Equity Analyst, LightStream Research

Aqila Ali

Equity Analyst

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.

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/kyocera-corp" target="_blank" data-smartkarma-citation="entities:753:1" rel="noopener"></a>
<div>
<div>
<div id="_com_1">
<ul>
<li>
<a href="https://www.smartkarma.com/entities/kyocera-corp" target="_blank" data-smartkarma-citation="entities:753:1" rel="noopener">Kyocera Corp (6971 JP)</a> serves rather diversified end-markets compared to other MLCC players like TDK and Murata</li>
</ul>
</div>
</div>
</div>
<ul>
<li>The company is shifting its focus from the components business towards its equipment business which appears to deliver better results for the company.</li>
<li>1Q has been quite weak. However, Kyocera kept its guidance unchanged. Although consensus and our expectations are for a slight miss, OPM could possibly improve from the current 5.8% mark to about 8% this FY.</li>
<li>The medium-term plan looks slightly optimistic despite product development, capacity expansions, and M&amp;As.</li>
<li>Attractive long-term growth prospects similar to <a href="https://www.smartkarma.com/entities/tdk-corp" target="_blank" data-smartkarma-citation="entities:18847:1" rel="noopener">TDK Corp (6762 JP)</a> and <a href="https://www.smartkarma.com/entities/murata-manufacturing-co-ltd" target="_blank" data-smartkarma-citation="entities:11649:1" rel="noopener">Murata Manufacturing (6981 JP)</a> ( <a href="https://www.smartkarma.com/insights/murata-mlccs-for-the-long-term" target="_blank" data-smartkarma-citation="insights:32144" rel="noopener">Murata: MLCCs for the Long Term, </a><a href="https://www.smartkarma.com/insights/sensor-business-expansion-and-progress-in-solid-state-batteries-using-mlcc-expertise" target="_blank" data-smartkarma-citation="insights:32776" rel="noopener">Sensor Business Expansion and Progress in Solid State Batteries Using MLCC Expertise</a>)</li>
</ul>
<ul>
<li>The company’s key distinctions with these players are its relatively lower exposure in China, focus on Document Solution and new business model for Life and Environment Group. The latter groups are likely to be key long-term growth drivers for the company</li>
</ul>
<ul>
<li>
<a target="_blank"></a>Kyocera’s valuation looks quite stretched trading slightly above market leader Murata. Based on relative valuation we would prefer Murata and TDK over Kyocera.</li>
</ul>
<div style="text-align: center;" class="content-caption">Summary: Kyocera Vs Leading MLCC Players</div>
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 14.72%;">
 
