'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/000/077/686/original/2019-02-02_09-34-42.png?1549067763" class="editor-image img-responsive" data-smartkarma-image-id="77686"></figure><div class="content-caption">Source: Japan Analytics</div><div style="text-align: left;" class="content-caption">
<strong>Note:</strong> The Results &amp; Revision Score is the average of our Results Score and Forecasts/Revision Score and is updated daily for each company and then cap-weighted-aggregated into Peer Groups, Sectors and the Market Composite. Both scores have a maximum of +30 and a minimum of -30 for each period. The Results Score is calculated quarterly, using the most recent eight quarters of company data for revenues, operating income and operating margin and measures the rate, degree and consistency of change for each metric. The Forecast/Revision Score is based on Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month or previous first-half results, with annual forecasts being double-weighted.</div><p><strong>DRIP, DRIP, DRIP</strong> - We 'lead' this fortnight's update with our All-Market Composite Results &amp; Revision Score. Calculated daily, the score is a 'real-time' measure of the state of, and the outlook for, listed Japanese corporations. As the scoring methodology includes earnings momentum 'factors', the data series can be a useful leading indicator of forward earnings. The correlation with the market over the last four years is 0.578, with the indicator leading more often than lagging.   Since peaking on 16th November 2017, the Results &amp; Revisions Score has fallen by 62% and has now returned to the level of May 2017. In the last ten years, the score has only been lower than at present one-third of the time - mostly during the fiscal year ended March 2017 when the total market value averaged ¥550t, close to the December 2018 low. <strong>If we are to repeat the relatively-mild cyclical downturn of 2016, the Results &amp; Revision Score will turn negative in May of this year, and the 25th December 2018 low will be retested.</strong></p><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/701/original/2019-02-02_14-11-25.png?1549084295" class="editor-image img-responsive" data-smartkarma-image-id="77701"></figure><p>Source: Japan Analytics</p>
</div><p><strong>PAST THE PEAK</strong> - Our earnings indicator peaked 14 months ago, two months ahead of the market's high point on 26th January 2018. It now appears that aggregate reported earnings, as well as aggregate company forecasts for the current year, are now turning decisively lower after nine quarters of uninterrupted growth. Forecast Net Income for the current year is now 7% below the high point in trailing-twelve-month (TTM) Net Income from this cycle, which was reached two months ago. Operating Income is, as usual, 'lagging' and forecasts are still marginally ahead of TTM. The TTM all-market price-earnings ratio reached 11.5 times on Christmas Day, which will prove to be the cycle low point.<strong> We expect the return to median levels, to be achieved more through lower 'E' as opposed to a higher 'P'. </strong> <strong>Mr Market is currently implying that Japanese corporate profits are due to fall by 23% on average from the cycle peak, or by 30% if we are to revisit the December low-point. </strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/746/original/2019-02-03_07-23-31.png?1549146223" class="editor-image img-responsive" data-smartkarma-image-id="77746"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>THE FIRST CUT</strong> - 23% of listed companies reported their most recent quarterly earnings results in the last two weeks. For these companies, TTM revenues grew by 5.1% year-on-year, but only by 0.5% quarter-on-quarter, the lowest qoq growth rate in over a year. TTM Operating Income is now 0.8% lower than the TTM total of one year ago and declined by 4.4% qoq. Operating margins fell by 49bps year-on-year.  Current forecasts for this group of companies imply 3.1% yoy top line growth, but only 0.3% compared to the quarter just declared. For Operating Income, the rates are -2.0% and 0.6%, reflecting the normal TTM-to-forecast 'lag'. <strong>Corporate Japan's profits are now rolling over and will be in a 'recession' by the fiscal year-end.  </strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/722/original/2019-02-02_18-25-46.png?1549099572" class="editor-image img-responsive" data-smartkarma-image-id="77722"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>INTERREGNUM</strong> - Our bear market rally has paused to look at and digest the earnings-announcement news flow and will likely be trendless for the next few weeks as 'good' reactions offset 'bad'.<strong> In due course, we expect the preponderance of negative momentum to tip the scales.</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/724/original/2019-02-02_18-41-12.png?1549100508" class="editor-image img-responsive" data-smartkarma-image-id="77724"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>TORAKU @110</strong> - The <em>Toraku</em> advance-decline indicator has continued to recover and is within ten points of the overbought zone, which has only been breached once since the market peak of January 2018.<strong> This signal is 'amber' and could be 'red' by the end of next week. </strong></p><div class="content-highlight">
<p><strong>OUTLOOK &amp; RECOMMENDATIONS</strong></p>
<ul>
<li><strong>We continue to recommend an underweight position in Japan in global portfolios.</strong></li>
<li><strong>The equity market decline at the end of last year was well in advance of the underlying trends in the economy and corporate profits; the recent 10% rally has corrected that imbalance. Nevertheless, the global cycle has turned down sharply, and many economies will be in a recession by the end of this quarter. We expect Japanese corporate earnings to follow suit. <em> </em></strong></li>
<li><strong>Although some of the coming decline in aggregate earnings has been well-discounted, our Results &amp; Revision Score has yet to turn negative. Accordingly, we expect the market to retest the December 2018 low, probably in May when the FY2020 forecasts are announced and our score starts 'seeing red'.</strong></li>
<li><strong>In the near term and despite the rally in the more cyclical sectors, we continue to favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, and Telecommunications sectors. We would avoid or short Banks and Non-Bank Finance.</strong></li>
</ul>
</div><p>In the <strong>DETAIL</strong> section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on <a href="https://www.smartkarma.com/entities/3700" target="_blank" data-smartkarma-citation="entities:3700:1">Anritsu (6754 JP)</a>, <a href="https://www.smartkarma.com/entities/12001" target="_blank" data-smartkarma-citation="entities:12001:1">Alps Alpine (6770 JP)</a>, <a href="https://www.smartkarma.com/entities/24540" target="_blank" data-smartkarma-citation="entities:24540:1">SanBio (4592 JP)</a>, <a href="https://www.smartkarma.com/entities/454" target="_blank" data-smartkarma-citation="entities:454:1">Lixil (5938 JP)</a> (yes, again), <a href="https://www.smartkarma.com/entities/752" target="_blank" data-smartkarma-citation="entities:752:1">Fanuc (6954 JP)</a>, <a href="https://www.smartkarma.com/entities/219" target="_blank" data-smartkarma-citation="entities:219:1">Mizuho Financial Group (8411 JP)</a> , and <a href="https://www.smartkarma.com/entities/8197" target="_blank" data-smartkarma-citation="entities:8197:1">Cyberagent (4751 JP)</a>.</p>

