'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

INTRODUCTION - Following on from our <a href="https://www.smartkarma.com/insights/japan-summer-results-revisions-market-composite-sectors-third-down" target="_blank" data-smartkarma-citation="insights:31759" rel="noopener">Insight</a> of last week covering the Market Composite &amp; Sector Aggregate Results and Results &amp; Revision Scores, this Insight will look at the cap-weighted Summer Results &amp; Revision Scores for the 321 Peer Groups that comprise our 29 Sectors and provide greater depth to our analysis of current business trends.  Peer Group definitions reflect both standard SIC/GICS classifications as well as local market conventions. The number of constituents and market capitalisation for each Peer Group varies widely.  As an introduction, we review below the best and worst-fifteen larger Peer Groups in terms of cumulative Results &amp; Revision Score, Volatility and Volatility-Adjusted Scores over the last fourteen years, following the widespread adoption of quarterly reporting.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/096/305/original/2019-08-20_15-07-54.png?1566281290" class="editor-image img-responsive" data-smartkarma-image-id="96305"></figure>
<div class="content-caption">Source: Japan Analytics</div>
CUMULATIVE TOP 15 - Only one manufacturing Peer Group makes the list - Motors (<a href="https://www.smartkarma.com/entities/nidec-corp" target="_blank" data-smartkarma-citation="entities:7245:1" rel="noopener">Nidec Corp (6594 JP)</a> although it has lost ground in the last year - with Retail (5) and Internet (3) Sector Peer Groups making up the majority. Welfare Services (mostly daycare services for children) has seen the best long-term track record; however, the largest company by market cap, Welbe (6556 JP) is only ¥50b, and the Peer Group has been volatile and underperformed as a result of initial overvaluation at IPO. Investment Banking Services (<a href="https://www.smartkarma.com/entities/nihon-m-a-center-inc" target="_blank" data-smartkarma-citation="entities:17616:1" rel="noopener">Nihon M&amp;A Center (2127 JP)</a> &amp; <a href="https://www.smartkarma.com/entities/m-a-capital-partners-co-ltd" target="_blank" data-smartkarma-citation="entities:10401:1" rel="noopener">M&amp;A Capital Partners (6080 JP)</a>) has been the best-performing financial-related Peer Group over the period, in contrast to the brokerage business, as shown below, and is the fastest-growing if the top fifteen.  Among the Retail Peer Groups, Home Furnishing (<a href="https://www.smartkarma.com/entities/nitori-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:20386:1" rel="noopener">Nitori (9843 JP)) </a>is powering ahead, but Pharmacies<a href="https://www.smartkarma.com/entities/ain-pharmaciez-inc" target="_blank" data-smartkarma-citation="entities:9313:1" rel="noopener">(Ain (9627 JP))</a> peaked over a year ago. Amongst the Internet Sector Groups, it pays to have Commercial end-users or to sell the 'picks and shovels'.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/096/312/original/2019-08-20_15-30-32.png?1566282642" class="editor-image img-responsive" data-smartkarma-image-id="96312"></figure>
<div class="content-caption">Source: Japan Analytics</div>
CUMULATIVE BOTTOM 15 - The worst business in Japan over the last fifteen years in terms of business performance has been Online Securities Broking, closely followed by five Regional Bank Peer Groups.  The Steel sector has two Peer Groups on the list, as does Media with Broadcasting and Audio/Visual Content<a href="https://www.smartkarma.com/entities/toho-co-ltd" target="_blank" data-smartkarma-citation="entities:7806:1" rel="noopener">(Toho (9602 JP)</a>/<a href="https://www.smartkarma.com/entities/toei-co-ltd" target="_blank" data-smartkarma-citation="entities:15379:1" rel="noopener">Toei (9605 JP)</a>) highlighting that Japan is not immune to the global trend away from the consumption of traditional forms of entertainment. 
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/096/315/original/2019-08-20_15-43-50.png?1566283445" class="editor-image img-responsive" data-smartkarma-image-id="96315"></figure>
<div class="content-caption">Source: Japan Analytics</div>

