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.

Event-Driven

Since the 17th of March we have published several notes regarding skews in performance between names that have heavy weights in TOPIX vs. those with heavy weights in the Nikkei. While it has required some very nimble trading the alpha generation if you were on the right side of the trades has been exceptionally good. We summarise the performance of the names we have highlighted and our thoughts on when to close out these trades below.

Since the 17th of March we have published several notes regarding skews in performance between names that have heavy weights in TOPIX vs. those with heavy weights in the Nikkei. While it has required some very nimble trading the alpha generation if you were on the right side of the trades has been exceptionally good. We summarise the performance of the names we have highlighted and our thoughts on when to close out these trades below.

Taking Stock of the Almost Excessive Alpha Generation From TOPIX-Nikkei Skew Trades

With the BOJ announcing yesterday that it would double the upper limit of its ETF purchases to ¥12trn a year and its previous policy shift to favour TOPIX-based ETFs over Nikkei-based ETFs it made sense for TOPIX to outperform Nikkei today. However, we found the degree of outperformance to be slightly surprising as TOPIX rose 2.60% while the Nikkei barely squeaked out a +0.06% gain. Below, we examine some individual names within the two indices to try and identify pairs which could generate alpha based on this theme.

With the BOJ announcing yesterday that it would double the upper limit of its ETF purchases to ¥12trn a year and its previous policy shift to favour TOPIX-based ETFs over Nikkei-based ETFs it made sense for TOPIX to outperform Nikkei today. However, we found the degree of outperformance to be slightly surprising as TOPIX rose 2.60% while the Nikkei barely squeaked out a +0.06% gain. Below, we examine some individual names within the two indices to try and identify pairs which could generate alpha based on this theme.

'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. 

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/115/540/original/2020-01-30_04-53-40.png?1580327644" class="editor-image img-responsive" data-smartkarma-image-id="115540"></figure><div class="content-caption">Source • Japan Analytics</div>29TH JANUARY ROUNDUP - Thre were 74 results and 30 forecasts or revisions announcements yesterday. Of the 32 larger-cap companies reporting results, seven saw year-on-year declines in their quarterly OP of greater than 25%, while three - <a href="https://www.smartkarma.com/entities/nec-corp" target="_blank" data-smartkarma-citation="entities:17084:1" rel="noopener">NEC (6701 JP)</a>, <a href="https://www.smartkarma.com/entities/cyberagent-inc" target="_blank" data-smartkarma-citation="entities:8197:1" rel="noopener">CyberAgent(4751 JP)</a>, and <a href="https://www.smartkarma.com/entities/valuecommerce-co-ltd" target="_blank" data-smartkarma-citation="entities:7970:1" rel="noopener">ValueCommerce (2491 JP)</a> grew profits by more than 25%, with the last of the three showing the strongest revenue growth. <a href="https://www.smartkarma.com/entities/omron-corp" target="_blank" data-smartkarma-citation="entities:15904:1" rel="noopener">Omron (6645 JP)</a> saw sales fall by 23%. Our market composite cap-weighted Results Score declined by 8bps to 0.99FORECASTS - <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" data-smartkarma-citation="entities:1:1" rel="noopener">Canon (7751 JP)</a> released the most optimistic forecasts and account for the 24bps uptick in our Forecast/Revision Score; however, in terms of OP the FY2020 forecast is the same as the FY2016 actual result which was the second-worst outcome in the last decade after FY2019. The weakest outlook came from <a href="https://www.smartkarma.com/entities/screen-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:5563:1" rel="noopener">Screen (7735 JP)</a> (-28% v TTM OP), which, when combined with <a href="https://www.smartkarma.com/entities/advantest-corp" target="_blank" data-smartkarma-citation="entities:18107:1" rel="noopener">Advantest (6857 JP)</a>'s third-quarter results, should go some way to puncturing the current fad for owning SPE companies.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/115/543/original/2020-01-30_05-28-22.png?1580329720" class="editor-image img-responsive" data-smartkarma-image-id="115543"></figure><div class="content-caption">Source • Japan Analytics</div>POST-RELEASE RPS CHANGES - Of the larger-cap companies announcing the day before yesterday or pre-close yesterday, <a href="https://www.smartkarma.com/entities/obic-co-ltd" target="_blank" data-smartkarma-citation="entities:1273:1" rel="noopener">OBIC (4684 JP)</a>, <a href="https://www.smartkarma.com/entities/obic-business-consultants" target="_blank" data-smartkarma-citation="entities:17383:1" rel="noopener">Obic Business Consultants (4733 JP)</a>, and <a href="https://www.smartkarma.com/entities/sakai-moving-service-co-ltd" target="_blank" data-smartkarma-citation="entities:10020:1" rel="noopener">Sakai Moving Service (9039 JP)</a> saw Relative Price Score declines. In contrast, the two Canon group companies, <a href="https://www.smartkarma.com/entities/m3-inc" target="_blank" data-smartkarma-citation="entities:13316:1" rel="noopener">M3 (2413 JP)</a>, and <a href="https://www.smartkarma.com/entities/sekisui-jushi-corp" target="_blank" data-smartkarma-citation="entities:7654:1" rel="noopener">Sekisui Jushi (4212 JP)</a> rose.  In the DETAIL below, we review our Sector Timelines and the announcements from <a href="https://www.smartkarma.com/entities/fanuc-corp" target="_blank" data-smartkarma-citation="entities:752:1" rel="noopener">Fanuc (6954 JP)</a>, <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" data-smartkarma-citation="entities:1:1" rel="noopener">Canon (7751 JP)</a>, <a href="https://www.smartkarma.com/entities/nec-corp" target="_blank" data-smartkarma-citation="entities:17084:1" rel="noopener">NEC (6701 JP)</a>, <a href="https://www.smartkarma.com/entities/cyberagent-inc" target="_blank" data-smartkarma-citation="entities:8197:1" rel="noopener">CyberAgent (4751 JP)</a>, <a href="https://www.smartkarma.com/entities/omron-corp" target="_blank" data-smartkarma-citation="entities:15904:1" rel="noopener">Omron (6645 JP)</a>, and <a href="https://www.smartkarma.com/entities/advantest-corp" target="_blank" data-smartkarma-citation="entities:18107:1" rel="noopener">Advantest(6857 JP)</a>.

