Tokyo

CM on Sky

https://www.skynews.com.au/details/_6102427118001

CM appeared on Sky News to discuss the situation with our banks, the potential risks from the recommendations of the Hayne Royal Commission and the issue of mortgage stress.

Time we Cheiked out, DeClyned and binned the deflated Castle

The truculence of Australian Wallabies coach Michael Cheika’s is infamous. While he has never shied away from roughing up journalists at media press conferences (like a coach who might have an enviable win record) he couldn’t take a question on his future (around the 3-minute mark in the video). As if he wasn’t going to be asked such a question? His preparation was worse than that of the Wallabies. Cheika said, “Find a little compassion for people that are hurting!” Really? Feel sympathy for a bully? Harden up, snowflake!

Watching the Wallabies last night showed a team with little cohesion and the all too common inability to execute. Is it any wonder fans have grown disinterested. The stats speak to the disaster.

The Wallabies had 64% of possession (68% in 2H) and 62% of the territory (66% in 2H) yet conceded 18 turnovers to England’s 8. England made 172 tackles vs our 73. Clearly, when England had the ball they managed to execute, hence four tries (including two embarrassing intercepts) to one. Dismal.

Post the Rugby World Cup 2019, Cheika has a 50% overall win record. With the All Blacks, it was 17%. England @ 13%. Ireland @ 20%. Even Scotland was @ 50%. Other Wallabies coaches had the following win ratios:

Bob Dwyer – 64% win record

Alan Jones – 68%

Greg Smith – 63%

Rod Macqueen – 79%

Eddie Jones – 58%

John Connolly- 59%

Robbie Deans – 58%

Ewen Mackenzie- 50%

However, the problem in CM’s view isn’t the quality or talent of the players. Far from it. It is the management off the field. Aussie rugby is being systematically destroyed. CM has written before about the falling attendance and drifting profitability. Fans are clearly well and truly tired of the excuses.

It shouldn’t surprise us when Rugby Australia (RA) & NZ Rugby (NZR) reveal primary objectives. It shouldn’t surprise us when RA & NZR reveal primary objectives.

Objective 1 in the NZR 2018 Annual Report is “REMAINING ON TOP OF THE WORLD” (p.18)

Objective 1 in RA’s 2018 Annual Report is written as, “For rugby to continue to be a sport of choice in a rapidly changing society…community coaches are responsible…for creating fun, safe and inclusive environments” (p.10).

Between 2014 vs 2018, RA had the following statistics:

-Wallabies team costs (coach, support etc) +70% ($9.97m)

-Matchday revenue -42.1% ($20.17m)

-Sponsorships -11.5% ($28.23m)

-Player contracts +3.2% ($16.79m)

– Licensing revenue -12.9% ($1.67m)

Has the board reflected on what might be the problem?

It smacks of similar issues that plagued Cricket Australia (CA) leading into the cheating scandal. A culture that thought it was untouchable. The arrogance that they knew better. CA has finally had a cathartic cleansing at the board and coaching level. Results are now starting to show.

If RA wants a new coach, they’d be better off looking to one which promotes fluidity and allows improvisation. The problem with set plays is that it requires the opposition to fall into the trap the attacking team want to set. Simplicity is key.

This video of Coach Brian Clough is a great story of how one man built a team and took it from the bottom of 2nd division to the top of the Premier League. He won two European championships too. Listen to how his players had such great respect for Clough (from the 37th minute).

The three C’s of RA need to go – Chairman Clyne, CEO Castle and Coach Cheika.

Banker Buster?

Banks.png

Before the GFC in 2008, bank shares across the globe were flying. Financial engineering promised a new paradigm of wealth creation and abundant profitability. They were unstoppable.

However 12 years later, many banks look mere shadows of their former selves. We are told by our political class to believe that our economies are robust and that a low-interest rate environment will keep things tickety-boo indefinitely. After all the wheels of the economy have always been greased by the financial sector.

If that were true, why does Europe’s largest economy have two of its major banks more than 90% off the peak? Commerz has shrunk so far that it has been thrown out of the DAX. Surely, Japan’s banks should be prospering under Abenomics so why are the shares between 65% and 80% below 2007 levels?

Ahh, but take a look at those Aussie beauties! How is it they have bucked the global trend? How can Commonwealth Bank be worth 6x Deutsche Bank?

Although we shouldn’t look at the Aussie banks with rose-tinted glasses they have mortgage debt up to the eyeballs. Mortgages to total loans exceed 62% in Australia. The next is daylight, followed by Norway at 40%. Japanese banks, before the bubble collapsed, were in the 40% range. CM wrote a comparo here. There is a real risk that these Aussie banks will require bailouts if the housing market craps out. It carries so many similarities to Japan and when anyone ever mentions stress tests – start running for the hills.

If you own Aussie banks in your superannuation portfolio, it is high time you dumped them. Franked dividends might be an ample reason to hold them, but things in finance turn on a dime and this time Australia doesn’t have a China to rescue us like it did in 2008-09. More details contained in the link in the paragraph above.