VOLATILITY BEST 15 - The least volatile Scores are, as would be expected clustered around the provision of food, personal and household products with Drugstores being the clear 'leader'. Medical Labs &amp; Testing Services has lost ground in recent years due to the poor performance of <a href="https://www.smartkarma.com/entities/miraca-holdings-inc" target="_blank" data-smartkarma-citation="entities:16580:1" rel="noopener">Miraca (4544 JP)</a>, while Printing &amp; Packaging Materials (<a href="https://www.smartkarma.com/entities/fuji-seal-international-inc" target="_blank" data-smartkarma-citation="entities:8723:1" rel="noopener">Fuji Seal (7864 JP) </a>) has gained the most.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/096/316/original/2019-08-20_15-50-09.png?1566283823" class="editor-image img-responsive" data-smartkarma-image-id="96316"></figure>
<div class="content-caption">Source: Japan Analytics</div>
VOLATILITY WORST 15 - Machinery (5) and Financial Services (3) Sector Peer Groups make up more than half of the most-volatile list. There have been three cyclical downturns in the last fourteen years - 2008/9, 2012/13, and 2016/17, with 2019/20 more than likely to be the next. Factory Automation Equipment (<a href="https://www.smartkarma.com/entities/fanuc-corp" target="_blank" data-smartkarma-citation="entities:752:1" rel="noopener">Fanuc (6954 JP)</a> is close to the low point of the last two cycles but well above that of 2008/9 as is the case for Securities Brokerage. Construction Machinery, Power &amp; Hand Tools, Carbon &amp; Graphite Products, SPE &amp; PCB Production Equipment, and Passive Components are only just beginning to 'rollover'. It is interesting to note the cyclicality of Venture Capital (<a href="https://www.smartkarma.com/entities/jafco-co-ltd" target="_blank" data-smartkarma-citation="entities:8848:1" rel="noopener">JAFCO(8595 JP))</a> in Japan.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/096/318/original/2019-08-20_16-17-31.png?1566285467" class="editor-image img-responsive" data-smartkarma-image-id="96318"></figure>
<div class="content-caption">Source: Japan Analytics</div>
VOLATILITY-ADJUSTED TOP 15 - The best volatility adjusted Peer Groups in Japan over the last fourteen years are all in non-manufacturing Sectors, with Retail contributing five Peer Groups, including three of the top five. Transportation &amp; Logistics, Healthcare and the Internet Sector add two apiece. 
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/096/319/original/2019-08-20_16-22-39.png?1566285775" class="editor-image img-responsive" data-smartkarma-image-id="96319"></figure>
<div class="content-caption">Source: Japan Analytics</div>
VOLATILITY-ADJUSTED BOTTOM 15 - The performance hall of shame has three brokerage-related Peer Groups (woe is the sell-side in Japan), but just two Machinery Sector  Peer Groups. Musical Instruments (<a href="https://www.smartkarma.com/entities/yamaha-corp" target="_blank" data-smartkarma-citation="entities:17841:1" rel="noopener">Yamaha (7951 JP))</a> and Steel Producers appear overdue cyclical downturns.
<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/096/322/original/2019-08-20_16-34-57.png?1566286513" class="editor-image img-responsive" data-smartkarma-image-id="96322"></figure>
Source: Japan Analytics
</div>
SCORE/VOLATILITY MATRIX - A scatter plot of average Results &amp; Revision Score (RRS) and Volatility shows Factory Automation Equipment as the most volatile large Peer Group but with a below-average RRS. Machine Tools &amp; Presses are evenly-balanced between risk and reward, while the 'lay-up' Peer Group for the last fourteen years has been Drugstores. 

<div class="content-highlight">
In the DETAIL section below, we list the top and bottom twenty Peer Groups ranked by Results &amp; Revision Score and the top and bottom twenty most-changed over the last three months as well the most optimistic and most pessimistic.  
</div>

INTRODUCTION - Following on from our Insight of last week covering the Market Composite &amp; Sector Aggregate Results and Results &amp; Revision Scores, this Insight will look at the cap-weighted Summer Results &amp; Revision Scores for the 321 Peer Groups that comprise our 29 Sectors and provide greater depth to our analysis of current business trends.  Peer Group definitions reflect both standard SIC/GICS classifications as well as local market conventions. The number of constituents and market capitalisation for each Peer Group varies widely.  As an introduction, we review below the best and worst-fifteen larger Peer Groups in terms of cumulative Results &amp; Revision Score, Volatility and Volatility-Adjusted Scores over the last fourteen years, following the widespread adoption of quarterly reporting.

Source: Japan Analytics
CUMULATIVE TOP 15 - Only one manufacturing Peer Group makes the list - Motors (Nidec Corp (6594 JP) although it has lost ground in the last year - with Retail (5) and Internet (3) Sector Peer Groups making up the majority. Welfare Services (mostly daycare services for children) has seen the best long-term track record; however, the largest company by market cap, Welbe (6556 JP) is only ¥50b, and the Peer Group has been volatile and underperformed as a result of initial overvaluation at IPO. Investment Banking Services (Nihon M&amp;A Center (2127 JP) &amp; M&amp;A Capital Partners (6080 JP)) has been the best-performing financial-related Peer Group over the period, in contrast to the brokerage business, as shown below, and is the fastest-growing if the top fifteen.  Among the Retail Peer Groups, Home Furnishing (Nitori (9843 JP)) is powering ahead, but Pharmacies(Ain (9627 JP)) peaked over a year ago. Amongst the Internet Sector Groups, it pays to have Commercial end-users or to sell the 'picks and shovels'.

Source: Japan Analytics
CUMULATIVE BOTTOM 15 - The worst business in Japan over the last fifteen years in terms of business performance has been Online Securities Broking, closely followed by five Regional Bank Peer Groups.  The Steel sector has two Peer Groups on the list, as does Media with Broadcasting and Audio/Visual Content(Toho (9602 JP)/Toei (9605 JP)) highlighting that Japan is not immune to the global trend away from the consumption of traditional forms of entertainment. 

