Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Cross Asset Strategy

In our Macro Overview of Global fund positioning, we cover the following: <ul>
<li>Managers raise EMEA Overweight, hit max underweight in US.</li>
<li>Taiwan key beneficiary of COVID rebalance, India sees outflows.</li>
<li>Cross country exodus seen in Financials/Energy.  Materials reverse long-term decline.</li>
<li>Active managers move towards defensive and secular growth sectors and out of cyclicals.</li>
<li>UK Energy stocks see decline, Dutch Tech stocks continue to attract new investment.</li>
</ul>Taken from our Global fund analysis, covering 391 active global funds with combined AUM of $800bn.

In our Macro Overview of Global fund positioning, we cover the following: 
Managers raise EMEA Overweight, hit max underweight in US.
Taiwan key beneficiary of COVID rebalance, India sees outflows.
Cross country exodus seen in Financials/Energy.  Materials reverse long-term decline.
Active managers move towards defensive and secular growth sectors and out of cyclicals.
UK Energy stocks see decline, Dutch Tech stocks continue to attract new investment.
Taken from our Global fund analysis, covering 391 active global funds with combined AUM of $800bn.

Global Equity Positioning:  Macro Overview.  Raising EU Overweights, Taiwan Vs India, UK Decouples

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

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)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/148/490/original/2020-07-29_05-46-56.png?1595972235" class="editor-image img-responsive" data-smartkarma-image-id="148490"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/148/491/original/2020-07-29_05-47-39.png?1595972270" class="editor-image img-responsive" data-smartkarma-image-id="148491"></figure><div class="content-caption">Source • Japan Analytics</div>OUTLIERS - This quarter's results are highlighting the wide variances in performance between companies in the same thematic basket - in yesterday's case - the SPE business of <a href="https://www.smartkarma.com/entities/tokyo-electron-ltd" target="_blank" data-smartkarma-citation="entities:280:1" rel="noopener">Tokyo Electron (8035 JP)</a> and the FA business of <a href="https://www.smartkarma.com/entities/fanuc-corp" target="_blank" data-smartkarma-citation="entities:752:1" rel="noopener">Fanuc (6954 JP)</a>.  The latter's forecast, if achieved, would take their incremental operating profit margin to -2,631. While the market has over-reacted to TEL's stability, many, including this writer, have been overly complacent about the pace Fanuc's recovery. The SPE and FAA business cycles are no longer synchronised, and Fanuc's valuations have yet to adjust to that new reality.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/148/493/original/2020-07-29_06-48-44.png?1595972935" class="editor-image img-responsive" data-smartkarma-image-id="148493"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/148/494/original/2020-07-29_06-49-07.png?1595972973" class="editor-image img-responsive" data-smartkarma-image-id="148494"></figure><div class="content-caption">Source • Japan Analytics</div><div>DAILY STATS</div><hr><div>55 Quarterly Results</div><div><ul>
<li>
Results Score: 14 Positive / 1 Neutral / 40 Negative</li>
<li>
Average Results Score Change: -3.4</li>
<li>
Average % Change in Revenue: -11.8% Quarter YoY / -2.4% Rolling TTM YoY </li>
<li>
Average Operating Profit Margin Change: -1.0ppt</li>
<li>
Percentage Making Quarterly Losses: 31%</li>
</ul></div><hr><div> 23 Annual • 17 Interim Forecasts/Revisions</div><div><ul>
<li>
Annual Forecast/Revision Score: 7 Positive / 0 Neutral / 16 Negative</li>
<li>
Interim Forecast/Revision Score Change: 4 Positive / 0 Neutral / 13 Negative</li>
<li>
Average Forecast/Revision Score Change: -9.8</li>
</ul></div>

Source • Japan AnalyticsOUTLIERS - This quarter's results are highlighting the wide variances in performance between companies in the same thematic basket - in yesterday's case - the SPE business of Tokyo Electron (8035 JP) and the FA business of Fanuc (6954 JP).  The latter's forecast, if achieved, would take their incremental operating profit margin to -2,631. While the market has over-reacted to TEL's stability, many, including this writer, have been overly complacent about the pace Fanuc's recovery. The SPE and FAA business cycles are no longer synchronised, and Fanuc's valuations have yet to adjust to that new reality.Source • Japan AnalyticsDAILY STATS55 Quarterly Results

Results Score: 14 Positive / 1 Neutral / 40 Negative

Average Results Score Change: -3.4

Average % Change in Revenue: -11.8% Quarter YoY / -2.4% Rolling TTM YoY 

Average Operating Profit Margin Change: -1.0ppt

Percentage Making Quarterly Losses: 31%
 23 Annual • 17 Interim Forecasts/Revisions

