'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

<blockquote>
<p style="text-align: center;"><strong>“I’ve been a manager for almost half a century, but this is the first time I’ve seen such a large single-month drop in orders for us. What we witnessed in November and December was just extraordinary.”</strong></p>
<p style="text-align: center;"><strong> Nidec CEO - Shigenobu Nagamori</strong></p>
</blockquote>
<div class="content-caption">
<hr>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/929/original/2019-01-19_14-18-27.png?1547875119" class="editor-image img-responsive" data-smartkarma-image-id="75929"></figure>
<p>Source: Japan Analytics</p>
</div>
<p><strong>BEAR MARKET RALLY ON CUE </strong>- The bear market rally we <a href="https://www.smartkarma.com/insights/japan-2018-market-review-bear-market-rally-ahead" target="_blank" data-smartkarma-citation="insights:26917">envisaged</a> has seen the Market Composite recover by nearly 5% this year and 10% from the Christmas Day low of ¥533t. Seven of the last nine trading days have been 'up', and the Bank of Japan dutifully intervened on one of the two 'down' days - January 16th. The US dollar has also retraced three-quarters of the ¥6.5 decline from December 26th to January as concerns over US-China relations temporarily subsided.   </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/932/original/2019-01-19_14-21-49.png?1547875320" class="editor-image img-responsive" data-smartkarma-image-id="75932"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>5D RSI @75 </strong>-<strong> </strong>The 5-day Relative Strength Index is now at a level that suggests the bulk of this initial move is complete, and a consolidation can be expected in the weeks ahead as the majority of third-quarter earnings are released - particularly if, as we discuss further below, <a href="https://www.smartkarma.com/entities/7245" target="_blank" data-smartkarma-citation="entities:7245:1">Nidec (6594 JP)</a> has set a trend.</p>
<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/934/original/2019-01-19_14-26-43.png?1547875616" class="editor-image img-responsive" data-smartkarma-image-id="75934"></figure>
<p>Source: Japan Analytics</p>
</div>
<p><strong>VALUE TRADED RATIO </strong>- After reaching a three-month high of 64bps on 21st December, the Value Traded Ratio (value traded/total market value) has returned to below-trend levels for the last two days - another indicator of a coming pause in the uptrend.   </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/936/original/2019-01-19_14-32-51.png?1547875989" class="editor-image img-responsive" data-smartkarma-image-id="75936"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>% ABOVE MOVING AVERAGE</strong> - The percentage of stocks trading above a weighted sum of five periods of moving averages has recovered to above '20' as measured by market value, although the stock count percentage is still below that level. We expect the pattern of 2016 to be replayed here, which suggests an ultimate 'low' in the summer of 2019. </p>
<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/935/original/2019-01-19_14-27-41.png?1547875671" class="editor-image img-responsive" data-smartkarma-image-id="75935"></figure>
<p>Source: Japan Analytics</p>
</div>
<p><strong>TORAKU &gt; 80</strong> - On a further positive note, on Friday the 25-day Toraku advance-decline indicator finally recovered to above the '80' level, indicating that the December 25th 'low' is unlikely to be breached in the short term.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/972/original/2019-01-20_06-16-45.png?1547932620" class="editor-image img-responsive" data-smartkarma-image-id="75972"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>THE NIDEC CANARY</strong> - Despite the market's nonchalant reaction to Nidec's<a href="https://www.smartkarma.com/insights/nidec-6594-jp-big-downward-revision" target="_blank" data-smartkarma-citation="insights:27118"> downward revision</a>, the company's revised forecasts have broader implications. For the first time since March 2017, forecasts for our Market Composite for Operating Income are now lower than the trailing-twelve-month (TTM) Operating Income. Also, the 'gap' between forecast Net Income and TTM Net Income is now ¥2.9t - the largest such gap in over ten years. Mr. Market is suggesting that Japanese corporate profits are due to fall by 18% on average, to the level last reached in the first quarter of 2017 - implying bottom-line declines of up to 50% for some key 'global' sectors such as <strong>Autos</strong>, <strong>Machinery</strong>, <strong>Chemicals</strong>, <strong>Electrical Equipment</strong> and <strong>Technology Hardware</strong>, which together comprise one-third of aggregate Net Income.