Friday, November 10, 2017

L Brands (NYSE:LB)

Quick look at L Brands:
  • Owns 2 major brands: Victorias Secret (underwear) and Bath & Body Works (like Body Shop).  
  • 2/3rd of operating profit is from Victoria's Secret, 1/3rd from B&BW.  
  • 97% of profits from US & Canada.  They have only recently started expanding e.g.: opened flagship stores in China and Singapore last year.
  • While B&BW has been growing, Victoria's Secret has suffered declining sales in the past 2 years, causing their stock price to drop almost 50%.  Last week they reported their first positive monthly comparable-sales number in ten months, driving the stock up 8%.

Competitive Position

They are the largest player in the US: IBISWorld estimates they have over 60% of the lingerie market, Bernstein gives around 30% of the women's underwear market (and increasing).

Victoria's Secret is in the mid-to-slightly-expensive range.  They sell at the $35-50 price point, compared to:
  • La Perla ($100+ to $700) range
  • Gap ($17-$70)
  • Target ($10-20)
  • Walmart ($8-15)
  • Amazon's Iris & Lilly brand ($10) - at these prices, Amazon is not competing with VS.

Changing fashion and Trends

Bralettes - a cheaper bra with no wiring - have become popular recently, hurting VS's profits.  However these are only suitable for B-cups and below.

A major competitor is American Eagle's Aerir brand.  Its aimed at teenagers, and rather than the airbrushed model look, they have the girl-next-door look.

Aerie has has has 15-25% quarterly same-store sales growth for the past 5 quarters.

Source: eMarketerRetail

Victoria Secret's competing brand, Pink, is also growing, but at a lower rate.  Their Annual Report states "low double-digit sales growth over last year" (not same-store sales).   So Aerie is beating them.

Can this industry be disrupted by online competitors, especially when it comes to offering a better fit and greater variety?  I would guess not, but who knows?

The Numbers

L Brand's profits dropped in 2016 and 2017:

Profit breakdown:

Because the "COGS, Buying and Occupancy" costs are one line on the income statement, we can't model their operating leverage (e.g.: An x% drop in sales leads to a > x% drop in profits, due to fixed costs - mostly rental).

ROE is meaningless because the company has long periods of negative shareholder equity!  Due to share buybacks and dividends, leaving minimal retained earnings.  Shares outstanding have steadily decreased:

Debt is a bit higher than I'd like, at around 6X projected 2017 earnings.  Its also been increasing:

I don't like the way they have borrowed in order to buyback shares and pay dividends.  Smells like financial engineering.  But they are still safely able to pay the interest.

Most of it is fixed rate debt:

    Source: Company presentation

Off-balance-sheet liabilities look OK: Negligible operating leases at 12m.  104m of real-estate guarantees as contingent liabilities. 


Buying this is a bet that their 2-year losing streak is over and same-store-sales keep recovering.  I'm betting on this because of VS' long history of growing market share, and I think that selling high-priced lingerie online will be difficult.

The stock is cheap, and a recovery is not priced in.  Its trading at 13X trailing earnings, and 20X projected 2017 earnings - trough earnings, hopefully.  I think it should trade at 15 to 20X earnings.  I think the US economy will be strong over the next few years.

I don't want to hold a retail company for years, due to recession risk and changing consumer trends.  If same-store-sales and earnings increase over the next year, the stock should be re-rated, and I'll sell.


Monday, November 6, 2017

Bought L Brands (NYSE:LB)

Bought 304 shares of L Brands at $47.91 on 6/Nov/17.  Total cost USD 14659.59.

Busy now, will write more on the weekend.

Wednesday, October 18, 2017

Bought Scorpio Tankers (STNG)

Scorpio Tankers owns a large fleet of product tankers.  They just completed a merger,  and management is aggressively betting that product rates will rise in the 4th quarter this year.  From their 2Q transcripts:

"we remain optimistic on the product tanker market outlook with fundamental drivers of our market that will remain largely unchanged. We expected demand growth actually to overtake supply growth in the second half of this year and this is happening with demand setting itself around the 4% mark supply being between 1% and 2% going forward....being already in positive territory makes us believe that it shouldn't take us too long."