Source: Japan Analytics

VOLATILITY BEST 15 - The least volatile Scores are, as would be expected clustered around the provision of food, personal and household products with Drugstores being the clear 'leader'. Medical Labs &amp; Testing Services has lost ground in recent years due to the poor performance of Miraca (4544 JP), while Printing &amp; Packaging Materials (Fuji Seal (7864 JP) ) has gained the most.

Source: Japan Analytics
VOLATILITY WORST 15 - Machinery (5) and Financial Services (3) Sector Peer Groups make up more than half of the most-volatile list. There have been three cyclical downturns in the last fourteen years - 2008/9, 2012/13, and 2016/17, with 2019/20 more than likely to be the next. Factory Automation Equipment (Fanuc (6954 JP) is close to the low point of the last two cycles but well above that of 2008/9 as is the case for Securities Brokerage. Construction Machinery, Power &amp; Hand Tools, Carbon &amp; Graphite Products, SPE &amp; PCB Production Equipment, and Passive Components are only just beginning to 'rollover'. It is interesting to note the cyclicality of Venture Capital (JAFCO(8595 JP)) in Japan.

Source: Japan Analytics
VOLATILITY-ADJUSTED TOP 15 - The best volatility adjusted Peer Groups in Japan over the last fourteen years are all in non-manufacturing Sectors, with Retail contributing five Peer Groups, including three of the top five. Transportation &amp; Logistics, Healthcare and the Internet Sector add two apiece. 

Source: Japan Analytics
VOLATILITY-ADJUSTED BOTTOM 15 - The performance hall of shame has three brokerage-related Peer Groups (woe is the sell-side in Japan), but just two Machinery Sector  Peer Groups. Musical Instruments (Yamaha (7951 JP)) and Steel Producers appear overdue cyclical downturns.


Source: Japan Analytics

SCORE/VOLATILITY MATRIX - A scatter plot of average Results &amp; Revision Score (RRS) and Volatility shows Factory Automation Equipment as the most volatile large Peer Group but with a below-average RRS. Machine Tools &amp; Presses are evenly-balanced between risk and reward, while the 'lay-up' Peer Group for the last fourteen years has been Drugstores. 


In the DETAIL section below, we list the top and bottom twenty Peer Groups ranked by Results &amp; Revision Score and the top and bottom twenty most-changed over the last three months as well the most optimistic and most pessimistic.  


🇯🇵 JAPAN • Summer Results & Revision Scores - Peer Groups

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/094/809/original/2019-08-04_13-24-01.png?1564892655" class="editor-image img-responsive" data-smartkarma-image-id="94809"></figure><div class="content-caption">Source: Japan Analytics</div>SOUTHBOUND - Two weeks into the announcements of the June quarter-end period, it is clear that the momentum of Japanese listed corporate earnings is still heading lower. Since July 22nd, 1,216 or 32% of companies have reported results and 292 forecast revisions have been announced. The Japan Analytics Results &amp; Revision Score reached a new 28-month low on Friday of 1.43, a decline of 78% from the current cycle peak of 6.50 on 16th November 2017. The correlation between the Score and the Market Capitalisation of listed companies excluding REITs is 0.77, and the Score is more of a leading or co-incident than lagging indicator.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/094/810/original/2019-08-04_13-32-15.png?1564893149" class="editor-image img-responsive" data-smartkarma-image-id="94810"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/094/812/original/2019-08-04_13-39-03.png?1564893556" class="editor-image img-responsive" data-smartkarma-image-id="94812"></figure><div class="content-caption">Source: Japan Analytics</div>BREAKDOWN - The Results &amp; Revision Score is a weighted sum of three components, the Results Score, the Annual Forecast/Revision Score and the Interim Forecast/Revision Score, with the last of these only being applicable for nine months of each year. The two Forecast/Revision Scores are, as would be expected., leading indicators for the Results Score. The current quarter's Results Scor decline already exceeds the previous quarter's more-benign decline which also saw an increase in the Annual Forecast/Revision Score as the majority of companies 'rolled' their forecast ahead by one year. In contrast, the forecasts for the Interim period which for most companies ends next month were the most pessimistic since April 2016 and the mostly first-quarter results are confirming the early caution. In addition, full-year forecasts are also being downgraded and are at the lowest level for three months.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/094/816/original/2019-08-04_13-44-46.png?1564893904" class="editor-image img-responsive" data-smartkarma-image-id="94816"></figure><div class="content-caption">Source: Japan Analytics</div>YEN DRIVER - The key driver of the Results &amp; Revision Score has been the year-on-year change in the US dollar/Yen exchange rate lagged by six months. The major turning points in <a href="https://www.smartkarma.com/entities/22826" target="_blank" data-smartkarma-citation="entities:22826:1" rel="noopener">JUSDJPY CURNCY</a> over the last twelve years highlighted above line up well with changes in the direction of earnings momentum as represented by the Results &amp; Revision Score. With the Yen having reverted to a period of strengthening in recent weeks, the trend in the Score will be downwards over the next six months, which will be reflected in due course by the market.    <div class="content-highlight">In the DETAIL section below, we update our Market Composite Results Timeline, Sector and Peer Group Results &amp; Revision Scores, Sector Performance and Valuation and look at the best and worst large-cap individual company results over the last two weeks. In the meantime, we lighten the mood with a classic Allman Brother track featuring the incomparable Dicky Betts.</div><center></center><div class="content-caption">The Allman Brothers Band - Southbound - 1/16/1982 - University Of Florida Bandshell</div>

