conflicts of interest exist between divisions, and different layers of leadership. As analysts become more senior and become busier, they tend to see a company as a stock or a financial instrument (an important perspective for investors), but it is helpful for analysts to remind themselves of the human elements behind the financial figures. Even now, more than 30 years later, when I think about the potential behaviour or decision-making process of a large company, what I learnt from this initial company analysis provides me with a benchmark of my thoughts.
After the fishery industry, I was assigned to cover the capital goods industry. I absolutely loved the sector and visited companies that manufacture products such as bearings, fire engines, tractors, industrial pumps, heat exchangers, knitting machines, and automated diaper assembling equipment. Every company had its own history and a strong sense of pride in its product. As such, when I showed my sincerity and eagerness to learn about their business, they were very generous with their time. I learned new things every day and even started to like the smell of machine oil. I still remember the factory head of a major bicycle parts company commenting that they supplied some critical car parts to a top automotive company with only minimum profit. Although the company was the dominant player in the bicycle parts industry globally and very profitable, they kept the less profitable car parts business to keep up with ‘major league’ manufacturing technologies. The company is still the dominant player in their field today.
I sometimes made a terrible stock call. One day I found an interesting short article about ‘low-cost CNC’ in a machine tool industry magazine. Machine tools are used to curve metals into various shapes and are often called ‘mother machines’ because they produce core parts of other machines. There were many machine tool companies globally at that time, but the key component, CNC (computer numerical control: a dedicated computing unit and servo motors to control positioning of metal cutting tools), was largely supplied by one Japanese company. This CNC maker was highly profitable and had a disproportionate share of the industry profit pool while its customers, the machine tool makers, were suffering from low margins and significant earnings volatility. The magazine article talked about two start-up companies in California that had launched a substantially lower-priced CNC system operated by personal computers. I was very excited to read the article because those companies could totally reshape the machine tool industry structure through technology innovation.
My boss was generous enough to send me to the US West Coast to meet the founders of those private companies. Although I did not have an engineering background, I had studied CNC enough to hold a sensible conversation with them, and they took me seriously. The technology seemed to be legitimate and had a good track record of initial customer wins. The manufacturing facilities were modern and organized. I went back to Japan and cross checked what I had learnt with several industry engineers. Their feedback was generally favourable. So, with due diligence, I wrote a fairly pessimistic report regarding the future profitability of the dominant CNC company. I was completely wrong. The low-cost CNC stayed as a niche product and the dominant CNC company continued to grow their business very successfully and profitably. I learned a painful lesson. I was too excited about the initial idea of a dramatic shift in industry dynamics and did not pay enough attention to the multiple reasons why the incumbent had been so strong.
This was probably a typical case of ‘confirmation bias’. I loved the story of small start-up companies potentially winning against a dominant large company and was almost unconsciously wishing such a market share shift to happen. So, I probably unconsciously selected to meet engineers who also wished the same result. Given the importance of the topic, I really should have solicited views from a more diverse group of experts.
Not Just a Japanese Tourist – Becoming a China H-share Analyst (1996–1998)
During my days as a backpacker in the mid-1980s, I spent about two months travelling around China when there were hardly any cars and thousands of bicycles on the street even in large cities. I was fascinated by the culture and people in this enormous country and felt the strong potential of the economy. Needless to say, I would never have predicted the country would come so far in terms of economic development. While I really enjoyed covering the capital goods industry where Japan had a very strong presence globally, I was looking for an opportunity to go to Hong Kong to get closer to Mainland China. At that time, most equity research activities related to Mainland China were done in Hong Kong. I went through extensive Mandarin language training for several months to prepare for the move. In 1996, the firm moved me to Hong Kong and I became the first equity analyst covering China H-shares with a Japanese passport. Back then, the concepts of an equity market and equity research were still in their early stages in Mainland China. Most listed companies at that time were state-owned enterprises and when I visited a power equipment company, my first interview as a China H-share analyst, the CEO gave me a 45-minute uninterrupted speech in response to my first simple question. By the end of it he hadn't answered my question either!
Despite some challenges, visiting countless number of companies and talking to management was an extremely rewarding experience. Many were at the very early stage of becoming commercial entities and were keen to learn from overseas companies regarding their internal organization, production, marketing, etc. As a non-local analyst with only a little local knowledge and connectivity, I tried to apply the basic global industry framework when analysing H-share companies. My assessment of the positioning of each company within the global competitive landscape was well received by investors not just regionally but globally too. Since I had spent a lot of time walking around factory floors of Japanese industrial companies, I was able to gauge the level of manufacturing proficiency of their Chinese counterparts by visiting the factories and asking a number of questions. At that time, many industries in China were extremely fragmented and I was able to provide insight into their potential consolidation process by leveraging the experience of developed markets. I was extremely happy to find that such skillsets gained through analysing Japanese and global capital goods companies was, and still remains, helpful to those investing in the China market. Although I was not aware of the concepts then, this was probably my first real attempt to use ‘time machine’ and ‘pattern recognition’ analysis that is discussed in Chapter 1. The fact that such tools were so powerful that even an analyst who was very new to China coverage was able to differentiate and add value almost immediately was a valuable lesson. Although I felt an extreme bull on Chinese industrial development at the time, in hindsight I was actually very conservative in my projections.
A Truly Global Research Experience – Semiconductor Analyst (1998–2007)
Having covered China H-share companies for three years I felt like testing my skills as an analyst on a truly global platform. In 1998, I was fortunate enough to join the Goldman Sachs technology research team covering the Japanese semiconductor industry. Since I knew nothing about semiconductors, I spent the first several months in the New York office learning the basics of the industry and getting connected with the US team. It was an incredible environment for me to learn from the ‘all-stars’ of technology research. One thing that really surprised me was the level of respect and attention research analysts and major investors received from corporate top management. Back then in Asia, investor relations was something corporates broadly treated as a low priority job, certainly not a necessity. Hence, analysts in Asia needed to make substantial efforts to establish ‘give-and-take’ relationships with corporate management before they were fully open to you.
After spending a super-exciting several months in New York, I went back to Tokyo and initiated coverage on the Japanese semiconductor equipment companies and also some technology hardware companies. The Japan sell-side community then was well established and produced high-quality research products, but it was also pretty domestic and a closed world. As a newcomer with only limited knowledge of the technology industry, I introduced two simple practices that immediately captured the attention of investors. One was the focus on quarterly earnings and the other was the timely read-across notes from the earnings calls of overseas companies. Those are pretty standard practice now but back then very few Japanese analysts were able to understand the nuance of earnings calls of US companies.