At current rates, their operating cashflow is neutral to mildly-positive - rates need to raise in about 9-12 months, or else this company has to raise money from the market.  This stock is like a 1-year call option on product tanker rates.  It may go to zero, or go up several times if product tanker rates improve.

Bought STNG yesterday, 785 shares at USD 3.70, total cost USD 2901.29.  Its 0.5% of my portfolio.

Sunday, September 10, 2017

Offshore Support Vehicles

Owners of Offshore Support Vessels have have been hard by the oil price downturn.  Where are we in the price cycle?

What are OSVs?

Offshore Support Vessels (OSVs) are small vessels used to support both deepwater and shallow water rigs.  The main types are:
  • Anchor Handling Tug Supply (AHTS)
  • Platform Supply Vessel (PSV) 
  • Diving Support Vessel (DSV)
  • Construction Support Vessel (CSV)
  • Utility vessels.  Sometimes with Remote Operated Vehicle (ROV)
There seems to be a clear distinction between the first 2 types: AHTS (tug boats) and PSVs (supply boats).  There is a less clear distinction between the other types - an old AHTS may be converted into one of the 3 last types.

Different vessel types support different phases of a well's lifecycle:

Industry Overview

There are currently around 5000 to 5500 OSVs globally, with around 1500 to 2000 currently idle 1,2,3,4

The industry is highly fragmented.  The largest player, Tidewater, has a global fleet of 300 vessels, but they are so small that they are also a price taker:

Vessels operate in certain areas (e.g.: SEA, North Sea, Gulf of Mexico (GoM)).  They can move from one area to another to balance out supply & demand, but there are legal restrictions on some areas, for example:
  • Vessels in Indonesia have to satisfy ownership and crewing restrictions.
  • Vessels in US waters (GoM) need to comply with the Jones Act: the vessel must be owned, crewed and operated by Americans, and must never have been owned by a foreign company.

The Capital Cycle

New Supply

The OSV industry has followed the normal boom-bust capital cycle.  The most recent boom cycle started in 2006, and has seen over 400 vessels delivered till now.  Vessels from this boom are still being delivered, but drop off sharply in the coming years: 410 vessels are expected to be delivered the remainder of this year, 98 in 2018, and 5 in 2019:

Some vessels on order may be cancelled (e.g.: from speculative buyers) and some may never be put into operation.


Despite lease rates being below operating costs, only a negligible number vessels have been scrapped.  Since January 2015, only 2% of OSVs have been scrapped.  OSVs have low scrap value since they have little steel.  Delivering the vessels to be scrapped may cost more than the scrap price.

Unused vessels have been stacked instead.  Its possible they will never be reactivated, as this costs more the longer the vessels have been stacked (e.g.: required 5 year survey)5.  Due to safety concerns, charters may not lease ships that have been in lengthly layups.

The industry has been rife with bankruptcies:
  • The largest global player Tidewater (TDW), has just emerged from bankruptcy.
  • Gulfmark Offshore (GLF), with 70 vessels, has filed for bankruptcy several months ago.
  • In the Singapore market this year we've had Ezra and Swissco
These bankruptcies are not reducing industry capacity.  Vessels are simply sold off at fire sale prices, giving a low cost base to the buyer.  Or the company is resurrected with new shareholders, a new pile of cash, reduced debt and a lower cost base.


Quite a few reports predict increased OSV demand:
  • Pareto predicts a gradual recovery: If oil remains between $50 and $60, they predict an additional 130 rigs from 2018 to 2020, leading to additional work for around 390 to 520 OSVs.
  • Douglas-Westwood predicts OSV expenditure to grow at a 4% CAGR between 2017-2021: DSVs at a 6% CAGR, MSVs (consisting of CSVs and Utility Vessels with ROVs) at 7% CAGR, and pipelay expenditure at negative 4%.


There will be a recovery sometime.  We are waiting for laid-up ships to slowly rust, until it is uneconomical to put them back into service, while...hopefully...demand rises gradually at a single digit CAGR over the next few years.  

