Survival Kit for an Equity Analyst

Discover a one-of-a-kind blueprint to equity analyst success from an industry leader

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.

Preface: Why I Wanted to Write This Book xi

Introduction: How to Approach Company Analysis xv

List of Acronyms xix

Part I: Lessons From the Past: My Story as an Analyst 1

From Fish Cakes to Computer Numerical Control (1988–1995) 2

Not Just a Japanese Tourist – Becoming a China H-share Analyst (1996–1998) 5

A Truly Global Research Experience – Semiconductor Analyst (1998–2007) 7

New Lexicon: Clinical Trial, Cap Rate, Embedded Value, Metal Spread (2008–2013) 11

Importing DM Experience to EM: From Japan to Asia-Pacific (2014–2017) 13

Connecting the Dots: From Asia to Global (2018–now) 16

Part II: Laying the Groundwork 19

Chapter 1: Understand the ‘Character’ of the Industry 21

Six Basic Steps for Forecasting Industry Growth 22

TAM Growth Rate 27

Ten Additional Angles for Testing Forecasts 28

Chapter 2: Assess the Earnings Drivers in Different Industries 37

Hyper Growth – Internet, Fintech, Biotechnology 45

Secular Growth – Software, Medical Technology 48

Cyclical – Capital Goods, Transport, Energy,

Commodities, Chemicals, Autos 49

Cyclical Growth – Semiconductor, Electronic Components, Technology Hardware, Clean Energy 54

Stable – Consumer Staples, Retail, Consumer Discretionary, Pharmaceutical, Media, Business Services 58

Interest Rate Sensitive – REITs, Property Developers, Banks, Insurance 63

Regulated – Utilities, Telecoms 66

Chapter 3: Identify the ‘Personality’ of the Company 71

Product and Service 71

Origin and History 72

Management Profile 73

Ownership Structure 73

Value Chain 74

Competitive Moat 75

Track Record of Strategic Decisions 76

Corporate Culture by Country 77

Earnings Guidance Track Record 77

Controversy Record 78

Management Quality – A Framework 78

Part III: Analyse and Apply the Findings 83

Chapter 4: Put Findings into the Earnings Model 85

Segmental Revenue Forecast 87

Income Statement Forecast 88

Balance Sheet Forecast 95

Cash Flow Forecast 98

How to Put Cyclicality into Long-term Earnings Forecasts 100

Quarterly Forecasts can be Helpful 100

A Birdseye View is Helpful 101

Financial and Property Sectors are Unique 101

Chapter 5: Summarize All Thoughts 105

A Suggested Method for Creating a Practical Scorecard 105

Chapter 6: Find the Appropriate Valuation Framework 109

Hyper Growth – Internet, Biotechnology 112

Secular Growth – Software, Medical Technology 114

Cyclical – Capital Goods, Transport, Energy,

Commodities, Chemicals, Autos 115

Cyclical Growth – Semiconductor, Technology Hardware, Clean Energy 116

Stable – Consumer Staples, Retail, Consumer Discretionary, Pharmaceutical, Media, Business Services 117

Interest Rate Sensitive – Banks, Emerging Market Banks, Insurance, Property, REITs 118

Regulated – Utilities, Telecoms 120

Conglomerates 121

Additional Considerations on Valuation 124

Chapter 7: Differentiation versus Street 131

Is the View Actually Different? 131

Where is the Difference? 132

What is Driving the Difference? 133

Value of an Undifferentiated Conclusion 134

Part IV: What to Research and How to Power the Analysis 135

Chapter 8: How to Generate Exciting Ideas 137

1: Burning Questions 137

2: Products to Solve Problems 138

3: Forgotten New Technologies 138

4: ‘Little Stories’ 139

5: New Language 140

6: B2B and Orphan Stocks 140

7: The Second or Third Derivatives of Structural Changes 141

8: Local Trends 141

9: Inputs from the Real World 141

Chapter 9: How to Deal with Disruptors, Emerging Markets, ESG, and Downturns 145

How to Forecast and Value ‘Disruptors’ 145

How Should Emerging Markets be Looked at? 149

How to Think about ESG Issues 151

How to Cope with Economic Downturns 155

Chapter 10: Using Soft Skills to Power the Analysis 157

How to Build a Relationship with Companies 157

How to Leverage the Team 159

How to Communicate Ideas Effectively 161

What Types of Training Should New Analysts Ask for? 163

Time Management 165

Part V: Recap and Closing Thoughts 169

About the Author 173

Acknowledgements 175

Index 177

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.

In a time when traders following passive management and quant strategies have rapidly increased their weights in total assets under management in equities, it is more important than ever for active equity fund managers to shift to more concentrated and longer-term bets in their portfolios.

Survival Kit for an Equity Analyst: The Essentials You Must Know delivers a fascinating window into the world of company analysis. Drawing on author Shin Horie’s decades of experience as an equity analyst, the book offers readers a practical survival guide to succeeding as an equity research analyst and countless expert tips on how to discover, analyze, forecast, and evaluate public companies.

The author presents the book in a narrative format, providing analysts with a resource that neither stand-alone financial theories nor business textbooks can match. It offers analyses at the industry level, from a global perspective, and with a particular focus on making appropriate adjustments when covering emerging market companies. Readers will learn a method for obtaining a holistic understanding of a sector’s makeup, competitive landscape, and revenue and cost drivers before turning to individual firms and their place in that sector.

Survival Kit for an Equity Analyst explores the background of a basic process flow for company analysis and valuation, gives guidelines for analyzing potential earnings drivers in major industries, and explains how to dig deep into a company’s background to find actionable intelligence that doesn’t reveal itself with a cursory analysis of a financial statement.

Survival Kit for an Equity Analyst: The Essentials You Must Know is a singular resource for entry-level analysts at sell-side research houses, asset management companies, investment banks, private equity firms, and corporate strategy divisions within companies or management consultancies.

Praise for Survival Kit for an Equity Analyst

“Shin Horie has come up with an excellent guidebook for young equity analysts, providing both an overall investment framework and personal episodes useful for professional development. I believe his book would also be valuable to private equity professionals, for valuation analysis, developing investment thesis and analyzing risk factors. The highest recommendation for any professionals engaged in investment activities.”

—John Ehara, Co-founder, Unison Capital

“The book is very clearly written and well organized. It is bursting with practical insights that come from decades of experience combined with analytical understanding. Shin has distilled an extraordinarily complex process into an easy-to-follow manual that is valuable for new and seasoned analysts alike. The checklists at the end of each chapter provide useful summaries, making it easy for someone to go back and quickly find what they are looking for after reading it. The book will become the standard for equity analysts for years to come.”

—Randall S. Kroszner, Deputy Dean for Executive Programs, Norman R. Bobins Professor of Economics, The University of Chicago Booth School of Business

“A practical how-to from someone who was one of the best himself and who supervised the best in the business for over two decades. A rare look inside how the process really works rather than the standard clichés.”

—Steve Strongin, Former head of Global Investment Research, Goldman Sachs

“This book elaborates on how experienced equity analysts analyze industries and companies with frameworks and structure. It is highly recommendable not only for financial professionals but also for senior corporate managers in order to understand how equity analysts and investors are assessing strategies, financials and valuations of companies in practice. His personal anecdotes are also a quite enjoyable read.”

—Tetsuo (Tom) Tsuneishi, Chairman of the board, Tokyo Electron Ltd.