Independent Insight Provider, Japanese equities, LightStream Research

Scott Foster

Independent Insight Provider, Japanese equities

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. 

Equity Bottom-Up

Management continued to invest in expansion while top line growth slowed, contributing to accelerating profit declines in 2Q, a substantial reduction in full-year FY Mar-19 guidance, and the collapse of the share price. Monthly consolidated sales growth declined from 11.7% year-on-year in July to 1.2% in September, with Factory Automation down from 5.1% to -2.9%, Die Components down from 6.0% to -3.4%, and VONA down from 20.7% to 7.2%. Last April and May, Factory Automation was also growing at rates close to 20%.Consolidated operating profit was down 22.7% year-on-year on a 5.9% increase in sales in the three months to September, compared with a 9.9% decline in operating profit on a 12.7% increase in sales in 1Q. In the Factory Automation segment, sales growth dropped from 16.0% in 1Q to 0.9% in 2Q, while the year-on-year change in operating profit went from 7.3% to -21.5%. VONA operating profit was down 43.1% year-on-year in 2Q, but appears to be stabilizing at about 4% of sales. Die Component profit was also fairly stable.1H operating profit was 20% short of guidance and full-year operating profit guidance was cut by 13%, but this implies a 20% sequential rebound in operating profit in 2H. That, in our estimation, seems unlikely.At ¥2,162 (Monday, October 29 closing price), the shares are down 29% since late September and selling at 24x management's new EPS guidance for FY Mar-19. But sales and profit trends appear to put this estimate at risk. October sales data should be available by November 20.

Management continued to invest in expansion while top line growth slowed, contributing to accelerating profit declines in 2Q, a substantial reduction in full-year FY Mar-19 guidance, and the collapse of the share price. Monthly consolidated sales growth declined from 11.7% year-on-year in July to 1.2% in September, with Factory Automation down from 5.1% to -2.9%, Die Components down from 6.0% to -3.4%, and VONA down from 20.7% to 7.2%. Last April and May, Factory Automation was also growing at rates close to 20%.Consolidated operating profit was down 22.7% year-on-year on a 5.9% increase in sales in the three months to September, compared with a 9.9% decline in operating profit on a 12.7% increase in sales in 1Q. In the Factory Automation segment, sales growth dropped from 16.0% in 1Q to 0.9% in 2Q, while the year-on-year change in operating profit went from 7.3% to -21.5%. VONA operating profit was down 43.1% year-on-year in 2Q, but appears to be stabilizing at about 4% of sales. Die Component profit was also fairly stable.1H operating profit was 20% short of guidance and full-year operating profit guidance was cut by 13%, but this implies a 20% sequential rebound in operating profit in 2H. That, in our estimation, seems unlikely.At ¥2,162 (Monday, October 29 closing price), the shares are down 29% since late September and selling at 24x management's new EPS guidance for FY Mar-19. But sales and profit trends appear to put this estimate at risk. October sales data should be available by November 20. 

