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

<p>Yaskawa reported results today which surprised to the upside significantly at the OP level (¥6.2bn vs. consensus ¥3.7bn and LSR ¥6.7bn) but were in-line at the revenue level (¥90.8bn vs. consensus ¥91.3bn and LSR ¥98.4bn). Our forecasts were driven based on a variety of datapoints including regional breakdowns and identified but underestimated the extent of developed market weakness. We detected the strength in China as well and one of the key drivers of profitability appears to have been the seasonally high servomotor sales in China which we flagged previously. Inverter sales to the US oil and gas industry appear to have collapsed faster than expected dragging down revenues.</p>

Yaskawa reported results today which surprised to the upside significantly at the OP level (¥6.2bn vs. consensus ¥3.7bn and LSR ¥6.7bn) but were in-line at the revenue level (¥90.8bn vs. consensus ¥91.3bn and LSR ¥98.4bn). Our forecasts were driven based on a variety of datapoints including regional breakdowns and identified but underestimated the extent of developed market weakness. We detected the strength in China as well and one of the key drivers of profitability appears to have been the seasonally high servomotor sales in China which we flagged previously. Inverter sales to the US oil and gas industry appear to have collapsed faster than expected dragging down revenues.

Yaskawa – Developed Market Deceleration Striking

<p>Yaskawa Electric will report 1QFY03/21 earnings on Fri the 10<sup>th</sup> of Jul kicking off earnings season for the factory automation sector as usual. The sector has been a high-flyer in the recent market rally. Yaskawa itself is up almost 9% in four trading sessions pointing to high market expectations. LSR has been experimenting with data-driven forecasting of company results and we continue this below.</p>

Yaskawa Electric will report 1QFY03/21 earnings on Fri the 10th of Jul kicking off earnings season for the factory automation sector as usual. The sector has been a high-flyer in the recent market rally. Yaskawa itself is up almost 9% in four trading sessions pointing to high market expectations. LSR has been experimenting with data-driven forecasting of company results and we continue this below.

Yaskawa – Previewing 1Q Earnings With Data Analysis

<p>Keyence reported FY numbers in line with consensus as OP of ¥277.6bn was marginally above consensus’ ¥277.0bn. Revenue was more encouraging as the ¥551.8bn result was 0.8% above consensus’ ¥547.5bn. OP was hurt by increased SG&amp;A expenses. A slight encouragement was an effective increase in the dividend as Keyence maintained its ¥100 payout despite the Nov 21 stock split, effectively increasing the dividend from ¥200 to ¥300 (on pre-split like for like) and forecasting ¥400 for this year (¥200 post-split). Of course, this could still be increased but it is a step in the right direction and implies a payout ratio that will probably be over 20% this year. That is not high, but it is better than what you might imagine given Keyence’s miserly reputation.</p>

Keyence reported FY numbers in line with consensus as OP of ¥277.6bn was marginally above consensus’ ¥277.0bn. Revenue was more encouraging as the ¥551.8bn result was 0.8% above consensus’ ¥547.5bn. OP was hurt by increased SG&amp;A expenses. A slight encouragement was an effective increase in the dividend as Keyence maintained its ¥100 payout despite the Nov 21 stock split, effectively increasing the dividend from ¥200 to ¥300 (on pre-split like for like) and forecasting ¥400 for this year (¥200 post-split). Of course, this could still be increased but it is a step in the right direction and implies a payout ratio that will probably be over 20% this year. That is not high, but it is better than what you might imagine given Keyence’s miserly reputation.

Keyence – Weakness in China but the US Encourages

<p>Yaskawa reported results for FY02/20 last Friday kicking off the earnings season for the FA sector. With its FY ending one month earlier than other players, investors and analysts were keen to get some sort of a read on the real impact of COVID-19 on the sector. However, while the company beat subdued consensus numbers, particularly at the OP level, and sounded optimistic about recovering orders, there was nevertheless significant uncertainty and it would be difficult take an overly bullish stance here. Results and orders appear to be bottoming and we believe consensus is too low for FY02/21, but with very rich valuations prevailing, we believe the market is also significantly above consensus and could be pricing in too strong of a recovery, creating downside risks.</p>

Yaskawa reported results for FY02/20 last Friday kicking off the earnings season for the FA sector. With its FY ending one month earlier than other players, investors and analysts were keen to get some sort of a read on the real impact of COVID-19 on the sector. However, while the company beat subdued consensus numbers, particularly at the OP level, and sounded optimistic about recovering orders, there was nevertheless significant uncertainty and it would be difficult take an overly bullish stance here. Results and orders appear to be bottoming and we believe consensus is too low for FY02/21, but with very rich valuations prevailing, we believe the market is also significantly above consensus and could be pricing in too strong of a recovery, creating downside risks.

