Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Late last evening, Nikkei published an <a href="https://asia.nikkei.com/Business/Business-deals/NTT-to-take-over-wireless-unit-Docomo-for-38bn" target="_blank" rel="noopener">article</a> that <a href="https://www.smartkarma.com/entities/nippon-telegraph-telephone-corporation" target="_blank" data-smartkarma-citation="entities:623:1" rel="noopener">NTT (Nippon Telegraph &amp; Telephone) (9432 JP)</a> was looking to take full control of <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a> in a deal that could be worth around  ¥4 trillion (US$38bn) based on a 30% premium to the last close.<a href="https://www.smartkarma.com/entities/nippon-telegraph-telephone-corporation" target="_blank" data-smartkarma-citation="entities:623:1" rel="noopener">NTT (Nippon Telegraph &amp; Telephone) (9432 JP)</a> is trading 2.4% lower today while <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a> is still untraded on a glut of buy orders. The ADR closed 30% higher overnight.A second order effect of the buyout is that it would open up a slot in 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> that would need to be filled. <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a> belongs to the Technology sector and the replacement will most likely be a stock from the same sector.We see <a href="https://www.smartkarma.com/entities/murata-manufacturing-co-ltd" target="_blank" data-smartkarma-citation="entities:11649:1" rel="noopener">Murata Manufacturing (6981 JP)</a>, <a href="https://www.smartkarma.com/entities/renesas-electronics-corp" target="_blank" data-smartkarma-citation="entities:15933:1" rel="noopener">Renesas Electronics (6723 JP)</a> and <a href="https://www.smartkarma.com/entities/sharp-corp" target="_blank" data-smartkarma-citation="entities:391:1" rel="noopener">Sharp Corp (6753 JP)</a> as the most likely candidates to replace <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a>. There is a lower probability of <a href="https://www.smartkarma.com/entities/rohm-co-ltd" target="_blank" data-smartkarma-citation="entities:2953:1" rel="noopener">ROHM Co Ltd (6963 JP)</a> or <a href="https://www.smartkarma.com/entities/anritsu-corp" target="_blank" data-smartkarma-citation="entities:3700:1" rel="noopener">Anritsu Corp (6754 JP)</a> being included in the index.

Late last evening, Nikkei published an article that NTT (Nippon Telegraph &amp; Telephone) (9432 JP) was looking to take full control of NTT Docomo Inc (9437 JP) in a deal that could be worth around  ¥4 trillion (US$38bn) based on a 30% premium to the last close.NTT (Nippon Telegraph &amp; Telephone) (9432 JP) is trading 2.4% lower today while NTT Docomo Inc (9437 JP) is still untraded on a glut of buy orders. The ADR closed 30% higher overnight.A second order effect of the buyout is that it would open up a slot in the Nikkei 225 (NKY INDEX) that would need to be filled. NTT Docomo Inc (9437 JP) belongs to the Technology sector and the replacement will most likely be a stock from the same sector.We see Murata Manufacturing (6981 JP), Renesas Electronics (6723 JP) and Sharp Corp (6753 JP) as the most likely candidates to replace NTT Docomo Inc (9437 JP). There is a lower probability of ROHM Co Ltd (6963 JP) or Anritsu Corp (6754 JP) being included in the index.

Nikkei 225 Index Rebalance: Likely Candidates to Replace NTT Docomo

Equity Analyst, LightStream Research

Aqila Ali

Equity Analyst

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

<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>’s 1Q FY03/21 was weak but surpassed market expectations on OP significantly. 1Q revenue and OP declined by 11.9% YoY and  17% YoY respectively. Sales fell below consensus estimates by 3% and our estimate by 10%. However, OP exceeded consensus by 108% and our estimate by 14%. Taiyo also managed to surpass its 1Q FY03/21 guidance. As expected COVID-19 impact in Malaysia and the Philippines affected the company’s 1Q results.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/151/651/original/image_56216613341597032376925.png?1597032377" class="editor-image img-responsive" data-smartkarma-image-id="151651"></figure>Source: Company Disclosures, CapIQ, LSR<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/151/652/original/image_1465125651597032387868.png?1597032391" class="editor-image img-responsive" data-smartkarma-image-id="151652"></figure>Source: Company DisclosuresThe company’s 1H FY03/21E guidance looks achievable with 46% of revenue and 53% of the OP target already achieved in 1Q. However the slowdown in consumer and auto demand is likely to affect the company through this FY, That being said, we believe that the company’s increasing focus on auto’s and IT infrastructure than smartphones, is like to give Taiyo a more stable business that is not affected by seasonal demand (smartphones) over the long term. For the short term, however, 5G deployment and recovery in the Auto sector are key growth drivers.The company’s share price did not take a significant hit during March 2020 similar to its peers <a href="https://www.smartkarma.com/entities/tdk-corp" target="_blank" data-smartkarma-citation="entities:18847:1" rel="noopener">TDK Corp (6762 JP)</a> and <a href="https://www.smartkarma.com/entities/kyocera-corp" target="_blank" data-smartkarma-citation="entities:753:1" rel="noopener">Kyocera Corp (6971 JP)</a>. Also, the share price rebounded quite quickly to reach near pre-COVID 19 levels. The company is currently trading at 14.5x FY2 PE, marginally below its historical average and at a discount to peers. Though <a href="https://www.smartkarma.com/entities/murata-manufacturing-co-ltd" target="_blank" data-smartkarma-citation="entities:11649:1" rel="noopener">Murata Manufacturing (6981 JP)</a> Murata is likely to retain leadership in the MLCC sector, we feel Taiyo has higher potential for growth. Therefore, we recommend owning Taiyo for its long term prospects.We go through the details below.