In closing, Milton Friedman said it best with respect to the ability of central banks to control outcomes,

“… we are in danger of assigning to monetary policy a larger role than it can perform, in danger of asking it to accomplish tasks that it cannot achieve, and as a result, in danger of preventing it from making the contribution that it is capable of making.

 

Go Fund Me’s double standards

RAICES.png

Well, well, well. How come it took so many days for GoFundMe to come to this conclusion? What ridiculous double standards the site has. It was bullied pure and simple and folded to activist pressure to appear as if it was a clerical oversight. Why not sack the gatekeepers at GoFundMe who should have flagged this up the chain but didn’t until they felt backed into a corner by apparatchiks?

So easy to fob it off using “GoFundMe’s terms of service say it can take down funds that are “for the legal defence of alleged crimes associated with hate, violence, harassment, bullying, discrimination, terrorism or intolerance of any kind relating to race, ethnicity, national origin, religious affiliation, sexual orientation, sex, gender or gender identity or serious disabilities or diseases. It was something it should have immediately caught but didn’t.

GoFundMe’s Country Manager Nicola Britton said the site doesn’t support Folau’s anti-gay views but presumably she supports funds that say hell awaits adulterers, fornicators, liars, drunks, thieves, atheists and idolators.

Regardless of whether one agrees with Folau’s religious beliefs or not, thousands of people still volunteered $750,000 to defend his rights to free speech. Will GoFundMe doxx all of those people who felt his cause was worthy enough to donate to? If he provides his bank account details for deposits, will his bank suspend his personal account?

Many people think it is outrageous that Folau doesn’t sell his properties and self-fund. Yet who are they to determine the voluntary nature of people who helped him raise $750k? They were not forced to. Do those who donated tell the faux outrage mob how to spend their money? No.

The irony is that GoFundMe is more than happy to run campaigns of $3m (GBP1.6m) to attack Folau for his supposed intolerance. Is that the sort of double standard the company operates under? CM is sure that GoFundMe will say it was an accident.

It wasn’t that long ago that GoFundMe happily allowed people to raise funds to pay for ladders assisting illegal immigrants to thwart national border protection laws. So when it comes to breaking federal US laws, then raising funds is OK under GoFundMe guidelines? One presumes that GoFundMe enforces its own arbitrary set of rules against its own pet causes.

Don’t forget that GoFundMe happily allowed $80,000 to be raised for Egg Boi who attacked Fraser Anning. Once again, regardless of Anning’s views, funds were raised for the legal defence of a teenager who committed violence, harassed, expressed hate and showed intolerance of another’s view, no matter how abhorrent the former Senator’s words might have been. Doesn’t that violate the same terms and conditions? Or is that OK because GoFundMe dislikes our politicians?

One hopes Folau moves to another fundraising site and doubles his target. GoFundMe has only shown exactly why free speech is at stake. CM doesn’t think much of his tweet but the reality is that 99.8% of people rolled their eyes and moved on. Rugby Australia (RA) also flicked the chicken switch and appears to have acted in haste and ran the risk of constructive dismissal. RA practices the very discrimination it claims it does not.

In any event, GoFundMe’s hypocrisy is there for all to see. If we want to express outrage that people didn’t fund better causes, look no further than the Refugee and Immigrant Center for Education and Legal Services (RAICES). The viral photo-shopped Time magazine picture of a little girl crying at a defiant Trump was used with great effect by RAICES to raise $20mn via Facebook crowdfunding!

Even after it was revealed that the child – stolen from her father – was never separated from the mother (who left her other 3 kids behind) and paid a smuggler to get to the border, RAICES still shamelessly uses the picture to boost its funding target to $25mn. Sanctimony at its finest.

Nippon Carbon – hidden black diamond

Nippon Carbon (5302) is a hidden gem. CM stumbled over this company in 2012. A decade prior to this, one of the commercial jet engine makers spoke of a new space age technology on the horizon. He mentioned there was a secret sauce that went in to make ceramic matrix composites (CMC). However, because of the secretive nature of R&D, the supplier wasn’t disclosed. So 12 years after that meeting and years of trying to hunt down this miracle ingredient, CM stumbled into meet Nippon Carbon to discuss its mainline graphite electrodes business. In the lobby, a dusty glass trophy cabinet revealed a mysterious cotton reel with black fibres wrapped around it (pic above).

Needless to say on application, the investor relations director told CM it was Hi-Nicalon which goes into CMC! Bingo. Forget the mainstay graphite electrodes! CM found the missing link. In the process, he told CM that the company had spent 40 (yes, forty) years developing it. Who does that? Only in Japan. What the material does is enable jet engines to burn hotter which means longer life, more efficiency with fewer emissions and lower weight. Win, win, win, win.

CFM International (GE/Safran JV) has 8,000 jets (16,000 engines) in the order book. Nippon Carbon’s JV to make Hi-Nicalon was lifted 10 fold in recent years to 10 tons (full capacity will be hit this year) and GE has licensed another 100% capacity increase from Nippon Carbon to produce locally in the US. It is black gold of another dimension.

