Equity Analyst, LightStream Research

Shifara Samsudeen, ACMA, CGMA

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

<p><a href="https://www.smartkarma.com/entities/eisai-co-ltd" target="_blank" data-smartkarma-citation="entities:21001:1" rel="noopener">Eisai Co Ltd (4523 JP)</a>  is a global R&amp;D based pharmaceutical company who has positioned neurology and oncology as its therapeutic areas of focus. Since October 2017, Biogen and Eisai have collaborated on the development and commercialisation of Aducanumab (BIIB037), an investigational treatment for Alzheimer’s disease. The US FDA accepted the Biologics License Application (BLA) for Aducanumab for review in August 2020 and was granted priority review status.</p><p>US FDA briefing documents (dated 04<sup>th</sup> November) states that the FDA staff have enough data to approve the treatment, which would become the first new Alzheimer’s therapy in nearly two decades. The briefing documents have been released ahead of a meeting of outside advisers who will issue a non-binding vote on whether to recommend Aducanumab’s approval. These experts are scheduled to meet on Friday, 06<sup>th</sup> November.</p><p>Eisai’s shares have climbed 18% during Thursday’s trading following the release of the FDA briefing document. In this insight, we take a look at Aducanumab, the collaboration agreement between Eisai and Biogen, and the impact on the company’s fundamental and valuation if the drug is approved by the FDA.</p>

Eisai Co Ltd (4523 JP)  is a global R&amp;D based pharmaceutical company who has positioned neurology and oncology as its therapeutic areas of focus. Since October 2017, Biogen and Eisai have collaborated on the development and commercialisation of Aducanumab (BIIB037), an investigational treatment for Alzheimer’s disease. The US FDA accepted the Biologics License Application (BLA) for Aducanumab for review in August 2020 and was granted priority review status.US FDA briefing documents (dated 04th November) states that the FDA staff have enough data to approve the treatment, which would become the first new Alzheimer’s therapy in nearly two decades. The briefing documents have been released ahead of a meeting of outside advisers who will issue a non-binding vote on whether to recommend Aducanumab’s approval. These experts are scheduled to meet on Friday, 06th November.Eisai’s shares have climbed 18% during Thursday’s trading following the release of the FDA briefing document. In this insight, we take a look at Aducanumab, the collaboration agreement between Eisai and Biogen, and the impact on the company’s fundamental and valuation if the drug is approved by the FDA.

Eisai: Shares Surge on Positive Review of Drug Candidate; Blockbuster Potential if Approved

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Quantitative Analysis

<p>The question has been asked about dividends in Japan and what they may look like for the remainder of this year and into 2021. </p><p>Japanese companies have grown revenues over the past ten years, and have grown net income quite a bit faster. In addition, payout ratios have risen on a normalized basis since their last-decade lows in 2014. Because net income has dropped in the past year while dividends paid out have risen, payout ratios have spiked sharply. With the very large amount of buybacks executed in the past fiscal year to March 2020, total payout to shareholders has been quite significant. </p><p>But COVID-19 has changed things. When companies announced earnings in April and May, a huge swath of corporate Japan neglected to provide forecasts. The largest number I have ever seen provided forecasts in ranges rather than as numbers. When Q1 earnings came around, many companies made a stab at full-year. Some have provided dividend guidance but net income in the April-June quarter along with forecasts for H1 and FY have given the Street some comfort to be able to forecast earnings and DPS. If one looks at the top 500, top 1000, and full set of companies in TOPIX on a like-for-like basis (where guidance exists), company guidance on both net income and dividends is below where the Street is (on a consensus basis). I expect, for the moment, that the Street still may have some to come down. There is every possibility that covid-19 aftershocks will produce some VERY bad numbers, but I do not expect that many companies to exceed forecasts by a wide margin. Some WFH and tech names may do well, but Japan is not NASDAQ (much to the chagrin of Japan's investors). </p><p>On the whole, there are significant discrepancies in forecasts among sectors - autos, airlines, materials are all bad - but interestingly, there is also huge discrepancy among market cap biases. Even on a like-for-like basis on coverage or guidance, the top 500 names see total dividend forecasts for the FY to March 2021 only 3% lower than what was paid in the year to March 2020. That seems like a relatively small drop. The consensus implied drop in DPS for the next 500 names seems considerably larger, though some of this may be to worse data quality as you go down the market cap scale. </p><p><em>A study of dividends this year and beyond continues below.</em></p>