Yaskawa – First Peek at FA Earnings Cycle Suggests Recovery but One Which Won’t Justify Valuations

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/127/525/original/File%202020-04-12%203%2030%2058.jpeg?1586636737" class="editor-image img-responsive" data-smartkarma-image-id="127525"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/127/559/original/File%202020-04-12%208%2003%2009.jpeg?1586646443" class="editor-image img-responsive" data-smartkarma-image-id="127559"></figure><div class="content-caption">Source • ourworldindata.org</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/127/550/original/File%202020-04-12%207%2012%2036.jpeg?1586643194" class="editor-image img-responsive" data-smartkarma-image-id="127550"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/127/551/original/File%202020-04-12%207%2014%2052.jpeg?1586643688" class="editor-image img-responsive" data-smartkarma-image-id="127551"></figure><div class="content-caption">Source • Financial Times</div><p style="text-align: left;"><strong>CONTAINMENT NOT CONTAGION (SO FAR)</strong> - In the last week, the number of daily new confirmed cases of COVID-19 has increased from 300-400 to 500-600 of which Tokyo represents about one third. The case count is rising in many hitherto unaffected prefectures, partly as a result of migrations out of the seven prefectures which are under the 'state of emergency' declared on 7th April and also due to the return of asymptomatic Japanese nationals based overseas. The number of active cases (currently 6,279), those in critical care (122) and deaths (114) have yet to peak, although on a per capita basis Japan is in line with its East Asian neighbours. For the Japanese social distancing 'experiment' to be deemed successful, the 7-day rolling peak number of new cases needs to be below 1,000.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/127/573/original/IMG_1249.jpg?1586663212" class="editor-image img-responsive" data-smartkarma-image-id="127573"></figure><div class="content-caption">Source • NHK</div><p style="text-align: left;"><strong>NO-LOCKDOWN 'LOCKDOWN'</strong> - Japan's evolving compromise between social distancing and preserving the economy has revealed tensions between the central and local governments over the implementation of the powers that the former has ceded to the latter. Governor Koike had pressed for a broader range of business closures but relented over beauty salons and barbershops. DIY stores, convenience stores and restaurants can also remain open provided social distancing measures are implemented. Prefectures that were not included in the initial seven have now proposed measures of their own, including compensation for businesses forced to close which the national government has, so far, ruled out. Although no curfews have been instituted a ban on selling alcohol after seven o'clock is a reasonable 'carrot-like' alternative. From the helicopter that NHK paid to survey the scene, Tokyo was all-but-deserted on Saturday night. On Sunday. The 'recommendation' to refrain from going to bars and nightclubs has been extended to cover the whole of Japan. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/127/575/original/lots-of-hanko.jpg?1586663417" class="editor-image img-responsive" data-smartkarma-image-id="127575"></figure><div class="content-caption">Source • Wikimedia Commons</div><p><strong>WFH</strong> - PM Abe has very forcibly called for companies to institute 'WFH' for up to 70% of clerical staff - a factor which supports our continued bullish view for the <strong>Information Technology</strong> Sector. A Tokyo Chamber Of Commerce survey suggests that less 54% of SMEs do not intend to comply. The problem of the use of personal seals or '<em>hanko</em>' for the certification of documents remains, requiring many employees to trek into the office to affix them. Perhaps this is a business opportunity for <a href="https://www.smartkarma.com/entities/sansan-inc" target="_blank" data-smartkarma-citation="entities:28112:1" rel="noopener">Sansan (4443 JP)</a>?</p><p><strong>SIDELINED</strong> - In recent weeks, Japan's COVID-19 policy response has been led more by the Cabinet Office and Economic and Fiscal Policy Minister Yasutoshi Nishimura rather than the Kato-san of the Ministry of Health, Labour and Welfare. Kato-san and his bureaucrats have fallen out of favour for their handling of the Diamond Princess, inflexibility over testing and the rules requiring all positive cases to be hospitalised and the approval process of <a href="https://www.smartkarma.com/entities/fujifilm-holdings-corp" target="_blank" data-smartkarma-citation="entities:16353:1" rel="noopener">Fujifilm (4901 JP)</a>'s drug Avigan for use in COVID-19 cases. For better or worse, Japan's response to COVID-19 is being driven by broader considerations than the longevity of its elderly citizens.