</td>
<td style="width: 29.18%;">
Murata
</td>
<td style="width: 29.22%;">
TDK
</td>
<td style="width: 26.88%;">
Kyocera
</td>
</tr>
<tr>
<td style="width: 14.72%;">
Revenue Level
</td>
<td style="width: 29.18%;">
JPY1.5trn
</td>
<td style="width: 29.22%;">
JPY1.3trn
</td>
<td style="width: 26.88%;">
JPY1.6trn
</td>
</tr>
<tr>
<td style="width: 14.72%;">
OP Level
</td>
<td style="width: 29.18%;">
Higher- OPM at around 13.9%
</td>
<td style="width: 29.22%;">
Relatively Low- OPM at around 7.8%
</td>
<td style="width: 26.88%;">
Relatively Low- 5-year OPM average at around 6.5%
</td>
</tr>
<tr>
<td style="width: 14.72%;">
1QFY03/19 Performance
</td>
<td style="width: 29.18%;">
Relatively Strong
</td>
<td style="width: 29.22%;">
Weak
</td>
<td style="width: 26.88%;">
Weak
</td>
</tr>
<tr>
<td style="width: 14.72%;">
Company Expectations for FY
</td>
<td style="width: 29.18%;">
Conservative- Marginal Revenue growth and an OP decline
</td>
<td style="width: 29.22%;">
Relatively Optimistic- Higher Revenue Growth and a significant OP increase
</td>
<td style="width: 26.88%;">
Quite Optimistic- Strong double-digit growth in OP
</td>
</tr>
<tr>
<td style="width: 14.72%;">
Our Expectations
</td>
<td style="width: 29.18%;">
OP may not take as significant a hit as expected. Revenue could fall slightly below target
</td>
<td style="width: 29.22%;">
A miss vs. target is highly likely. Limited growth for revenue and OP
</td>
<td style="width: 26.88%;">
A slight miss in revenue and OPM target is likely
</td>
</tr>
<tr>
<td style="width: 14.72%;">
Primary Reason
</td>
<td style="width: 29.18%;">
Unfavourable economic conditions in China
</td>
<td style="width: 29.22%;">
Unfavourable economic conditions in China
</td>
<td style="width: 26.88%;">
AVX Corp exposure in the US, Demand for semiconductor processing equipment might not recover completely during the FY
</td>
</tr>
<tr>
<td style="width: 14.72%;">
Company focus
</td>
<td style="width: 29.18%;">
MLCCs mainly for the Auto and Telecommunication sectors
</td>
<td style="width: 29.22%;">
MLCCs, and expertise used for new battery and semiconductor technologies
</td>
<td style="width: 26.88%;">
Ultra-small MLCCs, and MLCCs specifically focused for Document Solution and Power and Energy related markets
</td>
</tr>
<tr>
<td style="width: 14.72%;">
Relative Valuation
</td>
<td style="width: 29.18%;">
Premium (justifiable)
FY20 PE: 14.5x
FY21 PE: 12.8x
FY1 Historical Median: 18.2x
</td>
<td style="width: 29.22%;">
Reasonably valued
FY20 PE: 14.7x
FY21 PE: 11.9x
FY1 Historical Median: 14.5x
</td>
<td style="width: 26.88%;">
A touch expensive
FY20 PE: 19.5
FY21 PE: 17.1
FY1 Historical Median: 19.4
</td>
</tr>
</tbody>
</table>
<div class="content-remarks">
Source: Company Disclosures, LSR
</div>







Kyocera Corp (6971 JP) serves rather diversified end-markets compared to other MLCC players like TDK and Murata





The company is shifting its focus from the components business towards its equipment business which appears to deliver better results for the company.
1Q has been quite weak. However, Kyocera kept its guidance unchanged. Although consensus and our expectations are for a slight miss, OPM could possibly improve from the current 5.8% mark to about 8% this FY.
The medium-term plan looks slightly optimistic despite product development, capacity expansions, and M&amp;As.
Attractive long-term growth prospects similar to TDK Corp (6762 JP) and Murata Manufacturing (6981 JP) ( Murata: MLCCs for the Long Term, Sensor Business Expansion and Progress in Solid State Batteries Using MLCC Expertise)


The company’s key distinctions with these players are its relatively lower exposure in China, focus on Document Solution and new business model for Life and Environment Group. The latter groups are likely to be key long-term growth drivers for the company



Kyocera’s valuation looks quite stretched trading slightly above market leader Murata. Based on relative valuation we would prefer Murata and TDK over Kyocera.

Summary: Kyocera Vs Leading MLCC Players




 


Murata


TDK


Kyocera




Revenue Level


JPY1.5trn


JPY1.3trn


JPY1.6trn




OP Level


Higher- OPM at around 13.9%


Relatively Low- OPM at around 7.8%


Relatively Low- 5-year OPM average at around 6.5%




1QFY03/19 Performance


Relatively Strong


Weak


Weak




Company Expectations for FY


Conservative- Marginal Revenue growth and an OP decline


Relatively Optimistic- Higher Revenue Growth and a significant OP increase


Quite Optimistic- Strong double-digit growth in OP




Our Expectations


OP may not take as significant a hit as expected. Revenue could fall slightly below target


A miss vs. target is highly likely. Limited growth for revenue and OP


A slight miss in revenue and OPM target is likely




Primary Reason


Unfavourable economic conditions in China


Unfavourable economic conditions in China


AVX Corp exposure in the US, Demand for semiconductor processing equipment might not recover completely during the FY