Source: Japan AnalyticsSOUTHBOUND - Two weeks into the announcements of the June quarter-end period, it is clear that the momentum of Japanese listed corporate earnings is still heading lower. Since July 22nd, 1,216 or 32% of companies have reported results and 292 forecast revisions have been announced. The Japan Analytics Results &amp; Revision Score reached a new 28-month low on Friday of 1.43, a decline of 78% from the current cycle peak of 6.50 on 16th November 2017. The correlation between the Score and the Market Capitalisation of listed companies excluding REITs is 0.77, and the Score is more of a leading or co-incident than lagging indicator.Source: Japan AnalyticsBREAKDOWN - The Results &amp; Revision Score is a weighted sum of three components, the Results Score, the Annual Forecast/Revision Score and the Interim Forecast/Revision Score, with the last of these only being applicable for nine months of each year. The two Forecast/Revision Scores are, as would be expected., leading indicators for the Results Score. The current quarter's Results Scor decline already exceeds the previous quarter's more-benign decline which also saw an increase in the Annual Forecast/Revision Score as the majority of companies 'rolled' their forecast ahead by one year. In contrast, the forecasts for the Interim period which for most companies ends next month were the most pessimistic since April 2016 and the mostly first-quarter results are confirming the early caution. In addition, full-year forecasts are also being downgraded and are at the lowest level for three months.Source: Japan AnalyticsYEN DRIVER - The key driver of the Results &amp; Revision Score has been the year-on-year change in the US dollar/Yen exchange rate lagged by six months. The major turning points in JUSDJPY CURNCY over the last twelve years highlighted above line up well with changes in the direction of earnings momentum as represented by the Results &amp; Revision Score. With the Yen having reverted to a period of strengthening in recent weeks, the trend in the Score will be downwards over the next six months, which will be reflected in due course by the market.    In the DETAIL section below, we update our Market Composite Results Timeline, Sector and Peer Group Results &amp; Revision Scores, Sector Performance and Valuation and look at the best and worst large-cap individual company results over the last two weeks. In the meantime, we lighten the mood with a classic Allman Brother track featuring the incomparable Dicky Betts.The Allman Brothers Band - Southbound - 1/16/1982 - University Of Florida Bandshell

🇯🇵 Japan • Summer Results & Revisions First Cut - Southbound

Cross Asset Strategy

TW3 NORTH ASIA 22-27 JUNESmartkarma's North Asian Insight providers produced 28 new Insights this week, mostly focused on a deluge of 'events' and the start of the, mostly first quarter, earnings announcements. The tone was overwhelmingly 'bullish' with only six 'bearish' notes, despite the weaker trends in earnings and the simmering trade and reparation disputes between the two nations.EVENT - DRIVEN

Sanghyun Park provides summaries of the rumour mills surrounding Naver Corp (035420 KS), the Naver Financial offering, Jieum and the possible diminution of LINE (3938 JP)'s role in the evolution of the group as well as the potential for  SK Telecom (017670 KS) to acquire the Asiana group companies and the resulting conversion of SKT into a holding company.

Travis Lundy and LightStream Research noted the 'short squeeze' taking place following Chiyoda Corp (6366 JP)'s removal from the Nikkei 225 (NKY INDEX) - the shares rose by 8.7% over the week.
Travis also covered three highly-unusual contested and hostile 'J-on-J" corporate actions currently unfolding. One 'white knight' has already emerged, while another two could be appearing over the horizon - a busy time for Japan's IBs:- 

Askul/Yahoo Japan -  Askul has accused YJ of lying as to its intentions surrounding the future of their JV company LOHACO and their move to have Askul's CEO dismissed - Askul has requested a dissolution of their tie-up and could be seeking a white knight

UNIZO/HIS - UNIZO has, so far, been unable to respond in writing to HIS's Tender Offer of 11th July and requires 'more information' from the Offeror. UNIZO in buying some more time is likely to be preparing a revised RNAV and probably also seeking a white knight given HIS's lack of real estate chops.