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/127/571/original/2020-04-12_12-13-13.png?1586661205" class="editor-image img-responsive" data-smartkarma-image-id="127571"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/127/572/original/2020-04-12_12-12-59.png?1586661219" class="editor-image img-responsive" data-smartkarma-image-id="127572"></figure><div class="content-caption">Source • EpiCentro/Istituto Superiore di Sanità </div><p><strong>HARD CHOICES</strong> - It is highly unlikely that Japan's first 'wave' of COVID-19 infections will peak conveniently to coincide with the Golden Week holiday period. However, as is becoming evident in New York City, the impact of 'total lockdowns' has been overestimated relative to social distancing Temporary overflow hospitals are empty, and in some US states have been closed or handed back to the military. <a href="https://www.epicentro.iss.it/en/coronavirus/bollettino/Report-COVID-2019_2_april_2020.pdf" target="_blank" rel="noopener">Evidence</a> from Italy's EpiCentro/Istituto Superiore di Sanità shows that the vast majority of fatalities are found in those over 60 years of age who have one or more comorbidity. These findings are also valid for Japan and other developed countries. As the economic cost of the moral imperative behind lockdowns becomes clear, the pressure to restart will increase, and the protocols for reaching herd immunity will be debated. The likelihood of second and third 'waves' before the widespread availability of mass-testing or vaccinees may require semi-permanent social-distancing for the most vulnerable and prolonged shutdowns of the crowded, noisy indoor venues that attract the most foolhardy. By anticipating the post-COVID protocols, The approach adopted by Taiwan, South Korea, Singapore and Japan offers a better glide-path to economic recovery. All are, however, dependent on the major Western economies, currently pickled in aspic, finding their exit strategies before summer.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/127/661/original/File%202020-04-13%205%2057%2023.jpeg?1586725178" class="editor-image img-responsive" data-smartkarma-image-id="127661"></figure><div class="content-caption">Source • gotazual@nyit.edu</div><p><strong>PRO-VAX</strong> - Another factor in Japan's favour is the country's early adoption, in 1947, of a universal childhood BCG vaccination programme. A recent <a href="https://www.medrxiv.org/content/10.1101/2020.03.24.20042937v1" target="_blank" rel="noopener">study</a> has found that "<em>countries without universal policies of BCG vaccination (Italy, Netherlands, Belgium United States) have been more severely affected compared to countries with universal and long-standing BCG policies. Countries that have a late start of universal BCG policy (Iran, 1984) had high mortality, consistent with the idea that BCG protects the vaccinated elderly population. We also found that BCG vaccination also reduced the number of reported COVID-19 cases in a country. The combination of reduced morbidity and mortality makes BCG vaccination a potential new tool in the fight against COVID-19.</em>" Ironically for President Bolsonaro, Brazil's programme started in 1920 and currently has an even lower mortality rate than Japan.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/127/583/original/File%202020-04-12%2014%2045%2024.jpeg?1586670339" class="editor-image img-responsive" data-smartkarma-image-id="127583"></figure><div class="content-caption">Source • oec.world</div><p><strong>CHINA PASSING -</strong> Of longer-term significance, Japan's COVID-19 stimulus package includes U¥220 billion to support Japanese companies moving production facilities out of China. Imports from China have fallen by more than 50% year-on-year and many Japanese manufacturers have been starved of critical components. While high-value-added parts will be shifted home, others could be sourced from SouthEast Asian countries.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/127/586/original/File%202020-04-12%2015%2002%2044.jpeg?1586671392" class="editor-image img-responsive" data-smartkarma-image-id="127586"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/127/587/original/File%202020-04-12%2015%2006%2029.jpeg?1586671741" class="editor-image img-responsive" data-smartkarma-image-id="127587"></figure><div class="content-caption">Source • McKinsey</div><p><strong>FOOD SECURITY</strong> - Meanwhile, several countries, including India, Russia, Kazakhstan, Ukraine, Vietnam, and Romania, are restricting exports of foodstuffs. Fortunately for Japan, much of the nations food imports come from the United States, Australia and Canada. Nevertheless, we expect a repeat of the 2008 food price inflation before the summer and suggest 'treading carefully; in the currently buoyant <strong>Food Beverage &amp; Tobacco</strong> Sector.</p><div>
<p><strong>SELECTIVELY BULLISH</strong> - While Japan's globally-orientated companies will struggle with almost no demand from the lockdown economies, specific domestic Sectors and Peer Groups, such as <strong>Information Technology </strong>and<strong> Internet Content &amp; Services</strong> are thriving in the COVID economy. Overall, by resisting a total lockdown, Japan remains relatively well-placed for 'the other side'. </p>
<p>In the <strong>DETAIL</strong> section below, we shall provide an update on the market overall, look at Sector and Peer Group performance and review the results and revision announcements made on Friday.</p>
<blockquote><p style="text-align: center;"><strong>It is not given to human beings - happily for them, for otherwise life would be intolerable - to foresee or to predict to any large extent the unfolding course of events." - Winston Churchill</strong></p></blockquote>
</div>

