'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

<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

Founder

Kemp Dolliver, CFA

Cherrystone Hill Research

Equity Capital Markets

Shanghai Henlius Biotech  / Equity Capital Markets

The oncology treatment landscape in China is evolving rapidly as the government has prioritized access to innovative drugs to meet this significant unmet need. In particular, investors considering the <a href="https://www.smartkarma.com/entities/27888" target="_blank" data-smartkarma-citation="entities:27888:1">Shanghai Henlius Biotech (1566213D HK)</a> listing should be aware of the emergence of a drug that potentially is superior to <a href="https://www.smartkarma.com/entities/27906" target="_blank" data-smartkarma-citation="entities:27906:1">Roche Holding AG (ROG SW)</a>'s Herceptin (and Shanghai Henlius' HLX02) for the treatment of patients with HER2-positive breast cancer (and ultimately HER2-positive gastric cancer). While there should be good demand for cheaper alternatives to Herceptin, the availability of a superior alternative potentially shortens the lifecycle of Herceptin biosimilars. China has only recently "modernized" its drug approval and reimbursement, so there is little precedent to rely upon to estimate the speed and magnitude of changes in the market. As brokers rollout forecasts for the company and HLX02, investors should ask if the numbers somehow reflect this risk.We do not have a view of the offering, but tag this Insight as Bearish because we are highlighting a potential risk.

The oncology treatment landscape in China is evolving rapidly as the government has prioritized access to innovative drugs to meet this significant unmet need. In particular, investors considering the Shanghai Henlius Biotech (1566213D HK) listing should be aware of the emergence of a drug that potentially is superior to Roche Holding AG (ROG SW)'s Herceptin (and Shanghai Henlius' HLX02) for the treatment of patients with HER2-positive breast cancer (and ultimately HER2-positive gastric cancer). While there should be good demand for cheaper alternatives to Herceptin, the availability of a superior alternative potentially shortens the lifecycle of Herceptin biosimilars. China has only recently "modernized" its drug approval and reimbursement, so there is little precedent to rely upon to estimate the speed and magnitude of changes in the market. As brokers rollout forecasts for the company and HLX02, investors should ask if the numbers somehow reflect this risk.We do not have a view of the offering, but tag this Insight as Bearish because we are highlighting a potential risk.

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

Download the Morningstar Fact Sheet : http://corporate.morningstar.com/US/documents/MarketingFactSheets/AboutMorningstarFactsheet.pdf

Thematic (Sector/Industry)

The Best Ideas list is a compilation of stock ideas sourced from Morningstar’s global equity research team. With more than 100 analysts covering nearly 1,500 companies, we’re able to provide a wide variety of what we believe are attractively priced securities looking across sectors, industries, and geographies. Best Ideas are nominated by analysts and approved by managers in addition to the normal due diligence processes that precede our published research and ratings.The list may include a broad mix of quality and risk characteristics to meet varying investor needs, including no-, narrow-, and wide-moat companies as well as the full spectrum of uncertainty ratings from low to very high. Most or all of the highlighted stocks will be trading at a discount to our estimate of intrinsic value, indicating improved odds of capital appreciation.

The Best Ideas list is a compilation of stock ideas sourced from Morningstar’s global equity research team. With more than 100 analysts covering nearly 1,500 companies, we’re able to provide a wide variety of what we believe are attractively priced securities looking across sectors, industries, and geographies. Best Ideas are nominated by analysts and approved by managers in addition to the normal due diligence processes that precede our published research and ratings.The list may include a broad mix of quality and risk characteristics to meet varying investor needs, including no-, narrow-, and wide-moat companies as well as the full spectrum of uncertainty ratings from low to very high. Most or all of the highlighted stocks will be trading at a discount to our estimate of intrinsic value, indicating improved odds of capital appreciation.

