Expert on Japan Retail and Consumer Markets, JapanConsuming

Michael Causton

Expert on Japan Retail and Consumer Markets

Real Insight on Japanese Consumer Markets

JapanConsuming

JapanConsuming is a specialist research firm producing intelligence on Japanese retail and consumer markets. Founded in 2000, JapanConsuming has become the leading provider of insights on Japanese retailers and consumer trends to retailers, brands, government agencies and investors. As well as a highly regarded monthly report on the market, JapanConsuming produces in-depth reports on retail sectors, seminars on key trends and telephone consulting to investors on trends and retailers.

JapanConsuming was founded by Michael Causton and Roy Larke. 

Thematic (Sector/Industry)

Interbrand’s annual valuation of top brands saw growing numbers of Japanese firms in retail and FMCG (Fast Moving Consumer Goods) enter its global brand ranking.
At home, online companies like Zozo and Mercari are also climbing the rankings.

Interbrand’s annual valuation of top brands saw growing numbers of Japanese firms in retail and FMCG (Fast Moving Consumer Goods) enter its global brand ranking.
At home, online companies like Zozo and Mercari are also climbing the rankings.

Uniqlo Japan’s Most Valuable Retail Brand

Consumer Discretionary / Industrials

Henry Kwon

February 2019 had 2 more selling days than February 2018, and 5 less selling days than in January 2019.  While CAAM and other media reports were quick to point to the lunar holidays as the main culprit behind the sequential and YoY fall in auto demand, the lunar holiday effect is taken into consideration when the sales figures are seasonally adjusted.  According to our observations China's February SAAR fell sequentially to 21.7m units from 24.8m units January (-12.3% MoM), and from 27.7m units in February 2018 (-21.4% YoY). Over the past few months we did not see much macro signals that would point to an imminent collapse in selling rates to the level of February's observation so we would wait for the March data points to assess how much truth there may to suggestions that car buyers may be holding back in anticipation of another round of government stimuli.  In the meantime, we would not ascribe too much credence to talks about lunar holidays or shrinking shadow banking systems as there is very little statistical evidence that would support such anecdotal assertions.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/081/963/original/Screen%20Shot%202019-03-13%20at%206.01.24%20PM.png?1552525296" class="editor-image img-responsive" data-smartkarma-image-id="81963"></figure><div class="content-caption">Sources: CEIC, SAAR estimated by Author using known seasonal factors</div>

February 2019 had 2 more selling days than February 2018, and 5 less selling days than in January 2019.  While CAAM and other media reports were quick to point to the lunar holidays as the main culprit behind the sequential and YoY fall in auto demand, the lunar holiday effect is taken into consideration when the sales figures are seasonally adjusted.  According to our observations China's February SAAR fell sequentially to 21.7m units from 24.8m units January (-12.3% MoM), and from 27.7m units in February 2018 (-21.4% YoY). Over the past few months we did not see much macro signals that would point to an imminent collapse in selling rates to the level of February's observation so we would wait for the March data points to assess how much truth there may to suggestions that car buyers may be holding back in anticipation of another round of government stimuli.  In the meantime, we would not ascribe too much credence to talks about lunar holidays or shrinking shadow banking systems as there is very little statistical evidence that would support such anecdotal assertions.Sources: CEIC, SAAR estimated by Author using known seasonal factors

A Few Thoughts on Weak February China Auto Sales - Lunar Holidays Don't Explain It in SAAR Terms

