'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/000/132/350/original/2020-05-10_07-41-07.png?1589064097" class="editor-image img-responsive" data-smartkarma-image-id="132350"></figure><div class="content-caption">Source • Japan Analytics</div>HERD IMMUNITY - The market 'herd' continues to be immune to the siren song of earnings announcements. In last week's two reporting days, aggregate trailing operating income declined by ¥400 billion, while the current year forecast was trimmed by ¥800 billion. The respective numbers for net income were ¥600 billion and ¥200 billion - the latter being flattering in its 'deception' as the figure includes three net-income 'heavy' sogo-shosha. We expect a PER 'breakout' to above 18x in the coming week.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/132/351/original/2020-05-10_08-08-43.png?1589065754" class="editor-image img-responsive" data-smartkarma-image-id="132351"></figure><div class="content-caption">Source • Japan Analytics</div>INTERIM LEADING THE WAY - Our Results and Revisions scoring methodology tracks both Interim and Annual forecasts with the former signalling the direction of the latter. For some companies such as <a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl (4921 JP)</a>, <a href="https://www.smartkarma.com/entities/jcu-corp" target="_blank" data-smartkarma-citation="entities:16229:1" rel="noopener">JCU (4975 JP)</a> and <a href="https://www.smartkarma.com/entities/zenkoku-hosho-co-ltd" target="_blank" data-smartkarma-citation="entities:5537:1" rel="noopener">Zenkoku Hosho (7164 JP)</a>, the Interim forecast is sufficiently pessimistic as to taint the reliability of the annual forecast. Our Interim Score will reach a new ten-year low this week; the Annual Score did so last month. We do not expect the COVID-19 earnings cycle to bottom until the January/February's mostly third-quarter results announcements.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/132/366/original/2020-05-10_09-01-50.png?1589068924" class="editor-image img-responsive" data-smartkarma-image-id="132366"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/132/367/original/2020-05-10_09-00-50.png?1589068939" class="editor-image img-responsive" data-smartkarma-image-id="132367"></figure><div class="content-caption">Source • Japan Analytics</div><div class="content-caption"></div>In the DETAIL below, we shall review the results, revisions and initial forecast announcements made by larger-cap (¥75b+) companies on Friday. The balance between positive/neutral/negative of the 211 results announcements was 90:27:107. The average change in Score was -1. For the 131 revisions/initial forecasts, the split was 43:4:84  and the average Score was -5. Of the 155 companies declaring full-year results, 49% made interim and annual forecasts for the current year. Two hundred thirty-three companies will announce on Monday, the largest of which by market capitalisation will be <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a>, <a href="https://www.smartkarma.com/entities/mitsubishi-electric-corp" target="_blank" data-smartkarma-citation="entities:11171:1" rel="noopener">Mitsubishi Electric (6503 JP)</a>, and <a href="https://www.smartkarma.com/entities/bridgestone-corp" target="_blank" data-smartkarma-citation="entities:8914:1" rel="noopener">Bridgestone (5108 JP)</a>. Friday's 'best' and worst scoring results were from <a href="https://www.smartkarma.com/entities/chiyoda-corp" target="_blank" data-smartkarma-citation="entities:6232:1" rel="noopener">Chiyoda (6366 JP)</a> and <a href="https://www.smartkarma.com/entities/keihan-electric-railway-co" target="_blank" data-smartkarma-citation="entities:6120:1" rel="noopener">Keihan Electric Railway (9045 JP)</a>, although the former is below our cap cut-off for our tables below. For more, see <a href="https://www.smartkarma.com/profiles/mio-kato-cfa" target="_blank" data-smartkarma-citation="accounts:713" rel="noopener">Mio Kato</a>'s results update <a href="https://www.smartkarma.com/insights/chiyoda-gross-margin-disappoints-but-sg-a-control-continues" target="_blank" data-smartkarma-citation="insights:39166" rel="noopener">Chiyoda – Gross Margin Disappoints but SG&amp;A Control Continues</a>.

