Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

Harmonic Drive Systems / Equity Bottom-Up

<p>With <a href="https://www.smartkarma.com/entities/10238" target="_blank" data-smartkarma-citation="entities:10238:1">Harmonic Drive Systems (6324 JP)</a> having rebounded as much as 56% from its trough this year, risk-reward looks decidedly less attractive now. While we had been somewhat constructive on the name due to order looking like they have a hit bottom, a closer analysis of the breakdown of orders has us thinking that a potential rebound could underwhelm relative to the markets revenue expectations and that the stock's premium multiple could leave it more vulnerable than more modestly priced peers.</p>

With Harmonic Drive Systems (6324 JP) having rebounded as much as 56% from its trough this year, risk-reward looks decidedly less attractive now. While we had been somewhat constructive on the name due to order looking like they have a hit bottom, a closer analysis of the breakdown of orders has us thinking that a potential rebound could underwhelm relative to the markets revenue expectations and that the stock's premium multiple could leave it more vulnerable than more modestly priced peers.

Harmonic Drive: Measuring the Potential Downside Risk

<p>Following a long period of weakness, robotics related stocks are displaying stronger performance recently as 3Q results have come in weak, but generally done so with management reassurances that this is the bottom.</p>
<table class="table table-striped">
<tbody>
<tr>
<td>Company</td>
<td>Peak to Trough Performance</td>
<td>Trough</td>
<td>Performance Since Trough</td>
</tr>
<tr>
<td><a href="https://www.smartkarma.com/entities/752" target="_blank" data-smartkarma-citation="entities:752:1">Fanuc Corp (6954 JP)</a></td>
<td style="text-align: right;">-52.8%</td>
<td style="text-align: right;">26 Dec</td>
<td style="text-align: right;">+18.6%</td>
</tr>
<tr>
<td><a href="https://www.smartkarma.com/entities/2458" target="_blank" data-smartkarma-citation="entities:2458:1">Yaskawa Electric (6506 JP)</a></td>
<td style="text-align: right;">-58.5%</td>
<td style="text-align: right;">4 Jan</td>
<td style="text-align: right;">+24.7%</td>
</tr>
<tr>
<td><a href="https://www.smartkarma.com/entities/13176" target="_blank" data-smartkarma-citation="entities:13176:1">Nabtesco Corp (6268 JP)</a></td>
<td style="text-align: right;">-58.9%</td>
<td style="text-align: right;">26 Dec</td>
<td style="text-align: right;">+35.4%</td>
</tr>
<tr>
<td><a href="https://www.smartkarma.com/entities/10238" target="_blank" data-smartkarma-citation="entities:10238:1">Harmonic Drive Systems (6324 JP)</a></td>
<td style="text-align: right;">-65.8%</td>
<td style="text-align: right;">4 Jan</td>
<td style="text-align: right;">+41.3%</td>
</tr>
</tbody>
</table>
<p>We had been negative on the sector for some time before turning more constructive in mid January following Yaskawa's earnings. We concur with the general messaging that this is the bottom based on our analysis of order levels for the companies and regional trend breakdowns. We do not expect a particularly sharp rebound in orders and sales in the near future and believe there is still some risk of these stocks returning toward the lows over the course of the year. However, we believe that the next significant move should be upwards and longer term investors should be looking for entry timings.</p>

Following a long period of weakness, robotics related stocks are displaying stronger performance recently as 3Q results have come in weak, but generally done so with management reassurances that this is the bottom.



Company
Peak to Trough Performance
Trough
Performance Since Trough


Fanuc Corp (6954 JP)
-52.8%
26 Dec
+18.6%


Yaskawa Electric (6506 JP)
-58.5%
4 Jan
+24.7%


Nabtesco Corp (6268 JP)
-58.9%
26 Dec
+35.4%


Harmonic Drive Systems (6324 JP)
-65.8%
4 Jan
+41.3%



We had been negative on the sector for some time before turning more constructive in mid January following Yaskawa's earnings. We concur with the general messaging that this is the bottom based on our analysis of order levels for the companies and regional trend breakdowns. We do not expect a particularly sharp rebound in orders and sales in the near future and believe there is still some risk of these stocks returning toward the lows over the course of the year. However, we believe that the next significant move should be upwards and longer term investors should be looking for entry timings.

Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc

'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

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/078/341/original/2019-02-10_05-07-57.png?1549742898" class="editor-image img-responsive" data-smartkarma-image-id="78341"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>BOTTOM LINE BREAKDOWN</strong> - 1,277 earnings results and/or revisions announcements were released last week in Japan covering 36% of listed market capitalisation. The good news is that aggregate trailing-twelve-month (TTM) Operating Income only declined by ¥300b. Less welcome is the ¥1.7t decline in TTM Net Income to which <a href="https://www.smartkarma.com/entities/73" target="_blank" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a>, <a href="https://www.smartkarma.com/entities/154" target="_blank" data-smartkarma-citation="entities:154:1">Honda Motor (7267 JP)</a>, <a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">Softbank Group (9984 JP)</a>, <a href="https://www.smartkarma.com/entities/7797" target="_blank" data-smartkarma-citation="entities:7797:1">Hitachi (6501 JP)</a> were the most significant contributors, each declining by more than ¥200b. Three 'financials', <a href="https://www.smartkarma.com/entities/742" target="_blank" data-smartkarma-citation="entities:742:1">Nomura Holdings (8604 JP)</a>, <a href="https://www.smartkarma.com/entities/219" target="_blank" data-smartkarma-citation="entities:219:1">Mizuho Financial Group (8411 JP)</a>, and <a href="https://www.smartkarma.com/entities/6267" target="_blank" data-smartkarma-citation="entities:6267:1">Suruga Bank (8358 JP)</a> subtracted ¥400b between them. Only <a href="https://www.smartkarma.com/entities/563" target="_blank" data-smartkarma-citation="entities:563:1">Sony (6758 JP)</a> and <a href="https://www.smartkarma.com/entities/637" target="_blank" data-smartkarma-citation="entities:637:1">Toshiba (6502 JP)</a> added more than ¥100b for the quarter. <strong>The substantial 'gap' between forecast and TTM Net Income has been reduced to just ¥600b, again confirming the reliability of corporate forecasting in Japan. The All-Market PER is now 13.5 times but will likely rise as aggregate Net Income falls further in the next two weeks.</strong></p><div class="content-highlight"><p><strong>In the DETAIL section below, we review this year's results of all listed companies in aggregate, update our All-Market and Sector Results &amp; Revision Scores and look at the twenty-five best and worst large-cap company results over the last week, with short comments on <a href="https://www.smartkarma.com/entities/13176" target="_blank" data-smartkarma-citation="entities:13176:1">Nabtesco Corp (6268 JP)</a>, <a href="https://www.smartkarma.com/entities/8467" target="_blank" data-smartkarma-citation="entities:8467:1">Workman (7564 JP)</a>, <a href="https://www.smartkarma.com/entities/20823" target="_blank" data-smartkarma-citation="entities:20823:1">Nakanishi (7716 JP)</a>, and <a href="https://www.smartkarma.com/entities/747" target="_blank" data-smartkarma-citation="entities:747:1">DeNA (2432 JP)</a></strong></p></div>

Source: Japan AnalyticsBOTTOM LINE BREAKDOWN - 1,277 earnings results and/or revisions announcements were released last week in Japan covering 36% of listed market capitalisation. The good news is that aggregate trailing-twelve-month (TTM) Operating Income only declined by ¥300b. Less welcome is the ¥1.7t decline in TTM Net Income to which Toyota Motor (7203 JP), Honda Motor (7267 JP), Softbank Group (9984 JP), Hitachi (6501 JP) were the most significant contributors, each declining by more than ¥200b. Three 'financials', Nomura Holdings (8604 JP), Mizuho Financial Group (8411 JP), and Suruga Bank (8358 JP) subtracted ¥400b between them. Only Sony (6758 JP) and Toshiba (6502 JP) added more than ¥100b for the quarter. The substantial 'gap' between forecast and TTM Net Income has been reduced to just ¥600b, again confirming the reliability of corporate forecasting in Japan. The All-Market PER is now 13.5 times but will likely rise as aggregate Net Income falls further in the next two weeks.In the DETAIL section below, we review this year's results of all listed companies in aggregate, update our All-Market and Sector Results &amp; Revision Scores and look at the twenty-five best and worst large-cap company results over the last week, with short comments on Nabtesco Corp (6268 JP), Workman (7564 JP), Nakanishi (7716 JP), and DeNA (2432 JP)

