Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>Today after the close, <a href="https://www.smartkarma.com/entities/1132" target="_blank" data-smartkarma-citation="entities:1132:1">Johnson &amp; Johnson (JNJ US)</a><a href="https://ssl4.eir-parts.net/doc/4924/announcement5/45828/00.pdf" target="_blank">announced</a> a US$2bn+ deal and Tender Offer to buy the 52% of <a href="https://www.smartkarma.com/entities/19625" target="_blank" data-smartkarma-citation="entities:19625:1">Ci:z Holdings (4924 JP)</a> not held by CIC Corp (the family company of CEO Dr. Shirono and family) and Cilag GmbH International - a subsidiary of J&amp;J which already owns 19.9% of Ci:z Holdings. Ci:z Holdings announced that the board of directors resolved at a board meeting today to express its opinion in support of the Tender Offer. </p>
<p>The relationship between Johnson &amp; Johnson and Ci:z Holdings was established with a Capital and Business Alliance proposed in October 2015 and <a href="https://ci-z-holdings.com/en/news/20160801_pr067.pdf" target="_blank">signed</a> in July 2016 whereby J&amp;J got the rights to proactively market Ci:z Holdings brands outside Japan. J&amp;J bought the shares from family members.</p>
<p>CIC Corp has agreed not to sell its shares in the Tender Offer, but there is an existing shareholder agreement with J&amp;J such that CIC agrees not to sell any shares without J&amp;J's permission. J&amp;J has agreed to purchase the shares held by CIC at the same price as the shares purchased in the Tender Offer on the condition that the Tender Offer is completed successfully. The terms of the Tender Offer and side agreements associated are that if the Tender Offer is successful, Dr Shirono will resign as an officer and employee of the company, but will act as Honorary Chairman and Senior Advisor to the board, and provide consulting services to the Offeror and Target Company.</p>
<p>This is Dr. Shirono getting out.</p>
<p>The Tender Offer has a minimum threshold of success of  9,144,100 shares or 18.80%. It is a bit less than 40% of the remaining non J&amp;J, non-CIC float. This is the number that will get J&amp;J to a two-thirds-plus-1-share level which would be required to execute a minority squeezeout via a "Two Step Acquisition" (as discussed below) including the position of both Cilag and CIC.</p>
<table class="table table-striped">
<tbody>
<tr>
<td colspan="2">
<h2>Schedule of Tender Offer </h2>
</td>
</tr>
<tr>
<td>
<p><strong>Event </strong></p>
</td>
<td>
<p><strong>Date</strong></p>
</td>
</tr>
<tr>
<td>
<p>Announcement Date </p>
</td>
<td>
<p>23-Oct-2018</p>
</td>
</tr>
<tr>
<td>
<p>Date of Public Notice of Tender Offer </p>
</td>
<td>
<p>29-Oct-2018</p>
</td>
</tr>
<tr>
<td>
<p>Tender Offer Start Date </p>
</td>
<td>
<p>29-Oct-2018</p>
</td>
</tr>
<tr>
<td>
<p>Tender Offer Closing Date </p>
</td>
<td>
<p>10-Jan-2019 (48 business days)</p>
</td>
</tr>
<tr>
<td>
<p>Payment Date </p>
</td>
<td>
<p>17-Jan-2019</p>
</td>
</tr>
<tr>
<td>
<p>Likely Squeeze Out if &gt;90%</p>
</td>
<td>
<p>late Feb-2019</p>
</td>
</tr>
</tbody>
</table>
<table class="table table-striped">
<tbody>
<tr>
<td colspan="2">
<h2>Details of Tender Offer</h2>
</td>
</tr>
<tr>
<td><strong>Detail</strong></td>
<td><strong>Data In the Detail</strong></td>
</tr>
<tr>
<td>Expected Shares To Buy</td>
<td>25,355,704 shares</td>
</tr>
<tr>
<td>Minimum Shares To Buy For Successful Tender</td>
<td>9,144,100 shares</td>
</tr>
<tr>
<td>Tender Offer Price</td>
<td>¥5,900/share</td>
</tr>
<tr>
<td>Premium to Close (23 Oct)</td>
<td>55.26%</td>
</tr>
<tr>
<td>Premium to 1wk Average as of 22 Oct</td>
<td>59.98%</td>
</tr>
<tr>
<td>Premium to 1mo Average as of 22 Oct</td>
<td>51.63%</td>
</tr>
<tr>
<td>Premium to 3mo Average as of 22 Oct</td>
<td>33.03%</td>
</tr>
<tr>
<td>Lifetime High ?</td>
<td>No</td>
</tr>
<tr>
<td>52 week High ?</td>
<td>No</td>
</tr>
<tr>
<td>Tender Agent</td>
<td>SMBC Nikko Securities</td>
</tr>
</tbody>
</table>
<p>Given how sharply the shares have fallen since this summer, this deal is likely to make it through, but interestingly it is a VERY long-dated Tender Offer (most do not go past 30 days).</p>