I have no idea when the turnaround will happen.  From the numbers above - especially if the 400+ expected new ships are delivered - no one can see it happening this year.  But these type of industry numbers won't tell us anything till after the turnaround.  Technicals will tell us, but will give a lot of false starts.  If I was going to buy, I would take very small positions, and spread out my buying over time.

1 Tradewinds article: Crisis batters OSV hub (19th/Apr/17): "We have around 5,000 OSVs in the market and about 3,000 are working." 
2 Tradewinds article: Rig's Inflection Point offers hope of gradual recovery (7th/Sep/17): "About 1500 to 1800 OSVs are sitting idle now." 
3 Clarksons Offshore Support Vessels front page: "OSVs in service: 5301" on 10/Sep/17." 
4 Offshore Support Journal: Greenshoots of Recovery in downbeat OSV market (6?Apr/17): "There were also around 1200 vessels laid up globally of a fleet of around 5,500 vessels
5 Some numbers here: "According to Clarksons Research records, just under 50% of laid-up OSVs no longer have an active class certificate as of February 2017. Two thirds of these out-of-class vessels are older units built prior to 1990....However, 856 of the laid-up OSVs appear to still have an active class certificate. These are skewed towards the younger end of the fleet...However, this number might decline in the future: 22% are scheduled to have their five year special survey in 2017 and a further 24% in 2018.....Financing special survey costs is also an issue for active OSVs, as well as those in lay-up. Considering the active fleet (3,688 units at start February 2017), 641 OSVs have their special survey due in 2017 and a further 721 vessels in 2018. The majority of these (over 80%) were not under long-term contract. " 

Wednesday, August 16, 2017

Sold Snap Options

Sold at $3.19.  Profit USD 2182.43.

Q2 earnings were bad and SNAP shares fell.  But they haven't been falling in the past few days: staff were allowed to sell on Monday, and even allowing a few days for the paperwork with brokerage accounts, they are not selling now.  Maybe the big drop is already priced in.  Since my short-term options are up 45% on volatility, and most options expire worthless, take the small profit now.

At what price would I turn around and buy Snap?  The app and the user-base has value.  But since the common shares have no voting rights, they're probably worth zero.

Tuesday, July 11, 2017


Snapchat is an app that lets you send doodley pictures your friends.  Widely used by teens/millennials.  Its different from Facebook in that its private - you only send to your close friends, and pictures are removed after viewing.  Its a way to talk with around 20 or so of your friends, rather than to show off to the whole world.  70% of Snapchat users are female.

The Numbers

Snap has never been profitable:

  • Revenue has been smaller than COGS for the last 2 years.  Let alone all the other costs.
  • I've excluded stock compensation costs here.  Lets optimistically consider them "non-cash" or "one-off".

Snap is burning cash:

With 3.2bn cash on their balance sheet from their IPO, they can last another 4 years at their 2016 "burn rate".  The only good thing we can say is that cash burn remained steady in 1Q17.

The key for a company like this is to either:
  • Increase its user base to gain critical mass by the network effect, so that they become attractive to advertisers.
  • Or else, they may already have gained critical mass in the teen/millennial market, and look for a way to monetize it.
For the first way: their Daily Active Users (DAU) has risen spectacularly since 2014, but levelled out in 1Q17, sending the stock down 25%.

For the second, they have several ways of monetizing their experience (1) (2) (3) which look interesting:
  • For their normal app: ads, lenses and geofilters.
  • Stories: photos or short videos, with annotations, doodles and music.  Post them in your Stories section and they can be seen by all your friends for 24 hours.
  • Spectacles: spectacles which can take 10s videos uploaded to snapchat.  They are pretty cool looking, not geeky like google glass.
We have not seen any meaningful increase in revenue in 1Q17 due to these.  Maybe we will later.


Snap's competitor is Facebook, who tried to buy the company for 3bn in 2013 but was rejected.  Since then FB has directly competed with them by trying to make Snapchat clones (which failed) and outright copying their Stories functionality into Instagram.  This succeeded: Instagram Stories now has 200m users, more than Snapchat's 166m.