Star Asia/Sakura Sogo REIT/Mirai - This J-REIT 'event' is already a 'threesome' however the lack of any merger terms, the nonsense of the potential for abuse in the 'Deemed Approval' of non-voting shareholders and the blatant self-interest of the Sakura Soo sponsors are further glaring lacunae in Japanese corporate governance (sic)


The Asahi Group (2502 JP) acquisition of ABInBev's Australian operation CUB was deemed positive and value accretive by LightStream Research but Arun George points out that the price already factors in ambitious targets for further share gains.
Lastly, Travis Lundy recommends buying the Sanyo Chemical (4471 JP)  / Nippon Shokubai (4114 JP) 'ratio' with upsides ranging from 7% to 34%, while LightStream Research continue to applaud Denso Corp (6902 JP) further moves into autonomous driving after establishing a chip JV with Toyota Motor (7203 JP).
EQUITY BOTTOM-UP    

Douglas Kim explores the three catalysts driving Hite Jinro (000080 KS) at present - a beneficiary of the South Korean boycott of all things Japanese and then correlates Samsung Electronics (SMSD LI) with trends in US bond markets and reaches a bearish conclusion

LightStream Research thinks Money Forward (3994 JP)'s new pricing plan will result in 45% three-year annual compound revenue growth which would take the company to breakeven but would wait before investing.

Kirk Boodry looks at Softbank Group (9984 JP)'s Vision Fund II, while Michael Causton surveys the task ahead for Fast Retailing (9983 JP)'s new and first female CEO and new stores opening in Shibuya and Shinsaibashi for J Front Retailing (3086 JP)

 Lastly, J. Brian Waterhouse looks at the beleaguered Fukushima Bank (8562 JP) whose largest shareholder is another listed company - Prospect Co Ltd (3528 JP) - although they are classified as a 'foreign' shareholder as the shares were originally held in the Prospect Japan Fund which has now been acquired by Prospect
 RESULTS COMMENTARY

LightStream Research maintains their bullish recommendations on both Shin Etsu Chemical (4063 JP) and Nidec (6594 JP), despite the latter's 'underwhelming' results, while also 'staying loyal to Nissan Motor (7201 JP) as they steer well clear of a Renault SA (RNO FP)-led future. They consider Toyota Motor (7203 JP) as they clear leader in the global auto industry.

Douglas Kim updated us on Naver Corp (035420 KS)'s second quarter and reviewed the Naver Financial spin-off and concludes that 'things are looking up' for the company and the CEO, Han Seong-Sook.
Bearish notes appeared from Kirk Boodry on NTT Docomo Inc (9437 JP) (although he views Docomo's woes as good news for rivals KDDI Corp (9433 JP) and Softbank Group (9984 JP), while Scott Foster highlights the potential 20% downside risk in Keyence (6861 JP) whose first-quarter results sale the first downturn in sales and profits since 2010.
THEMATIC &amp; STRATEGYA somewhat prolific week for Douglas Kim saw him round off with two strategy notes, the first a bullish Insight on Korean telecom companies in light of the rollout of 5G and a reminder that the likely date for the announcement of Sout Korea's exclusion from Japan's 'whitelist' of preferred trading counterparties will be between August 2nd and August 9th. He remains pessimistic on the outlook for the Korean market.      EVENT DRIVEN: BULLISHSanyo Chem - Nippon Shokubai Merger Ratio Is a BUY ASKUL vs Yahoo Japan - Receipts Provided LINE, Naver &amp; LHJ's Jieum: Local Speculations SKT's Asiana Takeover &amp; Intermediate Holdco Conversion Timeframe Chiyoda: Squeeze Coming Through Chiyoda in Full Squeeze - For Now Another Move by Denso to Accelerate Its ADAS Game Asahi to Acquire Carlton &amp; United Breweries: Positive for Asahi Not so for AB InBev UNIZO Board Statement on HIS Tender - No Opinion Yet Naver Financial ECO: Meaning for LINE EVENT DRIVEN: BEARISHAsahi Group: The Acquisition and the Hangover Sakura Sogo/Mirai: White Knight Guess The Ratio Isn't Easy PickingsEQUITY BOTTOM-UP: BULLISHHiteJinro: 3 Catalysts - Japanese Beer Boycott, Soju Price Increase, &amp; "Tesla" The Drink Money Forward’s New Pricing Plan Could Be Its First Step in the Path to Profitability Softbank Group: Another Step Closer to Vision Fund 2 Uniqlo’s First Female CEO Gets the Job of Managing the Cull of Stores at Home J Front Retailing Aims High with New Builds in Shibuya and Shinsaibashi EQUITY BOTTOM-UP: BEARISHKOSPI Vs. Samsung Electronics at Different Stages of the Bond Yield Differentials Fukushima Bank (8562 JP) - Living on the EdgeRESULTS COMMENTARY:  BULLISHNidec: Underwhelming 1Q But OP Recovery in PlaceNaver - The Spin-Off of Naver Financial Business &amp; Major Highlights of 2Q19 Results Shin-Etsu: Solid Growth in Semiconductor Silicon Despite Declining Memory Market Nissan: Nissan Taking Its Medicine Is Making Toyota Healthier MonotaRO (3064 JP): 1H Results on Track, but Margins Declining RESULTS COMMENTARY:  BEARISHDoCoMo Q1 19 - New Tariffs Impact Profit/User Interest Low/Good for KDDI &amp; Softbank Keyence (6861 JP): Downturn Confirmed THEMATIC &amp; STRATEGY: BULLISHThe 5G Service Rollout Update &amp; Earnings Preview of Korean Telcos in 2Q19 THEMATIC &amp; STRATEGY: BEARISHExclusion of South Korea from Japan's "Whitelist" Of Countries: D-Day - August 2nd? 

