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

Ankit Agrawal, CFA

Equity L/S Analyst | Forensic Accounting | India

Forensic Accounting

In this Smartkarma Original, we bring to you a forensic analysis tool that scores companies across Developed Asia on their accounting risk. We use 25+ accounting parameters in our framework to come up with an accounting risk score. Our tool is based in Excel and is linked dynamically to Capital IQ for fetching latest data.
Insight Flow
<ol>
<li>Forensic Analysis Framework</li>
<li>Excel Model
<ol>
<li>How to Download and Use the Tool</li>
<li>Steps to Run the Model</li>
</ol>
</li>
<li>Target Universe</li>
<li>Companies with Highest Accounting Risk </li>
<li>Summary Statistics from our Analysis</li>
<li>Key Model Limitations and Risks</li>
<li>Appendix
<ol>
<li>List of Companies in our Target Universe with Accounting Risk Score &gt;= 8</li>
<li>Glossary</li>
<li>Snapshot of Capital IQ Screener Used for Filtering Universe</li>
<li>Switch Formula Calculation Option in Excel</li>
<li>Refresh Worksheet Option in Capital IQ Plugin</li>
</ol>
</li>
</ol>
<div class="content-highlight">
What's Original?
Over time with experience and taking cues from past financial shenanigans, we have developed a proprietary quantitative framework for identifying accounting irregularities. This framework comprises of 25+ accounting parameters and takes into account 10 years of historical data to assess the quality of accounting.
</div>

In this Smartkarma Original, we bring to you a forensic analysis tool that scores companies across Developed Asia on their accounting risk. We use 25+ accounting parameters in our framework to come up with an accounting risk score. Our tool is based in Excel and is linked dynamically to Capital IQ for fetching latest data.
Insight Flow

Forensic Analysis Framework
Excel Model

How to Download and Use the Tool
Steps to Run the Model


Target Universe
Companies with Highest Accounting Risk 
Summary Statistics from our Analysis
Key Model Limitations and Risks
Appendix

List of Companies in our Target Universe with Accounting Risk Score &gt;= 8
Glossary
Snapshot of Capital IQ Screener Used for Filtering Universe
Switch Formula Calculation Option in Excel
Refresh Worksheet Option in Capital IQ Plugin




What's Original?
Over time with experience and taking cues from past financial shenanigans, we have developed a proprietary quantitative framework for identifying accounting irregularities. This framework comprises of 25+ accounting parameters and takes into account 10 years of historical data to assess the quality of accounting.


A Forensic Analysis Tool for Detecting Accounting Red Flags: Focus on Developed Asia

'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. 