(Source: Business Insider)

FB wants to continue to dominate social media, and prevent (or buy out) any startup taking off.  SnapChat has an entrenched position in the highly desired teen market, which FB can't attack - no matter what new functionality FB comes up with, people will stick with an existing social network because their friends are on it.  But FB is preventing Snap from expanding.  So Snap either needs to monetize its existing user base before it bleeds to death, or find some way to completely re-invent the market - something completely different, like what the iPhone did to the mobile phone market.

My Short Bet

The story is put very simply here: 80% of Snap's free float has been locked up, but becomes tradable at the end of July till end August:

I'm short: bought 22 SNAP Put options last night @ 2.18 each.  Strike $15, 19th Jan 2018 expiry.  Breakeven if Snap goes down to $12.82.  Total cost USD 4,815.75.  This trade has 100% downside (for me) and roughly 120% upside (if SNAP goes to $10).

  • The Q2 earnings release is due between the end July lockup expiry and end August one.  Snap may pull a rabbit out of their hat, e.g.: make more advertising deals, recount DAUs, or recognise some revenue.  Its possible that, since they know about the lockup time, they planned this and put all their bad news in the previous 1Q results (kitchen sink).
  • This is a consensus trade - every man and his dog is short SNAP.  Any good news will cause a short squeeze.
This is a speculative trade, using 1% of my capital.  Might go to zero.

Overall, the best you could say about SNAP as a company is that its overvalued and theres a lot of growth built into the price.


Good look at Snap's strategy from Stratechery:

Sold UUP

Sold all my UUP at 24.875 for a total of USD 19890.29.  The trade wasn't working, and since currencies don't move much, its pointless to keep so much capital tied up in it. Total loss was USD 891.30.

Currently I have:

Some of my positions are included as 'Speculative Positions".  They are risky 1% positions that may go to zero, but have a potential 3X payoff.  Most of them are from newsletters paid for and are not described in blog posts.  So are any unnamed stocks.

Saturday, July 1, 2017

Bits and Pieces

US natural gas prices to fall

  • due to increased production (link 1) (link 2)
  • associated with oil production, and new pipelines from Marcellus/Utica around 2017/18.
I like TimeOnTarget's comments on SA for following the US Natural gas market.  A good place to start for anyone looking to learn about it.  Have to look at demand, supply and pipelines.  US gas prices are cheap due past discoveries in the Marcellus/Utica, which was already served by pipelines.  At some point it may reach the stage where every producer is losing money, and things can only get better. COG seems the cheapest producer, but pipelines are the key.  Prices vary greatly across the country depending on that.  Not sure if I'll ever make a bet on this industry, but its useful to have a view on US Natural gas for anything related, such as chemicals, fertilizers, solar/nuclear, and so on.


North Korea

Has been out of the news for a while.  GeopoliticalFutures thinks that:
I don't know how a war would affect the markets:
  • The war would be very bad for South Korea, due to Seoul being within range of North Korean artillery, which cannot be easily neutralized
  • I believe the markets are not expecting a war now, but I think the war would be short, maybe 1-6 months.  No telling what the markets would do if they expect that.  They may even go up a few days after the war starts.
  • Long term, reunification would be costly - in economic terms - worse than the German reunification in 1989.
  • I don't know any way for retail investors to buy Korean stocks anyway.



Although ZH is unreliable, its worth keeping in mind the risks to the market if Trump changes back to his old election self again. USD up if it happens.

Friday, June 30, 2017

Bought Mongolia Mining Corporation (HK:0975)

Bought 227000 shares on Wed 28th July, at HKD 0.169.  Total cost around USD 4875.

This is from the Capitalist Exploits blog in Sept.  The story is about the resurrection of a Mongolian coal mine, which together with a proposed railroad to China, can provide coking coal cheaper than Australian producers.  The risks are political and in execution.  This is a 1% position and the stock may go to zero.  A crash in HK small caps last week gave an opportunity to buy.

Friday, June 16, 2017


Potash has been dropping for four years now.  Is this a normal commodity cycle, where prices stay low enough that new investment is discouraged and marginal players are squeezed out?  If so, where are we now?


Potash is a fertiliser which provides crops with potassium - one of the three primary nutrients for plants.  It accounts for 70 to 90% of potassium fertiliser used, and is commonly used for bulk crops or grains (1).  There is no commercially feasible substitute, although some are working on it (12).

