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

On Thursday we highlighted a number of stock pairs that had seen extreme levels of relative performance dislocations, speculating that this was due to relative value unwinds that were being rushed for completion prior to the long weekend. This morning the skews are reversing and with Nikkei now outperforming Topix (+02.7% vs. -0.87% at the time of this writing) we believe this opportunity is being realised quickly. Our thoughts on next steps below.

On Thursday we highlighted a number of stock pairs that had seen extreme levels of relative performance dislocations, speculating that this was due to relative value unwinds that were being rushed for completion prior to the long weekend. This morning the skews are reversing and with Nikkei now outperforming Topix (+02.7% vs. -0.87% at the time of this writing) we believe this opportunity is being realised quickly. Our thoughts on next steps below.

Japan Long Weekend Portfolio Blowout Theme Is Working Quickly

We previously highlighted the strong skew between names which have a heavy weighting in Topix vs. those which have a heavy weighting in the Nikkei. Given extreme looking skews even in individual names it does not seem unreasonable that some relative value fund(s) are exiting positions aggressively prior to what could be a key long weekend for Japan with potentially heavy volatility on Monday. We examine some striking performance discrepancies below.

We previously highlighted the strong skew between names which have a heavy weighting in Topix vs. those which have a heavy weighting in the Nikkei. Given extreme looking skews even in individual names it does not seem unreasonable that some relative value fund(s) are exiting positions aggressively prior to what could be a key long weekend for Japan with potentially heavy volatility on Monday. We examine some striking performance discrepancies below.

What Is Getting Blown Out of Portfolios Before the Long Weekend in Japan?

Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/oriental-land-co-ltd" target="_blank" data-smartkarma-citation="entities:13517:1" rel="noopener">Oriental Land (4661 JP)</a>, the operator of the Tokyo Disney Resorts extended the temporary closure of Tokyo Disneyland and Tokyo DisneySea till April 2020 to prevent the spread of COVID-19.</li>
<li>We discussed the impact of an extended shutdown in our previous insight: <a href="https://www.smartkarma.com/insights/oriental-land-tokyo-disney-resorts-closed-the-tender-buyback-could-be-preventing-a-further-decline" target="_blank" rel="noopener">Oriental Land: Tokyo Disney Resorts Closed, The Tender Buyback Could Be Preventing a Further Decline</a>
</li>
<li>Given the extent of Oriental Land’s dependence on the theme park business which has come to a standstill due to the COVID-19 pandemic, we expected Oriental Land’s share price to take a battering during these uncertain times.</li>
<li>However, during the first three months of 2020, the share price of Oriental Land has outperformed TOPIX and Nikkei by 14.5% and 15.9% respectively.</li>
<li>Travis Lundy, in his insight <a href="https://www.smartkarma.com/insights/oriental-land-buyback-interrupted-and-an-overhang" target="_blank" rel="noopener">Oriental Land - Buyback Interrupted, and an Overhang?</a> said that the actual free float is far less than the 45% disclosed by the TSE and warned that there could be a potential for a short squeeze despite an overhang. It appears that he was spot on.</li>
<li>With some help from Travis, in this insight, we look at the reasons, magnitude and the timeline of this irrational movement in Oriental Land’s share price hoping to make gains when things start to unravel.</li>
</ul>



Oriental Land (4661 JP), the operator of the Tokyo Disney Resorts extended the temporary closure of Tokyo Disneyland and Tokyo DisneySea till April 2020 to prevent the spread of COVID-19.
We discussed the impact of an extended shutdown in our previous insight: Oriental Land: Tokyo Disney Resorts Closed, The Tender Buyback Could Be Preventing a Further Decline

Given the extent of Oriental Land’s dependence on the theme park business which has come to a standstill due to the COVID-19 pandemic, we expected Oriental Land’s share price to take a battering during these uncertain times.
However, during the first three months of 2020, the share price of Oriental Land has outperformed TOPIX and Nikkei by 14.5% and 15.9% respectively.
Travis Lundy, in his insight Oriental Land - Buyback Interrupted, and an Overhang? said that the actual free float is far less than the 45% disclosed by the TSE and warned that there could be a potential for a short squeeze despite an overhang. It appears that he was spot on.
With some help from Travis, in this insight, we look at the reasons, magnitude and the timeline of this irrational movement in Oriental Land’s share price hoping to make gains when things start to unravel.


