Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

The TOPIX 2019 Free Float Weight Rebalance announcement was made on the 7th of October and the moves in the basket so far are limited. It is still a near-$20bn trade for month-end so investors should be aware of what is moving. There may be portfolio rebalance opportunities for your stocks trading on a LOC basis on the event day.Comprehensive basket performance and excess volume measurements where it matters below.

The TOPIX 2019 Free Float Weight Rebalance announcement was made on the 7th of October and the moves in the basket so far are limited. It is still a near-$20bn trade for month-end so investors should be aware of what is moving. There may be portfolio rebalance opportunities for your stocks trading on a LOC basis on the event day.Comprehensive basket performance and excess volume measurements where it matters below.

Independent Insight Provider, Japanese equities, LightStream Research

Scott Foster

Independent Insight Provider, Japanese equities

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Equity Bottom-Up

1Q results confirmed the first decline in Keyence's sales and profits in a decade. Caused by cyclical weakness in major user industries followed by the U.S.-China trade war, the resulting pall of uncertainty cast over corporate investment plans, and the appreciation of the yen, it has brought a long period of high growth and rising margins to an end.The duration and severity of the downturn remain unclear, but demand for factory automation products from the electronics, auto, and metal &amp; machine tool industries, which together account for more than 60% of the company's sales, is unlikely to rebound quickly. There is no sign of recovery in demand for semiconductors, cell phones, autos or the equipment used to make them. Weakening regional economies and the quarterly data point to difficult year-on-year comparisons for the rest of this fiscal year and the possibility of further sales and profit declines in FY Mar-21. Nevertheless, valuations remain high. At ¥61,400 (Wednesday, August 28 closing price), the shares are selling at 39x our EPS estimate for FY Mar-20, 40x our estimate for FY Mar-21 and 37x our estimate for FY Mar-22. We expect successively weak quarterly results to undermine expectations of a quick return to double-digit growth, with potential downside risk on the order of 20%.

1Q results confirmed the first decline in Keyence's sales and profits in a decade. Caused by cyclical weakness in major user industries followed by the U.S.-China trade war, the resulting pall of uncertainty cast over corporate investment plans, and the appreciation of the yen, it has brought a long period of high growth and rising margins to an end.The duration and severity of the downturn remain unclear, but demand for factory automation products from the electronics, auto, and metal &amp; machine tool industries, which together account for more than 60% of the company's sales, is unlikely to rebound quickly. There is no sign of recovery in demand for semiconductors, cell phones, autos or the equipment used to make them. Weakening regional economies and the quarterly data point to difficult year-on-year comparisons for the rest of this fiscal year and the possibility of further sales and profit declines in FY Mar-21. Nevertheless, valuations remain high. At ¥61,400 (Wednesday, August 28 closing price), the shares are selling at 39x our EPS estimate for FY Mar-20, 40x our estimate for FY Mar-21 and 37x our estimate for FY Mar-22. We expect successively weak quarterly results to undermine expectations of a quick return to double-digit growth, with potential downside risk on the order of 20%.

Keyence (6861 JP): Undermined by Weak Demand and Uncertainty

The acquisition of OMRON Automotive Electronics Co. Ltd., announced on April 16, should further Nidec's advance into vehicle electrification and augmented/autonomous driving, enhancing the growth potential that supports its relatively high valuations. The acquisition will also bring Nidec approximately 600 engineers, forestalling a looming shortage. Omron is reportedly selling because it cannot afford the investment required to remain competitive in automotive control equipment.OMRON Automotive Electronics makes electronic control units (ECUs) for auto body, chassis, transmission and motor control, power steering and other power control systems, remote keyless entry and other RF/LF products, switches and other components. These fit with Nidec's focus on electric power steering (EPS) motors, electric brake motors, electric vehicle (EV) traction motor systems, and electronic control units (ECU). The acquisition also offers synergies with Elesys, an ECU manufacturer acquired by Nidec in 2014, in Advanced Driver Assistance Systems (ADAS). Nidec Elesys makes wave radar and camera-related products, while OMRON Automotive Electronics makes laser radar and driver monitoring systems.In FY Mar-18, Nidec, OMRON Automotive Electronics reported sales of ¥36.3 billion, recurring profit of ¥1.1 billion and net profit of ¥3.6 billion. The acquisition price, yet to be finalized, is expected to be about ¥100 billion. Given Nidec CEO Nagamori's reputation for driving a hard bargain, this does not seem particularly cheap, but the potential synergies and addition of a large number of experienced engineers indicate that it is not unreasonable.Nidec plans to announced FY Mar-19 results on April 23.