🇰🇷🇯🇵 That Was The Week That Was • North Asia 22nd-27th July 2019 @Smartkarma

Independent Insight Provider, Japanese equities, LightStream Research

Scott Foster

Independent Insight Provider, Japanese equities

Equity Bottom-Up

1Q results from Keyence confirm the first downturn in sales and profits since 2010. In the three months to June, sales were down 6.0% year-on-year, operating profit was down 15.3% and net profit down 16.5%.Demand from the electronics, machine tool and auto industries was weak both in Japan and overseas. Economic conditions and the quarterly data point to difficult year-on-year comparisons for the rest of this fiscal year. At ¥65,040 (July 26 closing price), the shares are selling at 38x our EPS estimate for FY Mar-20.  The 5-year historical P/E range is 18x - 42x. Other valuations are also on the high side of their historical ranges. Underlying demand trends indicate potential downside risk of 20% or more. A retest of the ¥50,780 52-week low seems likely. We will review our sales and profit forecast after speaking with management.

1Q results from Keyence confirm the first downturn in sales and profits since 2010. In the three months to June, sales were down 6.0% year-on-year, operating profit was down 15.3% and net profit down 16.5%.Demand from the electronics, machine tool and auto industries was weak both in Japan and overseas. Economic conditions and the quarterly data point to difficult year-on-year comparisons for the rest of this fiscal year. At ¥65,040 (July 26 closing price), the shares are selling at 38x our EPS estimate for FY Mar-20.  The 5-year historical P/E range is 18x - 42x. Other valuations are also on the high side of their historical ranges. Underlying demand trends indicate potential downside risk of 20% or more. A retest of the ¥50,780 52-week low seems likely. We will review our sales and profit forecast after speaking with management.

