'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

<p><strong>INTRODUCTION</strong> - Following on from our review of Spring Market  &amp; Sector Aggregates &amp; Scores <a href="https://www.smartkarma.com/insights/japan-spring-results-revisions-market-sector-aggregates-scores-2nd-quarter" target="_blank" data-smartkarma-citation="insights:29938">Insight</a>, this Insight will cover the cap-weighted Results &amp; Revision Scores for the 328 Peer Groups that comprise our 30 Sectors and provide greater depth to our analysis of current business trends.  Peer Group definitions reflect both standard SIC/GICS classifications as well as local market conventions. The number of constituents and market capitalisation for each Peer Group varies widely. A full list of the Peer Groups within each sector is provided below. </p><p>As an appetiser, the charts below show the top and bottom ten Peer Groups ranked by Results &amp; Revision Score.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/088/989/original/2019-05-28_11-43-58.png?1559011506" class="editor-image img-responsive" data-smartkarma-image-id="88989"></figure><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/088/991/original/2019-05-28_11-46-04.png?1559011726" class="editor-image img-responsive" data-smartkarma-image-id="88991"></figure><p>Source: Japan Analytics</p>
</div><div class="content-highlight"><p>In the <strong>DETAIL</strong> section below, we list the top and bottom twenty Peer Groups ranked by Results &amp; Revision Score and the top and bottom twenty most-changed over the last three months as well the most optimistic and most pessimistic.  </p></div>

INTRODUCTION - Following on from our review of Spring Market  &amp; Sector Aggregates &amp; Scores Insight, this Insight will cover the cap-weighted Results &amp; Revision Scores for the 328 Peer Groups that comprise our 30 Sectors and provide greater depth to our analysis of current business trends.  Peer Group definitions reflect both standard SIC/GICS classifications as well as local market conventions. The number of constituents and market capitalisation for each Peer Group varies widely. A full list of the Peer Groups within each sector is provided below. As an appetiser, the charts below show the top and bottom ten Peer Groups ranked by Results &amp; Revision Score.
Source: Japan Analytics
In the DETAIL section below, we list the top and bottom twenty Peer Groups ranked by Results &amp; Revision Score and the top and bottom twenty most-changed over the last three months as well the most optimistic and most pessimistic.  

🇯🇵 JAPAN • Spring Results & Revision Scores - Peer Groups

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>In September 2013, <a href="https://www.smartkarma.com/entities/280" target="_blank" data-smartkarma-citation="entities:280:1">Tokyo Electron (8035 JP)</a> and Applied Materials announced a business integration plan where the two companies would merge under a Dutch holdco. In the end, it took multiple extensions of the timeline as anti-trust regulators were loathe to approve before the two companies just gave up at the end of April 2015 the day before the Golden Week holidays started. </p><p>The Tokyo Electron analyst meeting which accompanied the announcement of the deal failing was remarkable. It included strong earnings forecasts (31Mar2019 net revenue was expected at ¥839bn (a number analysts at the time balked at, but which was beaten this year by well over 50%), a dramatic admission of having learned about management process and shareholder value from the AMAT side during the period when they were planning for the integration, and it included a buyback of 8.5% of shares outstanding where the company hoped to avoid a dramatic selloff by arbs. The entire saga was discussed and trade recommendations were made on Smartkarma at the time. What seemed overly aggressive at the time has come through and more. To me it was obvious the company's management had experienced a kind of Damascene conversion.</p><p>The company actually went ahead and bought back 15.4mm shares (which was at the time close to 8.6% of shares outstanding) in the next six months, and proceeded to beat estimates handily over the next few years. </p><h2>The New News</h2><p>Since earnings were announced on April 26 providing a forecast for March 2020 showing an expected net revenue <em>fall</em> of 13.9%yoy, and an EPS fall of more than 33%, the stock itself has fallen 13+%. </p><p>Today the company announced revisions to its <a href="https://www.tel.com/about/release/2019/20190527_001.html" target="_blank">Medium Term Management Plan</a> and Financial Model. </p><p>The company <em>also</em><a href="https://www.tel.com/about/release/2019/20190527_002.html" target="_blank">announced</a> a 14mm share buyback going from 28 May through end-December. This is theoretically an 8.5% buyback. The amount available to spend on the buyback is ¥150 billion. Given the last traded price of ¥14,615, investors in Tokyo Electron should dearly hope that they don't buy back all 14mm shares because that implies a price of ¥10,714/share. </p><p>While the MTMP shows slightly less aggressive forecasts in the year or two ahead than the last one of May 2018, the combination of the MTMP, shareholder return policy, and the buyback is still powerful stuff. </p>

