'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. 

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/963/original/2020-02-15_09-46-55.png?1581796265" class="editor-image img-responsive" data-smartkarma-image-id="117963"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>A YEAR TO FORGET</strong> - The aggregate earnings of Japanese listed companies peaked on December 26th 2018 and, over the last five quarters, have declined by ¥10.5 trillion or by 22%. Net margins have declined by 135 basis points over this period to 4.5%, 224 bps below the current operating margin. Whatever the uncertainties over the impact of Covid-19, the current quarter will see a further decline. A base-case outlook for aggregate Net Income is ¥30 trillion by May 2020, which, if the total market cap were to remain at current levels, would take the  PE to a ten-year high of 22.4 times. The decline in Operating Income has been more moderate at 11%, illustrating the still all-too-frequent write-offs that Japanse corporate routinely require as penance for their mostly-overseas capital misallocations.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/966/original/2020-02-16_05-32-51.png?1581798783" class="editor-image img-responsive" data-smartkarma-image-id="117966"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/967/original/2020-02-16_05-28-20.png?1581798803" class="editor-image img-responsive" data-smartkarma-image-id="117967"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>ACCELERATING DOWNTREND</strong> -  Trailing-twelve-month (TTM) Revenues are now declining quarter-on-quarter, and the pace of decline in Operating Income has accelerated for the fourth quarter in a row. The aggregate one year forward forecasts have seen falling QoQ revenues and OP since TTM-2. With only one month to go before the end of FY2020 for the majority of companies and with many December year-end companies looking forward ten months, a degree of optimism has slowed the pace of decline in the current quarter. We expect Covid-19 to result in many of these forecasts to be revised down at the interim results to be released in August. </p><p><strong>RECESSION</strong> - With GDP shrinking by an annualised 6.3% in the fourth quarter and Covid-19 having at least a similar impact in the current quarter, Japan will be in an, albeit 'technical', recession by the spring.</p><div class="content-highlight"><p>In the<strong> DETAIL</strong> below, we shall review the actual results and initial and revised forecasts by Sector and highlight the best and worst-performing companies by one-quarter revenue and margin changes. Part 2 will update our Results and Revision Scoring for the market, Sectors, Peer Groups and Companies.</p></div>

Source • Japan AnalyticsA YEAR TO FORGET - The aggregate earnings of Japanese listed companies peaked on December 26th 2018 and, over the last five quarters, have declined by ¥10.5 trillion or by 22%. Net margins have declined by 135 basis points over this period to 4.5%, 224 bps below the current operating margin. Whatever the uncertainties over the impact of Covid-19, the current quarter will see a further decline. A base-case outlook for aggregate Net Income is ¥30 trillion by May 2020, which, if the total market cap were to remain at current levels, would take the  PE to a ten-year high of 22.4 times. The decline in Operating Income has been more moderate at 11%, illustrating the still all-too-frequent write-offs that Japanse corporate routinely require as penance for their mostly-overseas capital misallocations.Source • Japan AnalyticsACCELERATING DOWNTREND -  Trailing-twelve-month (TTM) Revenues are now declining quarter-on-quarter, and the pace of decline in Operating Income has accelerated for the fourth quarter in a row. The aggregate one year forward forecasts have seen falling QoQ revenues and OP since TTM-2. With only one month to go before the end of FY2020 for the majority of companies and with many December year-end companies looking forward ten months, a degree of optimism has slowed the pace of decline in the current quarter. We expect Covid-19 to result in many of these forecasts to be revised down at the interim results to be released in August. RECESSION - With GDP shrinking by an annualised 6.3% in the fourth quarter and Covid-19 having at least a similar impact in the current quarter, Japan will be in an, albeit 'technical', recession by the spring.In the DETAIL below, we shall review the actual results and initial and revised forecasts by Sector and highlight the best and worst-performing companies by one-quarter revenue and margin changes. Part 2 will update our Results and Revision Scoring for the market, Sectors, Peer Groups and Companies.

🇯🇵 JAPAN • IT'S A WRAP! Part 1 - 2020-Q1 Earnings Results & Forecasts

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

Harmonic Drive Systems / Equity Bottom-Up

<p>Almost nine months ago when Harmonic Drive released its ¥1bn OP guidance for the year we said:</p><blockquote><p>“That ¥1bn OP estimate may look exceedingly conservative on the surface, but in reality it may not be and it is not impossible for HDS to make an operating loss this FY in our opinion.</p></blockquote><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/397/original/image_46663124421581465016919.png?1581465016" class="editor-image img-responsive"></figure><figure class="editor-figure mceNonEditable"></figure><div style="text-align: left;" class="content-caption"><em>Source: Company disclosures</em></div><blockquote><p>A simple way to illustrate this is using the above chart. If we assume all depreciation is part of COGS and effectively look at cash gross margin we can see that it has trended around 50%, rising above that recently but now looking to be reverting. If it is 50% this FY then on ¥42bn in sales that is ¥21bn in gross profit excluding depreciation. Quarterly depreciation rose from ¥1.33bn to ¥1.87bn over the course of last year. If it remains at 4Q's level this FY that is ¥7.5bn in depreciation. SG&amp;A costs have been elevated following the acquisition of Harmonic Drive AG and were between ¥3.2bn and ¥3.6bn per quarter last year. If SG&amp;A remains at last year's level that implies ¥13.5bn in costs. Together with depreciation that is ¥21bn in costs to offset cash gross profit. This still ignores the potential impact of inventory reductions.”</p></blockquote><p>With three quarters now passed, GP excluding depreciation looks to be on track to hit about ¥19bn, depreciation looks set to hit about ¥7.5bn and SG&amp;A costs look set to hit about ¥11.5bn. Ultimately the ¥42bn sales guidance proved too optimistic, and we believe the next concern should be next year’s OP where consensus’ ¥4.4bn OP on ¥43bn in sales looks optimistic.</p>

