UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS and INTERNATIONAL CENTER FOR PROMOTION OF ENTERPRISES, (ICPE), LJUBLJANA MASTER DEGREE THESIS THE ANALYSIS OF INVESTMENT OPPORTUNITIES IN THE JAPANESE ELECTRICAL MACHINERY AND COMMUNICATION INDUSTRIES Ljubljana, September 2004 Primož Krajnik I Author’s Statement I Primož Krajnik, hereby certify to be the author of this Master’s Degree thesis, which was written under mentorship of Dr. Silva Deželan and in compliance with the Act of Author’s and Related Rights – Para. 1, Article 21. I herewith agree this thesis to be published on the website pages of ICPE and the Faculty of Economics. Ljubljana, September 9, 2004 Signature…….……………… II CONTENTS 1 INTRODUCTION.......................................................................................................1 1.1 DESCRIPTION OF THE PROBLEM.......................................................................1 1.2 THE PURPOSE OF THE THESIS............................................................................2 1.3 THE GOALS OF THE THESIS ................................................................................3 1.4 METHODS APPLIED IN THE THESIS ..................................................................3 1.5 STRUCTURE OF THE THESIS...............................................................................4 2 INVESTING STRATEGIES AND METHODS ......................................................5 2.1 INTRODUCTION TO INVESTING AND RISKS INVOLVED .............................5 2.1.1 Business or »Stand-Alone« risk.............................................................................5 2.1.2 Non-diversifiable or market risk ............................................................................6 2.1.3 Diversification........................................................................................................8 2.1.4 Capital Asset Pricing Model and its critics............................................................9 2.2 EQUITY MANAGEMENT STRATEGIES............................................................10 2.2.1 Value Investing....................................................................................................11 2.2.2 Growth investing..................................................................................................12 2.2.3 Growth at a reasonable price - GARP..................................................................13 2.3 APPROACHES TO SECURITY ANALYSIS........................................................15 2.3.1 Top-down and bottom-up approach.....................................................................15 2.3.2 Fundamental stock analysis.................................................................................17 2.3.3 Technical analysis................................................................................................22 2.3.4 Which type of analysis is better? .........................................................................23 2.4 STOCK VALUATION MODELS...........................................................................23 2.4.1 Gordon's constant growth model..........................................................................24 2.4.2 Multistage growth model .....................................................................................24 2.4.3 Free cash flow models..........................................................................................25 2.4.4 Valuation based on market multiples...................................................................28 2.5 CRITERIA FOR SELECTING STOCKS ...............................................................29 2.5.1 Personal selection criteria and their use in the final model..................................30 3 CHARACTERISTICS OF THE JAPANESE STOCK MARKET ......................35 3.1 CHARACTERISTICS OF THE NIKKEI STOCK AVERAGE .............................36 3.1.1 Nikkei 225 stock average.....................................................................................36 3.1.2 Nikkei 500 stock average.....................................................................................38 3.2 HISTORICAL PERFORMANCE OF NIKKEI 225 AND ITS MAIN FACTORS BEHIND...................................................................................................................38 3.3 A COMPARISON BETWEEN JAPANESE GENERALLY ACCEPTABLE ACCOUNTING PRACTICES (GAAP) AND INTERNATIONAL ACCOUNTING STANDARDS..........................................................................................................40 III 4 FUNDAMENTAL ANALYSIS OF SELECTED NIKKEI 500 COMMUNICATION AND ELECTRIC MACHINERY INDEX STOCKS.......43 4.1 TOP-DOWN APPROACH TO FUNDAMENTAL ANALYSIS OF JAPANESE STOCKS ..................................................................................................................43 4.1.1 The Japanese macroeconomic situation...............................................................45 4.1.2 Japanese economic recovery................................................................................49 4.1.3 Business cycles and Japanese economy...............................................................52 4.1.4 US counterparts for Japanese electric machinery and communication industry..54 4.2 ANALYSIS OF THE NIKKEI 500 COMMUNICATIONS STOCKS...................55 4.2.1 Telecommunication sector...................................................................................55 4.2.2 The broadcasting sector........................................................................................64 4.3 ANALYSIS OF THE NIKKEI 500 ELECTRIC MACHINERY STOCKS............69 4.3.1 Audio and video products sector..........................................................................72 4.3.2 The robots, automation equipment, and system engineering sector ....................79 4.3.3 The electronic measurement equipment and scientific instruments sector..........83 4.3.4 The IT solutions, computer and peripherals, CD-ROM, disk drives, LCD displays sector ..........................................................................................................87 4.3.5 The electronic components: Semiconductors, IC, semiconductor equipment, passive components, circuit boards and assembly sector.........................................92 4.3.6 Lighting and auto parts sector..............................................................................97 4.3.7 Miscellaneous.....................................................................................................100 4.4 THE FINAL SELECTION OF THE ANALYSED FIRMS..................................102 5 CONCLUSIONS .....................................................................................................105 REFERENCES........................................................................................................107 SOURCES................................................................................................................111 APPENDIX IV List of abbreviations Abbreviation Description 3G Third Generation AC Alternate Current ADR American Depositary Receipts ADSL Asymmetric Digital Subscriber Line APT Arbitrage Pricing Theory ARPU Average Revenue Per Unit ASBJ Accounting Standards Board of Japan ASIC Application Specific Integrated Circuit AV Audio / Video B Billion = 1,000,000,000 B/M Book-to-Market price ratio (the opposite of P/B) CAPM Capital Asset Pricing Model CEO Chief Executive Officer CF Cash Flow CFO Chief Financial Officer CCFL Cold Cathode Fluorescent Lamp (light source in LCD) CMOS Complementary Metal Oxide Semiconductor CNBC CNBC television = Consumer News and Business Channel CNC Computerized Numerically-Controlled CR Current Ratio (of short term assets to debt) CRT Cathode-Ray Tube (for monitors and TV sets) CT Computed Tomography CV Coefficient of variance D/E Debt to Equity ratio DCF Discounted Cash Flow DDM Dividend Discount Model DPF Diesel Particular Filters DPS Dividend Per Share DRAM Dynamic RAM – RAM which has to be continuously refreshed to keep information DSL Digital Subscriber Line DVD Digital Video Disk EAFE Europe, Australasia, Far East EBIT Earnings Before Interests and Taxes EBITDA Earnings Before Interests, Taxes, Depreciation, and Amortization ECB European Central Bank EMH Efficient Market Hypothesis EPS Earnings Per Share EU European Union FCF Free Cash Flow FCFE Free Cash Flow to Equity FCFF Free Cash Flow to Firm FDD Floppy Disc Drive (data storage media) FPGA Field-Programmable Gate Array FSA Financial Services Agency V Abbreviation Description FY Fiscal Year G7 Group of 7 most developed world nations to which Russia was added to form G8 GAAP Generally Acceptable Accounting Practices GARP Growth at a Reasonable Price GDP Gross Domestic Product GNP Gross National Product GPS Global Positioning System HD High Definition HDD Hard Disc Drive (data storage media) HID High Intensity Discharge IAS International Accounting Standards IC Integrated Circuit (semiconductor chip) IFO Institute for Economic Research, Munich IFR International Federation of Robotics IFRS International Financial Reporting Standards IPO Initial Public Offering IP Internet Protocol or Intellectual Property IT Information Technology LCD Liquid Crystal Display LSI Large Scale Integration (for semiconductor circuits) LT Long Term M1 Total money supply. M1 includes only checkable demand deposits M2 Money supply 2is M1 and also savings and other time deposits MC Market Capitalization MOU Minutes of Usage MRAM Magneto-resistive RAM, or Magnetic RAM MRI Magnetic Resonance