China and US Equity Analyst

Roger Xie

Equity Bottom-Up

<p><a href="https://www.smartkarma.com/insights/hkex-388-hk-solid-quarter-with-strong-trading-volume-but-weak-investment-income" target="_blank" rel="noopener">HKEx (388.HK): Solid 1Q20 Quarter with Strong Trading Volume but Weak Investment Income</a>, the bourse also announced that its CEO Charles Li would not seek re-appointment when his term ends in Oct'21. Mr. Li has held HKEx CEO helm for ten years and is widely respected as the mastermind of stock connect program. Investors might wonder whether the change would signal a strategic shift. We disagree and believe near-term share price weakness could provide good entry point to accumulate. </p><p>Our bullish view are based on the followings:</p><p>1) Hong Kong's defacto central bank HKMA is the single largest shareholder of HKEx, and Hong Kong government appoints 6 of 13 board directors of HKEx (13 board members include 6 appointments from Hong Kong government, 6 elections from shareholders, and HKEx CEO). We don't expect a strategic shift at HKEx.</p><p>2) HKEx serves as the only offshore gateway to China capital market. HKEx has consistently enjoyed the superior margin and profitability, given that it can charge higher trading fee rates than other bourses. Chinese companies and investors prefer HKEx as the offshore trading venue. We don't expect this dynamic will change.</p><p>3) Stock connect program has become a more important trading volume contributors for HKEx. We expect this trend continue as the program continues to enhance. China ADR returning to list in HK will bring more trading volume to HKEx. And the launch of MSCI China A-share Index future could complement HKEx derivative product offering. </p><p>We forecast HKEx Securities ADT reaches HK$140/150bn in FY 20-21E, which translates to profitability growing at 20% year-over-year in 2020. We are using forward 29x P/E as multiple. The sensitivity analysis of share price and ADT points to TP HK$280.</p><figure class="editor-figure mceNonEditable"><img class="editor-image img-responsive" src="https://static-prod.smartkarma.com/images/media/000/132/326/original/image.png?1589039299" data-smartkarma-image-id="132326"></figure>

HKEx (388.HK): Solid 1Q20 Quarter with Strong Trading Volume but Weak Investment Income, the bourse also announced that its CEO Charles Li would not seek re-appointment when his term ends in Oct'21. Mr. Li has held HKEx CEO helm for ten years and is widely respected as the mastermind of stock connect program. Investors might wonder whether the change would signal a strategic shift. We disagree and believe near-term share price weakness could provide good entry point to accumulate. Our bullish view are based on the followings:1) Hong Kong's defacto central bank HKMA is the single largest shareholder of HKEx, and Hong Kong government appoints 6 of 13 board directors of HKEx (13 board members include 6 appointments from Hong Kong government, 6 elections from shareholders, and HKEx CEO). We don't expect a strategic shift at HKEx.2) HKEx serves as the only offshore gateway to China capital market. HKEx has consistently enjoyed the superior margin and profitability, given that it can charge higher trading fee rates than other bourses. Chinese companies and investors prefer HKEx as the offshore trading venue. We don't expect this dynamic will change.3) Stock connect program has become a more important trading volume contributors for HKEx. We expect this trend continue as the program continues to enhance. China ADR returning to list in HK will bring more trading volume to HKEx. And the launch of MSCI China A-share Index future could complement HKEx derivative product offering. We forecast HKEx Securities ADT reaches HK$140/150bn in FY 20-21E, which translates to profitability growing at 20% year-over-year in 2020. We are using forward 29x P/E as multiple. The sensitivity analysis of share price and ADT points to TP HK$280.