In September 2013, Tokyo Electron (8035 JP) and Applied Materials announced a business integration plan where the two companies would merge under a Dutch holdco. In the end, it took multiple extensions of the timeline as anti-trust regulators were loathe to approve before the two companies just gave up at the end of April 2015 the day before the Golden Week holidays started. The Tokyo Electron analyst meeting which accompanied the announcement of the deal failing was remarkable. It included strong earnings forecasts (31Mar2019 net revenue was expected at ¥839bn (a number analysts at the time balked at, but which was beaten this year by well over 50%), a dramatic admission of having learned about management process and shareholder value from the AMAT side during the period when they were planning for the integration, and it included a buyback of 8.5% of shares outstanding where the company hoped to avoid a dramatic selloff by arbs. The entire saga was discussed and trade recommendations were made on Smartkarma at the time. What seemed overly aggressive at the time has come through and more. To me it was obvious the company's management had experienced a kind of Damascene conversion.The company actually went ahead and bought back 15.4mm shares (which was at the time close to 8.6% of shares outstanding) in the next six months, and proceeded to beat estimates handily over the next few years. The New NewsSince earnings were announced on April 26 providing a forecast for March 2020 showing an expected net revenue fall of 13.9%yoy, and an EPS fall of more than 33%, the stock itself has fallen 13+%. Today the company announced revisions to its Medium Term Management Plan and Financial Model. The company alsoannounced a 14mm share buyback going from 28 May through end-December. This is theoretically an 8.5% buyback. The amount available to spend on the buyback is ¥150 billion. Given the last traded price of ¥14,615, investors in Tokyo Electron should dearly hope that they don't buy back all 14mm shares because that implies a price of ¥10,714/share. While the MTMP shows slightly less aggressive forecasts in the year or two ahead than the last one of May 2018, the combination of the MTMP, shareholder return policy, and the buyback is still powerful stuff. 

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

<ul>
<li>
<a href="https://www.smartkarma.com/entities/tokyo-electron-ltd/overview" target="_blank">Tokyo Electron (8035 JP/TEL)</a>reported its 4QFY03/19 and full-year FY03/19 results on 26<sup>th</sup> of April. The company reported a solid full-year with double-digit growth in revenue and operating profit due to strong demand for semiconductors mainly during the first half of the year.</li>
<li>However, the fourth quarter numbers failed to impress with both revenue and operating profit declining YoY, providing the indication that the semiconductor downturn has started impacting the company’s results.</li>
<li>Moreover, the management is expecting the FY03/2020 to have the worst impact from the memory market decline with revenue and operating profit forecasted to decline 13.9% YoY and 29.2% YoY respectively. This did not come in as a surprise to us as the semiconductor market has already been decelerating and the market expects the inventory adjustments to continue well into 2019.</li>
<li>We feel the stock is still overvalued at its current price of JPY17,645 per share and it could decline further once the market witnesses the severity of the down-cycle. Despite management being positive about the future business prospects, we feel it is too soon to establish a bullish view on the stock given the current decline in the semiconductor market.</li>
</ul>



Tokyo Electron (8035 JP/TEL)reported its 4QFY03/19 and full-year FY03/19 results on 26th of April. The company reported a solid full-year with double-digit growth in revenue and operating profit due to strong demand for semiconductors mainly during the first half of the year.
However, the fourth quarter numbers failed to impress with both revenue and operating profit declining YoY, providing the indication that the semiconductor downturn has started impacting the company’s results.
Moreover, the management is expecting the FY03/2020 to have the worst impact from the memory market decline with revenue and operating profit forecasted to decline 13.9% YoY and 29.2% YoY respectively. This did not come in as a surprise to us as the semiconductor market has already been decelerating and the market expects the inventory adjustments to continue well into 2019.
We feel the stock is still overvalued at its current price of JPY17,645 per share and it could decline further once the market witnesses the severity of the down-cycle. Despite management being positive about the future business prospects, we feel it is too soon to establish a bullish view on the stock given the current decline in the semiconductor market.


