Global Special Situations & Strategy, SR Services Ltd

David Lepper

Global Special Situations & Strategy

SR Services Ltd

SR Services provides Strategic Knowledge and Solutions services for Family Offices and Corporate Business. 

We deliver this via advisory services, strategic planning, opportunity analysis/sourcing, as well as solution implementation. 

Whilst, we create intellectual discipline and operational leverage for your projects or daily activities, our ultimate objective is to empower whilst enhancing your decision making. 

Strategic Knowledge and Solutions

Cross Asset Strategy

<h2>Eight new names, SoftBank remains for the 3rd quarter running</h2>
<ul>
<li>
OurQ2-2021 All Cap High-Risk screen of stocks produced a market cap-weighted average price decline of 2%. In comparison, the MSCI Asia Pacific Index posted a decline of 1.7% over the same period. The stock quality of our Q2 2021 decreased 2.4 points or 3.8% over the period. Within the mix of 34 stocks in our Q2 2021 (May) list 19 posted negative performance, with an average decline of 14.1%.</li>
<li>
At a static number of 34 stocks our Q3 2021 screen, delivers an interesting composition this quarter, with eight (8) new names and strong representation from Hong Kong in terms of geography and Industrials and Basic Materials from a sector perspective. This suggests that the “reopening of the economy” trade may have run its course for now.</li>
<li>Our Q3 2021 screen shows a further reduction in average stock rank (a reading on relative quality amongst the broad market peers with 100 being the highest) to 61 from 65.18 in Q2 2021.</li>
<li>
Stock specific focus: We discuss why SoftBank stands out as a stock that presents with additional risk. We also discuss the fact that whilst there is a high representation of Industrials in the list, within this list, there are several names that may warrant not being too bearish towards.</li>
</ul>

Eight new names, SoftBank remains for the 3rd quarter running


OurQ2-2021 All Cap High-Risk screen of stocks produced a market cap-weighted average price decline of 2%. In comparison, the MSCI Asia Pacific Index posted a decline of 1.7% over the same period. The stock quality of our Q2 2021 decreased 2.4 points or 3.8% over the period. Within the mix of 34 stocks in our Q2 2021 (May) list 19 posted negative performance, with an average decline of 14.1%.

At a static number of 34 stocks our Q3 2021 screen, delivers an interesting composition this quarter, with eight (8) new names and strong representation from Hong Kong in terms of geography and Industrials and Basic Materials from a sector perspective. This suggests that the “reopening of the economy” trade may have run its course for now.
Our Q3 2021 screen shows a further reduction in average stock rank (a reading on relative quality amongst the broad market peers with 100 being the highest) to 61 from 65.18 in Q2 2021.

Stock specific focus: We discuss why SoftBank stands out as a stock that presents with additional risk. We also discuss the fact that whilst there is a high representation of Industrials in the list, within this list, there are several names that may warrant not being too bearish towards.


Screening the Silk Road: Q3 2021 High-Risk Names to Avoid

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.

Thematic (Sector/Industry)

<a href="https://asia.nikkei.com/Business/Energy/Japan-taps-Australia-and-Brunei-for-hydrogen-import-goal" target="_blank" rel="noopener">Momentum is building within East Asia to propel the Hydrogen economy forward</a> as Japan, Korea and China have demonstrated interest in investing heavily in the technology, a call that is being answered by a variety of players through the supply chain. We examine below the key investment opportunities and timelines for these players.

Momentum is building within East Asia to propel the Hydrogen economy forward as Japan, Korea and China have demonstrated interest in investing heavily in the technology, a call that is being answered by a variety of players through the supply chain. We examine below the key investment opportunities and timelines for these players.

