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

<p>Fanuc’s 3Q results beat consensus as revenue of ¥125.5bn was 1.4% above consensus at ¥123.8bn and OP of ¥19.6bn beat consensus’ ¥16.8bn by 16.7%. On a QoQ basis, profitability decreased 4% but we feel conditions have now bottomed. Despite this, valuations look stretched and we remain most negative on Fanuc out of the FA names including Keyence, Yaskawa and Harmonic Drive.</p>

Fanuc’s 3Q results beat consensus as revenue of ¥125.5bn was 1.4% above consensus at ¥123.8bn and OP of ¥19.6bn beat consensus’ ¥16.8bn by 16.7%. On a QoQ basis, profitability decreased 4% but we feel conditions have now bottomed. Despite this, valuations look stretched and we remain most negative on Fanuc out of the FA names including Keyence, Yaskawa and Harmonic Drive.

<p>Stock performance and financial performance for Yaskawa continue to diverge. The stock continues to rise in absolute terms though outperformance vs. TOPIX ended in late October. We continue to believe that the market is pricing in too strong of a recovery too early and so far, financial results have been poor. The market has looked past this deterioration in anticipation of the next recovery, but we remain unconvinced about the strength of a potential recovery. As such we remain highly cautious on the sector and heavily favour the more robust earnings structure and greater potential for overseas growth of Keyence within the FA space.</p>

Stock performance and financial performance for Yaskawa continue to diverge. The stock continues to rise in absolute terms though outperformance vs. TOPIX ended in late October. We continue to believe that the market is pricing in too strong of a recovery too early and so far, financial results have been poor. The market has looked past this deterioration in anticipation of the next recovery, but we remain unconvinced about the strength of a potential recovery. As such we remain highly cautious on the sector and heavily favour the more robust earnings structure and greater potential for overseas growth of Keyence within the FA space.

Asian Insight Provider - Actionable ideas, CrossASEAN Research

Henry Soediarko

Asian Insight Provider - Actionable ideas

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

<div>Investors are hopeful that the US-China Trade issues will be resolved soon, driving the share price up by almost 100% YTD when in reality, every time an agreement has been "<strong>reached</strong>" either China or the US had gone back on their words, causing the said agreement to falter, again. Midea's valuation has increased proportionately to the earnings growth with the exception of August this year but it has since caught up. </div>
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<div class="content-caption">source: Capital IQ</div>
<div>Post-acquisition of Toshiba Appliances, <a href="https://www.smartkarma.com/entities/midea-group-co-ltd-a" target="_blank" data-smartkarma-citation="entities:16185:1" rel="noopener">Midea Group Co Ltd A (000333 CH)</a> enjoyed a strong revenue growth and caused the PEG ratio to be below 1, indicating undervaluation for a growth stock. Meanwhile, there has been no notable improvement in the margins and debt to equity level remains the same. </div>
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<p><em><strong>For Growth Investors: </strong></em>it has performed much better than many other stocks in light of the volatilities and now the hope for trade deal has been more realistic thus the aggressive buying should soon fade out. Recently, the PEG ratio has hit 1 and with the modest growth prospect, the PEG ratio will be higher thus it will be considered expensive for growth investors. </p>
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<strong>Lock in the +90%</strong> return while possible and wait for the contribution from the Robotics division to be sizeable enough before rushing to own Midea stock again. </div>
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<strong><em>For Value Investors: </em></strong>the stock is unlikely to experience such a massive sell-off given it is still one of the largest household appliances globally and its five year PBR ratio ranged from 2.5x to 5.5x at the highest. In the event that the share price falls hard and Midea trades at below book value, value investors should rush to seek ownership in Midea. Currently, the stock is trading at 3.89 PBR. </div>
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Investors are hopeful that the US-China Trade issues will be resolved soon, driving the share price up by almost 100% YTD when in reality, every time an agreement has been "reached" either China or the US had gone back on their words, causing the said agreement to falter, again. Midea's valuation has increased proportionately to the earnings growth with the exception of August this year but it has since caught up. 




source: Capital IQ
Post-acquisition of Toshiba Appliances, Midea Group Co Ltd A (000333 CH) enjoyed a strong revenue growth and caused the PEG ratio to be below 1, indicating undervaluation for a growth stock. Meanwhile, there has been no notable improvement in the margins and debt to equity level remains the same. 