Misumi Group (9962 JP): Expansion Plan Undercut by Weak Demand

'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/000/061/034/original/2018-08-16_19-07-34.png?1534672507" class="editor-image img-responsive" data-smartkarma-image-id="61034"></figure><div class="content-caption">Source: Japan Analytics</div>A GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in earnings.  However, the score has only declined by 31 basis points since last quarter showing a degree of 'stability' seen only in 2011 in recent years.  The aggregate Forecast/Revision score has also continued to decline and is now lower for the fourth straight month. As would be expected, this score is a reliable leading indicator for the Results Score and suggests further weakening in the rate of earnings growth in the months ahead.  Neither score is, as yet, suggesting a decline in earnings before the end of the fiscal year.YEN CORRELATION WEAKENING - This quarter's earnings' stability was surprising given the relative strength of the Yen compared to a year ago. In the past and even as recently as 2016, a 5 per cent year-on-year decline has resulted in negative Results Scores. The year-on-year change in now positive so any negative impact will dissipate over the next two quarters.MARKET FOLLOWS MOMENTUM LOWER - The All Market Composite peaked on 23rd January and has since fallen by 11% despite a continuation of the Bank of Japan's ETF purchasing programme. Weakening earnings momentum and the overvaluation of many of the leading stocks, as in our '<a href="https://www.smartkarma.com/insights/japan-most-overbought-most-oversold-the-relative-price-score" target="_blank" data-smartkarma-citation="insights:21149">Nifty 50</a>' portfolio, have been contributing factors. With prospects for a much weaker Yen limited by the current trade negotiations between Japan and the United States, and with global growth slowing, we expect both Results and Revision Scores to trend lower, but to end the fiscal year in positive territory. Historically, the market has not risen during periods when both the Results and Forecast/Revision Scores have been trending down.<div class="content-highlight">MARKET RECOMMENDATION - Within a global portfolio, we would market-weight Japanese equities with a bias towards domestic sectors and not hedge the currency exposure.</div>SECTOR RESULTS SCORES -The good news is that only one sector, (Multi-Industry - 75% of which is <a href="https://www.smartkarma.com/entities/359" target="_blank" data-smartkarma-citation="entities:359:1">Japan Post [6178 JP</a>]) has a negative score - and its score is less negative than last quarter. Both the Media and Consumer Services sectors' scores turned positive and each increased by more than two points.  On the other hand, over half of our 29 sectors saw declining scores, although the number was lower than last quarter.  The top sectors in terms of quarter-on-quarter change were Energy, Consumer Services, Media, Information Technology and Other Commercial Products while the laggards were Non-Bank Finance, Chemicals, Construction, Machinery and Utilities. SECTOR REVISION SCORES - Five sectors have negative Forecast/Revision Scores with Utilities now joining Media, Multi-Industry, Autos and Banks from last quarter. The highest scores are in the Energy, Technology Hardware, Electrical Equipment, Retail and Information Technology sectors. Improvements of greater than one point were seen in Energy, Media and Machinery while Food, Beverages &amp; Tobacco, Chemicals, Utilities, Other Materials and Technology Hardware all lost more than one point. Overall eighteen sectors saw declines.REVISION V. RESULTS SCORES - The difference between the Results and Revision Scores is a good indicator of corporate expectations compared with the trailing-twelve-month reality. In some cases (e.g. Restaurants) the 'optimism' is due to a failure to revise forecasts in the light of weaker results. In others, such as Telecommunications, there is scope for upward revisions in the coming quarters.<div class="content-highlight">
THE OPTIMISTS
Restaurants • Other Materials • Electrical Equipment • Technology Hardware • Retail
THE PESSIMISTS
Banks • Autos • Telecommunications • Utilities • Media • Chemicals
</div>SECTOR PERFORMANCE - Over the last three months, our Japan Market Composite declined by 5.8%. Only four sectors saw an increase in value led by Telecommunications, Energy, Commercial Services and Information Technology. The largest declines were in the Building Materials, Metals, Real Estate Construction and Machinery sectors. Nine sectors are now negative over one year led by Building Materials, Metals and Food, Beverages &amp; Tobacco and only eight are up in double-digits led by Services and Information Technology. For the time being, Domestic Non-Manufacturing sectors 'rules the roost' and Domestic Cyclical sectors have taken over from Global Cyclicals in the 'doghouse'.'.<div class="content-highlight">
SECTOR RECOMMENDATIONS
Our most-preferred sectors are currently Energy, Healthcare, Telecommunications, Other Commercial Products and Information Technology.
Least-preferred sectors are Metals, Chemicals, Machinery, Autos, Construction, Real Estate, Building Materials, Food Beverages &amp; Tobacco and Utilities.
</div>TOP 5 LARGER PEER GROUPS - The top five Peer Groups capitalised at over ¥1 trillion are Machine Tools &amp; Presses, PC &amp; Computer Peripherals, Oil &amp; Gas Refining &amp; Marketing, Telecom Distribution Services and Sporting &amp; Outdoor Goods. The top twenty larger Peer Groups have gained 16% over one year but have declined by 4% on average the last three months.BOTTOM 5 LARGER PEER GROUPS - The bottom five Peer Groups capitalised at over ¥1 trillion are Audio/Visual Content, LCD/LED Materials &amp; Equipment, Electrical Engineering, General Contractors and Real Estate - Leasing. The bottom twenty larger Peer Groups have lost 2% over one year and 9% over the last three months. Only Security Services and Tobacco have risen since May.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/038/original/2018-08-19_19-33-03.png?1534674804" class="editor-image img-responsive" data-smartkarma-image-id="61038"></figure>

