Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

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

<ul>
<li>SMC reported its 2QFY22 results beating revenue and OP guidance by 5.5% and 18.0% respectively.</li>
<li>A weak yen and strong SG&amp;A control are helping boost margins to unusually high levels as well.</li>
<li>However, cyclical patterns suggest a revenue downturn is incoming at a time when valuations are extremely stretched.</li>
</ul>


SMC reported its 2QFY22 results beating revenue and OP guidance by 5.5% and 18.0% respectively.
A weak yen and strong SG&amp;A control are helping boost margins to unusually high levels as well.
However, cyclical patterns suggest a revenue downturn is incoming at a time when valuations are extremely stretched.


SMC – OP Beat Incoming but so Is the Downcycle

Keyence has been our boring top pick within the factory automation sector for some time and has boringly and consistently outperformed peers. We still consider it the highest quality name within the sector but given valuations, we are reluctantly disembarking here.

Keyence has been our boring top pick within the factory automation sector for some time and has boringly and consistently outperformed peers. We still consider it the highest quality name within the sector but given valuations, we are reluctantly disembarking here.

Keyence – Time to Step Off and Some Warning Signs for Markets

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

On Friday 11 June, the TSE published its final revisions to the Corporate Governance Code which had been undergoing review by the Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code and subsequently comment for the past many months. The new Code went into effect as of 11 June. The first revision to the Guidelines for Investor and Company Engagement were published as well. The new version of Japan's Corporate Governance Code is <a href="https://www.jpx.co.jp/english/news/1020/b5b4pj0000046kxj-att/b5b4pj0000046l07.pdf" target="_blank" rel="noopener">here</a> with the tracked change version <a href="https://www.jpx.co.jp/english/news/1020/b5b4pj0000046kxj-att/b5b4pj0000046l0c.pdf" target="_blank" rel="noopener">here</a>. This is the second revision of the Code (the first revision was in 2018).The revisions to the JFSA Guidelines for Investor and Company Engagement are <a href="https://www.jpx.co.jp/english/news/1020/b5b4pj0000046kxj-att/b5b4pj0000046l3e.pdf" target="_blank" rel="noopener">here</a>. Tracked changes are <a href="https://www.jpx.co.jp/english/news/1020/b5b4pj0000046kxj-att/b5b4pj0000046l50.pdf" target="_blank" rel="noopener">here</a>.The major changes to the Code recommend enhancements to Board independence, diversity, Sustainability and ESG, and also recommend improvements to investor accessibility and voting and a small change to listed parent-listed subsidiary relationships which unfortunately will not do much to counter abuse by companies of listed sub minority shareholders. Below is more discussion of the changes and what they mean.But I remind investors, these changes are almost all box-ticking exercises. They will not improve governance for shareholders except at the margins. Companies which "get" good governance are still rare. And those which don't get it seem to abuse shareholders on a regular basis. And for that, investors still need more cowbell.

On Friday 11 June, the TSE published its final revisions to the Corporate Governance Code which had been undergoing review by the Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code and subsequently comment for the past many months. The new Code went into effect as of 11 June. The first revision to the Guidelines for Investor and Company Engagement were published as well. The new version of Japan's Corporate Governance Code is here with the tracked change version here. This is the second revision of the Code (the first revision was in 2018).The revisions to the JFSA Guidelines for Investor and Company Engagement are here. Tracked changes are here.The major changes to the Code recommend enhancements to Board independence, diversity, Sustainability and ESG, and also recommend improvements to investor accessibility and voting and a small change to listed parent-listed subsidiary relationships which unfortunately will not do much to counter abuse by companies of listed sub minority shareholders. Below is more discussion of the changes and what they mean.But I remind investors, these changes are almost all box-ticking exercises. They will not improve governance for shareholders except at the margins. Companies which "get" good governance are still rare. And those which don't get it seem to abuse shareholders on a regular basis. And for that, investors still need more cowbell.

