Equity Analyst, LightStream Research

Oshadhi Kumarasiri

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

<ul>
<li>1H and 9MFY2019 earnings misses forced Calbee to revise its FY2019 estimates</li>
<li>Increased costs, slower progress in international markets and sluggish Frugra brand sales led the company to revise its FY2019 estimates</li>
<li>Nikkei POS data: average price per unit is on a decline</li>
<li>Frugra brand recovery comes at the expense of average price per unit</li>
<li>Potato chips and potato-based snacks: sluggish performance driven by declining average price per unit</li>
<li>Unable to pass the cost inflation to customers due to falling average price per unit</li>
<li>Mid-term plan: unconvinced by Calbee’s plan for its domestic business</li>
<li>Falling out of favor with the Buy Side</li>
<li>The status quo on which the investment thesis is based on is changing</li>
<li>Conclusion</li>
</ul>


1H and 9MFY2019 earnings misses forced Calbee to revise its FY2019 estimates
Increased costs, slower progress in international markets and sluggish Frugra brand sales led the company to revise its FY2019 estimates
Nikkei POS data: average price per unit is on a decline
Frugra brand recovery comes at the expense of average price per unit
Potato chips and potato-based snacks: sluggish performance driven by declining average price per unit
Unable to pass the cost inflation to customers due to falling average price per unit
Mid-term plan: unconvinced by Calbee’s plan for its domestic business
Falling out of favor with the Buy Side
The status quo on which the investment thesis is based on is changing
Conclusion


Calbee Inc: Falling Average Price Per Unit Causes Concern Among Investors

'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

- MARKET COMPOSITE -<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/079/882/original/2019-02-24_11-07-12.png?1550974089" class="editor-image img-responsive" data-smartkarma-image-id="79882"></figure><div class="content-caption">Source: Japan Analytics</div>ALMOST THREE-MONTH HIGH RECOVERY - The bear market rally is now in its second stage, and the market composite is now 14% above the Christmas Day low. The 'market value'-based percentage above moving averages almost reached a new three-month on Thursday; the stock count version is lagging as usual.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/079/886/original/2019-02-24_11-32-45.png?1550975583" class="editor-image img-responsive" data-smartkarma-image-id="79886"></figure><div class="content-caption">Source: Japan Analytics</div>STILL SOME UPSIDE - Using the three-month rate of change in this indicator, we are a few weeks away from generating a short-term sell signal, the last such trigger having occurred on 25th October. <hr>- SECTORS - <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/079/887/original/2019-02-24_11-45-38.png?1550976349" class="editor-image img-responsive" data-smartkarma-image-id="79887"></figure><div style="text-align: left;" class="content-caption">
LEGEND: The 'sparklines' show the three-year trend in the weighted percentage above moving average relative to the Market Composite and the 'STDev' column is a measure of the variability of that relative measure. The table also provides averages for the breaks above and breaks below and the positive and negative crossovers.</div>SECTOR BREAKDOWN - The top six sectors remain domestic and defensive. REITs, Information Technology, Transporation and Utilities continue from our previous review with Restaurants and Healthcare replacing Media and Telecommunications. Equally predictable is the bottom half-dozen - Banks, Non-Bank Finance, Autos, and Metals remain from two weeks ago, with Construction and Retail replacing Chemicals and Other Materials. <hr>- COMPANIES -COMPANY MOVING AVERAGE OUTLIERS - As with the Market Composite and Sectors, the Moving Average Outlier indicator uses a weighted sum of each company's share price relative to its 5-day, 20-day, 60-day, 120-day and 240-day moving averages. 'Extreme' values are weighted sums greater than 100% and less than -100%. We would caution that this indicator is best used for timing shorter-term reversals and, in many cases, higher highs and lower lows will be seen. <div class="content-highlight">
In the DETAIL section below, we highlight the current top and bottom twenty-five large capitalisation outliers, as well as those companies that have seen the most significant positive and negative changes in their outlier percentage in the last two weeks and provide short comments on companies of particular note.
<a href="https://www.smartkarma.com/entities/26181" target="_blank" data-smartkarma-citation="entities:26181:1">PKSHA Technology (3993 JP)</a> is currently the most extreme large capitalisation positive outlier and an excellent example of a -100 to 100 'roundtrip' in under two months. <a href="https://www.smartkarma.com/entities/24540" target="_blank" data-smartkarma-citation="entities:24540:1">SanBio (4592 JP)</a> is, again, the most extreme negative outlier, having topped the 13th January positive outlier list and is another 'round-tripper'. We also add the chart for 'cockroach' stock <a href="https://www.smartkarma.com/entities/8244" target="_blank" data-smartkarma-citation="entities:8244:1">Leopalace21 (8848 JP)</a> which no longer qualifies for inclusion in our tables, having lost 60% of its value in the last two weeks and 79% in less than a year.
</div><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/079/890/original/2019-02-24_12-58-23.png?1550980729" class="editor-image img-responsive" data-smartkarma-image-id="79890"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/079/891/original/2019-02-24_12-59-54.png?1550980806" class="editor-image img-responsive" data-smartkarma-image-id="79891"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/079/892/original/2019-02-24_13-12-58.png?1550981589" class="editor-image img-responsive" data-smartkarma-image-id="79892"></figure>Source: Japan Analytics
</div>