Company focus


MLCCs mainly for the Auto and Telecommunication sectors


MLCCs, and expertise used for new battery and semiconductor technologies


Ultra-small MLCCs, and MLCCs specifically focused for Document Solution and Power and Energy related markets




Relative Valuation


Premium (justifiable)
FY20 PE: 14.5x
FY21 PE: 12.8x
FY1 Historical Median: 18.2x


Reasonably valued
FY20 PE: 14.7x
FY21 PE: 11.9x
FY1 Historical Median: 14.5x


A touch expensive
FY20 PE: 19.5
FY21 PE: 17.1
FY1 Historical Median: 19.4





Source: Company Disclosures, LSR


Kyocera First Look: Positive Long Term Does Not Justify Premium

Early this month, the two key MLCC players reported some new developments to their product portfolios. This insight looks at these announcements, which suggest <a href="https://www.smartkarma.com/entities/murata-manufacturing-co-ltd" target="_blank" data-smartkarma-citation="entities:11649:1" rel="noopener">Murata Manufacturing (6981 JP)</a> continuing to focus on 5G, while <a href="https://www.smartkarma.com/entities/tdk-corp" target="_blank" data-smartkarma-citation="entities:18847:1" rel="noopener">TDK Corp (6762 JP)</a> builds its sensor business. The key points are:
<ul class="">
<li>Murata partners with US-based Resonant Inc to use the latter’s XBAR technology (a Radio Frequency-RF filter technology) to design RF filters that will help accelerate 5G deployment.
<ul class="">
<li>Following up on this, Murata also agreed to develop a Millimetre-Wave RF module for Facebook’s Terragraph (a gigabit wireless technology project).</li>
<li>XBAR technology and Facebook’s project are both expected to successfully enter the market by 2020, alongside 5G.</li>
<li>We believe that Murata’s connection with Resonant is geared to help the MLCC leader capitalise on possible 5G business opportunities like Facebook’s Terragraph.</li>
</ul>
</li>
<li>TDK, via its TDK-Micronas partnership, expands its sensor business by adding new features to its Hall Effect sensor product: masterHAL. The solution appears suitable for EVs and Automotive applications and is expected to start production in 2020.
<ul class="">
<li>With the new addition, TDK’s masterHAL becomes an all-in-one sensor device. </li>
</ul>
</li>
<li>Murata and TDK have increased by almost 29% and 4% respectively since our last report ( <a href="https://www.smartkarma.com/insights/murata-mlccs-for-the-long-term" target="_blank" data-smartkarma-citation="insights:32144" rel="noopener">Murata: MLCCs for the Long Term</a> and <a href="https://www.smartkarma.com/insights/sensor-business-expansion-and-progress-in-solid-state-batteries-using-mlcc-expertise" target="_blank" data-smartkarma-citation="insights:32776" rel="noopener">Sensor Business Expansion and Progress in Solid State Batteries Using MLCC Expertise</a>). Despite overall weak momentum due to trade tension, Murata has managed to rise as we expected, on the back of better expectations on the smartphone market. TDK (given its exposure in the sensor business) recently improved as chipmakers saw a surge in share price following Samsung’s optimistic Q3 guidance. </li>
</ul>

Early this month, the two key MLCC players reported some new developments to their product portfolios. This insight looks at these announcements, which suggest Murata Manufacturing (6981 JP) continuing to focus on 5G, while TDK Corp (6762 JP) builds its sensor business. The key points are:

Murata partners with US-based Resonant Inc to use the latter’s XBAR technology (a Radio Frequency-RF filter technology) to design RF filters that will help accelerate 5G deployment.

Following up on this, Murata also agreed to develop a Millimetre-Wave RF module for Facebook’s Terragraph (a gigabit wireless technology project).
XBAR technology and Facebook’s project are both expected to successfully enter the market by 2020, alongside 5G.
We believe that Murata’s connection with Resonant is geared to help the MLCC leader capitalise on possible 5G business opportunities like Facebook’s Terragraph.


