Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, 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

The acquisition of OMRON Automotive Electronics Co. Ltd., announced on April 16, should further Nidec's advance into vehicle electrification and augmented/autonomous driving, enhancing the growth potential that supports its relatively high valuations. The acquisition will also bring Nidec approximately 600 engineers, forestalling a looming shortage. Omron is reportedly selling because it cannot afford the investment required to remain competitive in automotive control equipment.OMRON Automotive Electronics makes electronic control units (ECUs) for auto body, chassis, transmission and motor control, power steering and other power control systems, remote keyless entry and other RF/LF products, switches and other components. These fit with Nidec's focus on electric power steering (EPS) motors, electric brake motors, electric vehicle (EV) traction motor systems, and electronic control units (ECU). The acquisition also offers synergies with Elesys, an ECU manufacturer acquired by Nidec in 2014, in Advanced Driver Assistance Systems (ADAS). Nidec Elesys makes wave radar and camera-related products, while OMRON Automotive Electronics makes laser radar and driver monitoring systems.In FY Mar-18, Nidec, OMRON Automotive Electronics reported sales of ¥36.3 billion, recurring profit of ¥1.1 billion and net profit of ¥3.6 billion. The acquisition price, yet to be finalized, is expected to be about ¥100 billion. Given Nidec CEO Nagamori's reputation for driving a hard bargain, this does not seem particularly cheap, but the potential synergies and addition of a large number of experienced engineers indicate that it is not unreasonable.Nidec plans to announced FY Mar-19 results on April 23.

The acquisition of OMRON Automotive Electronics Co. Ltd., announced on April 16, should further Nidec's advance into vehicle electrification and augmented/autonomous driving, enhancing the growth potential that supports its relatively high valuations. The acquisition will also bring Nidec approximately 600 engineers, forestalling a looming shortage. Omron is reportedly selling because it cannot afford the investment required to remain competitive in automotive control equipment.OMRON Automotive Electronics makes electronic control units (ECUs) for auto body, chassis, transmission and motor control, power steering and other power control systems, remote keyless entry and other RF/LF products, switches and other components. These fit with Nidec's focus on electric power steering (EPS) motors, electric brake motors, electric vehicle (EV) traction motor systems, and electronic control units (ECU). The acquisition also offers synergies with Elesys, an ECU manufacturer acquired by Nidec in 2014, in Advanced Driver Assistance Systems (ADAS). Nidec Elesys makes wave radar and camera-related products, while OMRON Automotive Electronics makes laser radar and driver monitoring systems.In FY Mar-18, Nidec, OMRON Automotive Electronics reported sales of ¥36.3 billion, recurring profit of ¥1.1 billion and net profit of ¥3.6 billion. The acquisition price, yet to be finalized, is expected to be about ¥100 billion. Given Nidec CEO Nagamori's reputation for driving a hard bargain, this does not seem particularly cheap, but the potential synergies and addition of a large number of experienced engineers indicate that it is not unreasonable.Nidec plans to announced FY Mar-19 results on April 23.

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Friday 8 March after the close, the Nikkei <a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20190308E_1.pdf" target="_blank">announced</a> that because the third party share sale of <a href="https://www.smartkarma.com/entities/15895" target="_blank" data-smartkarma-citation="entities:15895:1">Pioneer Corp (6773 JP)</a>  had been completed, it would be deleted from the Nikkei 225 Average (and the Nikkei 500 Index). <a href="https://www.smartkarma.com/entities/15904" target="_blank" data-smartkarma-citation="entities:15904:1">Omron Corp (6645 JP)</a> will replace Pioneer in the Nikkei 225 Average, with a deemed par value of 50 yen per share.The date for this index deletion and inclusion event is the 15th of March, as per the schedule of the February 19th announcement as to how the Pioneer event would be treated. This affords special sits/events followers a couple of different events to look at.

Friday 8 March after the close, the Nikkei announced that because the third party share sale of Pioneer Corp (6773 JP)  had been completed, it would be deleted from the Nikkei 225 Average (and the Nikkei 500 Index). Omron Corp (6645 JP) will replace Pioneer in the Nikkei 225 Average, with a deemed par value of 50 yen per share.The date for this index deletion and inclusion event is the 15th of March, as per the schedule of the February 19th announcement as to how the Pioneer event would be treated. This affords special sits/events followers a couple of different events to look at. 

