'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. 

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/125/889/original/2020-04-01_12-59-11.png?1585713567" class="editor-image img-responsive" data-smartkarma-image-id="125889"></figure><div class="content-caption">Source • Japan Analytics</div>DIVIDENDS AT RISK - As noted in our daily Results &amp; Revisions Updates in the last few days, Japanese companies are starting to shore up their cash flow but cutting or eliminating their dividends. Following <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc" target="_blank" data-smartkarma-citation="entities:516:1" rel="noopener">HSBC (5 HK) </a>and <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (STAN LN)</a> moves on April 1st, a wave of similar moves is expected in Japan. Although dividends are thought to be very 'sticky' in this market,  on average,  of the 75% of non-financial companies that pay dividends, 14% reduce their payouts each year. In FY2009 and FY2010, this ratio rose to one-third.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/125/899/original/2020-04-01_13-47-18.png?1585716458" class="editor-image img-responsive" data-smartkarma-image-id="125899"></figure><div class="content-caption">Source • Japan Analytics</div>30% HAIRCUT - The 'stickiness' of Japanese dividends is clear from the trends in absolute values. The total amount of cash dividends paid by non-financial companies declined by 30% from 2008 to 2010 or by ¥1.8 trillion. Since the 2010 'low', total cash dividends paid by these companies have increased by 168% to ¥11.8 trillion, a 'trailing yield' of 2.4%. A 30% dividend haircut to ¥8.3 trillion would reduce the yield on current market cap to 1.7%, slightly above the 2010 low of 1.63%.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/905/original/2020-04-07_13-29-26.png?1586233784" class="editor-image img-responsive" data-smartkarma-image-id="126905"></figure><div class="content-caption">Source • Japan Analytics</div>WHO'S CUTTING NEXT? - Some serial dividend 'cutters', like <a href="https://www.smartkarma.com/entities/nipro-corp" target="_blank" data-smartkarma-citation="entities:18346:1" rel="noopener">Nipro (8086 JP)</a> above, have already announced a cut for the fiscal year just ended. In the DETAIL section below, we shall attempt to highlight those larger (Market Cap &gt; ¥50b) companies with the greatest risk of having to cut their dividends.

Source • Japan AnalyticsDIVIDENDS AT RISK - As noted in our daily Results &amp; Revisions Updates in the last few days, Japanese companies are starting to shore up their cash flow but cutting or eliminating their dividends. Following HSBC (5 HK) and Standard Chartered (STAN LN) moves on April 1st, a wave of similar moves is expected in Japan. Although dividends are thought to be very 'sticky' in this market,  on average,  of the 75% of non-financial companies that pay dividends, 14% reduce their payouts each year. In FY2009 and FY2010, this ratio rose to one-third.Source • Japan Analytics30% HAIRCUT - The 'stickiness' of Japanese dividends is clear from the trends in absolute values. The total amount of cash dividends paid by non-financial companies declined by 30% from 2008 to 2010 or by ¥1.8 trillion. Since the 2010 'low', total cash dividends paid by these companies have increased by 168% to ¥11.8 trillion, a 'trailing yield' of 2.4%. A 30% dividend haircut to ¥8.3 trillion would reduce the yield on current market cap to 1.7%, slightly above the 2010 low of 1.63%.Source • Japan AnalyticsWHO'S CUTTING NEXT? - Some serial dividend 'cutters', like Nipro (8086 JP) above, have already announced a cut for the fiscal year just ended. In the DETAIL section below, we shall attempt to highlight those larger (Market Cap &gt; ¥50b) companies with the greatest risk of having to cut their dividends.

🇯🇵 JAPAN • Dividends At Risk - The Serial 'Cutters'

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

* Instead of Applause, Throw Tomatoes: The call for a 21-day nationwide lockdown to contain the corona virus, has caused a massive liquidity drain and significant credit defaults in India as the duration and depth of this economic slowdown remains unknown. In response, the Reserve Bank of India (RBI) announced a string of policy measures to shore up the financial system. Unfortunately India's financial sector strains are chronic, and the RBI’s previous actions/inactions were avoidable and unfortunately have been additive to the economic impact of the current coronavirus crisis;* Yes Bank Was Not Systemically Important:  Yes Bank (YESBANK.IN) [Yes] - India’s fourth largest lender – was failed on March 9th, although this situation was well known for the better part of a year whilst the corona virus was brewing in Asia since January. A coordinated effort to resolve both Yes and the economic fallout of the corona virus (when its next neighbor mainland China had been dealing with this problem since mid-December) would have been far more constructive given the 19 days between bank seizure (March 9th) and RBI policy initiatives (March 28th). As such, the RBI triggered an unnecessary systemic negative loop at a time when global liquidity has all but ceased; and* Resolving Self-Inflicted Wounds: The RBI announced several measures to improve liquidity conditions and credit flows through the Indian economy – undoing some of the self-inflicted strain caused by the Yes rescue - notably the deposit outflows at the private banks and redemptions at mutual funds which led to a spike in yields across the board. Over the near-term, these measures should provide some relief to a portion of the financial sector which is facing liquidity challenges and also potentially reduce some risk aversion. Let’s face it, the only real cure in India and elsewhere is for economic conditions to reverse course.