The acquisition of OMRON Automotive Electronics Co. Ltd., announced on April 16, should further Nidec's advance into vehicle electrification and augmented/autonomous driving, enhancing the growth potential that supports its relatively high valuations. The acquisition will also bring Nidec approximately 600 engineers, forestalling a looming shortage. Omron is reportedly selling because it cannot afford the investment required to remain competitive in automotive control equipment.OMRON Automotive Electronics makes electronic control units (ECUs) for auto body, chassis, transmission and motor control, power steering and other power control systems, remote keyless entry and other RF/LF products, switches and other components. These fit with Nidec's focus on electric power steering (EPS) motors, electric brake motors, electric vehicle (EV) traction motor systems, and electronic control units (ECU). The acquisition also offers synergies with Elesys, an ECU manufacturer acquired by Nidec in 2014, in Advanced Driver Assistance Systems (ADAS). Nidec Elesys makes wave radar and camera-related products, while OMRON Automotive Electronics makes laser radar and driver monitoring systems.In FY Mar-18, Nidec, OMRON Automotive Electronics reported sales of ¥36.3 billion, recurring profit of ¥1.1 billion and net profit of ¥3.6 billion. The acquisition price, yet to be finalized, is expected to be about ¥100 billion. Given Nidec CEO Nagamori's reputation for driving a hard bargain, this does not seem particularly cheap, but the potential synergies and addition of a large number of experienced engineers indicate that it is not unreasonable.Nidec plans to announced FY Mar-19 results on April 23.

Friday 8 March after the close, the Nikkei <a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20190308E_1.pdf" target="_blank">announced</a> that because the third party share sale of <a href="https://www.smartkarma.com/entities/15895" target="_blank" data-smartkarma-citation="entities:15895:1">Pioneer Corp (6773 JP)</a>  had been completed, it would be deleted from the Nikkei 225 Average (and the Nikkei 500 Index). <a href="https://www.smartkarma.com/entities/15904" target="_blank" data-smartkarma-citation="entities:15904:1">Omron Corp (6645 JP)</a> will replace Pioneer in the Nikkei 225 Average, with a deemed par value of 50 yen per share.The date for this index deletion and inclusion event is the 15th of March, as per the schedule of the February 19th announcement as to how the Pioneer event would be treated. This affords special sits/events followers a couple of different events to look at.

Friday 8 March after the close, the Nikkei announced that because the third party share sale of Pioneer Corp (6773 JP)  had been completed, it would be deleted from the Nikkei 225 Average (and the Nikkei 500 Index). Omron Corp (6645 JP) will replace Pioneer in the Nikkei 225 Average, with a deemed par value of 50 yen per share.The date for this index deletion and inclusion event is the 15th of March, as per the schedule of the February 19th announcement as to how the Pioneer event would be treated. This affords special sits/events followers a couple of different events to look at. 

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Quantitative Analysis

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/728/original/2019-03-02_20-40-55.png?1551526871" class="editor-image img-responsive" data-smartkarma-image-id="80728"></figure>Source: Japan Analytics
</div>LIQUIDITY RULES - Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the strongest in over two years, and much of this 'boom' is flowing into risk assets. Large-scale repatriation of offshore funds by US companies has also helped boost the US dollar against the yen. The Market Composite responded by rising 2.3% over the last two weeks, although only by 1% in US dollar terms.WEAK MACRO - Net exports and higher inventories offset private investment and consumption during the fourth quarter, resulting in flat GDP growth year-on-year. January industrial production fell to the lowest level in 30 months, and, with the manufacturing PMI nearing 50, the prospect is for further weakness this quarter. Inventories continue to rise and, in North Asia, to levels last seen in 2005. Combined with the sharp fall in exports in Japan, Korea and Taiwan, export pricing in back in deflationary territory, putting further upward pressure on real interest rates.  Meanwhile, January retail sales saw the largest month-on-month decline in over three years as department stores saw fewer Chinese tourists over the New Year.  Equity markets are living on 'borrowed time'.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/722/original/2019-03-02_18-02-59.png?1551517390" class="editor-image img-responsive" data-smartkarma-image-id="80722"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/724/original/2019-03-02_18-07-56.png?1551517689" class="editor-image img-responsive" data-smartkarma-image-id="80724"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/729/original/2019-03-02_20-41-51.png?1551526925" class="editor-image img-responsive" data-smartkarma-image-id="80729"></figure><div class="content-caption">Source: Japan Analytics</div>HOLD FOR NOW - This bear market rally is two months old and is maturing. The Value Traded ratio is below trend again, the RSI is neutral, and the Toraku is signalling caution. We expect another month of liquidity/weak Yen-driven strength before the economic realities begin to prevail.MARKET/SECTOR STRATEGY- We continue to recommend an underweight position in Japan in global portfolios and favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, Transportation, Healthcare and Telecommunications sectors. We would avoid or short the financial sectors Banks, Non-Bank Finance and Multi-Industry. We would underweight the Auto, Retail and Other Consumer Products sectors as consumer spending contracts further in the US, Europe, China and Japan. In the DETAIL section below, we will review Sector performance, company results, revisions and stock performance over the previous two weeks, as well as adding some brief comments on <a href="https://www.smartkarma.com/entities/10020" target="_blank" data-smartkarma-citation="entities:10020:1">Sakai Moving Service (9039 JP)</a>, <a href="https://www.smartkarma.com/entities/20269" target="_blank" data-smartkarma-citation="entities:20269:1">Sumitomo Chemical (4005 JP)</a>, <a href="https://www.smartkarma.com/entities/8431" target="_blank" data-smartkarma-citation="entities:8431:1">Parco (8251 JP)</a>, <a href="https://www.smartkarma.com/entities/4489" target="_blank" data-smartkarma-citation="entities:4489:1">Chugai Pharmaceutical (4519 JP)</a>, <a href="https://www.smartkarma.com/entities/14674" target="_blank" data-smartkarma-citation="entities:14674:1">Nichias (5393 JP)</a>, <a href="https://www.smartkarma.com/entities/27043" target="_blank" data-smartkarma-citation="entities:27043:1">Raksul (4384 JP)</a>, <a href="https://www.smartkarma.com/entities/10503" target="_blank" data-smartkarma-citation="entities:10503:1">Daito Trust (1878 JP)</a>, and <a href="https://www.smartkarma.com/entities/14502" target="_blank" data-smartkarma-citation="entities:14502:1">Benefit One (2412 JP)</a>.