The question has been asked about dividends in Japan and what they may look like for the remainder of this year and into 2021. Japanese companies have grown revenues over the past ten years, and have grown net income quite a bit faster. In addition, payout ratios have risen on a normalized basis since their last-decade lows in 2014. Because net income has dropped in the past year while dividends paid out have risen, payout ratios have spiked sharply. With the very large amount of buybacks executed in the past fiscal year to March 2020, total payout to shareholders has been quite significant. But COVID-19 has changed things. When companies announced earnings in April and May, a huge swath of corporate Japan neglected to provide forecasts. The largest number I have ever seen provided forecasts in ranges rather than as numbers. When Q1 earnings came around, many companies made a stab at full-year. Some have provided dividend guidance but net income in the April-June quarter along with forecasts for H1 and FY have given the Street some comfort to be able to forecast earnings and DPS. If one looks at the top 500, top 1000, and full set of companies in TOPIX on a like-for-like basis (where guidance exists), company guidance on both net income and dividends is below where the Street is (on a consensus basis). I expect, for the moment, that the Street still may have some to come down. There is every possibility that covid-19 aftershocks will produce some VERY bad numbers, but I do not expect that many companies to exceed forecasts by a wide margin. Some WFH and tech names may do well, but Japan is not NASDAQ (much to the chagrin of Japan's investors). On the whole, there are significant discrepancies in forecasts among sectors - autos, airlines, materials are all bad - but interestingly, there is also huge discrepancy among market cap biases. Even on a like-for-like basis on coverage or guidance, the top 500 names see total dividend forecasts for the FY to March 2021 only 3% lower than what was paid in the year to March 2020. That seems like a relatively small drop. The consensus implied drop in DPS for the next 500 names seems considerably larger, though some of this may be to worse data quality as you go down the market cap scale. A study of dividends this year and beyond continues below.

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Thematic (Sector/Industry)

<p style="text-align: center;"><strong>•BEST &amp; WORST 3rd AUGUST •</strong></p><p style="text-align: left;">The 'best' and 'worst' from yesterday's large-cap announcements came from <a href="https://www.smartkarma.com/entities/kyorin-holdings-inc" target="_blank" data-smartkarma-citation="entities:15216:1" rel="noopener">Kyorin (4569 JP)</a> and <a href="https://www.smartkarma.com/entities/japan-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1184:1" rel="noopener">Japan Airlines (9201 JP)</a>.  More extensive coverage follows in the DETAIL section below. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/150/264/original/2020-08-04_06-29-14.png?1596490167" class="editor-image img-responsive" data-smartkarma-image-id="150264"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/150/265/original/2020-08-04_06-30-03.png?1596490220" class="editor-image img-responsive" data-smartkarma-image-id="150265"></figure><div class="content-caption">Source • Japan Analytics</div><hr><div><p style="text-align: center;"><strong>DAILY STATS</strong></p></div><div><p><strong>PERCENTAGES </strong>- 66% of quarterly results,  61% of annual forecasts/revisions and 64% of interim forecasts have negative Scores and 26% of companies reporting lost money for the quarter.</p></div><hr><div><p style="text-align: center;"><strong>105 Quarterly Result</strong>s</p></div><div><ul>
<li>
<strong>Results Score</strong>: 29% Positive / 6% Neutral / 66% Negative</li>
<li>
<strong>Average Results Score Change:</strong> -2.5 points</li>
<li>
<strong>Average % Change in Revenue:</strong> -7.4% Quarter YoY / -1.3% Rolling TTM YoY </li>
<li>
<strong>Average Operating Profit Margin Change:</strong> -0.8 ppt</li>
<li>
<strong>Percentage Making Quarterly Losses:</strong> 26%</li>
</ul></div><hr><div><p style="text-align: center;"><br><strong>36 Annual • 25 Interim Forecasts/Revisions</strong></p></div><div><ul>
<li>
<strong>Annual Forecast/Revision Score:</strong> 31% Positive / 8% Neutral / 61% Negative</li>
<li>
<strong>Interim Forecast/Revision Score Change:</strong> 32% Positive / 4% Neutral / 64% Negative</li>
<li>
<strong>Average Forecast/Revision Score Change:</strong> -7.0 points</li>
</ul></div>