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

• BEST &amp; WORST •Our best and worst pair from yesterday is <a href="https://www.smartkarma.com/entities/hirose-electric-co-ltd" target="_blank" data-smartkarma-citation="entities:13513:1" rel="noopener">Hirose Electric (6806 JP)</a> with a 41% upward revision to interim operating income, and leisure and travel conglomerate <a href="https://www.smartkarma.com/entities/seibu-holdings-inc" target="_blank" data-smartkarma-citation="entities:458:1" rel="noopener">Seibu (9024 JP)</a> which revised down both for the interim and full-year, the latter scoring a maximum negative -30.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/161/651/original/2020-09-25_06-15-33.png?1600982296" class="editor-image img-responsive" data-smartkarma-image-id="161651"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/161/652/original/2020-09-25_06-14-28.png?1600982419" class="editor-image img-responsive" data-smartkarma-image-id="161652"></figure><div class="content-caption">Source for all charts &amp; tables: Japan Analytics</div>DAILY STATS <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/161/650/original/2020-09-25_06-07-47.png?1600981686" class="editor-image img-responsive" data-smartkarma-image-id="161650"></figure><a href="https://www.smartkarma.com/entities/oracle-corp-japan" target="_blank" data-smartkarma-citation="entities:16787:1" rel="noopener">Oracle Japan (4716 JP)</a>- Seasonally, the first quarter is the low point of Oracle's annual cycle following the fourth quarter high. This first quarter was unusually subdued as revenue growth was flat for the second quarter in a row. As revenues slow to a single-digit pace, the company has focused on cost reductions, resulting in a Q1 year-on-year 50bps operating margin improvement. OJ is becoming more of an annuity. As such and noting the ¥225b in Net Financial Assets on the Balance Sheet and no debt, it is time for another extraordinary dividend.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/161/653/original/2020-09-25_06-29-09.png?1600982967" class="editor-image img-responsive" data-smartkarma-image-id="161653"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/161/654/original/2020-09-25_06-28-42.png?1600983014" class="editor-image img-responsive" data-smartkarma-image-id="161654"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/161/655/original/2020-09-25_06-33-14.png?1600983265" class="editor-image img-responsive" data-smartkarma-image-id="161655"></figure><hr><div>
 12 Annual • 13 Interim Forecasts/Revisions
The trend in forecasts and revisions has turned down again - only four of 25 announcements made yesterday scored positively and the average score change was -11: -
</div><div><ul style="list-style-type: disc;">
<li>Annual Forecast/Revision Score: 17% Positive / 0% Neutral / 83% Negative</li>
<li>Interim Forecast/Revision Score Change: 15% Positive / 8% Neutral / 77% Negative</li>
<li>Average Forecast/Revision Score Change: -11.2 points</li>
</ul></div>

• BEST &amp; WORST •Our best and worst pair from yesterday is Hirose Electric (6806 JP) with a 41% upward revision to interim operating income, and leisure and travel conglomerate Seibu (9024 JP) which revised down both for the interim and full-year, the latter scoring a maximum negative -30.Source for all charts &amp; tables: Japan AnalyticsDAILY STATS Oracle Japan (4716 JP)- Seasonally, the first quarter is the low point of Oracle's annual cycle following the fourth quarter high. This first quarter was unusually subdued as revenue growth was flat for the second quarter in a row. As revenues slow to a single-digit pace, the company has focused on cost reductions, resulting in a Q1 year-on-year 50bps operating margin improvement. OJ is becoming more of an annuity. As such and noting the ¥225b in Net Financial Assets on the Balance Sheet and no debt, it is time for another extraordinary dividend.
 12 Annual • 13 Interim Forecasts/Revisions
The trend in forecasts and revisions has turned down again - only four of 25 announcements made yesterday scored positively and the average score change was -11: -

Annual Forecast/Revision Score: 17% Positive / 0% Neutral / 83% Negative
Interim Forecast/Revision Score Change: 15% Positive / 8% Neutral / 77% Negative
Average Forecast/Revision Score Change: -11.2 points


🇯🇵 JAPAN • Results & Revisions 09/​​​​​​​​​​​​24 - A Quieter Oracle, Hirose, Shippers, NGK, Seibu

Time to remove the upper market cap limit as risk increases.<ul>
<li>
Our screen from this quarter onwards is for all stocks<a href="applewebdata://17FB2464-550F-48C5-BBBA-E248B1412D29#_ftn1" target="_blank" rel="noopener">[1]</a> above a market capitalisation of US$500m as we now encounter possibly one of the riskier periods in our market history. With this in mind, we have removed our Small-Mid Cap focus (US$500m-US$10bn market capitalisation) from our screens. </li>
<li>
21 stocks appear in our Q3 2020 screen. The average stock rank in our list has maintained a ranking of 63.5 points compared to 68 in Q2 2020 placing the stocks lower in the second quartile of the market, suggesting deteriorating fundamentals and a strong possibility of lagging performance.</li>
<li>
As we highlighted in Q1, watch for the risk of deteriorating credit metrics over 2020: In Q3, the Altman Z score is at a market-cap-weighted 1.44 times, versus 1.31 in Q2. Whilst marginally improved, since earnings continue to be adjusted by analysts and there is limited visibility of their bottoming, the potential for a lower Z score in Q4 2020 and H1 2021is increased.</li>
</ul>

Time to remove the upper market cap limit as risk increases.