Source • Japan AnalyticsHERD IMMUNITY - The market 'herd' continues to be immune to the siren song of earnings announcements. In last week's two reporting days, aggregate trailing operating income declined by ¥400 billion, while the current year forecast was trimmed by ¥800 billion. The respective numbers for net income were ¥600 billion and ¥200 billion - the latter being flattering in its 'deception' as the figure includes three net-income 'heavy' sogo-shosha. We expect a PER 'breakout' to above 18x in the coming week.Source • Japan AnalyticsINTERIM LEADING THE WAY - Our Results and Revisions scoring methodology tracks both Interim and Annual forecasts with the former signalling the direction of the latter. For some companies such as Fancl (4921 JP), JCU (4975 JP) and Zenkoku Hosho (7164 JP), the Interim forecast is sufficiently pessimistic as to taint the reliability of the annual forecast. Our Interim Score will reach a new ten-year low this week; the Annual Score did so last month. We do not expect the COVID-19 earnings cycle to bottom until the January/February's mostly third-quarter results announcements.Source • Japan AnalyticsIn the DETAIL below, we shall review the results, revisions and initial forecast announcements made by larger-cap (¥75b+) companies on Friday. The balance between positive/neutral/negative of the 211 results announcements was 90:27:107. The average change in Score was -1. For the 131 revisions/initial forecasts, the split was 43:4:84  and the average Score was -5. Of the 155 companies declaring full-year results, 49% made interim and annual forecasts for the current year. Two hundred thirty-three companies will announce on Monday, the largest of which by market capitalisation will be Softbank Corp (9434 JP), Mitsubishi Electric (6503 JP), and Bridgestone (5108 JP). Friday's 'best' and worst scoring results were from Chiyoda (6366 JP) and Keihan Electric Railway (9045 JP), although the former is below our cap cut-off for our tables below. For more, see Mio Kato's results update Chiyoda – Gross Margin Disappoints but SG&amp;A Control Continues. 

🇯🇵 JAPAN • Results & Revisions Update 8th May - Lion, PPI, Hoya, Sogo Shosha, NEC

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Quantitative Analysis

In the past 4 weeks we have seen substantial disruption in global markets. Total equity market cap across the world is down tens of trillions of dollars, credit spreads exploded, 'risk-free' rate curves steepened dramatically, investment funds blew up, the very structure of money markets was briefly in question. Central banks around the world have acted in coordinated fashion to stem the tide of panic. The US Fed has stepped in with QE Forever, providing trillions of dollars of balance sheet and funding to stabilise systemic risk, and governments have announced trillions of dollars of stimulus packages to try to cushion economies from short-term restrictive social policies meant to stem the slow the spread of COVID-19 and lessen long-term economic damage from loss of life and work.Amidst this, the Nikkei 225/TOPIX ratio has gone through something of a rough patch. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/125/379/original/Screenshot%202020-03-29%20at%206.18.38%20PM.png?1585477145" class="editor-image img-responsive" data-smartkarma-image-id="125379"></figure>There is (obviously) a forest-for-the-trees argument to be made here. I'll stipulate that. But investors are expected to do their job come inclement weather, global pestilence, pandemic, or war - that is their job as stewards. Right now, an enormous part of that is second-guessing what other investors will do. This insight is a walk through the conditions which enabled and perhaps prompted the wild swings in some of the major constituents in Nikkei 225 and what caused the major swings in Nikkei vs. TOPIX.

