Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

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

Advantest achieved record orders and sales in FY Mar-21 and operating profit rose 20.5% to the highest level in 15 years. On top of that management is guiding for another 20% increase in operating profit in FY Mar-22. Are we looking at the peak?That will not be clear for another two quarters at least. In the meantime, the 1.2 Book-to-Bill ratio recorded in 2H of FY Mar-21, strong demand for both SoC and memory test systems, and much improved mechatronics and service margins suggest that FY Mar-22 guidance may be conservative.That would be consistent with last fiscal year, when guidance was raised twice but still fell short of the company's actual performance. We expect demand for test equipment to continue to rise as IC shortages are overcome.We maintain our ¥12,000 share price target, which indicates upside potential of 16%.

Advantest achieved record orders and sales in FY Mar-21 and operating profit rose 20.5% to the highest level in 15 years. On top of that management is guiding for another 20% increase in operating profit in FY Mar-22. Are we looking at the peak?That will not be clear for another two quarters at least. In the meantime, the 1.2 Book-to-Bill ratio recorded in 2H of FY Mar-21, strong demand for both SoC and memory test systems, and much improved mechatronics and service margins suggest that FY Mar-22 guidance may be conservative.That would be consistent with last fiscal year, when guidance was raised twice but still fell short of the company's actual performance. We expect demand for test equipment to continue to rise as IC shortages are overcome.We maintain our ¥12,000 share price target, which indicates upside potential of 16%.

Advantest (6857 JP): Further Growth Ahead

On January 10, we wrote that demand for semiconductor equipment could exceed SEMI's growth forecast for 2021, that Tokyo Electron's guidance for FY Mar-21 was probably conservative, and that Investors in Tokyo Electron (TEL)... should benefit, even if the shares appear to be overbought. (see<a href="https://www.smartkarma.com/insights/tokyo-electron-8035-jp-semiconductor-shortage-points-to-stronger-year-ahead" target="_blank" data-smartkarma-citation="insights:46893" rel="noopener">Tokyo Electron (8035 JP): Semiconductor Shortage Points to Stronger Year Ahead </a> ).  Since then, TEL has raised guidance, Intel and TSMC have announced big new capital spending plans, SEMI has raised its forecast of semiconductor equipment demand, and TEL's share price has risen by 24%. How much more upside is there?The shares are now selling at 34x management's EPS guidance for FY Mar-21 and 31x our estimate for FY Mar-22. These multiples are not high compared with those of other first-rate Japanese  precision manufacturing companies, but they are double what they were two or three years ago. It is tempting to say that valuations are extended in what remains a cyclical industry, but the greater risk to earnings growth, in our estimation, is high and rising depreciation and R&amp;D expenses as the company expands capacity and develops technology for the 2 nanometer node and beyond (See <a href="https://www.smartkarma.com/insights/screen-holdings-7735-jp-aiming-at-2nm-process-technology" target="_blank" data-smartkarma-citation="insights:49767" rel="noopener">Screen Holdings (7735 JP): Aiming at 2nm Process Technology</a> ).

On January 10, we wrote that demand for semiconductor equipment could exceed SEMI's growth forecast for 2021, that Tokyo Electron's guidance for FY Mar-21 was probably conservative, and that Investors in Tokyo Electron (TEL)... should benefit, even if the shares appear to be overbought. (seeTokyo Electron (8035 JP): Semiconductor Shortage Points to Stronger Year Ahead  ).  Since then, TEL has raised guidance, Intel and TSMC have announced big new capital spending plans, SEMI has raised its forecast of semiconductor equipment demand, and TEL's share price has risen by 24%. How much more upside is there?The shares are now selling at 34x management's EPS guidance for FY Mar-21 and 31x our estimate for FY Mar-22. These multiples are not high compared with those of other first-rate Japanese  precision manufacturing companies, but they are double what they were two or three years ago. It is tempting to say that valuations are extended in what remains a cyclical industry, but the greater risk to earnings growth, in our estimation, is high and rising depreciation and R&amp;D expenses as the company expands capacity and develops technology for the 2 nanometer node and beyond (See Screen Holdings (7735 JP): Aiming at 2nm Process Technology ).

Tokyo Electron (8035 JP): Getting Ahead of Itself

On March 24, the Nikkei newspaper reported that Tokyo Electron (TEL) (8035 JP), Canon (7751 JP) and Screen Holdings will cooperate with Japan's National Institute of Advanced Industrial Science and Technology (AIST) to develop "next-generation production technology in the 2-nanometer process and beyond by the mid-2020s."In response to our inquiries, Tokyo Electron and Canon said "No Comment," but Screen told us that (1) The article is basically true, (2) Only these three companies seem to be involved, and (3) This is a new activity for Screen.This should help Japanese equipment makers support TSMC, which is now targeting commercial production with 3-nm process technology in 2022. It is also a reminder that Screen, like TEL, is a long-term investment.Screen's share price has risen by 16% since we last wrote on the company at the beginning of February. But there remains 24% potential upside to our ¥12,000 share price target.