Our screen from this quarter onwards is for all stocks[1] above a market capitalisation of US$500m as we now encounter possibly one of the riskier periods in our market history. With this in mind, we have removed our Small-Mid Cap focus (US$500m-US$10bn market capitalisation) from our screens. 

21 stocks appear in our Q3 2020 screen. The average stock rank in our list has maintained a ranking of 63.5 points compared to 68 in Q2 2020 placing the stocks lower in the second quartile of the market, suggesting deteriorating fundamentals and a strong possibility of lagging performance.

As we highlighted in Q1, watch for the risk of deteriorating credit metrics over 2020: In Q3, the Altman Z score is at a market-cap-weighted 1.44 times, versus 1.31 in Q2. Whilst marginally improved, since earnings continue to be adjusted by analysts and there is limited visibility of their bottoming, the potential for a lower Z score in Q4 2020 and H1 2021is increased.


Screening the Silk Road: Q3 2020 High Risk Names to Avoid

<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/139/997/original/2020-06-15_11-08-56.png?1592186965" class="editor-image img-responsive" data-smartkarma-image-id="139997"></figure><div class="content-caption">Source: Japan Analytics</div>
STRESS TESTS - This Insight is the second in our Japan Stress Test series in which we endeavour to assess where business risk is concentrated among larger Japanese companies. <a href="https://www.smartkarma.com/insights/japan-stress-tests-part-1-altman-z-scores" target="_blank" data-smartkarma-citation="insights:40180" rel="noopener">Part 1</a> looked at the time-worn Altman-Z Score for both manufacturing and non-manufacturing companies. In Part 2 will we turn our attention to the cash flow statement starting with the 'lifeblood' of all businesses - Operating Cash Flow.
ACCRUAL ACCOUNTING - Despite the sacrosanctity in some quarters of discounted cash flow analysis, for valuation purposes, our preference is to use accrual accounting. As Professor Stephen Penman states, "Accrual accounting brings the future forward in time and anticipates future cash flows."  Nevertheless, cash flow accounting, and the level of accounting accruals, can provide early insights into periodic stress. <a href="https://www.smartkarma.com/entities/nissan-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:72:1" rel="noopener">Nissan Motor (7201 JP)'s</a> Accruals (Operating Income less Operating Cash Flow) as a percentage of period-end market capitalisation correlate with the company's Relative Price Score over the last thirty years. Further Insights in this series will continue to 'mine'  the Cash Flow statement by exploring Financing Cash Flows and the Working Capital Cycle.
REFORMULATED CASH FLOWSTATEMENTS - Our Operating Cash Flow calculation is derived from each company's Balance Sheet and Income Statement for periods of up to twenty-eight years. Cash Flow items relating to operating activities are divided into Operating Cash Flow and Investing Cash Flow, which includes Fixed Asset and Inventory Cash Flows.  Cash flows relating to financing activities are divided into Financing Cash Flow and Shareholder Cash Flow. The reformulated Balance Sheets, Income and Cash Flow Statements follow a clean-surplus relationship. All three Statements are fully articulated to include items of Other Comprehensive Income which are added to or subtracted from Shareholders' Equity. 
</div>UNIVERSE - The universe for this Insight comprises the 614 Japanese companies with a market capitalisation excluding Treasury Stock over ¥100 million and for which we have at least two years of cash flow data.  Five non-financial companies, which have significant financial subsidiaries (<a href="https://www.smartkarma.com/entities/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten (4755 JP)</a>, <a href="https://www.smartkarma.com/entities/z-holdings-corp" target="_blank" data-smartkarma-citation="entities:19603:1" rel="noopener">Z Holdings (4689 JP)</a>, <a href="https://www.smartkarma.com/entities/japan-post-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:359:1" rel="noopener">Japan Post (6178 JP)</a>, <a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a> and <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony (6758 JP)</a>), have been excluded from this analysis.