In the past 4 weeks we have seen substantial disruption in global markets. Total equity market cap across the world is down tens of trillions of dollars, credit spreads exploded, 'risk-free' rate curves steepened dramatically, investment funds blew up, the very structure of money markets was briefly in question. Central banks around the world have acted in coordinated fashion to stem the tide of panic. The US Fed has stepped in with QE Forever, providing trillions of dollars of balance sheet and funding to stabilise systemic risk, and governments have announced trillions of dollars of stimulus packages to try to cushion economies from short-term restrictive social policies meant to stem the slow the spread of COVID-19 and lessen long-term economic damage from loss of life and work.Amidst this, the Nikkei 225/TOPIX ratio has gone through something of a rough patch. There is (obviously) a forest-for-the-trees argument to be made here. I'll stipulate that. But investors are expected to do their job come inclement weather, global pestilence, pandemic, or war - that is their job as stewards. Right now, an enormous part of that is second-guessing what other investors will do. This insight is a walk through the conditions which enabled and perhaps prompted the wild swings in some of the major constituents in Nikkei 225 and what caused the major swings in Nikkei vs. TOPIX. 

Breaking Down Wild Nikkei 225 Component Moves

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Event-Driven

Softbank stock ended up locked limit up towards the end of the trading day after the company announced a massive ¥4.5trn in asset sales/monetisation together with a ¥2.0trn share buyback on top of the already announced ¥0.5trn buyback. Together the two buybacks could soak up 45% of outstanding shares. Given that the stock had fallen 53% between the 12th of February and last Thursday, the 19th of March, it is not surprising that it went limit up. It would not be entirely surprising if the stock were limit up again tomorrow. If so, that could have some interesting implications for other Nikkei names. Details below.

Softbank stock ended up locked limit up towards the end of the trading day after the company announced a massive ¥4.5trn in asset sales/monetisation together with a ¥2.0trn share buyback on top of the already announced ¥0.5trn buyback. Together the two buybacks could soak up 45% of outstanding shares. Given that the stock had fallen 53% between the 12th of February and last Thursday, the 19th of March, it is not surprising that it went limit up. It would not be entirely surprising if the stock were limit up again tomorrow. If so, that could have some interesting implications for other Nikkei names. Details below.

What Do You Buy if the Softbank Mega-Buyback Drives a Nikkei Squeeze?

On Friday 29 November 2019, <a href="https://www.smartkarma.com/entities/sanyo-chemical-industries" target="_blank" data-smartkarma-citation="entities:16624:1" rel="noopener">Sanyo Chemical Industries (4471 JP)</a> and <a href="https://www.smartkarma.com/entities/nippon-shokubai-co-ltd" target="_blank" data-smartkarma-citation="entities:19373:1" rel="noopener">Nippon Shokubai (4114 JP)</a> announced (<a href="https://www.sanyo-chemical.co.jp/wp/wp-content/uploads/2019/11/k191129a.pdf" target="_blank" rel="noopener">Japanese</a>, <a href="https://www.shokubai.co.jp/en/news/file.cgi?file=file1_0215.pdf" target="_blank" rel="noopener">English</a>) the result of their 6-month long deliberations towards agreeing a merger with the announcement of a Final Agreement Concerning the Business Integration by Way of Joint Share Transfer of the two companies.
The Final Agreement states the two will create a holding company called Synfomix Co., Ltd. which will entail a share transfer to a single listed company on 1 October 2020, with the intention to effect a merger of the units under the holdco no later than two years from that date. 
General meetings to approve the deal on the part of the shareholders of both companies will take place in June 2020, with record date for the vote 31 March 2020. 
The Share Exchange Ratio means 1 Sanyo Chemical share will get 1 Synfomix (Holdco) share and 1 share of Nippon Shokubai will get 1.225 Synfomix shares. That means an effective SanyoChem /Nippon Shokubai ratio of 0.8163265, just below the closing price ratio of 0.822747. 
As I stated in the original piece <a href="https://www.smartkarma.com/insights/sanyo-chemical-nippon-shokubai-merger-another-guess-the-ratio-trade" target="_blank" data-smartkarma-citation="insights:30122" rel="noopener">Sanyo Chemical - Nippon Shokubai Merger - Another "Guess the Ratio" Trade</a> 
<blockquote>
The fundamentals here are not terribly lopsided. Similar GPMs and OPMs over time and not too dissimilar Net Income growth over the past ten years. A difference in volatility and 2020 forecast growth may tip the scales (compared to current ratio) towards Sanyo Chemical.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/108/568/original/Screenshot%202019-11-30%20at%202.12.24%20PM.png?1575094360" class="editor-image img-responsive" data-smartkarma-image-id="108568"></figure>
</blockquote>
In the end, the ratio here is probably not bad enough to get really upset, especially if you did not make noise to Sanyo Chem during the 6 months when you could have. It IS disappointing for Sanyo Chemical shareholders based on recent years' performance and even worse when taking into account the forecast for this year and beyond, and the recent deterioration of performance of Nippon Shokubai financial performance.  The ratio selected is even lower than the ratio of the day before the original announcement they were looking to merge, which itself was too low, even if the ratio had run up recently. Given developments since then, a bare minimum of a few percent higher would have been appropriate.
I would be reluctant to say that the penchant of Japanese management and directors to ignore things like assets and cashflow is one of the dangers one has when making decisions on fundamentals in Japan. But it is. That is one reason why I recommend relatively few "guess-the-ratio" trades. It is also one reason why I was somewhat comfortable recommending a trade in this case, recommending the dollar-neutral Long Sanyo-Short Shokubai trade as a Buy on 23 July (0.7433) and the next several days, again 16 August (0.7475), and again 4 November (0.7856).
Now we move on to what happens next...