•BEST &amp; WORST 3rd AUGUST •The 'best' and 'worst' from yesterday's large-cap announcements came from Kyorin (4569 JP) and Japan Airlines (9201 JP).  More extensive coverage follows in the DETAIL section below. Source • Japan AnalyticsDAILY STATSPERCENTAGES - 66% of quarterly results,  61% of annual forecasts/revisions and 64% of interim forecasts have negative Scores and 26% of companies reporting lost money for the quarter.105 Quarterly Results

Results Score: 29% Positive / 6% Neutral / 66% Negative

Average Results Score Change: -2.5 points

Average % Change in Revenue: -7.4% Quarter YoY / -1.3% Rolling TTM YoY 

Average Operating Profit Margin Change: -0.8 ppt

Percentage Making Quarterly Losses: 26%
 36 Annual • 25 Interim Forecasts/Revisions

Annual Forecast/Revision Score: 31% Positive / 8% Neutral / 61% Negative

Interim Forecast/Revision Score Change: 32% Positive / 4% Neutral / 64% Negative

Average Forecast/Revision Score Change: -7.0 points


🇯🇵 JAPAN • Results & Revisions 3rd August - Capcom, K's, Kikkoman, USS, Eisai

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

<div><p>The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.</p></div><div><p>Hong Kong saw shorts rise on <a href="https://www.smartkarma.com/entities/jd-com-inc" target="_blank" data-smartkarma-citation="entities:29043:1" rel="noopener">JD.com (HK) (9618 HK)</a>, <a href="https://www.smartkarma.com/entities/netease" target="_blank" data-smartkarma-citation="entities:29030:1" rel="noopener">NetEase (9999 HK)</a>, <a href="https://www.smartkarma.com/entities/cspc-pharmaceutical-group-ltd" target="_blank" data-smartkarma-citation="entities:229:1" rel="noopener">CSPC Pharmaceutical Group (1093 HK)</a> and <a href="https://www.smartkarma.com/entities/anta-sports-products-ltd" target="_blank" data-smartkarma-citation="entities:10261:1" rel="noopener">Anta Sports Products (2020 HK)</a> while there was short covering on <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a>, <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan Dianping (3690 HK)</a>, <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a> and <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a>. Shorts increased in Health Care, Industrials and Energy, and were covered in Consumer Discretionary, Information Technology and Financials.</p></div><div><p>Japan saw an increase in shorts on <a href="https://www.smartkarma.com/entities/mitsubishi-corp" target="_blank" data-smartkarma-citation="entities:20668:1" rel="noopener">Mitsubishi Corp (8058 JP)</a>, <a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba Corp (6502 JP)</a>, <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" data-smartkarma-citation="entities:1:1" rel="noopener">Canon Inc (7751 JP)</a> and <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-trust-holdings-inc" target="_blank" data-smartkarma-citation="entities:19450:1" rel="noopener">Sumitomo Mitsui Trust Holdings (8309 JP)</a> and a reduction in shorts on <a href="https://www.smartkarma.com/entities/tokyo-electron-ltd" target="_blank" data-smartkarma-citation="entities:280:1" rel="noopener">Tokyo Electron (8035 JP)</a>, <a href="https://www.smartkarma.com/entities/fanuc-corp" target="_blank" data-smartkarma-citation="entities:752:1" rel="noopener">Fanuc Corp (6954 JP)</a>, <a href="https://www.smartkarma.com/entities/eisai-co-ltd" target="_blank" data-smartkarma-citation="entities:21001:1" rel="noopener">Eisai Co Ltd (4523 JP)</a> and <a href="https://www.smartkarma.com/entities/astellas-pharma-inc" target="_blank" data-smartkarma-citation="entities:6091:1" rel="noopener">Astellas Pharma (4503 JP)</a>. Sectorally, shorts increased on Industrials, Communication Services and Financials, and reduced on Information Technology, Health Care and Materials.