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Quantitative Analysis

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/728/original/2019-03-02_20-40-55.png?1551526871" class="editor-image img-responsive" data-smartkarma-image-id="80728"></figure>Source: Japan Analytics
</div>LIQUIDITY RULES - Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the strongest in over two years, and much of this 'boom' is flowing into risk assets. Large-scale repatriation of offshore funds by US companies has also helped boost the US dollar against the yen. The Market Composite responded by rising 2.3% over the last two weeks, although only by 1% in US dollar terms.WEAK MACRO - Net exports and higher inventories offset private investment and consumption during the fourth quarter, resulting in flat GDP growth year-on-year. January industrial production fell to the lowest level in 30 months, and, with the manufacturing PMI nearing 50, the prospect is for further weakness this quarter. Inventories continue to rise and, in North Asia, to levels last seen in 2005. Combined with the sharp fall in exports in Japan, Korea and Taiwan, export pricing in back in deflationary territory, putting further upward pressure on real interest rates.  Meanwhile, January retail sales saw the largest month-on-month decline in over three years as department stores saw fewer Chinese tourists over the New Year.  Equity markets are living on 'borrowed time'.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/722/original/2019-03-02_18-02-59.png?1551517390" class="editor-image img-responsive" data-smartkarma-image-id="80722"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/724/original/2019-03-02_18-07-56.png?1551517689" class="editor-image img-responsive" data-smartkarma-image-id="80724"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/729/original/2019-03-02_20-41-51.png?1551526925" class="editor-image img-responsive" data-smartkarma-image-id="80729"></figure><div class="content-caption">Source: Japan Analytics</div>HOLD FOR NOW - This bear market rally is two months old and is maturing. The Value Traded ratio is below trend again, the RSI is neutral, and the Toraku is signalling caution. We expect another month of liquidity/weak Yen-driven strength before the economic realities begin to prevail.MARKET/SECTOR STRATEGY- We continue to recommend an underweight position in Japan in global portfolios and favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, Transportation, Healthcare and Telecommunications sectors. We would avoid or short the financial sectors Banks, Non-Bank Finance and Multi-Industry. We would underweight the Auto, Retail and Other Consumer Products sectors as consumer spending contracts further in the US, Europe, China and Japan. In the DETAIL section below, we will review Sector performance, company results, revisions and stock performance over the previous two weeks, as well as adding some brief comments on <a href="https://www.smartkarma.com/entities/10020" target="_blank" data-smartkarma-citation="entities:10020:1">Sakai Moving Service (9039 JP)</a>, <a href="https://www.smartkarma.com/entities/20269" target="_blank" data-smartkarma-citation="entities:20269:1">Sumitomo Chemical (4005 JP)</a>, <a href="https://www.smartkarma.com/entities/8431" target="_blank" data-smartkarma-citation="entities:8431:1">Parco (8251 JP)</a>, <a href="https://www.smartkarma.com/entities/4489" target="_blank" data-smartkarma-citation="entities:4489:1">Chugai Pharmaceutical (4519 JP)</a>, <a href="https://www.smartkarma.com/entities/14674" target="_blank" data-smartkarma-citation="entities:14674:1">Nichias (5393 JP)</a>, <a href="https://www.smartkarma.com/entities/27043" target="_blank" data-smartkarma-citation="entities:27043:1">Raksul (4384 JP)</a>, <a href="https://www.smartkarma.com/entities/10503" target="_blank" data-smartkarma-citation="entities:10503:1">Daito Trust (1878 JP)</a>, and <a href="https://www.smartkarma.com/entities/14502" target="_blank" data-smartkarma-citation="entities:14502:1">Benefit One (2412 JP)</a>.