TDK, via its TDK-Micronas partnership, expands its sensor business by adding new features to its Hall Effect sensor product: masterHAL. The solution appears suitable for EVs and Automotive applications and is expected to start production in 2020.

With the new addition, TDK’s masterHAL becomes an all-in-one sensor device. 


Murata and TDK have increased by almost 29% and 4% respectively since our last report ( Murata: MLCCs for the Long Term and Sensor Business Expansion and Progress in Solid State Batteries Using MLCC Expertise). Despite overall weak momentum due to trade tension, Murata has managed to rise as we expected, on the back of better expectations on the smartphone market. TDK (given its exposure in the sensor business) recently improved as chipmakers saw a surge in share price following Samsung’s optimistic Q3 guidance. 


5G Proliferation and RF Filters for Murata; Sensors for TDK

<a href="https://www.smartkarma.com/entities/tdk-corp" target="_blank" data-smartkarma-citation="entities:18847:1" rel="noopener">TDK Corp (6762 JP)</a> has taken a hit during the recent quarters following the slowdown in its key end-markets: Automotive and Industrial Equipment. This was mainly because of the company’s exposure to the Chinese market. However, as we have previously mentioned, the long-term growth prospects for the MLCC players are very attractive, and the focal point seems to be which of these players will be able to better capitalise on its opportunities.
Similar to <a href="https://www.smartkarma.com/entities/murata-manufacturing-co-ltd" target="_blank" data-smartkarma-citation="entities:11649:1" rel="noopener">Murata Manufacturing (6981 JP)</a>, TDK also wants to secure business beyond MLCCs for smartphones and consumer electronics and has taken necessary steps to do so. While Murata seems to be betting solely on its MLCC technology for use in products, TDK appears to be using its MLCC expertise to advance new technology for areas like semiconductors and batteries. In our opinion, TDK’s efforts in solid-state battery development and the holistic expertise it has obtained in sensor technology via its strategic acquisitions should probably give the company a strong competitive edge to better exploit the potential growth prospects.  
Despite the current low performance in earnings (which is likely to continue during the FY), TDK has still managed to surpass market expectations. That said, in our opinion, the share price does not look vulnerable to significant declines as of now, whereas there is some upside if business conditions improve. Similar to Murata, TDK’s long-term prospects seem quite appealing. Thus, trading in line with peer <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" data-smartkarma-citation="entities:9924:1" rel="noopener">Taiyo Yuden (6976 JP)</a> and slightly below Murata (which deserves a premium), the stock seems to be reasonably valued. Although we would not aggressively accumulate the stock as some underperformance might still be likely, we feel that long term investors should consider accumulating on weakness.
This Insight discusses:
-The company’s 1Q FY03/20 earnings
- Expectations for FY03/20E
- The long-term view for TDK and its MTP

TDK Corp (6762 JP) has taken a hit during the recent quarters following the slowdown in its key end-markets: Automotive and Industrial Equipment. This was mainly because of the company’s exposure to the Chinese market. However, as we have previously mentioned, the long-term growth prospects for the MLCC players are very attractive, and the focal point seems to be which of these players will be able to better capitalise on its opportunities.
Similar to Murata Manufacturing (6981 JP), TDK also wants to secure business beyond MLCCs for smartphones and consumer electronics and has taken necessary steps to do so. While Murata seems to be betting solely on its MLCC technology for use in products, TDK appears to be using its MLCC expertise to advance new technology for areas like semiconductors and batteries. In our opinion, TDK’s efforts in solid-state battery development and the holistic expertise it has obtained in sensor technology via its strategic acquisitions should probably give the company a strong competitive edge to better exploit the potential growth prospects.  
Despite the current low performance in earnings (which is likely to continue during the FY), TDK has still managed to surpass market expectations. That said, in our opinion, the share price does not look vulnerable to significant declines as of now, whereas there is some upside if business conditions improve. Similar to Murata, TDK’s long-term prospects seem quite appealing. Thus, trading in line with peer Taiyo Yuden (6976 JP) and slightly below Murata (which deserves a premium), the stock seems to be reasonably valued. Although we would not aggressively accumulate the stock as some underperformance might still be likely, we feel that long term investors should consider accumulating on weakness.
This Insight discusses:
-The company’s 1Q FY03/20 earnings
- Expectations for FY03/20E
- The long-term view for TDK and its MTP