- MARKET COMPOSITE -Source: Japan AnalyticsALMOST THREE-MONTH HIGH RECOVERY - The bear market rally is now in its second stage, and the market composite is now 14% above the Christmas Day low. The 'market value'-based percentage above moving averages almost reached a new three-month on Thursday; the stock count version is lagging as usual.Source: Japan AnalyticsSTILL SOME UPSIDE - Using the three-month rate of change in this indicator, we are a few weeks away from generating a short-term sell signal, the last such trigger having occurred on 25th October. - SECTORS - 
LEGEND: The 'sparklines' show the three-year trend in the weighted percentage above moving average relative to the Market Composite and the 'STDev' column is a measure of the variability of that relative measure. The table also provides averages for the breaks above and breaks below and the positive and negative crossovers.SECTOR BREAKDOWN - The top six sectors remain domestic and defensive. REITs, Information Technology, Transporation and Utilities continue from our previous review with Restaurants and Healthcare replacing Media and Telecommunications. Equally predictable is the bottom half-dozen - Banks, Non-Bank Finance, Autos, and Metals remain from two weeks ago, with Construction and Retail replacing Chemicals and Other Materials. - COMPANIES -COMPANY MOVING AVERAGE OUTLIERS - As with the Market Composite and Sectors, the Moving Average Outlier indicator uses a weighted sum of each company's share price relative to its 5-day, 20-day, 60-day, 120-day and 240-day moving averages. 'Extreme' values are weighted sums greater than 100% and less than -100%. We would caution that this indicator is best used for timing shorter-term reversals and, in many cases, higher highs and lower lows will be seen. 
In the DETAIL section below, we highlight the current top and bottom twenty-five large capitalisation outliers, as well as those companies that have seen the most significant positive and negative changes in their outlier percentage in the last two weeks and provide short comments on companies of particular note.
PKSHA Technology (3993 JP) is currently the most extreme large capitalisation positive outlier and an excellent example of a -100 to 100 'roundtrip' in under two months. SanBio (4592 JP) is, again, the most extreme negative outlier, having topped the 13th January positive outlier list and is another 'round-tripper'. We also add the chart for 'cockroach' stock Leopalace21 (8848 JP) which no longer qualifies for inclusion in our tables, having lost 60% of its value in the last two weeks and 79% in less than a year.