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/403/original/2020-02-18_08-44-22.png?1581983074" class="editor-image img-responsive" data-smartkarma-image-id="118403"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/404/original/2020-02-18_08-42-56.png?1581983098" class="editor-image img-responsive" data-smartkarma-image-id="118404"></figure><div class="content-caption">Source • Japan Analytics</div>THREE-YEAR LOW - With <a href="https://www.smartkarma.com/entities/bridgestone-corp" target="_blank" data-smartkarma-citation="entities:8914:1" rel="noopener">Bridgestone (5108 JP)</a>'s results and revision now added, our final tally for this season is a 196 basis point decline in our Results Sore - the lowest since March 2017.  In contrast, the Forecast/Revision Score reached a three-month high as the 470 companies with December year-ends put an optimistic gloss on their medium-term outlook. As we have noted in our recent daily roundups, a normal precondition for a cycle low is for the Forecast/Revision Score to rise above the Results Score. Forecast/Revision Score peaks and troughs usually occur one to two quarters ahead of those for the Results Score.  Covid-19's impact will likely see the 2016 'playbook' repeated next quarter with a lower Results Score and a 'sideways' Forecast/Results Score. The Results Score cycle low point will be reached with the mostly-interim results to be released in six months. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/405/original/2020-02-18_09-29-28.png?1581985792" class="editor-image img-responsive" data-smartkarma-image-id="118405"></figure><div class="content-caption">Source • Japan Analytics</div>LEADING INDICATOR - By including several momentum factors into our Scoring (see below), we can provide a better indication of future business conditions. Indeed there is a 0.83 correlation between the Cabinet Office's Business Condition Leading Indicator and the Forecast/Revision Score. Reported earnings, as well as company forecasts, are lagging indicators and, as shown in Part 1 of this Insight. Both data series peaked one year after our Scores and the market peaked in early 2018. SCORING METHODOLOGY - For those new to these Insights, we briefly recap our scoring methodology below:-<ul>
<li>Results Scores are calculated using the most recent eight quarters of company data for Revenues, Operating Income and Operating Margin and, for each, measure the rate, degree and consistency of change. The Results Score has a maximum of +30 and a minimum of -30 for each period. Our data series commences from the time a particular company issues quarterly results. The sample size becomes significant from March 2005.</li>
<li>The Forecast/Revision Score is based on both Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month (TTM) or previous first-half results, with annual forecasts being double-weighted. This Score also has a maximum of +30 and a minimum of -30 for each period.  For this series, our data samples start from August 2008.</li>
<li>The combined Results &amp; Revision Score (RRS) is the average of the Results Score and the Forecasts/Revision Score.</li>
<li>
All company Scores are then cap-weight-aggregated into Sector, Peer Group and Market Composite Scores for which the seventeen-year monthly and two-year daily track records are shown above. Only currently listed-companies are covered in the aggregate Scores, and the Total Market Capitalisation excludes delisted entities. REITs are not included.
<hr>
• SECTOR SCORES •
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/410/original/2020-02-18_09-55-29.png?1581987489" class="editor-image img-responsive" data-smartkarma-image-id="118410"></figure><div class="content-caption">Source • Japan Analytics</div>
In the DETAIL Section below, we provide a detailed breakdown of our RRS Scoring for Sectors, Peer Groups and individual companies, highlighting this quarter's 'winners' and 'losers'. The chart above shows a  seventeen-year 'timeline' of the cap-weight-aggregated Sector RRS Scores and the ebbs and flows around the business cycles. The Metals Sector is the most volatile on the downside and has yet to 'bottom' this cycle. Technology Hardware appears to have already rebounded; however, Covid-19 suggests this Sector may relapse. On the upside, the Information Technology Sector has replaced the Internet and Telecoms Sectors as the contra-cyclical 'champion'. 
</li>
</ul>

Source • Japan AnalyticsTHREE-YEAR LOW - With Bridgestone (5108 JP)'s results and revision now added, our final tally for this season is a 196 basis point decline in our Results Sore - the lowest since March 2017.  In contrast, the Forecast/Revision Score reached a three-month high as the 470 companies with December year-ends put an optimistic gloss on their medium-term outlook. As we have noted in our recent daily roundups, a normal precondition for a cycle low is for the Forecast/Revision Score to rise above the Results Score. Forecast/Revision Score peaks and troughs usually occur one to two quarters ahead of those for the Results Score.  Covid-19's impact will likely see the 2016 'playbook' repeated next quarter with a lower Results Score and a 'sideways' Forecast/Results Score. The Results Score cycle low point will be reached with the mostly-interim results to be released in six months. Source • Japan AnalyticsLEADING INDICATOR - By including several momentum factors into our Scoring (see below), we can provide a better indication of future business conditions. Indeed there is a 0.83 correlation between the Cabinet Office's Business Condition Leading Indicator and the Forecast/Revision Score. Reported earnings, as well as company forecasts, are lagging indicators and, as shown in Part 1 of this Insight. Both data series peaked one year after our Scores and the market peaked in early 2018. SCORING METHODOLOGY - For those new to these Insights, we briefly recap our scoring methodology below:-
Results Scores are calculated using the most recent eight quarters of company data for Revenues, Operating Income and Operating Margin and, for each, measure the rate, degree and consistency of change. The Results Score has a maximum of +30 and a minimum of -30 for each period. Our data series commences from the time a particular company issues quarterly results. The sample size becomes significant from March 2005.
The Forecast/Revision Score is based on both Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month (TTM) or previous first-half results, with annual forecasts being double-weighted. This Score also has a maximum of +30 and a minimum of -30 for each period.  For this series, our data samples start from August 2008.
The combined Results &amp; Revision Score (RRS) is the average of the Results Score and the Forecasts/Revision Score.

All company Scores are then cap-weight-aggregated into Sector, Peer Group and Market Composite Scores for which the seventeen-year monthly and two-year daily track records are shown above. Only currently listed-companies are covered in the aggregate Scores, and the Total Market Capitalisation excludes delisted entities. REITs are not included.