Sensor Business Expansion and Progress in Solid State Batteries Using MLCC Expertise

MLCC players are likely to be affected by any decline in the end markets to which they cater. As such, <a href="https://www.smartkarma.com/entities/murata-manufacturing-co-ltd" target="_blank" data-smartkarma-citation="entities:11649:1" rel="noopener">Murata Manufacturing (6981 JP)</a> has also taken a hit during the recent quarters following the slowdown in its key end-market- Communications. As <a href="https://www.smartkarma.com/profiles/farha-sabri" target="_blank" data-smartkarma-citation="accounts:1653" rel="noopener">Farha Sabri</a> mentioned in her previous notes ( <a href="https://www.smartkarma.com/insights/murata-diversification-into-new-markets-and-m-a-to-propel-long-term-growth" target="_blank" data-smartkarma-citation="insights:17849" rel="noopener">Murata: Diversification into New Markets and M&amp;A to Propel Long-Term Growth,  </a><a href="https://www.smartkarma.com/insights/metrocirc-production-issues-open-buying-opportunity" target="_blank" data-smartkarma-citation="insights:17209" rel="noopener">Metrocirc Production Issues Open Buying Opportunity</a><a href="https://www.smartkarma.com/insights/murata-diversification-into-new-markets-and-m-a-to-propel-long-term-growth" target="_blank" data-smartkarma-citation="insights:17849" rel="noopener"> , </a><a href="https://www.smartkarma.com/insights/murata-revises-fy03-19-guidance-following-solid-1h-performance" target="_blank" data-smartkarma-citation="insights:25656" rel="noopener">Murata Revises FY03/19 Guidance Following Solid 1H Performance</a>), the company is an MLCC leader, with products being developed to capture the new trends in its end market. The company trades at a premium to peers, due to its market leadership but recent unfavourable economic conditions (especially in the smartphone and automotive markets) and dependence on customers like Huawei for sales, have hurt the stock. That said, despite the current low performance in earnings (which is likely to continue during the FY), we feel that the share price has sort of reached its bottom and is unlikely to significantly decline further (similar levels during the first half of 2016). Trading at an FY1 PE of 14.5x Murata is below its historical median and in-line with its peers’ historical median, looking reasonably valued and quite attractive for its prospects in the market (focus on Auto Electronics for long term growth, attractive line-up of new products, M&amp;A activities, and strengths in technology and execution). Thus, while downside risks are minimum, the upside is quite promising for Murata, suggesting that its current investor should have faith in the stock for its long-term growth prospects and that new investors may consider now a good entry point.
This Insight takes a look at:
-The company’s 1Q FY03/20 earnings analysis
- Expectations for FY03/20E
- The long-term view for Murata and its medium-term plan
We go through the details below.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/097/620/original/Screenshot_1.jpg?1567331928" class="editor-image img-responsive" data-smartkarma-image-id="97620"></figure>
<div class="content-remarks">
Source: CapIQ
</div>

MLCC players are likely to be affected by any decline in the end markets to which they cater. As such, Murata Manufacturing (6981 JP) has also taken a hit during the recent quarters following the slowdown in its key end-market- Communications. As Farha Sabri mentioned in her previous notes ( Murata: Diversification into New Markets and M&amp;A to Propel Long-Term Growth,  Metrocirc Production Issues Open Buying Opportunity , Murata Revises FY03/19 Guidance Following Solid 1H Performance), the company is an MLCC leader, with products being developed to capture the new trends in its end market. The company trades at a premium to peers, due to its market leadership but recent unfavourable economic conditions (especially in the smartphone and automotive markets) and dependence on customers like Huawei for sales, have hurt the stock. That said, despite the current low performance in earnings (which is likely to continue during the FY), we feel that the share price has sort of reached its bottom and is unlikely to significantly decline further (similar levels during the first half of 2016). Trading at an FY1 PE of 14.5x Murata is below its historical median and in-line with its peers’ historical median, looking reasonably valued and quite attractive for its prospects in the market (focus on Auto Electronics for long term growth, attractive line-up of new products, M&amp;A activities, and strengths in technology and execution). Thus, while downside risks are minimum, the upside is quite promising for Murata, suggesting that its current investor should have faith in the stock for its long-term growth prospects and that new investors may consider now a good entry point.
This Insight takes a look at:
-The company’s 1Q FY03/20 earnings analysis
- Expectations for FY03/20E
- The long-term view for Murata and its medium-term plan
We go through the details below.