No Tourists and Park Closure Extended till April Due to COVID-19, Yet the Share Price Is Strong

'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/000/123/035/original/2020-03-15_07-07-04.png?1584223644" class="editor-image img-responsive" data-smartkarma-image-id="123035"></figure><div class="content-caption">Source • Japan Analytics</div>RELATIVE VALUE - Since the recent peak of December 17th, the TOPIX Index has fallen by 28% in 56 trading days. The -0.57% daily average rate of decline over the last three months has only been exceeded on 32 of the 10,142 days since March 1979, eight of which occurred in 1990, with the balance in 2008. From the January 23rd 2018 peak of 1,911, the index has fallen by 34% and is within 3% of our target (expressed in terms of Total Market Value ex REITs) outlined in our <a href="https://www.smartkarma.com/insights/japan-market-update-opportunity-knocks" target="_blank" data-smartkarma-citation="insights:37049" rel="noopener">Opportunity Knocks?</a> Insight published on 1st March. The market is also within 5% of the TOPIX low of 1,196 of 12th February 2016, which we expect will provide some short-term support. Although Japan and many other developed world economies are now in recession, markets do not fall in a straight line forever. Japanese equities now offer attractive relative value and should outperform over the coming months.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/123/034/original/2020-03-15_06-53-01.png?1584222882" class="editor-image img-responsive" data-smartkarma-image-id="123034"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/123/036/original/2020-03-15_07-18-49.png?1584224347" class="editor-image img-responsive" data-smartkarma-image-id="123036"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/123/037/original/2020-03-15_07-23-55.png?1584224666" class="editor-image img-responsive" data-smartkarma-image-id="123037"></figure><div class="content-caption">Source • Japan Analytics</div>IT'S DIFFERENT THIS TIME - Most bear markets in Japan have coincided with periods of Yen strength, including the 29% 2015/16 decline when the currency strengthened by 19%. Repeating the rate of decline analysis above, in US dollar terms there have only been four days in the last twenty-eight years with worse 56-day rates of decline - all in October 2008. All four days provided fearless investors with excellent medium-term gains. Although this increase in market volatility may be less welcome for international investors in Japanese equities, the impact of the Covid-19 recession on the Japanese economy will be more muted. Also, the 48% collapse in the oil price year-to-date will help offset the negative impact of the October 2019 increase in the consumption tax and the decline in export sales in Europe. Lastly, we would suggest that the much-derided net cash that Japanese corporates 'hoard' for rainy days such as these, should delay the need for increases in credit lines. Our recent series of Insights on<a href="https://www.smartkarma.com/insights/japan-who-s-swimming-naked-part-2-altman-z-score" target="_blank" data-smartkarma-citation="insights:37316" rel="noopener"> Who’s Swimming Naked?</a> cover those companies to which this does not apply. Overall, for Japan at least, it is different this time.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/123/039/original/File%202020-03-15%203%2024%2020.jpeg?1584225464" class="editor-image img-responsive" data-smartkarma-image-id="123039"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/123/040/original/File%202020-03-15%203%2026%2031.jpeg?1584225508" class="editor-image img-responsive" data-smartkarma-image-id="123040"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/123/041/original/File%202020-03-15%207%2044%2021.jpeg?1584225894" class="editor-image img-responsive" data-smartkarma-image-id="123041"></figure><div class="content-caption">Source • Max Roser, Hannah Ritchie and Esteban Ortiz-Ospina (2020) - "Coronavirus Disease (COVID-19) – Research and Statistics". Published online at OurWorldInData.org. Retrieved from: 'https://ourworldindata.org/coronavirus' [Online Resource]</div>CONTAINING COVID - According to <a href="https://ourworldindata.org/coronavirus" target="_blank" rel="noopener">data</a> from the peerless Global Change Data Lab at Oxford University, Japan has, (except for the unfortunate passengers and crew on the Diamond Princess cruise ship), managed to contain Covid-19 better than any other large nation. While, there is some scepticism that this outcome could be a result of under-testing to avoid cancellation of the Olympic Games; nevertheless, the recorded cases fatality rate in a country with an above-average age profile is surprisingly low.  Currently, the daily increase in active Covid-19 cases in Japan is less than one hundred and was only seventeen on March 15th. The cumulative number of confirmed Covid-19 fatalities is 24, of which two occurred yesterday. The confirmed number of cases per 100,000 population is 0.65, which compares with 19.5 in South Korea, 16.5 in Italy and 12 in Iran. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/123/038/original/2020-03-15_07-34-05.png?1584225268" class="editor-image img-responsive" data-smartkarma-image-id="123038"></figure><div class="content-caption">Source • oann.com</div>KEEP CALM AND CARRY ON - Last night's press conference by Prime Minister Abe was in stark contrast to the sombre tone to those of Prime Minister Johnson of the United Kingdom and the tragicomic ramblings of the US President. Having received the legislative powers to declare a state of emergency, Abe declined at this stage to invoke any social restrictions beyond the already-announced school closures. As in the UK, sporting authorities are cancelling events or holding them sine populo. Japan's long obsession with cleanliness, the culture of bowing as a greeting and readiness to conform have served to 'flatten the curve'. The increased focus on such practices has also resulted in a very low incidence of seasonal influenza this year. Japan also has significantly lower levels of air pollution compared to China, Iran and northern Italy, a  factor that has become a factor in fatality rates, especially amongst the elderly. Although internal travel and restaurant patronage have sharply declined in Japan, shops are open and are well-stocked (except for now-rationed paper products) and 'free movement' with slightly-greater-than-normal social distancing is the norm. Whatever the motivations may be regarding the Olympics and Abe's legacy, Japan is unwilling to force the economy into the economic depression that would be the result of prolonged lockdown. A COVID-19 WORLD - This 'keep-calm-carry-on' model of a Covid-19-prevalent world (as is also seen in Singapore and Taiwan) will eventually have to be applied globally. These countries rapid transition to the new 'Covid-19 world' should result in better short-term outcomes for these economies.  The UK is currently being criticised for attempting to follow a version of this model, and may eventually have to go against the advice of its epidemiologists. Fortunately, for now, the general public are giving the UK government the benefit of the doubt. There will be a sharp divergence in the medium-term economic outlooks for countries taking these two 'paths' with those that are over-reacting paying a heavy price. While this does not bode well for the Eurozone, East Asia, including Japan, should emerge in better shape in this new 'viral' world.      <div class="content-highlight">In the DETAIL section below, we shall review a number of our favourite market indicators, recent sector performance and make some recommendations as to how to harness this once-in-a-decade opportunity to buy high-quality Japanese companies at attractive prices.</div>

