Equity Analyst, LightStream Research

Aqila Ali

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

<ul>
<li>The company’s FY20 results, though weak were not disappointing. <a href="https://www.smartkarma.com/entities/panasonic-corp" target="_blank" data-smartkarma-citation="entities:222:1" rel="noopener">Panasonic Corp (6752 JP)</a> managed to slightly surpass consensus and our estimates on OP. </li>
<li>Panasonic’s FY03/20 revenue was marginally above the company’s revised guidance (outpaced by +0.5%), while OP was marginally below revised guidance (by -1.6%).</li>
<li>The company revised its guidance on April 27th which were broadly in line with our estimates at 3Q (<a href="https://www.smartkarma.com/insights/3q-points-to-recovery-increase-in-op-and-a-new-prismatic-battery-jv-with-toyota" target="_blank" data-smartkarma-citation="insights:36340" rel="noopener">3Q Points to Recovery: Increase in OP and A New Prismatic Battery JV with Toyota</a>).  </li>
</ul><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/134/475/original/image_14982316621589899912139.png?1589899914" class="editor-image img-responsive" data-smartkarma-image-id="134475"></figure><div class="content-remarks">Source: Company Disclosures, CapIQ, LSR</div><ul>
<li>Our key concern with the FY03/20 earnings is still the Industrial Solutions segment (a core-growth segment for Panasonic) which continues to struggle due to China’s slowdown.</li>
<li>Continuing losses in the automotive segment are not a major concern to us. We expected the segment to report increasing losses during 4Q, following production stoppage at <a href="https://www.smartkarma.com/entities/tesla-motors-inc" target="_blank" data-smartkarma-citation="entities:20279:1" rel="noopener">Tesla Motors (TSLA US)</a> due to COVID 19 (<a href="https://www.smartkarma.com/insights/panasonic-suspends-production-at-its-gigafactory-the-tesla-effect-on-panasonic-again" target="_blank" data-smartkarma-citation="insights:37806" rel="noopener">Panasonic Suspends Production at Its Gigafactory: The Tesla-Effect on Panasonic Again?</a>).  </li>
<li>We expect Toyota’s involvement in the Automotive segment and the Life solutions segment to drive growth for Panasonic.</li>
<li>Panasonic did not provide guidance for FY03/21E just like most other companies.</li>
<li>Panasonic, looks quite cheap, trading at an FY03/21PE of around 12.6x below its historical median (16.9x). Adding more to positions here appears attractive, given the long-term prospects Toyota offers Panasonic, and we believe it is reasonable to accumulate within the range of ¥800-900 for a move back towards its recent highs, and eventually higher. However, some downside risks still exist given the current economic condition.</li>
</ul>


The company’s FY20 results, though weak were not disappointing. Panasonic Corp (6752 JP) managed to slightly surpass consensus and our estimates on OP. 
Panasonic’s FY03/20 revenue was marginally above the company’s revised guidance (outpaced by +0.5%), while OP was marginally below revised guidance (by -1.6%).
The company revised its guidance on April 27th which were broadly in line with our estimates at 3Q (3Q Points to Recovery: Increase in OP and A New Prismatic Battery JV with Toyota).  
Source: Company Disclosures, CapIQ, LSR
Our key concern with the FY03/20 earnings is still the Industrial Solutions segment (a core-growth segment for Panasonic) which continues to struggle due to China’s slowdown.
Continuing losses in the automotive segment are not a major concern to us. We expected the segment to report increasing losses during 4Q, following production stoppage at Tesla Motors (TSLA US) due to COVID 19 (Panasonic Suspends Production at Its Gigafactory: The Tesla-Effect on Panasonic Again?).  
We expect Toyota’s involvement in the Automotive segment and the Life solutions segment to drive growth for Panasonic.
Panasonic did not provide guidance for FY03/21E just like most other companies.
Panasonic, looks quite cheap, trading at an FY03/21PE of around 12.6x below its historical median (16.9x). Adding more to positions here appears attractive, given the long-term prospects Toyota offers Panasonic, and we believe it is reasonable to accumulate within the range of ¥800-900 for a move back towards its recent highs, and eventually higher. However, some downside risks still exist given the current economic condition.