Source: CapIQ


'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

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. 

Quantitative Analysis

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/686/original/2019-02-02_09-34-42.png?1549067763" class="editor-image img-responsive" data-smartkarma-image-id="77686"></figure><div class="content-caption">Source: Japan Analytics</div><div style="text-align: left;" class="content-caption">
Note: The Results &amp; Revision Score is the average of our Results Score and Forecasts/Revision Score and is updated daily for each company and then cap-weighted-aggregated into Peer Groups, Sectors and the Market Composite. Both scores have a maximum of +30 and a minimum of -30 for each period. The Results Score is calculated quarterly, using the most recent eight quarters of company data for revenues, operating income and operating margin and measures the rate, degree and consistency of change for each metric. The Forecast/Revision Score is based on Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month or previous first-half results, with annual forecasts being double-weighted.</div>DRIP, DRIP, DRIP - We 'lead' this fortnight's update with our All-Market Composite Results &amp; Revision Score. Calculated daily, the score is a 'real-time' measure of the state of, and the outlook for, listed Japanese corporations. As the scoring methodology includes earnings momentum 'factors', the data series can be a useful leading indicator of forward earnings. The correlation with the market over the last four years is 0.578, with the indicator leading more often than lagging.   Since peaking on 16th November 2017, the Results &amp; Revisions Score has fallen by 62% and has now returned to the level of May 2017. In the last ten years, the score has only been lower than at present one-third of the time - mostly during the fiscal year ended March 2017 when the total market value averaged ¥550t, close to the December 2018 low. If we are to repeat the relatively-mild cyclical downturn of 2016, the Results &amp; Revision Score will turn negative in May of this year, and the 25th December 2018 low will be retested.<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/701/original/2019-02-02_14-11-25.png?1549084295" class="editor-image img-responsive" data-smartkarma-image-id="77701"></figure>Source: Japan Analytics
</div>PAST THE PEAK - Our earnings indicator peaked 14 months ago, two months ahead of the market's high point on 26th January 2018. It now appears that aggregate reported earnings, as well as aggregate company forecasts for the current year, are now turning decisively lower after nine quarters of uninterrupted growth. Forecast Net Income for the current year is now 7% below the high point in trailing-twelve-month (TTM) Net Income from this cycle, which was reached two months ago. Operating Income is, as usual, 'lagging' and forecasts are still marginally ahead of TTM. The TTM all-market price-earnings ratio reached 11.5 times on Christmas Day, which will prove to be the cycle low point. We expect the return to median levels, to be achieved more through lower 'E' as opposed to a higher 'P'.  Mr Market is currently implying that Japanese corporate profits are due to fall by 23% on average from the cycle peak, or by 30% if we are to revisit the December low-point. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/746/original/2019-02-03_07-23-31.png?1549146223" class="editor-image img-responsive" data-smartkarma-image-id="77746"></figure><div class="content-caption">Source: Japan Analytics</div>THE FIRST CUT - 23% of listed companies reported their most recent quarterly earnings results in the last two weeks. For these companies, TTM revenues grew by 5.1% year-on-year, but only by 0.5% quarter-on-quarter, the lowest qoq growth rate in over a year. TTM Operating Income is now 0.8% lower than the TTM total of one year ago and declined by 4.4% qoq. Operating margins fell by 49bps year-on-year.  Current forecasts for this group of companies imply 3.1% yoy top line growth, but only 0.3% compared to the quarter just declared. For Operating Income, the rates are -2.0% and 0.6%, reflecting the normal TTM-to-forecast 'lag'. Corporate Japan's profits are now rolling over and will be in a 'recession' by the fiscal year-end.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/722/original/2019-02-02_18-25-46.png?1549099572" class="editor-image img-responsive" data-smartkarma-image-id="77722"></figure><div class="content-caption">Source: Japan Analytics</div>INTERREGNUM - Our bear market rally has paused to look at and digest the earnings-announcement news flow and will likely be trendless for the next few weeks as 'good' reactions offset 'bad'. In due course, we expect the preponderance of negative momentum to tip the scales.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/724/original/2019-02-02_18-41-12.png?1549100508" class="editor-image img-responsive" data-smartkarma-image-id="77724"></figure><div class="content-caption">Source: Japan Analytics</div>TORAKU @110 - The Toraku advance-decline indicator has continued to recover and is within ten points of the overbought zone, which has only been breached once since the market peak of January 2018. This signal is 'amber' and could be 'red' by the end of next week. <div class="content-highlight">
OUTLOOK &amp; RECOMMENDATIONS
<ul>
<li>We continue to recommend an underweight position in Japan in global portfolios.</li>
<li>The equity market decline at the end of last year was well in advance of the underlying trends in the economy and corporate profits; the recent 10% rally has corrected that imbalance. Nevertheless, the global cycle has turned down sharply, and many economies will be in a recession by the end of this quarter. We expect Japanese corporate earnings to follow suit.  </li>
<li>Although some of the coming decline in aggregate earnings has been well-discounted, our Results &amp; Revision Score has yet to turn negative. Accordingly, we expect the market to retest the December 2018 low, probably in May when the FY2020 forecasts are announced and our score starts 'seeing red'.</li>
<li>In the near term and despite the rally in the more cyclical sectors, we continue to favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, and Telecommunications sectors. We would avoid or short Banks and Non-Bank Finance.</li>
</ul>
</div>In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on <a href="https://www.smartkarma.com/entities/3700" target="_blank" data-smartkarma-citation="entities:3700:1">Anritsu (6754 JP)</a>, <a href="https://www.smartkarma.com/entities/12001" target="_blank" data-smartkarma-citation="entities:12001:1">Alps Alpine (6770 JP)</a>, <a href="https://www.smartkarma.com/entities/24540" target="_blank" data-smartkarma-citation="entities:24540:1">SanBio (4592 JP)</a>, <a href="https://www.smartkarma.com/entities/454" target="_blank" data-smartkarma-citation="entities:454:1">Lixil (5938 JP)</a> (yes, again), <a href="https://www.smartkarma.com/entities/752" target="_blank" data-smartkarma-citation="entities:752:1">Fanuc (6954 JP)</a>, <a href="https://www.smartkarma.com/entities/219" target="_blank" data-smartkarma-citation="entities:219:1">Mizuho Financial Group (8411 JP)</a> , and <a href="https://www.smartkarma.com/entities/8197" target="_blank" data-smartkarma-citation="entities:8197:1">Cyberagent (4751 JP)</a>.