For Growth Investors: it has performed much better than many other stocks in light of the volatilities and now the hope for trade deal has been more realistic thus the aggressive buying should soon fade out. Recently, the PEG ratio has hit 1 and with the modest growth prospect, the PEG ratio will be higher thus it will be considered expensive for growth investors. 


Lock in the +90% return while possible and wait for the contribution from the Robotics division to be sizeable enough before rushing to own Midea stock again. 



For Value Investors: the stock is unlikely to experience such a massive sell-off given it is still one of the largest household appliances globally and its five year PBR ratio ranged from 2.5x to 5.5x at the highest. In the event that the share price falls hard and Midea trades at below book value, value investors should rush to seek ownership in Midea. Currently, the stock is trading at 3.89 PBR. 


Midea (000333): Sell and Wait for the Robot

<p>Fanuc reported weak results after the close with quarterly revenue missing by 4.3% and OP missing by 13.9%. The company also revised down revenue guidance by 3.8% dashing hopes for a u-shaped recovery.</p><p>While the company’s OP guidance was too conservative to begin with and did not need to be revised down from ¥71.3bn to ¥69.1bn (1H OP beat guidance by ¥5.9bn), even on a more reasonable ¥90bn OP (assuming the company’s revenue guidance is accurate), EV/OP would be 43.4x. That is not cheap considering that it is unclear whether there will be a true recovery for its Robodrill Segment.</p>

Fanuc reported weak results after the close with quarterly revenue missing by 4.3% and OP missing by 13.9%. The company also revised down revenue guidance by 3.8% dashing hopes for a u-shaped recovery.While the company’s OP guidance was too conservative to begin with and did not need to be revised down from ¥71.3bn to ¥69.1bn (1H OP beat guidance by ¥5.9bn), even on a more reasonable ¥90bn OP (assuming the company’s revenue guidance is accurate), EV/OP would be 43.4x. That is not cheap considering that it is unclear whether there will be a true recovery for its Robodrill Segment.

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Quantitative Analysis

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/102/797/original/2019-10-22_07-21-37.png?1571696560" class="editor-image img-responsive" data-smartkarma-image-id="102797"></figure><div class="content-caption">Source: Japan Analytics</div><p>There has been much discussion on Smartkarma in the last week on the 'overexuberance' in Japan's semiconductor production equipment ("SPE") and factory automation (FA) companies' share prices following a 'spike' in <strong><a href="https://www.smartkarma.com/entities/harmonic-drive-systems-inc" target="_blank" data-smartkarma-citation="entities:10238:1" rel="noopener">Harmonic Drive Systems (6324 JP)</a></strong>(HDS) as discussed <a href="https://www.smartkarma.com/entities/harmonic-drive-systems-inc/discussion?discussion=56418" target="_blank" rel="noopener">here, </a>and Capital Group’s block sale in SK Hynix. <a href="https://www.smartkarma.com/companies/lightstream-research" target="_blank" data-smartkarma-citation="companies:909" rel="noopener">LightStream Research</a> explored the topic in detail in yesterday's <a href="https://www.smartkarma.com/insights/readthrough-to-japanese-fa-sector-from-capital-s-sk-hynix-block-sale" target="_blank" data-smartkarma-citation="insights:33298" rel="noopener">Readthrough to Japanese FA Sector from Capital's SK Hynix Block Sale</a>. As <a href="https://www.smartkarma.com/profiles/raghav-kapoor" target="_blank" data-smartkarma-citation="accounts:2" rel="noopener">Raghav Kapoor</a> noted in the discussion on that note: - "<em><strong>The trends between the pricing of the BI Japan Factory Automation Index (BIAPJAVP Index) and the SOX are strikingly similar</strong></em>."   </p><p>This Insight will briefly examine these correlations using the Japan Analytic's scoring framework as well as updating our valuation work on <strong><a href="https://www.smartkarma.com/entities/fanuc-corp" target="_blank" data-smartkarma-citation="entities:752:1" rel="noopener">Fanuc (6954 JP)</a>, <a href="https://www.smartkarma.com/entities/yaskawa-electric-corp" target="_blank" data-smartkarma-citation="entities:2458:1" rel="noopener">Yaskawa Electric (6506 JP)</a>, <a href="https://www.smartkarma.com/entities/daifuku-co-ltd" target="_blank" data-smartkarma-citation="entities:10408:1" rel="noopener">Daifuku (6383 JP)</a>, </strong><a href="https://www.smartkarma.com/entities/harmonic-drive-systems-inc" target="_blank" data-smartkarma-citation="entities:10238:1" rel="noopener"><strong>Harmonic Drive Systems (6324 JP)</strong>, </a>as well as <strong><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/advantest-corp" target="_blank" data-smartkarma-citation="entities:18107:1" rel="noopener">Advantest (6857 JP)</a>,</strong> and <strong><a href="https://www.smartkarma.com/entities/disco-corp" target="_blank" data-smartkarma-citation="entities:15817:1" rel="noopener">Disco (6146 JP)</a></strong>.     Please refer to our earlier Insight <a href="https://www.smartkarma.com/insights/6954-fanuc-timing-the-cycle" target="_blank" data-smartkarma-citation="insights:29401" rel="noopener">Fanuc • Timing the Cycle</a> for details on our scoring methodology.</p><p><strong>We conclude that, although we are likely to confirm the cycle bottom in the next few weeks as interim results are announced, the potential for recovery is more than adequately reflected in these group's extreme valuations and relative-to-market stock prices. As we noted in the discussion on HDS, "the market is re-running the playbook of 2009-2010 where earnings momentum recovered sharply [..] we think the better scenario is the more gradual recovery of  2012-2015 which saw the stock trade sideways until the recovery was well-advanced."</strong></p>