Weak FY03/20 Places Toyota Battery Business as Hope for LT Recovery

Last week, it was reported that Toyota and <a href="https://www.smartkarma.com/entities/ntt-data-corp" target="_blank" data-smartkarma-citation="entities:11232:1" rel="noopener">NTT Data Corp (9613 JP)</a> will spend around JPY 200 bn ($1.81 bn) on building a smart city, starting in 2021. Despite the ongoing pandemic, Toyota is continuing to work on its next-generation technology aims.NTT is one of the dominant telco providers in Japan, and Toyota already partnered with the carrier in 2017 for research and development on connectivity. Besides NTT, the company has also partnered with the other two dominant telecommunication operators: <a href="https://www.smartkarma.com/entities/kddi-corp" target="_blank" data-smartkarma-citation="entities:639:1" rel="noopener">KDDI Corp (9433 JP)</a> and <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a>.Toyota had initially partnered with KDDI (in 2016) for its connectivity goal. The partnership was formed to develop a global connectivity platform. That said, it seems that Toyota has been working with both NTT and KDDI to exploit its connectivity plans. The recent partnership with NTT could suggest that the company is getting closer to NTT than KDDI for connectivity goals. However, we believe that Toyota has carefully planned how it could use each of the telco providers in pioneering CASE goals.The key focus behind this deal is the development of a smart city. Given Toyota’s investment in ‘Town Development Business’ (building smart homes with <a href="https://www.smartkarma.com/entities/panasonic-corp" target="_blank" data-smartkarma-citation="entities:222:1" rel="noopener">Panasonic Corp (6752 JP)</a>), its interest in building a smart city seems reasonable. Additionally, being a part of a smart city allows Toyota to expedite its CASE progress in the meantime, as the city is likely to deploy Toyota’s self-driving cars, and possibly its connectivity platform.We go through the details below.

Last week, it was reported that Toyota and NTT Data Corp (9613 JP) will spend around JPY 200 bn ($1.81 bn) on building a smart city, starting in 2021. Despite the ongoing pandemic, Toyota is continuing to work on its next-generation technology aims.NTT is one of the dominant telco providers in Japan, and Toyota already partnered with the carrier in 2017 for research and development on connectivity. Besides NTT, the company has also partnered with the other two dominant telecommunication operators: KDDI Corp (9433 JP) and Softbank Corp (9434 JP).Toyota had initially partnered with KDDI (in 2016) for its connectivity goal. The partnership was formed to develop a global connectivity platform. That said, it seems that Toyota has been working with both NTT and KDDI to exploit its connectivity plans. The recent partnership with NTT could suggest that the company is getting closer to NTT than KDDI for connectivity goals. However, we believe that Toyota has carefully planned how it could use each of the telco providers in pioneering CASE goals.The key focus behind this deal is the development of a smart city. Given Toyota’s investment in ‘Town Development Business’ (building smart homes with Panasonic Corp (6752 JP)), its interest in building a smart city seems reasonable. Additionally, being a part of a smart city allows Toyota to expedite its CASE progress in the meantime, as the city is likely to deploy Toyota’s self-driving cars, and possibly its connectivity platform.We go through the details below.

Toyota Partners with NTT for Smart City Development: Connection With Telco Providers Key for CASE

Last week it was reported that <a href="https://www.smartkarma.com/entities/panasonic-corp" target="_blank" data-smartkarma-citation="entities:222:1" rel="noopener">Panasonic Corp (6752 JP)</a> and <a href="https://www.smartkarma.com/entities/tesla-motors-inc" target="_blank" data-smartkarma-citation="entities:20279:1" rel="noopener">Tesla Motors (TSLA US)</a>’s Gigafactory 1 in Nevada, will close for 14 days after March 23. Tesla also announced that it will suspend its assembly plant for finished cars in California. Panasonic did not comment on the effect the production stoppage will have on its battery production levels.
During the 3Q earnings release, Panasonic reported that its Gigafactory with Tesla generated profits. It was expected that as Tesla’s production volume increases Panasonic should be able to stabilise profits from its battery business. While this is true to an extent, we have always considered Tesla’s volatility to be a risk for Panasonic (this time the volatility seems to have come from the virus outbreak).
Our key points:
<ul>
<li>Panasonic stops production at Gigafactory. This is likely to have short term impact on the company’s earnings.</li>
<li>However, Toyota, on the other hand, continues its investment plans in China for EVs.</li>
<li>Panasonic’s and Toyota’s factories in China are not affected by the COVID pandemic.</li>
<li>We believe that given Toyota’s partnership with Panasonic, the latter’s battery business in China is less likely to take a significant hit due to the ongoing virus outbreak.</li>
<li>Short term risks do exist, but we like the company for their strengthening ties with Toyota</li>
</ul>