Annual Forecast/Revision Score: 7 Positive / 0 Neutral / 16 Negative

Interim Forecast/Revision Score Change: 4 Positive / 0 Neutral / 13 Negative

Average Forecast/Revision Score Change: -9.8


🇯🇵 JAPAN • Results & Revisions 28th July - TEL, Fanuc, Canon, Nissan, Shin-Etsu, Omron

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/143/496/original/2020-06-30_14-16-44.png?1593494217" class="editor-image img-responsive" data-smartkarma-image-id="143496"></figure>
<div class="content-caption">Source • Japan Analytics</div>
THE CASH CONVERSION CYCLE - Net Working Capital is a measure of how efficiently a company manages its short-term assets and liabilities to generate cash and is also known as the Cash Conversion Cycle. In practice, Net Working Capital is scaled by the number of days of Revenue or Cost of Goods Sold that are 'tied' up in three components - Receivables, Inventory, and Payables.
Net Working Capital Days varies by industry and the lower the number, the better. Amounts over 210 days are excessive, and a sign of business stress.  Net Working Capital is defined as:-
<ul>
<li>
+ Receivables/Revenue - the average number of days required to collect on sales. Businesses usually extend a degree of credit to non-cash customers.  Receivables Days over 100 are excessive.</li>
<li>
+ Inventory/Cost of Goods Sold - the average number of days it takes to sell out of Inventory. Amounts vary widely by industry but days over 210 are excessive.</li>
<li>- Payables/Cost of Goods Sold -the average number of days the company takes to settle transactions with suppliers. By extending nominally interest-free credit, suppliers provide operating leverage to a business. A larger negative number is better, but days less than -100 are excessive.</li>
</ul>
The relationship between Receivables and Payables should also be considered particularly where the company is giving more generous credit terms to its customers than it receives from its suppliers. The Cash Conversion Cycle for the aggregate of all non-financial currently-listed Japanese companies has averaged 77 days over the last thirty years. However, over the previous twelve months., a fourteen-day rise in Inventory Days during the last four years has pushed Net Working Capital Days to 93.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/143/529/original/2020-06-30_15-09-41.png?1593497395" class="editor-image img-responsive" data-smartkarma-image-id="143529"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/143/530/original/2020-06-30_15-10-32.png?1593497471" class="editor-image img-responsive" data-smartkarma-image-id="143530"></figure>
<div class="content-caption">Source • Japan Analytics</div>
<div class="content-caption"></div>
NET WORKING CAPITAL DAYS AS A STRESS TEST - The correlation between Net Working Capital Days and relative performance varies by company and by Sectors. The examples above show how signals can be heeded -  <a href="https://www.smartkarma.com/entities/nikon-corp" target="_blank" data-smartkarma-citation="entities:7117:1" rel="noopener">Nikon (7731 JP)</a>, or ignored - <a href="https://www.smartkarma.com/entities/smc-corp" target="_blank" data-smartkarma-citation="entities:20866:1" rel="noopener">SMC (6273 JP)</a> since 2018. (For more on SMC working capital issues, please see my colleague <a href="https://www.smartkarma.com/profiles/scott-foster" target="_blank" data-smartkarma-citation="accounts:1134" rel="noopener">Scott Foster</a>'s Insight of last year - <a href="https://www.smartkarma.com/insights/smc-6273-jp-getting-in-line-with-reality" target="_blank" data-smartkarma-citation="insights:30081" rel="noopener">SMC (6273 JP): Getting in Line with Reality</a>).   
For this Insight, we have limited our review to larger capitalisation manufacturing companies. In the DETAIL section below, we shall cover the outliers at both ends of Receivables Days, Inventory Days, Payables Days, and finally Net Working Capital Days.


Source • Japan Analytics
THE CASH CONVERSION CYCLE - Net Working Capital is a measure of how efficiently a company manages its short-term assets and liabilities to generate cash and is also known as the Cash Conversion Cycle. In practice, Net Working Capital is scaled by the number of days of Revenue or Cost of Goods Sold that are 'tied' up in three components - Receivables, Inventory, and Payables.
Net Working Capital Days varies by industry and the lower the number, the better. Amounts over 210 days are excessive, and a sign of business stress.  Net Working Capital is defined as:-


+ Receivables/Revenue - the average number of days required to collect on sales. Businesses usually extend a degree of credit to non-cash customers.  Receivables Days over 100 are excessive.

