'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

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

THE FAILURE TO FAILOVER -  <a href="https://www.smartkarma.com/entities/japan-exchange-group-inc" target="_blank" data-smartkarma-citation="entities:11266:1" rel="noopener">Japan Exchange Group (8697 JP)</a> released the report in its investigation into the October 1st system failure yesterday. However, the report, although couched in neutral language, details basic failures of communication and proper testing protocols by both the TSE and <a href="https://www.smartkarma.com/entities/fujitsu-ltd" target="_blank" data-smartkarma-citation="entities:16968:1" rel="noopener">Fujitsu (6702 JP) </a>the TSE arrowhead trading system vendor. This failure to conduct worst-case scenario planning is nothing new to those familiar with the implementation and management of IT systems in Japan.   <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/166/119/original/2020-10-20_09-54-29.png?1603155299" class="editor-image img-responsive" data-smartkarma-image-id="166119"></figure><div class="content-caption">Source: TSE</div></section>COUNTERMEASURES - The TSE 'countermeasures' include the establishment of a council to establish 'rules and regulations' to deal with failures which will consist of ' securities companies, investors, and system vendors' and will 'take into account evidence from overseas'. <blockquote>
Establishment of a "Council for Recurrence Prevention Measures" in Response to System Failure 
TSE would like to deeply apologize for the inconvenience caused to many investors and other market users due to the failure in the arrowhead cash equity trading system on October 1, 2020.With the aim of considering how it can develop its response to system failures and its rules and regulations to prevent a recurrence of this incident, TSE will establish a "Council for Recurrence Prevention Measures" comprised of market users. 
1. Purpose The recent system failure revealed not only issues with the IT system itself but also  issues with the operation of the system, such as a need for clarification and better transparency of standards and procedures for recovery, and an absence of rules for order handling in the event of system failures. The market users making up the Council will consider how TSE should develop its responses to system failures and its rules and regulations from the perspective of investors, taking into account evidence from overseas.
2. Council Members A variety of market users such as securities companies, investors, and system vendors are expected to become Council members. The Financial Services Agency of Japan and other such organizations are expected to become observers.
3. Others The secretariat of the Council will be Tokyo Stock Exchange, Inc.The first meeting of the Council will be held by the end of October 2020. Agendas, outlines of minutes, and other related materials will be published on the JPX website after meetings.  
</blockquote>FSA COMES KNOCKING - The Nikkei reported this morning that an FSA onsite-inspection of the TSE began yesterday. Such inspections are normally not pre-announced and never fail to find fault and require remedial action.

THE FAILURE TO FAILOVER -  Japan Exchange Group (8697 JP) released the report in its investigation into the October 1st system failure yesterday. However, the report, although couched in neutral language, details basic failures of communication and proper testing protocols by both the TSE and Fujitsu (6702 JP) the TSE arrowhead trading system vendor. This failure to conduct worst-case scenario planning is nothing new to those familiar with the implementation and management of IT systems in Japan.   Source: TSECOUNTERMEASURES - The TSE 'countermeasures' include the establishment of a council to establish 'rules and regulations' to deal with failures which will consist of ' securities companies, investors, and system vendors' and will 'take into account evidence from overseas'. 
Establishment of a "Council for Recurrence Prevention Measures" in Response to System Failure 
TSE would like to deeply apologize for the inconvenience caused to many investors and other market users due to the failure in the arrowhead cash equity trading system on October 1, 2020.With the aim of considering how it can develop its response to system failures and its rules and regulations to prevent a recurrence of this incident, TSE will establish a "Council for Recurrence Prevention Measures" comprised of market users. 
1. Purpose The recent system failure revealed not only issues with the IT system itself but also  issues with the operation of the system, such as a need for clarification and better transparency of standards and procedures for recovery, and an absence of rules for order handling in the event of system failures. The market users making up the Council will consider how TSE should develop its responses to system failures and its rules and regulations from the perspective of investors, taking into account evidence from overseas.
2. Council Members A variety of market users such as securities companies, investors, and system vendors are expected to become Council members. The Financial Services Agency of Japan and other such organizations are expected to become observers.
3. Others The secretariat of the Council will be Tokyo Stock Exchange, Inc.The first meeting of the Council will be held by the end of October 2020. Agendas, outlines of minutes, and other related materials will be published on the JPX website after meetings.  
FSA COMES KNOCKING - The Nikkei reported this morning that an FSA onsite-inspection of the TSE began yesterday. Such inspections are normally not pre-announced and never fail to find fault and require remedial action.  

