Credit Researcher - South Asia, Bondcritic

Shrey Bhandari

Credit Researcher - South Asia

Asian Fixed Income/Frontier Market Research

Bondcritic

Bondcritic, established in 2009, is designed to be an independent credit research voice that helps investors gain insights and unbiased analyses on Asian fixed income market. Our mission is to discover deep-value Asian high-yield and distressed bonds with a bottom-up approach, together with the help of our proprietary ESG (Environmental, Social Development, and Governance) model. At the same time, we focus on bringing investment cases of unrated and unloved issuers to the general public.

Credit

Il&Fs Engineering & Construction / Credit

<p>We chose to study Infrastructure Leasing &amp; Financial Services Ltd (ILFS)’s default case. The company is engaged in infrastructure development and financing activities in India. Since the start of June 2018, the company has defaulted on a series of payments, resulting in rating downgrades. More recently, in January 2019, ILFS’ affiliated company Jharkhand Road Projects Implementation Company failed to pay INR760m due to its lenders. This resulted in CRISIL downgrading the bonds to D, which amounts to junk status. ILFS is one of the most important companies in the Indian infrastructure space and this default indicates signs of worry for investors.</p>

We chose to study Infrastructure Leasing &amp; Financial Services Ltd (ILFS)’s default case. The company is engaged in infrastructure development and financing activities in India. Since the start of June 2018, the company has defaulted on a series of payments, resulting in rating downgrades. More recently, in January 2019, ILFS’ affiliated company Jharkhand Road Projects Implementation Company failed to pay INR760m due to its lenders. This resulted in CRISIL downgrading the bonds to D, which amounts to junk status. ILFS is one of the most important companies in the Indian infrastructure space and this default indicates signs of worry for investors.

­­Asian Credit Monitor: Infrastructure Leasing & Financial Services – INR Bond Default

