Most sell-side analysts at that time were mainly focused on the annual earnings forecasts and did not adjust earnings forecasts frequently. In addition, the concept of street consensus earnings did not yet clearly exist. Such focus on very short-term earnings trends was adopted quickly in the Japanese market. Ironically, Japan probably had a high proportion of quality sell-side analyst reports, with in-depth discussions on corporate strategies and long-term structural industry perspectives, before the focus on short-term earnings kicked in.
After initiating on the Japanese technology companies, I spent the majority of my time on field trips. The technology hardware industry is global, interconnected, and fast moving, so travelling around the world and meeting various companies in the supply chain gave me a substantial information edge. To understand the semiconductor industry better, you need to understand all parts of the chain, including materials, equipment, components, devices, and the various final products such as personal computers (PCs), mobile phones, communication equipment, consumer electronics products, and autos. In addition, inventory levels of components and final products can fluctuate a lot. Pricing of memory chips such as dynamic random access memory (DRAM) and NAND flash memory can be very volatile. Chip makers introduce new process technologies every year to improve chip density. At that time there were also numerous mergers between chip makers and equipment makers. On average I was on the road about one-third of the time travelling between Mainland China, Taiwan, Korea, Netherland, and Silicon Valley, etc.
It was my dream come true in terms of global research. I exchanged multiple emails and phone calls each day with my global analyst counterparts in the United States, Taiwan, Korea, Europe, and Japan, sharing details of new findings. It is blindingly obvious now to connect Asian countries together but back then research teams were structured on a by-country basis. We were probably one of the first to create a fully functional Pan-Asia technology research team among sell-side research houses. Many people from the strategy divisions of global technology companies would come regularly to see us to garner our thoughts on the broad industry because even large technology companies did not have such a comprehensive understanding of the whole technology hardware industry on such a real-time basis.
One of the most memorable experiences for me was the International Trade Partners Conference (ITPC), organized by industry association SEMI (formerly Semiconductor Equipment and Materials International) and held annually in Hawaii. ITPC was initiated by SEMI in the 1980s, after the semiconductor trade dispute between the United States and Japan, in order to create a venue where global semiconductor top executives could get together to discuss the future of the industry. I was invited to the conference several times as a speaker and the experience gave me an invaluable industry network. Many top executives from the semiconductor industry were open, frank, collaborative, and willing to take feedback. Learning about their ambitions, strategies, and concerns at a beachfront bar in Maui Island, while also receiving questions about my views on the future direction of the industry and specific companies from chairpersons and CEOs, was a truly amazing experience. Observing how corporate executives interact with each other was not something analysts got to see often at that time and it was very educational. It was also good to meet some of their family members. In order to maintain this industry network, I sent my published research work regularly to those top executives. My list of contacts, across the globe, became as large as 2,000 at its peak, quite some progress on the 50 name-card goal I was set when first starting out as an equity analyst.
Another memorable research project was about ink jet printer cartridges. When we buy a personal printer, we tend to spend more money on the cartridges as consumables than the hardware and hence for printer manufacturers the majority of their profit comes from selling cartridges. Given these cartridges were heavily protected by patents and a high level of manufacturing process technology, there was no low-cost competition from Taiwan, Korea, and Mainland China then, unlike that faced by other technology products. Sustainability of the competitive edge makes a significant difference to the future profitability for printer makers. Given the high profitability, there were a number of companies entering into the third-party cartridge and refill market to capture the lucrative profit pool. At the same time, the European Union (EU) was investigating the printer cartridge market based on anti-trust concerns. But companies were not particularly vocal about this issue. As such, I needed to do something beyond regular research. I called some of my contacts who supplied materials and parts to the cartridge industry. I then met second- and third-tier printer makers in Taiwan and Korea and the producers of third-party cartridges. I also read patent filings and sought advice from a patent lawyer to learn about cross-licensing agreements. By the end, although there were no clear-cut answers, I concluded that inkjet cartridge technology was resilient enough to stay profitable for the time being. I had learnt my lesson though from the CNC case and tried a more balanced and less rushed approach to the research. Printer makers at that time were saying the cartridge business was resilient because they had a technology advantage but they provided little detail beyond that. So, my extra-mile research effort was very well received, particularly by long-term investors who held large positions in printer companies. Even now ink jet cartridges continue to be profitable and a major source of earnings for printer manufacturers.
New Lexicon: Clinical Trial, Cap Rate, Embedded Value, Metal Spread (2008–2013)
In 2008, I passed on my coverage to a colleague and became the Director of Japan Equity Research. On top of all the personnel-related matters, one of the main responsibilities of the Director of Research is quality control of the research product. From day one, for all analysts in Japan, I was required to give advice and approval for rating changes, new thematic reports, and coverage initiations via the Investment Review Committee. I had spent the previous 10 years thinking in depth about semiconductors and hardware technology, and had only limited ideas about other industries. There were many unusual words, such as cap rate, embedded value, phase three clinical trial, and metal spread. I needed to digest and study. Sometimes I spent hours discussing the dynamics of certain industries with analyst teams until midnight. It was a fascinating experience and I felt like a whole new area of my brain not previously used had been turned on.
Having attended these Investment Review Committee meetings for a few months, I was getting used to giving advice to real industry experts on their investment views. I found it absolutely fascinating to see that even 10-year or 15-year industry veterans have blind spots. As they know the industries so well and are deeply wedded to the sectors, they could sometimes miss some of the more obvious future trends. For example, when I was an analyst, a mistake I made in hindsight was being too slow to acknowledge the disappearance of film cameras and then also the decline of dedicated digital cameras. Since I knew how quickly the specifications of CMOS (complementary metal-oxide semiconductor; essentially the eye of the digital camera) image sensors and lens technologies had been progressing as a semiconductor analyst, I should have predicted the major decline of digital cameras earlier.
In a similar vein, discussions with the auto sector analysts on electric vehicle transition were also interesting. Auto-sector analysts have often said in the past that the pure electric vehicle adoption would likely be slow because the batteries are too heavy and too expensive, and automakers did not want to focus on this business because it was loss making. But I argued that I had seen many technologies advance faster than expected when the whole industry focused their efforts on it, and also it is ultimately the consumer who decides what to buy, not the car makers. While I don't think I always get the advice right, listening to the analysts present their high-level views and quickly identifying the blind spots without knowing too much detail is an extremely valuable skill I learned through the experience. I really wished I had listened to presentations by other analysts more when I was a coverage analyst and figured this out earlier.
During my tenure as the Director of Japan Equity Research, Japanese equity was not popular with investors – low profitability, slow to implement changes, poor corporate governance, and fierce competition from the rest of Asia. One day in 2010, when I went to see a client in Edinburgh, Scotland that was known for long-term selective investing, the veteran portfolio manager told me that our research was useless because it did not address the core value of a company at all. Hence, he gave no business to us. He said he