HKEx (388.HK): CEO Transition Doesn't Change Our Bullish View

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

<p><em><strong>* Swing and A Miss:</strong></em>Hong Kong Exchanges &amp; Clearing (388.HK)[HKEx] reported 1Q20 results of HKD 2.26 mn. Although 13.9% below consensus, linked quarter results were quite the improvement over 4Q19 – increasing HKD 283 mn or 14.3%.The consensus miss was primarily the result of a HKD 626 mn (108%) decline in investment income which posted a HKD 46 mn loss during the period which was related to a mark-to-market (MTM) of its equity and bond portfolios;</p><p><strong><em>* Results Challenged Going Forward:</em></strong> HKEx’s core operating revenue could see near-term weakness as market activity slows. There are downside risks to trading volumes post the initial sell-off amid market volatility. As such, linked quarter 2Q20 ADTV has already declined some 20% at HKD 100 bn with Stock Connect ADTV down by about 15%. We note a similar trend in derivatives. Nevertheless, if markets become robust, HKEx does appear to have strong IPO and a secondary market ADR pipelines; and</p><p><strong><em>* CEO On His Way Out The Door: </em></strong>HKEx also announced that it will begin a formal search process for a successor to its CEO Charles Li who is not seeking re-appointment. He will also be remembered for destroying HKEx’s balance sheet by substantially overpaying for LME at the top of the market, and nearly doing it again with his failed London Stock Exchange bid with his everything British obsession. We wish Mr. Li nothing but the best in his retirement and are hopeful that NO internal hire is made.</p>

* Swing and A Miss:Hong Kong Exchanges &amp; Clearing (388.HK)[HKEx] reported 1Q20 results of HKD 2.26 mn. Although 13.9% below consensus, linked quarter results were quite the improvement over 4Q19 – increasing HKD 283 mn or 14.3%.The consensus miss was primarily the result of a HKD 626 mn (108%) decline in investment income which posted a HKD 46 mn loss during the period which was related to a mark-to-market (MTM) of its equity and bond portfolios;* Results Challenged Going Forward: HKEx’s core operating revenue could see near-term weakness as market activity slows. There are downside risks to trading volumes post the initial sell-off amid market volatility. As such, linked quarter 2Q20 ADTV has already declined some 20% at HKD 100 bn with Stock Connect ADTV down by about 15%. We note a similar trend in derivatives. Nevertheless, if markets become robust, HKEx does appear to have strong IPO and a secondary market ADR pipelines; and* CEO On His Way Out The Door: HKEx also announced that it will begin a formal search process for a successor to its CEO Charles Li who is not seeking re-appointment. He will also be remembered for destroying HKEx’s balance sheet by substantially overpaying for LME at the top of the market, and nearly doing it again with his failed London Stock Exchange bid with his everything British obsession. We wish Mr. Li nothing but the best in his retirement and are hopeful that NO internal hire is made.

<ul><li>
<strong><em>Strong FY 4Q19 To End Year: </em></strong>Japan Exchange (JSX) reported a strong FY 4Q19 result of JPY 14.3 bnm increasing JPY 2.6 bn (22.2%) linked period. Outperformance was across the board on transaction revenues, which improved JOY 5.1 bn (28.7%); standouts during the period were derivatives trading which increased JPY 2.3 bn (79.3%) and cash equities trading which increased JPY 1.3 bn or 21.0%; and </li></ul><ul><li>
<em><strong>Lowering Guidance:</strong></em>April derivative volumes  are tracking 61% lower MOM and cash equities volumes are tracking 35%. With that, JSX is guiding for an 11% YOY decline in FY 2020 net income reflecting a forecasted 2% lower top line, and 5% higher operating expenses.</li></ul>


Strong FY 4Q19 To End Year: Japan Exchange (JSX) reported a strong FY 4Q19 result of JPY 14.3 bnm increasing JPY 2.6 bn (22.2%) linked period. Outperformance was across the board on transaction revenues, which improved JOY 5.1 bn (28.7%); standouts during the period were derivatives trading which increased JPY 2.3 bn (79.3%) and cash equities trading which increased JPY 1.3 bn or 21.0%; and 
Lowering Guidance:April derivative volumes  are tracking 61% lower MOM and cash equities volumes are tracking 35%. With that, JSX is guiding for an 11% YOY decline in FY 2020 net income reflecting a forecasted 2% lower top line, and 5% higher operating expenses.