'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/000/077/686/original/2019-02-02_09-34-42.png?1549067763" class="editor-image img-responsive" data-smartkarma-image-id="77686"></figure><div class="content-caption">Source: Japan Analytics</div><div style="text-align: left;" class="content-caption">
<strong>Note:</strong> The Results &amp; Revision Score is the average of our Results Score and Forecasts/Revision Score and is updated daily for each company and then cap-weighted-aggregated into Peer Groups, Sectors and the Market Composite. Both scores have a maximum of +30 and a minimum of -30 for each period. The Results Score is calculated quarterly, using the most recent eight quarters of company data for revenues, operating income and operating margin and measures the rate, degree and consistency of change for each metric. The Forecast/Revision Score is based on Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month or previous first-half results, with annual forecasts being double-weighted.</div><p><strong>DRIP, DRIP, DRIP</strong> - We 'lead' this fortnight's update with our All-Market Composite Results &amp; Revision Score. Calculated daily, the score is a 'real-time' measure of the state of, and the outlook for, listed Japanese corporations. As the scoring methodology includes earnings momentum 'factors', the data series can be a useful leading indicator of forward earnings. The correlation with the market over the last four years is 0.578, with the indicator leading more often than lagging.   Since peaking on 16th November 2017, the Results &amp; Revisions Score has fallen by 62% and has now returned to the level of May 2017. In the last ten years, the score has only been lower than at present one-third of the time - mostly during the fiscal year ended March 2017 when the total market value averaged ¥550t, close to the December 2018 low. <strong>If we are to repeat the relatively-mild cyclical downturn of 2016, the Results &amp; Revision Score will turn negative in May of this year, and the 25th December 2018 low will be retested.</strong></p><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/701/original/2019-02-02_14-11-25.png?1549084295" class="editor-image img-responsive" data-smartkarma-image-id="77701"></figure><p>Source: Japan Analytics</p>
</div><p><strong>PAST THE PEAK</strong> - Our earnings indicator peaked 14 months ago, two months ahead of the market's high point on 26th January 2018. It now appears that aggregate reported earnings, as well as aggregate company forecasts for the current year, are now turning decisively lower after nine quarters of uninterrupted growth. Forecast Net Income for the current year is now 7% below the high point in trailing-twelve-month (TTM) Net Income from this cycle, which was reached two months ago. Operating Income is, as usual, 'lagging' and forecasts are still marginally ahead of TTM. The TTM all-market price-earnings ratio reached 11.5 times on Christmas Day, which will prove to be the cycle low point.<strong> We expect the return to median levels, to be achieved more through lower 'E' as opposed to a higher 'P'. </strong> <strong>Mr Market is currently implying that Japanese corporate profits are due to fall by 23% on average from the cycle peak, or by 30% if we are to revisit the December low-point. </strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/746/original/2019-02-03_07-23-31.png?1549146223" class="editor-image img-responsive" data-smartkarma-image-id="77746"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>THE FIRST CUT</strong> - 23% of listed companies reported their most recent quarterly earnings results in the last two weeks. For these companies, TTM revenues grew by 5.1% year-on-year, but only by 0.5% quarter-on-quarter, the lowest qoq growth rate in over a year. TTM Operating Income is now 0.8% lower than the TTM total of one year ago and declined by 4.4% qoq. Operating margins fell by 49bps year-on-year.  Current forecasts for this group of companies imply 3.1% yoy top line growth, but only 0.3% compared to the quarter just declared. For Operating Income, the rates are -2.0% and 0.6%, reflecting the normal TTM-to-forecast 'lag'. <strong>Corporate Japan's profits are now rolling over and will be in a 'recession' by the fiscal year-end.  </strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/722/original/2019-02-02_18-25-46.png?1549099572" class="editor-image img-responsive" data-smartkarma-image-id="77722"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>INTERREGNUM</strong> - Our bear market rally has paused to look at and digest the earnings-announcement news flow and will likely be trendless for the next few weeks as 'good' reactions offset 'bad'.<strong> In due course, we expect the preponderance of negative momentum to tip the scales.</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/077/724/original/2019-02-02_18-41-12.png?1549100508" class="editor-image img-responsive" data-smartkarma-image-id="77724"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>TORAKU @110</strong> - The <em>Toraku</em> advance-decline indicator has continued to recover and is within ten points of the overbought zone, which has only been breached once since the market peak of January 2018.<strong> This signal is 'amber' and could be 'red' by the end of next week. </strong></p><div class="content-highlight">
<p><strong>OUTLOOK &amp; RECOMMENDATIONS</strong></p>
<ul>
<li><strong>We continue to recommend an underweight position in Japan in global portfolios.</strong></li>
<li><strong>The equity market decline at the end of last year was well in advance of the underlying trends in the economy and corporate profits; the recent 10% rally has corrected that imbalance. Nevertheless, the global cycle has turned down sharply, and many economies will be in a recession by the end of this quarter. We expect Japanese corporate earnings to follow suit. <em> </em></strong></li>
<li><strong>Although some of the coming decline in aggregate earnings has been well-discounted, our Results &amp; Revision Score has yet to turn negative. Accordingly, we expect the market to retest the December 2018 low, probably in May when the FY2020 forecasts are announced and our score starts 'seeing red'.</strong></li>
<li><strong>In the near term and despite the rally in the more cyclical sectors, we continue to favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, and Telecommunications sectors. We would avoid or short Banks and Non-Bank Finance.</strong></li>
</ul>
</div><p>In the <strong>DETAIL</strong> section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on <a href="https://www.smartkarma.com/entities/3700" target="_blank" data-smartkarma-citation="entities:3700:1">Anritsu (6754 JP)</a>, <a href="https://www.smartkarma.com/entities/12001" target="_blank" data-smartkarma-citation="entities:12001:1">Alps Alpine (6770 JP)</a>, <a href="https://www.smartkarma.com/entities/24540" target="_blank" data-smartkarma-citation="entities:24540:1">SanBio (4592 JP)</a>, <a href="https://www.smartkarma.com/entities/454" target="_blank" data-smartkarma-citation="entities:454:1">Lixil (5938 JP)</a> (yes, again), <a href="https://www.smartkarma.com/entities/752" target="_blank" data-smartkarma-citation="entities:752:1">Fanuc (6954 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/8197" target="_blank" data-smartkarma-citation="entities:8197:1">Cyberagent (4751 JP)</a>.</p>