Source: Japan Analytics


🇯🇵 Japan: Moving Average Outliers - PKSHA, SanBio, Goldwin, ZOZO, Drugstores & ASICS

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)

The following is an in-depth review of the Japanese convenience store (CVS) sector and, in particular, the top three players, Seven Eleven (<a href="https://www.smartkarma.com/entities/1041" target="_blank" data-smartkarma-citation="entities:1041:1">Seven &amp; I Holdings (3382 JP)</a>), <a href="https://www.smartkarma.com/entities/320" target="_blank" data-smartkarma-citation="entities:320:1">Familymart (8028 JP)</a> and <a href="https://www.smartkarma.com/entities/1040" target="_blank" data-smartkarma-citation="entities:1040:1">Lawson Inc (2651 JP)</a>. Also covered are the smaller firms like <a href="https://www.smartkarma.com/entities/1043" target="_blank" data-smartkarma-citation="entities:1043:1">Ministop Co Ltd (9946 JP)</a>, <a href="https://www.smartkarma.com/entities/5762" target="_blank" data-smartkarma-citation="entities:5762:1">Poplar Co Ltd (7601 JP)</a>, Daily Yamazaki, <a href="https://www.smartkarma.com/entities/19816" target="_blank" data-smartkarma-citation="entities:19816:1">Cvs Bay Area (2687 JP)</a>, <a href="https://www.smartkarma.com/entities/11801" target="_blank" data-smartkarma-citation="entities:11801:1">Three F Co Ltd (7544 JP)</a> and <a href="http://secoma.co.jp" target="_blank">Secoma</a> which are targets for the Big Three.
The key operational and strategic themes relevant to investors in CVS in Japan:
<ul class="">
<li>The Japanese convenience store sector may have reached saturation but this has just encouraged the top three operators to speed up their quest to take over the remaining smaller chains while pushing into regions where they have fewer stores.</li>
<li>At the same time, all are looking at new forms of retailing to expand further:
<ul>
<li>All of the top three had previously failed to come up with coherent e-commerce strategies, but this year Seven Eleven and Lawson have launched new ideas that make better use of their existing store networks and could reach national coverage quite soon.</li>
<li>Diversification is another strategy to overcome saturation, and Familymart, in particular, is tying with all manner of partners to try and come up with a hit hybrid format to find new growth.</li>
</ul>
</li>
<li>While competition from drugstores and discount food retailers is a threat, convenience stores will continue to find new sources of growth from e-commerce, hybrid stores and innovative products.</li>
</ul>
This first report reviews the sector overall and the main players, <a href="https://www.smartkarma.com/insights/seven-eleven-familymart-and-lawson-find-new-growth-strategies-in-tighter-market" target="_blank">while a second report looks at the big three CVS operators – which have a combined 91% share of the market – in detail</a>.

The following is an in-depth review of the Japanese convenience store (CVS) sector and, in particular, the top three players, Seven Eleven (Seven &amp; I Holdings (3382 JP)), Familymart (8028 JP) and Lawson Inc (2651 JP). Also covered are the smaller firms like Ministop Co Ltd (9946 JP), Poplar Co Ltd (7601 JP), Daily Yamazaki, Cvs Bay Area (2687 JP), Three F Co Ltd (7544 JP) and Secoma which are targets for the Big Three.
The key operational and strategic themes relevant to investors in CVS in Japan:

The Japanese convenience store sector may have reached saturation but this has just encouraged the top three operators to speed up their quest to take over the remaining smaller chains while pushing into regions where they have fewer stores.
At the same time, all are looking at new forms of retailing to expand further:

All of the top three had previously failed to come up with coherent e-commerce strategies, but this year Seven Eleven and Lawson have launched new ideas that make better use of their existing store networks and could reach national coverage quite soon.
Diversification is another strategy to overcome saturation, and Familymart, in particular, is tying with all manner of partners to try and come up with a hit hybrid format to find new growth.


While competition from drugstores and discount food retailers is a threat, convenience stores will continue to find new sources of growth from e-commerce, hybrid stores and innovative products.

This first report reviews the sector overall and the main players, while a second report looks at the big three CVS operators – which have a combined 91% share of the market – in detail.