Taiyo Yuden (6976 JP)’s 1Q FY03/21 was weak but surpassed market expectations on OP significantly. 1Q revenue and OP declined by 11.9% YoY and  17% YoY respectively. Sales fell below consensus estimates by 3% and our estimate by 10%. However, OP exceeded consensus by 108% and our estimate by 14%. Taiyo also managed to surpass its 1Q FY03/21 guidance. As expected COVID-19 impact in Malaysia and the Philippines affected the company’s 1Q results.Source: Company Disclosures, CapIQ, LSRSource: Company DisclosuresThe company’s 1H FY03/21E guidance looks achievable with 46% of revenue and 53% of the OP target already achieved in 1Q. However the slowdown in consumer and auto demand is likely to affect the company through this FY, That being said, we believe that the company’s increasing focus on auto’s and IT infrastructure than smartphones, is like to give Taiyo a more stable business that is not affected by seasonal demand (smartphones) over the long term. For the short term, however, 5G deployment and recovery in the Auto sector are key growth drivers.The company’s share price did not take a significant hit during March 2020 similar to its peers TDK Corp (6762 JP) and Kyocera Corp (6971 JP). Also, the share price rebounded quite quickly to reach near pre-COVID 19 levels. The company is currently trading at 14.5x FY2 PE, marginally below its historical average and at a discount to peers. Though Murata Manufacturing (6981 JP) Murata is likely to retain leadership in the MLCC sector, we feel Taiyo has higher potential for growth. Therefore, we recommend owning Taiyo for its long term prospects.We go through the details below.

Taiyo’s OP Outperforms Consensus Amidst COVID-19

<a href="https://www.smartkarma.com/entities/murata-manufacturing-co-ltd" target="_blank" data-smartkarma-citation="entities:11649:1" rel="noopener">Murata Manufacturing (6981 JP)</a>’s 1Q FY03/21 was weak but better than expected. 1Q revenue declined by 8.6% YoY and operating profits declined by 18% YoY. However, sales and OP beat consensus estimates by +1% and 30% respectively and our estimates by nearly 3% and 8% respectively.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/150/166/original/image_39261655421596444097611.png?1596444098" class="editor-image img-responsive" data-smartkarma-image-id="150166"></figure>Source: Company Disclosures, CapIQ, LSRDecline in revenue was mainly due to the decline in demand for smartphone and automotive electronics post-COVID-19. As expected, the delay in 5G and Apple’s delay in 5G smartphone launch has had its effect on Murata during the quarter. However, on the brighter side demand for 5G base stations has been strong with Telco providers continuing the development of 5G alongside the rising demand for computers during COVID-19 lockdowns.The OP decline was mainly due to the decline in average sales prices following the pandemic. Despite the decline, Murata still outperformed market expectations and maintained an  OPM of 15.7%, compared to <a href="https://www.smartkarma.com/entities/tdk-corp" target="_blank" data-smartkarma-citation="entities:18847:1" rel="noopener">TDK Corp (6762 JP)'</a>s (6.0%) and <a href="https://www.smartkarma.com/entities/kyocera-corp" target="_blank" data-smartkarma-citation="entities:753:1" rel="noopener">Kyocera Corp (6971 JP)</a>’s (2.4%).<div class="content-caption">Murata Outperforms; Peers Disappoint</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/150/167/original/image_76919538531596444146301.png?1596444148" class="editor-image img-responsive" data-smartkarma-image-id="150167"></figure>The company’s share price increased around 9% since we last wrote about the company and it is currently trading at 19.5x FY2 PE, marginally above the historical average. We are hopeful, Murata will continue to outperform peers over the medium-term, however, the current valuation makes Murata’s risk-reward relatively unattractive.We go through the details below.