Today after the close, Johnson &amp; Johnson (JNJ US)announced a US$2bn+ deal and Tender Offer to buy the 52% of Ci:z Holdings (4924 JP) not held by CIC Corp (the family company of CEO Dr. Shirono and family) and Cilag GmbH International - a subsidiary of J&amp;J which already owns 19.9% of Ci:z Holdings. Ci:z Holdings announced that the board of directors resolved at a board meeting today to express its opinion in support of the Tender Offer. 
The relationship between Johnson &amp; Johnson and Ci:z Holdings was established with a Capital and Business Alliance proposed in October 2015 and signed in July 2016 whereby J&amp;J got the rights to proactively market Ci:z Holdings brands outside Japan. J&amp;J bought the shares from family members.
CIC Corp has agreed not to sell its shares in the Tender Offer, but there is an existing shareholder agreement with J&amp;J such that CIC agrees not to sell any shares without J&amp;J's permission. J&amp;J has agreed to purchase the shares held by CIC at the same price as the shares purchased in the Tender Offer on the condition that the Tender Offer is completed successfully. The terms of the Tender Offer and side agreements associated are that if the Tender Offer is successful, Dr Shirono will resign as an officer and employee of the company, but will act as Honorary Chairman and Senior Advisor to the board, and provide consulting services to the Offeror and Target Company.
This is Dr. Shirono getting out.
The Tender Offer has a minimum threshold of success of  9,144,100 shares or 18.80%. It is a bit less than 40% of the remaining non J&amp;J, non-CIC float. This is the number that will get J&amp;J to a two-thirds-plus-1-share level which would be required to execute a minority squeezeout via a "Two Step Acquisition" (as discussed below) including the position of both Cilag and CIC.




Schedule of Tender Offer 




Event 


Date




Announcement Date 


23-Oct-2018




Date of Public Notice of Tender Offer 


29-Oct-2018




Tender Offer Start Date 


29-Oct-2018




Tender Offer Closing Date 


10-Jan-2019 (48 business days)




Payment Date 


17-Jan-2019




Likely Squeeze Out if &gt;90%


late Feb-2019








Details of Tender Offer



Detail
Data In the Detail


Expected Shares To Buy
25,355,704 shares


Minimum Shares To Buy For Successful Tender
9,144,100 shares


Tender Offer Price
¥5,900/share


Premium to Close (23 Oct)
55.26%


Premium to 1wk Average as of 22 Oct
59.98%


Premium to 1mo Average as of 22 Oct
51.63%


Premium to 3mo Average as of 22 Oct
33.03%


Lifetime High ?
No


52 week High ?
No


Tender Agent
SMBC Nikko Securities



Given how sharply the shares have fallen since this summer, this deal is likely to make it through, but interestingly it is a VERY long-dated Tender Offer (most do not go past 30 days).