Source: Japan Analytics
STRESS TESTS - This Insight is the second in our Japan Stress Test series in which we endeavour to assess where business risk is concentrated among larger Japanese companies. Part 1 looked at the time-worn Altman-Z Score for both manufacturing and non-manufacturing companies. In Part 2 will we turn our attention to the cash flow statement starting with the 'lifeblood' of all businesses - Operating Cash Flow.
ACCRUAL ACCOUNTING - Despite the sacrosanctity in some quarters of discounted cash flow analysis, for valuation purposes, our preference is to use accrual accounting. As Professor Stephen Penman states, "Accrual accounting brings the future forward in time and anticipates future cash flows."  Nevertheless, cash flow accounting, and the level of accounting accruals, can provide early insights into periodic stress. Nissan Motor (7201 JP)'s Accruals (Operating Income less Operating Cash Flow) as a percentage of period-end market capitalisation correlate with the company's Relative Price Score over the last thirty years. Further Insights in this series will continue to 'mine'  the Cash Flow statement by exploring Financing Cash Flows and the Working Capital Cycle.
REFORMULATED CASH FLOWSTATEMENTS - Our Operating Cash Flow calculation is derived from each company's Balance Sheet and Income Statement for periods of up to twenty-eight years. Cash Flow items relating to operating activities are divided into Operating Cash Flow and Investing Cash Flow, which includes Fixed Asset and Inventory Cash Flows.  Cash flows relating to financing activities are divided into Financing Cash Flow and Shareholder Cash Flow. The reformulated Balance Sheets, Income and Cash Flow Statements follow a clean-surplus relationship. All three Statements are fully articulated to include items of Other Comprehensive Income which are added to or subtracted from Shareholders' Equity. 
UNIVERSE - The universe for this Insight comprises the 614 Japanese companies with a market capitalisation excluding Treasury Stock over ¥100 million and for which we have at least two years of cash flow data.  Five non-financial companies, which have significant financial subsidiaries (Rakuten (4755 JP), Z Holdings (4689 JP), Japan Post (6178 JP), Softbank Group (9984 JP) and Sony (6758 JP)), have been excluded from this analysis. 

🇯🇵 JAPAN - Stress Tests Part 2 - Operating Cash Flow & Accruals

Japan

Nippon Yusen Kabushiki Kaisha mainly provides marine transportation services and transportation management solution from international hub ports to both domestic and international ports. The Company operates container transportation, tramp and specialized carriers, and logistics and cruise lines. Nippon Yusen offers scheduled and unscheduled transportation services around the world.

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Nippon Yusen Kk (9101 JP)

Screening the Silk Road: Q3 2021 High-Risk Names to Avoid

Screening the Silk Road Q3 2021: Asia Pac High-risk names to avoid screening is out now. Eight new names, despite being down 23%, SoftBank remains...

David Lepper

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China's increasing favour towards hydrogen is starting to generate investor interest in potential hydrogen economy and FCV plays. We examine...

Mio Kato

🇯🇵 JAPAN • Results & Revisions 09/24 - A Quieter Oracle, Hirose, Shippers, NGK, Seibu

• BEST WORST • DAILY STATS

Campbell Gunn

Screening the Silk Road: Q3 2020 High Risk Names to Avoid

Time to remove the upper market cap limit as risk increases. Our screen from this quarter onwards is for all stocks[1] above a market...

David Lepper

🇯🇵 JAPAN - Stress Tests Part 2 - Operating Cash Flow & Accruals

STRESS TESTS - This Insight is the second in our Japan Stress Test series in which we endeavour to assess where business risk is concentrated...

Campbell Gunn

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Screening the Silk Road: Q3 2021 High-Risk Names to Avoid

Screening the Silk Road Q3 2021: Asia Pac High-risk names to avoid screening is out now. Eight new names, despite being down 23%, SoftBank remains...

David Lepper

Asia’s Hydrogen Economy

China's increasing favour towards hydrogen is starting to generate investor interest in potential hydrogen economy and FCV plays. We examine...

Mio Kato

🇯🇵 JAPAN • Results & Revisions 09/​​​​​​​​​​​​24 - A Quieter Oracle, Hirose, Shippers, NGK, Seibu

• BEST WORST • DAILY STATS

Campbell Gunn

Screening the Silk Road: Q3 2020 High Risk Names to Avoid

Time to remove the upper market cap limit as risk increases. Our screen from this quarter onwards is for all stocks[1] above a market...

David Lepper

🇯🇵 JAPAN - Stress Tests Part 2 - Operating Cash Flow & Accruals

STRESS TESTS - This Insight is the second in our Japan Stress Test series in which we endeavour to assess where business risk is concentrated...

Campbell Gunn

🇯🇵 JAPAN • Results & Revisions 09/24 - A Quieter Oracle, Hirose, Shippers, NGK, Seibu