Source: Japan Analytics
Note: The Results &amp; Revision Score is the average of our Results Score and Forecasts/Revision Score and is updated daily for each company and then cap-weighted-aggregated into Peer Groups, Sectors and the Market Composite. Both scores have a maximum of +30 and a minimum of -30 for each period. The Results Score is calculated quarterly, using the most recent eight quarters of company data for revenues, operating income and operating margin and measures the rate, degree and consistency of change for each metric. The Forecast/Revision Score is based on Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month or previous first-half results, with annual forecasts being double-weighted.DRIP, DRIP, DRIP - We 'lead' this fortnight's update with our All-Market Composite Results &amp; Revision Score. Calculated daily, the score is a 'real-time' measure of the state of, and the outlook for, listed Japanese corporations. As the scoring methodology includes earnings momentum 'factors', the data series can be a useful leading indicator of forward earnings. The correlation with the market over the last four years is 0.578, with the indicator leading more often than lagging.   Since peaking on 16th November 2017, the Results &amp; Revisions Score has fallen by 62% and has now returned to the level of May 2017. In the last ten years, the score has only been lower than at present one-third of the time - mostly during the fiscal year ended March 2017 when the total market value averaged ¥550t, close to the December 2018 low. If we are to repeat the relatively-mild cyclical downturn of 2016, the Results &amp; Revision Score will turn negative in May of this year, and the 25th December 2018 low will be retested.
Source: Japan Analytics
PAST THE PEAK - Our earnings indicator peaked 14 months ago, two months ahead of the market's high point on 26th January 2018. It now appears that aggregate reported earnings, as well as aggregate company forecasts for the current year, are now turning decisively lower after nine quarters of uninterrupted growth. Forecast Net Income for the current year is now 7% below the high point in trailing-twelve-month (TTM) Net Income from this cycle, which was reached two months ago. Operating Income is, as usual, 'lagging' and forecasts are still marginally ahead of TTM. The TTM all-market price-earnings ratio reached 11.5 times on Christmas Day, which will prove to be the cycle low point. We expect the return to median levels, to be achieved more through lower 'E' as opposed to a higher 'P'.  Mr Market is currently implying that Japanese corporate profits are due to fall by 23% on average from the cycle peak, or by 30% if we are to revisit the December low-point. Source: Japan AnalyticsTHE FIRST CUT - 23% of listed companies reported their most recent quarterly earnings results in the last two weeks. For these companies, TTM revenues grew by 5.1% year-on-year, but only by 0.5% quarter-on-quarter, the lowest qoq growth rate in over a year. TTM Operating Income is now 0.8% lower than the TTM total of one year ago and declined by 4.4% qoq. Operating margins fell by 49bps year-on-year.  Current forecasts for this group of companies imply 3.1% yoy top line growth, but only 0.3% compared to the quarter just declared. For Operating Income, the rates are -2.0% and 0.6%, reflecting the normal TTM-to-forecast 'lag'. Corporate Japan's profits are now rolling over and will be in a 'recession' by the fiscal year-end.  Source: Japan AnalyticsINTERREGNUM - Our bear market rally has paused to look at and digest the earnings-announcement news flow and will likely be trendless for the next few weeks as 'good' reactions offset 'bad'. In due course, we expect the preponderance of negative momentum to tip the scales.Source: Japan AnalyticsTORAKU @110 - The Toraku advance-decline indicator has continued to recover and is within ten points of the overbought zone, which has only been breached once since the market peak of January 2018. This signal is 'amber' and could be 'red' by the end of next week. 
OUTLOOK &amp; RECOMMENDATIONS