• SECTOR SCORES •
Source • Japan Analytics
In the DETAIL Section below, we provide a detailed breakdown of our RRS Scoring for Sectors, Peer Groups and individual companies, highlighting this quarter's 'winners' and 'losers'. The chart above shows a  seventeen-year 'timeline' of the cap-weight-aggregated Sector RRS Scores and the ebbs and flows around the business cycles. The Metals Sector is the most volatile on the downside and has yet to 'bottom' this cycle. Technology Hardware appears to have already rebounded; however, Covid-19 suggests this Sector may relapse. On the upside, the Information Technology Sector has replaced the Internet and Telecoms Sectors as the contra-cyclical 'champion'. 



🇯🇵 JAPAN • IT’S A WRAP! Part 2: 2020-Q1 Results & Revision Scores

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/740/original/2020-02-07_03-39-22.png?1581019080" class="editor-image img-responsive" data-smartkarma-image-id="116740"></figure><div class="content-caption">Source • Japan Analytics</div>INTO THE 'RED' - As predicted, our Results Score dipped into negative territory yesterday, declining by 56 basis points to -0.21. Of the 65 large-cap results, only ten companies had positive qoq changes in Results Score, while seventeen saw double-digit declines. <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" data-smartkarma-citation="entities:73:1" rel="noopener">Toyota Motor (7203 JP)</a> did well to limit its quarterly year-on-year changes in Revenue and OP to -3%, and they are forecasting similar declines against TTM numbers for the full year. The Forecast/Revision Score added six basis points driven primarily by <a href="https://www.smartkarma.com/entities/shiseido-co-ltd" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido (4911 JP)</a> overly optimistic initial forecast for FY2020. 'Mr Market' meanwhile is content to bid up share prices to close to the recent highs, and 8% below the January 2018 peak, when the Results Score was 7.54. <hr>• SECTOR TIMELINE •<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/741/original/2020-02-07_03-45-05.png?1581019946" class="editor-image img-responsive" data-smartkarma-image-id="116741"></figure><div class="content-caption">Source • Japan Analytics</div>SECTOR TIMELINE - The majority of Sectors saw lower Results &amp; Revision Scores yesterday, with Food, Beverages &amp; Tobacco being the exception due to <a href="https://www.smartkarma.com/entities/japan-tobacco-inc" target="_blank" data-smartkarma-citation="entities:13498:1" rel="noopener">Japan Tobacco (2914 JP)</a>'s stable topline performance and better-than-expected 2020 forecast. <a href="https://www.smartkarma.com/entities/mitsubishi-heavy-industries" target="_blank" data-smartkarma-citation="entities:13613:1" rel="noopener">Mitsubishi Heavy Industries (7011 JP)</a> decline into the red at the OP level and full-year downward revision took the Machinery Sector lower, while <a href="https://www.smartkarma.com/entities/seibu-holdings-inc" target="_blank" data-smartkarma-citation="entities:458:1" rel="noopener">Seibu (9024 JP)</a> was the negative driver for Multi-Industry. <a href="https://www.smartkarma.com/entities/terumo-corp" target="_blank" data-smartkarma-citation="entities:6708:1" rel="noopener">Terumo (4543 JP)</a> and <a href="https://www.smartkarma.com/entities/olympus-corp" target="_blank" data-smartkarma-citation="entities:356:1" rel="noopener">Olympus (7733 JP)</a> fuelled the decline in Healthcare and <a href="https://www.smartkarma.com/entities/fujifilm-holdings-corp" target="_blank" data-smartkarma-citation="entities:16353:1" rel="noopener">Fujifilm (4901 JP)</a> did the same for Technology Hardware.

Source • Japan AnalyticsINTO THE 'RED' - As predicted, our Results Score dipped into negative territory yesterday, declining by 56 basis points to -0.21. Of the 65 large-cap results, only ten companies had positive qoq changes in Results Score, while seventeen saw double-digit declines. Toyota Motor (7203 JP) did well to limit its quarterly year-on-year changes in Revenue and OP to -3%, and they are forecasting similar declines against TTM numbers for the full year. The Forecast/Revision Score added six basis points driven primarily by Shiseido (4911 JP) overly optimistic initial forecast for FY2020. 'Mr Market' meanwhile is content to bid up share prices to close to the recent highs, and 8% below the January 2018 peak, when the Results Score was 7.54. • SECTOR TIMELINE •Source • Japan AnalyticsSECTOR TIMELINE - The majority of Sectors saw lower Results &amp; Revision Scores yesterday, with Food, Beverages &amp; Tobacco being the exception due to Japan Tobacco (2914 JP)'s stable topline performance and better-than-expected 2020 forecast. Mitsubishi Heavy Industries (7011 JP) decline into the red at the OP level and full-year downward revision took the Machinery Sector lower, while Seibu (9024 JP) was the negative driver for Multi-Industry. Terumo (4543 JP) and Olympus (7733 JP) fuelled the decline in Healthcare and Fujifilm (4901 JP) did the same for Technology Hardware. 