Source: Japan Analytics
LIQUIDITY RULES - Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the strongest in over two years, and much of this 'boom' is flowing into risk assets. Large-scale repatriation of offshore funds by US companies has also helped boost the US dollar against the yen. The Market Composite responded by rising 2.3% over the last two weeks, although only by 1% in US dollar terms.WEAK MACRO - Net exports and higher inventories offset private investment and consumption during the fourth quarter, resulting in flat GDP growth year-on-year. January industrial production fell to the lowest level in 30 months, and, with the manufacturing PMI nearing 50, the prospect is for further weakness this quarter. Inventories continue to rise and, in North Asia, to levels last seen in 2005. Combined with the sharp fall in exports in Japan, Korea and Taiwan, export pricing in back in deflationary territory, putting further upward pressure on real interest rates.  Meanwhile, January retail sales saw the largest month-on-month decline in over three years as department stores saw fewer Chinese tourists over the New Year.  Equity markets are living on 'borrowed time'.  Source: Japan AnalyticsHOLD FOR NOW - This bear market rally is two months old and is maturing. The Value Traded ratio is below trend again, the RSI is neutral, and the Toraku is signalling caution. We expect another month of liquidity/weak Yen-driven strength before the economic realities begin to prevail.MARKET/SECTOR STRATEGY- We continue to recommend an underweight position in Japan in global portfolios and favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, Transportation, Healthcare and Telecommunications sectors. We would avoid or short the financial sectors Banks, Non-Bank Finance and Multi-Industry. We would underweight the Auto, Retail and Other Consumer Products sectors as consumer spending contracts further in the US, Europe, China and Japan. In the DETAIL section below, we will review Sector performance, company results, revisions and stock performance over the previous two weeks, as well as adding some brief comments on Sakai Moving Service (9039 JP), Sumitomo Chemical (4005 JP), Parco (8251 JP), Chugai Pharmaceutical (4519 JP), Nichias (5393 JP), Raksul (4384 JP), Daito Trust (1878 JP), and Benefit One (2412 JP).   

🇯🇵 Japan • Fortnightly Update - Liquidity Rules

Since hitting a 52-week low of ¥50, 780 on October 26, Keyence has rebounded by 18%. On November 1, the company announced double-digit 1H sales and profit growth, and an increase in the dividend from ¥100 to ¥200 per share. On Friday, November 2, the share price jumped 11.3% to ¥60,060.Operating profit was up 16.6% on a 17.3% increase in sales in the six months to September, in marked contrast to poor results at other factory automation related companies such as Fanuc (6954 JP) and Omron (6645 JP). We attribute this to Keyence's gearing to incremental improvements rather than large capital outlays, and to customers' R&amp;D spending, plus its diversified user industries and active development of new markets.That does not mean that Keyence has escaped the slowdown affecting the overall factory automation business. Sales growth dropped from 19.7% in 1Q to 15.2% in 2Q and operating profit growth dropped from 21.2% to 12.7%. Net profit growth dropped to 9.3%, but that was due in part to the revision of financial statements at affiliate JustSystems (4686 JP), which resulted in an equity method loss.Year-on-year sales and operating profit growth rates peaked in the three months to Dec-17 at 34.0% and 40.7%, respectively, and have now declined for three quarters in a row. Before that, in the three months to Sep-16,  sales  and operating profit growth rates bottomed out at 2.6% and -0.1%. In view of industry trends and American protectionism, investor's concerns seem unlikely to dissipate until growth rates stop falling.In view of economic conditions, we have lowered our profit forecast for this fiscal year and lowered both our sales and profit forecasts for FY Mar-20. We expect growth to continue to decelerate for at least two more quarters. The shares are now selling at 31x our new EPS estimate for this fiscal year and 29x our estimate for next year. Their 5-year historical P/E range is 18x - 42x, with the market now splitting the difference. Consolidation of last week's gains seems likely.<div class="content-highlight">Keyence supplies sensors, measuring systems, laser markers, microscopes, machine vision systems and other products used in factory automation to a wide range of industries including electronics, autos, metal products, materials, food, pharmaceuticals and packaging.  It has more than 200,000 customers in about 100 countries and territories worldwide. These are served by offices in 30 countries in the Americas, Europe and Asia-Pacific, and by representatives elsewhere. Products, parts and materials are sourced from numerous suppliers, mostly in Japan, but in the case of parts and materials also in other countries. Goods for sale are finished in Japan. </div>