On March 24, the Nikkei newspaper reported that Tokyo Electron (TEL) (8035 JP), Canon (7751 JP) and Screen Holdings will cooperate with Japan's National Institute of Advanced Industrial Science and Technology (AIST) to develop "next-generation production technology in the 2-nanometer process and beyond by the mid-2020s."In response to our inquiries, Tokyo Electron and Canon said "No Comment," but Screen told us that (1) The article is basically true, (2) Only these three companies seem to be involved, and (3) This is a new activity for Screen.This should help Japanese equipment makers support TSMC, which is now targeting commercial production with 3-nm process technology in 2022. It is also a reminder that Screen, like TEL, is a long-term investment.Screen's share price has risen by 16% since we last wrote on the company at the beginning of February. But there remains 24% potential upside to our ¥12,000 share price target.

Screen Holdings (7735 JP): Aiming at 2nm Process Technology

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Last Week in Event SPACE: Capitaland, Languang Justbon, Fast Retailing, Crown Resorts, Adani Power

Travis Lundy

The Nikkei wrote an article last Thursday 18 March 2021 saying the BOJ would change its monetary/quantitative easing policy after having commenced a review in December.
The general idea was a slight curve steepening allowance made "to allow banks to be more profitable" and a change to the way ETF buying was conducted. 
<div class="content-highlight">
I published a quick analysis of the <a href="https://www.smartkarma.com/insights/changes-in-boj-etf-buying-which-stocks-impacted-and-how" target="_blank" data-smartkarma-citation="insights:49331" rel="noopener">Changes In BOJ ETF Buying - Which Stocks Impacted and How?</a> 
</div>
On Friday 19 March, the BOJ met and after the MPC Meeting published...
<ul>
<li>The policy statement for this release, <a href="https://www.boj.or.jp/en/announcements/release_2021/k210319a.pdf" target="_blank" rel="noopener">Further Effective and Sustainable Monetary Easing</a>
</li>
<li>a <a href="https://www.boj.or.jp/en/announcements/release_2021/k210319c.pdf" target="_blank" rel="noopener">Background</a> to the policy change which discussed the work they did called the Assessment for Further Effective and Sustainable Monetary Easing.
</li>
<li>a nifty <a href="https://www.boj.or.jp/en/announcements/release_2021/k210319b.pdf" target="_blank" rel="noopener">two-pager powerpoint presentation</a> of the Background</li>
<li>and a document called <a href="https://www.boj.or.jp/en/announcements/release_2021/rel210319c.pdf" target="_blank" rel="noopener">Establishment of "Principal Terms and Conditions of the Interest Scheme to Promote Lending"</a> which also contains the change in wording for the QQE</li>
</ul>
This showed there was some subtlety in the methodology, but it also showed some of the restrictions that the BOJ would place on itself in how it decided when and how much ETF buying to do. 
<div class="content-highlight">
I looked at the methodology and numbers and proposed a model in <a href="https://www.smartkarma.com/insights/quantifying-the-boj-change-in-etf-policy-assessing-future-etf-buying-methodology" target="_blank" data-smartkarma-citation="insights:49434" rel="noopener">Quantifying the BOJ Change in ETF Policy: Assessing Future ETF Buying Methodology</a> 
</div>
The market reaction on some high-Nikkei weight stocks on Thursday afternoon and particularly Friday afternoon was striking. <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" data-smartkarma-citation="entities:751:1" rel="noopener">Fast Retailing (9983 JP)</a> fell 5.2% in significant volume in the 30 minutes after the announcement.
The balance of ETF buying since the BOJ lifted its buying amount from ¥6 trillion annually to ¥12 trillion in mid-March 2020 in the covid-crash has been as would have been expected. From the 20th of March 2020 through the 19th of March 2021, the BOJ bought ¥5.29trln of regular ETFs of these three indices (and ¥290bn of ETFs to Support Investment in Physical &amp; Human Capital).
In <a href="https://www.smartkarma.com/insights/boj-etf-buying-composition-clarified" target="_blank" data-smartkarma-citation="insights:38898" rel="noopener">BOJ ETF Buying Composition Clarified</a> in April 2020, I noted the mix was at that time likely to be 90.5% TOPIX, 8.9% Nikkei 225, and 0.6% JPX Nikkei 400. By my calculation, reconstructing the purchases every day based on the rules, the purchase amount over the past year has been 90.4% TOPIX, 9.1% Nikkei 225, and 0.6% JPX Nikkei 400. Given that the BOJ owns most of the ETFs outstanding of these three indices, it would have been difficult to see substantial deviation from that rate.
<div class="content-highlight">
The question is whether the change dramatically impacts stocks going forward.
The easy arithmetic answer is.... no. 
</div>
<ul>
<li>Assuming the BOJ were to buy the same amount, TOPIX would see a 10.7% increase in allocations to TOPIX ETFs (from 90.4% to 100.0%)</li>
<li>Nikkei 225 and JPX Nikkei 400 ETFs get nothing. But Nikkei 225 stocks are, by definition, also members of TOPIX, and the vast majority of JPX Nikkei 400 stocks are too. </li>
</ul>
But there is some subtlety here too.
What it really means, however, is that traders and investors cannot count on incremental BOJ demand over the next year to be a material part of remaining Real World Float. This is more a problem of expected support being withdrawn.
Analysis on this below the fold.