Japan Convenience Stores Still Innovating in a Saturated Market

Macro & Asian equity Technical Strategies, BBSP Asia

Federico D'Inca

Macro & Asian equity Technical Strategies

BBSP Asia

Technical Analysis

THE MAIN IDEA (Relative Value Approach in USD Terms) Long Term Allocation (Strategic view) Relative Value vs MXAP in USD terms ⦁ NIKKEI/MXAP: Long term out performance in progress. ⦁ HSI/MXAP: Long term out performance in progress/still expected. ⦁ HSCEI/MXAP: Bullish weekly indicators advocate for long term HSCEI out performance against MXAP. ⦁ ASX/MXAP: ASX out performance challenged but not invalidated (testing key support at 26.00/25.50). ⦁ KOSPI/MXAP: Long term out performance still expected. ⦁ Nifty/MXAP: Mixed elements. Neutral for now. ⦁ TWSE/MXAP: Neutral at the moment, watching closely key level at (2.22 on ratio TWSE/MXAP) to surpass to confirm TWSE long-term out performance vs MXAP Mid Term Country Allocation (Tactical view) Relative Value vs MXAP in USD terms ⦁ Downgrade Australia and Korea tactically from "Increase Exposure" to "Hold" due to mixed elements. ⦁ Ratings unchanged for the rest: Japan, Hong Kong (HSI) maintain their "Increase Exposure" ratings while still a "Hold" rating for Taiwan, India and China (HSCEI). ⦁ On the RV HSCEI/MXAP, still monitoring 8.50 level to break to confirm China (HSCEI) out performance.Should you have any questions and wish to speak with one of our analysts, please don’t hesitate to contact us. Equity Asia: + (65) 6735 3040 or <a href="mailto:asia@bbsp.sg" target="_blank">asia@bbsp.sg</a> Access to this document is restricted to the use of the intended recipient designated by BBSP and may not be shared with others. Any unauthorised use, dissemination, distribution or copying of this document, in whole or in part, is strictly prohibited. This document is provided solely for information purposes. Under no circumstances is the information contained or referred to herein to be relied upon as constituting personal investment advice or construed as any offer or solicitation to buy or sell investments. While all reasonable effort has been made to ensure that the information contained herein is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness and it should not be relied upon as such. BBSP does not undertake any obligation to update such information. All content, data, statements and other information are not warranted as to completeness or accuracy, are subject to change without notice, and should never prevent investors from using their own judgments. Investors are fully responsible for any investment or trading decisions they make.

THE MAIN IDEA (Relative Value Approach in USD Terms) Long Term Allocation (Strategic view) Relative Value vs MXAP in USD terms ⦁ NIKKEI/MXAP: Long term out performance in progress. ⦁ HSI/MXAP: Long term out performance in progress/still expected. ⦁ HSCEI/MXAP: Bullish weekly indicators advocate for long term HSCEI out performance against MXAP. ⦁ ASX/MXAP: ASX out performance challenged but not invalidated (testing key support at 26.00/25.50). ⦁ KOSPI/MXAP: Long term out performance still expected. ⦁ Nifty/MXAP: Mixed elements. Neutral for now. ⦁ TWSE/MXAP: Neutral at the moment, watching closely key level at (2.22 on ratio TWSE/MXAP) to surpass to confirm TWSE long-term out performance vs MXAP Mid Term Country Allocation (Tactical view) Relative Value vs MXAP in USD terms ⦁ Downgrade Australia and Korea tactically from "Increase Exposure" to "Hold" due to mixed elements. ⦁ Ratings unchanged for the rest: Japan, Hong Kong (HSI) maintain their "Increase Exposure" ratings while still a "Hold" rating for Taiwan, India and China (HSCEI). ⦁ On the RV HSCEI/MXAP, still monitoring 8.50 level to break to confirm China (HSCEI) out performance.Should you have any questions and wish to speak with one of our analysts, please don’t hesitate to contact us. Equity Asia: + (65) 6735 3040 or asia@bbsp.sg Access to this document is restricted to the use of the intended recipient designated by BBSP and may not be shared with others. Any unauthorised use, dissemination, distribution or copying of this document, in whole or in part, is strictly prohibited. This document is provided solely for information purposes. Under no circumstances is the information contained or referred to herein to be relied upon as constituting personal investment advice or construed as any offer or solicitation to buy or sell investments. While all reasonable effort has been made to ensure that the information contained herein is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness and it should not be relied upon as such. BBSP does not undertake any obligation to update such information. All content, data, statements and other information are not warranted as to completeness or accuracy, are subject to change without notice, and should never prevent investors from using their own judgments. Investors are fully responsible for any investment or trading decisions they make.