🇯🇵 JAPAN • October 1st TSE Incident Report  & FSA Inspection

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

* Peak Value:So much value has been derived again on hope for the shares of Hong Kong Exchanges &amp; Clearing (388.HK) [HKEx], which included that on: southbound connect, futures markets,  structural reforms, and the change in CEO. Cash and derivative volumes are also higher on HKEx YOY by 39% and 5%, respectively. As such, we witnessed HKEx’s 2020 share performance of 45.1% that has resulted in a global exchange leading valuation of 9.7x P/BV; and* 3Q20 Results Will Be Telling: HKEx will release its 3Q earnings result on November 11, 2020. While its fund to hope and dream, the reality is that equity turnover velocity and volumes on HKEX have declined on the back of weaker price volatility. Cash equity ADTV has declined from a high of HKD 165 bn in July to HKD 135 bn in August to lower still at HKD 123 bn during September. The October figure to date has declined another 21.9% MOM to HKD 95 bn. Volume weakness was also seen in derivatives contracts from a July peak of 1.4 mn ADTV to 1.0 mn during Aug/Sep). To put these declines into perspective, volumes in the cash equity and derivatives amount to over 50% of HKEx's revenue.

* Peak Value:So much value has been derived again on hope for the shares of Hong Kong Exchanges &amp; Clearing (388.HK) [HKEx], which included that on: southbound connect, futures markets,  structural reforms, and the change in CEO. Cash and derivative volumes are also higher on HKEx YOY by 39% and 5%, respectively. As such, we witnessed HKEx’s 2020 share performance of 45.1% that has resulted in a global exchange leading valuation of 9.7x P/BV; and* 3Q20 Results Will Be Telling: HKEx will release its 3Q earnings result on November 11, 2020. While its fund to hope and dream, the reality is that equity turnover velocity and volumes on HKEX have declined on the back of weaker price volatility. Cash equity ADTV has declined from a high of HKD 165 bn in July to HKD 135 bn in August to lower still at HKD 123 bn during September. The October figure to date has declined another 21.9% MOM to HKD 95 bn. Volume weakness was also seen in derivatives contracts from a July peak of 1.4 mn ADTV to 1.0 mn during Aug/Sep). To put these declines into perspective, volumes in the cash equity and derivatives amount to over 50% of HKEx's revenue.

Hong Kong Exchanges & Clearing – Fully Discounted

*Weaker Futures Activity Continues: ASX Limited (ASX.AU) [ASX] remains a among the better listed exchanges globally, earnings fundamentals are likely to remain under pressure for the foreseeable future. During the September 2020 update, stronger capital markets activity was a positive surprise and velocity is tracking well. However, the weaker trend in futures activity continues its downward trend whilst costs continue to rise as ASX continues to invest in technology; and*Expect Consensus To Take Hatchet To EPS:  New revenue initiatives are also unlikely to add materially to growth in FY 2021. In our view, consensus forecasts remain beyond what is rational and significant EPS downgrades are inevitable.  In light of these headwinds, it’s pretty difficult to justify a P/E of 38x FY 2022 consensus forecasts.