Source: Japan Analytics
Note: The Results &amp; Revision Score is the average of our Results Score and Forecasts/Revision Score and is updated daily for each company and then cap-weighted-aggregated into Peer Groups, Sectors and the Market Composite. Both scores have a maximum of +30 and a minimum of -30 for each period. The Results Score is calculated quarterly, using the most recent eight quarters of company data for revenues, operating income and operating margin and measures the rate, degree and consistency of change for each metric. The Forecast/Revision Score is based on Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month or previous first-half results, with annual forecasts being double-weighted.DRIP, DRIP, DRIP - We 'lead' this fortnight's update with our All-Market Composite Results &amp; Revision Score. Calculated daily, the score is a 'real-time' measure of the state of, and the outlook for, listed Japanese corporations. As the scoring methodology includes earnings momentum 'factors', the data series can be a useful leading indicator of forward earnings. The correlation with the market over the last four years is 0.578, with the indicator leading more often than lagging.   Since peaking on 16th November 2017, the Results &amp; Revisions Score has fallen by 62% and has now returned to the level of May 2017. In the last ten years, the score has only been lower than at present one-third of the time - mostly during the fiscal year ended March 2017 when the total market value averaged ¥550t, close to the December 2018 low. If we are to repeat the relatively-mild cyclical downturn of 2016, the Results &amp; Revision Score will turn negative in May of this year, and the 25th December 2018 low will be retested.
Source: Japan Analytics
PAST THE PEAK - Our earnings indicator peaked 14 months ago, two months ahead of the market's high point on 26th January 2018. It now appears that aggregate reported earnings, as well as aggregate company forecasts for the current year, are now turning decisively lower after nine quarters of uninterrupted growth. Forecast Net Income for the current year is now 7% below the high point in trailing-twelve-month (TTM) Net Income from this cycle, which was reached two months ago. Operating Income is, as usual, 'lagging' and forecasts are still marginally ahead of TTM. The TTM all-market price-earnings ratio reached 11.5 times on Christmas Day, which will prove to be the cycle low point. We expect the return to median levels, to be achieved more through lower 'E' as opposed to a higher 'P'.  Mr Market is currently implying that Japanese corporate profits are due to fall by 23% on average from the cycle peak, or by 30% if we are to revisit the December low-point. Source: Japan AnalyticsTHE FIRST CUT - 23% of listed companies reported their most recent quarterly earnings results in the last two weeks. For these companies, TTM revenues grew by 5.1% year-on-year, but only by 0.5% quarter-on-quarter, the lowest qoq growth rate in over a year. TTM Operating Income is now 0.8% lower than the TTM total of one year ago and declined by 4.4% qoq. Operating margins fell by 49bps year-on-year.  Current forecasts for this group of companies imply 3.1% yoy top line growth, but only 0.3% compared to the quarter just declared. For Operating Income, the rates are -2.0% and 0.6%, reflecting the normal TTM-to-forecast 'lag'. Corporate Japan's profits are now rolling over and will be in a 'recession' by the fiscal year-end.  Source: Japan AnalyticsINTERREGNUM - Our bear market rally has paused to look at and digest the earnings-announcement news flow and will likely be trendless for the next few weeks as 'good' reactions offset 'bad'. In due course, we expect the preponderance of negative momentum to tip the scales.Source: Japan AnalyticsTORAKU @110 - The Toraku advance-decline indicator has continued to recover and is within ten points of the overbought zone, which has only been breached once since the market peak of January 2018. This signal is 'amber' and could be 'red' by the end of next week. 
OUTLOOK &amp; RECOMMENDATIONS