'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

<p><strong>SHORT-LIVED</strong> - The much-lauded 'breakout' in the <a href="https://www.smartkarma.com/entities/22909" target="_blank" data-smartkarma-citation="entities:22909:1">Nikkei 225 (NKY INDEX)</a> at the end of last month proved to be short-lived. As measured by Total Market Value in Yen (TMV), the market peaked at ¥726.7t on 25th September, revisited that level in 2nd October and promptly fell by 8% in eight days. Despite a modest recovery towards the end of last week, TMV is now 6.5% lower year-to-date and down 1.3% over one year.  Although the TMV has, so far, held above ¥665t - the lower bound of the nine-month trading range - in US$ terms, last week saw a break below US$6t to a new one-year low. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/245/original/2018-10-21_10-24-24.png?1540085075" class="editor-image img-responsive" data-smartkarma-image-id="67245"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>SPIKED</strong> - As highlighted in our last update <a href="https://www.smartkarma.com/insights/japan-fortnightly-update-celebration" target="_blank" data-smartkarma-citation="insights:24383">Celebration</a>, both the 5-Day Relative Strength Index and 25-Day Toraku were signalling caution, which proved to be correct. Having peaked at its highest level in a year, on Monday, the former registered its second-lowest reading in over three years, while the latter has reverted to a neutral reading. In addition, the 52-week New High minus New Low indicator saw its third-lowest reading in three years. While these indicators suggest a possible short-term rebound ahead, they have yet to show the degree of capitulation indicative of a change in market trend which continues to be range-bound. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/246/original/2018-10-21_10-51-59.png?1540086749" class="editor-image img-responsive" data-smartkarma-image-id="67246"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/249/original/2018-10-21_10-52-14.png?1540087713" class="editor-image img-responsive" data-smartkarma-image-id="67249"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/250/original/2018-10-21_11-07-45.png?1540087729" class="editor-image img-responsive" data-smartkarma-image-id="67250"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>CHEAPER YET</strong> - The 333 earnings revisions and 437 results announcements since 24th September have had almost no impact on aggregate TTM and Forecast Net and Operating Income - the exception being a 0.15% decline in Forecast Operating Income. TTM Net Income remains 4% higher than Forecast Net Income and offers scope for some upward revisions as half-year results for March year-end companies are announced over the next four weeks. The current TTM PER is at a three-year low of 14 times and also offers a degree of support. However, should the first-half results confirm the caution inherent in current forecasts, further market weakness is likely.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/253/original/2018-10-21_11-46-25.png?1540090011" class="editor-image img-responsive" data-smartkarma-image-id="67253"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>WEAKER ¥ TO CURTAIL NEGATIVE EARNINGS MOMENTUM </strong>- The Japan Analytics' Results and Revision Scores measure the cap-weighted momentum of earnings results and forecasts/revisions for all listed companies. Both scores have been in decline since peaking in January 2018 and October 2017, respectively. Historically, one of the principal drivers of earnings has been the change in the US$/¥ exchange rate lagged six months. The recent peak in the Yen coincided with the March fiscal year-end and explains the cautious initial forecasts for the current year. The ¥10 downwards swing in the last six months boosted Q1 results and will do so again for the first half results. A recovery in earnings momentum would be a positive surprise an would provide some upside to the market.   </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/259/original/2018-10-21_13-22-32.png?1540095762" class="editor-image img-responsive" data-smartkarma-image-id="67259"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/260/original/2018-10-21_13-23-52.png?1540095850" class="editor-image img-responsive" data-smartkarma-image-id="67260"></figure><div class="content-caption">Source: Japan Analytics</div><div class="content-highlight"><p><strong>OUTLOOK</strong> - The 'dip' we expected after the September breakout was more severe than anticipated due to the confluence of some external factors. Local macroeconomic indicators are still far from positive. Industrial production is flatlining, and current trends in the German auto sector does not bode well for Japanese auto manufacturing. Higher wage incomes have been matched by food and energy price inflation and consumers have so far preferred to save rather than spend ahead of next year's 2% rise in the consumption tax. As usual, the results and revisions announced over the next four weeks will be the primary driver of stock returns and, with the market neither overbought nor overvalued, there is scope for some upside. Nevertheless, given the continuing macro concerns, the best-expected outcome is that the market stays within its nine-month trading range.  </p></div>