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/093/001/original/2019-07-13_16-16-31.png?1563002212" class="editor-image img-responsive" data-smartkarma-image-id="93001"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/093/005/original/2019-07-13_16-25-24.png?1563002742" class="editor-image img-responsive" data-smartkarma-image-id="93005"></figure>Source: Japan Analytics
</div>MOVING AVERAGE BREAKOUT - Japanese equities have now risen by 5.1% since the low of 4th June and, since July 1st, the Total Market Value has exceeded the 50-Day Moving Average for the first time since 26th April. Over the last two weeks, the Total Market Value has gained 1.7% in both Yen and US dollar times. For the previous twelve months, the equity market has moved in line with the US dollar/Japanese Yen exchange rate. It remains to be seen how the 'gap' that has opened up in the last month will be closed. Any further strength in the Yen from current levels will likely see the market slip below the 50-Day Moving Average again.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/093/020/original/2019-07-14_06-28-16.png?1563053334" class="editor-image img-responsive" data-smartkarma-image-id="93020"></figure><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/093/024/original/2019-07-14_06-45-29.png?1563054338" class="editor-image img-responsive" data-smartkarma-image-id="93024"></figure> Source: Japan Analytics</div>VALUE TRADED RATIO - The Value Traded Ratio (Value Traded/Total Market Value) has seen two new eighteen-month lows. If the three days around Christmas are excluded, the current apathy towards Japanese equities is the most extreme since 2012 and is confirmed by recent BAML investor surveys. In the past, such periods of inactivity (marked"▲"above)  have preceded changes in market direction, more often upwards rather than downwards and suggest the current rally has more 'legs'. <div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/093/025/original/2019-07-14_06-47-40.png?1563054585" class="editor-image img-responsive" data-smartkarma-image-id="93025"></figure> Source: Japan Analytics</div>TORAKU INDEX - Conversely, the Toraku advance/decline index is suggesting a degree of caution having breached the 120 'overbought' line for only the third time in eighteen months. Combining this analysis with the Value Traded Ratio, there is scope for a short-term upward move akin to that of October 2018 to be followed by a sharper downward trend into the autumn.  <div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/093/026/original/2019-07-14_06-54-51.png?1563054906" class="editor-image img-responsive" data-smartkarma-image-id="93026"></figure> Source: Japan Analytics</div>VOLUME SCORE TIMELINE - The lull in market turnover is confirmed in the greener 'bias' in our Sector volume timeline. The Retail and Restaurant Sectors are hot as we are in the middle of the quarterly results announcements for February/May/August/November year-end companies. REITs remain the 'go-to' defensive Sector while the Information Technology and Internet Sectors are the 'tema-du-jour' - to mix language metaphors. The 'untouchables' are Metals, Banks, UtilitiesTransportation,  and Multi-Industry.<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/093/028/original/2019-07-14_07-31-40.png?1563057109" class="editor-image img-responsive" data-smartkarma-image-id="93028"></figure> Source: Japan Analytics</div>3-MONTH SECTOR CONTRIBUTION - Over the last three months, a long Telcos/short Autos strategy would have yielded 82 basis points of performance. The Retail Sector has responded well to the results released so far led by drugstores <a href="https://www.smartkarma.com/entities/welcia-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:20895:1" rel="noopener">Welcia (3141 JP)</a> and <a href="https://www.smartkarma.com/entities/tsuruha-holdings-inc" target="_blank" data-smartkarma-citation="entities:9536:1" rel="noopener">Tsuruha (3391 JP), </a><a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" data-smartkarma-citation="entities:751:1" rel="noopener">Fast Retailing (9983 JP)</a><a href="https://www.smartkarma.com/entities/tsuruha-holdings-inc" target="_blank" data-smartkarma-citation="entities:9536:1" rel="noopener">, and </a><a href="https://www.smartkarma.com/entities/lawson-inc" target="_blank" data-smartkarma-citation="entities:1040:1" rel="noopener">Lawson (2651 JP)</a>. Electrical Equipment has suffered from weakness in component stocks <a href="https://www.smartkarma.com/entities/alps-alpine-co-ltd" target="_blank" data-smartkarma-citation="entities:12001:1" rel="noopener">Alps Alpine (6770 JP)</a> (-38% over one year), <a href="https://www.smartkarma.com/entities/murata-manufacturing-co-ltd" target="_blank" data-smartkarma-citation="entities:11649:1" rel="noopener">Murata (6981 JP)</a> (see <a href="https://www.smartkarma.com/profiles/scott-foster" target="_blank" data-smartkarma-citation="accounts:1134" rel="noopener">Scott Foster</a>'s <a href="https://www.smartkarma.com/insights/murata-mfg-6981-jp-buy-on-decline-for-the-long-term" target="_blank" data-smartkarma-citation="insights:30919" rel="noopener">(Buy on Decline for the Long Term</a>), and <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" data-smartkarma-citation="entities:9924:1" rel="noopener">Taiyo Yuden (6976 JP)</a>, while <a href="https://www.smartkarma.com/entities/smc-corp" target="_blank" data-smartkarma-citation="entities:20866:1" rel="noopener">SMC (6273 JP)</a>, <a href="https://www.smartkarma.com/entities/fanuc-corp" target="_blank" data-smartkarma-citation="entities:752:1" rel="noopener">Fanuc (6954 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> have weighed on the Machinery Sector.<div class="content-caption">
<figure class="editor-figure mceNonEditable"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/093/031/original/2019-07-14_07-44-47.png?1563057897" class="editor-image img-responsive" data-smartkarma-image-id="93031"></figure></figure> Source: Japan Analytics</div>SECTOR SCORE MATRIX - Arranging our cap-weighted Sector Relative Price Scores and Results &amp; Revisions Scores in a four-quadrant matrix whose extremes are Contrarian Sell, Contrarian Buy, Unrequited Growth, and Ex-Growth suggest profit-taking in Information Technology (<a href="https://www.smartkarma.com/entities/obic-co-ltd" target="_blank" data-smartkarma-citation="entities:1273:1" rel="noopener">OBIC (4684 JP)</a>, Other Commerical Products (<a href="https://www.smartkarma.com/entities/hoya-corp" target="_blank" data-smartkarma-citation="entities:8990:1" rel="noopener">Hoya Corp (7741 JP)</a>, and Commercial Services (<a href="https://www.smartkarma.com/entities/recruit-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:15070:1" rel="noopener">Recruit 6098 JP).</a> We are not contrarian enough to fall into the banking 'trap', however, the Metals Sector may offer some 'crumbs' of comfort for those in need of a deep value 'fix' (<a href="https://www.smartkarma.com/entities/nippon-steel-sumitomo-metal-corp" target="_blank" data-smartkarma-citation="entities:961:1" rel="noopener">Nippon Steel &amp; Sumitomo Metal (5401 JP)</a>) <div class="content-highlight">In the DETAIL section below, we will review Sector performance, scores and valuation in more detail, as well as Company Results &amp; Revisions and individual stock performance over the previous two weeks, as well as adding some brief comments on <a href="https://www.smartkarma.com/entities/welcia-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:20895:1" rel="noopener">Welcia (3141 JP)</a>, <a href="https://www.smartkarma.com/entities/daiseki-co-ltd" target="_blank" data-smartkarma-citation="entities:2330:1" rel="noopener">Daiseki (9793 JP), </a><a href="https://www.smartkarma.com/entities/yaskawa-electric-corp" target="_blank" data-smartkarma-citation="entities:2458:1" rel="noopener">Yaskawa Electric (6506 JP), </a><a href="https://www.smartkarma.com/entities/pola-orbis-holdings-inc" target="_blank" data-smartkarma-citation="entities:2287:1" rel="noopener">Pola Orbis (4927 JP)</a>, <a href="https://www.smartkarma.com/entities/sekisui-house-ltd" target="_blank" data-smartkarma-citation="entities:4508:1" rel="noopener">Sekisui House (1928 JP)</a>, <a href="https://www.smartkarma.com/entities/keyence-corp" target="_blank" data-smartkarma-citation="entities:3077:1" rel="noopener">Keyence (6861 JP)</a>, <a href="https://www.smartkarma.com/entities/japan-post-insurance-co-ltd" target="_blank" data-smartkarma-citation="entities:840:1" rel="noopener">Japan Post Insurance (7181 JP)</a>, and <a href="https://www.smartkarma.com/entities/obic-co-ltd" target="_blank" data-smartkarma-citation="entities:1273:1" rel="noopener">Obic (4684 JP)</a>.</div>