'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/000/081/407/original/2019-03-09_14-25-50.png?1552109168" class="editor-image img-responsive" data-smartkarma-image-id="81407"></figure>
Source: Japan Analytics
</div>
JAPAN CORPORATE CASH FLOW UPDATE - This insight updates our previous <a href="https://www.smartkarma.com/insights/japan-the-2018-q3-cash-flow-stakes-runners-riders-red-flags" target="_blank" data-smartkarma-citation="insights:26816">Insight</a> with data from all of the most recent quarterly reports. Our market composite cash flow model reformulates disclosed cash flows into four categories which sum to Change in Cash: -
<ul>
<li>Operating Cash Flow</li>
<li>
Investing Cash Flow (which includes Inventory Cash Flow) 
<ul>
<li>Free Cash Flow (Operating Cash Flow less Investing Cash Flow)</li>
</ul>
</li>
<li>Financing Cash Flow</li>
<li>Shareholder Cash Flow  (Equity Cash Flow and Dividend Cash Flow) </li>
</ul>
     =  Change in Cash (including Minorities Cash Flow)
OCF COLLAPSES - In the last three months, Japan's non-financial companies generated only ¥2.1t in Operating Cash Flow (OCF), ¥10.1t less than the previous quarter. ¥2.1t is the lowest quarterly OCF since 2016-Q2, and the quarter-on-quarter decline is the largest since 2009 and represents a substantial 'red flag' for the market.
FCF NEGATIVE - Aggregate spending on fixed assets shrunk by ¥4.5t qoq to ¥4.6t resulting in Free Cash Flow for the quarter of -¥2.5t, the first negative Free Cash Flow quarter since 2012-Q4. <a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">Softbank Group (9984 JP)</a>, <a href="https://www.smartkarma.com/entities/1089" target="_blank" data-smartkarma-citation="entities:1089:1">NTT Docomo (9437 JP)</a> and <a href="https://www.smartkarma.com/entities/751" target="_blank" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a> together generated ¥3.3t in positive Free Cash Flow for the quarter. Excluding these three companies, the aggregate total quarterly FCF was -¥5.8t, equivalent to an annualised Free Cash Flow yield of -4.3% for the universe of listed non-financial companies.
BACK TO BORROWING - To finance ¥4.5t in dividend payments, Japanese non-financial companies borrowed ¥4.8t in new debt, sold investment securities worth ¥1.9t (the most significant reduction since 2016-Q2) and raised 0.28t in new equity net of share buybacks. This increase in financing cash flow was the largest in any quarter since 2009.
SECTORS &amp; STOCKS - In the DETAIL below, we also look at sector cash flow trends and provide brief comments on some of the most significant changes in individual cash flows over the last three months including <a href="https://www.smartkarma.com/entities/73" target="_blank" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a>, <a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">Softbank Group (9984 JP)</a>, <a href="https://www.smartkarma.com/entities/13475" target="_blank" data-smartkarma-citation="entities:13475:1">Pan Pacific International (7532 JP)</a>,  <a href="https://www.smartkarma.com/entities/1040" target="_blank" data-smartkarma-citation="entities:1040:1">Lawson (2651 JP)</a>, and <a href="https://www.smartkarma.com/entities/6391" target="_blank" data-smartkarma-citation="entities:6391:1">I</a><a href="https://www.smartkarma.com/entities/6391" target="_blank" data-smartkarma-citation="entities:6391:1">DOM (7599 JP)</a>



Source: Japan Analytics

JAPAN CORPORATE CASH FLOW UPDATE - This insight updates our previous Insight with data from all of the most recent quarterly reports. Our market composite cash flow model reformulates disclosed cash flows into four categories which sum to Change in Cash: -

Operating Cash Flow

Investing Cash Flow (which includes Inventory Cash Flow) 

Free Cash Flow (Operating Cash Flow less Investing Cash Flow)


Financing Cash Flow
Shareholder Cash Flow  (Equity Cash Flow and Dividend Cash Flow) 

     =  Change in Cash (including Minorities Cash Flow)
OCF COLLAPSES - In the last three months, Japan's non-financial companies generated only ¥2.1t in Operating Cash Flow (OCF), ¥10.1t less than the previous quarter. ¥2.1t is the lowest quarterly OCF since 2016-Q2, and the quarter-on-quarter decline is the largest since 2009 and represents a substantial 'red flag' for the market.
FCF NEGATIVE - Aggregate spending on fixed assets shrunk by ¥4.5t qoq to ¥4.6t resulting in Free Cash Flow for the quarter of -¥2.5t, the first negative Free Cash Flow quarter since 2012-Q4. Softbank Group (9984 JP), NTT Docomo (9437 JP) and Fast Retailing (9983 JP) together generated ¥3.3t in positive Free Cash Flow for the quarter. Excluding these three companies, the aggregate total quarterly FCF was -¥5.8t, equivalent to an annualised Free Cash Flow yield of -4.3% for the universe of listed non-financial companies.
BACK TO BORROWING - To finance ¥4.5t in dividend payments, Japanese non-financial companies borrowed ¥4.8t in new debt, sold investment securities worth ¥1.9t (the most significant reduction since 2016-Q2) and raised 0.28t in new equity net of share buybacks. This increase in financing cash flow was the largest in any quarter since 2009.
SECTORS &amp; STOCKS - In the DETAIL below, we also look at sector cash flow trends and provide brief comments on some of the most significant changes in individual cash flows over the last three months including Toyota Motor (7203 JP), Softbank Group (9984 JP), Pan Pacific International (7532 JP),  Lawson (2651 JP), and IDOM (7599 JP)