We continue to recommend an underweight position in Japan in global portfolios.
The equity market decline at the end of last year was well in advance of the underlying trends in the economy and corporate profits; the recent 10% rally has corrected that imbalance. Nevertheless, the global cycle has turned down sharply, and many economies will be in a recession by the end of this quarter. We expect Japanese corporate earnings to follow suit.  
Although some of the coming decline in aggregate earnings has been well-discounted, our Results &amp; Revision Score has yet to turn negative. Accordingly, we expect the market to retest the December 2018 low, probably in May when the FY2020 forecasts are announced and our score starts 'seeing red'.
In the near term and despite the rally in the more cyclical sectors, we continue to favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, and Telecommunications sectors. We would avoid or short Banks and Non-Bank Finance.

In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on Anritsu (6754 JP), Alps Alpine (6770 JP), SanBio (4592 JP), Lixil (5938 JP) (yes, again), Fanuc (6954 JP), Mizuho Financial Group (8411 JP) , and Cyberagent (4751 JP).

Japan Fortnightly Update: Drip, Drip, Drip...

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/073/556/original/Update.png?1545212207" class="editor-image img-responsive" data-smartkarma-image-id="73556"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>JAPAN CORPORATE CASH FLOW UPDATE - </strong>This insight updates our previous Insight <a href="https://www.smartkarma.com/insights/japan-quarterly-cash-flow-update-yen-weakens-normal-service-resumed" target="_blank" data-smartkarma-citation="insights:23357">Yen Weakens &gt; Normal Service Resumed</a> with data from all of the most quarterly reports filed last month. Our aggregate cash flow model reformulated cash flows into eight categories which sum to Change in Cash - Free Cash Flow (Operating Cash Flow less Investing Cash Flow), Financing Cash Flow, Shareholder Cash Flow (Equity Cash Flow and Dividend Cash Flow) and Minorities. In the last three months, Japan's non-financial companies generated ¥12.1t in Operating Cash Flow while investing ¥9.2t - the largest quarterly amount of capex since 2016-Q4.  Of the total ¥2.9t in Free Cash Flow, 65% was returned to shareholders of which half was in the form of reductions in equity - an improving and welcome trend which we covered in an earlier <a href="https://www.smartkarma.com/insights/japan-share-buybacks-less-than-meets-the-eye" target="_blank" data-smartkarma-citation="insights:22599">Insight</a>. After a ¥0.8t increase in debt and a ¥0.3t increase in Minorities Cash Flow, aggregate cash rose by ¥2.2t for the quarter. <strong>Since 2011-Q4, 58% of the ¥102.7t in cumulative FCF has been allocated to shareholders and 40% to cash, leaving considerable room for improvement in the relative size of these ratios.</strong></p>
<p><strong>SECTORS &amp; STOCKS - </strong>In the DETAIL below, we also look at sector cash flow trends and provide brief comments on some of the most significant changes in individual cash flows over the last three months including <strong><a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">Softbank Group (9984 JP)</a>, <a href="https://www.smartkarma.com/entities/3548" target="_blank" data-smartkarma-citation="entities:3548:1">Kawasaki Kisen Kaisha (9107 JP)</a>, <a href="https://www.smartkarma.com/entities/2818" target="_blank" data-smartkarma-citation="entities:2818:1">Hanwa (8078 JP)</a>, <a href="https://www.smartkarma.com/entities/19550" target="_blank" data-smartkarma-citation="entities:19550:1">Open House (3288 JP)</a>, <a href="https://www.smartkarma.com/entities/26074" target="_blank" data-smartkarma-citation="entities:26074:1">Macnica Fuji Electronics (3132 JP)</a>, </strong>and <strong><a href="https://www.smartkarma.com/entities/13747" target="_blank" data-smartkarma-citation="entities:13747:1">Digital Garage (4819 JP)</a>.</strong></p>