SHORT-LIVED - The much-lauded 'breakout' in the Nikkei 225 (NKY INDEX) at the end of last month proved to be short-lived. As measured by Total Market Value in Yen (TMV), the market peaked at ¥726.7t on 25th September, revisited that level in 2nd October and promptly fell by 8% in eight days. Despite a modest recovery towards the end of last week, TMV is now 6.5% lower year-to-date and down 1.3% over one year.  Although the TMV has, so far, held above ¥665t - the lower bound of the nine-month trading range - in US$ terms, last week saw a break below US$6t to a new one-year low. Source: Japan AnalyticsSPIKED - As highlighted in our last update Celebration, both the 5-Day Relative Strength Index and 25-Day Toraku were signalling caution, which proved to be correct. Having peaked at its highest level in a year, on Monday, the former registered its second-lowest reading in over three years, while the latter has reverted to a neutral reading. In addition, the 52-week New High minus New Low indicator saw its third-lowest reading in three years. While these indicators suggest a possible short-term rebound ahead, they have yet to show the degree of capitulation indicative of a change in market trend which continues to be range-bound. Source: Japan AnalyticsCHEAPER YET - The 333 earnings revisions and 437 results announcements since 24th September have had almost no impact on aggregate TTM and Forecast Net and Operating Income - the exception being a 0.15% decline in Forecast Operating Income. TTM Net Income remains 4% higher than Forecast Net Income and offers scope for some upward revisions as half-year results for March year-end companies are announced over the next four weeks. The current TTM PER is at a three-year low of 14 times and also offers a degree of support. However, should the first-half results confirm the caution inherent in current forecasts, further market weakness is likely.Source: Japan AnalyticsWEAKER ¥ TO CURTAIL NEGATIVE EARNINGS MOMENTUM - The Japan Analytics' Results and Revision Scores measure the cap-weighted momentum of earnings results and forecasts/revisions for all listed companies. Both scores have been in decline since peaking in January 2018 and October 2017, respectively. Historically, one of the principal drivers of earnings has been the change in the US$/¥ exchange rate lagged six months. The recent peak in the Yen coincided with the March fiscal year-end and explains the cautious initial forecasts for the current year. The ¥10 downwards swing in the last six months boosted Q1 results and will do so again for the first half results. A recovery in earnings momentum would be a positive surprise an would provide some upside to the market.   Source: Japan AnalyticsOUTLOOK - The 'dip' we expected after the September breakout was more severe than anticipated due to the confluence of some external factors. Local macroeconomic indicators are still far from positive. Industrial production is flatlining, and current trends in the German auto sector does not bode well for Japanese auto manufacturing. Higher wage incomes have been matched by food and energy price inflation and consumers have so far preferred to save rather than spend ahead of next year's 2% rise in the consumption tax. As usual, the results and revisions announced over the next four weeks will be the primary driver of stock returns and, with the market neither overbought nor overvalued, there is scope for some upside. Nevertheless, given the continuing macro concerns, the best-expected outcome is that the market stays within its nine-month trading range.  

Equity Analyst, LightStream Research

Chacko Jacob

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

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

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

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

Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/6246" target="_blank" data-smartkarma-citation="entities:6246:1">Unicharm Corp (8113 JP)</a> is a Japanese consumer goods company that manufactures hygiene products for adults and infants. The company has a presence in 18 countries globally and is the market leader in Asia for baby and feminine products. Unicharm's overseas segment currently accounts for 60% of consolidated revenue and continues to buoy its growth story. In this report, we take a look at the Unicharm's operations and strategy in India and China specifically. We also look at the company's valuation which, at current levels, we think might have already priced in future growth and appears overvalued. The stock has already retreated 13% since touching the overbought line in September 2018 and could drop further.</p>

Unicharm Corp (8113 JP) is a Japanese consumer goods company that manufactures hygiene products for adults and infants. The company has a presence in 18 countries globally and is the market leader in Asia for baby and feminine products. Unicharm's overseas segment currently accounts for 60% of consolidated revenue and continues to buoy its growth story. In this report, we take a look at the Unicharm's operations and strategy in India and China specifically. We also look at the company's valuation which, at current levels, we think might have already priced in future growth and appears overvalued. The stock has already retreated 13% since touching the overbought line in September 2018 and could drop further.