</p></div><div><p>Short Interest in Korea increased in almost all industry groups led by Banks, Technology Hardware, Capital Goods and Diversified Financials. Stocks that saw the most shorts were <a href="https://www.smartkarma.com/entities/samsung-electronics-co-ltd" target="_blank" data-smartkarma-citation="entities:191:1" rel="noopener">Samsung Electronics (005930 KS)</a>, <a href="https://www.smartkarma.com/entities/samsung-sdi-co-ltd" target="_blank" data-smartkarma-citation="entities:503:1" rel="noopener">Samsung SDI (006400 KS)</a>, <a href="https://www.smartkarma.com/entities/kb-financial-group-inc" target="_blank" data-smartkarma-citation="entities:718:1" rel="noopener">Kb Financial Group (105560 KS)</a>, <a href="https://www.smartkarma.com/entities/hana-financial-group" target="_blank" data-smartkarma-citation="entities:12843:1" rel="noopener">Hana Financial (086790 KS)</a> and <a href="https://www.smartkarma.com/entities/shinhan-financial-group-ltd" target="_blank" data-smartkarma-citation="entities:6978:1" rel="noopener">Shinhan Financial (055550 KS)</a>. </p></div><div><p>Short Interest in Taiwan decreased in Consumer Durables, Pharmaceuticals, Insurance and Automobiles, while shorts increased in Banks, Semiconductors and Materials. Stocks that saw the highest increase in shorts were <a href="https://www.smartkarma.com/entities/taiwan-semiconductor-manufacturing-company" target="_blank" data-smartkarma-citation="entities:11230:1" rel="noopener">TSMC (2330 TT)</a>, <a href="https://www.smartkarma.com/entities/genius-electronic-optical-co-ltd" target="_blank" data-smartkarma-citation="entities:9632:1" rel="noopener">Genius Electronic Optical (3406 TT)</a>, <a href="https://www.smartkarma.com/entities/catcher-technology-co-ltd" target="_blank" data-smartkarma-citation="entities:4957:1" rel="noopener">Catcher Technology (2474 TT)</a> and <a href="https://www.smartkarma.com/entities/hon-hai-precision-industry-co-ltd" target="_blank" data-smartkarma-citation="entities:745:1" rel="noopener">Hon Hai Precision Industry (2317 TT)</a> while shorts were covered in <a href="https://www.smartkarma.com/entities/novatek-microelectronics-corp" target="_blank" data-smartkarma-citation="entities:10904:1" rel="noopener">Novatek Microelectronics Corp (3034 TT)</a>, <a href="https://www.smartkarma.com/entities/yageo-corporation" target="_blank" data-smartkarma-citation="entities:13212:1" rel="noopener">Yageo Corporation (2327 TT)</a>, <a href="https://www.smartkarma.com/entities/iteq-corp" target="_blank" data-smartkarma-citation="entities:5942:1" rel="noopener">Iteq Corp (6213 TT)</a> and <a href="https://www.smartkarma.com/entities/makalot-industrial-co-ltd" target="_blank" data-smartkarma-citation="entities:13928:1" rel="noopener">Makalot Industrial (1477 TT)</a>. </p></div>

The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.Hong Kong saw shorts rise on JD.com (HK) (9618 HK), NetEase (9999 HK), CSPC Pharmaceutical Group (1093 HK) and Anta Sports Products (2020 HK) while there was short covering on Alibaba Group (9988 HK), Meituan Dianping (3690 HK), Ping An Insurance (H) (2318 HK) and Tencent Holdings (700 HK). Shorts increased in Health Care, Industrials and Energy, and were covered in Consumer Discretionary, Information Technology and Financials.Japan saw an increase in shorts on Mitsubishi Corp (8058 JP), Toshiba Corp (6502 JP), Canon Inc (7751 JP) and Sumitomo Mitsui Trust Holdings (8309 JP) and a reduction in shorts on Tokyo Electron (8035 JP), Fanuc Corp (6954 JP), Eisai Co Ltd (4523 JP) and Astellas Pharma (4503 JP). Sectorally, shorts increased on Industrials, Communication Services and Financials, and reduced on Information Technology, Health Care and Materials.Short Interest in Korea increased in almost all industry groups led by Banks, Technology Hardware, Capital Goods and Diversified Financials. Stocks that saw the most shorts were Samsung Electronics (005930 KS), Samsung SDI (006400 KS), Kb Financial Group (105560 KS), Hana Financial (086790 KS) and Shinhan Financial (055550 KS). Short Interest in Taiwan decreased in Consumer Durables, Pharmaceuticals, Insurance and Automobiles, while shorts increased in Banks, Semiconductors and Materials. Stocks that saw the highest increase in shorts were TSMC (2330 TT), Genius Electronic Optical (3406 TT), Catcher Technology (2474 TT) and Hon Hai Precision Industry (2317 TT) while shorts were covered in Novatek Microelectronics Corp (3034 TT), Yageo Corporation (2327 TT), Iteq Corp (6213 TT) and Makalot Industrial (1477 TT). 