Potash is plentiful, but the industry has long since been an oligopoly, due to the enormous capital requirements in setting up the mines and transport.  In 2013 the potash oligopoly broke up, with one of the players flooding the market.  Prices have headed down since:

(Source: SeekingAlpha article: Potash - a 2018 story?)


Annual demand is around 55-65 million tons.

In the long term demand is constant.  A known amount of Potassium is depleted in the soil for each crop and must be replenished.  But usage varies year by year, as replenishment can be delayed a few years due to crop rotations, rainfall, crop prices, etc:

(Source: Uralkali 2015 investor presentation)

Long term demand is has grown by 2% since 1994:

(Source: 2016 Agrium Inevstor day presentation)

Ignore short term demand since its unpredictable.  Just assume long term demand growth of 2%, and concentrate on looking at supply instead.


The latest cost curve I have, showing actual production estimates, is from 2015:

(Source: Morgan Stanley: March 2016 Report: Global Chemicals: Potash S&D Update)

Transport Costs

The above excludes transport costs, which are significant for a bulk commodity like Potash.

From Canada:
From Russia:
  • 80% of Uralkali's exports are shipped through St. Petersburg.  Total transport cost (rail and freight) for this was USD 28 per tonne in 2015 (p29).  Most of the remaining potash was transported to China by rail, which cost USD 39 per ton.
From Belarus:
  • Belaruskali gives no transport costs, but they must be lower since Belarus is so much closer to the sea that Uralkali's Perm region mines.

Future Supply

Supply is quite easy to predict.  Since potash mines are massive projects that take 5-7 years and $1-2 bn to complete, most companies' expansion plans are well known.   Most projects go belly up, especially those from small companies.

For production that is likely to be built, net depletions:
  • I get 11 mt/pa to be added by 2021.  8.5mt if you exclude Yancoal, for which the project has not started development yet.
  • That is assuming mines operate at 90% of capacity. 
  • Also excluding any additional capacity from Potash Corp (POT).  Assume they won't increase production even if they have capacity, as they continue to act as the swing producer in a low priced environment.
  • Also assumes Jansen dies.


Even taking the lowest figure of 8.5 mt net extra capacity by 2020, with the conservative assumptions above - with long term growth of 2%, it will take 5.5 years (from now) to absorb the extra supply.  That seems balanced.  We are not at a place where we can say that Potash prices will rise due to constrained supply in the future.  We're at a place where we can say they may stop going down.

Another thing to watch for are potential African projects.  Ethiopia (Dankalli) seems dead, with ICL pulling out due to lack of infrastructure.  But Republic of Congo and Gabon look interesting - very low production costs, no rail required, and easy shipping to Brazil.  Still too early to tell if they produce, but if they do hit their numbers, they'll be the cheapest producers in the world.

Appendix - List of future Potash projects

I judge the likelihood of new capacity plans to be actually built based on the track record of the company, their financial backing, and the cash costs of the project.

New production capacity that is likely to be built is below, listed from lowest-cost to highest-cost (left side of cost curve first):

Net production addition
Cash Costs/mt
Increase from 10.8mt KCl (production) in 2016 to 14.4mt (nameplate capacity) in 2020  That includes a 2mt loss from existing mine depletion, and 2 new Mines (Solikamsk No 2 for 2.3mt/pa and Ust-Yayvinsky for 2.5mt/pa).  (Source: E&MJ, 2015 article)
2.2mt by 2020, assuming operating at 90%capacity.
Same as existing Uralkali operations
2mt.  Production scheduled to start from 2021 to 2023.

Mine under design in 2015. 

This company seems very profitable, but this is their first potash mine.
2 mt capacity.

1.8 mt if operating at 90% capacity.
Same as Uralkali - in Prem region.
Usolskiy mine expected startup in 4Q 2017.
Volgakaliy expected mid 2018 startup.
Both projects have 8.3mt KCl production potential.
4.2 mt nameplate capacity around 2020. 

So 3.8mt if operating at 90% capacity.

8.3mt nameplate capacity afterward?
Same as Uralkali

That includes Petrikovskoye, which will add 1.5mt KCl.