Asia Healthcare Analyst, Pathology Associates Limited

Dion Stéfan Büchner M.D., FCAP

Asia Healthcare Analyst

Pathology Associates Limited

Equity Bottom-Up

<ul>
<li>Non-inhibitor patients constitute ~80-90% of the total hemophilia A population size</li>
<li>Consequently, Hemlibra’s (emicizumab, in-house, US Launch -Nov 2017 for inhibitor pts, co-developed with <a href="https://www.smartkarma.com/entities/26852" target="_blank" data-smartkarma-citation="entities:26852:1">Roche Holding Ag (ROG SE)</a>) approval for non-inhibitor patients will significantly boost <a href="https://www.smartkarma.com/entities/4489" target="_blank" data-smartkarma-citation="entities:4489:1">Chugai Pharmaceutical (4519 JP)</a>’s topline</li>
<li>However, Hemlibra faces fierce competition from <a href="https://www.smartkarma.com/entities/27033" target="_blank" data-smartkarma-citation="entities:27033:1">Shire PLC (SHPG US)</a>’s Advate / Adynovate (antihemophilic factor recombinant), which is currently the gold standard therapy for non-inhibitor patients.</li>
<li>While Hemlibra scores higher with overall positive clinical data and convenient dosage regimen (once a week 1st four weeks, then monthly SC vs 2/3 times a week IV for Shire drugs), concerns remain over recently reported case of development of anti-drug antibody to Hemlibra</li>
<li>On the other hand, Advate/Adynovate has been on the market for &gt;15 years leading to robust safety data in the real-world setting.</li>
<li>Consequently, it will be important to monitor the rate of patient switch from current gold standard therapy to Hemlibra.</li>
<li>We estimate Hemlibra to capture ~40% share of the non-inhibitor market in 5 years after launch and project combined (from inhibitor and non-inhibitor) FY22e global sales potential of $4.3b.</li>
</ul>


Non-inhibitor patients constitute ~80-90% of the total hemophilia A population size
Consequently, Hemlibra’s (emicizumab, in-house, US Launch -Nov 2017 for inhibitor pts, co-developed with Roche Holding Ag (ROG SE)) approval for non-inhibitor patients will significantly boost Chugai Pharmaceutical (4519 JP)’s topline
However, Hemlibra faces fierce competition from Shire PLC (SHPG US)’s Advate / Adynovate (antihemophilic factor recombinant), which is currently the gold standard therapy for non-inhibitor patients.
While Hemlibra scores higher with overall positive clinical data and convenient dosage regimen (once a week 1st four weeks, then monthly SC vs 2/3 times a week IV for Shire drugs), concerns remain over recently reported case of development of anti-drug antibody to Hemlibra
On the other hand, Advate/Adynovate has been on the market for &gt;15 years leading to robust safety data in the real-world setting.
Consequently, it will be important to monitor the rate of patient switch from current gold standard therapy to Hemlibra.
We estimate Hemlibra to capture ~40% share of the non-inhibitor market in 5 years after launch and project combined (from inhibitor and non-inhibitor) FY22e global sales potential of $4.3b.


As Expected, USFDA Approves Hemlibra for Hemophilia A in Patients Without Inhibitors

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Hua Medicine Ltd / Equity Capital Markets