* Instead of Applause, Throw Tomatoes: The call for a 21-day nationwide lockdown to contain the corona virus, has caused a massive liquidity drain and significant credit defaults in India as the duration and depth of this economic slowdown remains unknown. In response, the Reserve Bank of India (RBI) announced a string of policy measures to shore up the financial system. Unfortunately India's financial sector strains are chronic, and the RBI’s previous actions/inactions were avoidable and unfortunately have been additive to the economic impact of the current coronavirus crisis;* Yes Bank Was Not Systemically Important:  Yes Bank (YESBANK.IN) [Yes] - India’s fourth largest lender – was failed on March 9th, although this situation was well known for the better part of a year whilst the corona virus was brewing in Asia since January. A coordinated effort to resolve both Yes and the economic fallout of the corona virus (when its next neighbor mainland China had been dealing with this problem since mid-December) would have been far more constructive given the 19 days between bank seizure (March 9th) and RBI policy initiatives (March 28th). As such, the RBI triggered an unnecessary systemic negative loop at a time when global liquidity has all but ceased; and* Resolving Self-Inflicted Wounds: The RBI announced several measures to improve liquidity conditions and credit flows through the Indian economy – undoing some of the self-inflicted strain caused by the Yes rescue - notably the deposit outflows at the private banks and redemptions at mutual funds which led to a spike in yields across the board. Over the near-term, these measures should provide some relief to a portion of the financial sector which is facing liquidity challenges and also potentially reduce some risk aversion. Let’s face it, the only real cure in India and elsewhere is for economic conditions to reverse course.

Reserve Bank of India – Zero Forethought

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Despite distress in the global financial markets, there is still money being put to work by asset managers. New issue credit spreads are alluring for investors and long-term yields are attractive for issuers in this low interest rate environment. The return of over-subscriptions and spread tightening from initial price talk (IPT) to issuance suggests that it’s not as easy to get into a deal as it was two weeks ago when US banks were pricing long-dated deals at IPT levels. Spread concessions to issue have declined over the last two weeks; nonetheless, if you’re part of the rush back in or thinking of joining it, the question is at what point do you get out? Our perspective is that improving stability in the market may be tested again and, as such, hedging downside risks may be appropriate. For an assessment of the conditions in global financial markets, please see: <a href="https://www.smartkarma.com/insights/bank-credit-weekly-global-financial-markets-stabilized-but-still-in-icu" target="_blank" rel="noopener" data-smartkarma-citation="insights:37899">Bank Credit Weekly: Global Financial Markets Stabilized, but Still in ICU</a>.In this note we highlight several benchmark new issue bonds by global banks and explore their pricing implications for Asia-headquartered bank bonds.

Despite distress in the global financial markets, there is still money being put to work by asset managers. New issue credit spreads are alluring for investors and long-term yields are attractive for issuers in this low interest rate environment. The return of over-subscriptions and spread tightening from initial price talk (IPT) to issuance suggests that it’s not as easy to get into a deal as it was two weeks ago when US banks were pricing long-dated deals at IPT levels. Spread concessions to issue have declined over the last two weeks; nonetheless, if you’re part of the rush back in or thinking of joining it, the question is at what point do you get out? Our perspective is that improving stability in the market may be tested again and, as such, hedging downside risks may be appropriate. For an assessment of the conditions in global financial markets, please see: Bank Credit Weekly: Global Financial Markets Stabilized, but Still in ICU.In this note we highlight several benchmark new issue bonds by global banks and explore their pricing implications for Asia-headquartered bank bonds.

Asian Bank Relative Value - Notes from Last Weeks' Global Bank Debt Issuance

Equity Bottom-Up

BOC Hong Kong (BOC HK) / Equity Bottom-Up

* Despite Managed Set of Results, Still A Miss: BOC Hong Kong Holdings (2388.HK) [BOCHK] reported 2H19 earnings results of HKD 15.6 bn substantially missing consensus forecasts – although HKD 645 mn or 13.1% ahead of 1H19 numbers. Given the reserve bleed on top of credit weakness which was attributed to mainland China, we calculate that the 2H19 bottom-line result was overstated by over 5%;
* Credit and NIMs to Weaken: BOCHK’s stated figures fail to tell the entire story. Net new problem loan growth amounted to HKD 2.0 bn or 74.4% linked period or 149% on annualized basis. This is alarming as we have yet to feel the impact of the corona virus on BOCHK’s results while its mainland China NPLs have already increased 157% HOH. 4Q19 net interest income actually declined 2% as the higher HIBOR rates was more than offset by USD rates while the NIM declined 6 bp to 1.66%. There is increasing pressure on asset sensitive balance sheets in response to a lagging HIBOR post the aggressive FRB moves.