Source: Japan AnalyticsA GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in earnings.  However, the score has only declined by 31 basis points since last quarter showing a degree of 'stability' seen only in 2011 in recent years.  The aggregate Forecast/Revision score has also continued to decline and is now lower for the fourth straight month. As would be expected, this score is a reliable leading indicator for the Results Score and suggests further weakening in the rate of earnings growth in the months ahead.  Neither score is, as yet, suggesting a decline in earnings before the end of the fiscal year.YEN CORRELATION WEAKENING - This quarter's earnings' stability was surprising given the relative strength of the Yen compared to a year ago. In the past and even as recently as 2016, a 5 per cent year-on-year decline has resulted in negative Results Scores. The year-on-year change in now positive so any negative impact will dissipate over the next two quarters.MARKET FOLLOWS MOMENTUM LOWER - The All Market Composite peaked on 23rd January and has since fallen by 11% despite a continuation of the Bank of Japan's ETF purchasing programme. Weakening earnings momentum and the overvaluation of many of the leading stocks, as in our 'Nifty 50' portfolio, have been contributing factors. With prospects for a much weaker Yen limited by the current trade negotiations between Japan and the United States, and with global growth slowing, we expect both Results and Revision Scores to trend lower, but to end the fiscal year in positive territory. Historically, the market has not risen during periods when both the Results and Forecast/Revision Scores have been trending down.MARKET RECOMMENDATION - Within a global portfolio, we would market-weight Japanese equities with a bias towards domestic sectors and not hedge the currency exposure.SECTOR RESULTS SCORES -The good news is that only one sector, (Multi-Industry - 75% of which is Japan Post [6178 JP]) has a negative score - and its score is less negative than last quarter. Both the Media and Consumer Services sectors' scores turned positive and each increased by more than two points.  On the other hand, over half of our 29 sectors saw declining scores, although the number was lower than last quarter.  The top sectors in terms of quarter-on-quarter change were Energy, Consumer Services, Media, Information Technology and Other Commercial Products while the laggards were Non-Bank Finance, Chemicals, Construction, Machinery and Utilities. SECTOR REVISION SCORES - Five sectors have negative Forecast/Revision Scores with Utilities now joining Media, Multi-Industry, Autos and Banks from last quarter. The highest scores are in the Energy, Technology Hardware, Electrical Equipment, Retail and Information Technology sectors. Improvements of greater than one point were seen in Energy, Media and Machinery while Food, Beverages &amp; Tobacco, Chemicals, Utilities, Other Materials and Technology Hardware all lost more than one point. Overall eighteen sectors saw declines.REVISION V. RESULTS SCORES - The difference between the Results and Revision Scores is a good indicator of corporate expectations compared with the trailing-twelve-month reality. In some cases (e.g. Restaurants) the 'optimism' is due to a failure to revise forecasts in the light of weaker results. In others, such as Telecommunications, there is scope for upward revisions in the coming quarters.
THE OPTIMISTS
Restaurants • Other Materials • Electrical Equipment • Technology Hardware • Retail
THE PESSIMISTS
Banks • Autos • Telecommunications • Utilities • Media • Chemicals
SECTOR PERFORMANCE - Over the last three months, our Japan Market Composite declined by 5.8%. Only four sectors saw an increase in value led by Telecommunications, Energy, Commercial Services and Information Technology. The largest declines were in the Building Materials, Metals, Real Estate Construction and Machinery sectors. Nine sectors are now negative over one year led by Building Materials, Metals and Food, Beverages &amp; Tobacco and only eight are up in double-digits led by Services and Information Technology. For the time being, Domestic Non-Manufacturing sectors 'rules the roost' and Domestic Cyclical sectors have taken over from Global Cyclicals in the 'doghouse'.'.
SECTOR RECOMMENDATIONS
Our most-preferred sectors are currently Energy, Healthcare, Telecommunications, Other Commercial Products and Information Technology.
Least-preferred sectors are Metals, Chemicals, Machinery, Autos, Construction, Real Estate, Building Materials, Food Beverages &amp; Tobacco and Utilities.
TOP 5 LARGER PEER GROUPS - The top five Peer Groups capitalised at over ¥1 trillion are Machine Tools &amp; Presses, PC &amp; Computer Peripherals, Oil &amp; Gas Refining &amp; Marketing, Telecom Distribution Services and Sporting &amp; Outdoor Goods. The top twenty larger Peer Groups have gained 16% over one year but have declined by 4% on average the last three months.BOTTOM 5 LARGER PEER GROUPS - The bottom five Peer Groups capitalised at over ¥1 trillion are Audio/Visual Content, LCD/LED Materials &amp; Equipment, Electrical Engineering, General Contractors and Real Estate - Leasing. The bottom twenty larger Peer Groups have lost 2% over one year and 9% over the last three months. Only Security Services and Tobacco have risen since May.