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 6th February ▲ 2914 4911 6406 ▼ 9024 4901 7951

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

If effectively implemented, the Japan Corporate Governance Code, the Japan Stewardship Code, the Engagement Guidelines and the CGS Guidelines would also represent a sea change in the role of Japanese boards in terms of management selection, management compensation, and capital deployment. If. This is largely a 'soft" law rather than a hard regulatory change, limiting the regulator's power to address minority rights.
There is a need to see improvement in governance, independence, board structure, and capital stewardship by a very large number of companies in Japan. Enhancement of diversity on the board will enable increased effectiveness and also strengthen companies' governance structure.
Investors are calling on companies to hire outside board members and tackle cross-holdings. The TSE-mandated Corporate Governance Code seeks at least two independent outside board members for listed companies and preferably a third, a majority, and provides an example of "at least one-third independent directors". But these examples, and other much-needed changes, remain inadequate.
One of the fundamental problems with the combination of the Japanese Corporate Governance Code and the Companies Act, and the lack of liability of directors for their own decisions, is that they can hang their hat on irrational economic arguments and there are no repercussions. 
Investors want better "governance", however, international investors seek more than improving the box-ticking form prized by many Japanese companies. Analysing non-box-ticking ESG/governance is difficult. It is difficult to track and analyse. And even if box-ticking is evident, it is not necessarily true that doing so will raise long-term equity returns. It is possible it will raise costs, which would lower profit growth - this may be good for society, it may not be good for valuations.
International investors are more concerned with improving information access, management responsiveness to investors, and management efforts to make companies become better economic engines. International investors would like to see companies concentrate on their business rather than see them run long-short funds (i.e. hold cross-holdings) with investor capital, hold excess cash, or invest in real estate as an alternative source of income.
A Consultation Paper reviewing the TSE cash equity market - first mentioned in December 2018, followed by a Market Consultation, culminating in four documents posted on the FSA's <a href="https://www.fsa.go.jp/singi/singi_kinyu/market-str/doc/1120/20191120.html" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://www.fsa.go.jp/singi/singi_kinyu/market-str/doc/1120/20191120.html&amp;source=gmail&amp;ust=1578636374440000&amp;usg=AFQjCNF9oBdPpl8bkcuUAZcU46ntY4YcHw" rel="noopener">website</a> last November - make it clear to the TSE, governmental, and regulatory authorities that existing governance and stewardship levels don't cut it.
For now, there's a lot of technocratic navel-gazing.

If effectively implemented, the Japan Corporate Governance Code, the Japan Stewardship Code, the Engagement Guidelines and the CGS Guidelines would also represent a sea change in the role of Japanese boards in terms of management selection, management compensation, and capital deployment. If. This is largely a 'soft" law rather than a hard regulatory change, limiting the regulator's power to address minority rights.
There is a need to see improvement in governance, independence, board structure, and capital stewardship by a very large number of companies in Japan. Enhancement of diversity on the board will enable increased effectiveness and also strengthen companies' governance structure.
Investors are calling on companies to hire outside board members and tackle cross-holdings. The TSE-mandated Corporate Governance Code seeks at least two independent outside board members for listed companies and preferably a third, a majority, and provides an example of "at least one-third independent directors". But these examples, and other much-needed changes, remain inadequate.
One of the fundamental problems with the combination of the Japanese Corporate Governance Code and the Companies Act, and the lack of liability of directors for their own decisions, is that they can hang their hat on irrational economic arguments and there are no repercussions. 
Investors want better "governance", however, international investors seek more than improving the box-ticking form prized by many Japanese companies. Analysing non-box-ticking ESG/governance is difficult. It is difficult to track and analyse. And even if box-ticking is evident, it is not necessarily true that doing so will raise long-term equity returns. It is possible it will raise costs, which would lower profit growth - this may be good for society, it may not be good for valuations.
International investors are more concerned with improving information access, management responsiveness to investors, and management efforts to make companies become better economic engines. International investors would like to see companies concentrate on their business rather than see them run long-short funds (i.e. hold cross-holdings) with investor capital, hold excess cash, or invest in real estate as an alternative source of income.
A Consultation Paper reviewing the TSE cash equity market - first mentioned in December 2018, followed by a Market Consultation, culminating in four documents posted on the FSA's website last November - make it clear to the TSE, governmental, and regulatory authorities that existing governance and stewardship levels don't cut it.
For now, there's a lot of technocratic navel-gazing.