Japan: Results & Revisions Second Cut - Bottom Line Breakdown

Thematic (Sector/Industry)

<p>As the world says goodbye to Rethink Robotics' Baxter and Sawyer, we would caution against drawing the wrong inferences from the failure of this pioneer of the cobotics movement.</p><p>Ultimately, while Rethink Robotics had a great idea, we believe poor execution and product fit - particularly for more demanding industrial customers were what doomed the company, rather than a weak market where, by all accounts, growth continues to steam along. While market expectations have rightly corrected.</p>

As the world says goodbye to Rethink Robotics' Baxter and Sawyer, we would caution against drawing the wrong inferences from the failure of this pioneer of the cobotics movement.Ultimately, while Rethink Robotics had a great idea, we believe poor execution and product fit - particularly for more demanding industrial customers were what doomed the company, rather than a weak market where, by all accounts, growth continues to steam along. While market expectations have rightly corrected.

Shuttering of Rethink Robotics Just a Bump in the Road for Cobots

<p>We had been positive on the factory automation robotics names for most of last year, favouring <a href="https://www.smartkarma.com/entities/2458" target="_blank" data-smartkarma-citation="entities:2458:1">Yaskawa Electric Corp (6506 JP)</a>, <a href="https://www.smartkarma.com/entities/13176" target="_blank" data-smartkarma-citation="entities:13176:1">Nabtesco Corp (6268 JP)</a> and <a href="https://www.smartkarma.com/entities/10238" target="_blank" data-smartkarma-citation="entities:10238:1">Harmonic Drive Systems Inc (6324 JP)</a>, but taking a negative view on <a href="https://www.smartkarma.com/entities/752" target="_blank" data-smartkarma-citation="entities:752:1">Fanuc Corp (6954 JP)</a>. This proved the right call on a relative basis with Yaskawa outperforming Fanuc by 71% from Jan till Oct 2017 when we finally suggested stepping away from the sector. This was despite a 22% rise in Fanuc itself. Since that call in Oct, Fanuc is down 9%…</p>

We had been positive on the factory automation robotics names for most of last year, favouring Yaskawa Electric Corp (6506 JP), Nabtesco Corp (6268 JP) and Harmonic Drive Systems Inc (6324 JP), but taking a negative view on Fanuc Corp (6954 JP). This proved the right call on a relative basis with Yaskawa outperforming Fanuc by 71% from Jan till Oct 2017 when we finally suggested stepping away from the sector. This was despite a 22% rise in Fanuc itself. Since that call in Oct, Fanuc is down 9%…

LightStream Factory Automation View: Still Early in the Downcycle

Japan

Nabtesco Corporation manufactures Aircraft and Hydraulic products, Precision equipment, and transportation equipment. The Company's products include landing gear system for aircrafts, railroad vehicle brake system, and precision reduction gears for industrial robots.

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Nabtesco (6268 JP)

Harmonic Drive: Measuring the Potential Downside Risk

With Harmonic Drive Systems (6324 JP) having rebounded as much as 56% from its trough this year, risk-reward looks decidedly less attractive now....

Mio Kato

Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc

Following a long period of weakness, robotics related stocks are displaying stronger performance recently as 3Q results have come in weak, but...

Mio Kato

Japan: Results & Revisions Second Cut - Bottom Line Breakdown

BOTTOM LINE BREAKDOWN - 1,277 earnings results and/or revisions announcements were released last week in Japan covering 36% of listed market...

Campbell Gunn

Shuttering of Rethink Robotics Just a Bump in the Road for Cobots

As the world says goodbye to Rethink Robotics' Baxter and Sawyer, we would caution against drawing the wrong inferences from the failure of this...

Mio Kato

LightStream Factory Automation View: Still Early in the Downcycle

We had been positive on the factory automation robotics names for most of last year, favouring Yaskawa Electric Corp (6506 JP), Nabtesco Corp (6268...

Mio Kato

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