Source: Japan Analytics
Note: The Results &amp; Revision Score is the average of our Results Score and Forecasts/Revision Score and is updated daily for each company and then cap-weighted-aggregated into Peer Groups, Sectors and the Market Composite. Both scores have a maximum of +30 and a minimum of -30 for each period. The Results Score is calculated quarterly, using the most recent eight quarters of company data for revenues, operating income and operating margin and measures the rate, degree and consistency of change for each metric. The Forecast/Revision Score is based on Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month or previous first-half results, with annual forecasts being double-weighted.DRIP, DRIP, DRIP - We 'lead' this fortnight's update with our All-Market Composite Results &amp; Revision Score. Calculated daily, the score is a 'real-time' measure of the state of, and the outlook for, listed Japanese corporations. As the scoring methodology includes earnings momentum 'factors', the data series can be a useful leading indicator of forward earnings. The correlation with the market over the last four years is 0.578, with the indicator leading more often than lagging.   Since peaking on 16th November 2017, the Results &amp; Revisions Score has fallen by 62% and has now returned to the level of May 2017. In the last ten years, the score has only been lower than at present one-third of the time - mostly during the fiscal year ended March 2017 when the total market value averaged ¥550t, close to the December 2018 low. If we are to repeat the relatively-mild cyclical downturn of 2016, the Results &amp; Revision Score will turn negative in May of this year, and the 25th December 2018 low will be retested.
Source: Japan Analytics
PAST THE PEAK - Our earnings indicator peaked 14 months ago, two months ahead of the market's high point on 26th January 2018. It now appears that aggregate reported earnings, as well as aggregate company forecasts for the current year, are now turning decisively lower after nine quarters of uninterrupted growth. Forecast Net Income for the current year is now 7% below the high point in trailing-twelve-month (TTM) Net Income from this cycle, which was reached two months ago. Operating Income is, as usual, 'lagging' and forecasts are still marginally ahead of TTM. The TTM all-market price-earnings ratio reached 11.5 times on Christmas Day, which will prove to be the cycle low point. We expect the return to median levels, to be achieved more through lower 'E' as opposed to a higher 'P'.  Mr Market is currently implying that Japanese corporate profits are due to fall by 23% on average from the cycle peak, or by 30% if we are to revisit the December low-point. Source: Japan AnalyticsTHE FIRST CUT - 23% of listed companies reported their most recent quarterly earnings results in the last two weeks. For these companies, TTM revenues grew by 5.1% year-on-year, but only by 0.5% quarter-on-quarter, the lowest qoq growth rate in over a year. TTM Operating Income is now 0.8% lower than the TTM total of one year ago and declined by 4.4% qoq. Operating margins fell by 49bps year-on-year.  Current forecasts for this group of companies imply 3.1% yoy top line growth, but only 0.3% compared to the quarter just declared. For Operating Income, the rates are -2.0% and 0.6%, reflecting the normal TTM-to-forecast 'lag'. Corporate Japan's profits are now rolling over and will be in a 'recession' by the fiscal year-end.  Source: Japan AnalyticsINTERREGNUM - Our bear market rally has paused to look at and digest the earnings-announcement news flow and will likely be trendless for the next few weeks as 'good' reactions offset 'bad'. In due course, we expect the preponderance of negative momentum to tip the scales.Source: Japan AnalyticsTORAKU @110 - The Toraku advance-decline indicator has continued to recover and is within ten points of the overbought zone, which has only been breached once since the market peak of January 2018. This signal is 'amber' and could be 'red' by the end of next week. 
OUTLOOK &amp; RECOMMENDATIONS

We continue to recommend an underweight position in Japan in global portfolios.
The equity market decline at the end of last year was well in advance of the underlying trends in the economy and corporate profits; the recent 10% rally has corrected that imbalance. Nevertheless, the global cycle has turned down sharply, and many economies will be in a recession by the end of this quarter. We expect Japanese corporate earnings to follow suit.  
Although some of the coming decline in aggregate earnings has been well-discounted, our Results &amp; Revision Score has yet to turn negative. Accordingly, we expect the market to retest the December 2018 low, probably in May when the FY2020 forecasts are announced and our score starts 'seeing red'.
In the near term and despite the rally in the more cyclical sectors, we continue to favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, and Telecommunications sectors. We would avoid or short Banks and Non-Bank Finance.

In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on Anritsu (6754 JP), Alps Alpine (6770 JP), SanBio (4592 JP), Lixil (5938 JP) (yes, again), Fanuc (6954 JP), Mizuho Financial Group (8411 JP) , and Cyberagent (4751 JP).

Japan Fortnightly Update: Drip, Drip, Drip...

