Survival Kit for an Equity Analyst The Essentials You Must Know

In Survival Kit for an Equity Analyst: The Essentials You Must Know, veteran analyst Shin Horie delivers a must-read, practical guide on the analysis of companies and industries. The book offers a guide to conducting industry-level analysis from a global perspective, with a particular emphasis on adjustments necessary for covering companies in emerging markets. Readers will also get:

• A robust background on the basic process flow of company analysis and valuation
• Guidelines for examining earnings drivers in major industries
• Tips on the qualitative profiling of companies and how to dig deeper to find nuance that financial statements don't express

Perfect for early-career equity analysts themselves, as well as corporate managers who seek to understand how their organisations will be scrutinized and examined by finance professionals, Survival Kit for an Equity Analyst offers readers an insightful narrative on the necessary ingredients for success in this demanding field.

Shin Horie is cohead of Global Single-Name Research (Equity and Credit Research) for Goldman Sachs and is a board member of Goldman Sachs Asia LLC. He is the former director of the Japan Equity Research Department and the former manager of the Korea and Taiwan Equity Research Departments.

Preface

Introduction

I: MY STORY

Lessons from the Past: My Story as an Analyst

From Fish Cakes to Computer Numerical Control (1988–1995)

Not Just a Japanese Tourist – Becoming a China H-share Analyst (1996–1998)

A Truly Global Research Experience – Semiconductor Analyst (1998–2007)

New Lexicon: Clinical Trial, Cap Rate, Embedded Value, Metal Spread (2008–2013)

Importing DM Experience to EM: From Japan to Asia-Pacific (2014–2017)

Connecting the Dots: From Asia to Global
(2018–now)

II: LAYING THE GROUNDWORK

1: Understand the ‘Character’ of the Industry

Six Basic Steps for Forecasting Industry Growth

1: Product and Service Details

2: History of the Industry

3: Definition of TAM and Segments

4: Market Structure

5: Competitor Analysis

6: Global Comparison

TAM Growth Rate

Ten Additional Angles for Testing Forecasts

1: Replacement Threat from Other Businesses

2; Merging Categories

3: Geopolitical Dynamics

4: Consumer Behaviour Changes

5: Pace of Technology Changes

6: Multiple Variables

7: Outsourcing Trends

8: Industry Cyclicality

9: Regulatory Environment

10: Pattern Recognition

2: Assess the Earnings Drivers in Different Industries

Hyper Growth – Internet, Fintech, Biotechnology

Internet

Fintech

Biotechnology

Secular Growth – Software, Medical Technology

Software

Medical Technology

Cyclical – Capital Goods, Transport, Energy, Commodities, Chemicals, Autos

Capital Goods

Transport

Energy

Commodities

Chemicals

Autos

Cyclical Growth – Semiconductor, Electronic

Components, Technology Hardware, Clean Energy

Semiconductor

Electronic Components

Technology Hardware (Enterprise)

Technology Hardware (Consumer)

Clean Energy

Stable – Consumer Staples, Retail, Consumer Discretionary, Pharmaceutical, Media, Business Services