Unicharm (8113 JP): High Valuation Overshadows Steady Growth Story

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

<ul>
<li>
<strong>There have been increasing news and social media accounts in the past two days about the Chinese government increasingly cracking down on overseas travelers coming back to China with excessive amounts of luxury goods, especially cosmetics and women's bags. </strong>This has devastated share prices of global luxury goods makers including <a href="https://www.smartkarma.com/entities/5718" target="_blank" data-smartkarma-citation="entities:5718:1">Shiseido Co Ltd (4911 JP)</a>, <a href="https://www.smartkarma.com/entities/20854" target="_blank" data-smartkarma-citation="entities:20854:1">Amorepacific Corp (090430 KS)</a>, and <a href="https://www.smartkarma.com/entities/6501" target="_blank" data-smartkarma-citation="entities:6501:1">Lg Household &amp; Health Care (051900 KS)</a>, whose share prices are down 7.4%, 15.3%, and 9.9%, respectively in the past two days.</li>
<li>The news about the apparent crackdown on the Chinese daigou who bring excessive amounts of luxury goods to China came out at a similar time to the re-appearance of China's famous star Fan Bingbing, who has been fined nearly US$70 million on tax evasion. Was this just a coincidence? We think not. Most likely, given the superstar status of Fan Bingbing, the Chinese government probably wanted to set an example for the entire entertainment and the tourism industries that the Chinese government is ready to become more strict in tax collections and bringing excessive amounts of luxury items illegally to China. </li>
<li>In terms of trade, we like the long <a href="https://www.smartkarma.com/entities/6501" target="_blank" data-smartkarma-citation="entities:6501:1">Lg Household &amp; Health Care (051900 KS)</a> and short <a href="https://www.smartkarma.com/entities/5718" target="_blank" data-smartkarma-citation="entities:5718:1">Shiseido Co Ltd (4911 JP)</a> idea. We put a report on this called<strong> <a href="https://www.smartkarma.com/insights/post-2q18-earnings-lg-h-h-or-shiseido" target="_blank" data-smartkarma-citation="insights:22419">Post 2Q18 Earnings, LG H&amp;H or Shiseido?</a> </strong>Basically, even with these new crackdown on border controls and daigou, they are not really specific to any one country such as Japan or South Korea.  </li>
</ul>



There have been increasing news and social media accounts in the past two days about the Chinese government increasingly cracking down on overseas travelers coming back to China with excessive amounts of luxury goods, especially cosmetics and women's bags. This has devastated share prices of global luxury goods makers including Shiseido Co Ltd (4911 JP), Amorepacific Corp (090430 KS), and Lg Household &amp; Health Care (051900 KS), whose share prices are down 7.4%, 15.3%, and 9.9%, respectively in the past two days.
The news about the apparent crackdown on the Chinese daigou who bring excessive amounts of luxury goods to China came out at a similar time to the re-appearance of China's famous star Fan Bingbing, who has been fined nearly US$70 million on tax evasion. Was this just a coincidence? We think not. Most likely, given the superstar status of Fan Bingbing, the Chinese government probably wanted to set an example for the entire entertainment and the tourism industries that the Chinese government is ready to become more strict in tax collections and bringing excessive amounts of luxury items illegally to China. 
In terms of trade, we like the long Lg Household &amp; Health Care (051900 KS) and short Shiseido Co Ltd (4911 JP) idea. We put a report on this called Post 2Q18 Earnings, LG H&amp;H or Shiseido? Basically, even with these new crackdown on border controls and daigou, they are not really specific to any one country such as Japan or South Korea.  


China's Stricter Border Controls and Efforts to Crack Down on Daigou?

Thematic (Sector/Industry)