Source: Japan Analytics
JAPAN CORPORATE CASH FLOW UPDATE - This insight updates our previous Insight Yen Weakens &gt; Normal Service Resumed with data from all of the most quarterly reports filed last month. Our aggregate cash flow model reformulated cash flows into eight categories which sum to Change in Cash - Free Cash Flow (Operating Cash Flow less Investing Cash Flow), Financing Cash Flow, Shareholder Cash Flow (Equity Cash Flow and Dividend Cash Flow) and Minorities. In the last three months, Japan's non-financial companies generated ¥12.1t in Operating Cash Flow while investing ¥9.2t - the largest quarterly amount of capex since 2016-Q4.  Of the total ¥2.9t in Free Cash Flow, 65% was returned to shareholders of which half was in the form of reductions in equity - an improving and welcome trend which we covered in an earlier Insight. After a ¥0.8t increase in debt and a ¥0.3t increase in Minorities Cash Flow, aggregate cash rose by ¥2.2t for the quarter. Since 2011-Q4, 58% of the ¥102.7t in cumulative FCF has been allocated to shareholders and 40% to cash, leaving considerable room for improvement in the relative size of these ratios.
SECTORS &amp; STOCKS - In the DETAIL below, we also look at sector cash flow trends and provide brief comments on some of the most significant changes in individual cash flows over the last three months including Softbank Group (9984 JP), Kawasaki Kisen Kaisha (9107 JP), Hanwa (8078 JP), Open House (3288 JP), Macnica Fuji Electronics (3132 JP), and Digital Garage (4819 JP).

Japan: The 2018-Q3 Cash Flow Stakes - Runners, Riders & Red Flags

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/507/original/2018-11-02_10-20-29.png?1541121653" class="editor-image img-responsive" data-smartkarma-image-id="68507"></figure><p>Source: Japan Analytics</p>
<p>NB: companies are colour-coded by sector</p>
</div><p style="text-align: left;"><strong>28 YEARS OF NON-FINANCIAL MARKET LEADERSHIP</strong> - To offer some light relief from the current market, we have compiled a graphic illustrating the evolution in the ranking of the leading non-financial Japanese companies by market capitalisation measured at the end of each of the last 28 years.</p><p><strong>METHODOLOGY</strong> - Our comments follow in the detail below, but first a few notes:-</p><ul>
<li>In the interests of clarity (/sanity?), financials have been omitted. Twelve of the Top 20-ranked companies in 1990 were financials. However, only <a href="https://www.smartkarma.com/entities/742" target="_blank" data-smartkarma-citation="entities:742:1">Nomura (8604 JP)</a>, <a href="https://www.smartkarma.com/entities/6483" target="_blank" data-smartkarma-citation="entities:6483:1">Aozora (8304 JP)</a> and <a href="https://www.smartkarma.com/entities/16897" target="_blank" data-smartkarma-citation="entities:16897:1">Shinsei (8303 JP)</a> have survived in their original corporate structure and have the same ticker code. Our chart would have otherwise have included the now-merged IBJ, Fuji Bank, Dai-Ichi Kangyo Bank, Mitsubishi Bank, Sakura Bank, Sumitomo Bank, Tokai Bank, Sanwa Bank and Mitsubishi Trust Bank.  Excluded from the present-day Top 20 are <a href="https://www.smartkarma.com/entities/218" target="_blank" data-smartkarma-citation="entities:218:1">Mitsubishi UFJ (8306 JP)</a>, <a href="https://www.smartkarma.com/entities/217" target="_blank" data-smartkarma-citation="entities:217:1">Sumitomo Mitsui Financial (8316 JP)</a>, <a href="https://www.smartkarma.com/entities/838" target="_blank" data-smartkarma-citation="entities:838:1">Japan Post Bank (7182 JP)</a>, <a href="https://www.smartkarma.com/entities/359" target="_blank" data-smartkarma-citation="entities:359:1">Japan Post Holdings (6178 JP)</a> and <a href="https://www.smartkarma.com/entities/219" target="_blank" data-smartkarma-citation="entities:219:1">Mizuho Financial (8411 JP)</a> from the present day.</li>
<li>Only companies that were in the Top 20 in 1990 or 2018, as well as those companies that have been in the Top 10 for at least three of the last 28 years, have been included. </li>
<li>Two companies from 1990's Top 20 - Seibu Railway and Japan Airlines - have since been delisted. Although they have relisted as <a href="https://www.smartkarma.com/entities/458" target="_blank" data-smartkarma-citation="entities:458:1">Seibu Holdings (9024 JP)</a> and <a href="https://www.smartkarma.com/entities/1184" target="_blank" data-smartkarma-citation="entities:1184:1">Japan Airlines (9201 JP)</a>, they are no longer highly-ranked.</li>
<li>Seven current Top 20 companies - (<a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">Softbank (9984 JP)</a>, <a href="https://www.smartkarma.com/entities/1089" target="_blank" data-smartkarma-citation="entities:1089:1">NTT Docomo (9437 JP)</a>, <a href="https://www.smartkarma.com/entities/639" target="_blank" data-smartkarma-citation="entities:639:1">KDDI (9433 JP)</a>, <a href="https://www.smartkarma.com/entities/13498" target="_blank" data-smartkarma-citation="entities:13498:1">Japan Tobacco (2914 JP)</a>, <a href="https://www.smartkarma.com/entities/13520" target="_blank" data-smartkarma-citation="entities:13520:1">Central Japan Railway (9022 JP)</a>, <a href="https://www.smartkarma.com/entities/751" target="_blank" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a> and <a href="https://www.smartkarma.com/entities/15070" target="_blank" data-smartkarma-citation="entities:15070:1">Recruit (6098 JP)</a>)  - have listed during the last 28 years. </li>
</ul><p><strong>THE 2050 RANKING?</strong>- Which of the current market leaders will still be in the Top 20 in 2050 in their current guise? For those still around to read this in 32 year's time, we would wager on just three - <a href="https://www.smartkarma.com/entities/3077" target="_blank" data-smartkarma-citation="entities:3077:1">Keyence (6861 JP)</a>, <a href="https://www.smartkarma.com/entities/73" target="_blank" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a> and <a href="https://www.smartkarma.com/entities/563" target="_blank" data-smartkarma-citation="entities:563:1">Sony (6758 JP)</a>. </p>