Consumer Staples

Retail

Consumer Discretionary

Pharmaceutical

Media

Business Services

Interest Rate Sensitive – REITs, Property Developers, Banks, Insurance

REITs

Property Developers

Banks

Insurance

Regulated – Utilities, Telecoms

Utilities

Telecoms

Conglomerates

3: Identify the ‘Personality’ of the Company

Product and Service

Origin and History

Management Profile

Ownership Structure

Value Chain

Competitive Moat

Track Record of Strategic Decisions

Corporate Culture by Country

Earnings Guidance Track Record

Controversy Record

Management Quality – A Framework

III: ANALYSE AND APPLY THE FINDINGS

4: Put Findings into the Earnings Model

Segmental Revenue Forecast

Income Statement Forecast

Operating Leverage

Product Pricing

Exchange Rate

Changes in Cost Items

Take Rate

Customer Acquisition Cost

Depreciation Cost

Research and Development Cost

Inventory Fluctuation

Companies with Multiple Businesses

Tax Rate

Minority Interest

Dividend and Share Buybacks

Changes in Accounting Standard

Earnings Guidance of the Company

Balance Sheet Forecast

Working Capital

Fixed Assets

Intangible Assets

Debt Management

Cash Balance

Off-Balance Sheet Items

Cash Flow Forecast

How to Put Cyclicality into Long-term Earnings Forecasts

Quarterly Forecasts can be Helpful

A Birdseye View is Helpful

Financial and Property Sectors are Unique

5: Summarize All Thoughts

A Suggested Method for Creating a Practical Scorecard

6: Find the Appropriate Valuation Framework

Hyper Growth – Internet, Biotechnology

Secular Growth – Software, Medical Technology

Cyclical – Capital Goods, Transport, Energy, Commodities, Chemicals, Autos

Cyclical Growth – Semiconductor, Technology Hardware, Clean Energy

Stable – Consumer Staples, Retail, Consumer Discretionary, Pharmaceutical, Media, Business Services

Interest Rate Sensitive – Banks, Emerging Market Banks, Insurance, Property, REITs

Banks

Emerging Market Banks

Insurance

Property

REITs

 Regulated – Utilities, Telecoms

Conglomerates

Additional Considerations on Valuation

High and Low Multiples

How to Choose Comparable Companies

CROCI

PEG Ratio

Reality Check

Residual Value

Scenario/Sensitivity Analysis

Back Test

M&A Value

Sector-Level Relative View

7: Differentiation versus Street

Is the View Actually Different?

1: The Fair Value Conclusion is Different to the Current Share Price

2: The Earnings Forecasts are Different

3: The Equity Story is Different from the One the Market Believes

Where is the Difference?

What is Driving the Difference?

Value of an Undifferentiated Conclusion

IV: WHAT TO RESEARCH AND HOW TO POWER THE ANALYSIS

8: How to Generate Exciting Ideas

1: Burning Questions

2: Products to Solve Problems

3: Forgotten New Technologies

4: ‘Little Stories’

5: New Language

6: B2B and Orphan Stocks

7: The Second or Third Derivatives of Structural Changes

8: Local Trends

9: Inputs from the Real World

9: How to Deal with Disruptors, Emerging Markets, ESG, and Downturns

How to Forecast and Value ‘Disruptors’

Forecasting the Earnings of Disruptors

How to Look at the Valuation of Disruptors

How Should Emerging Markets be Looked at?

1: Terminology

2: Things Can Move Much Faster

3: Lack of an Apparent Cohesive Strategy

4: Comparison among Emerging Countries

5: Government Subsidy

How to Think about ESG Issues

1: Definition

2: ESG Data

3: Corporate Social Responsibility

4: Business Opportunities

5: ESG Valuation

How to Cope with Economic Downturns

10: Using Soft Skills to Power the Analysis

How to Build a Relationship with Companies

1: Trust

2: Mutual Benefit

3: Passion and Preparation

How to Leverage the Team

1: Share Questions

2: Form a Temporary Cross-Sector Group

3: Casual Chats

4: Debate

5: Joint Presentation

How to Communicate Ideas Effectively

1: Conclusion First

2: Provide Context

3: Know the Audience

4: Use a Few Key Numbers

5: Difference from the Street

6: Listen Carefully

7: Chain of Thought

What Types of Training Should New Analysts Ask for?

1: A Deep Dive Research Project

2: Peer Presentation

3: Critical Thinking Projects

Time Management

1: Timetable

2: Management of Managers

3: Research takes Time

4: Quality and Depth First

V: RECAP AND CLOSING THOUGHTS

How to Predict the Future of a Company …

Closing Thoughts

About the Author

Acknowledgements

List of Acronyms

Index

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