<p style="text-align: center;"><strong>APATHY STRIKES AGAIN</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/686/original/2018-09-23_17-11-57.png?1537690346" class="editor-image img-responsive" data-smartkarma-image-id="64686"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>THE APATHY INDICATOR - </strong>Our Fortnightly Update for 26th August highlighted the lack of market activity after the end of the results announcements over the previous six weeks. In recent years, similar periods of apathy had coincided with market turning points, usually to the upside. After an initial rally the following week, our 'apathy indicator' added another three signals before the market subsequently bottomed out on 7th September. Since then, Total Market Value has risen by 6.7%, TOPIX has had its best week in almost two years, both the 50 and 200-day moving averages were surpassed and, on Friday, the Value Traded Ratio had its fifth-best day of the year. Its 'party-time' here indeed.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/690/original/2018-09-23_17-44-03.png?1537692262" class="editor-image img-responsive" data-smartkarma-image-id="64690"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>BREAKOUT</strong> - Much fanfare was also made over the fact that the <a href="https://www.smartkarma.com/entities/22909" target="_blank" data-smartkarma-citation="entities:22909:1">Nikkei 225 (NKY INDEX)</a> reached a 26-year high and broke out of nine-month and 22-year trading ranges. Although such positive news is always welcome for us Japan-only 'diehards', both TOPIX and TOPIX-US$ reached new 26-year highs in January, only to later fade away for the next seven months. New highs for both these indices are required to confirm that the December 1989 high is indeed again the target.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/701/original/2018-09-05_19-59-32.png?1537698981" class="editor-image img-responsive" data-smartkarma-image-id="64701"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>GAIJIN WRONGFOOTED</strong> - As <a href="https://www.smartkarma.com/profiles/25" target="_blank" data-smartkarma-citation="accounts:25">Travis Lundy</a> noted on 2nd September - <a href="https://www.smartkarma.com/insights/japan-flow-redux-foreign-investor-flows-still-matter-and-they-are-still-cyclical" target="_blank" data-smartkarma-citation="insights:23654">Foreign Investor Flows (Still) Matter, and They Are (Still) Cyclical</a>, foreign investor flows have recently been at 'the lower end of the cycle' and foreign investors tend to be pro-cyclical price-takers chasing returns on a net exposure basis driven by the relative performance of the US$TOPIX/S&amp;P 500 ratio. As we also noted in <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</a>, historically September is the second-worst performing month in the Japanese market calendar with October being the fourth-worst. Add some concerns over trade and auto tariffs to the mix and a portfolio underweighting of Japan at the start of this quarter was not going to alarm any trustees. Given all of the above and with a holiday this Monday, some sharp short-covering was also in evidence towards to end of last week in anticipation of more leisurely-timed long-only fund flows to come.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/704/original/2018-09-23_20-08-06.png?1537700901" class="editor-image img-responsive" data-smartkarma-image-id="64704"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>CHEAP + UPSIDE TO FORECASTS</strong> - The last two weeks have taken the total market cap (ex REITs) to back above ¥700t, however, the trailing-twelve-month (TTM) PER is still below 15x. In aggregate the current forecasts for current year's Net Income are nearly ¥2t behind the TTM data, leaving scope for some market-boosting upward revisions in November as the (mostly interim) results are announced. Assuming upward revisions bring forecasts in line with our estimate the November TTM aggregate Net Income of ¥50t, the market PE at the January peak capitalisation would still be below 15x.  </p><p><strong>CAVEATS</strong> - Curbing the enthusiasm in the last paragraph are some macro caveats. Industrial production has slowed to nearly zero in recent months, and higher wage income is being mostly channelled into increased savings. For the first time in the post-WWII era, both profit's share and labour's share of GDP exceed 12%. Both cannot continue to rise in tandem indefinitely, and we would expect the former to turn down before the latter. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/705/original/2018-09-23_20-19-16.png?1537701582" class="editor-image img-responsive" data-smartkarma-image-id="64705"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/707/original/2018-09-23_20-34-21.png?1537702506" class="editor-image img-responsive" data-smartkarma-image-id="64707"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>OUTLOOK</strong> - After a hectic four-day week and another shortened week to come, a pause would be welcome. The 5-day Relative Strength Index at 91 is at its highest level since 8th November 2017 and is in the first percentile of occurrences over the last three years. The 25-day Toraku advance-decline indicator is also nearing '120'. Although this is far from perfect as an indicator, recent peaks and troughs have coincided with Toraku outliers. Two weeks ago, we suggested the market would rise and Yen would fall 'into the month end absent any adverse developments on the trade front'. With newly-re-elected PM Abe in New York this week, we expect another quiet week for the continuing (now sector-specific) Japan-US trade negotiations. Further Yen weakness would limit any short-term profit-taking, and there are still enough global portfolios underweight Japan to buy the coming dip and support rolling our forecast forward until month-end.</p><p><strong>SECTOR RECOMMENDATIONS</strong> - Our sector recommendations have fared less well over the last two weeks. Our most-preferred marginally out-performed our least-preferred with the gains in <strong>Energy</strong> and <strong>Telecoms</strong> offsetting 'losses' from underweights in<strong> Utilities</strong>, <strong>Machinery</strong>, <strong>Real Estate</strong> and <strong>Autos</strong> and overweights in <strong>Information Technology</strong> and <strong>Other Commercial Products</strong>. </p><p><strong>COMPANIES</strong> - Our results, revisions and stock performance reviews below contain short comments on <a href="https://www.smartkarma.com/entities/11720" target="_blank" data-smartkarma-citation="entities:11720:1">Kikkoman (2801 JP)</a>, <a href="https://www.smartkarma.com/entities/4102" target="_blank" data-smartkarma-citation="entities:4102:1">Nissan Chemical (4021 JP)</a> and <a href="https://www.smartkarma.com/entities/1496" target="_blank" data-smartkarma-citation="entities:1496:1">Showa Denko (4004 JP)</a>.</p>