*Weaker Futures Activity Continues: ASX Limited (ASX.AU) [ASX] remains a among the better listed exchanges globally, earnings fundamentals are likely to remain under pressure for the foreseeable future. During the September 2020 update, stronger capital markets activity was a positive surprise and velocity is tracking well. However, the weaker trend in futures activity continues its downward trend whilst costs continue to rise as ASX continues to invest in technology; and*Expect Consensus To Take Hatchet To EPS:  New revenue initiatives are also unlikely to add materially to growth in FY 2021. In our view, consensus forecasts remain beyond what is rational and significant EPS downgrades are inevitable.  In light of these headwinds, it’s pretty difficult to justify a P/E of 38x FY 2022 consensus forecasts.

ASX Limited – Softening Trends Continue

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/162/994/original/Tokyo_Stock_Exchange_logo.png?1601590198" class="editor-image img-responsive" data-smartkarma-image-id="162994"></figure>FAILOVER FAILURE - Thursday's unprecedented failure of the Tokyo Stock Exchange's arrowhead trading system developed in co-ordination with <a href="https://www.smartkarma.com/entities/fujitsu-ltd" target="_blank" data-smartkarma-citation="entities:16968:1" rel="noopener">Fujitsu (6702 JP)</a> is highly embarrassing for the newly-minted administration of Prime Minster Suga who has placed particular emphasis on improving Japan's digital capabilities. Trading will resume this morning as normal at 9 am Japan Time.PASSING THE BUCK - In the DETAIL section below, we shall provide a summary of the explanations that were offered by the senior management of <a href="https://www.smartkarma.com/entities/japan-exchange-group-inc" target="_blank" data-smartkarma-citation="entities:11266:1" rel="noopener">Japan Exchange Group (8697 JP)</a> (JPX) at a 98 minute-long press conference that was held last night. JPX places the 'blame' for this incident squarely on Fujitsu. However, as JPX admitted, Fujitsu is 'just a vendor' and responsibility for the smooth function of the exchange's systems is the responsibility of JPX. We would also note that this is not the first time that the exchange's protocols have failed to failover and that the arrowhead system was upgraded as recently as November 5 2019. At that time the JPX press release stated:-<blockquote>The new version of “arrowhead” uses the existing system as a base for an upgraded technology that offers users the familiar, high speed, high-reliability experience, while delivering even greater convenience. The trading system and transaction services have been improved in order to respond to changes in the business environment and better meet the needs of users, providing stronger overall market functionality.</blockquote><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/162/995/original/File%202020-10-01%2016%2020%2047.jpeg?1601591437" class="editor-image img-responsive" data-smartkarma-image-id="162995"></figure><div class="content-caption">Source: Nikkei</div>

FAILOVER FAILURE - Thursday's unprecedented failure of the Tokyo Stock Exchange's arrowhead trading system developed in co-ordination with Fujitsu (6702 JP) is highly embarrassing for the newly-minted administration of Prime Minster Suga who has placed particular emphasis on improving Japan's digital capabilities. Trading will resume this morning as normal at 9 am Japan Time.PASSING THE BUCK - In the DETAIL section below, we shall provide a summary of the explanations that were offered by the senior management of Japan Exchange Group (8697 JP) (JPX) at a 98 minute-long press conference that was held last night. JPX places the 'blame' for this incident squarely on Fujitsu. However, as JPX admitted, Fujitsu is 'just a vendor' and responsibility for the smooth function of the exchange's systems is the responsibility of JPX. We would also note that this is not the first time that the exchange's protocols have failed to failover and that the arrowhead system was upgraded as recently as November 5 2019. At that time the JPX press release stated:-The new version of “arrowhead” uses the existing system as a base for an upgraded technology that offers users the familiar, high speed, high-reliability experience, while delivering even greater convenience. The trading system and transaction services have been improved in order to respond to changes in the business environment and better meet the needs of users, providing stronger overall market functionality.Source: Nikkei