Japan Exchange – Nice Way to End The Year

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/130/679/original/2020-05-01_05-31-11.png?1588278692" class="editor-image img-responsive" data-smartkarma-image-id="130679"></figure><div class="content-caption">Source • Japan Analytics</div><div class="content-caption"></div><p><strong>COMFORT BLANKET</strong> - As the politically-motivated Central Banks smother equity markets with the comfort blanket of the 'mother of all QEs', the reality of what The Economist describes as the '90% Economy' unfolds in the daily earnings and forecasts revisions announced by Japanese companies. In some cases, such as <a href="https://www.smartkarma.com/entities/nidec-corp" target="_blank" data-smartkarma-citation="entities:7245:1" rel="noopener">Nidec (6594 JP)</a>, the picture is distorted by the strength in overseas demand in February as Chinese competition was put on hold and the rest of North Asia took up the resulting 'slack'. As we have noted before, the first and second-order impacts of COVID-19 will not be revealed until the August and November results, when we expect both of our Scores to be closer to their 2009 troughs. Meanwhile, the US Federal Reserves trillion-dollar rescue package will keep upward pressure on the yen as the Bank of Japan struggles to keep up.  </p><p><strong>COUNTERMEASURES</strong> - Japan's revised supplementary budget was approved yesterday, allowing for interest-free loans to businesses, tax deferrals and cash handouts to all households. The COVID crisis has also prompted Japan to engage in a bout of 'magical thinking' allowing for the rolling back or revision of many long-cherished traditions:-</p><ul>
<li>The start of the academic year will now probably be pushed back to September this year - discussions have started to make this shift permanent, finally bringing Japan into line with the rest of the world.</li>
<li>Hanko personal and corporate seals that are required to certify documents may now also be going the way of the dodo as the Keidanren business organisation has acknowledged that they 'do not meet the digital age'.</li>
</ul><hr><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/130/680/original/File%202020-05-01%203%2039%2027.jpeg?1588280828" class="editor-image img-responsive" data-smartkarma-image-id="130680"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/130/681/original/File%202020-05-01%203%2027%2003.jpeg?1588280873" class="editor-image img-responsive" data-smartkarma-image-id="130681"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/130/683/original/File%202020-05-01%203%2040%2007.jpeg?1588281553" class="editor-image img-responsive" data-smartkarma-image-id="130683"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/130/682/original/File%202020-05-01%203%2031%2028.jpeg?1588280903" class="editor-image img-responsive" data-smartkarma-image-id="130682"></figure><div class="content-caption">Source • ourworldindata.org</div><p><strong>MAYDAY</strong> - Although Japan's daily case count has fallen to around 200, the medical experts advising the Japanese government are suggesting that this level will require an extension to the states of emergency (SOEs) currently operating in all prefectures beyond May 6th. Hospitals are still working at above-normal capacity, and patients are still being turned away from many hospitals. Alarmingly Japan's current eight death-doubling-days count is amongst the worst in the world. Also, excess mortality data for Tokyo suggests that, in March, there were over 60 excess deaths a week not attributed to COVID-19. The expectation is that the SOEs will be extended to Sunday, May 31st and that schools will not reopen until September. In most European countries extensive testing is one of the requisites for easing lockdown restrictions, and the UK is now ramping up testing capacity in anticipation. Japan's woeful record on testing will become a factor by the end of May. Japan's case fatality rate of 3% suggests that the number of cases could be ten times the official number.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/130/684/original/2020-05-01_06-41-23.png?1588282906" class="editor-image img-responsive" data-smartkarma-image-id="130684"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>30TH APRIL -</strong> In the <strong>DETAIL</strong> below, we shall review Thursday's large-cap results, revisions and initial forecast announcements.  The positive/neutral/negative balance for the 132 results was 51:10:71; and for the 83 revisions or initial forecasts, the split was 30:7:43. Of the 98 companies announcing annual results, only 43 made forecasts for the current year. The ratio of dividend cuts to increases was 5:10 with <a href="https://www.smartkarma.com/entities/japan-exchange-group-inc" target="_blank" data-smartkarma-citation="entities:11266:1" rel="noopener">Japan Exchange Group (8697 JP)</a> being the most prominent in the former camp.</p>