<a href="https://www.smartkarma.com/entities/27410" target="_blank" data-smartkarma-citation="entities:27410:1">Hua Medicine Ltd (2552 HK)</a> which specialises in developing drugs to treat Type 2 diabetes, is the third pre-profit biotech firm to IPO in Hong Kong since <a href="https://www.smartkarma.com/entities/27265" target="_blank" data-smartkarma-citation="entities:27265:1">Ascletis Pharma Inc (1672 HK)</a> and <a href="https://www.smartkarma.com/entities/27352" target="_blank" data-smartkarma-citation="entities:27352:1">BeiGene Ltd (6160 HK)</a>. In line with our recommendation to avoid the Ascletis IPO, the shares are down 34% post-IPO. In contrast, we are bullish on BeiGene and its shares are marginally down 2% post-IPO. The mid-point of Hua Medicine's IPO price range of HK$8.28-9.28 per share implies a market value of $1.2 billion (HK$9.2 billion).Hua Medicine has a Type 2 drug, Dorzagliatin, which is currently in Phase 3 trials and plans to submit a new drug application (NDA) in China by 2019. Hua Medicine claim to fame is that Dorzagliatin is the first ever GKA (glucokinase activator) globally to reach Phase 3 clinical trials. GKAs are designed to control the progressive degenerative nature of diabetes. Hua Medicine's innovative diabetes drug undoubtedly has huge potential due to the large addressable market in China driven by increasing treatment rates. However, we believe that IPO investors are being asked to participate at a valuation range that is unattractive due to:<ol>
<li>We value Hua Medicine on a risk-adjusted net present value (rNPV) basis. Hua Medicine’s founder, Dr Li Chen, was quoted in South China Morning Post that Hua Medicine is “targeting sales of about US$3 billion by 2025”, which would give Dorzagliatin a 15% share of China’s anti-diabetics market. Consequently, Hua Medicine’s valuation will be highly dependent on Dorzagliatin. Based on assumptions which we believe are bullish, we arrive at a rNPV valuation for Hua Medicine of $1.0 billion (HK$7.8 billion). This valuation is 11% below the low-end of the IPO valuation range.</li>
<li>
Dorzagliatin faces strong competition from established Type 2 diabetes therapies and from several companies pursuing new Type 2 diabetes therapies (including GKAs). Insulin had the largest share of the anti-diabetics market in China with a market share of 46% in 2017. Citing the US anti-diabetics market, Hua Medicine argues that new innovative drugs with good efficacy have made rapid gains in market share. However, we believe that the IPO price range already factors in this bullish scenario for Dorzagliatin in China.</li>
<li>The rNPV valuation is contingent on assumptions about the individual drug's peak market share and terminal EBIT margin. As shown below, the proposed IPO price range already factors in ambitious targets regarding these two metrics. For example, if Dorzagliatin's terminal EBIT margin is 40%, the peak market share for Dorzagliatin should be at least 15% to justify the IPO price range. Currently, in the China anti-diabetics market, α-glucosidase’s market share of 17% is the second largest after insulin. In other words, Dorzagliatin needs to establish itself as the leading anti-diabetics drug after insulin in China to justify the IPO price range.</li>
</ol><div class="content-caption">rNPV valuation sensitivity to terminal EBIT margin and peak market share</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/062/492/original/Sensitivity.png?1535923539" class="editor-image img-responsive" data-smartkarma-image-id="62492"></figure><div class="content-caption">Source: Global Equity Research; Note: Grey highlighted area denotes valuation at or higher than the IPO valuation range, Red highlighted box denotes our valuation of Hua Medicine</div><div class="content-highlight">Our overall view is that while we do not doubt that Hua Medicine's drugs will be successful, the IPO valuation range already factors in bullish market traction for Dorzagliatin. Consequently, there is little money left on the table for IPO investors. While the relatively small IPO raise compared to Ascletis and BeiGene should help in quickly covering the books, we are inclined to sit on the sidelines.</div>