Last week it was reported that Panasonic Corp (6752 JP) and Tesla Motors (TSLA US)’s Gigafactory 1 in Nevada, will close for 14 days after March 23. Tesla also announced that it will suspend its assembly plant for finished cars in California. Panasonic did not comment on the effect the production stoppage will have on its battery production levels.
During the 3Q earnings release, Panasonic reported that its Gigafactory with Tesla generated profits. It was expected that as Tesla’s production volume increases Panasonic should be able to stabilise profits from its battery business. While this is true to an extent, we have always considered Tesla’s volatility to be a risk for Panasonic (this time the volatility seems to have come from the virus outbreak).
Our key points:

Panasonic stops production at Gigafactory. This is likely to have short term impact on the company’s earnings.
However, Toyota, on the other hand, continues its investment plans in China for EVs.
Panasonic’s and Toyota’s factories in China are not affected by the COVID pandemic.
We believe that given Toyota’s partnership with Panasonic, the latter’s battery business in China is less likely to take a significant hit due to the ongoing virus outbreak.
Short term risks do exist, but we like the company for their strengthening ties with Toyota


Panasonic Suspends Production at Its Gigafactory: The Tesla-Effect on Panasonic Again?

'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

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/342/original/2020-03-11_11-02-32.png?1583892183" class="editor-image img-responsive" data-smartkarma-image-id="122342"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/590/original/2020-03-12_07-42-03.png?1583966536" class="editor-image img-responsive" data-smartkarma-image-id="122590"></figure><div class="content-caption">Source • Japan Analytics</div>CUMULATIVE CASH FLOWS - In this third and final of our series on Japanese companies that might be compromised as the Covid-19 recession unfolds,  we shall look at Cumulative Cash Flows. Our cash flow model is derived from the disclosed Balance Sheets and Statements of Comprehensive Income and balances to zero for every company for every comparable period. Variations in disclosure between the audited annual yuho and unaudited quarterly kessan tanshin reports, notably when the company is reporting under the weaker IFRS standard can result in unavoidable quarter-to-quarter variations. Consequently, our analysis will focus on year-on-year changes as of the most recent quarterly disclosure irrespective of fiscal year-end.  Our review will cover six principal cash flow metrics:-<ul>
<li>
Operating Cash Flow - Operating Cash Flow comprises all cash flow items relating to transactions with customers and suppliers except inventory cash flows.</li>
<li>
Investing Cash Flow - Investing Cash Flow comprises cash flow to or from Fixed Assets and Inventories. Unlike GAAP Cash Flows Statements, It does not include investments in financial assets.</li>
<li>
Inventory Cash Flow - A sub-set of Investing Cash Flow, inventory Cash Flow is the change in Inventory on the Balance Sheet. </li>
<li>
Free Cash Flow - Free Cash Flow the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow.</li>
<li>
Financing Cash Flow - Financing Cash Flow comprises Debt &amp; Lease Liabilities, Investments and the taxation that is allocated to Financing Cash Flow. Debt &amp; Lease Liabilities includes changes in Short and Long-Term Debt and Lease Liabilities and Interest and Bond Issuance Expenses.' Investments' includes Interest &amp; Dividend Income, Purchases and Sales of Securities, Loans, Gains and Losses on Marketable Securities and Equity Earnings.</li>
<li>Change in Cash - Change in Cash is the sum of Free Cash Flow, Financing Cash Flow and Shareholder Cash Flow after including Minorities &amp; Adjustments. </li>
</ul>EXCLUDED - Four companies have been excluded from our review as they have substantial financial subsidiaries - <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/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten (4755 JP)</a>, <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony (6758 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> which distort their balance sheets. We have also excluded companies with a current market cap below ¥50b, although some exceptions have been made for abnormally large movements, such as those in <a href="https://www.smartkarma.com/entities/japan-display-inc" target="_blank" data-smartkarma-citation="entities:8280:1" rel="noopener">Japan Display (6740 JP).</a><a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba (6502 JP)</a>-  As an example of our analysis, Toshiba has seen the largest reduction in Cash as a percentage of market value over the last twelve months of any large-cap Japanese company. Toshiba's cash balance has declined by ¥1.4 trillion since peaking in 2019-Q2 - 114% of the current market cap. 70% of the cash generated between 2018-Q4 and 2019-Q2 has been allocated to share repurchases, dividends and cash reduction. The company's net cash remains at a healthy 51% of market value and 43% of Shareholders' Equity; however, Cumulative Operating Cash Flow will fall below zero in the current quarter. There are few additional reductions in Fixed Assets and Inventories that can be sustained without irreparable damage. The logic of buying back shares in an entity that has negative residual returns is not clear to us. Despite the potential for a TOPIX re-inclusion 'bounce', fundamentally the stock should be avoided.<div class="content-highlight">In the DETAIL Section below, we shall look at the top (or bottom) thirty large-cap companies on each of the metric above scaled by market capitalisation. </div>