Little information available about this company.
1 mt if operating at 90% capacity.
Same as existing Belaruskali operations
Produced 2.2m in 2016, which is 73% of nameplate capacity of 3mt (p8).  Expect to ramp up in 2017 .
0.5 mt, if operating at 90% capacity.
Same as existing Agrium   operations
Legacy: started producing in May 2017, expect to reach 2m production by end 2017.  Plan to sell 0.7mt to US, the remainder offshore.
Started production May 2017

K+S estimated to currently produce 6mt in Germany.  High cost operations.
2mt by end 2017

2.9 mt by end 2019
Slightly lower than Potash Corp
Potash Corp (POT)
9.3mt production in 2016.  They closed high cost mine (New Brunswick) but opened a cheaper one (Rocanville).
Total planned expansion is 10.1mt.    Morgan Stanley estimates 2015 had 9.3mt operating capacity, with 5.5mt capable of restarting in 12 months.  They model 13.4mt capacity increase by 2020.

Not all their capacity is used; POT acts as the swing producer.
Additional 10mt capacity, but may not be used if process remain low.

Part of Yanzhou Coal (HK:1171), which has been profitable for the last 5 years (p10) , but with high debt (40X 2016 income, p11). 

Are Chinese companies operating from a strategic rather than economic perspective?  ie: acquire resources, don't expect profits.

Economics should be the same as any Ssachkatchewan project. 

2.5 mt if operating at 90% capacity.
Similar to POT

Production the is likely to be removed is listed below:

Net production removal
Cash Costs/mt
Cease UK production of 1mt/pa in 2018, produce SOP instead.

High-cost US miner.  May go out of business.  I’ll be conservative, and assume they do.

Sigmundshall mine depleted by 2020.  Estimate its production is 0.3mt (p25p8)

0.5mt.  Depleted by 2018
-0.5 mt

Speculative projects, as of now, unlikely to be built:

Nameplate Capacity
Cash Costs/mt
Additional 2.8mt from panned Polovodovo mine.

Costs 1.6bn, they may not have the money.
2.8 mt by 2023
Same as existing Uralkali operations
Jansen.  8mt pa production, (10m nameplate capacity). 

I don’t think it will ever produce.
10 mt
Need potash price of over USD 400 to be profitable, says POT.
Sirius Minerlas
York project, under a national Park.  Nameplate capacity 20mt/pa.  Currently under design and site preparation.
Produces polyhite, not KCl.

May be a different product.  Polyhite is probably more useful for producing SOP  It has 4 plant nutrients, so may be better sold as as blended fertilizer that has no Cl.  Has less potassium than SOP.

LSE listed.  Stock price up to ~1.4bn pounds market cap.  Gina Rinehart has a stake.
Probably not relevant, supplying a different market.
Encato Potash
2.8mt capacity in Saskatchewan. They bought native rights. 

Encato has a market cap of ~50m.
2.8 mt
Similar to POT
Circum Minerals
New Dankalli mine (Ethopia) schedued to produce 2mnt by 2021

ICL quit the project in Oct 2016.
2 mt
USD 38/t operating costs.  But 500km rail/truck to Dijoubit. 
Dankalli/Colluli (Eritrea)
Produce SOP not MOP, not relevant here.

Elemental Minerals (Kore Potash)
Kola project. DFS to end in 2018.  Expected start of production 2022.   DFS to focus on 2mt.
Yangala (Dougou extesion)

ASX listed, small company
Very Cheap: Life-of-Mine cost $68/ton. 
Cheap transport: Only 36km from coast – use conveyor belt
In Gabon (near KorePotash, north of Republic or Cngo)
2 projects, no estimate for production capacity.

ASX listed, small company

African Potash
Lac Dinga: In Republic of Congo.  No estimate provided for production capacity.

Small AIM listed company.

Highfield Resources
1.6mt production for 2 Spanish projects. Plus 1m for another project.

ASX listed, small company
3.6 mt

Sold Pacific Basin Shipping

Sold Pacific Basin Shipping (HK:2343) at HKD 1.60 on 8th June, for loss of SGD 1703.

