Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Quantitative Analysis

<p>The question has been asked about dividends in Japan and what they may look like for the remainder of this year and into 2021. </p><p>Japanese companies have grown revenues over the past ten years, and have grown net income quite a bit faster. In addition, payout ratios have risen on a normalized basis since their last-decade lows in 2014. Because net income has dropped in the past year while dividends paid out have risen, payout ratios have spiked sharply. With the very large amount of buybacks executed in the past fiscal year to March 2020, total payout to shareholders has been quite significant. </p><p>But COVID-19 has changed things. When companies announced earnings in April and May, a huge swath of corporate Japan neglected to provide forecasts. The largest number I have ever seen provided forecasts in ranges rather than as numbers. When Q1 earnings came around, many companies made a stab at full-year. Some have provided dividend guidance but net income in the April-June quarter along with forecasts for H1 and FY have given the Street some comfort to be able to forecast earnings and DPS. If one looks at the top 500, top 1000, and full set of companies in TOPIX on a like-for-like basis (where guidance exists), company guidance on both net income and dividends is below where the Street is (on a consensus basis). I expect, for the moment, that the Street still may have some to come down. There is every possibility that covid-19 aftershocks will produce some VERY bad numbers, but I do not expect that many companies to exceed forecasts by a wide margin. Some WFH and tech names may do well, but Japan is not NASDAQ (much to the chagrin of Japan's investors). </p><p>On the whole, there are significant discrepancies in forecasts among sectors - autos, airlines, materials are all bad - but interestingly, there is also huge discrepancy among market cap biases. Even on a like-for-like basis on coverage or guidance, the top 500 names see total dividend forecasts for the FY to March 2021 only 3% lower than what was paid in the year to March 2020. That seems like a relatively small drop. The consensus implied drop in DPS for the next 500 names seems considerably larger, though some of this may be to worse data quality as you go down the market cap scale. </p><p><em>A study of dividends this year and beyond continues below.</em></p>

The question has been asked about dividends in Japan and what they may look like for the remainder of this year and into 2021. Japanese companies have grown revenues over the past ten years, and have grown net income quite a bit faster. In addition, payout ratios have risen on a normalized basis since their last-decade lows in 2014. Because net income has dropped in the past year while dividends paid out have risen, payout ratios have spiked sharply. With the very large amount of buybacks executed in the past fiscal year to March 2020, total payout to shareholders has been quite significant. But COVID-19 has changed things. When companies announced earnings in April and May, a huge swath of corporate Japan neglected to provide forecasts. The largest number I have ever seen provided forecasts in ranges rather than as numbers. When Q1 earnings came around, many companies made a stab at full-year. Some have provided dividend guidance but net income in the April-June quarter along with forecasts for H1 and FY have given the Street some comfort to be able to forecast earnings and DPS. If one looks at the top 500, top 1000, and full set of companies in TOPIX on a like-for-like basis (where guidance exists), company guidance on both net income and dividends is below where the Street is (on a consensus basis). I expect, for the moment, that the Street still may have some to come down. There is every possibility that covid-19 aftershocks will produce some VERY bad numbers, but I do not expect that many companies to exceed forecasts by a wide margin. Some WFH and tech names may do well, but Japan is not NASDAQ (much to the chagrin of Japan's investors). On the whole, there are significant discrepancies in forecasts among sectors - autos, airlines, materials are all bad - but interestingly, there is also huge discrepancy among market cap biases. Even on a like-for-like basis on coverage or guidance, the top 500 names see total dividend forecasts for the FY to March 2021 only 3% lower than what was paid in the year to March 2020. That seems like a relatively small drop. The consensus implied drop in DPS for the next 500 names seems considerably larger, though some of this may be to worse data quality as you go down the market cap scale. A study of dividends this year and beyond continues below.

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>We have been touting Keyence as a long hedge against our least favoured pick within the FA space, Fanuc. Since October 2019 the long Keyence, short Fanuc ratio is up about 50% and was at one point up almost 70%. With the FA names generally reporting weak numbers and price action deteriorating, the sector looks like it is losing its bullet-proof quality. We examine below, signs of a potential earnings bottom and the trading outlook for what has been a sector that has completely ignored earnings trends for more than a year.</p>

We have been touting Keyence as a long hedge against our least favoured pick within the FA space, Fanuc. Since October 2019 the long Keyence, short Fanuc ratio is up about 50% and was at one point up almost 70%. With the FA names generally reporting weak numbers and price action deteriorating, the sector looks like it is losing its bullet-proof quality. We examine below, signs of a potential earnings bottom and the trading outlook for what has been a sector that has completely ignored earnings trends for more than a year.

Keyence – 1Q Weak but It Is the SG&A and Hiring Trend Which Should Be Monitored

<p>We have been harping on the excessive valuations in the FA sector for quite some time, and on Fanuc’s relative overvaluation vs. peers for even longer than that. In our view the case against Fanuc is stark and yesterday’s results highlight this further.</p>

We have been harping on the excessive valuations in the FA sector for quite some time, and on Fanuc’s relative overvaluation vs. peers for even longer than that. In our view the case against Fanuc is stark and yesterday’s results highlight this further.