🇯🇵 JAPAN • Fujitsu Fails to Failover > JPX Tries to Pass the Buck

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/162/974/original/File%202020-10-01%2015%2010%2035.jpeg?1601583635" class="editor-image img-responsive" data-smartkarma-image-id="162974"></figure><div class="content-caption">Source: NHK</div>FAILOVERFAILURE - The failure of the Fail Over system in <a href="https://www.smartkarma.com/entities/japan-exchange-group-inc" target="_blank" data-smartkarma-citation="entities:11266:1" rel="noopener">Japan Exchange (8697 JP)</a> / <a href="https://www.smartkarma.com/entities/fujitsu-ltd" target="_blank" data-smartkarma-citation="entities:16968:1" rel="noopener">Fujitsu (6702 JP)</a> 'arrowhead' trading system on Thursday morning resulted in an unprecedented full-day market suspension. The details and implication will be covered in a separate Insight; however, the embarrassment to Japan's financial system is extreme. The Chief Cabinet Secretary was particularly blunt:-<blockquote>
 Currently, the Financial Services Agency is instructing the Japan Exchange Group and the Tokyo Stock Exchange to investigate the cause and take measures for recovery, and we are working diligently to recover. I know that the inability to trade on the exchange, which is an important infrastructure of the market, limits the opportunities for trading for investors, and I think it is very regrettable.   
<h3>Katō Katsunobu, Naikaku-kanbō-chōkan</h3>
October 1st, 2020
</blockquote><hr>• BEST &amp; WORST •The release of earnings announcements, forecasts and revisions was unaffected, and our best and worst pair is medical wear manufacturer <a href="https://www.smartkarma.com/entities/nagaileben-co-ltd" target="_blank" data-smartkarma-citation="entities:3165:1" rel="noopener">Nagaileben (7447 JP)</a> and waste management company <a href="https://www.smartkarma.com/entities/daiseki-co-ltd" target="_blank" data-smartkarma-citation="entities:2330:1" rel="noopener">Daiseki (9793 JP)</a>.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/162/977/original/2020-10-02_06-08-02.png?1601586653" class="editor-image img-responsive" data-smartkarma-image-id="162977"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/162/976/original/2020-10-02_06-10-05.png?1601586638" class="editor-image img-responsive" data-smartkarma-image-id="162976"></figure><div class="content-caption">Source for all charts &amp; tables unless otherwise stated: Japan Analytics</div><div>DAILY STATS</div><hr><div>12 Quarterly Results</div><div><ul style="list-style-type: disc;">
<li>Results Score: 67% Positive / 10% Neutral / 33% Negative</li>
<li>Average Results Score Change: +3.1 points</li>
<li>Average % Change in Revenue: 3.0% Quarter YoY / +1.9% Rolling TTM YoY </li>
<li>Average Operating Profit Margin Change: 0.5ppt</li>
<li>Percentage Making Quarterly Losses: 0%</li>
</ul></div><hr><div>7 Annual • 5 Interim Forecasts/Revisions</div><ul style="list-style-type: disc;">
<li>Annual Forecast/Revision Score: 57% Positive / 0% Neutral / 43% Negative</li>
<li>Interim Forecast/Revision Score Change: 60% Positive / 20% Neutral / 20% Negative</li>
<li>Average Forecast/Revision Score Change: +4.0 points</li>
</ul><div class="content-highlight">Although the sample size is small the 'stats' above are the best since we started this daily series. </div>

