provides structure on how to think about differentiated views versus the street.
PART IV: What to Research and How to Power the AnalysisChapter 8 provides suggestions on how to generate exciting new research ideas.Chapter 9 addresses some specific issues such as Disruptors, Emerging Markets, Environmental, Social, and Governance, and Downturns.Chapter 10 suggests a number of soft skills that can be used to power the analysis.
PART V: Recap and Closing Thoughts
If the whole book has been read, a new analyst will have a detailed overview of the company research process. But what I am really hoping, as an author, is that analysts keep this book on their desks and refer to specific sections when they run into issues during their own researching process, and that they find something useful within the book to help navigate these issues.
I purposely avoided the use of specific company names and industry data throughout the book because what I want to discuss is the process of doing research as opposed to my directional view on specific industries or companies. However, all the examples used in the book are actual cases I have encountered.
Although this book is written mainly for equity analysts researching public companies, I would be delighted if private equity investors and managers in corporate strategy also find some parts of the book useful.
Before we get into the methodologies of company analysis, I would like to start with my own experience as an equity research analyst, which contains a number of real‐life examples of the issues that are discussed in later chapters. However, if you need practical advice immediately, you can go straight to Chapter 1 and visit my story later.
List of Acronyms
1PFirst‐party relationship3PThird‐party relationshipABSAcrylonitrile Butadiene StyreneADRAmerican Depository ReceiptAIArtificial IntelligenceAPAccounts PayableARAccounts ReceivableARPUAverage Revenue per UserB2BBusiness‐to‐BusinessCACCustomer Acquisition CostCAGRCompound Annual Growth RateCAMEL Capital, Asset Quality, Management, Earnings, and LiquidityCEOChief Executive OfficerCFOChief Financial OfficerCMOContract Manufacturing OrganizationCMOSComplementary Metal‐Oxide SemiconductorCNCComputer Numerical ControlCOGSCost of Goods SoldCPUCentral Processing UnitCROCICash Return on Capital InvestedDACFDebt Adjusted Cash FlowDCFDiscounted Cash FlowDDMDividend Discount ModelDeFiDe‐Centralized FinanceDMDeveloped MarketsDRAMDynamic Random Access MemoryEBITEarnings Before Interest and TaxesEBITDAEarnings Before Interest, Taxes, Depreciation, and AmortizationEMEmerging MarketsEPSEarnings per ShareESGEnvironmental, Social, and GovernanceESOPEmployee Share Ownership PlanEUEuropean UnionEVEnterprise ValueEV/EBITDAEnterprise Value/EBITDAFCFFree Cash FlowFintechFinancial TechnologyGAAPGenerally Accepted Accounting PrinciplesGCIGross Cash InvestedGDPGross Domestic ProductGMVGross Merchandise ValueGPUGraphics Processing UnitGTVGross Transaction ValueIaaSInfrastructure as a ServiceIASInternational Accounting StandardsIPOInitial Public OfferingITPCInternational Trade Partners ConferenceKOLsKey Opinion LeadersLCDLiquid Crystal DisplayLiDARLight Detection and RangingLNGLiquefied Natural GasLTVLife Time ValueM&AMergers and AcquisitionsMAUMonthly Active UsersMLCCMultilayer Ceramic CapacitorsNAVNet Asset ValueNFTNon‐Fungible TokenOLEDOrganic Light‐Emitting DiodeP&CProperty and CasualtyP/BPrice to BookP/EPrice to EarningsP/PPOPPrice to Pre‐Provision Operating ProfitPaaSPlatform as a ServicePEGPrice Earnings to GrowthPETPolyethylene TerephthalatePVCPolyvinyl ChlorideR&DResearch and DevelopmentREITReal Estate Investment TrustREITsReal Estate Investment TrustsROEReturn on EquityROICReturn on Invested CapitalSaaSSoftware as a ServiceSEMISemiconductor Equipment and Materials InternationalSiCSilicon CarbideSKUStock Keeping UnitSNSSocial Network ServiceSOTPSum of the PartsSPESemiconductor Production EquipmentSVODSubscription Video on DemandTAMTotal Addressable MarketVRVirtual RealityWACCWeighted Average Cost of Capital
Part I Lessons from the Past: My Story as an Analyst
I plan to draw on my 33-year career as an equity analyst to offer anecdotes that illustrate why the intellectual challenge of equity analysis never gets stale, and why starting with some basic tools is so valuable. Repeatedly throughout my career I have moved into a different research environment that required me to look at a new landscape; whether this was being assigned to cover the capital goods industry in Japan in the 1980s or serving as the first Japanese analyst covering China H-share companies in the 1990s, the essentials were the same. What were the core characteristics of the industries and the sources of structural change? Who were the players and what was the distinguishing ‘personality’ of each? What were its earnings drivers and how were those changing against the industry backdrop? Finally, where did that mean the numbers were going and what were investors missing?
From Fish Cakes to Computer Numerical Control (1988–1995)
Anyone who has ever eaten a California roll at their local sushi place is familiar with surimi. But you have probably never given a thought to where the white, flaky ‘imitation crab’ meat comes from. I hadn't either until one day in 1988 when I was given my first assignment as a new equity analyst at Nomura Research Institute to analyse one of the top Japanese fishery companies. The pelagic fishery industry had been one of the major industries in Japan in the early twentieth century, and most companies made significant profits from it. After the 1960s, given the international pressure to ban whale fishing, fishery companies had to seek other sources of profit. Surimi, the fish cake, was a promising next pillar of profit growth.
When I was assigned to research the company, my supervisor told me to collect 50 name cards from the company before I started to write the report. It was not easy to come up with reasons to meet that many people in one company, hence I had to study thoroughly the company's products, its organizational structure, production, marketing, research and development (R&D), and financials. I read many books regarding corporate management and studied its competitors. By the time I had collected 30 name cards, I found that the relatively new innovation of the ‘Surimi Ship’ was the source of its future growth, and I was fascinated by the concept. Surimi is made out of cod fish, but the fish does not keep its freshness for long so the company decided to set up a surimi production factory on board, processing the cod fish while the ship was returning from the trip. Although it was a significant capital expenditure burden for the company, the differentiated technology gave it a sustainable, profitable business. To study the technology and its patents, I needed to visit the National Diet Library and the Ministry of Agriculture, Forestry and Fisheries several times in addition to company interviews (the internet did not exist then!). I felt I did almost everything an outsider could do to study the company. The only thing I thought I missed was to actually board the surimi ship, which the company politely declined when I asked.
Although profitability of the surimi business could be influenced by fluctuations in price, I had a strong conviction that the company had a structural competitive moat in its profitable surimi business. Hence, my confidence level in my earnings growth forecasts for the company was very high. I am still thankful to my supervisor who pushed me and allowed me to go as deep as possible to learn about one company for my first assignment as an equity analyst. As I was so junior at that time, I had less expertise in translating this extensive knowledge of the fishery company into a smart investment idea. As my first encounter with a company as an equity analyst, I learnt many invaluable lessons. Spending so much time researching one company gave me a real sense of how a large corporation operates in the real world, such as how various organisational functions work, how the chief executive officer's (CEO) strategy is cascaded down, how financial budgets are determined,