APATHY STRIKES AGAINSource: Japan AnalyticsTHE APATHY INDICATOR - Our Fortnightly Update for 26th August highlighted the lack of market activity after the end of the results announcements over the previous six weeks. In recent years, similar periods of apathy had coincided with market turning points, usually to the upside. After an initial rally the following week, our 'apathy indicator' added another three signals before the market subsequently bottomed out on 7th September. Since then, Total Market Value has risen by 6.7%, TOPIX has had its best week in almost two years, both the 50 and 200-day moving averages were surpassed and, on Friday, the Value Traded Ratio had its fifth-best day of the year. Its 'party-time' here indeed.Source: Japan AnalyticsBREAKOUT - Much fanfare was also made over the fact that the Nikkei 225 (NKY INDEX) reached a 26-year high and broke out of nine-month and 22-year trading ranges. Although such positive news is always welcome for us Japan-only 'diehards', both TOPIX and TOPIX-US$ reached new 26-year highs in January, only to later fade away for the next seven months. New highs for both these indices are required to confirm that the December 1989 high is indeed again the target.Source: Japan AnalyticsGAIJIN WRONGFOOTED - As Travis Lundy noted on 2nd September - Foreign Investor Flows (Still) Matter, and They Are (Still) Cyclical, foreign investor flows have recently been at 'the lower end of the cycle' and foreign investors tend to be pro-cyclical price-takers chasing returns on a net exposure basis driven by the relative performance of the US$TOPIX/S&amp;P 500 ratio. As we also noted in Japan: Seasonality, historically September is the second-worst performing month in the Japanese market calendar with October being the fourth-worst. Add some concerns over trade and auto tariffs to the mix and a portfolio underweighting of Japan at the start of this quarter was not going to alarm any trustees. Given all of the above and with a holiday this Monday, some sharp short-covering was also in evidence towards to end of last week in anticipation of more leisurely-timed long-only fund flows to come.Source: Japan AnalyticsCHEAP + UPSIDE TO FORECASTS - The last two weeks have taken the total market cap (ex REITs) to back above ¥700t, however, the trailing-twelve-month (TTM) PER is still below 15x. In aggregate the current forecasts for current year's Net Income are nearly ¥2t behind the TTM data, leaving scope for some market-boosting upward revisions in November as the (mostly interim) results are announced. Assuming upward revisions bring forecasts in line with our estimate the November TTM aggregate Net Income of ¥50t, the market PE at the January peak capitalisation would still be below 15x.  CAVEATS - Curbing the enthusiasm in the last paragraph are some macro caveats. Industrial production has slowed to nearly zero in recent months, and higher wage income is being mostly channelled into increased savings. For the first time in the post-WWII era, both profit's share and labour's share of GDP exceed 12%. Both cannot continue to rise in tandem indefinitely, and we would expect the former to turn down before the latter. Source: Japan AnalyticsOUTLOOK - After a hectic four-day week and another shortened week to come, a pause would be welcome. The 5-day Relative Strength Index at 91 is at its highest level since 8th November 2017 and is in the first percentile of occurrences over the last three years. The 25-day Toraku advance-decline indicator is also nearing '120'. Although this is far from perfect as an indicator, recent peaks and troughs have coincided with Toraku outliers. Two weeks ago, we suggested the market would rise and Yen would fall 'into the month end absent any adverse developments on the trade front'. With newly-re-elected PM Abe in New York this week, we expect another quiet week for the continuing (now sector-specific) Japan-US trade negotiations. Further Yen weakness would limit any short-term profit-taking, and there are still enough global portfolios underweight Japan to buy the coming dip and support rolling our forecast forward until month-end.SECTOR RECOMMENDATIONS - Our sector recommendations have fared less well over the last two weeks. Our most-preferred marginally out-performed our least-preferred with the gains in Energy and Telecoms offsetting 'losses' from underweights in Utilities, Machinery, Real Estate and Autos and overweights in Information Technology and Other Commercial Products. COMPANIES - Our results, revisions and stock performance reviews below contain short comments on Kikkoman (2801 JP), Nissan Chemical (4021 JP) and Showa Denko (4004 JP).

Japan

Shiseido Company, Limited manufactures cosmetic and toiletry products. The Company offers an array of makeup and skin-care products, toiletries, beauty salon, pharmaceuticals, foodstuffs, and fine chemicals.

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Shiseido Company (4911 JP)

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