Source • Japan AnalyticsCUMULATIVE CASH FLOWS - In this third and final of our series on Japanese companies that might be compromised as the Covid-19 recession unfolds,  we shall look at Cumulative Cash Flows. Our cash flow model is derived from the disclosed Balance Sheets and Statements of Comprehensive Income and balances to zero for every company for every comparable period. Variations in disclosure between the audited annual yuho and unaudited quarterly kessan tanshin reports, notably when the company is reporting under the weaker IFRS standard can result in unavoidable quarter-to-quarter variations. Consequently, our analysis will focus on year-on-year changes as of the most recent quarterly disclosure irrespective of fiscal year-end.  Our review will cover six principal cash flow metrics:-

Operating Cash Flow - Operating Cash Flow comprises all cash flow items relating to transactions with customers and suppliers except inventory cash flows.

Investing Cash Flow - Investing Cash Flow comprises cash flow to or from Fixed Assets and Inventories. Unlike GAAP Cash Flows Statements, It does not include investments in financial assets.

Inventory Cash Flow - A sub-set of Investing Cash Flow, inventory Cash Flow is the change in Inventory on the Balance Sheet. 

Free Cash Flow - Free Cash Flow the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow.

Financing Cash Flow - Financing Cash Flow comprises Debt &amp; Lease Liabilities, Investments and the taxation that is allocated to Financing Cash Flow. Debt &amp; Lease Liabilities includes changes in Short and Long-Term Debt and Lease Liabilities and Interest and Bond Issuance Expenses.' Investments' includes Interest &amp; Dividend Income, Purchases and Sales of Securities, Loans, Gains and Losses on Marketable Securities and Equity Earnings.
Change in Cash - Change in Cash is the sum of Free Cash Flow, Financing Cash Flow and Shareholder Cash Flow after including Minorities &amp; Adjustments. 
EXCLUDED - Four companies have been excluded from our review as they have substantial financial subsidiaries - Z Holdings (4689 JP), Rakuten (4755 JP), Sony (6758 JP), Japan Post (6178 JP) which distort their balance sheets. We have also excluded companies with a current market cap below ¥50b, although some exceptions have been made for abnormally large movements, such as those in Japan Display (6740 JP).Toshiba (6502 JP)-  As an example of our analysis, Toshiba has seen the largest reduction in Cash as a percentage of market value over the last twelve months of any large-cap Japanese company. Toshiba's cash balance has declined by ¥1.4 trillion since peaking in 2019-Q2 - 114% of the current market cap. 70% of the cash generated between 2018-Q4 and 2019-Q2 has been allocated to share repurchases, dividends and cash reduction. The company's net cash remains at a healthy 51% of market value and 43% of Shareholders' Equity; however, Cumulative Operating Cash Flow will fall below zero in the current quarter. There are few additional reductions in Fixed Assets and Inventories that can be sustained without irreparable damage. The logic of buying back shares in an entity that has negative residual returns is not clear to us. Despite the potential for a TOPIX re-inclusion 'bounce', fundamentally the stock should be avoided.In the DETAIL Section below, we shall look at the top (or bottom) thirty large-cap companies on each of the metric above scaled by market capitalisation. 