Source: Japan Analytics
NB: companies are colour-coded by sector
28 YEARS OF NON-FINANCIAL MARKET LEADERSHIP - To offer some light relief from the current market, we have compiled a graphic illustrating the evolution in the ranking of the leading non-financial Japanese companies by market capitalisation measured at the end of each of the last 28 years.METHODOLOGY - Our comments follow in the detail below, but first a few notes:-
In the interests of clarity (/sanity?), financials have been omitted. Twelve of the Top 20-ranked companies in 1990 were financials. However, only Nomura (8604 JP), Aozora (8304 JP) and Shinsei (8303 JP) have survived in their original corporate structure and have the same ticker code. Our chart would have otherwise have included the now-merged IBJ, Fuji Bank, Dai-Ichi Kangyo Bank, Mitsubishi Bank, Sakura Bank, Sumitomo Bank, Tokai Bank, Sanwa Bank and Mitsubishi Trust Bank.  Excluded from the present-day Top 20 are Mitsubishi UFJ (8306 JP), Sumitomo Mitsui Financial (8316 JP), Japan Post Bank (7182 JP), Japan Post Holdings (6178 JP) and Mizuho Financial (8411 JP) from the present day.
Only companies that were in the Top 20 in 1990 or 2018, as well as those companies that have been in the Top 10 for at least three of the last 28 years, have been included. 
Two companies from 1990's Top 20 - Seibu Railway and Japan Airlines - have since been delisted. Although they have relisted as Seibu Holdings (9024 JP) and Japan Airlines (9201 JP), they are no longer highly-ranked.
Seven current Top 20 companies - (Softbank (9984 JP), NTT Docomo (9437 JP), KDDI (9433 JP), Japan Tobacco (2914 JP), Central Japan Railway (9022 JP), Fast Retailing (9983 JP) and Recruit (6098 JP))  - have listed during the last 28 years. 
THE 2050 RANKING?- Which of the current market leaders will still be in the Top 20 in 2050 in their current guise? For those still around to read this in 32 year's time, we would wager on just three - Keyence (6861 JP), Toyota Motor (7203 JP) and Sony (6758 JP). 