Source • Japan AnalyticsRELATIVE VALUE - Since the recent peak of December 17th, the TOPIX Index has fallen by 28% in 56 trading days. The -0.57% daily average rate of decline over the last three months has only been exceeded on 32 of the 10,142 days since March 1979, eight of which occurred in 1990, with the balance in 2008. From the January 23rd 2018 peak of 1,911, the index has fallen by 34% and is within 3% of our target (expressed in terms of Total Market Value ex REITs) outlined in our Opportunity Knocks? Insight published on 1st March. The market is also within 5% of the TOPIX low of 1,196 of 12th February 2016, which we expect will provide some short-term support. Although Japan and many other developed world economies are now in recession, markets do not fall in a straight line forever. Japanese equities now offer attractive relative value and should outperform over the coming months.Source • Japan AnalyticsIT'S DIFFERENT THIS TIME - Most bear markets in Japan have coincided with periods of Yen strength, including the 29% 2015/16 decline when the currency strengthened by 19%. Repeating the rate of decline analysis above, in US dollar terms there have only been four days in the last twenty-eight years with worse 56-day rates of decline - all in October 2008. All four days provided fearless investors with excellent medium-term gains. Although this increase in market volatility may be less welcome for international investors in Japanese equities, the impact of the Covid-19 recession on the Japanese economy will be more muted. Also, the 48% collapse in the oil price year-to-date will help offset the negative impact of the October 2019 increase in the consumption tax and the decline in export sales in Europe. Lastly, we would suggest that the much-derided net cash that Japanese corporates 'hoard' for rainy days such as these, should delay the need for increases in credit lines. Our recent series of Insights on Who’s Swimming Naked? cover those companies to which this does not apply. Overall, for Japan at least, it is different this time.Source • Max Roser, Hannah Ritchie and Esteban Ortiz-Ospina (2020) - "Coronavirus Disease (COVID-19) – Research and Statistics". Published online at OurWorldInData.org. Retrieved from: 'https://ourworldindata.org/coronavirus' [Online Resource]CONTAINING COVID - According to data from the peerless Global Change Data Lab at Oxford University, Japan has, (except for the unfortunate passengers and crew on the Diamond Princess cruise ship), managed to contain Covid-19 better than any other large nation. While, there is some scepticism that this outcome could be a result of under-testing to avoid cancellation of the Olympic Games; nevertheless, the recorded cases fatality rate in a country with an above-average age profile is surprisingly low.  Currently, the daily increase in active Covid-19 cases in Japan is less than one hundred and was only seventeen on March 15th. The cumulative number of confirmed Covid-19 fatalities is 24, of which two occurred yesterday. The confirmed number of cases per 100,000 population is 0.65, which compares with 19.5 in South Korea, 16.5 in Italy and 12 in Iran. Source • oann.comKEEP CALM AND CARRY ON - Last night's press conference by Prime Minister Abe was in stark contrast to the sombre tone to those of Prime Minister Johnson of the United Kingdom and the tragicomic ramblings of the US President. Having received the legislative powers to declare a state of emergency, Abe declined at this stage to invoke any social restrictions beyond the already-announced school closures. As in the UK, sporting authorities are cancelling events or holding them sine populo. Japan's long obsession with cleanliness, the culture of bowing as a greeting and readiness to conform have served to 'flatten the curve'. The increased focus on such practices has also resulted in a very low incidence of seasonal influenza this year. Japan also has significantly lower levels of air pollution compared to China, Iran and northern Italy, a  factor that has become a factor in fatality rates, especially amongst the elderly. Although internal travel and restaurant patronage have sharply declined in Japan, shops are open and are well-stocked (except for now-rationed paper products) and 'free movement' with slightly-greater-than-normal social distancing is the norm. Whatever the motivations may be regarding the Olympics and Abe's legacy, Japan is unwilling to force the economy into the economic depression that would be the result of prolonged lockdown. A COVID-19 WORLD - This 'keep-calm-carry-on' model of a Covid-19-prevalent world (as is also seen in Singapore and Taiwan) will eventually have to be applied globally. These countries rapid transition to the new 'Covid-19 world' should result in better short-term outcomes for these economies.  The UK is currently being criticised for attempting to follow a version of this model, and may eventually have to go against the advice of its epidemiologists. Fortunately, for now, the general public are giving the UK government the benefit of the doubt. There will be a sharp divergence in the medium-term economic outlooks for countries taking these two 'paths' with those that are over-reacting paying a heavy price. While this does not bode well for the Eurozone, East Asia, including Japan, should emerge in better shape in this new 'viral' world.      In the DETAIL section below, we shall review a number of our favourite market indicators, recent sector performance and make some recommendations as to how to harness this once-in-a-decade opportunity to buy high-quality Japanese companies at attractive prices.

