'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

<p><strong>SHORT-LIVED</strong> - Over the last two weeks, Japanese equities marched back up and then promptly fell back down, losing 1.5% over the period. We remain under the spell of the 'Death Cross' (50-day moving average &lt; 200-day), although, partly thanks to the Bank of Japan, we have danced along the fine line between these two ratios since August.  A decisive breach to the downside is now the most likely outcome and would help bring foreign investors back to a market they have become increasingly less interested in as the year has progressed.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/070/118/original/2018-11-17_10-47-31.png?1542419262" class="editor-image img-responsive" data-smartkarma-image-id="70118"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/070/119/original/2018-11-17_10-47-53.png?1542419283" class="editor-image img-responsive" data-smartkarma-image-id="70119"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>VOLUME VOLATILITY</strong> - After spiking into the most recent low, volumes have returned to trend levels and will decline further into year-end as is usual.  A <a href="https://www.jpx.co.jp/english/corporate/news/news-releases/0060/b5b4pj000002jlgo-att/01.pdf" target="_blank">malfunction </a>in the TSE trading systems occurred on October 9th and the apportioning of the 'blame' is now the subject of some heated <a href="http://www.asahi.com/ajw/articles/AJ201810190030.html" target="_blank">debate</a> amongst the market participants involved. It is not clear to what extent this event has had any subsequent impact on the activities of the firms involved, and the only remedial action that has been announced to date has been a salary cut and censure for the <a href="https://www.smartkarma.com/entities/11266" target="_blank" data-smartkarma-citation="entities:11266:1">Japan Exchange (8697 JP)</a> officials deemed responsible. We would note that, since October 9th, volumes have been more volatile than any other period this year.   </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/070/120/original/2018-11-17_11-00-22.png?1542420041" class="editor-image img-responsive" data-smartkarma-image-id="70120"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>FINAL TALLY</strong> - With the exception of <a href="https://www.smartkarma.com/entities/7591" target="_blank" data-smartkarma-citation="entities:7591:1">Tokio Marine (8766 JP)</a>, <a href="https://www.smartkarma.com/entities/631" target="_blank" data-smartkarma-citation="entities:631:1">MS&amp;AD (8725 JP)</a> and <a href="https://www.smartkarma.com/entities/632" target="_blank" data-smartkarma-citation="entities:632:1">Sompo (8630 JP)</a>, all of whom report tomorrow, the quarterly results and revisions 'season' is now complete. As noted <a href="https://www.smartkarma.com/insights/japan-autumn-results-revisions-flash-flatlining-weakest-quarter-in-two-years" target="_blank" data-smartkarma-citation="insights:25804">earlier</a>, the most recent quarter was the weakest in two years. TTM Operating Income and Forecast Operating Income are both unchanged from the summer, and Forecast Operating Income is only 0.8% higher than TTM Operating Income -implying a flat second quarter for earnings. The 'gap' between TTM and Forecast Net Income is now -4.8%, implying that there are over ¥2 trillion of extraordinary losses to be booked in the next six months. A 'foretaste' of such write-offs was recently provided by <a href="https://www.smartkarma.com/entities/16705" target="_blank" data-smartkarma-citation="entities:16705:1">Tsukuba Bank (8338 JP)</a>.</p><p><strong>MARKET-IMPLIED 20% FALL IN EARNINGS</strong> - Based on TTM Net Income the market PER is a record-low 13.2x, and the discounting of the coming weaker earnings growth is reasonably well-advanced. A 'normal' earnings multiple is often thought to be 16.7x (being the 'inverse' of a 6% yield). The market-implied decline in future Net Income, using this benchmark,  is 20%, which is equivalent to an aggregate Net Income of ¥38.6t - the level achieved in Summer 2017, or five quarters ago.  </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/070/124/original/2018-11-17_11-48-39.png?1542422946" class="editor-image img-responsive" data-smartkarma-image-id="70124"></figure><div class="content-caption">Source: Japan Analytics</div><div class="content-highlight"><p><strong>OUTLOOK</strong> - Although 58% of companies still have positive Results Scores, only 40% of companies saw a quarter-on-quarter improvement and 40% of revisions scored negatively.  As covered in <a href="https://www.smartkarma.com/insights/japan-autumn-results-revisions-scores-market-composite-sector-review-slomo-slowdown" target="_blank" data-smartkarma-citation="insights:25923">SloMo Slowdown</a>, we are in a slow-motion bear market that will accelerate in the event of any further Yen strength or erosion of global growth. The downside may be limited by current valuations. However, we have yet to see how far Japanese corporate profits can fall this time. As we noted <a href="https://www.smartkarma.com/insights/japan-market-update-oversold-however" target="_blank" data-smartkarma-citation="insights:25370">here</a>, a decisive low has yet to be reached.</p></div>