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/034/original/2018-08-16_19-07-34.png?1534672507" class="editor-image img-responsive" data-smartkarma-image-id="61034"></figure><div class="content-caption">Source: Japan Analytics</div>A GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in earnings.  However, the score has only declined by 31 basis points since last quarter showing a degree of 'stability' seen only in 2011 in recent years.  The aggregate Forecast/Revision score has also continued to decline and is now lower for the fourth straight month. As would be expected, this score is a reliable leading indicator for the Results Score and suggests further weakening in the rate of earnings growth in the months ahead.  Neither score is, as yet, suggesting a decline in earnings before the end of the fiscal year.YEN CORRELATION WEAKENING - This quarter's earnings' stability was surprising given the relative strength of the Yen compared to a year ago. In the past and even as recently as 2016, a 5 per cent year-on-year decline has resulted in negative Results Scores. The year-on-year change in now positive so any negative impact will dissipate over the next two quarters.MARKET FOLLOWS MOMENTUM LOWER - The All Market Composite peaked on 23rd January and has since fallen by 11% despite a continuation of the Bank of Japan's ETF purchasing programme. Weakening earnings momentum and the overvaluation of many of the leading stocks, as in our '<a href="https://www.smartkarma.com/insights/japan-most-overbought-most-oversold-the-relative-price-score" target="_blank" data-smartkarma-citation="insights:21149">Nifty 50</a>' portfolio, have been contributing factors. With prospects for a much weaker Yen limited by the current trade negotiations between Japan and the United States, and with global growth slowing, we expect both Results and Revision Scores to trend lower, but to end the fiscal year in positive territory. Historically, the market has not risen during periods when both the Results and Forecast/Revision Scores have been trending down.<div class="content-highlight">MARKET RECOMMENDATION - Within a global portfolio, we would market-weight Japanese equities with a bias towards domestic sectors and not hedge the currency exposure.</div>SECTOR RESULTS SCORES -The good news is that only one sector, (Multi-Industry - 75% of which is <a href="https://www.smartkarma.com/entities/359" target="_blank" data-smartkarma-citation="entities:359:1">Japan Post [6178 JP</a>]) has a negative score - and its score is less negative than last quarter. Both the Media and Consumer Services sectors' scores turned positive and each increased by more than two points.  On the other hand, over half of our 29 sectors saw declining scores, although the number was lower than last quarter.  