🇯🇵 JAPAN MARKET UPDATE • Relative Value: Short-Term Buy On Japanese Equities

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

As discussed in <a href="https://www.smartkarma.com/insights/oriental-land-buyback-tender-offer" target="_blank" data-smartkarma-citation="insights:36204" rel="noopener">Oriental Land Buyback Tender Offer</a>, on 30 January this year when they announced Q3 results, <a href="https://www.smartkarma.com/entities/oriental-land-co-ltd" target="_blank" data-smartkarma-citation="entities:13517:1" rel="noopener">Oriental Land (4661 JP)</a> also launched a buyback tender offer which was designed to buy back shares from one of its large cross-holders, <a href="https://www.smartkarma.com/entities/mitsui-fudosan-co-ltd" target="_blank" data-smartkarma-citation="entities:565:1" rel="noopener">Mitsui Fudosan (8801 JP)</a>. It did so using the format of an Own Share Tender Offer, which creates strange issues around how much money actually comes out of it for most shareholders. It was launched at a price (¥13830) which was below the market and that was, itself, a reason why most people would not have wanted to sell shares into the Tender Offer. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/121/167/original/Screenshot%202020-03-03%20at%204.09.48%20PM.png?1583223014" class="editor-image img-responsive" data-smartkarma-image-id="121167"></figure>It looked like the Partial Tender would go fine. It was below market, and there was friction in the thing (for more on the friction, which is real for all except for a small minority of market participants, please read the details in the original piece <a href="https://www.smartkarma.com/insights/oriental-land-buyback-tender-offer" target="_blank" rel="noopener">here</a>).Shares traded above ¥14000 for almost all of the next two weeks. Then coronavirus fears started, then people in the west started getting more worried. There were fears of large crowds and rumors that Tokyo Disneyland might close temporarily. In the US, Donald Trump told everyone not to worry, which of course made fears worse. Shares dropped sharply in the last week of February. This presented an opportunity for some market participants (I noted the put option in the previous insight, and only a few people contacted me to discuss).The share price fall led to possibilities, and with the results out now, leads to potential issues, discussed below.And it turns out that Tokyo Disneyland <a href="http://www.olc.co.jp/ja/news/news_olc/20200228_1/main/0/link/0228.pdf" target="_blank" rel="noopener">announced</a> a temporary closure, from 29 February to 16 March, on the 28th of February.