🇯🇵 Japan • Largest QoQ Decline in Operating Cash Flow in a Decade - Free Cash Flow Turns Negative

February SAAR sequentially weakened to 16.6m units from 16.7m units in January 2019, and declined on YoY basis from 17.0m units in February 2018.  Media reports have attributed bad weather, government shutdown and consumer uncertainty about this year's tax refunds as some key reasons for the drop in SAAR.  While the jury is out, we believe these claims should be tested against March actuals in a month's time.  In the meantime, here are some of our initial observations regarding the February numbers:<ul>
<li>Average YTD incentive spending fell 4.8% YoY, which we believe can at least partially explain the drop in February SAAR.  Anecdotal evidence suggests that the industry has been moving away from zero percent financing in favor of cash deals in a rising interest rate environment.  Overall, there will be fewer new product launches in 2019 compared with 2018 in the industry so it remains to be seen how the incentive spendings go for the remainder of the year.  As for now there may be further needs to de-stock in the coming months.</li>
<li>Days supply rose sharply for light trucks while days supply for cars declined in February.  However, on a 3 month moving average basis days supply for both are rising, with higher light truck days supply.  </li>
<li>Light trucks in the industry mix climbed marginally to 69.4% in February from 68.1% in January but it was still down from December's  71.6%.  While it is too early to tell, we would begin to monitor whether the light truck mix has peaked.</li>
<li>Based on LMC Automotive's observations during the first 14 selling days of February, retail SAAR should have been about 75% of the total, suggesting that retail sales weakened while fleet sales sequentially strengthened in February.  On a YoY basis, fleet sales seems to have been flat while retail sales were down.</li>
<li>On the macro front there were some strong economic data points that could have led to a stronger SAAR: the 4.1% unemployment rate, and real disposable income rising by 2.3% sequentially from January.  However, the sequential improvement in consumer confidence based on the Univ. of Michigan Consumer Sentiment Index (CSI) still showed that sentiment remained at depressed levels from a year ago.   Mixed signals from the housing market, however, could be creating headwinds as we discussed in January (see <a href="https://www.smartkarma.com/insights/us-autos-looking-back-on-2018-and-musing-on-2019" target="_blank" data-smartkarma-citation="insights:27115">US Autos: Looking Back on 2018 and Musing on 2019</a>).  </li>
<li>In terms of brand performance in February, nearly every brand increased sales sequentially but generally lost volumes in YoY terms.  BMW, Hyundai-Kia, JLR, Mitsubishi, Porsche and Subaru managed to gain on YoY basis.  Tesla seems to have had a similar pattern based on third party estimates (Tesla does not release monthly sales figures).  On a cumulative YTD basis FCA, Ford, Honda, Hyundai-Kia, JLR, Mitsubishi, Porsche, Subaru and Tesla (again based on third party estimates) managed to achieve share gains against the backdrop of a 2.4% YoY industry decline.</li>
</ul>Based on our observations of the February figures, we maintain our cautious view on U.S. light vehicle demand in 2019.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/782/original/Screen%20Shot%202019-03-03%20at%208.46.31%20PM.png?1551613614" class="editor-image img-responsive" data-smartkarma-image-id="80782"></figure><div class="content-caption">Source: Autodata</div>