The top sectors in terms of quarter-on-quarter change were Energy, Consumer Services, Media, Information Technology and Other Commercial Products while the laggards were Non-Bank Finance, Chemicals, Construction, Machinery and Utilities. SECTOR REVISION SCORES - Five sectors have negative Forecast/Revision Scores with Utilities now joining Media, Multi-Industry, Autos and Banks from last quarter. The highest scores are in the Energy, Technology Hardware, Electrical Equipment, Retail and Information Technology sectors. Improvements of greater than one point were seen in Energy, Media and Machinery while Food, Beverages &amp; Tobacco, Chemicals, Utilities, Other Materials and Technology Hardware all lost more than one point. Overall eighteen sectors saw declines.REVISION V. RESULTS SCORES - The difference between the Results and Revision Scores is a good indicator of corporate expectations compared with the trailing-twelve-month reality. In some cases (e.g. Restaurants) the 'optimism' is due to a failure to revise forecasts in the light of weaker results. In others, such as Telecommunications, there is scope for upward revisions in the coming quarters.<div class="content-highlight">
THE OPTIMISTS
Restaurants • Other Materials • Electrical Equipment • Technology Hardware • Retail
THE PESSIMISTS
Banks • Autos • Telecommunications • Utilities • Media • Chemicals
</div>SECTOR PERFORMANCE - Over the last three months, our Japan Market Composite declined by 5.8%. Only four sectors saw an increase in value led by Telecommunications, Energy, Commercial Services and Information Technology. The largest declines were in the Building Materials, Metals, Real Estate Construction and Machinery sectors. Nine sectors are now negative over one year led by Building Materials, Metals and Food, Beverages &amp; Tobacco and only eight are up in double-digits led by Services and Information Technology. For the time being, Domestic Non-Manufacturing sectors 'rules the roost' and Domestic Cyclical sectors have taken over from Global Cyclicals in the 'doghouse'.'.<div class="content-highlight">
SECTOR RECOMMENDATIONS
Our most-preferred sectors are currently Energy, Healthcare, Telecommunications, Other Commercial Products and Information Technology.
Least-preferred sectors are Metals, Chemicals, Machinery, Autos, Construction, Real Estate, Building Materials, Food Beverages &amp; Tobacco and Utilities.
</div>TOP 5 LARGER PEER GROUPS - The top five Peer Groups capitalised at over ¥1 trillion are Machine Tools &amp; Presses, PC &amp; Computer Peripherals, Oil &amp; Gas Refining &amp; Marketing, Telecom Distribution Services and Sporting &amp; Outdoor Goods. The top twenty larger Peer Groups have gained 16% over one year but have declined by 4% on average the last three months.BOTTOM 5 LARGER PEER GROUPS - The bottom five Peer Groups capitalised at over ¥1 trillion are Audio/Visual Content, LCD/LED Materials &amp; Equipment, Electrical Engineering, General Contractors and Real Estate - Leasing. The bottom twenty larger Peer Groups have lost 2% over one year and 9% over the last three months. Only Security Services and Tobacco have risen since May.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/038/original/2018-08-19_19-33-03.png?1534674804" class="editor-image img-responsive" data-smartkarma-image-id="61038"></figure>