I've changed my mind.  Not confident on this one, as new ships can be built in 18-24 months, limiting any sustained rise in prices.  We can't just look at a 10-year chart and say the BDI is gonna go back to 2008 levels. I think the time to buy shipping stocks is when even the best players have been losing money for 1 or 2 quarters - when things are so bad they can only get better.  At that point, you may get 50% upside.  It would be a small trade - trying to catch a falling knife - and I would be dribbling in slowly... maybe 1% after one bad quarter and another 1% after a second.

If I want to play at all.  Shipping is a tough sector.  There's no way to value a shipping company - earnings and vessel values are cyclical.

Tuesday, May 9, 2017

Resona Bank (TYO:8308)

Japanese banks are trading at single digit PE ratios and below book value.  After 20 years of near-zero interest rates they are still profitable.

I'm looking at Resona, the fifth largest bank in Japan, because its purely a domestic play and makes most of its money from deposits and loans.

Market Share

Japan is 'over banked'.  The top four banks have around half the market share, and theres a 'long tail' of smaller banks due to each province historically having their own bank.  
     (Source: Credit Suisse, Midtier banks, Jan 2015)

The Japanese banking market is more competitive than SingaporeAustralia or the UK, where the top 3-5 banks have 60-75% of market share.  Consolidation has been occurring for years, but still has a long way to go.

To escape the competition and ever lowering interest rates, the larger banks (MUFJ, Mizuho Financial Group, Sumitomo Mitsui Financial Group and Mitsumi Sumitomo Trust Holdings) have expanded overseas and have built up their investment banking.  For example, MUFJ owns 20% of Morgan Stanley, plus banks in the US and Thailand.  Resona is the largest Japanese bank that is still purely domestic.

Resona's market share in certain prefectures:

     (Source: Feb 2017 Company Investor Presentation)

Income Breakdown

The vast majority of their operating income is from interest:

Interest income seems to track interest rates, with a spike in 08/09, amidst a general downtrend (the time period in the red box below):

This 'single focus' on deposits and loans makes it easier to analyse than the other large Japanese banks:
  • They have no investment banking or overseas operations.
  • And very little trading.  Most of their trading profits are from derivatives.
  • Fee and commission income is the second largest contributor, and seems to track the economy1:


Loan losses2 are slightly favourable compared to other Japanese large banks:


Resona's CET1 CAR is 8%, far lower than the other 4 big banks which are in the low teens.  This is because of their low capital base.  In 2015 they finished paying off public funds which were injected in 2003.  They now expect to increase their capital and aim for a 9% CET1 CAR in 2019.

As a domestic Japanese bank, their required CET1 CAR is only 4.5%. 


Resona's ROE is artificially higher than its peers, due to its low capital base:

As they increase their capital in future years, ROE will go down.

ROA is comparable to the other large Japanese banks:

This is far less than other countries.  Singapore banks for example, have ROAs of between 0.5 and 3%.


David Eirnhorn bought a stake in 2014 at 547 yen, and probably still has it.

At 620 Yen, Resona yields 2.7%.  Withholding tax for Singapore residents is 15.315%.


Reasons to buy:

  • Pretty Cheap.  At 620 yen, its trading at 9X earnings and price/book of 0.87  (From year-ending March 2016).
  • It is still profitable, despite operating in a fiercely competitive environment with interest rate headwinds.


  • Japanese banking market is more competitive than other countries.
  • Japan's well know demographic problems.
  • Risk of a sudden Yen devaluation if Japan loses control of its bond and currency markets.  May not happen as Japan's debt is domestically funded (1) (2).
  • Cyclical risk.  Japan is now in a boom, with record corporate profits and full employment.  The boom may end if it was solely due to money printing.

Overall, I think its an OK company trading at a cheap price.  Not a 'Buffet buy-and-hold-forever' stock.  The risks are priced in.

[Edit: Bought 2900 shares at 612.4 Yen on Friday 12th May.  Total cost in SGD is 29,505]

I like their mascot too:


1 There is a breakdown of their fees on p16 here, but it doesn't say much

2 From JGAAP financial results. "Loan losses" calculated as: 
     (Provisions for loan losses - Reversals in provision for loan losses) + (Write off loans - Recovery of write-off loans)