Fanuc – Single Stock Bubble Meet Single Stock Pin

<p>Silver Life is in a prime spot within Japan’s ageing demographic space providing meal kits to franchisees who often add rice and deliver the meals to elderly customers. The company also provides prepared ingredients to nursing facilities and supplies frozen bentos as an OEM. At its IPO in late 2017 which we covered <a href="https://www.smartkarma.com/insights/silver-life-ipo-aging-society-pure-play-to-usher-in-the-age-of-demographics" target="_blank" rel="noopener">here</a> the stock jumped 74% and continued rising thereafter to peak 490% above the IPO price in Sep 2018. Since then, however, it has fallen 40% and is just recovering from the COVID selloff and trading at 35.5x consensus PE. Now the company is an attractive bet on Japan’s ageing population and priced as such, but what makes the company truly interesting is its CEO. We explain why below.</p>

Silver Life is in a prime spot within Japan’s ageing demographic space providing meal kits to franchisees who often add rice and deliver the meals to elderly customers. The company also provides prepared ingredients to nursing facilities and supplies frozen bentos as an OEM. At its IPO in late 2017 which we covered here the stock jumped 74% and continued rising thereafter to peak 490% above the IPO price in Sep 2018. Since then, however, it has fallen 40% and is just recovering from the COVID selloff and trading at 35.5x consensus PE. Now the company is an attractive bet on Japan’s ageing population and priced as such, but what makes the company truly interesting is its CEO. We explain why below.

Silver Life – This Guy Is in Danger of Becoming Our Favourite CEO

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/133/748/original/2020-05-16_08-18-15.png?1589584720" class="editor-image img-responsive" data-smartkarma-image-id="133748"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>"WORSENING"</strong> - The Cabinet Office updated their Business Condition Leading Indicator for March this week, confirming the trend already apparent from our Results &amp; Revision Score data series. The correlation between the series is 0.80, with the only significant deviation occurring in 2016, Coincident conditions are assessed as "worsening" wording that is unchanged since August 2019. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/133/788/original/2020-05-16_12-10-50.png?1589598664" class="editor-image img-responsive" data-smartkarma-image-id="133788"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>DECOMPOSED</strong> - Our Score is decomposed into a Results Score, an Annual Forecast/Revision Score and an Interim Forecast Revision Score.  The last two are ten-year lows; the first should join them next week. A notable limiting factor is the shortage of forecasts being made. Without this reticence, both forecast Scores would be considerably lower.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/133/795/original/2020-05-16_12-47-02.png?1589600841" class="editor-image img-responsive" data-smartkarma-image-id="133795"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>RETICENCE</strong> - 77% by number and 81% by value of companies with year-ends in  March, June, September, or December have already reported. Of these 2,464 companies representing ¥438 trillion of market cap, just 1,119 have issued annual forecasts for the current year, and 583 have made interim forecasts. Of all listed companies, one-third by market value are currently unable to see ahead twelve months and only 16% by value and 23% by number are prepared to look forward four-and-a-half months. This unusual degree of reticence leaves the sell-side without their regular anchoring comfort blanket.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/133/802/original/2020-05-16_13-27-57.png?1589605282" class="editor-image img-responsive" data-smartkarma-image-id="133802"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>NOT CHEAP</strong> -  Even allowing for the lack of a full complement of forecasts, the market's forward multiple is at a five-year high with Net Income expected to reach levels first seen in 2015, 37% below the December 2018 peak. The ten-year peak trailing multiple was 29 on aggregate Net Income of  ¥14.6 trillion, which was ten times the 2009 trough.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/133/801/original/2020-05-16_14-00-16.png?1589605245" class="editor-image img-responsive" data-smartkarma-image-id="133801"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>FIDDLING ABOUT</strong> - The Bank of Japan has reduced the amount of its daily ETF program for a second time; however, intervened for the last three days of last week seemingly intent on keeping the <a href="https://www.smartkarma.com/entities/nikkei-225" target="_blank" data-smartkarma-citation="entities:22909:1" rel="noopener">Nikkei 225 (NKY INDEX)</a> above 20,000. The cumulative total of BoJ purchases represents over 5% of the Total Market Value.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/133/884/original/2020-05-17_12-54-22.png?1589687679" class="editor-image img-responsive" data-smartkarma-image-id="133884"></figure><div class="content-caption">Source • Japan Analytics</div><p>In the <strong>DETAIL</strong> below, we review some market data trends, look at the Results &amp; Revision Score trends by Sector (a 15-year timeline is shown above), apply some KPMG 'recovery analysis' to Japan and look at Friday's results and revisions.</p><div><ul>
<li>The balance between positive/neutral/negative of the <strong>490</strong> results announcements was <strong>206:45:239</strong>. The average change in Results Score was <strong>-0.2</strong>.</li>
<li>For the <strong>205</strong> revisions/initial forecasts, the split was <strong>49:10:146</strong>, and the average Revision Score was <strong>-7.5</strong>. Of the <strong>364</strong> companies declaring full-year results, <strong>47%</strong> made forecasts for the current year.</li>
<li>Fifty-one will announce today, the largest of which by market capitalisation will be <a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a>, <a href="https://www.smartkarma.com/entities/terumo-corp" target="_blank" data-smartkarma-citation="entities:6708:1" rel="noopener">Terumo Corp (4543 JP)</a>, and <a href="https://www.smartkarma.com/entities/komatsu-ltd" target="_blank" data-smartkarma-citation="entities:8416:1" rel="noopener">Komatsu (6301 JP).</a>
</li>
</ul></div>