Source: Japan AnalyticsA GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in earnings.  However, the score has only declined by 31 basis points since last quarter showing a degree of 'stability' seen only in 2011 in recent years.  The aggregate Forecast/Revision score has also continued to decline and is now lower for the fourth straight month. As would be expected, this score is a reliable leading indicator for the Results Score and suggests further weakening in the rate of earnings growth in the months ahead.  Neither score is, as yet, suggesting a decline in earnings before the end of the fiscal year.YEN CORRELATION WEAKENING - This quarter's earnings' stability was surprising given the relative strength of the Yen compared to a year ago. In the past and even as recently as 2016, a 5 per cent year-on-year decline has resulted in negative Results Scores. The year-on-year change in now positive so any negative impact will dissipate over the next two quarters.MARKET FOLLOWS MOMENTUM LOWER - The All Market Composite peaked on 23rd January and has since fallen by 11% despite a continuation of the Bank of Japan's ETF purchasing programme. Weakening earnings momentum and the overvaluation of many of the leading stocks, as in our 'Nifty 50' portfolio, have been contributing factors. With prospects for a much weaker Yen limited by the current trade negotiations between Japan and the United States, and with global growth slowing, we expect both Results and Revision Scores to trend lower, but to end the fiscal year in positive territory. Historically, the market has not risen during periods when both the Results and Forecast/Revision Scores have been trending down.MARKET RECOMMENDATION - Within a global portfolio, we would market-weight Japanese equities with a bias towards domestic sectors and not hedge the currency exposure.SECTOR RESULTS SCORES -The good news is that only one sector, (Multi-Industry - 75% of which is Japan Post [6178 JP]) has a negative score - and its score is less negative than last quarter. Both the Media and Consumer Services sectors' scores turned positive and each increased by more than two points.  On the other hand, over half of our 29 sectors saw declining scores, although the number was lower than last quarter.  The top sectors in terms of quarter-on-quarter change were Energy, Consumer Services, Media, Information Technology and Other Commercial Products while the laggards were Non-Bank Finance, Chemicals, Construction, Machinery and Utilities. SECTOR REVISION SCORES - Five sectors have negative Forecast/Revision Scores with Utilities now joining Media, Multi-Industry, Autos and Banks from last quarter. The highest scores are in the Energy, Technology Hardware, Electrical Equipment, Retail and Information Technology sectors. Improvements of greater than one point were seen in Energy, Media and Machinery while Food, Beverages &amp; Tobacco, Chemicals, Utilities, Other Materials and Technology Hardware all lost more than one point. Overall eighteen sectors saw declines.REVISION V. RESULTS SCORES - The difference between the Results and Revision Scores is a good indicator of corporate expectations compared with the trailing-twelve-month reality. In some cases (e.g. Restaurants) the 'optimism' is due to a failure to revise forecasts in the light of weaker results. In others, such as Telecommunications, there is scope for upward revisions in the coming quarters.
THE OPTIMISTS
Restaurants • Other Materials • Electrical Equipment • Technology Hardware • Retail
THE PESSIMISTS
Banks • Autos • Telecommunications • Utilities • Media • Chemicals
SECTOR PERFORMANCE - Over the last three months, our Japan Market Composite declined by 5.8%. Only four sectors saw an increase in value led by Telecommunications, Energy, Commercial Services and Information Technology. The largest declines were in the Building Materials, Metals, Real Estate Construction and Machinery sectors. Nine sectors are now negative over one year led by Building Materials, Metals and Food, Beverages &amp; Tobacco and only eight are up in double-digits led by Services and Information Technology. For the time being, Domestic Non-Manufacturing sectors 'rules the roost' and Domestic Cyclical sectors have taken over from Global Cyclicals in the 'doghouse'.'.
SECTOR RECOMMENDATIONS
Our most-preferred sectors are currently Energy, Healthcare, Telecommunications, Other Commercial Products and Information Technology.
Least-preferred sectors are Metals, Chemicals, Machinery, Autos, Construction, Real Estate, Building Materials, Food Beverages &amp; Tobacco and Utilities.
TOP 5 LARGER PEER GROUPS - The top five Peer Groups capitalised at over ¥1 trillion are Machine Tools &amp; Presses, PC &amp; Computer Peripherals, Oil &amp; Gas Refining &amp; Marketing, Telecom Distribution Services and Sporting &amp; Outdoor Goods. The top twenty larger Peer Groups have gained 16% over one year but have declined by 4% on average the last three months.BOTTOM 5 LARGER PEER GROUPS - The bottom five Peer Groups capitalised at over ¥1 trillion are Audio/Visual Content, LCD/LED Materials &amp; Equipment, Electrical Engineering, General Contractors and Real Estate - Leasing. The bottom twenty larger Peer Groups have lost 2% over one year and 9% over the last three months. Only Security Services and Tobacco have risen since May.