We continue to recommend an underweight position in Japan in global portfolios.
The equity market decline at the end of last year was well in advance of the underlying trends in the economy and corporate profits; the recent 10% rally has corrected that imbalance. Nevertheless, the global cycle has turned down sharply, and many economies will be in a recession by the end of this quarter. We expect Japanese corporate earnings to follow suit.  
Although some of the coming decline in aggregate earnings has been well-discounted, our Results &amp; Revision Score has yet to turn negative. Accordingly, we expect the market to retest the December 2018 low, probably in May when the FY2020 forecasts are announced and our score starts 'seeing red'.
In the near term and despite the rally in the more cyclical sectors, we continue to favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, and Telecommunications sectors. We would avoid or short Banks and Non-Bank Finance.

In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on Anritsu (6754 JP), Alps Alpine (6770 JP), SanBio (4592 JP), Lixil (5938 JP) (yes, again), Fanuc (6954 JP), Mizuho Financial Group (8411 JP) , and Cyberagent (4751 JP).

Japan Fortnightly Update: Drip, Drip, Drip...

Japan

TDK CORPORATION manufactures electronics components such as magnetic tapes and ferrite cores.  The Company also sells power supplies, inductors, transformers, ceramic capacitors, magnets, LAN (Local Area Network) components, sensors, and semiconductors.  TDK markets its products worldwide.

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TDK Corp (6762 JP)

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