'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)

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<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.

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/130/266/original/2020-04-24_08-07-36.png?1588109848" class="editor-image img-responsive" data-smartkarma-image-id="130266"></figure><div class="content-caption">Source • Japan Analytics</div>29TH APRIL - In the DETAIL below, we shall review Tuesday's large-cap results, revisions and initial forecast announcements.  The positive/neutral/negative balance for the 117 results was 52:3:62; and for the 76 revisions or initial forecasts, the split was 22:2:52. Of the 82 companies announcing annual results, only 22 made forecasts for the current year, while <a href="https://www.smartkarma.com/entities/shimano-inc" target="_blank" data-smartkarma-citation="entities:3777:1" rel="noopener">Shimano (7309 JP)</a> withdrew its FY2020 forecast. Our Sector Score chart is now showing some dramatic changes. Consumer Services is now the lowest-scoring Sector following <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>'s poor full-year results. In comparison, significant declines have been seen in Transportation &amp; Logistics (<a href="https://www.smartkarma.com/entities/east-japan-railway-co" target="_blank" data-smartkarma-citation="entities:14271:1" rel="noopener">East Japan Railway Co (9020 JP)</a> and Utilities (<a href="https://www.smartkarma.com/entities/tokyo-gas-co-ltd" target="_blank" data-smartkarma-citation="entities:2332:1" rel="noopener">Tokyo Gas (9531 JP))</a>.  The Internet Content &amp; Services (<a href="https://www.smartkarma.com/entities/zozo-inc" target="_blank" data-smartkarma-citation="entities:18379:1" rel="noopener">ZOZO (3092 JP)</a>) and Chemicals ( <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>) Sectors are the largest gainers.

Source • Japan Analytics29TH APRIL - In the DETAIL below, we shall review Tuesday's large-cap results, revisions and initial forecast announcements.  The positive/neutral/negative balance for the 117 results was 52:3:62; and for the 76 revisions or initial forecasts, the split was 22:2:52. Of the 82 companies announcing annual results, only 22 made forecasts for the current year, while Shimano (7309 JP) withdrew its FY2020 forecast. Our Sector Score chart is now showing some dramatic changes. Consumer Services is now the lowest-scoring Sector following Oriental Land (4661 JP)'s poor full-year results. In comparison, significant declines have been seen in Transportation &amp; Logistics (East Japan Railway Co (9020 JP) and Utilities (Tokyo Gas (9531 JP)).  The Internet Content &amp; Services (ZOZO (3092 JP)) and Chemicals ( Shin Etsu Chemical (4063 JP)) Sectors are the largest gainers. 

🇯🇵 JAPAN • Results & Revisions Update 29th April - Mit.Chem, TKC, Keyence, ZOZO, Shimano. Or.Land

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. 

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/115/369/original/2020-01-29_05-48-09.png?1580244521" class="editor-image img-responsive" data-smartkarma-image-id="115369"></figure><div class="content-caption">Source • Japan Analytics</div>28TH JANUARY ROUNDUP - Thre were 40 results and 14 forecasts or revisions announcements yesterday. Of the larger cap companies, five saw year-on-year declines in their quarterly OP of greater than 25%, while just two managed to grow profits by more than 10%. Revenue growth was strongest at <a href="https://www.smartkarma.com/entities/fujitsu-general-ltd" target="_blank" data-smartkarma-citation="entities:2025:1" rel="noopener">Fujitsu General (6755 JP)</a> at +23%, while <a href="https://www.smartkarma.com/entities/obic-business-consultants" target="_blank" data-smartkarma-citation="entities:17383:1" rel="noopener">Obic Business Consultants (4733 JP)</a> saw a decline in sales of 13%. The weakest outlook came from <a href="https://www.smartkarma.com/entities/canon-electronics-inc" target="_blank" data-smartkarma-citation="entities:20493:1" rel="noopener">Canon Electronics (7739 JP)</a> whose initial forecasts for FY2020 is for a 39% decline in OP to ¥4.9b. Overall our composite Results Score ticked down by 5bps to 1.07. The Forecast/REvision Score improved by 3bps to 0.21.In the DETAIL below, we review the announcements from <a href="https://www.smartkarma.com/entities/fujitsu-general-ltd" target="_blank" data-smartkarma-citation="entities:2025:1" rel="noopener">Fujitsu General (6755 JP),</a>  <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>, <a href="https://www.smartkarma.com/entities/m3-inc" target="_blank" data-smartkarma-citation="entities:13316:1" rel="noopener">M3 (2413 JP)</a>, and <a href="https://www.smartkarma.com/entities/obic-co-ltd" target="_blank" data-smartkarma-citation="entities:1273:1" rel="noopener">OBIC (4684 JP)</a>.

Source • Japan Analytics28TH JANUARY ROUNDUP - Thre were 40 results and 14 forecasts or revisions announcements yesterday. Of the larger cap companies, five saw year-on-year declines in their quarterly OP of greater than 25%, while just two managed to grow profits by more than 10%. Revenue growth was strongest at Fujitsu General (6755 JP) at +23%, while Obic Business Consultants (4733 JP) saw a decline in sales of 13%. The weakest outlook came from Canon Electronics (7739 JP) whose initial forecasts for FY2020 is for a 39% decline in OP to ¥4.9b. Overall our composite Results Score ticked down by 5bps to 1.07. The Forecast/REvision Score improved by 3bps to 0.21.In the DETAIL below, we review the announcements from Fujitsu General (6755 JP),  Shin Etsu Chemical (4063 JP), M3 (2413 JP), and OBIC (4684 JP).   

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 28th January - 6755, 4603, 2413, 4684

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)

🇯🇵 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

🇯🇵 JAPAN • Results & Revisions Update 29th April - Mit.Chem, TKC, Keyence, ZOZO, Shimano. Or.Land

29TH APRIL - In the DETAIL below, we shall review Tuesday's large-cap results, revisions and initial forecast announcements. The...

Campbell Gunn

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 28th January - 6755, 4603, 2413, 4684

28TH JANUARY ROUNDUP - Thre were 40 results and 14 forecasts or revisions announcements yesterday. Of the larger cap companies, five saw...

Campbell Gunn

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