Japan: The Evolution Of (Non-Financial) Market Leadership

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><a href="https://www.smartkarma.com/entities/14050" target="_blank" data-smartkarma-citation="entities:14050:1">Dowa Holdings (5714 JP)</a> faces headwinds this year in its non-ferrous and electronic materials businesses due to the falling commodity prices and a weak environment for silver powder on account of the elimination of Chinese subsidies. However, conditions in the environmental segment are picking up and could help drive earnings this year though we still expect a shortfall vs. guidance.</p><ul>
<li>The fall in imports of electronic waste into China is proving to be a boon for the company as demand for recycling in developed nations is boosting margins.</li>
<li>Collapsing zinc prices will pressure profitability but these losses should be recovered next year through higher TCs, and the start of operations of the Los Gatos mine will support earnings.</li>
<li>A slowdown in silver powder demand for solar cells will hurt this year, but as weaker players are weeded out in the typical Chinese excess supply elimination cycle, Dowa stands to benefit disproportionately from the rebound next year.</li>
<li>EV/Hybrid connector sales are now driving metal processing sales and we would expect an acceleration of growth as the company expands capacity.</li>
<li>Heat Treatment demand is strong and we expect improving vehicle specifications in India to help improve margins in the region, boosting profit.</li>
<li>While conditions will be tough in two of the company's five key segments this year, next year we expect all five segments to generate positive current profit growth.</li>
<li>As such, the 8.0x PE multiple the company trades at, which is at the 5th percentile historically, looks far too low. A return to its median 12x would imply 50% upside whereas we believe that current profit growth could rebound from -5% this FY to double digit growth next year supporting a further 10+% upside.</li>
<li>There is a lack of immediate catalysts but going into 2019, as investors start to look toward FY03/20 earnings, the expectation of higher zinc TCs, strengthening environmental segment earnings and the expansion of the company's sensor lineup could support the stock.</li>
</ul>

Dowa Holdings (5714 JP) faces headwinds this year in its non-ferrous and electronic materials businesses due to the falling commodity prices and a weak environment for silver powder on account of the elimination of Chinese subsidies. However, conditions in the environmental segment are picking up and could help drive earnings this year though we still expect a shortfall vs. guidance.
The fall in imports of electronic waste into China is proving to be a boon for the company as demand for recycling in developed nations is boosting margins.
Collapsing zinc prices will pressure profitability but these losses should be recovered next year through higher TCs, and the start of operations of the Los Gatos mine will support earnings.
A slowdown in silver powder demand for solar cells will hurt this year, but as weaker players are weeded out in the typical Chinese excess supply elimination cycle, Dowa stands to benefit disproportionately from the rebound next year.
EV/Hybrid connector sales are now driving metal processing sales and we would expect an acceleration of growth as the company expands capacity.
Heat Treatment demand is strong and we expect improving vehicle specifications in India to help improve margins in the region, boosting profit.
While conditions will be tough in two of the company's five key segments this year, next year we expect all five segments to generate positive current profit growth.
As such, the 8.0x PE multiple the company trades at, which is at the 5th percentile historically, looks far too low. A return to its median 12x would imply 50% upside whereas we believe that current profit growth could rebound from -5% this FY to double digit growth next year supporting a further 10+% upside.
There is a lack of immediate catalysts but going into 2019, as investors start to look toward FY03/20 earnings, the expectation of higher zinc TCs, strengthening environmental segment earnings and the expansion of the company's sensor lineup could support the stock.


Dowa Holdings: Fallow Year to Be Supported by Environmental Business, Strong Rebound Next Year