Asia Short Interest Weekly: JD, Netease, CSPC, Alibaba, Meituan, Tencent, Fanuc, Mitsubishi, Toshiba

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/068/original/2020-07-09_13-43-33.png?1594269841" class="editor-image img-responsive" data-smartkarma-image-id="145068"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>WHAT CURRENCY RISK?</strong> - It seems rather old-fashioned to raise the topic of currency risk in relation to potential stressors on Japanese listed companies. Compared to the thirty-five years to 2015, the last five years have been a period of benign calm in the USD/JPY exchange rate, aided and abetted by the action of central banks to eliminate interest rates and the functioning of the bond markets. Most observers expect this currency stability regime to continue and COVID-19 has so far only seen one short 'blip' to ¥102.36 on 9th March.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/095/original/2020-07-09_15-04-02.png?1594274675" class="editor-image img-responsive" data-smartkarma-image-id="145095"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>¥ BELOW 100</strong> -  If we isolate only the 1,484 days in the last forty years when Yen has traded above ¥100, the average TOPIX index is 975. The three Yen 'peaks' we have highlighted above in 1995, 2011, and 2016 proved excellent entry points. The subsequent trough-to-peak performance was 43%, 139%, and 60%, respectively. The COVID-19-induced trough-to-peak is, so far, just 31%.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/101/original/2020-07-09_15-13-11.png?1594275216" class="editor-image img-responsive" data-smartkarma-image-id="145101"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>KEY DRIVER </strong>- Nevertheless, for an increasingly-global Japan, the USDJPY exchange rate remains a key driver of earnings. With a lag of six months, the peaks and troughs of the USDJPY exchange rate have coincided with turning points in the earnings cycle as measured by our Results &amp; Revision Score. The six-month lag suggests that ignoring the impact of COVID-19, the exchange rate is mildly supportive of earnings momentum for the balance of 2020.</p><hr><p style="text-align: center;"><strong>• CORRELATION ANALYSIS •</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/499/original/2020-07-12_12-55-49.png?1594526165" class="editor-image img-responsive" data-smartkarma-image-id="145499"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/500/original/2020-07-12_13-13-53.png?1594527254" class="editor-image img-responsive" data-smartkarma-image-id="145500"></figure><div class="content-caption">Source • Japan Analytics</div><div class="content-caption"></div><p><strong>CORRELATIONS</strong> - Our analysis of the currency risk of specific companies will be in two parts. The first and simplest is to examine the long-term positive and negative correlations of each listed larger-capitalisation company against the US dollar and Euro for the split-adjusted share price. This analysis will yield some surprising results, including the positive US Dollar correlation of <a href="https://www.smartkarma.com/entities/nippon-express-co-ltd" target="_blank" data-smartkarma-citation="entities:18582:1" rel="noopener">Nippon Express (9062 JP)</a>, while <a href="https://www.smartkarma.com/entities/nikon-corp" target="_blank" data-smartkarma-citation="entities:7117:1" rel="noopener">Nikon (7731 JP)</a> is negatively correlated. </p><hr><p style="text-align: center;"><strong>• THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT •</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/502/original/2020-07-12_13-22-12.png?1594527750" class="editor-image img-responsive" data-smartkarma-image-id="145502"></figure><div class="content-caption">Source • Japan Analytics</div><p style="text-align: left;"><strong>FCTA </strong>- The second part is perhaps more abstruse, however but is a more accurate estimation of the actual currency risk embedded in the business model.  