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/20097" target="_blank" data-smartkarma-citation="entities:20097:1">Krungthai Card (KTC TB)</a> shows all too clearly how to keep profit growth high, rising from 20%, to 33% and to 56%, from 2016 through 2018. There are few financial companies that can compare to the persistent and high and improving rate of profit growth. We must remember that late in 2017, regulations changed lowering the maximum rate on credit card loans and limiting facilities based on a more stringent policy relating to income. Ironically, we believe this supports performance. Customers may have become more careful on defaulting, running the risk of getting cut off and having to re-apply for a personal loan or a credit card. And under new regulations, customers can not receive as high a credit limit as in the past, if their income is less than Bt30,000 or Bt50,000 per month.</p>

Krungthai Card (KTC TB) shows all too clearly how to keep profit growth high, rising from 20%, to 33% and to 56%, from 2016 through 2018. There are few financial companies that can compare to the persistent and high and improving rate of profit growth. We must remember that late in 2017, regulations changed lowering the maximum rate on credit card loans and limiting facilities based on a more stringent policy relating to income. Ironically, we believe this supports performance. Customers may have become more careful on defaulting, running the risk of getting cut off and having to re-apply for a personal loan or a credit card. And under new regulations, customers can not receive as high a credit limit as in the past, if their income is less than Bt30,000 or Bt50,000 per month.

Insight Provider, CrossASEAN Research

Nicolas Van Broekhoven

Insight Provider

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

<p><a href="https://www.smartkarma.com/entities/20224" target="_blank">Accordia Golf Trust (AGT SP)</a> has not been a great success story since its IPO in August 2014. The stock went to market at a unit price of 0.97 SGD and was recently traded at 0.53 SGD. If we include the dividends received since the IPO (0.2387 SGD) the '<em>real</em>' adjusted price is still only 0.76 SGD.</p><p>In the past we have attended several management meetings and the 2017 company AGM but were disappointed on multiple occasions by management that either 1) did not care, 2) did not know how or 3) was held back by other corporate Japanese factors from creating shareholder value.</p><p>Over the last six months several new developments are potentially creating a cocktail that could <em>finally </em>create sustained value for AGT unitholders:</p><ul>
<li>Appointment of new CFO who assures investors no repeat of “membership deposit debacle”</li>
<li>New five-year funding secured from two lenders</li>
<li>MBK Partners buys ORIX Golf Management</li>
<li>Value investor Hibiki Path Advisors buys 6.2% of the company</li>
<li>Clear focus on acquisitions and using its balance sheet strength</li>
</ul><p>With its 2019 financial year ending in March, investors can be hopeful that its dividend in FY20 can grow to a minimum of 5 SGD cents suggesting a yield of 9.5%. If management injects assets a higher DPU is possible.</p>

Accordia Golf Trust (AGT SP) has not been a great success story since its IPO in August 2014. The stock went to market at a unit price of 0.97 SGD and was recently traded at 0.53 SGD. If we include the dividends received since the IPO (0.2387 SGD) the 'real' adjusted price is still only 0.76 SGD.In the past we have attended several management meetings and the 2017 company AGM but were disappointed on multiple occasions by management that either 1) did not care, 2) did not know how or 3) was held back by other corporate Japanese factors from creating shareholder value.Over the last six months several new developments are potentially creating a cocktail that could finally create sustained value for AGT unitholders:
Appointment of new CFO who assures investors no repeat of “membership deposit debacle”
New five-year funding secured from two lenders
MBK Partners buys ORIX Golf Management
Value investor Hibiki Path Advisors buys 6.2% of the company
Clear focus on acquisitions and using its balance sheet strength
With its 2019 financial year ending in March, investors can be hopeful that its dividend in FY20 can grow to a minimum of 5 SGD cents suggesting a yield of 9.5%. If management injects assets a higher DPU is possible.