On Friday 29 November 2019, Sanyo Chemical Industries (4471 JP) and Nippon Shokubai (4114 JP) announced (Japanese, English) the result of their 6-month long deliberations towards agreeing a merger with the announcement of a Final Agreement Concerning the Business Integration by Way of Joint Share Transfer of the two companies.
The Final Agreement states the two will create a holding company called Synfomix Co., Ltd. which will entail a share transfer to a single listed company on 1 October 2020, with the intention to effect a merger of the units under the holdco no later than two years from that date. 
General meetings to approve the deal on the part of the shareholders of both companies will take place in June 2020, with record date for the vote 31 March 2020. 
The Share Exchange Ratio means 1 Sanyo Chemical share will get 1 Synfomix (Holdco) share and 1 share of Nippon Shokubai will get 1.225 Synfomix shares. That means an effective SanyoChem /Nippon Shokubai ratio of 0.8163265, just below the closing price ratio of 0.822747. 
As I stated in the original piece Sanyo Chemical - Nippon Shokubai Merger - Another "Guess the Ratio" Trade 

The fundamentals here are not terribly lopsided. Similar GPMs and OPMs over time and not too dissimilar Net Income growth over the past ten years. A difference in volatility and 2020 forecast growth may tip the scales (compared to current ratio) towards Sanyo Chemical.


In the end, the ratio here is probably not bad enough to get really upset, especially if you did not make noise to Sanyo Chem during the 6 months when you could have. It IS disappointing for Sanyo Chemical shareholders based on recent years' performance and even worse when taking into account the forecast for this year and beyond, and the recent deterioration of performance of Nippon Shokubai financial performance.  The ratio selected is even lower than the ratio of the day before the original announcement they were looking to merge, which itself was too low, even if the ratio had run up recently. Given developments since then, a bare minimum of a few percent higher would have been appropriate.
I would be reluctant to say that the penchant of Japanese management and directors to ignore things like assets and cashflow is one of the dangers one has when making decisions on fundamentals in Japan. But it is. That is one reason why I recommend relatively few "guess-the-ratio" trades. It is also one reason why I was somewhat comfortable recommending a trade in this case, recommending the dollar-neutral Long Sanyo-Short Shokubai trade as a Buy on 23 July (0.7433) and the next several days, again 16 August (0.7475), and again 4 November (0.7856).
Now we move on to what happens next...

