Survival Kit for an Equity Analyst. Shin Horie
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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. 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.
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