TSE Prime: Japan's Corporate Governance Code Finalized So Boxes Will Be Furiously Ticked

SMC reported its 4QFY21 results on Friday and posted revenue of ¥160bn (+14.6% QOQ, +23.2% YoY) and operating profit of ¥47bn (for an OPM of 29.6% compared to the OPM of 27.8% in 4QFY20).The reported 4QFY21 revenue and OP were higher than consensus estimates by 10.5% and 15.3% respectively, but the stock fell today due to weak looking guidance.<table class="table table-striped"><tbody>
<tr>
<td style="width: 129.0pt;">In ¥bn</td>
<td style="width: 107.0pt;">Revenue </td>
<td style="width: 110.0pt;">OP</td>
<td style="width: 83.0pt;">OPM</td>
</tr>
<tr>
<td style="width: 129.0pt;">Actual Results - 4QFY21</td>
<td style="width: 107.0pt;">160</td>
<td style="width: 110.0pt;">47</td>
<td style="width: 83.0pt;">29.6%</td>
</tr>
<tr>
<td style="width: 129.0pt;">Consensus - 4QFY21</td>
<td style="width: 107.0pt;">145</td>
<td style="width: 110.0pt;">41</td>
<td style="width: 83.0pt;">28.4%</td>
</tr>
<tr>
<td style="width: 129.0pt;">Surprise</td>
<td style="width: 107.0pt;">10.5%</td>
<td style="width: 110.0pt;">15.3%</td>
<td style="width: 83.0pt;">1.2%</td>
</tr>
<tr>
<td style="width: 129.0pt;"> </td>
<td style="width: 107.0pt;"> </td>
<td style="width: 110.0pt;"> </td>
<td style="width: 83.0pt;"> </td>
</tr>
<tr>
<td style="width: 129.0pt;">Actual - FY21</td>
<td style="width: 107.0pt;">552</td>
<td style="width: 110.0pt;">153</td>
<td style="width: 83.0pt;">27.8%</td>
</tr>
<tr>
<td style="width: 129.0pt;">Guidance - FY21</td>
<td style="width: 107.0pt;">525</td>
<td style="width: 110.0pt;">141</td>
<td style="width: 83.0pt;">26.9%</td>
</tr>
<tr>
<td style="width: 129.0pt;">Surprise</td>
<td style="width: 107.0pt;">5.2%</td>
<td style="width: 110.0pt;">8.8%</td>
<td style="width: 83.0pt;">0.9%</td>
</tr>
</tbody></table><div style="text-align: left;" class="content-caption">Source: Company disclosures, CapIQ</div>

SMC reported its 4QFY21 results on Friday and posted revenue of ¥160bn (+14.6% QOQ, +23.2% YoY) and operating profit of ¥47bn (for an OPM of 29.6% compared to the OPM of 27.8% in 4QFY20).The reported 4QFY21 revenue and OP were higher than consensus estimates by 10.5% and 15.3% respectively, but the stock fell today due to weak looking guidance.

In ¥bn
Revenue 
OP
OPM


Actual Results - 4QFY21
160
47
29.6%


Consensus - 4QFY21
145
41
28.4%


Surprise
10.5%
15.3%
1.2%


 
 
 
 


