Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

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>Nidec missed 3Q consensus as OP of ¥44.3bn came in 12.6% below consensus despite a 5.8% beat at the top line.</li>
<li>The deterioration in profitability across the Existing Auto, Machinery, and Appliance, Commercial and Industry businesses is a significant concern. </li>
<li>It also suggests that consensus expectations for 22.6% OP growth next year may prove highly optimistic.</li>
</ul>


Nidec missed 3Q consensus as OP of ¥44.3bn came in 12.6% below consensus despite a 5.8% beat at the top line.
The deterioration in profitability across the Existing Auto, Machinery, and Appliance, Commercial and Industry businesses is a significant concern. 
It also suggests that consensus expectations for 22.6% OP growth next year may prove highly optimistic.


Nidec – Machinery and Appliance, Commercial and Industry Segments Rolling Over

Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

<p>1H results turned out to be conservative, as we had expected, but both year-on-year sales growth and the gross &amp; operating profit margins declined in 2Q. Gross profit itself was down slightly and operating profit up only 2.4% sequentially in the three months to September.</p><p>The main reasons for this were the collapse of HDD spindle motor sales and the upfront cost of entering the EV motor business. Demand for the company's other products was generally strong.</p><p>In <a href="https://www.smartkarma.com/insights/nidec-early-results-for-the-ev-business-look-terrible" target="_blank" data-smartkarma-citation="insights:59569" rel="noopener">Nidec – Early Results for the EV Business Look Terrible</a> , Mio Kato noted that <em>Nidec faces the issue of a decline in volumes for HDD motors and appears to be betting the farm on capturing the top share for EV traction motors. We aren’t at all convinced that they can, but even if they do, the early signs are that that might not be as lucrative as they imagined.</em></p><p>And it might take longer than some investors have thought. As  noted in <a href="https://www.smartkarma.com/insights/nidec-6594-jp-good-1q-but-ev-motors-face-tough-competition-and-severe-pricing" target="_blank" data-smartkarma-citation="insights:54923" rel="noopener">Nidec (6594 JP): Good 1Q, but EV Motors Face Tough Competition and Severe Pricing</a> , EV power trains are not expected to become cheaper than Internal Combustion Engine power trains until 2025, In the meantime, Nidec faces rapidly growing competition from Hitachi and demanding customers in China.</p><p>Considering the risks, at 49x our EPS estimate for FY Mar-22 and 41x our estimate for FY Mar-24, the shares look Overvalued.</p>

1H results turned out to be conservative, as we had expected, but both year-on-year sales growth and the gross &amp; operating profit margins declined in 2Q. Gross profit itself was down slightly and operating profit up only 2.4% sequentially in the three months to September.The main reasons for this were the collapse of HDD spindle motor sales and the upfront cost of entering the EV motor business. Demand for the company's other products was generally strong.In Nidec – Early Results for the EV Business Look Terrible , Mio Kato noted that Nidec faces the issue of a decline in volumes for HDD motors and appears to be betting the farm on capturing the top share for EV traction motors. We aren’t at all convinced that they can, but even if they do, the early signs are that that might not be as lucrative as they imagined.And it might take longer than some investors have thought. As  noted in Nidec (6594 JP): Good 1Q, but EV Motors Face Tough Competition and Severe Pricing , EV power trains are not expected to become cheaper than Internal Combustion Engine power trains until 2025, In the meantime, Nidec faces rapidly growing competition from Hitachi and demanding customers in China.Considering the risks, at 49x our EPS estimate for FY Mar-22 and 41x our estimate for FY Mar-24, the shares look Overvalued.

Nidec (6594 JP): HDD & EV Motors Drag Down Profit Margins

Smartkarma Research Team, Smartkarma

Smartkarma Research

Smartkarma Research Team

Smartkarma

Smartkarma unites the fragmented investment industry, connecting institutional investors, independent research providers, and corporates within a single network.