Almost nine months ago when Harmonic Drive released its ¥1bn OP guidance for the year we said:“That ¥1bn OP estimate may look exceedingly conservative on the surface, but in reality it may not be and it is not impossible for HDS to make an operating loss this FY in our opinion.Source: Company disclosuresA simple way to illustrate this is using the above chart. If we assume all depreciation is part of COGS and effectively look at cash gross margin we can see that it has trended around 50%, rising above that recently but now looking to be reverting. If it is 50% this FY then on ¥42bn in sales that is ¥21bn in gross profit excluding depreciation. Quarterly depreciation rose from ¥1.33bn to ¥1.87bn over the course of last year. If it remains at 4Q's level this FY that is ¥7.5bn in depreciation. SG&amp;A costs have been elevated following the acquisition of Harmonic Drive AG and were between ¥3.2bn and ¥3.6bn per quarter last year. If SG&amp;A remains at last year's level that implies ¥13.5bn in costs. Together with depreciation that is ¥21bn in costs to offset cash gross profit. This still ignores the potential impact of inventory reductions.”With three quarters now passed, GP excluding depreciation looks to be on track to hit about ¥19bn, depreciation looks set to hit about ¥7.5bn and SG&amp;A costs look set to hit about ¥11.5bn. Ultimately the ¥42bn sales guidance proved too optimistic, and we believe the next concern should be next year’s OP where consensus’ ¥4.4bn OP on ¥43bn in sales looks optimistic.

Harmonic Drive – Margin Deterioration Hurts Even LT Story

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/227/original/2020-02-11_05-05-13.png?1581376613" class="editor-image img-responsive" data-smartkarma-image-id="117227"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>10TH FEBRUARY ROUNDUP</strong> - 189 results and 93 revision announcements had little impact on our aggregate Scores, although decliners still outweighed improvers by a factor of two times. Amongst larger caps, <a href="https://www.smartkarma.com/entities/mitsubishi-estate-co-ltd" target="_blank" data-smartkarma-citation="entities:566:1" rel="noopener">Mitsubishi Estate (8802 JP)</a> produced the best quarter-on-quarter change in Score, with <a href="https://www.smartkarma.com/entities/sundrug-co-ltd" target="_blank" data-smartkarma-citation="entities:12615:1" rel="noopener">Sundrug (9989 JP)</a> being one of the worst. Today is a public holiday (<em>kenkoku kinen no hi</em>), and so the next roundup will appear on Wednesday morning. </p><hr><p style="text-align: center;"><strong>• SECTOR TIMELINE •</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/228/original/2020-02-11_05-08-14.png?1581377317" class="editor-image img-responsive" data-smartkarma-image-id="117228"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>SECTOR TIMELINE</strong> - Monday's main moves were upwards for <strong>Real Estate</strong> and<strong> Media</strong> (<a href="https://www.smartkarma.com/entities/hakuhodo-dy-holdings-inc" target="_blank" data-smartkarma-citation="entities:8736:1" rel="noopener">Hakuhodo DY (2433 JP)</a>) and downwards (again) for <strong>Other Commercial Products</strong> (<a href="https://www.smartkarma.com/entities/hamamatsu-photonics-kk" target="_blank" data-smartkarma-citation="entities:14074:1" rel="noopener">Hamamatsu Photonics (6965 JP)</a>) and<strong> Building Materials</strong> (<a href="https://www.smartkarma.com/entities/nichias-corp" target="_blank" data-smartkarma-citation="entities:14674:1" rel="noopener">Nichias (5393 JP)</a>). </p>

Source • Japan Analytics10TH FEBRUARY ROUNDUP - 189 results and 93 revision announcements had little impact on our aggregate Scores, although decliners still outweighed improvers by a factor of two times. Amongst larger caps, Mitsubishi Estate (8802 JP) produced the best quarter-on-quarter change in Score, with Sundrug (9989 JP) being one of the worst. Today is a public holiday (kenkoku kinen no hi), and so the next roundup will appear on Wednesday morning. • SECTOR TIMELINE •Source • Japan AnalyticsSECTOR TIMELINE - Monday's main moves were upwards for Real Estate and Media (Hakuhodo DY (2433 JP)) and downwards (again) for Other Commercial Products (Hamamatsu Photonics (6965 JP)) and Building Materials (Nichias (5393 JP)). 

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 10th February ▲7003 8802 2433 ▼6965 9989 6324

<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.

Japan

Harmonic Drive Systems Inc. manufactures speed reducers used in industrial robots, semiconductor manufacturing equipment, and other precision instruments. The Company offers cup type, hollow-shaft type, and rotary type speed reducers. Harmonic Drive Systems also produces gear heads and harmonic drive actuators.

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Harmonic Drive Systems (6324 JP)

🇯🇵 JAPAN • IT'S A WRAP! Part 1 - 2020-Q1 Earnings Results & Forecasts

A YEAR TO FORGET - The aggregate earnings of Japanese listed companies peaked on December 26th 2018 and, over the last five quarters, have declined...

Campbell Gunn

Harmonic Drive – Margin Deterioration Hurts Even LT Story

Almost nine months ago when Harmonic Drive released its ¥1bn OP guidance for the year we said:“That ¥1bn OP estimate may look exceedingly...

Mio Kato

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 10th February ▲7003 8802 2433 ▼6965 9989 6324

10TH FEBRUARY ROUNDUP - 189 results and 93 revision announcements had little impact on our aggregate Scores, although decliners still outweighed...

Campbell Gunn

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

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