Tokyo Electron Reports Strong FY03/19 Results; Outlook for FY03/20 Looks Weak but Nothing Surprising

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/086/182/original/2019-04-29_12-24-09.png?1556508262" class="editor-image img-responsive" data-smartkarma-image-id="86182"></figure><p>Source: Japan Analytics</p>
</div><p><strong>EARLY DAYS</strong> - In the last seven trading days, 473 Japanese companies have reported quarterly results, 11% of the 3,830 that are currently listed. Of this 76 % have been annual results for the fiscal year ended March 2019.  Also, there have been 328 initial forecasts for the year to March 2020, 227 initial interim forecasts and 228 intra-year revisions. With the long holiday break, there will be an avalanche of announcements from the 7th May onwards. In this Insight, we shall look at the trends apparent in the results so far released.  In the last month, our Market Composite trailing-twelve-month (TTM) data series is unchanged for Operating Income, while Net Income has increased by ¥0.2t. <strong>With 13% of March-year-end companies have issued FY2020 forecasts, aggregate forecast Operating Income is ¥0.7t lower and is in line with TTM Operating Income. Forecast Net Income is ¥0.6 lower and is 4% below TTM Net Income. </strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/086/411/original/2019-04-30_13-26-24.png?1556598396" class="editor-image img-responsive" data-smartkarma-image-id="86411"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/086/412/original/File%202019-04-30%2013%2010%2017.jpeg?1556598417" class="editor-image img-responsive" data-smartkarma-image-id="86412"></figure><div class="content-caption">Source: Japan Analytics, Pictet Asset Management</div><p><strong>MARGIN SLIPPAGE</strong> -<strong> </strong>With revenues remaining relatively robust, margins are declining fast that at any time since 2016. The forecast operating margin is now 42 basis points below the 2018 peak level, while the slippage in net margins is 78 basis points. Although the sample is not the same, to IBES consensus estimates have current downtrend bottoming out in the second half of the year with net margins recovering to 6.6% in 2021. We consider this overly optimistic. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/086/187/original/2019-04-29_12-32-53.png?1556508784" class="editor-image img-responsive" data-smartkarma-image-id="86187"></figure><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/086/190/original/2019-04-29_12-51-24.png?1556509893" class="editor-image img-responsive" data-smartkarma-image-id="86190"></figure><p>Source: Japan Analytics</p>
</div><p style="text-align: left;"><strong>RESULTS &amp; REVISION SCORES</strong> - Our scoring methodology for results and forecasts/revisions incorporates rates of change and other momentum factors and has historically provided a better fit with changes in aggregate market value. Although the Market Composite Results Score has remained stable in the last week at 2.21, we expect the score to end this results 'season' closer to zero as indicated by the trend in the Forecast/Revision Score. The latter has declined for six quarters in a row and the current quarter will make it seven. <strong>Although our data series only covers the last forty quarters and is perhaps too short for generalisations, it would be unusual for the Forecasts/Revision Score series to have an eighth down quarter in a row. Perhaps the market's robust recovery from the Christmas Day low is anticipating such an outcome. </strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/086/193/original/2019-04-29_13-17-03.png?1556511439" class="editor-image img-responsive" data-smartkarma-image-id="86193"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>USDJPY NEUTRAL</strong> - In the past, one of the principal drivers of both scores has been changes in the US dollar/Yen exchange rate. The chart above merges both scores to create a cleaner timeline, and key turning points in <a href="https://www.smartkarma.com/entities/22826" target="_blank" data-smartkarma-citation="entities:22826:1">JUSDJPY CURNCY</a> highlighted. With the currency cross trading in a narrow range, there is little support or stimulus in the next six months. However, any sustained weakness in the Yen, such as occurred from September 2016, will be another confirmation that a cycle low has been reached. </p><div class="content-highlight"><p>In the<strong> DETAIL</strong> section below, we update our  Sector Results &amp; Revision Scores and look at the best and worst large-cap company results over the seven trading days.</p></div>