The Nikkei wrote an article last Thursday 18 March 2021 saying the BOJ would change its monetary/quantitative easing policy after having commenced a review in December.
The general idea was a slight curve steepening allowance made "to allow banks to be more profitable" and a change to the way ETF buying was conducted. 

I published a quick analysis of the Changes In BOJ ETF Buying - Which Stocks Impacted and How? 

On Friday 19 March, the BOJ met and after the MPC Meeting published...

The policy statement for this release, Further Effective and Sustainable Monetary Easing

a Background to the policy change which discussed the work they did called the Assessment for Further Effective and Sustainable Monetary Easing.

a nifty two-pager powerpoint presentation of the Background
and a document called Establishment of "Principal Terms and Conditions of the Interest Scheme to Promote Lending" which also contains the change in wording for the QQE

This showed there was some subtlety in the methodology, but it also showed some of the restrictions that the BOJ would place on itself in how it decided when and how much ETF buying to do. 

I looked at the methodology and numbers and proposed a model in Quantifying the BOJ Change in ETF Policy: Assessing Future ETF Buying Methodology 

The market reaction on some high-Nikkei weight stocks on Thursday afternoon and particularly Friday afternoon was striking. Fast Retailing (9983 JP) fell 5.2% in significant volume in the 30 minutes after the announcement.
The balance of ETF buying since the BOJ lifted its buying amount from ¥6 trillion annually to ¥12 trillion in mid-March 2020 in the covid-crash has been as would have been expected. From the 20th of March 2020 through the 19th of March 2021, the BOJ bought ¥5.29trln of regular ETFs of these three indices (and ¥290bn of ETFs to Support Investment in Physical &amp; Human Capital).
In BOJ ETF Buying Composition Clarified in April 2020, I noted the mix was at that time likely to be 90.5% TOPIX, 8.9% Nikkei 225, and 0.6% JPX Nikkei 400. By my calculation, reconstructing the purchases every day based on the rules, the purchase amount over the past year has been 90.4% TOPIX, 9.1% Nikkei 225, and 0.6% JPX Nikkei 400. Given that the BOJ owns most of the ETFs outstanding of these three indices, it would have been difficult to see substantial deviation from that rate.

The question is whether the change dramatically impacts stocks going forward.
The easy arithmetic answer is.... no. 


Assuming the BOJ were to buy the same amount, TOPIX would see a 10.7% increase in allocations to TOPIX ETFs (from 90.4% to 100.0%)
Nikkei 225 and JPX Nikkei 400 ETFs get nothing. But Nikkei 225 stocks are, by definition, also members of TOPIX, and the vast majority of JPX Nikkei 400 stocks are too. 

But there is some subtlety here too.
What it really means, however, is that traders and investors cannot count on incremental BOJ demand over the next year to be a material part of remaining Real World Float. This is more a problem of expected support being withdrawn.
Analysis on this below the fold. 

Quantifying BOJ Change in ETF Policy: Affecting Single Stocks

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 Ltd Unsp Adr (TOELY US)

Advantest (6857 JP): Further Growth Ahead

A strong order flow, improved margins and capacity expansion to overcome the shortage of automotive and other ICs point to further growth in demand...

Scott Foster

Tokyo Electron (8035 JP): Getting Ahead of Itself

The shared are up 33% so far this year, discounting record semiconductor capital spending and an upward revision to guidance. Peak earnings...

Scott Foster

Screen Holdings (7735 JP): Aiming at 2nm Process Technology

A Japanese project to develop next-generation semiconductor production technology reminds us that Screen is a key supplier to TSMC and a long-term...

Scott Foster

Last Week in Event SPACE: Capitaland, Languang Justbon, Fast Retailing, Crown Resorts, Adani Power

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett

Quantifying BOJ Change in ETF Policy: Affecting Single Stocks

BOJ Policy Changes are dramatic in price and volatility space. Vol goes up near space, down far space, skew flattens. Fast Retailing and others are...

Travis Lundy

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