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/973/original/2019-01-20_06-21-24.png?1547932897" class="editor-image img-responsive" data-smartkarma-image-id="75973"></figure>
<div class="content-caption">
<p>Source: Japan Analytics</p>
<p style="text-align: left;">Note: The Results &amp; Revision Score is the average of our Results Score and Forecasts/Revision Score for each company. Both scores are cap-weighted and 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 (TTM) or previous first-half results, with annual forecasts being double-weighted.</p>
</div>
<p><strong>LEADING OR LAGGING?</strong> - Our cap-weighted Results &amp; Revision Score bottomed at -2.55 in December 2016 and reached a two-decade high on 16th November 2017, two months before the market peak in January 2018. Since October last year, the market has been leading on the downside.  If we are to repeat the relatively-mild cyclical downturn of 2016, the Results &amp; Revision Score will turn negative at the time of the full-year results and forecasts for the new fiscal year, which, for the majority of companies, will be released in May. We expect the market to retest the lows of April 2017 and December 2018 around that time. </p>
<div class="content-highlight">
<p style="text-align: center;"><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.  <em> </em></strong></li>
<li>
<strong>The Japanese economy is still enjoying a robust domestically-driven growth cycle and is</strong><strong> close to full employment. As Nidec and Yaskawa Electric have demonstrated and as other companies will soon confirm, Japan's globally-orientated manufacturing companies are not immune to global trends. Although some of the coming downturn in 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.</strong>
</li>
<li><strong>In the near term, we continue to favour undervalued domestically-orientated companies in the Information Technology, Internet, Media and Telecommunications sectors. </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/7245" target="_blank" data-smartkarma-citation="entities:7245:1">Nidec (6594 JP)</a>, <a href="https://www.smartkarma.com/entities/2458" target="_blank" data-smartkarma-citation="entities:2458:1">Yaskawa Electric (6506 JP)</a>, <a href="https://www.smartkarma.com/entities/15862" target="_blank" data-smartkarma-citation="entities:15862:1">Fancl (4921 JP)</a>, <a href="https://www.smartkarma.com/entities/5718" target="_blank" data-smartkarma-citation="entities:5718:1">Shiseido (4911 JP)</a>, <a href="https://www.smartkarma.com/entities/18009" target="_blank" data-smartkarma-citation="entities:18009:1">Kose (4922 JP)</a>, <a href="https://www.smartkarma.com/entities/320" target="_blank" data-smartkarma-citation="entities:320:1">Familymart Uny (8028 JP)</a>, <a href="https://www.smartkarma.com/entities/751" target="_blank" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/356" target="_blank" data-smartkarma-citation="entities:356:1">Olympus (7733 JP)</a>, <a href="https://www.smartkarma.com/entities/454" target="_blank" data-smartkarma-citation="entities:454:1">Lixil (5938 JP)</a>, <a href="https://www.smartkarma.com/entities/7387" target="_blank" data-smartkarma-citation="entities:7387:1">Nippon Paint (4612 JP)</a>, <a href="https://www.smartkarma.com/entities/8990" target="_blank" data-smartkarma-citation="entities:8990:1">Hoya (7741 JP)</a>, <a href="https://www.smartkarma.com/entities/3077" target="_blank" data-smartkarma-citation="entities:3077:1">Keyence (6861 JP)</a>, and <a href="https://www.smartkarma.com/entities/6955" target="_blank" data-smartkarma-citation="entities:6955:1">Technopro (6028 JP)</a> .</p>