Source: Japan AnalyticsThere has been much discussion on Smartkarma in the last week on the 'overexuberance' in Japan's semiconductor production equipment ("SPE") and factory automation (FA) companies' share prices following a 'spike' in Harmonic Drive Systems (6324 JP)(HDS) as discussed here, and Capital Group’s block sale in SK Hynix. LightStream Research explored the topic in detail in yesterday's Readthrough to Japanese FA Sector from Capital's SK Hynix Block Sale. As Raghav Kapoor noted in the discussion on that note: - "The trends between the pricing of the BI Japan Factory Automation Index (BIAPJAVP Index) and the SOX are strikingly similar."   This Insight will briefly examine these correlations using the Japan Analytic's scoring framework as well as updating our valuation work on Fanuc (6954 JP), Yaskawa Electric (6506 JP), Daifuku (6383 JP), Harmonic Drive Systems (6324 JP), as well as Tokyo Electron (8035 JP), Advantest (6857 JP), and Disco (6146 JP).     Please refer to our earlier Insight Fanuc • Timing the Cycle for details on our scoring methodology.We conclude that, although we are likely to confirm the cycle bottom in the next few weeks as interim results are announced, the potential for recovery is more than adequately reflected in these group's extreme valuations and relative-to-market stock prices. As we noted in the discussion on HDS, "the market is re-running the playbook of 2009-2010 where earnings momentum recovered sharply [..] we think the better scenario is the more gradual recovery of  2012-2015 which saw the stock trade sideways until the recovery was well-advanced."

🇯🇵 Japan • FA & SPE - Calling Bottoms and Tops

Japan

FANUC CORPORATION manufactures factory automation (FA) systems and equipments, and robots. The Company's products include computerized numerically-controlled (CNC) equipment, servo motors, laser systems, industrial robots, wire-cut electric discharge machines, and CNC drill.  Fanuc participates in a joint venture with General Electric in the FA field.

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Fanuc Corp (6954 JP)

Fanuc – Still the Ugly Duckling

Fanuc’s 3Q results beat consensus as revenue of ¥125.5bn was 1.4% above consensus at ¥123.8bn and OP of ¥19.6bn beat consensus’ ¥16.8bn by 16.7%....

Mio Kato

Yaskawa – No Signs of Recovery

Stock performance and financial performance for Yaskawa continue to diverge. The stock continues to rise in absolute terms though outperformance...

Mio Kato

Midea (000333): Sell and Wait for the Robot

Investors are hopeful that the US-China Trade issues will be resolved soon, driving the share price up by almost 100% YTD when in reality, every...

Henry Soediarko

Fanuc – No Recovery In Sight

Fanuc reported weak results after the close with quarterly revenue missing by 4.3% and OP missing by 13.9%. The company also revised down revenue...

Mio Kato

🇯🇵 Japan • FA & SPE - Calling Bottoms and Tops

There has been much discussion on Smartkarma in the last week on the 'overexuberance' in Japan's semiconductor production equipment ("SPE") and...

Campbell Gunn

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