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 3: Cumulative Cash Flow

On the 26th of February, it was reported that <a href="https://www.smartkarma.com/entities/tesla-motors-inc" target="_blank" data-smartkarma-citation="entities:20279:1" rel="noopener">Tesla Motors (TSLA US)</a> and <a href="https://www.smartkarma.com/entities/panasonic-corp" target="_blank" data-smartkarma-citation="entities:222:1" rel="noopener">Panasonic Corp (6752 JP)</a> will end their joint solar cell production. Although the two companies will still operate their EV battery Gigafactory jointly, the two are increasingly parting ways. The news has it that Panasonic’s production of solar cells did not meet Tesla’s expected standards (mainly on price).<ul>
<li>We expected Panasonic to reduce its reliance on Tesla - the news only confirms our thoughts, and we view this as positive for Panasonic. For Panasonic, the solar business seems to not have yielded the results expected. Thus, the decision to end production (especially with Tesla) makes sense.</li>
<li>Tesla, on the other hand, expects its solar energy business to do well, given the price competitiveness (on its Powerwall product) from sourcing from Chinese suppliers alongside economies of scale benefits. However, even if demand conditions are good, it seems questionable as to whether Tesla’s production would come in time to meet the demand (now that the JV is no more as well).</li>
<li>On a side note, Tesla recently partnered with CATL for prismatic batteries while Panasonic is developing cylindrical batteries for Toyota’s BEVs. Given the limited use of prismatic batteries in BEVs, we do not really think such moves by Tesla should pressure Panasonic or be seen as a downside for the latter.</li>
</ul>

On the 26th of February, it was reported that Tesla Motors (TSLA US) and Panasonic Corp (6752 JP) will end their joint solar cell production. Although the two companies will still operate their EV battery Gigafactory jointly, the two are increasingly parting ways. The news has it that Panasonic’s production of solar cells did not meet Tesla’s expected standards (mainly on price).
We expected Panasonic to reduce its reliance on Tesla - the news only confirms our thoughts, and we view this as positive for Panasonic. For Panasonic, the solar business seems to not have yielded the results expected. Thus, the decision to end production (especially with Tesla) makes sense.
Tesla, on the other hand, expects its solar energy business to do well, given the price competitiveness (on its Powerwall product) from sourcing from Chinese suppliers alongside economies of scale benefits. However, even if demand conditions are good, it seems questionable as to whether Tesla’s production would come in time to meet the demand (now that the JV is no more as well).
On a side note, Tesla recently partnered with CATL for prismatic batteries while Panasonic is developing cylindrical batteries for Toyota’s BEVs. Given the limited use of prismatic batteries in BEVs, we do not really think such moves by Tesla should pressure Panasonic or be seen as a downside for the latter.


The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production

Japan

Panasonic Corporation manufactures electric and electronic products. The Company produces home appliances, car navigation systems, digital devices, computer peripherals, telecommunications, industrial equipment, and electronic parts. Panasonic has associated companies around the world.

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Panasonic Corp (6752 JP)

Weak FY03/20 Places Toyota Battery Business as Hope for LT Recovery

The company’s FY20 results, though weak were not disappointing. Panasonic Corp (6752 JP) managed to slightly surpass consensus and our estimates...

Aqila Ali

Toyota Partners with NTT for Smart City Development: Connection With Telco Providers Key for CASE

Last week, it was reported that Toyota and NTT Data Corp (9613 JP) will spend around JPY 200 bn ($1.81 bn) on building a smart city, starting in...

Aqila Ali

Panasonic Suspends Production at Its Gigafactory: The Tesla-Effect on Panasonic Again?

Last week it was reported that Panasonic Corp (6752 JP) and Tesla Motors (TSLA US)’s Gigafactory 1 in Nevada, will close for 14 days after March...

Aqila Ali

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 3: Cumulative Cash Flow

CUMULATIVE CASH FLOWS - In this third and final of our series on Japanese companies that might be compromised as the Covid-19 recession unfolds, ...

Campbell Gunn

The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production

On the 26th of February, it was reported that Tesla Motors (TSLA US) and Panasonic Corp (6752 JP) will end their joint solar cell production....

Aqila Ali

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