SHORT-LIVED - Over the last two weeks, Japanese equities marched back up and then promptly fell back down, losing 1.5% over the period. We remain under the spell of the 'Death Cross' (50-day moving average &lt; 200-day), although, partly thanks to the Bank of Japan, we have danced along the fine line between these two ratios since August.  A decisive breach to the downside is now the most likely outcome and would help bring foreign investors back to a market they have become increasingly less interested in as the year has progressed.Source: Japan AnalyticsVOLUME VOLATILITY - After spiking into the most recent low, volumes have returned to trend levels and will decline further into year-end as is usual.  A malfunction in the TSE trading systems occurred on October 9th and the apportioning of the 'blame' is now the subject of some heated debate amongst the market participants involved. It is not clear to what extent this event has had any subsequent impact on the activities of the firms involved, and the only remedial action that has been announced to date has been a salary cut and censure for the Japan Exchange (8697 JP) officials deemed responsible. We would note that, since October 9th, volumes have been more volatile than any other period this year.   Source: Japan AnalyticsFINAL TALLY - With the exception of Tokio Marine (8766 JP), MS&amp;AD (8725 JP) and Sompo (8630 JP), all of whom report tomorrow, the quarterly results and revisions 'season' is now complete. As noted earlier, the most recent quarter was the weakest in two years. TTM Operating Income and Forecast Operating Income are both unchanged from the summer, and Forecast Operating Income is only 0.8% higher than TTM Operating Income -implying a flat second quarter for earnings. The 'gap' between TTM and Forecast Net Income is now -4.8%, implying that there are over ¥2 trillion of extraordinary losses to be booked in the next six months. A 'foretaste' of such write-offs was recently provided by Tsukuba Bank (8338 JP).MARKET-IMPLIED 20% FALL IN EARNINGS - Based on TTM Net Income the market PER is a record-low 13.2x, and the discounting of the coming weaker earnings growth is reasonably well-advanced. A 'normal' earnings multiple is often thought to be 16.7x (being the 'inverse' of a 6% yield). The market-implied decline in future Net Income, using this benchmark,  is 20%, which is equivalent to an aggregate Net Income of ¥38.6t - the level achieved in Summer 2017, or five quarters ago.  Source: Japan AnalyticsOUTLOOK - Although 58% of companies still have positive Results Scores, only 40% of companies saw a quarter-on-quarter improvement and 40% of revisions scored negatively.  As covered in SloMo Slowdown, we are in a slow-motion bear market that will accelerate in the event of any further Yen strength or erosion of global growth. The downside may be limited by current valuations. However, we have yet to see how far Japanese corporate profits can fall this time. As we noted here, a decisive low has yet to be reached.

Japan Fortnightly Update: Watch Out Below

Japan

Marusho Hotta Co Ltd is a wholesaler of Japanese traditional kimono and other apparel products.  The Company also sells bedding and interior products.  Marusho Hotta also handles jewelry and fur products as well as health, nursing care, and environment related products.

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Marusho Hotta (8105 JP)

Japan Fortnightly Update: Watch Out Below

SHORT-LIVED - Over the last two weeks, Japanese equities marched back up and then promptly fell back down, losing 1.5% over the period. We remain...

Campbell Gunn

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