Source • ourworldindata.orgSource • Financial TimesCONTAINMENT NOT CONTAGION (SO FAR) - In the last week, the number of daily new confirmed cases of COVID-19 has increased from 300-400 to 500-600 of which Tokyo represents about one third. The case count is rising in many hitherto unaffected prefectures, partly as a result of migrations out of the seven prefectures which are under the 'state of emergency' declared on 7th April and also due to the return of asymptomatic Japanese nationals based overseas. The number of active cases (currently 6,279), those in critical care (122) and deaths (114) have yet to peak, although on a per capita basis Japan is in line with its East Asian neighbours. For the Japanese social distancing 'experiment' to be deemed successful, the 7-day rolling peak number of new cases needs to be below 1,000.Source • NHKNO-LOCKDOWN 'LOCKDOWN' - Japan's evolving compromise between social distancing and preserving the economy has revealed tensions between the central and local governments over the implementation of the powers that the former has ceded to the latter. Governor Koike had pressed for a broader range of business closures but relented over beauty salons and barbershops. DIY stores, convenience stores and restaurants can also remain open provided social distancing measures are implemented. Prefectures that were not included in the initial seven have now proposed measures of their own, including compensation for businesses forced to close which the national government has, so far, ruled out. Although no curfews have been instituted a ban on selling alcohol after seven o'clock is a reasonable 'carrot-like' alternative. From the helicopter that NHK paid to survey the scene, Tokyo was all-but-deserted on Saturday night. On Sunday. The 'recommendation' to refrain from going to bars and nightclubs has been extended to cover the whole of Japan. Source • Wikimedia CommonsWFH - PM Abe has very forcibly called for companies to institute 'WFH' for up to 70% of clerical staff - a factor which supports our continued bullish view for the Information Technology Sector. A Tokyo Chamber Of Commerce survey suggests that less 54% of SMEs do not intend to comply. The problem of the use of personal seals or 'hanko' for the certification of documents remains, requiring many employees to trek into the office to affix them. Perhaps this is a business opportunity for Sansan (4443 JP)?SIDELINED - In recent weeks, Japan's COVID-19 policy response has been led more by the Cabinet Office and Economic and Fiscal Policy Minister Yasutoshi Nishimura rather than the Kato-san of the Ministry of Health, Labour and Welfare. Kato-san and his bureaucrats have fallen out of favour for their handling of the Diamond Princess, inflexibility over testing and the rules requiring all positive cases to be hospitalised and the approval process of Fujifilm (4901 JP)'s drug Avigan for use in COVID-19 cases. For better or worse, Japan's response to COVID-19 is being driven by broader considerations than the longevity of its elderly citizens.Source • EpiCentro/Istituto Superiore di Sanità HARD CHOICES - It is highly unlikely that Japan's first 'wave' of COVID-19 infections will peak conveniently to coincide with the Golden Week holiday period. However, as is becoming evident in New York City, the impact of 'total lockdowns' has been overestimated relative to social distancing Temporary overflow hospitals are empty, and in some US states have been closed or handed back to the military. Evidence from Italy's EpiCentro/Istituto Superiore di Sanità shows that the vast majority of fatalities are found in those over 60 years of age who have one or more comorbidity. These findings are also valid for Japan and other developed countries. As the economic cost of the moral imperative behind lockdowns becomes clear, the pressure to restart will increase, and the protocols for reaching herd immunity will be debated. The likelihood of second and third 'waves' before the widespread availability of mass-testing or vaccinees may require semi-permanent social-distancing for the most vulnerable and prolonged shutdowns of the crowded, noisy indoor venues that attract the most foolhardy. By anticipating the post-COVID protocols, The approach adopted by Taiwan, South Korea, Singapore and Japan offers a better glide-path to economic recovery. All are, however, dependent on the major Western economies, currently pickled in aspic, finding their exit strategies before summer.Source • gotazual@nyit.eduPRO-VAX - Another factor in Japan's favour is the country's early adoption, in 1947, of a universal childhood BCG vaccination programme. A recent study has found that "countries without universal policies of BCG vaccination (Italy, Netherlands, Belgium United States) have been more severely affected compared to countries with universal and long-standing BCG policies. Countries that have a late start of universal BCG policy (Iran, 1984) had high mortality, consistent with the idea that BCG protects the vaccinated elderly population. We also found that BCG vaccination also reduced the number of reported COVID-19 cases in a country. The combination of reduced morbidity and mortality makes BCG vaccination a potential new tool in the fight against COVID-19." Ironically for President Bolsonaro, Brazil's programme started in 1920 and currently has an even lower mortality rate than Japan.Source • oec.worldCHINA PASSING - Of longer-term significance, Japan's COVID-19 stimulus package includes U¥220 billion to support Japanese companies moving production facilities out of China. Imports from China have fallen by more than 50% year-on-year and many Japanese manufacturers have been starved of critical components. While high-value-added parts will be shifted home, others could be sourced from SouthEast Asian countries.Source • McKinseyFOOD SECURITY - Meanwhile, several countries, including India, Russia, Kazakhstan, Ukraine, Vietnam, and Romania, are restricting exports of foodstuffs. Fortunately for Japan, much of the nations food imports come from the United States, Australia and Canada. Nevertheless, we expect a repeat of the 2008 food price inflation before the summer and suggest 'treading carefully; in the currently buoyant Food Beverage &amp; Tobacco Sector.
SELECTIVELY BULLISH - While Japan's globally-orientated companies will struggle with almost no demand from the lockdown economies, specific domestic Sectors and Peer Groups, such as Information Technology and Internet Content &amp; Services are thriving in the COVID economy. Overall, by resisting a total lockdown, Japan remains relatively well-placed for 'the other side'. 
In the DETAIL section below, we shall provide an update on the market overall, look at Sector and Peer Group performance and review the results and revision announcements made on Friday.
It is not given to human beings - happily for them, for otherwise life would be intolerable - to foresee or to predict to any large extent the unfolding course of events." - Winston Churchill