As discussed in Oriental Land Buyback Tender Offer, on 30 January this year when they announced Q3 results, Oriental Land (4661 JP) also launched a buyback tender offer which was designed to buy back shares from one of its large cross-holders, Mitsui Fudosan (8801 JP). It did so using the format of an Own Share Tender Offer, which creates strange issues around how much money actually comes out of it for most shareholders. It was launched at a price (¥13830) which was below the market and that was, itself, a reason why most people would not have wanted to sell shares into the Tender Offer. It looked like the Partial Tender would go fine. It was below market, and there was friction in the thing (for more on the friction, which is real for all except for a small minority of market participants, please read the details in the original piece here).Shares traded above ¥14000 for almost all of the next two weeks. Then coronavirus fears started, then people in the west started getting more worried. There were fears of large crowds and rumors that Tokyo Disneyland might close temporarily. In the US, Donald Trump told everyone not to worry, which of course made fears worse. Shares dropped sharply in the last week of February. This presented an opportunity for some market participants (I noted the put option in the previous insight, and only a few people contacted me to discuss).The share price fall led to possibilities, and with the results out now, leads to potential issues, discussed below.And it turns out that Tokyo Disneyland announced a temporary closure, from 29 February to 16 March, on the 28th of February.

Oriental Land - Buyback Interrupted, and an Overhang?

Japan

ORIENTAL LAND CO., LTD. operates Tokyo Disney Resort.  The Company also operates restaurants within the complex and sells Disney merchandise.

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Oriental Land (4661 JP)

Japan Long Weekend Portfolio Blowout Theme Is Working Quickly

On Thursday we highlighted a number of stock pairs that had seen extreme levels of relative performance dislocations, speculating that this was due...

Mio Kato

What Is Getting Blown Out of Portfolios Before the Long Weekend in Japan?

We previously highlighted the strong skew between names which have a heavy weighting in Topix vs. those which have a heavy weighting in the Nikkei....

Mio Kato

🇯🇵 JAPAN MARKET UPDATE • Relative Value: Short-Term Buy On Japanese Equities

RELATIVE VALUE - Since the recent peak of December 17th, the TOPIX Index has fallen by 28% in 56 trading days. The -0.57% daily average rate of...

Campbell Gunn

Oriental Land - Buyback Interrupted, and an Overhang?

As discussed in Oriental Land Buyback Tender Offer, on 30 January this year when they announced Q3 results, Oriental Land (4661 JP) also launched a...

Travis Lundy

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Japan Long Weekend Portfolio Blowout Theme Is Working Quickly

On Thursday we highlighted a number of stock pairs that had seen extreme levels of relative performance dislocations, speculating that this was due...

Mio Kato

What Is Getting Blown Out of Portfolios Before the Long Weekend in Japan?

We previously highlighted the strong skew between names which have a heavy weighting in Topix vs. those which have a heavy weighting in the Nikkei....

Mio Kato

No Tourists and Park Closure Extended till April Due to COVID-19, Yet the Share Price Is Strong

Oriental Land (4661 JP), the operator of the Tokyo Disney Resorts extended the temporary closure of Tokyo Disneyland and Tokyo DisneySea till...

Oshadhi Kumarasiri

🇯🇵 JAPAN MARKET UPDATE • Relative Value: Short-Term Buy On Japanese Equities

RELATIVE VALUE - Since the recent peak of December 17th, the TOPIX Index has fallen by 28% in 56 trading days. The -0.57% daily average rate of...

Campbell Gunn

Oriental Land - Buyback Interrupted, and an Overhang?

As discussed in Oriental Land Buyback Tender Offer, on 30 January this year when they announced Q3 results, Oriental Land (4661 JP) also launched a...

Travis Lundy