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>In both my insight last week <a href="https://www.smartkarma.com/insights/japan-passive-boj-heading-for-trouble-with-nikkei-225" target="_blank" data-smartkarma-citation="insights:21980">JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225</a> and my piece in February <a href="https://www.smartkarma.com/insights/the-boj-s-ongoing-etf-impact-is-a-nikkei-225-reshuffle-in-the-cards" target="_blank" data-smartkarma-citation="insights:17331">The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards?</a>, I suggested that the BOJ would have to soon consider what to do with regard to its ETF allocation policy.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/059/019/original/Screen%20Shot%202018-07-26%20at%205.57.53%20PM.png?1532599088" class="editor-image img-responsive" data-smartkarma-image-id="59019"></figure>
<h2>Last Night Saw Some New News</h2>
<p>A bit over 24 hours ago, a Nikkei article (and a Nikkei Asian Review <a href="https://asia.nikkei.com/Business/Markets/Bank-of-Japan-weighs-rebalancing-ETF-buys" target="_blank">article</a> in English) said <em>"The Bank of Japan will discuss reducing investment in exchange-traded funds that track the Nikkei Stock Average in favor of those that follow broader indexes such as the TOPIX when policymakers meet next week, answering criticism of the BOJ's influence on stock prices."</em></p>
<p><em>The article repeated the point made elsewhere (including in my linked piece) that the BOJ is a top 10 shareholder in almost 40% of listed stocks in Japan. </em></p>
<div class="content-highlight">
<p>On the face of it, the whole issue seems small.</p>
<ul>
<li>Nikkei 225 has a 5-year weekly r-squared to TOPIX of 95.6% and a beta of 1.016. Nikkei 225 to JPNK400 is 95.9% and 1.011. They are not too dissimilar.</li>
<li>The BOJ would simply be NOT BUYING Nikkei 225, and be conducting MORE BUYING of one or both of the other indices.</li>
</ul>
</div>
<p>IF the BOJ goes through with this, the effects are not difficult to model.</p>
<ul>
<li>It would involve a significant drop in the marginal buying of remaining float for the stocks with the lowest amount of true free float. Stocks which could have been expected to see significant buying as a percentage of remaining float such as <a href="https://www.smartkarma.com/entities/751" target="_blank" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/320" target="_blank" data-smartkarma-citation="entities:320:1">Familymart Uny Holdings (8028 JP)</a>, <a href="https://www.smartkarma.com/entities/13236" target="_blank" data-smartkarma-citation="entities:13236:1">Konami Holdings (9766 JP)</a>, <a href="https://www.smartkarma.com/entities/18107" target="_blank" data-smartkarma-citation="entities:18107:1">Advantest Corp (6857 JP)</a>, etc. would see those numbers drop dramatically.
<ul>
<li>FamilyMart UNY would still be high, in the 7-10% range, depending on the shape of the shareholder group which tenders into the Tender Offer by ITOCHU (discussed <a href="https://www.smartkarma.com/insights/itochu-tender-for-familymart-going-ahead-as-planned-but-remember-greedy-bears-get-stuck" target="_blank">here</a>).</li>
<li>The next highest would be a relatively small stock <a href="https://www.smartkarma.com/entities/26753" target="_blank" data-smartkarma-citation="entities:26753:1">RENOVA Inc (9519 JP)</a> at 4.1%. </li>
</ul>
</li>
<li>By my calculations, if the BOJ replaced all Nikkei 225 buying with TOPIX, no stocks within the top 1000 market cap names in Japan would see remaining "real float" shrink by more than 3% in the next year under the BOJ's current ETF buying program (assuming prices stayed stable). If the BOJ replaced all Nikkei 225 buying with JPNK400, it would reduce ADV impact on some smaller stocks and the largest float reduction among the top 1000 names would be ~3.2%.</li>
</ul>
<div class="content-highlight">
<p>But there are <strong>Other Interesting Residual and Collateral Issues</strong> in the background. </p>
<ul>
<li>While the effects above would be generally salutary, they do not solve the problem that the BOJ currently OWNS 30-40% of the "free float" of many names, and up to 60-70% on a few.</li>
<li>And there are other issues.</li>
</ul>
</div>
<p>The series on the BOJ-Nikkei225 issues includes the following insights (click the link to go to any of them)</p>
<div>
<table class="table table-striped">
<tbody>
<tr>
<td colspan="2">
<h2>The Last Year of Insights in the BOJ vs Nikkei 225 ETF Series</h2>
</td>
</tr>
<tr>
<td><em>26 July 2018</em></td>
<td><em><a href="https://www.smartkarma.com/insights/japan-passive-who-owns-what" target="_blank" data-smartkarma-citation="insights:22315">JAPAN PASSIVE:  Who Owns What?</a></em></td>
</tr>
<tr>
<td><em>23 July 2018</em></td>
<td><em><a href="https://www.smartkarma.com/insights/japan-passive-the-nikkei-225-baskets-if-boj-changes" target="_blank" data-smartkarma-citation="insights:22367">JAPAN PASSIVE:  The Nikkei 225 Baskets if BOJ Changes</a></em></td>
</tr>
<tr>
<td><em>19 July 2018</em></td>
<td><em><a href="https://www.smartkarma.com/insights/japan-passive-boj-heading-for-trouble-with-nikkei-225" target="_blank" data-smartkarma-citation="insights:21980">JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225</a></em></td>
</tr>
<tr>
<td><em>24 April 2018</em></td>
<td><em><a href="https://www.smartkarma.com/insights/japan-passive-update-on-the-boj-and-its-etf-buying" target="_blank" data-smartkarma-citation="insights:19628">JAPAN PASSIVE:  Update on the BOJ and Its ETF Buying</a></em></td>
</tr>
<tr>
<td><em>12 Feb 2018</em></td>
<td><em><a href="https://www.smartkarma.com/insights/trading-the-boj-nikkei-225-baskets" target="_blank" data-smartkarma-citation="insights:17602">Trading the BOJ-Nikkei 225 Baskets</a></em></td>
</tr>
<tr>
<td><em>4 Feb 2018</em></td>
<td><em><a href="https://www.smartkarma.com/insights/the-boj-s-ongoing-etf-impact-is-a-nikkei-225-reshuffle-in-the-cards" target="_blank" data-smartkarma-citation="insights:17331">The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards?</a></em></td>
</tr>
<tr>
<td><em>12 Jan 2018</em></td>
<td><em><a href="https://www.smartkarma.com/insights/fast-retailing-still-squeezable" target="_blank" data-smartkarma-citation="insights:16756">Fast Retailing:  Still Squeezable</a></em></td>
</tr>
<tr>
<td><em>19 Jul 2017</em></td>
<td><em><a href="https://www.smartkarma.com/insights/japan-passive-the-boj-and-japan-etfs" target="_blank" data-smartkarma-citation="insights:12181">JAPAN PASSIVE:  The BOJ and Japan ETFs</a></em></td>
</tr>
</tbody>
</table>
<hr>
<p>Discussion of the change in flows, the timing, and Other Interesting Residual and Collateral Issues follows below.</p>
</div>

