Survival Kit for an Equity Analyst. Shin Horie
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How to Approach Company Analysis
When asked to analyse and value a company, the best starting point is not to start by punching its financial statements into a spreadsheet. In order to understand a company in a deeper manner, we need to: start with an in‐depth analysis of the industry it belongs to; look at it in a global context; and learn about its competitors. We need to come up with our own 5–10‐year outlook for the industry. During this process, in addition to investigating various data, we also need to speak with a number of industry experts, including the company's suppliers and customers, or even regulators or scientists in some cases. Then we take a detailed look into the company itself, more specifically regarding its history, management, shareholders, culture, and competitive moat – i.e. the ‘personality’ of a company.
When learning about the company, we need to undertake extensive interviews with senior management and the heads of its major businesses. Factory and store visits, or evaluating mines and project sites first hand, are also critical parts in the overall process. Once all the ingredients are ready, we can combine our insights with the earnings forecasts. These forecasts are not just a linear extension of past growth rates and margins. Having foresight of non‐linear structural change is the real value addition of company analysis. Only then do we put a value on the company. At this stage, we need to leverage the market price on top of fundamental financial data. There are many different types of valuation methodologies depending on the nature of the business. The process is more of an art than a science and we need to be flexible and creative to aim at being roughly right rather than precisely wrong. At the end of this process we gauge if our view is different to the market consensus or not. If we have a differentiated view, we need to identify and articulate where and why we are different.
Structure of this Book
PART I: My Story
PART II: Laying the GroundworkChapter 1 introduces six basic steps to forecast industry TAM growth and then 10 additional considerations to help identify the ‘character’ of an industry.Chapter 2 provides useful guidelines on the ‘earnings drivers’ in different industries.Chapter 3 assists in identifying the ‘personality’ of a company.
PART III: Analyse and Apply the FindingsChapter 4 discusses how to combine all the accumulated knowledge and insights to produce financial forecasts.Chapter 5 explains how a scorecard can be used to summarize and digest what has been learnt and forecast.Chapter 6 aims to provide a framework for analysts to value companies in different sectors based on the fundamentals.Chapter 7 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