Research Reinvented

Thematic (Sector/Industry)

<p>On our next Webinar, we are thrilled to welcome back Insight Provider <a href="https://www.smartkarma.com/profiles/scott-foster" target="_blank" data-smartkarma-citation="accounts:1134" rel="noopener">Scott Foster</a>, who will present his hand-picked ideas in Japan's IT sector. </p>
<div>
<h3>The webinar will be hosted on Wednesday, 27 October 2021, 17:00 SGT/HKT.</h3>
<div class="content-highlight">
<h2><a href="https://share.hsforms.com/1H9pFZOB-RF2J00kbvMmxcw2c5gj?zoom_webinar_id=85198859426" target="_blank" rel="noopener">Register for the Webinar here</a></h2>
</div>
</div>
<div>
<div>
<p>Scott Foster is a securities analyst who has been covering electronics, precision equipment &amp; robotics, engineering, construction, transport, and other sectors for more than 25 years in Japan and 3 years in Korea.</p>
</div>
</div>

On our next Webinar, we are thrilled to welcome back Insight Provider Scott Foster, who will present his hand-picked ideas in Japan's IT sector. 

The webinar will be hosted on Wednesday, 27 October 2021, 17:00 SGT/HKT.

Register for the Webinar here




Scott Foster is a securities analyst who has been covering electronics, precision equipment &amp; robotics, engineering, construction, transport, and other sectors for more than 25 years in Japan and 3 years in Korea.



Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>Every year (usually in the beginning of September), the Nikkei Inc Index team conducts an annual review of the major price-weighted Nikkei indices - the most important being the Nikkei 225 Average - and adds and subtracts constituents according to the Rules.</p>
<p>Today, they announced the 2021 version of the changes (<a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210906E_1.pdf" target="_blank" rel="noopener">announcement</a>, <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210906E_3.pdf" target="_blank" rel="noopener">PAF changes</a>).</p>
<p><em>Below is <strong>Some Background</strong>. If you want to skip ahead to the juicy analysis, you can jump ahead to the <strong>Changes Announced</strong> section just below, and then more below the fold.</em></p>
<h3>Some Background</h3>
<p>The Nikkei 225, well-known globally as "the Nikkei" is a price-weighted index, originally started nearly 70 years ago as an average of a selected number of stocks listed on the TSE First Section. Later, it became 225 members. </p>
<p>Because it is price-weighted, and because for a long time it made no divisor adjustments for stock splits (so when a stock split 2:1 its weight fell by half because price fell by half and trackers had to sell half their shares in that stock), and the price multiplier was determined by the par value of a company, then they later they started adjusting for splits, stocks which are old, never split, AND have a high price end up having a high weight in the index. </p>
<p>There was a huge reshuffle in April 2000 when the Nikkei decided that the system needed rebalancing to include more tech, so they changed the Rules. They pushed 30 names out and 30 names in, <em>and the 30 names added were 50% of the new index</em>. </p>
<p>Twenty one years after the prior change in methodology, this past May 10 the Nikkei Inc Index Team announced new changes to the Rules. There was a <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210510E_1.pdf" target="_blank" rel="noopener">proposal</a>, with an <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210510E_3.pdf" target="_blank" rel="noopener">FAQ</a>, and <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210510E_2.pdf" target="_blank" rel="noopener">supplemental data</a>. On 5 July, the Nikkei confirmed the proposal with a new <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210705E_1.pdf" target="_blank" rel="noopener">Guidebook</a>.</p>
<p>When I wrote about this on 10 May in <em><a href="https://www.smartkarma.com/insights/after-20yrs-nikkei-225-proposes-minor-impact-rule-changes-nintendo-disappointment" target="_blank" data-smartkarma-citation="insights:51277" rel="noopener">After 20yrs, Nikkei 225 Proposes Minor Impact Rule Changes (Nintendo Disappointment?)</a></em> I said I thought the changes disappointing. There are real problems with the index and this did not do much; <em>the changes are evolutionary rather than revolutionary</em>, with the only interesting change being that constituents are added with a weight no greater than 1%. If the normal price adjustment factor would allow a constituent to enter at a weight <em>greater</em> than 1%, the Price Adjustment Factor (base 1) is lowered in increments of 0.1 so that the deemed inclusion weight on Base Date (end of July) is no more than 1%. There is no change to the idea that the Nikkei Index Team can override their rankings at any time as they see fit.</p>
<p>Because the Nikkei Index Team had let the sector balances and rankings slide quite a bit over the years (not adding "obvious" names and not deleting names which should probably have been deleted, and not rebalancing the sectors as the rules say they should), the possibility was that some names like <a href="https://www.smartkarma.com/entities/nintendo-co-ltd" target="_blank" data-smartkarma-citation="entities:5415:1" rel="noopener">Nintendo Co Ltd (7974 JP)</a> and similar high-price-low-share-count names which "deserved" to be included were not simply because their very high price would create undue impact (it was undue impact and the lack of incremental float for high-weight low-share-count names which caused the BOJ to lower, then eventually cease their buying of Nikkei 225 ETFs). This rule on capping inclusions at 1% would go a ways to mitigating that problem so that would allow the Nikkei to add previously un-addable names. Expectations were high on a group of names, with <a href="https://www.smartkarma.com/entities/nintendo-co-ltd" target="_blank" data-smartkarma-citation="entities:5415:1" rel="noopener">Nintendo Co Ltd (7974 JP)</a>, <a href="https://www.smartkarma.com/entities/keyence-corp" target="_blank" data-smartkarma-citation="entities:3077:1" rel="noopener">Keyence Corp (6861 JP)</a>, <a href="https://www.smartkarma.com/entities/zozo-inc" target="_blank" data-smartkarma-citation="entities:18379:1" rel="noopener">ZOZO Inc (3092 JP)</a>, and probably <a href="https://www.smartkarma.com/entities/oriental-land-co-ltd" target="_blank" data-smartkarma-citation="entities:13517:1" rel="noopener">Oriental Land (4661 JP)</a>, with the latter two likely to create some real froth if actually selected. </p>
<h2>The Changes Announced</h2>
<p>Today after the close, the Nikkei Index Team announced the following changes to the Nikkei 225 Average as a result of the Annual Review:</p>
<section class="figure">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/228/056/original/Screenshot+2021-09-06+at+5.11.07+PM.png?1630919479" class="editor-image img-responsive" data-smartkarma-image-id="228056"></figure>
</section>
<section class="figure">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/228/055/original/Screenshot+2021-09-06+at+5.06.02+PM.png?1630919179" class="editor-image img-responsive" data-smartkarma-image-id="228055"></figure>
<p></p>
</section>
<p>The changes will be made on the last trading day of September, at the close. I expect to see $10bn trade on that day.</p>
<p>The new rules allow the Nikkei Index team to not do a lot to the sector mix if the additions are made because of "High Liquidity" because while the sector mix would normally mean more than three deleted, the new rules cap changes at 3 per annual rebalance (which is not enough).</p>
<p>As noted above, <a href="https://www.smartkarma.com/entities/zozo-inc" target="_blank" data-smartkarma-citation="entities:18379:1" rel="noopener">ZOZO Inc (3092 JP)</a> and <a href="https://www.smartkarma.com/entities/oriental-land-co-ltd" target="_blank" data-smartkarma-citation="entities:13517:1" rel="noopener">Oriental Land (4661 JP)</a> were among names which were expected as possible inclusions and therefore a certain amount of pre-positioning may be in place. They may get somewhat hurt tomorrow.</p>
<div class="content-highlight">
<p>There are a LOT of moving parts here. There are 3 ADDs, 3 DELETIONS, 1 Price Adjustment Factor moved sharply <em>higher</em> and one moved somewhat <em>lower</em> (a list of all the PAFs announced by the Nikkei is <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210906E_3.pdf" target="_blank" rel="noopener">here</a>), then there are another 220 stocks which will see selling on 30 September at the rebalance. </p>
</div>
<p>For more detailed analysis of the stocks, their positioning, how much to buy, etc, please read on.</p>
<hr>
<p><em>For more about passive tracking in Japan, please refer to <a href="https://www.smartkarma.com/insights/japan-passive-who-owns-what-2021" target="_blank" data-smartkarma-citation="insights:55008" rel="noopener">JAPAN PASSIVE: Who Owns What 2021?</a> </em></p>