In both my insight last week JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225 and my piece in February The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards?, I suggested that the BOJ would have to soon consider what to do with regard to its ETF allocation policy.

Last Night Saw Some New News
A bit over 24 hours ago, a Nikkei article (and a Nikkei Asian Review article in English) said "The Bank of Japan will discuss reducing investment in exchange-traded funds that track the Nikkei Stock Average in favor of those that follow broader indexes such as the TOPIX when policymakers meet next week, answering criticism of the BOJ's influence on stock prices."
The article repeated the point made elsewhere (including in my linked piece) that the BOJ is a top 10 shareholder in almost 40% of listed stocks in Japan. 

On the face of it, the whole issue seems small.

Nikkei 225 has a 5-year weekly r-squared to TOPIX of 95.6% and a beta of 1.016. Nikkei 225 to JPNK400 is 95.9% and 1.011. They are not too dissimilar.
The BOJ would simply be NOT BUYING Nikkei 225, and be conducting MORE BUYING of one or both of the other indices.


IF the BOJ goes through with this, the effects are not difficult to model.

It would involve a significant drop in the marginal buying of remaining float for the stocks with the lowest amount of true free float. Stocks which could have been expected to see significant buying as a percentage of remaining float such as Fast Retailing (9983 JP), Familymart Uny Holdings (8028 JP), Konami Holdings (9766 JP), Advantest Corp (6857 JP), etc. would see those numbers drop dramatically.

FamilyMart UNY would still be high, in the 7-10% range, depending on the shape of the shareholder group which tenders into the Tender Offer by ITOCHU (discussed here).
The next highest would be a relatively small stock RENOVA Inc (9519 JP) at 4.1%. 


By my calculations, if the BOJ replaced all Nikkei 225 buying with TOPIX, no stocks within the top 1000 market cap names in Japan would see remaining "real float" shrink by more than 3% in the next year under the BOJ's current ETF buying program (assuming prices stayed stable). If the BOJ replaced all Nikkei 225 buying with JPNK400, it would reduce ADV impact on some smaller stocks and the largest float reduction among the top 1000 names would be ~3.2%.


But there are Other Interesting Residual and Collateral Issues in the background. 

While the effects above would be generally salutary, they do not solve the problem that the BOJ currently OWNS 30-40% of the "free float" of many names, and up to 60-70% on a few.
And there are other issues.


The series on the BOJ-Nikkei225 issues includes the following insights (click the link to go to any of them)





The Last Year of Insights in the BOJ vs Nikkei 225 ETF Series



26 July 2018
JAPAN PASSIVE:  Who Owns What?


23 July 2018
JAPAN PASSIVE:  The Nikkei 225 Baskets if BOJ Changes


19 July 2018
JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225


24 April 2018
JAPAN PASSIVE:  Update on the BOJ and Its ETF Buying


12 Feb 2018
Trading the BOJ-Nikkei 225 Baskets


4 Feb 2018
The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards?


12 Jan 2018
Fast Retailing:  Still Squeezable


19 Jul 2017
JAPAN PASSIVE:  The BOJ and Japan ETFs




Discussion of the change in flows, the timing, and Other Interesting Residual and Collateral Issues follows below.


JAPAN PASSIVE - BOJ To Buy Less Nikkei 225? Highly Likely

Japan

Central Japan Railway Company provides rail transportation services between Tokyo and Osaka, including the Tokai region.  The Company, through its subsidiaries, also provides bus transportation services, leases real estate, and operates department stores, hotels, restaurants, and construction businesses.

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Central Japan Railway (9022 JP)

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