Source • Japan Analytics29TH JANUARY ROUNDUP - Thre were 74 results and 30 forecasts or revisions announcements yesterday. Of the 32 larger-cap companies reporting results, seven saw year-on-year declines in their quarterly OP of greater than 25%, while three - NEC (6701 JP), CyberAgent(4751 JP), and ValueCommerce (2491 JP) grew profits by more than 25%, with the last of the three showing the strongest revenue growth. Omron (6645 JP) saw sales fall by 23%. Our market composite cap-weighted Results Score declined by 8bps to 0.99FORECASTS - Canon (7751 JP) released the most optimistic forecasts and account for the 24bps uptick in our Forecast/Revision Score; however, in terms of OP the FY2020 forecast is the same as the FY2016 actual result which was the second-worst outcome in the last decade after FY2019. The weakest outlook came from Screen (7735 JP) (-28% v TTM OP), which, when combined with Advantest (6857 JP)'s third-quarter results, should go some way to puncturing the current fad for owning SPE companies.Source • Japan AnalyticsPOST-RELEASE RPS CHANGES - Of the larger-cap companies announcing the day before yesterday or pre-close yesterday, OBIC (4684 JP), Obic Business Consultants (4733 JP), and Sakai Moving Service (9039 JP) saw Relative Price Score declines. In contrast, the two Canon group companies, M3 (2413 JP), and Sekisui Jushi (4212 JP) rose.  In the DETAIL below, we review our Sector Timelines and the announcements from Fanuc (6954 JP), Canon (7751 JP), NEC (6701 JP), CyberAgent (4751 JP), Omron (6645 JP), and Advantest(6857 JP). 

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 29th January - 6954▲ 7751► 6701▲ 4751▲ 6645▼6857▼

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

The TOPIX 2019 Free Float Weight Rebalance announcement was made on the 7th of October and the moves in the basket so far are limited. It is still a near-$20bn trade for month-end so investors should be aware of what is moving. There may be portfolio rebalance opportunities for your stocks trading on a LOC basis on the event day.Comprehensive basket performance and excess volume measurements where it matters below.

