

• RELATIVE PRICE SCORE • INTRODUCTION - The Relative Price Score (RPS) is a measure of stock price performance relative to TOPIX calculated by...

Campbell Gunn

🇯🇵 Japan • June Relative Price Scores: Market, Sectors & Peer Groups - More of The Same

• RELATIVE PRICE SCORE •The Relative Price Score (RPS) is a measure of stock price performance relative to TOPIX calculated by comparing the...

Campbell Gunn

🇯🇵 JAPAN • Spring Results & Revision Scores - Peer Groups

INTRODUCTION - Following on from our review of Spring Market & Sector Aggregates & Scores Insight, this Insight will cover the...

Campbell Gunn

Taiyo Nippon Sanso: Acquisition of Praxair's European Business Will Tax Balance Sheet

After market close Taiyo Nippon Sanso Corp (4091 JP) announced that it would acquire substantially all of the European business of Praxair Inc (PX...

Mio Kato

Iwatani: The Unsexy Ageing Demographic Play with a Pinch of Hydrogen Economy and a Dash of 10x PE

Iwatani Corp (8088 JP) is an Osaka-based small cap of JPY206bn market cap with a daily trading value of around JPY500m that we consider to have...

Mio Kato

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