* Despite Managed Set of Results, Still A Miss: BOC Hong Kong Holdings (2388.HK) [BOCHK] reported 2H19 earnings results of HKD 15.6 bn substantially missing consensus forecasts – although HKD 645 mn or 13.1% ahead of 1H19 numbers. Given the reserve bleed on top of credit weakness which was attributed to mainland China, we calculate that the 2H19 bottom-line result was overstated by over 5%;
* Credit and NIMs to Weaken: BOCHK’s stated figures fail to tell the entire story. Net new problem loan growth amounted to HKD 2.0 bn or 74.4% linked period or 149% on annualized basis. This is alarming as we have yet to feel the impact of the corona virus on BOCHK’s results while its mainland China NPLs have already increased 157% HOH. 4Q19 net interest income actually declined 2% as the higher HIBOR rates was more than offset by USD rates while the NIM declined 6 bp to 1.66%. There is increasing pressure on asset sensitive balance sheets in response to a lagging HIBOR post the aggressive FRB moves.

BOCHK – A Very Managed, Yet Poor Set of Numbers

<ul>
<li> Dusting Off the Old Playbook: The globe is finally coming to the realization that corona virus containment means that global economic activity will grind to a halt over the next 2-3 months. The market is going to aggressively retest the firewalls put in place during the GFC.  As a result, the GFC and sovereign crisis playbook is now being dusted off - including the Troubled Asset Recovery Program (TARP) in the US and the European Stability Mechanism (ESM) credit lines.  
</li>
<li> Not The Europeans....Again:Given the symbiotic relationship between European financials and sovereigns, the most recent market collapse has already pressured sovereign CDS spreads. The ebbing economic tide has significantly exposed the European financial system for what it always was - a low profit, weak capital generating, and highly geared sector which has been dangerously close to loss making for over a decade. The European Central Bank’s (ECB) faltering asset purchase program is unable to keep CDS spreads from significantly widening and having a knock-on effect with the rest of the world. </li>
<li>
Americans Getting Stressed Over Counterparty Risk Et al.  With Eurozone firewalls already breached, the two Trojan horses of counterparty risk and a challenged corporate bond market (ratings agency risk and waterfall risks due to cascading BBB and B3 corporates) embedded within the “well-capitalized” yet vulnerable US banking system will cause additional systemic wobbles. </li>
</ul>


 Dusting Off the Old Playbook: The globe is finally coming to the realization that corona virus containment means that global economic activity will grind to a halt over the next 2-3 months. The market is going to aggressively retest the firewalls put in place during the GFC.  As a result, the GFC and sovereign crisis playbook is now being dusted off - including the Troubled Asset Recovery Program (TARP) in the US and the European Stability Mechanism (ESM) credit lines.  

 Not The Europeans....Again:Given the symbiotic relationship between European financials and sovereigns, the most recent market collapse has already pressured sovereign CDS spreads. The ebbing economic tide has significantly exposed the European financial system for what it always was - a low profit, weak capital generating, and highly geared sector which has been dangerously close to loss making for over a decade. The European Central Bank’s (ECB) faltering asset purchase program is unable to keep CDS spreads from significantly widening and having a knock-on effect with the rest of the world. 

Americans Getting Stressed Over Counterparty Risk Et al.  With Eurozone firewalls already breached, the two Trojan horses of counterparty risk and a challenged corporate bond market (ratings agency risk and waterfall risks due to cascading BBB and B3 corporates) embedded within the “well-capitalized” yet vulnerable US banking system will cause additional systemic wobbles. 


Deja Wu – Corona Virus Now Infects Global Financials

Hong Kong

Standard Chartered plc is an international banking group operating principally in Asia, Africa, and the Middle East.  The Company offers its products and services in the personal, consumer, corporate, institutional and treasury areas.

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Standard Chartered (2888 HK)

🇯🇵 JAPAN • Dividends At Risk - The Serial 'Cutters'

DIVIDENDS AT RISK - As noted in our daily Results & Revisions Updates in the last few days, Japanese companies are starting to shore up their...

Campbell Gunn

Reserve Bank of India – Zero Forethought

* Instead of Applause, Throw Tomatoes: The call for a 21-day nationwide lockdown to contain the corona virus, has caused a massive liquidity drain...

Thomas J. Monaco

Asian Bank Relative Value - Notes from Last Weeks' Global Bank Debt Issuance

Despite distress in the global financial markets, there is still money being put to work by asset managers. New issue credit spreads are alluring...

Hank Calenti, CFA

BOCHK – A Very Managed, Yet Poor Set of Numbers

* Despite Managed Set of Results, Still A Miss: BOC Hong Kong Holdings (2388.HK) [BOCHK] reported 2H19 earnings results of HKD 15.6 bn...

Thomas J. Monaco

Deja Wu – Corona Virus Now Infects Global Financials

Dusting Off the Old Playbook: The globe is finally coming to the realization that corona virus containment means that global economic activity...

Thomas J. Monaco

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