Source: Japan Analytics
LIQUIDITY RULES - Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the strongest in over two years, and much of this 'boom' is flowing into risk assets. Large-scale repatriation of offshore funds by US companies has also helped boost the US dollar against the yen. The Market Composite responded by rising 2.3% over the last two weeks, although only by 1% in US dollar terms.WEAK MACRO - Net exports and higher inventories offset private investment and consumption during the fourth quarter, resulting in flat GDP growth year-on-year. January industrial production fell to the lowest level in 30 months, and, with the manufacturing PMI nearing 50, the prospect is for further weakness this quarter. Inventories continue to rise and, in North Asia, to levels last seen in 2005. Combined with the sharp fall in exports in Japan, Korea and Taiwan, export pricing in back in deflationary territory, putting further upward pressure on real interest rates.  Meanwhile, January retail sales saw the largest month-on-month decline in over three years as department stores saw fewer Chinese tourists over the New Year.  Equity markets are living on 'borrowed time'.  Source: Japan AnalyticsHOLD FOR NOW - This bear market rally is two months old and is maturing. The Value Traded ratio is below trend again, the RSI is neutral, and the Toraku is signalling caution. We expect another month of liquidity/weak Yen-driven strength before the economic realities begin to prevail.MARKET/SECTOR STRATEGY- We continue to recommend an underweight position in Japan in global portfolios and favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, Transportation, Healthcare and Telecommunications sectors. We would avoid or short the financial sectors Banks, Non-Bank Finance and Multi-Industry. We would underweight the Auto, Retail and Other Consumer Products sectors as consumer spending contracts further in the US, Europe, China and Japan. In the DETAIL section below, we will review Sector performance, company results, revisions and stock performance over the previous two weeks, as well as adding some brief comments on Sakai Moving Service (9039 JP), Sumitomo Chemical (4005 JP), Parco (8251 JP), Chugai Pharmaceutical (4519 JP), Nichias (5393 JP), Raksul (4384 JP), Daito Trust (1878 JP), and Benefit One (2412 JP).   

🇯🇵 Japan • Fortnightly Update - Liquidity Rules

Japan

OMRON Corporation manufactures electronic components, equipment and systems used for factory automation. The Company provides products and services in a variety of fields including industrial automation, electronic components, automotive electronics, social systems such as ticket gate machines and traffic control, and healthcare.

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Omron Corp (6645 JP)

TOPIX FFW Rebalance - Halfway There

The TOPIX 2019 Free Float Weight Rebalance announcement was made on the 7th of October and the moves in the basket so far are limited. It is still...

Travis Lundy

Keyence (6861 JP): Undermined by Weak Demand and Uncertainty

1Q results confirmed the first decline in Keyence's sales and profits in a decade. Caused by cyclical weakness in major user industries followed by...

Scott Foster

Nidec (6594 JP): More Strategic M&A

The acquisition of OMRON Automotive Electronics Co. Ltd., announced on April 16, should further Nidec's advance into vehicle electrification and...

Scott Foster

Omron into the Nikkei 225, Pioneer Out

Friday 8 March after the close, the Nikkei announced that because the third party share sale of Pioneer Corp (6773 JP) had been completed, it...

Travis Lundy

🇯🇵 Japan • Fortnightly Update - Liquidity Rules

LIQUIDITY RULES - Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the...

Campbell Gunn

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