Global Automotive Stocks/EV Focus/Event Driven, SC Capital

SC Capital

SC Capital has over 20 years' experience covering the global automotive industry both on the Sell Side (UBS & Morgan Stanley) and Buy Side (Och-Ziff), along with a wealth of industry contacts. 

Current focus is on electric vehicle stocks & their supply chains. Aim is to identify the winners and losers from a long/short perspective. This includes close coverage of legacy automakers as well.  

From time to time. we cover opportunistic events with stocks in the manufacturing sector, food & beverage, healthcare and tech, where we also have coverage experience.

Global Automotive Stocks/EV Focus/Event Driven

Sharp (6753) Ready to List on TSE 1st Section--Could Get Squeezy

Over 22 years covering Japanese equities on both the sell side and the buy side. 

Bottom-up Japan Equities Research

Event-Driven

<ul><li>Sharp's Q2 results on October 27<sup>th</sup> could coincide with an announcement that Sharp's stock will be elevated from the TSE-2 (Tokyo Stock Exchange Second Section) to the TSE-1 (Tokyo Stock Exchange First Section), which could cause a short squeeze of significant size due to the need for passive funds to buy Sharp's shares.</li><li>Based on the information we've gleaned from various stock loan desks in Tokyo, the current short interest in Sharp is around 20 days of its average daily trading volume and the cost of borrowing the shares is around 20% (versus normal cost of borrow at around 0.5% for less shorted names).</li><li>While it's hard to get real clarity on how much of the short interest is actually being utilized--rather than simply held to use once the stock pops on the TSE-1 re-listing news--we were told that roughly 93% of the Sharp's stock borrow is currently utilized.</li><li>If this is true, there could be a significant short squeeze when the TSE-1 news comes out, as passive funds would need to buy around $500m or 10 days of volume if Sharp is elevated from TSE-2 to TSE-1.</li><li>Fundamentals at Sharp are worse than consensus, however, so we would expect a quick sell off after the passive buying has subsided. Ever since Hon Hai management took control of Sharp in August 2016, there have been two quarters of a consensus beat, while the last quarterly results were just in line (see <a href="https://www.smartkarma.com/insights/sharp-q1-is-first-lackluster-set-of-results-since-hon-hai-takeover" target="_blank" data-smartkarma-citation="insights:12451">Sharp--Q1 Is First Lackluster Set of Results Since Hon Hai Takeover</a>).</li><li>Consensus OP estimates for Sharp's Q2 are currently at Y22bn, which would be around 15% higher than the company's target of Q2 OP of Y19.5bn, but our gut feeling is that Sharp should only just make its own Q2 target, which would mark the first quarterly consensus miss since Hon Hai took over (see details below).</li><li>There is no valuation support given Sharp's fragile earnings structure. The stock currently trades at a PER of 17x FY18 consensus EPS estimates (we get a PER of 19x, as we expect a decline in profits), while consumer electronics rivals like Sony and Panasonic--both of which have more stable and growing product segments--both trade at16x and generate much higher profitability.  </li></ul>

Sharp's Q2 results on October 27th could coincide with an announcement that Sharp's stock will be elevated from the TSE-2 (Tokyo Stock Exchange Second Section) to the TSE-1 (Tokyo Stock Exchange First Section), which could cause a short squeeze of significant size due to the need for passive funds to buy Sharp's shares.Based on the information we've gleaned from various stock loan desks in Tokyo, the current short interest in Sharp is around 20 days of its average daily trading volume and the cost of borrowing the shares is around 20% (versus normal cost of borrow at around 0.5% for less shorted names).While it's hard to get real clarity on how much of the short interest is actually being utilized--rather than simply held to use once the stock pops on the TSE-1 re-listing news--we were told that roughly 93% of the Sharp's stock borrow is currently utilized.If this is true, there could be a significant short squeeze when the TSE-1 news comes out, as passive funds would need to buy around $500m or 10 days of volume if Sharp is elevated from TSE-2 to TSE-1.Fundamentals at Sharp are worse than consensus, however, so we would expect a quick sell off after the passive buying has subsided. Ever since Hon Hai management took control of Sharp in August 2016, there have been two quarters of a consensus beat, while the last quarterly results were just in line (see Sharp--Q1 Is First Lackluster Set of Results Since Hon Hai Takeover).Consensus OP estimates for Sharp's Q2 are currently at Y22bn, which would be around 15% higher than the company's target of Q2 OP of Y19.5bn, but our gut feeling is that Sharp should only just make its own Q2 target, which would mark the first quarterly consensus miss since Hon Hai took over (see details below).There is no valuation support given Sharp's fragile earnings structure. The stock currently trades at a PER of 17x FY18 consensus EPS estimates (we get a PER of 19x, as we expect a decline in profits), while consumer electronics rivals like Sony and Panasonic--both of which have more stable and growing product segments--both trade at16x and generate much higher profitability.  

Sharp (6753)--Potential Short Squeeze Ahead

Sharp Corp

Sharp (6753)--Potential Short Squeeze Ahead