Source • Japan AnalyticsCOMFORT BLANKET - As the politically-motivated Central Banks smother equity markets with the comfort blanket of the 'mother of all QEs', the reality of what The Economist describes as the '90% Economy' unfolds in the daily earnings and forecasts revisions announced by Japanese companies. In some cases, such as Nidec (6594 JP), the picture is distorted by the strength in overseas demand in February as Chinese competition was put on hold and the rest of North Asia took up the resulting 'slack'. As we have noted before, the first and second-order impacts of COVID-19 will not be revealed until the August and November results, when we expect both of our Scores to be closer to their 2009 troughs. Meanwhile, the US Federal Reserves trillion-dollar rescue package will keep upward pressure on the yen as the Bank of Japan struggles to keep up.  COUNTERMEASURES - Japan's revised supplementary budget was approved yesterday, allowing for interest-free loans to businesses, tax deferrals and cash handouts to all households. The COVID crisis has also prompted Japan to engage in a bout of 'magical thinking' allowing for the rolling back or revision of many long-cherished traditions:-
The start of the academic year will now probably be pushed back to September this year - discussions have started to make this shift permanent, finally bringing Japan into line with the rest of the world.
Hanko personal and corporate seals that are required to certify documents may now also be going the way of the dodo as the Keidanren business organisation has acknowledged that they 'do not meet the digital age'.
Source • ourworldindata.orgMAYDAY - Although Japan's daily case count has fallen to around 200, the medical experts advising the Japanese government are suggesting that this level will require an extension to the states of emergency (SOEs) currently operating in all prefectures beyond May 6th. Hospitals are still working at above-normal capacity, and patients are still being turned away from many hospitals. Alarmingly Japan's current eight death-doubling-days count is amongst the worst in the world. Also, excess mortality data for Tokyo suggests that, in March, there were over 60 excess deaths a week not attributed to COVID-19. The expectation is that the SOEs will be extended to Sunday, May 31st and that schools will not reopen until September. In most European countries extensive testing is one of the requisites for easing lockdown restrictions, and the UK is now ramping up testing capacity in anticipation. Japan's woeful record on testing will become a factor by the end of May. Japan's case fatality rate of 3% suggests that the number of cases could be ten times the official number.Source • Japan Analytics30TH APRIL - In the DETAIL below, we shall review Thursday's large-cap results, revisions and initial forecast announcements.  The positive/neutral/negative balance for the 132 results was 51:10:71; and for the 83 revisions or initial forecasts, the split was 30:7:43. Of the 98 companies announcing annual results, only 43 made forecasts for the current year. The ratio of dividend cuts to increases was 5:10 with Japan Exchange Group (8697 JP) being the most prominent in the former camp.

🇯🇵 JAPAN • Results & Revisions Update 30th April - D1Life, Toto, JR-W, CTC, Murata, Nidec, Mercari

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

<div><p>The short notional in the market for the data released 28 April is US$33.44bn (down by US$62mm excluding FX movements and ETFs) with the largest short positions in <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a>, <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1"></a><a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a>, <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1:1">Canon Inc (7751 JP)</a> and <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:27445:1">Softbank Corp (9434 JP)</a>. </p></div><div><p>Most shorted stocks as a percentage of free float are <a href="https://www.smartkarma.com/entities/aruhi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:26072:1">Aruhi Corp (7198 JP)</a>, <a href="https://www.smartkarma.com/entities/anritsu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:3700:1">Anritsu Corp (6754 JP)</a>, <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a>, <a href="https://www.smartkarma.com/entities/nitta-gelatin-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1481:1">Nitta Gelatin (4977 JP)</a> and <a href="https://www.smartkarma.com/entities/leopalace21-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:8244:1">Leopalace21 Corp (8848 JP)</a> while the stocks with the highest days to cover are <a href="https://www.smartkarma.com/entities/nitta-gelatin-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1481:1">Nitta Gelatin (4977 JP)</a>, <a href="https://www.smartkarma.com/entities/vital-ksk-holdings-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:7398:1">Vital Ksk Holdings (3151 JP)</a>, <a href="https://www.smartkarma.com/entities/aruhi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:26072:1">Aruhi Corp (7198 JP)</a>, <a href="https://www.smartkarma.com/entities/katakura-industries-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:2007:1">Katakura Industries (3001 JP)</a> and <a href="https://www.smartkarma.com/entities/zojirushi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:19842:1">Zojirushi Corp (7965 JP)</a>.</p></div><div><p>The largest increases in short notional over the week were <a href="https://www.smartkarma.com/entities/astellas-pharma-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:6091:1">Astellas Pharma (4503 JP)</a>, <a href="https://www.smartkarma.com/entities/advantest-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18107:1">Advantest Corp (6857 JP)</a>, <a href="https://www.smartkarma.com/entities/kubota-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:12926:1">Kubota Corp (6326 JP)</a> and <a href="https://www.smartkarma.com/entities/ana-holdings-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:5308:1">Ana Holdings (9202 JP)</a> while shorts were covered in <a href="https://www.smartkarma.com/entities/shiseido-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5718:1">Shiseido Co Ltd (4911 JP)</a>, <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/japan-exchange-group-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:11266:1">Japan Exchange Group (8697 JP)</a> and <a href="https://www.smartkarma.com/entities/monotaro-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:15441:1">Monotaro Co Ltd (3064 JP)</a>.   </p></div><div><p>Sectorally, short positions increased in Health Care (US$175m), Communication Services (US$49m) and Industrials (US$42m) while shorts decreased in Consumer Staples (US$118m) and Consumer Discretionary (US$86m).</p></div>