Source: Japan Analytics
EARLY DAYS - In the last seven trading days, 473 Japanese companies have reported quarterly results, 11% of the 3,830 that are currently listed. Of this 76 % have been annual results for the fiscal year ended March 2019.  Also, there have been 328 initial forecasts for the year to March 2020, 227 initial interim forecasts and 228 intra-year revisions. With the long holiday break, there will be an avalanche of announcements from the 7th May onwards. In this Insight, we shall look at the trends apparent in the results so far released.  In the last month, our Market Composite trailing-twelve-month (TTM) data series is unchanged for Operating Income, while Net Income has increased by ¥0.2t. With 13% of March-year-end companies have issued FY2020 forecasts, aggregate forecast Operating Income is ¥0.7t lower and is in line with TTM Operating Income. Forecast Net Income is ¥0.6 lower and is 4% below TTM Net Income. Source: Japan Analytics, Pictet Asset ManagementMARGIN SLIPPAGE - With revenues remaining relatively robust, margins are declining fast that at any time since 2016. The forecast operating margin is now 42 basis points below the 2018 peak level, while the slippage in net margins is 78 basis points. Although the sample is not the same, to IBES consensus estimates have current downtrend bottoming out in the second half of the year with net margins recovering to 6.6% in 2021. We consider this overly optimistic. 
Source: Japan Analytics
RESULTS &amp; REVISION SCORES - Our scoring methodology for results and forecasts/revisions incorporates rates of change and other momentum factors and has historically provided a better fit with changes in aggregate market value. Although the Market Composite Results Score has remained stable in the last week at 2.21, we expect the score to end this results 'season' closer to zero as indicated by the trend in the Forecast/Revision Score. The latter has declined for six quarters in a row and the current quarter will make it seven. Although our data series only covers the last forty quarters and is perhaps too short for generalisations, it would be unusual for the Forecasts/Revision Score series to have an eighth down quarter in a row. Perhaps the market's robust recovery from the Christmas Day low is anticipating such an outcome. Source: Japan AnalyticsUSDJPY NEUTRAL - In the past, one of the principal drivers of both scores has been changes in the US dollar/Yen exchange rate. The chart above merges both scores to create a cleaner timeline, and key turning points in JUSDJPY CURNCY highlighted. With the currency cross trading in a narrow range, there is little support or stimulus in the next six months. However, any sustained weakness in the Yen, such as occurred from September 2016, will be another confirmation that a cycle low has been reached. In the DETAIL section below, we update our  Sector Results &amp; Revision Scores and look at the best and worst large-cap company results over the seven trading days.

🇯🇵 Japan • Spring Results & Revisions Flash - Early Days

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/983/original/2019-04-26_11-52-57.png?1556247183" class="editor-image img-responsive" data-smartkarma-image-id="85983"></figure><p>Source: Japan Analytics</p>
</div><p><strong><a href="https://www.smartkarma.com/entities/18107" target="_blank" data-smartkarma-citation="entities:18107:1">ADVANTEST (6857 JP)</a></strong> reported FY2019 on 25th April and released initial forecasts for the current year which suggest that Operating Income will decline by 54% on a 19% decline in sales and a 23% decline in new orders. For details, please see <a href="https://www.smartkarma.com/companies/909" target="_blank" data-smartkarma-citation="companies:909">LightStream Research</a>'s Insight <a href="https://www.smartkarma.com/insights/advantest-fy03-19-full-year-results-beat-consensus-4qfy03-19-declines-due-to-memory-downturn" target="_blank" data-smartkarma-citation="insights:29425">here</a>. This Insight will review the company's forecasting track record, update our Scoring Charts and, based on our valuation methodology, suggest the current downside risk or short 'potential' after today's near 9% decline.  <strong>We also highlight the 11% increase in net shares outstanding in the last five quarters.</strong></p>


Source: Japan Analytics
ADVANTEST (6857 JP) reported FY2019 on 25th April and released initial forecasts for the current year which suggest that Operating Income will decline by 54% on a 19% decline in sales and a 23% decline in new orders. For details, please see LightStream Research's Insight here. This Insight will review the company's forecasting track record, update our Scoring Charts and, based on our valuation methodology, suggest the current downside risk or short 'potential' after today's near 9% decline.  We also highlight the 11% increase in net shares outstanding in the last five quarters.

6857 🇯🇵 Advantest • Scoring & Valuation Update

Japan

Tokyo Electron Limited manufactures and sells industrial electronics products, such as semiconductor manufacturing machines, computer system, and electronic components.  The Company products are sold in US, Taiwan, and others as well as in Japan.

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Tokyo Electron (8035 JP)

🇯🇵 JAPAN • Spring Results & Revision Scores - Peer Groups

INTRODUCTION - Following on from our review of Spring Market & Sector Aggregates & Scores Insight, this Insight will cover the...

Campbell Gunn

Big Tokyo Electron Buyback

In September 2013, Tokyo Electron (8035 JP) and Applied Materials announced a business integration plan where the two companies would merge under a...

Travis Lundy

Tokyo Electron Reports Strong FY03/19 Results; Outlook for FY03/20 Looks Weak but Nothing Surprising

Tokyo Electron (8035 JP/TEL)reported its 4QFY03/19 and full-year FY03/19 results on 26th of April. The company reported a solid full-year with...

Shifara Samsudeen, ACMA, CGMA

🇯🇵 Japan • Spring Results & Revisions Flash - Early Days

EARLY DAYS - In the last seven trading days, 473 Japanese companies have reported quarterly results, 11% of the 3,830 that are currently listed. Of...

Campbell Gunn

6857 🇯🇵 Advantest • Scoring & Valuation Update

ADVANTEST (6857 JP) reported FY2019 on 25th April and released initial forecasts for the current year which suggest that Operating Income will...

Campbell Gunn

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