Source: NHKFAILOVERFAILURE - The failure of the Fail Over system in Japan Exchange (8697 JP) / Fujitsu (6702 JP) 'arrowhead' trading system on Thursday morning resulted in an unprecedented full-day market suspension. The details and implication will be covered in a separate Insight; however, the embarrassment to Japan's financial system is extreme. The Chief Cabinet Secretary was particularly blunt:-
 Currently, the Financial Services Agency is instructing the Japan Exchange Group and the Tokyo Stock Exchange to investigate the cause and take measures for recovery, and we are working diligently to recover. I know that the inability to trade on the exchange, which is an important infrastructure of the market, limits the opportunities for trading for investors, and I think it is very regrettable.   
Katō Katsunobu, Naikaku-kanbō-chōkan
October 1st, 2020
• BEST &amp; WORST •The release of earnings announcements, forecasts and revisions was unaffected, and our best and worst pair is medical wear manufacturer Nagaileben (7447 JP) and waste management company Daiseki (9793 JP).Source for all charts &amp; tables unless otherwise stated: Japan AnalyticsDAILY STATS12 Quarterly Results
Results Score: 67% Positive / 10% Neutral / 33% Negative
Average Results Score Change: +3.1 points
Average % Change in Revenue: 3.0% Quarter YoY / +1.9% Rolling TTM YoY 
Average Operating Profit Margin Change: 0.5ppt
Percentage Making Quarterly Losses: 0%
7 Annual • 5 Interim Forecasts/Revisions
Annual Forecast/Revision Score: 57% Positive / 0% Neutral / 43% Negative
Interim Forecast/Revision Score Change: 60% Positive / 20% Neutral / 20% Negative
Average Forecast/Revision Score Change: +4.0 points
Although the sample size is small the 'stats' above are the best since we started this daily series. 

🇯🇵 JAPAN • Results & Revisions 10/​​​​01 - Fail Over Fail, Nagaileben, Daiseki, Kewpie

Japan

Japan Exchange Group Inc is the holding company created through the merger of Tokyo Stock Exchange Group, Inc and Osaka Securities Exchange Co., Ltd. The group provides and operates a marketplace for the trading of equities, futures, and options. The Group manages the trading, as well as administers listed stocks and registered members.

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Japan Exchange Group (8697 JP)

🇯🇵 JAPAN • October 1st TSE Incident Report & FSA Inspection

THE FAILURE TO FAILOVER - Japan Exchange Group (8697 JP) released the report in its investigation into the October 1st system failure yesterday

Campbell Gunn

Hong Kong Exchanges & Clearing – Fully Discounted

Hong Kong Exchanges & Clearing: Alot of Positives Surrounding China Opportunity Has Pushed Shares 45% Higher In 2020, But Recent Fundamentals Would...

Thomas J. Monaco

ASX Limited – Softening Trends Continue

*Weaker Futures Activity Continues: ASX Limited (ASX.AU) [ASX] remains a among the better listed exchanges globally, earnings fundamentals are...

Thomas J. Monaco

🇯🇵 JAPAN • Fujitsu Fails to Failover > JPX Tries to Pass the Buck

FAILOVER FAILURE - Thu

Campbell Gunn

🇯🇵 JAPAN • Results & Revisions 10/01 - Fail Over Fail, Nagaileben, Daiseki, Kewpie

FAIL OVER -

Campbell Gunn

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🇯🇵 JAPAN • October 1st TSE Incident Report & FSA Inspection

THE FAILURE TO FAILOVER - Japan Exchange Group (8697 JP) released the report in its investigation into the October 1st system failure yesterday

Campbell Gunn

Hong Kong Exchanges & Clearing – Fully Discounted

Hong Kong Exchanges & Clearing: Alot of Positives Surrounding China Opportunity Has Pushed Shares 45% Higher In 2020, But Recent Fundamentals Would...

Thomas J. Monaco

ASX Limited – Softening Trends Continue

*Weaker Futures Activity Continues: ASX Limited (ASX.AU) [ASX] remains a among the better listed exchanges globally, earnings fundamentals are...

Thomas J. Monaco

🇯🇵 JAPAN • Fujitsu Fails to Failover > JPX Tries to Pass the Buck

FAILOVER FAILURE - Thu

Campbell Gunn

🇯🇵 JAPAN • Results & Revisions 10/​​​​01 - Fail Over Fail, Nagaileben, Daiseki, Kewpie

FAIL OVER -

Campbell Gunn

🇯🇵 JAPAN • Results & Revisions 10/01 - Fail Over Fail, Nagaileben, Daiseki, Kewpie