“I’ve been a manager for almost half a century, but this is the first time I’ve seen such a large single-month drop in orders for us. What we witnessed in November and December was just extraordinary.”
 Nidec CEO - Shigenobu Nagamori




Source: Japan Analytics

BEAR MARKET RALLY ON CUE - The bear market rally we envisaged has seen the Market Composite recover by nearly 5% this year and 10% from the Christmas Day low of ¥533t. Seven of the last nine trading days have been 'up', and the Bank of Japan dutifully intervened on one of the two 'down' days - January 16th. The US dollar has also retraced three-quarters of the ¥6.5 decline from December 26th to January as concerns over US-China relations temporarily subsided.   

Source: Japan Analytics
5D RSI @75 - The 5-day Relative Strength Index is now at a level that suggests the bulk of this initial move is complete, and a consolidation can be expected in the weeks ahead as the majority of third-quarter earnings are released - particularly if, as we discuss further below, Nidec (6594 JP) has set a trend.


Source: Japan Analytics

VALUE TRADED RATIO - After reaching a three-month high of 64bps on 21st December, the Value Traded Ratio (value traded/total market value) has returned to below-trend levels for the last two days - another indicator of a coming pause in the uptrend.   

Source: Japan Analytics
% ABOVE MOVING AVERAGE - The percentage of stocks trading above a weighted sum of five periods of moving averages has recovered to above '20' as measured by market value, although the stock count percentage is still below that level. We expect the pattern of 2016 to be replayed here, which suggests an ultimate 'low' in the summer of 2019. 


Source: Japan Analytics

TORAKU &gt; 80 - On a further positive note, on Friday the 25-day Toraku advance-decline indicator finally recovered to above the '80' level, indicating that the December 25th 'low' is unlikely to be breached in the short term.

Source: Japan Analytics
THE NIDEC CANARY - Despite the market's nonchalant reaction to Nidec's downward revision, the company's revised forecasts have broader implications. For the first time since March 2017, forecasts for our Market Composite for Operating Income are now lower than the trailing-twelve-month (TTM) Operating Income. Also, the 'gap' between forecast Net Income and TTM Net Income is now ¥2.9t - the largest such gap in over ten years. Mr. Market is suggesting that Japanese corporate profits are due to fall by 18% on average, to the level last reached in the first quarter of 2017 - implying bottom-line declines of up to 50% for some key 'global' sectors such as Autos, Machinery, Chemicals, Electrical Equipment and Technology Hardware, which together comprise one-third of aggregate Net Income.


Source: Japan Analytics
Note: The Results &amp; Revision Score is the average of our Results Score and Forecasts/Revision Score for each company. Both scores are cap-weighted and 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 (TTM) or previous first-half results, with annual forecasts being double-weighted.

LEADING OR LAGGING? - Our cap-weighted Results &amp; Revision Score bottomed at -2.55 in December 2016 and reached a two-decade high on 16th November 2017, two months before the market peak in January 2018. Since October last year, the market has been leading on the downside.  If we are to repeat the relatively-mild cyclical downturn of 2016, the Results &amp; Revision Score will turn negative at the time of the full-year results and forecasts for the new fiscal year, which, for the majority of companies, will be released in May. We expect the market to retest the lows of April 2017 and December 2018 around that time. 

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.   

The Japanese economy is still enjoying a robust domestically-driven growth cycle and is close to full employment. As Nidec and Yaskawa Electric have demonstrated and as other companies will soon confirm, Japan's globally-orientated manufacturing companies are not immune to global trends. Although some of the coming downturn in 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.

In the near term, we continue to favour undervalued domestically-orientated companies in the Information Technology, Internet, Media and Telecommunications sectors. 


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 Nidec (6594 JP), Yaskawa Electric (6506 JP), Fancl (4921 JP), Shiseido (4911 JP), Kose (4922 JP), Familymart Uny (8028 JP), Fast Retailing (9983 JP), Olympus (7733 JP), Lixil (5938 JP), Nippon Paint (4612 JP), Hoya (7741 JP), Keyence (6861 JP), and Technopro (6028 JP) .

Japan: Fortnightly Update - Nidec Leads the Way

Japan

SIGMA KOKI CO., LTD. manufactures and sells laser equipment for research and development use.  The Company's products include laser marking and laser controlled auto-positioning devices, as well as optical instruments.

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Sigma Koki (7713 JP)

Japan: Fortnightly Update - Nidec Leads the Way

“I’ve been a manager for almost half a century, but this is the first time I’ve seen such a large single-month drop in orders for us. What we...

Campbell Gunn

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