February SAAR sequentially weakened to 16.6m units from 16.7m units in January 2019, and declined on YoY basis from 17.0m units in February 2018.  Media reports have attributed bad weather, government shutdown and consumer uncertainty about this year's tax refunds as some key reasons for the drop in SAAR.  While the jury is out, we believe these claims should be tested against March actuals in a month's time.  In the meantime, here are some of our initial observations regarding the February numbers:
Average YTD incentive spending fell 4.8% YoY, which we believe can at least partially explain the drop in February SAAR.  Anecdotal evidence suggests that the industry has been moving away from zero percent financing in favor of cash deals in a rising interest rate environment.  Overall, there will be fewer new product launches in 2019 compared with 2018 in the industry so it remains to be seen how the incentive spendings go for the remainder of the year.  As for now there may be further needs to de-stock in the coming months.
Days supply rose sharply for light trucks while days supply for cars declined in February.  However, on a 3 month moving average basis days supply for both are rising, with higher light truck days supply.  
Light trucks in the industry mix climbed marginally to 69.4% in February from 68.1% in January but it was still down from December's  71.6%.  While it is too early to tell, we would begin to monitor whether the light truck mix has peaked.
Based on LMC Automotive's observations during the first 14 selling days of February, retail SAAR should have been about 75% of the total, suggesting that retail sales weakened while fleet sales sequentially strengthened in February.  On a YoY basis, fleet sales seems to have been flat while retail sales were down.
On the macro front there were some strong economic data points that could have led to a stronger SAAR: the 4.1% unemployment rate, and real disposable income rising by 2.3% sequentially from January.  However, the sequential improvement in consumer confidence based on the Univ. of Michigan Consumer Sentiment Index (CSI) still showed that sentiment remained at depressed levels from a year ago.   Mixed signals from the housing market, however, could be creating headwinds as we discussed in January (see US Autos: Looking Back on 2018 and Musing on 2019).  
In terms of brand performance in February, nearly every brand increased sales sequentially but generally lost volumes in YoY terms.  BMW, Hyundai-Kia, JLR, Mitsubishi, Porsche and Subaru managed to gain on YoY basis.  Tesla seems to have had a similar pattern based on third party estimates (Tesla does not release monthly sales figures).  On a cumulative YTD basis FCA, Ford, Honda, Hyundai-Kia, JLR, Mitsubishi, Porsche, Subaru and Tesla (again based on third party estimates) managed to achieve share gains against the backdrop of a 2.4% YoY industry decline.
Based on our observations of the February figures, we maintain our cautious view on U.S. light vehicle demand in 2019.Source: Autodata

February U.S. Auto Demand: Lower Incentives for Lower SAAR?

- PEER GROUP SCORE MATRIX -
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/079/840/original/2019-02-22_18-26-15.png?1550827634" class="editor-image img-responsive" data-smartkarma-image-id="79840"></figure>
<div class="content-caption">Source: Japan Analytics</div>
INTRODUCTION - Following on from our review of the Market Composite and Sectors, this Insight will cover the cap-weighted Results &amp; Revision Scores for the 328 Peer Groups that comprise our 30 Sectors providing greater depth to our analysis of current business trends.  Peer Group definitions reflect both standard SIC/GICS classifications as well as local market conventions. The number of constituents and market capitalisation for each Peer Group varies widely. 
RRS/RPS SCORE MATRIX - Combining our Results &amp; Revision Scores (RRS) with each Peer Group's Relative Price Score (RPS) allows a classification of our Peer Group universe into four quadrants -
<ul>
<li>'Contrarian Buy'  &gt; Low RRS &amp; Low RPS </li>
<li>'Contrarian Sell' &gt; High RRS &amp; High RPS</li>
<li>
Peak Growth' &gt; High RRS &amp; Low RPS</li>
<li>'Ex-Growth/Turnaround' &gt; Low RRS &amp; High RPS</li>
</ul>
THE 'QUADRANTS' - In the two 'Contrarian' quadrants, the market is aligned with the current earnings momentum of the Peer Groups suggesting opportunities exist only for those willing or brave enough to take a contrarian view.  For 'Peak Growth' Peer Groups, the market is calling for a downturn in momentum that has yet to be reflected in quarterly earnings. Where the cycle is more prolonged than expected, there are often opportunities for short-term rebounds in what are normally relatively-inexpensive companies. The 'Ex-Growth' quadrant often consists of former 'Contrarian Sell's where the market is reluctant to acknowledge that the cycle has turned. This quadrant can also contain 'Turnarounds' - formerly 'Contrarian Buys' where the market is correctly anticipating a change in fortunes.    
<div class="content-highlight">
In the DETAIL section below, we list the top and bottom twenty Peer Groups ranked by Results &amp; Revision Score and the top and bottom twenty most-changed over the last three months as well the most optimistic and most pessimistic.  In our ranked tables we have listed only those Peer Groups with an aggregate capitalisation of over ¥50b. 
</div>