Source: Japan Analytics
MOVING AVERAGE BREAKOUT - Japanese equities have now risen by 5.1% since the low of 4th June and, since July 1st, the Total Market Value has exceeded the 50-Day Moving Average for the first time since 26th April. Over the last two weeks, the Total Market Value has gained 1.7% in both Yen and US dollar times. For the previous twelve months, the equity market has moved in line with the US dollar/Japanese Yen exchange rate. It remains to be seen how the 'gap' that has opened up in the last month will be closed. Any further strength in the Yen from current levels will likely see the market slip below the 50-Day Moving Average again.
 Source: Japan AnalyticsVALUE TRADED RATIO - The Value Traded Ratio (Value Traded/Total Market Value) has seen two new eighteen-month lows. If the three days around Christmas are excluded, the current apathy towards Japanese equities is the most extreme since 2012 and is confirmed by recent BAML investor surveys. In the past, such periods of inactivity (marked"▲"above)  have preceded changes in market direction, more often upwards rather than downwards and suggest the current rally has more 'legs'. 
 Source: Japan AnalyticsTORAKU INDEX - Conversely, the Toraku advance/decline index is suggesting a degree of caution having breached the 120 'overbought' line for only the third time in eighteen months. Combining this analysis with the Value Traded Ratio, there is scope for a short-term upward move akin to that of October 2018 to be followed by a sharper downward trend into the autumn.  
 Source: Japan AnalyticsVOLUME SCORE TIMELINE - The lull in market turnover is confirmed in the greener 'bias' in our Sector volume timeline. The Retail and Restaurant Sectors are hot as we are in the middle of the quarterly results announcements for February/May/August/November year-end companies. REITs remain the 'go-to' defensive Sector while the Information Technology and Internet Sectors are the 'tema-du-jour' - to mix language metaphors. The 'untouchables' are Metals, Banks, UtilitiesTransportation,  and Multi-Industry.
 Source: Japan Analytics3-MONTH SECTOR CONTRIBUTION - Over the last three months, a long Telcos/short Autos strategy would have yielded 82 basis points of performance. The Retail Sector has responded well to the results released so far led by drugstores Welcia (3141 JP) and Tsuruha (3391 JP), Fast Retailing (9983 JP), and Lawson (2651 JP). Electrical Equipment has suffered from weakness in component stocks Alps Alpine (6770 JP) (-38% over one year), Murata (6981 JP) (see Scott Foster's (Buy on Decline for the Long Term), and Taiyo Yuden (6976 JP), while SMC (6273 JP), Fanuc (6954 JP), and Komatsu (6301 JP) have weighed on the Machinery Sector.
 Source: Japan AnalyticsSECTOR SCORE MATRIX - Arranging our cap-weighted Sector Relative Price Scores and Results &amp; Revisions Scores in a four-quadrant matrix whose extremes are Contrarian Sell, Contrarian Buy, Unrequited Growth, and Ex-Growth suggest profit-taking in Information Technology (OBIC (4684 JP), Other Commerical Products (Hoya Corp (7741 JP), and Commercial Services (Recruit 6098 JP). We are not contrarian enough to fall into the banking 'trap', however, the Metals Sector may offer some 'crumbs' of comfort for those in need of a deep value 'fix' (Nippon Steel &amp; Sumitomo Metal (5401 JP)) In the DETAIL section below, we will review Sector performance, scores and valuation in more detail, as well as Company Results &amp; Revisions and individual stock performance over the previous two weeks, as well as adding some brief comments on Welcia (3141 JP), Daiseki (9793 JP), Yaskawa Electric (6506 JP), Pola Orbis (4927 JP), Sekisui House (1928 JP), Keyence (6861 JP), Japan Post Insurance (7181 JP), and Obic (4684 JP).

🇯🇵 JAPAN • Market Update - Levitating on Thin Air

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)

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