Murata Manufacturing (6981 JP)’s 1Q FY03/21 was weak but better than expected. 1Q revenue declined by 8.6% YoY and operating profits declined by 18% YoY. However, sales and OP beat consensus estimates by +1% and 30% respectively and our estimates by nearly 3% and 8% respectively.Source: Company Disclosures, CapIQ, LSRDecline in revenue was mainly due to the decline in demand for smartphone and automotive electronics post-COVID-19. As expected, the delay in 5G and Apple’s delay in 5G smartphone launch has had its effect on Murata during the quarter. However, on the brighter side demand for 5G base stations has been strong with Telco providers continuing the development of 5G alongside the rising demand for computers during COVID-19 lockdowns.The OP decline was mainly due to the decline in average sales prices following the pandemic. Despite the decline, Murata still outperformed market expectations and maintained an  OPM of 15.7%, compared to TDK Corp (6762 JP)'s (6.0%) and Kyocera Corp (6971 JP)’s (2.4%).Murata Outperforms; Peers DisappointThe company’s share price increased around 9% since we last wrote about the company and it is currently trading at 19.5x FY2 PE, marginally above the historical average. We are hopeful, Murata will continue to outperform peers over the medium-term, however, the current valuation makes Murata’s risk-reward relatively unattractive.We go through the details below.

Murata Outperforms Despite a Weak 1QFY03/21

'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/000/146/891/original/2020-07-20_11-11-13.png?1595211104" class="editor-image img-responsive" data-smartkarma-image-id="146891"></figure><div class="content-caption">Source • Japan Analytics</div>THE 'HUNDRED DAYS WAR' - It is almost one hundred days since the equity markets began to discount the onset of COVID-19. Since the TOPIX closing low of 1,236.34 on 16th March, the index has recovered by 27%. However, it has only been in the last ten trading days that the number of new two-year share price highs and lows has consistently been in double-digits.  This month has seen 136 new two-year lows and 214 new two-year highs. Whatever the impact of COVID-19 on earnings, the market is very clearly signalling its preferences for COVID 'Heroes &amp; Villains'. In the DETAIL section below, we shall look at the leading large caps in both categories and suggest opportunities in each.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/146/894/original/2020-07-20_11-42-42.png?1595213322" class="editor-image img-responsive" data-smartkarma-image-id="146894"></figure><div class="content-caption">Source • Japan Analytics</div>RELATIVE PRICE - We shall also conduct the same analysis using our Relative Price Score methodology. The July numbers are 469 Relative Price Score new lows and 229 new highs suggesting a high degree of market polarity as confirmed by the percentages of market value in Overbought and Oversold Stocks - which are both at twenty-year highs.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/146/895/original/2020-07-20_11-58-18.png?1595214235" class="editor-image img-responsive" data-smartkarma-image-id="146895"></figure><div class="content-caption">Source • Japan Analytics</div>RESULTS DRIVER - We expect the number of absolute 'heroes and villains' to increase in the next two months as the COVID fallout on earnings is revealed, and will provide further updates as we progress.

Source • Japan AnalyticsTHE 'HUNDRED DAYS WAR' - It is almost one hundred days since the equity markets began to discount the onset of COVID-19. Since the TOPIX closing low of 1,236.34 on 16th March, the index has recovered by 27%. However, it has only been in the last ten trading days that the number of new two-year share price highs and lows has consistently been in double-digits.  This month has seen 136 new two-year lows and 214 new two-year highs. Whatever the impact of COVID-19 on earnings, the market is very clearly signalling its preferences for COVID 'Heroes &amp; Villains'. In the DETAIL section below, we shall look at the leading large caps in both categories and suggest opportunities in each.Source • Japan AnalyticsRELATIVE PRICE - We shall also conduct the same analysis using our Relative Price Score methodology. The July numbers are 469 Relative Price Score new lows and 229 new highs suggesting a high degree of market polarity as confirmed by the percentages of market value in Overbought and Oversold Stocks - which are both at twenty-year highs.Source • Japan AnalyticsRESULTS DRIVER - We expect the number of absolute 'heroes and villains' to increase in the next two months as the COVID fallout on earnings is revealed, and will provide further updates as we progress. 