Hua Medicine Ltd (2552 HK) which specialises in developing drugs to treat Type 2 diabetes, is the third pre-profit biotech firm to IPO in Hong Kong since Ascletis Pharma Inc (1672 HK) and BeiGene Ltd (6160 HK). In line with our recommendation to avoid the Ascletis IPO, the shares are down 34% post-IPO. In contrast, we are bullish on BeiGene and its shares are marginally down 2% post-IPO. The mid-point of Hua Medicine's IPO price range of HK$8.28-9.28 per share implies a market value of $1.2 billion (HK$9.2 billion).Hua Medicine has a Type 2 drug, Dorzagliatin, which is currently in Phase 3 trials and plans to submit a new drug application (NDA) in China by 2019. Hua Medicine claim to fame is that Dorzagliatin is the first ever GKA (glucokinase activator) globally to reach Phase 3 clinical trials. GKAs are designed to control the progressive degenerative nature of diabetes. Hua Medicine's innovative diabetes drug undoubtedly has huge potential due to the large addressable market in China driven by increasing treatment rates. However, we believe that IPO investors are being asked to participate at a valuation range that is unattractive due to:
We value Hua Medicine on a risk-adjusted net present value (rNPV) basis. Hua Medicine’s founder, Dr Li Chen, was quoted in South China Morning Post that Hua Medicine is “targeting sales of about US$3 billion by 2025”, which would give Dorzagliatin a 15% share of China’s anti-diabetics market. Consequently, Hua Medicine’s valuation will be highly dependent on Dorzagliatin. Based on assumptions which we believe are bullish, we arrive at a rNPV valuation for Hua Medicine of $1.0 billion (HK$7.8 billion). This valuation is 11% below the low-end of the IPO valuation range.

Dorzagliatin faces strong competition from established Type 2 diabetes therapies and from several companies pursuing new Type 2 diabetes therapies (including GKAs). Insulin had the largest share of the anti-diabetics market in China with a market share of 46% in 2017. Citing the US anti-diabetics market, Hua Medicine argues that new innovative drugs with good efficacy have made rapid gains in market share. However, we believe that the IPO price range already factors in this bullish scenario for Dorzagliatin in China.
The rNPV valuation is contingent on assumptions about the individual drug's peak market share and terminal EBIT margin. As shown below, the proposed IPO price range already factors in ambitious targets regarding these two metrics. For example, if Dorzagliatin's terminal EBIT margin is 40%, the peak market share for Dorzagliatin should be at least 15% to justify the IPO price range. Currently, in the China anti-diabetics market, α-glucosidase’s market share of 17% is the second largest after insulin. In other words, Dorzagliatin needs to establish itself as the leading anti-diabetics drug after insulin in China to justify the IPO price range.
rNPV valuation sensitivity to terminal EBIT margin and peak market shareSource: Global Equity Research; Note: Grey highlighted area denotes valuation at or higher than the IPO valuation range, Red highlighted box denotes our valuation of Hua MedicineOur overall view is that while we do not doubt that Hua Medicine's drugs will be successful, the IPO valuation range already factors in bullish market traction for Dorzagliatin. Consequently, there is little money left on the table for IPO investors. While the relatively small IPO raise compared to Ascletis and BeiGene should help in quickly covering the books, we are inclined to sit on the sidelines.

Hua Medicine IPO Preview: Suffering from the Ascletis Over-Valuation Syndrome

United States

Roche Holding AG develops and manufactures pharmaceutical and diagnostic products. The Company produces prescription drugs in the areas of cardiovascular, infectious, autoimmune, respiratory diseases, dermatology, metabolic disorders, oncology, transplantation, and the central nervous system. Roche Holding serves customers worldwide.

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Roche Holding (RO SE)

🇯🇵 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

HLX02: Innovation Could Overtake

The oncology treatment landscape in China is evolving rapidly as the government has prioritized access to innovative drugs to meet this significant...

Kemp Dolliver, CFA

Best Ideas List for January 2019

The Best Ideas list is a compilation of stock ideas sourced from Morningstar’s global equity research team. With more than 100 analysts covering...

Morningstar, Inc.

As Expected, USFDA Approves Hemlibra for Hemophilia A in Patients Without Inhibitors

Non-inhibitor patients constitute ~80-90% of the total hemophilia A population size Consequently, Hemlibra’s (emicizumab, in-house, US Launch -Nov...

Dion Stéfan Büchner M.D., FCAP

Hua Medicine IPO Preview: Suffering from the Ascletis Over-Valuation Syndrome

Hua Medicine Ltd (2552 HK) which specialises in developing drugs to treat Type 2 diabetes, is the third pre-profit biotech firm to IPO in Hong Kong...

Arun George

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