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>Continuing a now familiar theme for manufacturers Daikin’s 4QFY22 revenue beat consensus by 9.8% but raw material prices restricted OP to meagre 0.3% beat. </li>
<li>FY23 guidance is also mixed as they expect strong revenue of ¥3,380bn (+5.9% vs. consensus, +8.7% YoY) but weak OP of ¥340bn (-2.9% vs. consensus). </li>
<li>We believe price hikes could be bigger than projected and the weak yen will help but multiples remain elevated.</li>
</ul>


Continuing a now familiar theme for manufacturers Daikin’s 4QFY22 revenue beat consensus by 9.8% but raw material prices restricted OP to meagre 0.3% beat. 
FY23 guidance is also mixed as they expect strong revenue of ¥3,380bn (+5.9% vs. consensus, +8.7% YoY) but weak OP of ¥340bn (-2.9% vs. consensus). 
We believe price hikes could be bigger than projected and the weak yen will help but multiples remain elevated.


Daikin – Steady Volume Growth And Price Hikes But Expensive

Japan Specialist

Mark Chadwick

<ul>
<li>Daikin reported FY3/22 OP ¥316 bn, in-line with guidance and Nikkei preview. The company guided for FY3/23 OP of ¥340 billion (+7.5% yoy) on a 9% rise in projected sales</li>
<li>Guidance seems conservative as the company is using a USD/JPY rate of ¥116 and EUR/JPY ¥126. We highlight sales/margin risks making guidance a stretch </li>
<li>Daikin's premium valuation multiple will come under pressure in a rising interest rate environment. We would sell into today’s bounce.</li>
</ul>


Daikin reported FY3/22 OP ¥316 bn, in-line with guidance and Nikkei preview. The company guided for FY3/23 OP of ¥340 billion (+7.5% yoy) on a 9% rise in projected sales
Guidance seems conservative as the company is using a USD/JPY rate of ¥116 and EUR/JPY ¥126. We highlight sales/margin risks making guidance a stretch 
Daikin's premium valuation multiple will come under pressure in a rising interest rate environment. We would sell into today’s bounce.


Daikin (6367 JP) | Blowing Cold Air on the Guidance

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<ul>
<li>In early February 2022, Silchester International Investors (according to its website) sent letters to four low-ROE-earning Japanese regional banks proposing a new dividend policy.</li>
<li>The management and boards of each bank rejected the policy proposal though two of the four had upped their proposed dividend or changed policy prior, and two upped it afterwards.</li>
<li>While <a href="https://www.smartkarma.com/entities/bank-of-kyoto" target="_blank" data-smartkarma-citation="entities:5248:1" rel="noopener">Bank of Kyoto (8369 JP)</a> is the biggie, <a href="https://www.smartkarma.com/entities/shiga-bank-ltd" target="_blank" data-smartkarma-citation="entities:18665:1" rel="noopener">Shiga Bank (8366 JP)</a> is another one with significant equity holdings. </li>
</ul>


In early February 2022, Silchester International Investors (according to its website) sent letters to four low-ROE-earning Japanese regional banks proposing a new dividend policy.
The management and boards of each bank rejected the policy proposal though two of the four had upped their proposed dividend or changed policy prior, and two upped it afterwards.
While Bank of Kyoto (8369 JP) is the biggie, Shiga Bank (8366 JP) is another one with significant equity holdings. 


JAPAN ACTIVISM:  Silchester Goes After Shiga Bank

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Periscope Analytics

Periscope Analytics focuses on event-driven trades across Asia Pacific and provides comprehensive, timely and systematic coverage of index changes to major Asia Pacific indices in a structured manner.

The analysis includes forecasted inclusions and exclusions to all major Asian indices that have significant amount of tracking assets, including estimates of passive buy/sell flow on the stocks. The service also provides commentary and impact of market consultations, ground rule changes, and other events (IPOs, spin-offs, M&A) that could lead to index changes and passive flow.

Periscope Analytics works with multi-strategy hedge funds, proprietary trading firms, stat arb trading groups and long-only investors that invest and trade in the Asia Pacific region with the data being used to trade index rebalances, avoid pre-positioning and passive flow, and to time entry into and exit from stocks.

Event-Driven Trades Across Asia Pacific

NTT (Nippon Telegraph & Telephone) / Event-Driven

<ul>
<li>On 7 April, the JPX announced the changes to the Free Float Weights (FFW) for the TOPIX Index. There are some big changes due to the updated FFW methodology.</li>
<li>From April to June, we see a one-way turnover of 2.87% and a one-way trade of ¥2,285bn. Some stocks have opposite way flows in different months.</li>
<li>Stocks with inflows outperformed stocks with outflows from Oct-Dec 2021 before giving up all the gains. These stocks have started to outperform and could continue outperforming over the next quarter.</li>
</ul>


On 7 April, the JPX announced the changes to the Free Float Weights (FFW) for the TOPIX Index. There are some big changes due to the updated FFW methodology.
From April to June, we see a one-way turnover of 2.87% and a one-way trade of ¥2,285bn. Some stocks have opposite way flows in different months.
Stocks with inflows outperformed stocks with outflows from Oct-Dec 2021 before giving up all the gains. These stocks have started to outperform and could continue outperforming over the next quarter.


TOPIX FFW Transition - Big Flows from April to June

<ul>
<li>Daikin 3Q results were mixed with revenue of ¥743bn (-2.2% QoQ, 21.3% YoY) looking strong but OP of ¥66.8bn, implying an OPM decline to 9.0% from 10.3% last quarter. </li>
<li>Reported revenue was 6.0% higher than consensus while OP was 4.2% lower. </li>
<li>The company revised its FY22 revenue guidance to ¥3,050bn (+4.1%) but OP was raised just ¥10bn to ¥310bn (+3.3%) which may disappoint.</li>
</ul>


Daikin 3Q results were mixed with revenue of ¥743bn (-2.2% QoQ, 21.3% YoY) looking strong but OP of ¥66.8bn, implying an OPM decline to 9.0% from 10.3% last quarter. 
Reported revenue was 6.0% higher than consensus while OP was 4.2% lower. 
The company revised its FY22 revenue guidance to ¥3,050bn (+4.1%) but OP was raised just ¥10bn to ¥310bn (+3.3%) which may disappoint.


Daikin – Material Costs Look to Be Impacting Margins

Japan

DAIKIN INDUSTRIES, LTD. manufactures air conditioning equipment for household and commercial use.  The Company also produces fluorine chemical products such as fluorinated hydrocarbon gas and shells and warheads for defense industry.

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Daikin Industries (6367 JP)

Daikin – Steady Volume Growth And Price Hikes But Expensive

Operating conditions for Daikin look reasonable enough with strong top line growth and potential for margin overshoots on a weak yen and price...

Mio Kato

Daikin (6367 JP) | Blowing Cold Air on the Guidance

We do not believe that Daikin's guidance is conservative. We see top line troubles in the US and China, not to mention the negative impact of...

Mark Chadwick

JAPAN ACTIVISM: Silchester Goes After Shiga Bank

Silchester Int'l Investors has written letters to four regional banks where it holds large stakes. The goal appears to be to urge public debate of...

Travis Lundy

TOPIX FFW Transition - Big Flows from April to June

Changes to the Topix FFW methodology will result in a turnover of 2.87% & trade of ¥2,285bn from April to June. There is a lot to trade on some...

Brian Freitas

Daikin – Material Costs Look to Be Impacting Margins

Margins and valuations are a concern for Daikin as multiples look to be correcting from inflated levels around 25x EV/EBIT towards the historical...

Mio Kato

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