Japan: Results & Revision Scores Summer 2018 Update - Market Composite, Sectors & Peer Groups

<ul>
<li>VONA sales were up 19.0% year-on-year in the three months to June, but the segment's operating profit dropped by 49.2% due to the cost of overseas expansion. This led to a 9.9% decline in total consolidated operating profit and a 5.0% decline in net profit.</li>
<li>Misumi's e-commerce MRO business continues to lag that of MonotaRO (3064 JP). </li>
<li>Factory Automation segment profit was up 7.3%, but on a 16.0% increase in sales. Die Components profit was up  3.1% on a 1.1% decline in sales.</li>
<li>Guidance, which is…</li>
</ul>


VONA sales were up 19.0% year-on-year in the three months to June, but the segment's operating profit dropped by 49.2% due to the cost of overseas expansion. This led to a 9.9% decline in total consolidated operating profit and a 5.0% decline in net profit.
Misumi's e-commerce MRO business continues to lag that of MonotaRO (3064 JP). 
Factory Automation segment profit was up 7.3%, but on a 16.0% increase in sales. Die Components profit was up  3.1% on a 1.1% decline in sales.
Guidance, which is…


Misumi Group (9962 JP): VONA Drags Down Profits

CYCLICAL SECTORS RALLY WITH THE MARKET - Japanese equities have rallied 3.6% over the last two weeks, and the market composite is now flat since the end of April. Mean reversion was widespread and the range from worst to best three-month change narrowed from 22.5% to 18.1%. Banks, Energy, Chemicals, and Metals led, while REITs, Media,Telcom and Retail lagged. Domestic growth sectors (Internet, Commercial Services, Information Technology and Healthcare) are still well ahead over three months…

CYCLICAL SECTORS RALLY WITH THE MARKET - Japanese equities have rallied 3.6% over the last two weeks, and the market composite is now flat since the end of April. Mean reversion was widespread and the range from worst to best three-month change narrowed from 22.5% to 18.1%. Banks, Energy, Chemicals, and Metals led, while REITs, Media,Telcom and Retail lagged. Domestic growth sectors (Internet, Commercial Services, Information Technology and Healthcare) are still well ahead over three months…

Japan Fortnightly Update: Banks to Neutral/Utilities to Negative - Results Momentum Still Slowing

On Friday, June 22, MonotaRO closed at ¥5,050, up 56% from its March 5 low of ¥3,235 and above our ¥4,600 price target. Driven by another month of good sales and customer acquisition data, the shares are now selling at 61x our EPS estimate for this year, 54x our estimate for next year and 47 our estimate for FY Dec-20. That is probably enough for the time being. Consolidation seems likely at a level some 20% above their previous trading range, which was capped at ¥4,000.MonotaRO parent company…

On Friday, June 22, MonotaRO closed at ¥5,050, up 56% from its March 5 low of ¥3,235 and above our ¥4,600 price target. Driven by another month of good sales and customer acquisition data, the shares are now selling at 61x our EPS estimate for this year, 54x our estimate for next year and 47 our estimate for FY Dec-20. That is probably enough for the time being. Consolidation seems likely at a level some 20% above their previous trading range, which was capped at ¥4,000.MonotaRO parent company…

Monotaro (3064 JP): Share Price Hits New High; Outperforming VONA

Japan

MISUMI Group Inc. distributes precision machinery parts by mail order. The products include a variety of components such as press die, plastic mold, automated machinery, pc & network, and wiring.  The Company also sells supplies for factories, hospitals, and restaurants and semi-conductors by mail order.

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Misumi Group (9962 JP)