Every year (usually in the beginning of September), the Nikkei Inc Index team conducts an annual review of the major price-weighted Nikkei indices - the most important being the Nikkei 225 Average - and adds and subtracts constituents according to the Rules.
Today, they announced the 2021 version of the changes (announcement, PAF changes).
Below is Some Background. If you want to skip ahead to the juicy analysis, you can jump ahead to the Changes Announced section just below, and then more below the fold.
Some Background
The Nikkei 225, well-known globally as "the Nikkei" is a price-weighted index, originally started nearly 70 years ago as an average of a selected number of stocks listed on the TSE First Section. Later, it became 225 members. 
Because it is price-weighted, and because for a long time it made no divisor adjustments for stock splits (so when a stock split 2:1 its weight fell by half because price fell by half and trackers had to sell half their shares in that stock), and the price multiplier was determined by the par value of a company, then they later they started adjusting for splits, stocks which are old, never split, AND have a high price end up having a high weight in the index. 
There was a huge reshuffle in April 2000 when the Nikkei decided that the system needed rebalancing to include more tech, so they changed the Rules. They pushed 30 names out and 30 names in, and the 30 names added were 50% of the new index. 
Twenty one years after the prior change in methodology, this past May 10 the Nikkei Inc Index Team announced new changes to the Rules. There was a proposal, with an FAQ, and supplemental data. On 5 July, the Nikkei confirmed the proposal with a new Guidebook.
When I wrote about this on 10 May in After 20yrs, Nikkei 225 Proposes Minor Impact Rule Changes (Nintendo Disappointment?) I said I thought the changes disappointing. There are real problems with the index and this did not do much; the changes are evolutionary rather than revolutionary, with the only interesting change being that constituents are added with a weight no greater than 1%. If the normal price adjustment factor would allow a constituent to enter at a weight greater than 1%, the Price Adjustment Factor (base 1) is lowered in increments of 0.1 so that the deemed inclusion weight on Base Date (end of July) is no more than 1%. There is no change to the idea that the Nikkei Index Team can override their rankings at any time as they see fit.
Because the Nikkei Index Team had let the sector balances and rankings slide quite a bit over the years (not adding "obvious" names and not deleting names which should probably have been deleted, and not rebalancing the sectors as the rules say they should), the possibility was that some names like Nintendo Co Ltd (7974 JP) and similar high-price-low-share-count names which "deserved" to be included were not simply because their very high price would create undue impact (it was undue impact and the lack of incremental float for high-weight low-share-count names which caused the BOJ to lower, then eventually cease their buying of Nikkei 225 ETFs). This rule on capping inclusions at 1% would go a ways to mitigating that problem so that would allow the Nikkei to add previously un-addable names. Expectations were high on a group of names, with Nintendo Co Ltd (7974 JP), Keyence Corp (6861 JP), ZOZO Inc (3092 JP), and probably Oriental Land (4661 JP), with the latter two likely to create some real froth if actually selected. 
The Changes Announced
Today after the close, the Nikkei Index Team announced the following changes to the Nikkei 225 Average as a result of the Annual Review:







The changes will be made on the last trading day of September, at the close. I expect to see $10bn trade on that day.
The new rules allow the Nikkei Index team to not do a lot to the sector mix if the additions are made because of "High Liquidity" because while the sector mix would normally mean more than three deleted, the new rules cap changes at 3 per annual rebalance (which is not enough).
As noted above, ZOZO Inc (3092 JP) and Oriental Land (4661 JP) were among names which were expected as possible inclusions and therefore a certain amount of pre-positioning may be in place. They may get somewhat hurt tomorrow.

There are a LOT of moving parts here. There are 3 ADDs, 3 DELETIONS, 1 Price Adjustment Factor moved sharply higher and one moved somewhat lower (a list of all the PAFs announced by the Nikkei is here), then there are another 220 stocks which will see selling on 30 September at the rebalance. 

For more detailed analysis of the stocks, their positioning, how much to buy, etc, please read on.

For more about passive tracking in Japan, please refer to JAPAN PASSIVE: Who Owns What 2021? 