Accordia Golf Trust (AGT SP): MBK + ORIX + AGT = Time for Outperformance? 9.5% Dividend Yield

<p><strong>LOWER LOW</strong> - Japanese equities reached a new 52-week low on 29th October but rebounded on the subsequent four trading days to close the fortnight down 2.2% - 3.6% below its 50-day moving average. From peak to trough, Total Market Value declined by 16% and 18% in Yen and US$ terms, respectively. The Value Traded Ratio spiked to its 4th-highest point this year, the number of 52-week new lows reached a two-year high and the Toraku advance-decline indicator an eighteen-month low. All of these indicators suggest that we have seen an intermediate-term market low. A longer-term signal will require confirmation from the current results announcements that earnings momentum is still positive and a degree of stability in overseas markets.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/610/original/2018-11-03_15-06-55.png?1541225537" class="editor-image img-responsive" data-smartkarma-image-id="68610"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/612/original/2018-11-03_15-17-47.png?1541225881" class="editor-image img-responsive" data-smartkarma-image-id="68612"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/619/original/2018-11-03_16-26-07.png?1541229982" class="editor-image img-responsive" data-smartkarma-image-id="68619"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/620/original/2018-11-03_15-38-35.png?1541230008" class="editor-image img-responsive" data-smartkarma-image-id="68620"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>EARNINGS MOMENTUM CONTINUES TO SLOW</strong> - 37% of companies have now reported since the end of September and, in aggregate, revenues and operating profits continue to grow at a high single-digit annual pace. Quarter-on-Quarter trends in trailing-twelve-month (TTM) data are showing a declining trend with TTM QoQ operating profits showing no change. Operating margins have declined by 17 basis points since the final quarter of calendar 2017.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/632/original/2018-11-03_20-35-56.png?1541245010" class="editor-image img-responsive" data-smartkarma-image-id="68632"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>ALL COMPANY PROFIT TIMELINE ►</strong> - As a result, aggregate realised TTM profits for all listed companies have yet to see the 'uplift' that has been a feature of the last seven quarters. More importantly, forecasts for the current year are largely unchanged from May when the bulk of the forecasts were released. Revisions since then have only added 0.5% and 0.9% to forecast Operating and Net Income, respectively, compared with 'uplifts' of 6.2% and 4.7% over the same period in 2017. The 3.2% gap between TTM Net Income and Forecast Net Income for six months ahead persists and provides, depending on your outlook, either 'cover' for the coming weak second half or potential for upward surprises. Our preference is for the former. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/628/original/2018-11-03_19-43-15.png?1541241826" class="editor-image img-responsive" data-smartkarma-image-id="68628"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>RESULTS SCORE TIMELINE</strong> <strong>TURNS ▼</strong>- As measured by our Results Score, earnings momentum peaked on 1st February at 7.51 and has since declined 43% to 4.31, with the most significant declines being in May and October. The complimentary Forecast/Revision Score has followed a similar path to May but has since moved sideways. We anticipate further weakness in both scores. However, we expect both to remain positive for the next two quarters. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/630/original/2018-11-03_20-25-15.png?1541244334" class="editor-image img-responsive" data-smartkarma-image-id="68630"></figure><div style="text-align: center;" class="content-caption"><em>Source: Japan Analytics </em></div><div style="text-align: left;" class="content-caption"><em>NB: Results and Forecast/Revision Scores measure quarterly results, initial forecasts and any subsequent revisions for every company on a scale of +30 to -30 for 167,763 reported quarters since 2006. The Results Score covers the last eight quarters and measures quarter-on-quarter and year-on-year changes as well as the rate of change. The Forecast/Revision Score compares the initial or revised forecast with the previous forecast and the trailing-twelve-month results. Scores are aggregated based on market capitalisation into Peer Group, Sector and All Market Scores.</em></div><p><strong>SEASONALITY</strong> - Yesterday was Culture Day in Japan, and we would refer back to our earlier insight <a href="https://www.smartkarma.com/insights/japan-seasonality-sell-in-july-and-say-goodbye-please-come-back-on-culture-day" target="_blank" data-smartkarma-citation="insights:23682">Japan: Seasonality - "Sell in July and Say Goodbye...Please Come Back on Culture Day"</a> as a reminder that the next eight months are usually the best regarding market returns, although November is normally a 'large-cap' month - small caps have declined on average.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/643/original/2018-09-05_20-00-36.png?1541286434" class="editor-image img-responsive" data-smartkarma-image-id="68643"></figure><div class="content-highlight">
<p><strong>OUTLOOK</strong> - With now one-third of this quarter's results and revision announcements having been made, the outlook is far more muted. Of the 1,493 results released since 22nd September, 53% have been positive in terms of Results Score and 55% regarding Revision Score. However, the average scores are now declining.  So far companies have forgone two opportunities (the Q1 and now the Q2 results) to address the 3% 'shortfall' between TTM and FY19 Forecast Net Income. Forecasts for Operating Income in six months' time are also not seeing the customary mid-year uptick. In such circumstances, the fact that the market's PER multiple is at a three-year low of 13.7x should not be considered a mitigating factor. Having broken down and out of a nine-month trading range, and as noted in more detail <a href="https://www.smartkarma.com/insights/japan-market-update-oversold-however" target="_blank" data-smartkarma-citation="insights:25370">here</a>, a decisive low has yet to be reached. </p>
<p><strong>SECTOR RECOMMENDATIONS</strong> - Although we maintain a cautious outlook, we will reduce our implied net short in terms of our sector selection (see below) and revert to our standard 6-long 6-short recommendations from last month's 5/9 ratio.</p>
</div>