+ Inventory/Cost of Goods Sold - the average number of days it takes to sell out of Inventory. Amounts vary widely by industry but days over 210 are excessive.
- Payables/Cost of Goods Sold -the average number of days the company takes to settle transactions with suppliers. By extending nominally interest-free credit, suppliers provide operating leverage to a business. A larger negative number is better, but days less than -100 are excessive.

The relationship between Receivables and Payables should also be considered particularly where the company is giving more generous credit terms to its customers than it receives from its suppliers. The Cash Conversion Cycle for the aggregate of all non-financial currently-listed Japanese companies has averaged 77 days over the last thirty years. However, over the previous twelve months., a fourteen-day rise in Inventory Days during the last four years has pushed Net Working Capital Days to 93.


Source • Japan Analytics

NET WORKING CAPITAL DAYS AS A STRESS TEST - The correlation between Net Working Capital Days and relative performance varies by company and by Sectors. The examples above show how signals can be heeded -  Nikon (7731 JP), or ignored - SMC (6273 JP) since 2018. (For more on SMC working capital issues, please see my colleague Scott Foster's Insight of last year - SMC (6273 JP): Getting in Line with Reality).   
For this Insight, we have limited our review to larger capitalisation manufacturing companies. In the DETAIL section below, we shall cover the outliers at both ends of Receivables Days, Inventory Days, Payables Days, and finally Net Working Capital Days.

🇯🇵 JAPAN • Stress Tests Part 5: Net Working Capital Outliers

Japan Specialist

Mark Chadwick

<a href="https://www.smartkarma.com/entities/shin-etsu-polymer-co-ltd" target="_blank" data-smartkarma-citation="entities:11035:1" rel="noopener">Shin Etsu Polymer (7970 JP)</a>  is a diversified plastics company specialising in PVC and silicone rubber products. The poor quality of corporate governance, an inadequate capital allocation policy, and an overly diverse business portfolio obscures the company’s underlying value. 
The Precision Moulding division (70% of profits) benefits from exposure to semiconductor industry growth. It is a high margin business that piggy-backs on structural growth in end markets such as 5G, IoT, and AI. 
At 1x EV/Revenue, the Precision Moulding division alone could be worth ¥30b, which is more than the company’s entire enterprise value of ¥28b. Perhaps it is worth considerably more – other semiconductor equipment and materials peers trade at around 9-12x EV/EBIT – implying a divisional valuation of ¥45b to ¥60b. 
Shin-Etsu Polymer has a huge capital deployment opportunity, with a net cash balance sheet (60% of market cap), strong free cash generation (12% FCF yield) and so-far limited shareholder returns. 
Weak corporate governance, protected by a 52%-owned <a href="https://www.smartkarma.com/entities/shin-etsu-chemical-co-ltd" target="_blank" data-smartkarma-citation="entities:4481:1" rel="noopener">Shin Etsu Chemical (4063 JP)</a>, is a key barrier to realising a higher valuation and greater shareholder returns for minorities. 
With shareholders and regulators promoting corporate reorganisation, companies must reconsider these parent-child relationships. Now would be a good time for Shin-Etsu Chem to buy out the listed subsidiary and take full control. ROE has failed to reach 8% for many years, the stock trades below book value, and around a 5-year share price low versus the parent.  They may need some encouragement from an activist shareholder.

Shin Etsu Polymer (7970 JP)  is a diversified plastics company specialising in PVC and silicone rubber products. The poor quality of corporate governance, an inadequate capital allocation policy, and an overly diverse business portfolio obscures the company’s underlying value. 
The Precision Moulding division (70% of profits) benefits from exposure to semiconductor industry growth. It is a high margin business that piggy-backs on structural growth in end markets such as 5G, IoT, and AI. 
At 1x EV/Revenue, the Precision Moulding division alone could be worth ¥30b, which is more than the company’s entire enterprise value of ¥28b. Perhaps it is worth considerably more – other semiconductor equipment and materials peers trade at around 9-12x EV/EBIT – implying a divisional valuation of ¥45b to ¥60b. 
Shin-Etsu Polymer has a huge capital deployment opportunity, with a net cash balance sheet (60% of market cap), strong free cash generation (12% FCF yield) and so-far limited shareholder returns. 
Weak corporate governance, protected by a 52%-owned Shin Etsu Chemical (4063 JP), is a key barrier to realising a higher valuation and greater shareholder returns for minorities. 
With shareholders and regulators promoting corporate reorganisation, companies must reconsider these parent-child relationships. Now would be a good time for Shin-Etsu Chem to buy out the listed subsidiary and take full control. ROE has failed to reach 8% for many years, the stock trades below book value, and around a 5-year share price low versus the parent.  They may need some encouragement from an activist shareholder. 