2021 Nikkei 225 Rebalance: Nintendo, Murata, Keyence IN; Nisshinbo, Toyo Seikan, 'Skupper' OUT

<p>Nidec's share price jumped 2.4% to ¥1,300 on Wednesday, July 21 - the last trading day before Japan's national holidays, when the company announced results for 1Q of FY Mar-22 - but fell back 3.2% to ¥12,580 today.</p><p>This reflects the positives and negatives facing the company as it ramps up production of EV motors and drive systems.</p><p>Results for the three months to June looked good, with operating profit up 60% year-on-year on a 33% increase in sales. 1Q sales, operating profit and net profit were all about 56% of 1H guidance.</p><p>On top of that, Nidec and Hon Hai announced plans to establish a joint venture to develop Nidec E-axle traction motor systems for EVs made by Hon Hai subsidiary Foxtron Vehicle Technologies.</p><p>However, competitor Hitachi (6501 JP) announced plans to build EV component factories in Japan China and the U.S. to expand capacity by about 6 times; and price competition in China is severe.</p><p>At 53x management's EPS guidance and 50x our own EPS estimate for FY Mar-22, and 40x our estimate for FY Mar-24, a lot of potential growth is already in the price.</p><p>We reiterate our previous conclusion: Guidance is probably conservative, but the shares are still overvalued.</p>

Nidec's share price jumped 2.4% to ¥1,300 on Wednesday, July 21 - the last trading day before Japan's national holidays, when the company announced results for 1Q of FY Mar-22 - but fell back 3.2% to ¥12,580 today.This reflects the positives and negatives facing the company as it ramps up production of EV motors and drive systems.Results for the three months to June looked good, with operating profit up 60% year-on-year on a 33% increase in sales. 1Q sales, operating profit and net profit were all about 56% of 1H guidance.On top of that, Nidec and Hon Hai announced plans to establish a joint venture to develop Nidec E-axle traction motor systems for EVs made by Hon Hai subsidiary Foxtron Vehicle Technologies.However, competitor Hitachi (6501 JP) announced plans to build EV component factories in Japan China and the U.S. to expand capacity by about 6 times; and price competition in China is severe.At 53x management's EPS guidance and 50x our own EPS estimate for FY Mar-22, and 40x our estimate for FY Mar-24, a lot of potential growth is already in the price.We reiterate our previous conclusion: Guidance is probably conservative, but the shares are still overvalued.

Nidec (6594 JP): Good 1Q, but EV Motors Face Tough Competition and Severe Pricing

Japan

NIDEC CORPORATION is the world's leading manufacturer of small precision motors mainly used in HDD and optical disk drives. The company has extended its focus to the home appliance and automotive markets. NIDEC is active in M&A and its subsidiaries include the world's leading manufacturers of LCD panel handling robots and camera shutters.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Nidec Corp (6594 JP)

Nidec – Machinery and Appliance, Commercial and Industry Segments Rolling Over

Nidec missed 3Q consensus as OP of ¥44.3bn came in 12.6% below consensus. The deterioration in profitability suggests that consensus expectations...

Mio Kato

Nidec (6594 JP): HDD & EV Motors Drag Down Profit Margins

HDD motors in decline, EV motors losing money, and growth prospects limited without M&A. Overvalued at 49x projected earnings this fiscal year and...

Scott Foster

Smartkarma Webinar | Japan IT Picks

Join us for a session with Insight Provider Scott Foster, who will present his hand-picked ideas in Japan's IT sector.

Smartkarma Research

2021 Nikkei 225 Rebalance: Nintendo, Murata, Keyence IN; Nisshinbo, Toyo Seikan, 'Skupper' OUT

The Nikkei 225 Rebalance is here. A small surprise in the ADDs. No surprises on the DELETEs. A couple of housekeeping changes, and 600 baskets to...

Travis Lundy

Nidec (6594 JP): Good 1Q, but EV Motors Face Tough Competition and Severe Pricing

1Q results were good, but a new electric vehicle JV with Hon Hai will be offset by rising competition from Hitachi and severe pricing in China. Not...

Scott Foster

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)