The Foreign Currency Translation Adjustment (FCTA) is part of Other Comprehensive Income and has been disclosed in Japanese GAAP-based balance sheets and income statements since 2001 and 2011, respectively to measure the extent of each company's global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders' Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored. For example, the decline in the US dollar from ¥123 to ¥101 in 2016 resulted in a six-quarter ¥53 trillion negative FCTA adjustment, 65% of the gap between Net Income and CITC over that period.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/273/original/2020-07-10_16-08-25.png?1594364929" class="editor-image img-responsive" data-smartkarma-image-id="145273"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>CITC &amp; NET INCOME</strong> - Comprehensive Income adds a series of adjustments to Net Income to reflect as-yet-unrealised changes from currency translations, securities valuation differences, pensions, and deferred hedges. These adjustments are subsequently 'recycled' as and when realisations occur. In aggregate over the last seven years, Comprehensive Income has exceeded Net Income by a cumulative ¥56 trillion or 7%. However, as Comprehensive Income is inherently a more volatile data series, it is eschewed or overlooked by most analysts despite the direct impact on Shareholders' Equity. Nevertheless, Comprehensive Income illustrates that, as a result of increased globalisation and investments in marketable securities, the underlying earnings of Japanese corporates have become riskier than is implied by Net Income. In 2017, the FCTA resulted in an aggregate loss for Comprehensive Income to Common (CITC) and a corresponding decline in Shareholders' Equity for non-financial Japanese companies.  In the last two reported quarters, the 'gap' between Net Income and CITC has begun to widen again as both Valuation Differences and the FCTA have turned negative.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/447/original/2020-07-12_10-58-45.png?1594519146" class="editor-image img-responsive" data-smartkarma-image-id="145447"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>FCTA BY SECTOR</strong> - Two-thirds of the total absolute FCTA over the last seven years comes from seven Sectors - <strong>Autos</strong>, <strong>Wholesale</strong>, <strong>Electrical Equipment</strong>,<strong> Technology Hardware</strong>, <strong>Machinery</strong>, <strong>Other Consumer Products</strong> and <strong>Telecommunications </strong>(Softbank Group). The least-exposed Sectors are<strong> Services</strong>, <strong>IT</strong> &amp;<strong> Internet</strong>,<strong> Multi-Industry</strong> and<strong> Restaurants</strong>.</p><hr><p>In the<strong> DETAIL</strong> section below, we shall look at the Accumulated Balance Sheet Foreign Currency Adjustments where <a href="https://www.smartkarma.com/entities/eisai-co-ltd" target="_blank" data-smartkarma-citation="entities:21001:1" rel="noopener">Eisai Co Ltd (4523 JP)</a> and <a href="https://www.smartkarma.com/entities/dic-corp" target="_blank" data-smartkarma-citation="entities:7343:1" rel="noopener">Dic Corp (4631 JP)</a> have the most significant amounts of positive and negative Accumulated FCTA's relative to Equity, respectively.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/448/original/2020-07-12_11-12-20.png?1594519955" class="editor-image img-responsive" data-smartkarma-image-id="145448"></figure><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/617/original/2020-07-13_15-35-04.png?1594622118" class="editor-image img-responsive" data-smartkarma-image-id="145617"></figure><p>Source • Japan Analytics</p>
</div><div class="content-highlight"><p><strong>This Part 6 concludes our Stress Test series. However, forthcoming Insights will look at the Valuation Differences component of Other Comprehensive Income and those companies with the most substantial CITC/Net Income 'gaps'.</strong></p></div>