What is often underestimated, is that passing new technology in commercial aerospace is way harder than seeking new drug approval in the pharmaceutical world. A new drug might have drowsiness as a side effect. A jet engine can’t have that level of failure risk. So now that this product is already flying in the B737 MAX and A320neo, the technology will be rolled out on all new commercial jets from this point. The next generation Boeing 777x will sport Hi-Nicalon in its GENx engines which will use about 5x the material than a B737. 340 orders for the B777x have already been placed by airlines. Deliveries begin in May 2020. GE will be the only engine choice on 777x.

Nippon Carbon is the sole CMC source ingredient producer for GE, the world’s largest jet-engine/turbine maker. The wonderful part about that is the fact that no substitutes will replace it. There are no competitors because in aerospace, quality of material matters. Only source suppliers get a look in. Nippon Carbon owns 50% of the NGS Advanced Fibers business where Hi Nicalon sits. GE & Safran own 25% each of the remainder. 

Ube Industries (4208) has Tyranno-fiber and is partnered with Rolls-Royce. Yet it is tiny part inside a business dominated by construction cement.

Nippon Carbon shares were hit hard the day before 1Q earnings on the back of a downward revision by competitor Tokai Carbon (5301). This is what happens when stocks have no official stockbroker coverage and get tarred by having “Carbon” in the name.

Nippon Carbon’s 1Q results came out after the close the following day, reporting a 46% increase in sales vs last year and a 168% increase in EPS. Full-year earnings were left unchanged.

Nippon Carbon mentioned tougher pricing position in graphite electrodes like Tokai Carbon, but the volume side appears healthier. It would not disclose customers but said demand was still healthy.

Sadly, disclosure is not a strong point of many Japanese companies and Nippon Carbon is no exception. Yet Japanese retail investors get hysterical over homegrown technology winding its way onto globally famous products. Toray (3402), the massive textile manufacturer, signed an exclusive supply contract with Boeing for the 787’s carbon fibre needs. The share price did the following. The slump came on the back of GFC.

Toray Chart.png

Toray’s stock trebled. Carbon fibre was only 12% of its earnings at the time. It is around 20% today. The rest of the Toray business was low margin textiles. Buying Toray to get exposure to 787 was like buying a fruitcake to get some raisins.

Osaka Titanium

Osaka Titanium Technologies (5726) had an even more bonkers reaction to the 787 which was loaded with titanium parts. Coupled with a global production shortage of titanium sponge and sharply higher contract prices, OTT shares jumped 28x! From relative obscurity, the stock became the most liquid stock in Japan. This is what happens when the small-cap retail lunatics are running the asylum.

5302.png

Based on Nippon Carbon’s FY2019 EPS forecast of ¥1,148 it trades on a 3.6x PE ratio. It trades below replacement cost and invested capital. CM thinks that if it manages to hit 20t of Hi-Nicalon by 2020 its EPS could approach ¥1353. That would put it on 3.05x.  Writing in an Armageddon scenario (literally nuking the core graphite electrode business) of ¥210 EPS the stock would be trading at a trough 19.6x. Normally industrials in a downturn would face losses or 50-100x multiples. 

To be honest its biggest problem is that the Nippon Carbon has such woeful marketing of itself. A visit to its Tokyo HQ reveals a 1950s lobby. It doesn’t spend a lick on itself which is also a relief. No frills. It is a proper engineering company. Unlike Toray and Osaka Titanium (at the time), Nippon Carbon has no official broker coverage meaning it remains in obscurity.

Hi-Nicalon is truly revolutionary. It is a once in half-a-century product. It will become the defacto standard jet engine material. At the moment it stands at around 5% of revenue and minimal profit as it ramps up but by next year it could be as high as 15-16% in a few years, which maybe conservative. Depending on the demand for aircraft, it may head higher. It is worth noting at the time of GFC, airlines many upgraded to more efficient aircraft to lower operating costs. Leasing companies obliged. That isn’t to say that Nippon Carbon is isolated by any means but the product itself is unique which provides relative stability.

Worth taking a long hard look at the story. This is a game changer material. We only need for the retail investor to cotton on to this story and let the Pride of Nippon push it to absurd valuations. We have the history of Toray and Osaka Titanium. At 3.6x it is already at absurd valuations (just at the opposite end).

Panasonic pulls the plug on further Tesla capex

What a surprise? Panasonic is the main supplier of Tesla batteries. The Japanese tech giant is pulling the plug on further investment as it cites “financial problems” according to the Nikkei.

Panasonic had planned to ramp up production to 54GW by 2020 but it seems likely to stick to 35GW.

CM made the stance clear in the 30 reasons why Tesla will be a bug on a windshield report with respect to growth being at the mercy of suppliers willingness to co-invest.

Japanese suppliers are among some of the most tolerant around. For them to get pangs of concern should speak volumes about the real underlying conditions at Tesla. So much for a vote of confidence.