'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

Former Japan Equity PM with over 30 of experience now providing database-driven analysis of the market, sectors, peer groups and stocks for LightStream Research.

Leveraging data and graphic analysis provided by Japan Analytics, and the related Japan Analytics iPad App, we provide insights on companies are often ignored by the sell-side as well as challenging conventional wisdom on the market overall.

'Quantamental' Japan Specialist

Japan Inc. Applies the Brakes - 1st Quarterly Capex Contraction Since 2016 Signals a Cycle Peak

Japan: Quarterly Cash Flow Update - Yen Weakens > Normal Service Resumed

Japan: The 2018-Q3 Cash Flow Stakes - Runners, Riders & Red Flags

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. 

Thematic (Sector/Industry)

Japan Industrials / Thematic (Sector/Industry)

<ul class=""><li>The four-quarter period ended 2017Q3 was the best such period for listed Japanese non-financial corporate Operating Cash Flow (OCF) since 1989. OCF remains highly Yen sensitive, as reflected by the decline in the most recently disclosed quarter ended December 2017. To sustain aggregate OCF in excess of ¥10t requires a ¥/US$ rate of over ¥110. Conversely, were the Yen to breach ¥100 again, OCF is likely to fall below ¥5t and result in a sharp reduction in investments.</li><li><p>The four quarters ended 2017Q3 also saw investment spending reach a 28-year peak at ¥34t with much of this occurring now over a year ago. Fixed Asset Cash Flow is also Yen sensitive being driven to a large degree by Operating Cash Flow and was sharply curtailed in 2015/16 after a near ¥20 adverse swing in the exchange rate. </p></li><li>OCF is now trending down. Should this decline continue into the current and next quarter, we expect a curtailment in investments similar to that experienced in 2016. This would presage a contraction in GDP and weaker stock prices. A future reversal in investing cash flows as large the ¥38t swing in the one year between 2015Q2 and 2016Q2 would have a marked negative impact on the machinery sector which is currently trading a post-bubble relative high.</li><li>Contrary to market perception, Japanese companies do not have excessive Net Financial Assets. In aggregate, currently-listed Japanese non-financial companies have only been net cash positive since 2013Q2. Although a number of Japanese companies do have large amounts of cash on their Balance Sheet, in aggregate Net Financial Assets are currently only 5.2% of Total Assets and 11.8% of Net Assets. If the debt is ignored, the ratio of Cash and Marketable Securities to Total Assets is 14.9%. For US-listed companies as of the end of 2016, that ratio was 12.5%, having peaked at 14.5% in 2013.</li><li>Dividend payments have averaged 86% of Free Cash Flow over the last 27 quarters and the four-quarter total has nearly doubled from ¥5.4t to ¥10.1t in the last five years. If Equity Cash Flows are included, Shareholder Cash Flow has averaged 92% of Free Cash Flow since 2011. Short of requesting that companies borrow money to pay increased dividends, there is little more that can be expected of non-financial Japanese companies in this regard. </li><li>After a period of embracing share buy-backs, Equity Cash Flow has turned positive in the last three quarters as companies have raised new equity into the rising market. It appears that Japanese companies do not consider the valuation of their shares attractive at present. </li><li>TOPIX has not risen over the last seven years during quarters when quarterly Operating Cash Flow fell below an aggregate ¥5t. The declines in OCF during 2011/12 and 2015/16 saw the index fall 25% on both occasions. A sustained decline in Operating Cash Flow in the next three quarters should result in a similar performance and a move to below 1,400.</li><li>To the extent that recent cash flow trends are predictive of future cash flows, it would be prudent for investors to ‘buckle-up’ for a bumpier ride ahead.</li></ul>

The four-quarter period ended 2017Q3 was the best such period for listed Japanese non-financial corporate Operating Cash Flow (OCF) since 1989. OCF remains highly Yen sensitive, as reflected by the decline in the most recently disclosed quarter ended December 2017. To sustain aggregate OCF in excess of ¥10t requires a ¥/US$ rate of over ¥110. Conversely, were the Yen to breach ¥100 again, OCF is likely to fall below ¥5t and result in a sharp reduction in investments.The four quarters ended 2017Q3 also saw investment spending reach a 28-year peak at ¥34t with much of this occurring now over a year ago. Fixed Asset Cash Flow is also Yen sensitive being driven to a large degree by Operating Cash Flow and was sharply curtailed in 2015/16 after a near ¥20 adverse swing in the exchange rate. OCF is now trending down. Should this decline continue into the current and next quarter, we expect a curtailment in investments similar to that experienced in 2016. This would presage a contraction in GDP and weaker stock prices. A future reversal in investing cash flows as large the ¥38t swing in the one year between 2015Q2 and 2016Q2 would have a marked negative impact on the machinery sector which is currently trading a post-bubble relative high.Contrary to market perception, Japanese companies do not have excessive Net Financial Assets. In aggregate, currently-listed Japanese non-financial companies have only been net cash positive since 2013Q2. Although a number of Japanese companies do have large amounts of cash on their Balance Sheet, in aggregate Net Financial Assets are currently only 5.2% of Total Assets and 11.8% of Net Assets. If the debt is ignored, the ratio of Cash and Marketable Securities to Total Assets is 14.9%. For US-listed companies as of the end of 2016, that ratio was 12.5%, having peaked at 14.5% in 2013.Dividend payments have averaged 86% of Free Cash Flow over the last 27 quarters and the four-quarter total has nearly doubled from ¥5.4t to ¥10.1t in the last five years. If Equity Cash Flows are included, Shareholder Cash Flow has averaged 92% of Free Cash Flow since 2011. Short of requesting that companies borrow money to pay increased dividends, there is little more that can be expected of non-financial Japanese companies in this regard. After a period of embracing share buy-backs, Equity Cash Flow has turned positive in the last three quarters as companies have raised new equity into the rising market. It appears that Japanese companies do not consider the valuation of their shares attractive at present. TOPIX has not risen over the last seven years during quarters when quarterly Operating Cash Flow fell below an aggregate ¥5t. The declines in OCF during 2011/12 and 2015/16 saw the index fall 25% on both occasions. A sustained decline in Operating Cash Flow in the next three quarters should result in a similar performance and a move to below 1,400.To the extent that recent cash flow trends are predictive of future cash flows, it would be prudent for investors to ‘buckle-up’ for a bumpier ride ahead.

日本：営業キャッシュフローの減少により投資が抑制される