Japan: Results & Revision Scores Summer 2018 Update - Market Composite, Sectors & Peer Groups

Japan

Nisshin Seifun Group Inc. produces and sells flour, fodder, processed foods, and medicines. The Company offers specialized pasta sauce, frozen foods, and gourmet soup. Nisshin Seifun Group also markets pet foods.

Kewpie Corporation mainly produces and sells mayonnaise, salad dressing, egg products, and health foods.  The Company also purchases and sells jam, sauce, canned and frozen foods.  Kewpie sells canned foods under Aohata brand.

NH Foods Ltd. produces and sells ham, sausage, and processed meat products. The Company also breeds and raises cattle through its subsidiary. NH Foods owns a professional baseball team, the Nippon Ham Fighters.

YAKULT HONSHA CO., LTD produces and sells fermented milk products, soft drinks and food products.  The Company also manufactures pharmaceutical and cosmetic products.  Through its subsidiary, the professional baseball team, Tokyo Yakult Swallows is owned and managed.

NICHIREI CORPORATION produces and distributes frozen food, ice, and meat products.  The Company also provides a variety of cold storage services, as well as manages leasing business for buildings and parking garages.

MEIJI Holdings Co., Ltd. is the holding company established by reorganization of Meiji Seika Pharma & Meiji Corp.  The company manages subsidiaries engaging in production & sales of confectionary, milk, dairy products, and pharmaceuticals.

TOYO SUISAN KAISHA, LTD. purchases, processes, and sells seafood.  The Company also manufactures instant noodles, processed foods, fish paste, and frozen food products under Maru-chan brand.

CALBEE, Inc. manufactures a wide range of snack foods using potato, wheat, and corn as a main ingredient. The company also manufactures bakery products and cereals.

NIPPON SUISAN KAISHA, Ltd. fishes and purchases seafood, and produces seafood products including fresh, frozen, and canned fish.  The Company also produces fish oil and fish meal, and operates cold storage business.

House Foods Group Inc manufactures and sells spices and flavorings. The Company also produces snacks, instant noodles, and ingredients for cooking. House Foods Group serves both household and commercial buyers.

PPB Group Berhad is an investment holding company. The Company operations include grains trading, flour and animal feed milling industry as well as downstream activities including livestock farming, food processing and consumer products distribution with primary focus in Indonesia, Malaysia, China, India and Europe.

PT Indofood Sukses Makmur Tbk and its subsidiaries manufacture instant noodles, wheat flour, baby food, food seasonings, coffee, cooking oil, and snacks.

IOI Corporation Berhad cultivates and processes oil palm and rubber.  The Company, through its subsidiaries, operates in property development and investment, provides landscape services, and sells ornamental plants and turfing grass. IOI Corporation also manufactures industrial and medical gases, and provides building, engineering, and construction services.

CJ CheilJedang Corp. manufactures processed food products.  The Company's products include refined sugar, monosodium glutamate (MSG), condiment, wheat powder, flour, cooking oil, processed meats, and animal feed.  CJ CheilJedang also manufactures pharmaceutical and household products.

Flowers Foods, Inc. produces and markets packaged bakery foods for retail and foodservice customers. The Company offers fresh packaged and frozen bakery products, as well as pastries, doughnuts, and bakery snack products. Flowers Foods serves customers in the State of Georgia.

Universal Robina Corporation manufactures, markets, and distributes branded consumer foods. The Company's products include hogs and poultry farming, animal feeds, corn products, and animal health products.

Hatsun Agro Products Limited manufactures skimmed milk powder, skimmed milk powd er blends, instant skimmed milk powder, whole milk powder, and full cream milk p owder.

Samyang Foods Co., Ltd. manufactures instant and processed food products, such as noodles, snacks, cooking oil, and feed.  The Company also produces dairy goods including milk, cheese, and ice cream.

Heilongjiang Agriculture Co., Ltd. plants, processes, and sells rice, soybean, wheat, corn, and other grain products.  The Company also produces fertilizers and sells paper products.

PT Charoen Pokphand Indonesia Tbk manufactures and distributes animal feeds, woven plastic bags, and poultry equipment as well as processes chicken.  Through its subsidiaries, the Company also operates poultry farms and distributes its products.

YAMAZAKI BAKING CO., LTD. produces baking foods including bread, pastry, and cake.  The Company operates nationwide sales network.  YAMAZAKI BAKING also operates franchised cafeterias and convenience stores.

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Yamazaki Baking (2212 JP)

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