Source • Japan Analytics"WORSENING" - The Cabinet Office updated their Business Condition Leading Indicator for March this week, confirming the trend already apparent from our Results &amp; Revision Score data series. The correlation between the series is 0.80, with the only significant deviation occurring in 2016, Coincident conditions are assessed as "worsening" wording that is unchanged since August 2019. Source • Japan AnalyticsDECOMPOSED - Our Score is decomposed into a Results Score, an Annual Forecast/Revision Score and an Interim Forecast Revision Score.  The last two are ten-year lows; the first should join them next week. A notable limiting factor is the shortage of forecasts being made. Without this reticence, both forecast Scores would be considerably lower.Source • Japan AnalyticsRETICENCE - 77% by number and 81% by value of companies with year-ends in  March, June, September, or December have already reported. Of these 2,464 companies representing ¥438 trillion of market cap, just 1,119 have issued annual forecasts for the current year, and 583 have made interim forecasts. Of all listed companies, one-third by market value are currently unable to see ahead twelve months and only 16% by value and 23% by number are prepared to look forward four-and-a-half months. This unusual degree of reticence leaves the sell-side without their regular anchoring comfort blanket.Source • Japan AnalyticsNOT CHEAP -  Even allowing for the lack of a full complement of forecasts, the market's forward multiple is at a five-year high with Net Income expected to reach levels first seen in 2015, 37% below the December 2018 peak. The ten-year peak trailing multiple was 29 on aggregate Net Income of  ¥14.6 trillion, which was ten times the 2009 trough.Source • Japan AnalyticsFIDDLING ABOUT - The Bank of Japan has reduced the amount of its daily ETF program for a second time; however, intervened for the last three days of last week seemingly intent on keeping the Nikkei 225 (NKY INDEX) above 20,000. The cumulative total of BoJ purchases represents over 5% of the Total Market Value.Source • Japan AnalyticsIn the DETAIL below, we review some market data trends, look at the Results &amp; Revision Score trends by Sector (a 15-year timeline is shown above), apply some KPMG 'recovery analysis' to Japan and look at Friday's results and revisions.
The balance between positive/neutral/negative of the 490 results announcements was 206:45:239. The average change in Results Score was -0.2.
For the 205 revisions/initial forecasts, the split was 49:10:146, and the average Revision Score was -7.5. Of the 364 companies declaring full-year results, 47% made forecasts for the current year.
Fifty-one will announce today, the largest of which by market capitalisation will be Softbank Group (9984 JP), Terumo Corp (4543 JP), and Komatsu (6301 JP).



🇯🇵 JAPAN MARKET UPDATE 18th May - "Worsening"

Japan

KEYENCE CORPORATION develops, manufactures, and sells sensors and measuring instruments used for factory automation (FA) and high technology hobby products. The Company's products include fiber optic sensors, photoelectric sensors, programmable logic controllers (PLC), laser scan micrometers, bar code readers, and radio-controlled model cars.

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Keyence Corp (6861 JP)

Looking at Japan Dividends This Year

The question has been asked about dividends in Japan and what they may look like for the remainder of this year and into 2021. Japanese companies...

Travis Lundy

Keyence – 1Q Weak but It Is the SG&A and Hiring Trend Which Should Be Monitored

We have been touting Keyence as a long hedge against our least favoured pick within the FA space, Fanuc. Since October 2019 the long Keyence, short...

Mio Kato

Fanuc – Single Stock Bubble Meet Single Stock Pin

We have been harping on the excessive valuations in the FA sector for quite some time, and on Fanuc’s relative overvaluation vs. peers for even...

Mio Kato

Silver Life – This Guy Is in Danger of Becoming Our Favourite CEO

Silver Life is in a prime spot within Japan’s ageing demographic space providing meal kits to franchisees who often add rice and deliver the meals...

Mio Kato

🇯🇵 JAPAN MARKET UPDATE 18th May - "Worsening"

"WORSENING" - The Cabinet Office updated their Business Condition Leading Indicator for March this week, confirming the trend already apparent from...

Campbell Gunn

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