LOWER LOW - Japanese equities reached a new 52-week low on 29th October but rebounded on the subsequent four trading days to close the fortnight down 2.2% - 3.6% below its 50-day moving average. From peak to trough, Total Market Value declined by 16% and 18% in Yen and US$ terms, respectively. The Value Traded Ratio spiked to its 4th-highest point this year, the number of 52-week new lows reached a two-year high and the Toraku advance-decline indicator an eighteen-month low. All of these indicators suggest that we have seen an intermediate-term market low. A longer-term signal will require confirmation from the current results announcements that earnings momentum is still positive and a degree of stability in overseas markets.Source: Japan AnalyticsEARNINGS MOMENTUM CONTINUES TO SLOW - 37% of companies have now reported since the end of September and, in aggregate, revenues and operating profits continue to grow at a high single-digit annual pace. Quarter-on-Quarter trends in trailing-twelve-month (TTM) data are showing a declining trend with TTM QoQ operating profits showing no change. Operating margins have declined by 17 basis points since the final quarter of calendar 2017.Source: Japan AnalyticsALL COMPANY PROFIT TIMELINE ► - As a result, aggregate realised TTM profits for all listed companies have yet to see the 'uplift' that has been a feature of the last seven quarters. More importantly, forecasts for the current year are largely unchanged from May when the bulk of the forecasts were released. Revisions since then have only added 0.5% and 0.9% to forecast Operating and Net Income, respectively, compared with 'uplifts' of 6.2% and 4.7% over the same period in 2017. The 3.2% gap between TTM Net Income and Forecast Net Income for six months ahead persists and provides, depending on your outlook, either 'cover' for the coming weak second half or potential for upward surprises. Our preference is for the former. Source: Japan AnalyticsRESULTS SCORE TIMELINE TURNS ▼- As measured by our Results Score, earnings momentum peaked on 1st February at 7.51 and has since declined 43% to 4.31, with the most significant declines being in May and October. The complimentary Forecast/Revision Score has followed a similar path to May but has since moved sideways. We anticipate further weakness in both scores. However, we expect both to remain positive for the next two quarters. Source: Japan Analytics NB: Results and Forecast/Revision Scores measure quarterly results, initial forecasts and any subsequent revisions for every company on a scale of +30 to -30 for 167,763 reported quarters since 2006. The Results Score covers the last eight quarters and measures quarter-on-quarter and year-on-year changes as well as the rate of change. The Forecast/Revision Score compares the initial or revised forecast with the previous forecast and the trailing-twelve-month results. Scores are aggregated based on market capitalisation into Peer Group, Sector and All Market Scores.SEASONALITY - Yesterday was Culture Day in Japan, and we would refer back to our earlier insight Japan: Seasonality - "Sell in July and Say Goodbye...Please Come Back on Culture Day" as a reminder that the next eight months are usually the best regarding market returns, although November is normally a 'large-cap' month - small caps have declined on average.
OUTLOOK - With now one-third of this quarter's results and revision announcements having been made, the outlook is far more muted. Of the 1,493 results released since 22nd September, 53% have been positive in terms of Results Score and 55% regarding Revision Score. However, the average scores are now declining.  So far companies have forgone two opportunities (the Q1 and now the Q2 results) to address the 3% 'shortfall' between TTM and FY19 Forecast Net Income. Forecasts for Operating Income in six months' time are also not seeing the customary mid-year uptick. In such circumstances, the fact that the market's PER multiple is at a three-year low of 13.7x should not be considered a mitigating factor. Having broken down and out of a nine-month trading range, and as noted in more detail here, a decisive low has yet to be reached. 
SECTOR RECOMMENDATIONS - Although we maintain a cautious outlook, we will reduce our implied net short in terms of our sector selection (see below) and revert to our standard 6-long 6-short recommendations from last month's 5/9 ratio.