Since hitting a 52-week low of ¥50, 780 on October 26, Keyence has rebounded by 18%. On November 1, the company announced double-digit 1H sales and profit growth, and an increase in the dividend from ¥100 to ¥200 per share. On Friday, November 2, the share price jumped 11.3% to ¥60,060.Operating profit was up 16.6% on a 17.3% increase in sales in the six months to September, in marked contrast to poor results at other factory automation related companies such as Fanuc (6954 JP) and Omron (6645 JP). We attribute this to Keyence's gearing to incremental improvements rather than large capital outlays, and to customers' R&amp;D spending, plus its diversified user industries and active development of new markets.That does not mean that Keyence has escaped the slowdown affecting the overall factory automation business. Sales growth dropped from 19.7% in 1Q to 15.2% in 2Q and operating profit growth dropped from 21.2% to 12.7%. Net profit growth dropped to 9.3%, but that was due in part to the revision of financial statements at affiliate JustSystems (4686 JP), which resulted in an equity method loss.Year-on-year sales and operating profit growth rates peaked in the three months to Dec-17 at 34.0% and 40.7%, respectively, and have now declined for three quarters in a row. Before that, in the three months to Sep-16,  sales  and operating profit growth rates bottomed out at 2.6% and -0.1%. In view of industry trends and American protectionism, investor's concerns seem unlikely to dissipate until growth rates stop falling.In view of economic conditions, we have lowered our profit forecast for this fiscal year and lowered both our sales and profit forecasts for FY Mar-20. We expect growth to continue to decelerate for at least two more quarters. The shares are now selling at 31x our new EPS estimate for this fiscal year and 29x our estimate for next year. Their 5-year historical P/E range is 18x - 42x, with the market now splitting the difference. Consolidation of last week's gains seems likely.Keyence supplies sensors, measuring systems, laser markers, microscopes, machine vision systems and other products used in factory automation to a wide range of industries including electronics, autos, metal products, materials, food, pharmaceuticals and packaging.  It has more than 200,000 customers in about 100 countries and territories worldwide. These are served by offices in 30 countries in the Americas, Europe and Asia-Pacific, and by representatives elsewhere. Products, parts and materials are sourced from numerous suppliers, mostly in Japan, but in the case of parts and materials also in other countries. Goods for sale are finished in Japan. 

Keyence (6861 JP): 1H Results Impressive, but Slowdown Continues

Director, Pearl Hill Advisors

Nicholas Tanner

Director

Pearl Hill Advisors

1Q results were in line with the company's forecast. Sales rose 3% to Y209.8bn, gross profit rose 4% to Y87.7bn but operating profit fell 14% to Y19.6bn. This was due to higher R&amp;D costs as well as increased labour costs (particularly engineers). Marketing costs also rose. This has been a deliberate strategy implemented from the second half of last year. In terms of the business, the industrial automation business (IAB) saw sales rise 7% to Y102.8bn ((49% of sales) but operating profit fell 12%…

1Q results were in line with the company's forecast. Sales rose 3% to Y209.8bn, gross profit rose 4% to Y87.7bn but operating profit fell 14% to Y19.6bn. This was due to higher R&amp;D costs as well as increased labour costs (particularly engineers). Marketing costs also rose. This has been a deliberate strategy implemented from the second half of last year. In terms of the business, the industrial automation business (IAB) saw sales rise 7% to Y102.8bn ((49% of sales) but operating profit fell 12%…

Omron (6645) Results Inline, Management Increasingly Focused on Shareholder Returns. BUY Shares Here

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)

Nidec (6594 JP): More Strategic M&A

The acquisition of OMRON Automotive Electronics Co. Ltd., announced on April 16, should further Nidec's advance into vehicle electrification and...

Scott Foster

Omron into the Nikkei 225, Pioneer Out

Friday 8 March after the close, the Nikkei announced that because the third party share sale of Pioneer Corp (6773 JP) had been completed, it...

Travis Lundy

🇯🇵 Japan • Fortnightly Update - Liquidity Rules

LIQUIDITY RULES - Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the...

Campbell Gunn

Keyence (6861 JP): 1H Results Impressive, but Slowdown Continues

Since hitting a 52-week low of ¥50, 780 on October 26, Keyence has rebounded by 18%. On November 1, the company announced double-digit 1H sales and...

Scott Foster

Omron (6645) Results Inline, Management Increasingly Focused on Shareholder Returns. BUY Shares Here

1Q results were in line with the company's forecast. Sales rose 3% to Y209.8bn, gross profit rose 4% to Y87.7bn but operating profit fell 14% to...

Pearl Hill Advisors

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