The short notional in the market for the data released 28 April is US$33.44bn (down by US$62mm excluding FX movements and ETFs) with the largest short positions in Itochu Corp (8001 JP), Fast Retailing (9983 JP), Toyota Motor (7203 JP), Canon Inc (7751 JP) and Softbank Corp (9434 JP). Most shorted stocks as a percentage of free float are Aruhi Corp (7198 JP), Anritsu Corp (6754 JP), Taiyo Yuden (6976 JP), Nitta Gelatin (4977 JP) and Leopalace21 Corp (8848 JP) while the stocks with the highest days to cover are Nitta Gelatin (4977 JP), Vital Ksk Holdings (3151 JP), Aruhi Corp (7198 JP), Katakura Industries (3001 JP) and Zojirushi Corp (7965 JP).The largest increases in short notional over the week were Astellas Pharma (4503 JP), Advantest Corp (6857 JP), Kubota Corp (6326 JP) and Ana Holdings (9202 JP) while shorts were covered in Shiseido Co Ltd (4911 JP), Fast Retailing (9983 JP), Japan Exchange Group (8697 JP) and Monotaro Co Ltd (3064 JP).   Sectorally, short positions increased in Health Care (US$175m), Communication Services (US$49m) and Industrials (US$42m) while shorts decreased in Consumer Staples (US$118m) and Consumer Discretionary (US$86m).

More Covering on Consumer Staples and Discretionary

Japan

Japan Exchange Group Inc is the holding company created through the merger of Tokyo Stock Exchange Group, Inc and Osaka Securities Exchange Co., Ltd. The group provides and operates a marketplace for the trading of equities, futures, and options. The Group manages the trading, as well as administers listed stocks and registered members.

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Japan Exchange Group (8697 JP)

HKEx (388.HK): CEO Transition Doesn't Change Our Bullish View

HKEx (388.HK): Solid 1Q20 Quarter with Strong Trading Volume but Weak Investment Income, the bourse also announced that its CEO Charles Li would...

Roger Xie

HKEx – He’s Li-Eaving!!

* Swing and A Miss:Hong Kong Exchanges & Clearing (388.HK)[HKEx] reported 1Q20 results of HKD 2.26 mn. Although 13.9% below consensus, linked...

Thomas J. Monaco

Japan Exchange – Nice Way to End The Year

Strong FY 4Q19 To End Year: Japan Exchange (JSX) reported a strong FY 4Q19 result of JPY 14.3 bnm increasing JPY 2.6 bn (22.2%) linked period....

Thomas J. Monaco

🇯🇵 JAPAN • Results & Revisions Update 30th April - D1Life, Toto, JR-W, CTC, Murata, Nidec, Mercari

COMFORT BLANKET - As the politically-motivated Central Banks smother equity markets with the comfort blanket of the 'mother of all QEs', the...

Campbell Gunn

More Covering on Consumer Staples and Discretionary

The short notional in the market for the data released 28 April is US$33.44bn (down by US$62mm excluding FX movements and ETFs) with the largest...

Brian Freitas

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