Actual - FY21
552
153
27.8%


Guidance - FY21
525
141
26.9%


Surprise
5.2%
8.8%
0.9%

Source: Company disclosures, CapIQ

SMC – OP Guidance May Not Be Conservative

SMC’s business turned around sharply in 3Q with revenue of ¥140bn (+12.8% QOQ, +6.4% YoY) and operating profit of ¥41bn (for an OPM of 29.2% compared to the OPM of 26.6% in 3QFY20).<table class="table table-striped"><tbody>
<tr>
<td style="width: 30.06%;">In ¥bn</td>
<td style="width: 24.94%;">Revenue </td>
<td style="width: 25.64%;">OP</td>
<td style="width: 19.34%;">OPM</td>
</tr>
<tr>
<td style="width: 30.06%;">Actual Results - 3QFY21</td>
<td style="width: 24.94%;">140</td>
<td style="width: 25.64%;">41</td>
<td style="width: 19.34%;">29.2%</td>
</tr>
<tr>
<td style="width: 30.06%;">Consensus - 3QFY21</td>
<td style="width: 24.94%;">131</td>
<td style="width: 25.64%;">35</td>
<td style="width: 19.34%;">26.4%</td>
</tr>
<tr>
<td style="width: 30.06%;">Surprise</td>
<td style="width: 24.94%;">6.7%</td>
<td style="width: 25.64%;">18.1%</td>
<td style="width: 19.34%;">2.8% points</td>
</tr>
<tr>
<td style="width: 30.06%;"> </td>
<td style="width: 24.94%;"> </td>
<td style="width: 25.64%;"> </td>
<td style="width: 19.34%;"> </td>
</tr>
<tr>
<td style="width: 30.06%;">Guidance</td>
<td style="width: 24.94%;">525</td>
<td style="width: 25.64%;">141</td>
<td style="width: 19.34%;">26.9%</td>
</tr>
<tr>
<td style="width: 30.06%;">Consensus</td>
<td style="width: 24.94%;">514</td>
<td style="width: 25.64%;">138</td>
<td style="width: 19.34%;">26.8%</td>
</tr>
<tr>
<td style="width: 30.06%;">Difference</td>
<td style="width: 24.94%;">2.1%</td>
<td style="width: 25.64%;">2.4%</td>
<td style="width: 19.34%;">0.1% points</td>
</tr>
<tr>
<td style="width: 30.06%;"> </td>
<td style="width: 24.94%;"> </td>
<td style="width: 25.64%;"> </td>
<td style="width: 19.34%;"> </td>
</tr>
<tr>
<td style="width: 30.06%;">Implied Guidance- 4QFY21</td>
<td style="width: 24.94%;">133</td>
<td style="width: 25.64%;">35</td>
<td style="width: 19.34%;">26.4%</td>
</tr>
<tr>
<td style="width: 30.06%;">Consensus - 4QFY21</td>
<td style="width: 24.94%;">139</td>
<td style="width: 25.64%;">40</td>
<td style="width: 19.34%;">28.6%</td>
</tr>
<tr>
<td style="width: 30.06%;">Difference</td>
<td style="width: 24.94%;">-3.9%</td>
<td style="width: 25.64%;">-11.3%</td>
<td style="width: 19.34%;">-2.2% points</td>
</tr>
</tbody></table><div style="text-align: left;" class="content-caption">Source: Company disclosures, CapIQ</div>Revenue guidance was revised up by 9.4% while OP guidance was revised up by 21.5% to ¥141bn.

SMC’s business turned around sharply in 3Q with revenue of ¥140bn (+12.8% QOQ, +6.4% YoY) and operating profit of ¥41bn (for an OPM of 29.2% compared to the OPM of 26.6% in 3QFY20).

In ¥bn
Revenue 
OP
OPM


Actual Results - 3QFY21
140
41
29.2%


Consensus - 3QFY21
131
35
26.4%


Surprise
6.7%
18.1%
2.8% points


 
 
 
 


Guidance
525
141
26.9%


Consensus
514
138
26.8%


Difference
2.1%
2.4%
0.1% points


 
 
 
 


Implied Guidance- 4QFY21
133
35
26.4%


Consensus - 4QFY21
139
40
28.6%


Difference
-3.9%
-11.3%
-2.2% points

Source: Company disclosures, CapIQRevenue guidance was revised up by 9.4% while OP guidance was revised up by 21.5% to ¥141bn.

SMC – Expensive but Looking Better Than Peers

Japan

SMC CORPORATION manufactures directional control devices such as power, hand, and air valves.  The Company also produces air filters, cylinders, and actuators along with other pneumatic equipment.  SMC seeks to become a comprehensive maker of automated equipment through the market demand of information and communications products.

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SMC Corp (6273 JP)

SMC – OP Beat Incoming but so Is the Downcycle

SMC's 2Q was a nice beat but cyclical patterns suggest a revenue downturn is incoming at a time when valuations are extremely stretched.

Mio Kato

Keyence – Time to Step Off and Some Warning Signs for Markets

Keyence has been our top pick in the FA sector and has outperformed peers consistently but while we still consider it the highest quality name...

Mio Kato

TSE Prime: Japan's Corporate Governance Code Finalized So Boxes Will Be Furiously Ticked

The TSE on Friday announced the revisions to the Governance Code. This codifies the "governance thresholds" required to join TSE Prime next year....

Travis Lundy

SMC – OP Guidance May Not Be Conservative

SMC beat consensus on both revenue and OP but still saw its stock fall 2.6% due to weak guidance. While the company traditionally guides...

Mio Kato

SMC – Expensive but Looking Better Than Peers

SMC surprised positively with significant revenue growth coming through from China, setting the stage for significant OP growth next FY.

Mio Kato

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