Equity Analyst, LightStream Research

Shifara Samsudeen, FCMA, CGMA

Equity Analyst

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 Bottom-Up

We have been covering Hoya for close to a year and the company’s share price has rallied 71% over the last 12-months to JPY10,450 a share from JPY6,101 a share. While Hoya operates a solid business with good long-term growth potential, we believe, the company is presented with a strong opportunity to grow its earnings over the next 2-3 years driven by its Electronics business, EUV blanks and glass substrates in particular.Hoya is the largest supplier of mask blanks for EUV lithography which has just entered into mainstream production. In addition, we expect the process node migration to continue to drive demand for EUV mask blanks as further miniaturisation of semiconductor chips is not possible without EUV.Hoya has been the only supplier of glass substrates for HDDs and with growing data center capex and increased demand for large data storage, the HDD makers will switch to glass from aluminium and other materials which are currently being used. We expect this to offer growth in earnings for the segment. On the other hand, we expect Hoya’s Life Care business to remain solid and contribute to earnings.

We have been covering Hoya for close to a year and the company’s share price has rallied 71% over the last 12-months to JPY10,450 a share from JPY6,101 a share. While Hoya operates a solid business with good long-term growth potential, we believe, the company is presented with a strong opportunity to grow its earnings over the next 2-3 years driven by its Electronics business, EUV blanks and glass substrates in particular.Hoya is the largest supplier of mask blanks for EUV lithography which has just entered into mainstream production. In addition, we expect the process node migration to continue to drive demand for EUV mask blanks as further miniaturisation of semiconductor chips is not possible without EUV.Hoya has been the only supplier of glass substrates for HDDs and with growing data center capex and increased demand for large data storage, the HDD makers will switch to glass from aluminium and other materials which are currently being used. We expect this to offer growth in earnings for the segment. On the other hand, we expect Hoya’s Life Care business to remain solid and contribute to earnings.

2020 High Conviction: EUV Mask Blanks, Glass Substrates for HDDs Drive Next Phase of Growth for Hoya

Japan

OLYMPUS CORPORATION manufactures optoelectronic products.  The Company's products include cameras, video sets, endoscopes for medicine and industrial use, microscopes, analytical equipment, office communication systems, laseroptical scanners, and ionic printers.

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Olympus Corp (7733 JP)

A Forensic Analysis Tool for Detecting Accounting Red Flags: Focus on Developed Asia

In this Smartkarma Original, we bring to you a forensic analysis tool that scores companies across Developed Asia on their accounting risk. We use...

Ankit Agrawal, CFA

🇯🇵 JAPAN • IT’S A WRAP! Part 2: 2020-Q1 Results & Revision Scores

THREE-YEAR LOW - With Bridgestone (5108 JP)'s results and revision now added, our final tally for this season is a 196 basis point decline in our...

Campbell Gunn

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 6th February ▲ 2914 4911 6406 ▼ 9024 4901 7951

INTO THE 'RED' - As predicted, our Results Score dipped into negative territory yesterday, declining by 56 basis points to -0.21. Of the 65...

Campbell Gunn

Corporate Governance In Japan

If effectively implemented, the Japan Corporate Governance Code, the Japan Stewardship Code, the Engagement Guidelines and the CGS Guidelines would...

David Blennerhassett

2020 High Conviction: EUV Mask Blanks, Glass Substrates for HDDs Drive Next Phase of Growth for Hoya

We have been covering Hoya for close to a year and the company’s share price has rallied 71% over the last 12-months to JPY10,450 a share from...

Shifara Samsudeen, FCMA, CGMA

Price Gauge

52-week Range

Market Cap (USDm)

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