Japan Fortnightly Update: Lower Low as Earnings Slow

Japan

ORIX Corporation provides comprehensive financial services throughout the world. The Company's business lines include leasing, real estate loans, life insurance, banking, and consumer finance.  The Company also operates Environment related business and Private equity investment business. ORIX has a professional baseball team, the ORIX Buffalos.

Mitsubishi HC Capital Inc. provides customer finance services. The Company leases machinery and equipment, aircraft and ships, office buildings, and more. Mitsubishi HC Capital serves clients across worldwide.

Tokyo Century Corporation provides businesses with lease financing for their equipment needs, such as information/communication equipment and machinery.

Fuyo General Lease Co Ltd leases machinery and equipment.  The Company also provides other financial services such as installment sale and lending.

Zenkoku Hosho Co. Ltd. is a credit guarantee company mainly for real estate or education loans. The company also provides insurance agency and credit check services.

Mizuho Leasing Company, Limited operates as a leasing company. The Company provides finance leasing, operating leasing, automobile leasing, real estate leasing, and other services.  Mizuho Leasing also offers payment outsourcing, installment sales, and other services.

Financial Products Group Co Ltd provides integrated financial services and Japanese Operating Lease (JOL) arrangements, which includes the structuring, sale and management of large transportation assets such as shipping vessels, marine containers and aircraft.

RICOH LEASING COMPANY, LTD. offers credit sales and leasing of office automation equipment such as copiers mainly manufactured by its parent, Ricoh.  The Company leases industrial machinery such as construction machinery, transportation equipment, and medical device.

Japan Securities Finance Co., Ltd. provides loans and security lending services for collateral.  The Company mainly offers its services to securities firms who are the member of the Tokyo, Sapporo, and Fukuoka Stock Exchanges. Japan Securities Finance also provides trust banking, real estate brokerage, information processing, transfer agent, and securities maintenance.

eGuarantee, Inc. offers guarantee services for accounts and note receivables arising from business and financial service transactions. The Company analyzes the credit risk of receivables and loans. eGuarantee also provides consulting services for credit risk and credit management.

Rural Electrification Corporation Limited engages in the financing and promotion of transmission, distribution and generation projects in India. The Company provides funding to clients to assist them in formulating and implementing various types of power project-related schemes.

Bajaj Finserv Ltd. is currently engaged in life insurance; general insurance and consumer finance businesses and has plans to expand its business by offering a wide array of financial products and services in India. The Company is also active in wind-energy generation.

Fubon Financial Holding Co., Ltd. is a financial holding company, formed through the merger of Fubon Insurance, Fubon Securities, Fubon Commercial Bank, and Fubon Life Assurance.

Power Finance Corporation funds power projects in India.  The Company serves state power utilities, central power sector utilities, power departments, private power sector utilities, joint sector power utilities, power equipment manufacturers, and municipal power utilities.

EXOR N.V. is a diversified holding company. The Company brings in finance for the development of its companies, to improve their competitive position and profitability, and maintains a constant dialogue with the top management of the companies in which it invests, while fully respecting their operating autonomy.

FirstRand Limited is a portfolio of separately branded, integrated financial services businesses offering a universal set of transactional, lending, investment and insurance products and services in South Africa, certain markets in sub-Saharan Africa and the UK.

Indian Railway Finance Corporation Limited (IRFC) provides financial services. The Company raises money from the market through bonds and off-shores borrowings to finance the plan outlay of railways and other various developmental programs. IRFC serves customers in India. 

Indian Railway Finance Corporation (IRFC IN)

Bajaj Holdings and Investment Ltd. is an investment company. The Company investments include strategic investments and investments in government securities, bonds, debentures and mutual funds.

Industrivarden AB is an investment company.  The Company's holdings consists of a portfolio of listed Nordic industrial companies.

L E Lundbergforetagen AB is a real estate and investment company.  The Company owns,  develops, rents out, and manages commercial and residential properties located in central Sweden.  Lundbergs is also a long term investor in mostly publicly traded Swedish companies.  The Company takes an active ownership role in the companies.  Moreover Lundbergs is engaged in securities trading.

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