Shin-Etsu Polymer (7970 JP) - Fake Plastic Governance

Semiconductor & Technology Specialist, Ingenuity

William Keating

Semiconductor & Technology Specialist

Ingenuity

Our focus is exclusively on in-depth research & consulting in the broader semiconductor industry. We focus on the key players, namely Intel, Micron, Qualcomm, Apple, Samsung, NVIDIA, AMD, TSMC & Global Foundries - as well as some of the lesser known, but nonetheless critical, companies such as ASML (for EUV), Mellanox, Cavium, Xilinx etc. We specialise in their products, roadmaps, process technologies, competitive advantages & threats etc. We also help our clients understand the implications of new and emerging technologies, e.g. 3D X-Point, 3D NAND, Carbon Nanotubes, Autonomous Driving, Graphene, Silicon Photonics, Wafer-Level Optics, Artificial Intelligence, FPGA, GPU, ASIC etc. 

Semiconductor Analysis & Research

With all of the major silicon wafer manufacturers now having reported Q1 earnings, it's clear that the impact of COVID-19 was relatively minor as far as revenues net profits were concerned. That situation looks set to continue in the current quarter, with mostly flat to modestly higher revenue forecasts. The sector isn't COVID-19 immune however. Most manufacturers reported meaningfully higher logistics and shipping charges as freight-carrying passenger flights all but vanished during March. Furthermore, GlobalWafers reported that two of their facilities were forced to close for a month. While the bullish forecasts for the current quarter are encouraging, many believe this to be the result of inventory building in the face of the pandemic. As for the second half outlook, we were left with no actual forecasts, rather a strong sense that it all depends on the extent to which COVID-19 is demonstrably under control or not by then.Separately,  there was an important milestone during the first quarter with China's <a href="http://nsig.com/en" target="_blank" rel="noopener">National Semiconductor Industry Group</a> (NSIG) launching its IPO on the Shenzhen STAR market.

With all of the major silicon wafer manufacturers now having reported Q1 earnings, it's clear that the impact of COVID-19 was relatively minor as far as revenues net profits were concerned. That situation looks set to continue in the current quarter, with mostly flat to modestly higher revenue forecasts. The sector isn't COVID-19 immune however. Most manufacturers reported meaningfully higher logistics and shipping charges as freight-carrying passenger flights all but vanished during March. Furthermore, GlobalWafers reported that two of their facilities were forced to close for a month. While the bullish forecasts for the current quarter are encouraging, many believe this to be the result of inventory building in the face of the pandemic. As for the second half outlook, we were left with no actual forecasts, rather a strong sense that it all depends on the extent to which COVID-19 is demonstrably under control or not by then.Separately,  there was an important milestone during the first quarter with China's National Semiconductor Industry Group (NSIG) launching its IPO on the Shenzhen STAR market. 

Silicon Wafers. The Impact Of Covid-19 In Q1 And Likely Outlook For CY 2020.

Japan

Shin-Etsu Chemical Co., Ltd. produces and distributes synthetic resins and other chemical products such as fertilizers. The Company also manufactures electronic materials such as semiconductor silicon, synthetic, and rare earth quartz. Shin-Etsu Chemical operates in Japan and overseas.

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Shin Etsu Chemical (4063 JP)

Global Equity Positioning: Macro Overview. Raising EU Overweights, Taiwan Vs India, UK Decouples

In our Macro Overview of Global fund positioning, we cover the following: Managers raise EMEA Overweight, hit max underweight in US. Taiwan key...

Steven Holden

🇯🇵 JAPAN • Results & Revisions 28th July - TEL, Fanuc, Canon, Nissan, Shin-Etsu, Omron

OUTLIERS - This quarter's results are highlighting the wide variances in performance between companies in the same thematic basket - in yesterday's...

Campbell Gunn

🇯🇵 JAPAN • Stress Tests Part 5: Net Working Capital Outliers

THE CASH CONVERSION CYCLE - Net Working Capital is a measure of how efficiently a company manages its short-term assets and liabilities to...

Campbell Gunn

Shin-Etsu Polymer (7970 JP) - Fake Plastic Governance

Shin Etsu Polymer (7970 JP) is a diversified plastics company specialising in PVC and silicone rubber products. The poor quality of corporate...

Mark Chadwick

Silicon Wafers. The Impact Of Covid-19 In Q1 And Likely Outlook For CY 2020.

With all of the major silicon wafer manufacturers now having reported Q1 earnings, it's clear that the impact of COVID-19 was relatively minor as...

William Keating

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