SanyoChem / NipponShokubai Merger Announced - OK-Not-Great Ratio but Synergies+Accretion

Today, along with an earnings <a href="https://www.mitsubishicorp.com/jp/en/ir/event/meetings/190513.html" target="_blank">announcement</a> and a <a href="https://www.mitsubishicorp.com/jp/en/pr/archive/2019/files/0000037409_file1.pdf" target="_blank">plan</a> to inject significant capital into <a href="https://www.smartkarma.com/entities/6232" target="_blank" data-smartkarma-citation="entities:6232:1">Chiyoda Corp (6366 JP)</a> (which on Tuesday announced a significant downgrade to FY guidance as discussed by <a href="https://www.smartkarma.com/profiles/713" target="_blank" data-smartkarma-citation="accounts:713">Mio Kato, CFA</a> in <a href="https://www.smartkarma.com/insights/chiyoda-explanatory-call-on-downgrade-reinforces-impression-of-extreme-conservatism" target="_blank" data-smartkarma-citation="insights:29653">Chiyoda: Explanatory Call on Downgrade Reinforces Impression of Extreme Conservatism</a>, also announced a share buyback. The buyback plan <a href="https://www.mitsubishicorp.com/jp/en/pr/archive/2019/html/0000037402.html" target="_blank">announced</a> is to spend up to but not more than ¥300 billion to purchase up to but not more than 120 million of its own shares between 10 May 2019 and 8 May 2020, purchasing shares on the Tokyo Stock Exchange. At today's closing price,  ¥300 billion only buys 100mm shares so the repurchase would only be 6.25%, but that is enough to lift EPS over the year well-beyond forecast growth, which is minimal.As always, there are interesting details.

Today, along with an earnings announcement and a plan to inject significant capital into Chiyoda Corp (6366 JP) (which on Tuesday announced a significant downgrade to FY guidance as discussed by Mio Kato, CFA in Chiyoda: Explanatory Call on Downgrade Reinforces Impression of Extreme Conservatism, also announced a share buyback. The buyback plan announced is to spend up to but not more than ¥300 billion to purchase up to but not more than 120 million of its own shares between 10 May 2019 and 8 May 2020, purchasing shares on the Tokyo Stock Exchange. At today's closing price,  ¥300 billion only buys 100mm shares so the repurchase would only be 6.25%, but that is enough to lift EPS over the year well-beyond forecast growth, which is minimal.As always, there are interesting details.

Mitsubishi Corp Buyback - Bigger Than It Appears

Japan

TOYOTA TSUSHO CORPORATION, a member of the Toyota Group, is a trading company. The Company markets automobiles, trucks, steel products, industrial machinery, chemical products, and energy in both domestic and overseas markets.  Toyota Tsusho primarily exports Toyota cars to Southeast Asia, China, the Middle East, and Latin America.

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Toyota Tsusho (8015 JP)

🇯🇵 JAPAN • Results & Revisions Update 8th May - Lion, PPI, Hoya, Sogo Shosha, NEC

HERD IMMUNITY - The market 'herd' continues to be immune to the siren song of earnings announcements. In last week's two reporting days, aggregate...

Campbell Gunn

Breaking Down Wild Nikkei 225 Component Moves

In the past 4 weeks we have seen substantial disruption in global markets. Total equity market cap across the world is down tens of trillions of...

Travis Lundy

What Do You Buy if the Softbank Mega-Buyback Drives a Nikkei Squeeze?

Softbank stock ended up locked limit up towards the end of the trading day after the company announced a massive ¥4.5trn in asset...

Mio Kato

SanyoChem / NipponShokubai Merger Announced - OK-Not-Great Ratio but Synergies+Accretion

On Friday 29 November 2019, Sanyo Chemical Industries (4471 JP) and Nippon Shokubai (4114 JP) announced (Japanese, English) the result of their...

Travis Lundy

Mitsubishi Corp Buyback - Bigger Than It Appears

Today, along with an earnings announcement and a plan to inject significant capital into Chiyoda Corp (6366 JP) (which on Tuesday announced a...

Travis Lundy

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