🇯🇵 JAPAN • The Hundred Days War - COVID Heroes & Villains

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/139/255/original/2020-06-11_08-36-54.png?1591832240" class="editor-image img-responsive" data-smartkarma-image-id="139255"></figure><div class="content-caption">Source: Japan Analytics</div>STRESS TESTS - This Insight is the first in a series that will use a variety of standard and less-frequently used 'stress-tests' to look through the current euphoria and assess where business risk is concentrated among larger Japanese companies. According to Tokyo Shoko Research, 171 listed Japanese firms have raised nearly ¥10 trillion in new funds to weather COVID-19.ALTMAN Z-SCORES - The first Insight will update our earlier Who's<a href="https://www.smartkarma.com/insights/japan-who-s-swimming-naked-part-2-altman-z-score" target="_blank" data-smartkarma-citation="insights:37316" rel="noopener"> Swimming Naked?</a> Insight and focus on the Altman Z-Score as updated for the most recent quarterly results for both manufacturing and non-manufacturing companies.  In each category, ee will look at both the companies that are below Altman's 'distress' levels and those companies that have the most significant negative deviation from their seven-year average score. Only six of the bottom-thirty manufacturing and five of the bottom-thirty manufacturing companies have outperformed over one year. Many are already Oversold and offer potential value opportunities -as with <a href="https://www.smartkarma.com/entities/nissan-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:72:1" rel="noopener">Nissan Motor (7201 JP)</a> which is now as distressed as when Carlos Ghosn first arrived.  QUASI-FINANCIAL FIRMS - The Z-Score methodology does not work for financial firms. Accordingly, five non-financial companies which have significant financial subsidiaries -  <a href="https://www.smartkarma.com/entities/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten (4755 JP)</a>, <a href="https://www.smartkarma.com/entities/z-holdings-corp" target="_blank" data-smartkarma-citation="entities:19603:1" rel="noopener">Z Holdings (4689 JP)</a>, <a href="https://www.smartkarma.com/entities/japan-post-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:359:1" rel="noopener">Japan Post (6178 JP)</a>, <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> and <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony (6758 JP)</a>- have been excluded from this analysis.

Source: Japan AnalyticsSTRESS TESTS - This Insight is the first in a series that will use a variety of standard and less-frequently used 'stress-tests' to look through the current euphoria and assess where business risk is concentrated among larger Japanese companies. According to Tokyo Shoko Research, 171 listed Japanese firms have raised nearly ¥10 trillion in new funds to weather COVID-19.ALTMAN Z-SCORES - The first Insight will update our earlier Who's Swimming Naked? Insight and focus on the Altman Z-Score as updated for the most recent quarterly results for both manufacturing and non-manufacturing companies.  In each category, ee will look at both the companies that are below Altman's 'distress' levels and those companies that have the most significant negative deviation from their seven-year average score. Only six of the bottom-thirty manufacturing and five of the bottom-thirty manufacturing companies have outperformed over one year. Many are already Oversold and offer potential value opportunities -as with Nissan Motor (7201 JP) which is now as distressed as when Carlos Ghosn first arrived.  QUASI-FINANCIAL FIRMS - The Z-Score methodology does not work for financial firms. Accordingly, five non-financial companies which have significant financial subsidiaries -  Rakuten (4755 JP), Z Holdings (4689 JP), Japan Post (6178 JP), Softbank Group (9984 JP) and Sony (6758 JP)- have been excluded from this analysis. 

🇯🇵 JAPAN - Stress Tests Part 1 - Altman Z-Scores

Japan

MURATA MANUFACTURING COMPANY, LTD. manufactures and sells ceramic applied electronic components.  The Company's products include filters, capacitors, thermistors, resistors, noise suppression components, coils, piezoelectric sound components, power supplies, sensors, hybrid integrated circuit (IC), and microwave components.

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Murata Manufacturing (6981 JP)

Nikkei 225 Index Rebalance: Likely Candidates to Replace NTT Docomo

Late last evening, Nikkei published an article

Brian Freitas

Taiyo’s OP Outperforms Consensus Amidst COVID-19

Taiyo Yuden (6976 JP)’s 1Q FY03/21 was weak but surpassed market expectations on OP significantly. 1Q revenue and OP declined by 11.9% YoY and 17%...

Aqila Ali

Murata Outperforms Despite a Weak 1QFY03/21

Murata Manufacturing (6981 JP)’s 1Q FY03/21 was weak but better than expected. 1Q revenue declined by 8.6% YoY and operating profits declined by...

Aqila Ali

🇯🇵 JAPAN • The Hundred Days War - COVID Heroes & Villains

THE 'HUNDRED DAYS WAR' - It is almost one hundred days since the equity markets began to discount the onset of COVID-19. Since the TOPIX closing...

Campbell Gunn

🇯🇵 JAPAN - Stress Tests Part 1 - Altman Z-Scores

STRESS TESTS - This Insight is the first in a series that will use a variety of standard and less-frequently used 'stress-tests' to look through...

Campbell Gunn

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