Source • Japan AnalyticsWHAT CURRENCY RISK? - It seems rather old-fashioned to raise the topic of currency risk in relation to potential stressors on Japanese listed companies. Compared to the thirty-five years to 2015, the last five years have been a period of benign calm in the USD/JPY exchange rate, aided and abetted by the action of central banks to eliminate interest rates and the functioning of the bond markets. Most observers expect this currency stability regime to continue and COVID-19 has so far only seen one short 'blip' to ¥102.36 on 9th March.Source • Japan Analytics¥ BELOW 100 -  If we isolate only the 1,484 days in the last forty years when Yen has traded above ¥100, the average TOPIX index is 975. The three Yen 'peaks' we have highlighted above in 1995, 2011, and 2016 proved excellent entry points. The subsequent trough-to-peak performance was 43%, 139%, and 60%, respectively. The COVID-19-induced trough-to-peak is, so far, just 31%.Source • Japan AnalyticsKEY DRIVER - Nevertheless, for an increasingly-global Japan, the USDJPY exchange rate remains a key driver of earnings. With a lag of six months, the peaks and troughs of the USDJPY exchange rate have coincided with turning points in the earnings cycle as measured by our Results &amp; Revision Score. The six-month lag suggests that ignoring the impact of COVID-19, the exchange rate is mildly supportive of earnings momentum for the balance of 2020.• CORRELATION ANALYSIS •Source • Japan AnalyticsCORRELATIONS - Our analysis of the currency risk of specific companies will be in two parts. The first and simplest is to examine the long-term positive and negative correlations of each listed larger-capitalisation company against the US dollar and Euro for the split-adjusted share price. This analysis will yield some surprising results, including the positive US Dollar correlation of Nippon Express (9062 JP), while Nikon (7731 JP) is negatively correlated. • THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT •Source • Japan AnalyticsFCTA - The second part is perhaps more abstruse, however but is a more accurate estimation of the actual currency risk embedded in the business model.  The Foreign Currency Translation Adjustment (FCTA) is part of Other Comprehensive Income and has been disclosed in Japanese GAAP-based balance sheets and income statements since 2001 and 2011, respectively to measure the extent of each company's global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders' Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored. For example, the decline in the US dollar from ¥123 to ¥101 in 2016 resulted in a six-quarter ¥53 trillion negative FCTA adjustment, 65% of the gap between Net Income and CITC over that period.Source • Japan AnalyticsCITC &amp; NET INCOME - Comprehensive Income adds a series of adjustments to Net Income to reflect as-yet-unrealised changes from currency translations, securities valuation differences, pensions, and deferred hedges. These adjustments are subsequently 'recycled' as and when realisations occur. In aggregate over the last seven years, Comprehensive Income has exceeded Net Income by a cumulative ¥56 trillion or 7%. However, as Comprehensive Income is inherently a more volatile data series, it is eschewed or overlooked by most analysts despite the direct impact on Shareholders' Equity. Nevertheless, Comprehensive Income illustrates that, as a result of increased globalisation and investments in marketable securities, the underlying earnings of Japanese corporates have become riskier than is implied by Net Income. In 2017, the FCTA resulted in an aggregate loss for Comprehensive Income to Common (CITC) and a corresponding decline in Shareholders' Equity for non-financial Japanese companies.  In the last two reported quarters, the 'gap' between Net Income and CITC has begun to widen again as both Valuation Differences and the FCTA have turned negative.Source • Japan AnalyticsFCTA BY SECTOR - Two-thirds of the total absolute FCTA over the last seven years comes from seven Sectors - Autos, Wholesale, Electrical Equipment, Technology Hardware, Machinery, Other Consumer Products and Telecommunications (Softbank Group). The least-exposed Sectors are Services, IT &amp; Internet, Multi-Industry and Restaurants.In the DETAIL section below, we shall look at the Accumulated Balance Sheet Foreign Currency Adjustments where Eisai Co Ltd (4523 JP) and Dic Corp (4631 JP) have the most significant amounts of positive and negative Accumulated FCTA's relative to Equity, respectively.
Source • Japan Analytics
This Part 6 concludes our Stress Test series. However, forthcoming Insights will look at the Valuation Differences component of Other Comprehensive Income and those companies with the most substantial CITC/Net Income 'gaps'.

🇯🇵 JAPAN • Stress Tests Part 6: Currency Risk

Japan

Eisai Co., Ltd. produces prescription drugs and medical equipment and sells mainly to sales agents and subsidiaries.  Through its subsidiary, Sanko Junyaku, the Company produces and sells diagnostic drugs.  Eisai also markets its products through related companies in the US, Europe, and Asia.  The Company also manufactures and sells foods, livestock feeds, chemical, and agrochemicals.

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Eisai Co Ltd (4523 JP)

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🇯🇵 JAPAN • Stress Tests Part 6: Currency Risk

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