🇯🇵 JAPAN MARKET (& COVID-19) UPDATE - 12th April • To Each Their Own

Japan

YASKAWA Electric Corporation manufactures and markets servomotors, controllers, inverters, and industrial robots.  The Company's products include spindle controllers, computerized numerical control (CNC) systems, and system engineering.

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Yaskawa Electric (6506 JP)

Yaskawa – Developed Market Deceleration Striking

Yaskawa reported results today which surprised to the upside significantly at the OP level (¥6.2bn vs. consensus ¥3.7bn and LSR ¥6.7bn) but were...

Mio Kato

Yaskawa – Previewing 1Q Earnings With Data Analysis

Yaskawa Electric will report 1QFY03/21 earnings on Fri the 10th of Jul kicking off earnings season for the factory automation sector as usual. The...

Mio Kato

Keyence – Weakness in China but the US Encourages

Keyence reported FY numbers in line with consensus as OP of ¥277.6bn was marginally above consensus’ ¥277.0bn. Revenue was more encouraging as the...

Mio Kato

Yaskawa – First Peek at FA Earnings Cycle Suggests Recovery but One Which Won’t Justify Valuations

Yaskawa reported results for FY02/20 last Friday kicking off the earnings season for the FA sector. With its FY ending one month earlier than other...

Mio Kato

🇯🇵 JAPAN MARKET (& COVID-19) UPDATE - 12th April • To Each Their Own

CONTAINMENT NOT CONTAGION (SO FAR) - In the last week, the number of daily new confirmed cases of COVID-19 has increased from 300-400 to 500-600 of...

Campbell Gunn

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