The TOPIX 2019 Free Float Weight Rebalance announcement was made on the 7th of October and the moves in the basket so far are limited. It is still a near-$20bn trade for month-end so investors should be aware of what is moving. There may be portfolio rebalance opportunities for your stocks trading on a LOC basis on the event day.Comprehensive basket performance and excess volume measurements where it matters below.

Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

Equity Bottom-Up

1Q results confirmed the first decline in Keyence's sales and profits in a decade. Caused by cyclical weakness in major user industries followed by the U.S.-China trade war, the resulting pall of uncertainty cast over corporate investment plans, and the appreciation of the yen, it has brought a long period of high growth and rising margins to an end.The duration and severity of the downturn remain unclear, but demand for factory automation products from the electronics, auto, and metal &amp; machine tool industries, which together account for more than 60% of the company's sales, is unlikely to rebound quickly. There is no sign of recovery in demand for semiconductors, cell phones, autos or the equipment used to make them. Weakening regional economies and the quarterly data point to difficult year-on-year comparisons for the rest of this fiscal year and the possibility of further sales and profit declines in FY Mar-21. Nevertheless, valuations remain high. At ¥61,400 (Wednesday, August 28 closing price), the shares are selling at 39x our EPS estimate for FY Mar-20, 40x our estimate for FY Mar-21 and 37x our estimate for FY Mar-22. We expect successively weak quarterly results to undermine expectations of a quick return to double-digit growth, with potential downside risk on the order of 20%.

1Q results confirmed the first decline in Keyence's sales and profits in a decade. Caused by cyclical weakness in major user industries followed by the U.S.-China trade war, the resulting pall of uncertainty cast over corporate investment plans, and the appreciation of the yen, it has brought a long period of high growth and rising margins to an end.The duration and severity of the downturn remain unclear, but demand for factory automation products from the electronics, auto, and metal &amp; machine tool industries, which together account for more than 60% of the company's sales, is unlikely to rebound quickly. There is no sign of recovery in demand for semiconductors, cell phones, autos or the equipment used to make them. Weakening regional economies and the quarterly data point to difficult year-on-year comparisons for the rest of this fiscal year and the possibility of further sales and profit declines in FY Mar-21. Nevertheless, valuations remain high. At ¥61,400 (Wednesday, August 28 closing price), the shares are selling at 39x our EPS estimate for FY Mar-20, 40x our estimate for FY Mar-21 and 37x our estimate for FY Mar-22. We expect successively weak quarterly results to undermine expectations of a quick return to double-digit growth, with potential downside risk on the order of 20%.

Keyence (6861 JP): Undermined by Weak Demand and Uncertainty

Japan

OMRON Corporation manufactures electronic components, equipment and systems used for factory automation. The Company provides products and services in a variety of fields including industrial automation, electronic components, automotive electronics, social systems such as ticket gate machines and traffic control, and healthcare.

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Omron Corp (6645 JP)

Taking Stock of the Almost Excessive Alpha Generation From TOPIX-Nikkei Skew Trades

Since the 17th of March we have published several notes regarding skews in performance between names that have heavy weights in TOPIX vs. those...

Mio Kato

The Topix Vs. Nikkei Skew

With the BOJ announcing yesterday that it would double the upper limit of its ETF purchases to ¥12trn a year and its previous policy shift to...

Mio Kato

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 29th January - 6954▲ 7751► 6701▲ 4751▲ 6645▼6857▼

29TH JANUARY ROUNDUP - Thre were 74 results and 30 forecasts or revisions announcements yesterday. Of the 32 larger-cap companies reporting...

Campbell Gunn

TOPIX FFW Rebalance - Halfway There

The TOPIX 2019 Free Float Weight Rebalance announcement was made on the 7th of October and the moves in the basket so far are limited. It is still...

Travis Lundy

Keyence (6861 JP): Undermined by Weak Demand and Uncertainty

1Q results confirmed the first decline in Keyence's sales and profits in a decade. Caused by cyclical weakness in major user industries followed by...

Scott Foster

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