- PEER GROUP SCORE MATRIX -

Source: Japan Analytics
INTRODUCTION - Following on from our review of the Market Composite and Sectors, this Insight will cover the cap-weighted Results &amp; Revision Scores for the 328 Peer Groups that comprise our 30 Sectors providing greater depth to our analysis of current business trends.  Peer Group definitions reflect both standard SIC/GICS classifications as well as local market conventions. The number of constituents and market capitalisation for each Peer Group varies widely. 
RRS/RPS SCORE MATRIX - Combining our Results &amp; Revision Scores (RRS) with each Peer Group's Relative Price Score (RPS) allows a classification of our Peer Group universe into four quadrants -

'Contrarian Buy'  &gt; Low RRS &amp; Low RPS 
'Contrarian Sell' &gt; High RRS &amp; High RPS

Peak Growth' &gt; High RRS &amp; Low RPS
'Ex-Growth/Turnaround' &gt; Low RRS &amp; High RPS

THE 'QUADRANTS' - In the two 'Contrarian' quadrants, the market is aligned with the current earnings momentum of the Peer Groups suggesting opportunities exist only for those willing or brave enough to take a contrarian view.  For 'Peak Growth' Peer Groups, the market is calling for a downturn in momentum that has yet to be reflected in quarterly earnings. Where the cycle is more prolonged than expected, there are often opportunities for short-term rebounds in what are normally relatively-inexpensive companies. The 'Ex-Growth' quadrant often consists of former 'Contrarian Sell's where the market is reluctant to acknowledge that the cycle has turned. This quadrant can also contain 'Turnarounds' - formerly 'Contrarian Buys' where the market is correctly anticipating a change in fortunes.    

In the DETAIL section below, we list the top and bottom twenty Peer Groups ranked by Results &amp; Revision Score and the top and bottom twenty most-changed over the last three months as well the most optimistic and most pessimistic.  In our ranked tables we have listed only those Peer Groups with an aggregate capitalisation of over ¥50b. 


🇯🇵 Japan: Winter Peer Group Results & Revision Scores - Contrarian Buys & Sells/Peak & Ex-Growth

Japan

Toyota Motor Corporation manufactures, sells, leases, and repairs passenger cars, trucks, buses, and their related parts worldwide. The Company also operates financing services through their subsidiaries. Toyota Motor builds homes, produces pleasure boats, and develops intelligent transportation systems including radar cruise control and electronic toll collection systems.

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Toyota Motor Corp Spon Adr (TM US)

Uniqlo Japan’s Most Valuable Retail Brand

Interbrand’s annual valuation of top brands saw growing numbers of Japanese firms in retail and FMCG (Fast Moving Consumer Goods) enter its global...

Michael Causton

A Few Thoughts on Weak February China Auto Sales - Lunar Holidays Don't Explain It in SAAR Terms

February 2019 had 2 more selling days than February 2018, and 5 less selling days than in January 2019. While CAAM and other media reports were...

Henry Kwon

🇯🇵 Japan • Largest QoQ Decline in Operating Cash Flow in a Decade - Free Cash Flow Turns Negative

JAPAN CORPORATE CASH FLOW UPDATE - This insight updates our previous Insight with data from all of the most recent quarterly reports. Our market...

Campbell Gunn

February U.S. Auto Demand: Lower Incentives for Lower SAAR?

February SAAR sequentially weakened to 16.6m units from 16.7m units in January 2019, and declined on YoY basis from 17.0m units in February 2018. ...

Henry Kwon

🇯🇵 Japan: Winter Peer Group Results & Revision Scores - Contrarian Buys & Sells/Peak & Ex-Growth

- PEER GROUP SCORE MATRIX - INTRODUCTION - Following on from our review of the Market Composite and Sectors, this Insight will cover the...

Campbell Gunn

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