Equity Long-Short Analyst

Pyari Menon

Thematic (Sector/Industry)

<ul>
<li>Brand recognition is a driver of margins and returns for consumer products, but developing and maintaining product superiority is of paramount importance to establish and sustain brands and market share</li>
<li>In this report, we take  look at how well companies in personal hygiene products like diapers, sanitary pads,  linings, and tampons are positioned from a technological perspective</li>
<li>
<a href="https://www.smartkarma.com/entities/procter-gamble-co" target="_blank" data-smartkarma-citation="entities:978:1" rel="noopener">Procter &amp; Gamble Co (PG US)</a>, <a href="https://www.smartkarma.com/entities/kimberly-clark-corp" target="_blank" data-smartkarma-citation="entities:2292:1" rel="noopener">Kimberly Clark (KMB US)</a> , <a href="https://www.smartkarma.com/entities/unicharm-corp" target="_blank" data-smartkarma-citation="entities:6246:1" rel="noopener">Unicharm Corp (8113 JP)</a>, <a href="https://www.smartkarma.com/entities/daio-paper-corp" target="_blank" data-smartkarma-citation="entities:3211:1" rel="noopener">Daio Paper Corp (3880 JP)</a>, and <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" data-smartkarma-citation="entities:12933:1" rel="noopener">Kao Corp (4452 JP)</a> lead the field</li>
</ul>


Brand recognition is a driver of margins and returns for consumer products, but developing and maintaining product superiority is of paramount importance to establish and sustain brands and market share
In this report, we take  look at how well companies in personal hygiene products like diapers, sanitary pads,  linings, and tampons are positioned from a technological perspective

Procter &amp; Gamble Co (PG US), Kimberly Clark (KMB US) , Unicharm Corp (8113 JP), Daio Paper Corp (3880 JP), and Kao Corp (4452 JP) lead the field


Stock Ideas from Data Mining Technical Publications: A Look at Diapers, Sanitary Pads, and Tampons

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

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.

<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/163/118/original/2020-10-03_15-34-01.png?1601706874" class="editor-image img-responsive" data-smartkarma-image-id="163118"></figure><div class="content-caption">Source for all charts &amp; tables: Japan Analytics</div>
<p><strong>WARMING UP</strong> - Earnings momentum is finally on the 'up'. Our Interim Forecast/Revision Score data series which runs from March to September finished 2020 on a two-month high, while both the Annual series are above their September low points. The divergence between domestic non-manufacturing and globally-orientated manufacturing companies continues to widen exemplified by <a href="https://www.smartkarma.com/entities/honda-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:154:1" rel="noopener">Honda Motor (7267 JP)</a>'s announcement of their decision to pull out of Formula 1 from the end of the 2021 season. Although trailing earnings have also stabilised, operating and net income forecasts and their 'gap to trailing' continue to increase. The forward multiple is 32.5 times. </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/163/261/original/2020-10-04_07-12-52.png?1601763187" class="editor-image img-responsive" data-smartkarma-image-id="163261"></figure><p style="text-align: center;"><strong>• BEST &amp; WORST •</strong></p>
</div><div><p>Our best and worst pair is home centre <a href="https://www.smartkarma.com/entities/shimachu-co-ltd" target="_blank" data-smartkarma-citation="entities:5235:1" rel="noopener">Shimachu (8184 JP)</a> for whom a rumoured bid from peer DCM has emerged and diaper machinery maker and small-cap value investor favourite and Unicharm proxy<a href="https://www.smartkarma.com/entities/zuiko-corp" target="_blank" data-smartkarma-citation="entities:5568:1" rel="noopener"> Zuiko (6279 JP)</a>. </p></div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/163/135/original/2020-10-03_17-07-27.png?1601712488" class="editor-image img-responsive" data-smartkarma-image-id="163135"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/163/136/original/2020-10-03_17-08-41.png?1601712545" class="editor-image img-responsive" data-smartkarma-image-id="163136"></figure><hr><div><p style="text-align: center;"><strong>DAILY STATS</strong></p></div><hr><div><p style="text-align: center;"><strong>18 Quarterly Results</strong></p></div><div><ul style="list-style-type: disc;">
<li><p><strong>Results Score:</strong> 56% Positive / 11% Neutral / 33% Negative</p></li>
<li><p><strong>Average Results Score Change:</strong> 0.0 points</p></li>
<li><p><strong>Average % Change in Revenue:</strong> -9.6% Quarter YoY / -5.2% Rolling TTM YoY </p></li>
<li><p><strong>Average Operating Profit Margin Change:</strong> -2.6ppt</p></li>
<li><p><strong>Percentage Making Quarterly Losses:</strong> 33%</p></li>
</ul></div><hr><div><p style="text-align: center;"><strong>9 Annual • 6 Interim Forecasts/Revisions</strong></p></div><div><ul style="list-style-type: disc;">
<li><p><strong>Annual Forecast/Revision Score:</strong> 33% Positive /22% Neutral / 44% Negative</p></li>
<li><p><strong>Interim Forecast/Revision Score Change:</strong> 50% Positive / 17% Neutral / 33% Negative</p></li>
<li><p><strong>Average Forecast/Revision Score Change:</strong> -2.1 points</p></li>
</ul></div>


Source for all charts &amp; tables: Japan Analytics
WARMING UP - Earnings momentum is finally on the 'up'. Our Interim Forecast/Revision Score data series which runs from March to September finished 2020 on a two-month high, while both the Annual series are above their September low points. The divergence between domestic non-manufacturing and globally-orientated manufacturing companies continues to widen exemplified by Honda Motor (7267 JP)'s announcement of their decision to pull out of Formula 1 from the end of the 2021 season. Although trailing earnings have also stabilised, operating and net income forecasts and their 'gap to trailing' continue to increase. The forward multiple is 32.5 times. 
• BEST &amp; WORST •
Our best and worst pair is home centre Shimachu (8184 JP) for whom a rumoured bid from peer DCM has emerged and diaper machinery maker and small-cap value investor favourite and Unicharm proxy Zuiko (6279 JP). DAILY STATS18 Quarterly Results
Results Score: 56% Positive / 11% Neutral / 33% Negative
Average Results Score Change: 0.0 points
Average % Change in Revenue: -9.6% Quarter YoY / -5.2% Rolling TTM YoY 
Average Operating Profit Margin Change: -2.6ppt
Percentage Making Quarterly Losses: 33%
9 Annual • 6 Interim Forecasts/Revisions
Annual Forecast/Revision Score: 33% Positive /22% Neutral / 44% Negative
Interim Forecast/Revision Score Change: 50% Positive / 17% Neutral / 33% Negative
Average Forecast/Revision Score Change: -2.1 points


🇯🇵 JAPAN • Results & Revisions 10/​​​​​02 DCM (Under)Bids for Shimachu, Zuiko>Unicharm, Ktk>Canon

<p><strong>eRESULTS &amp; REVISIONS UPDATE SERIES</strong> - After a month's gap, we shall now resume daily coverage of Japan's results, forecasts and revisions announcements as the 420 companies with February, May, August and November year-ends start to report. Initially, we shall cover all companies irrespective of market capitalisation, to highlight the financial impact of COVID-19  on specific Sectors and Peer Groups.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/142/848/original/2020-06-29_05-02-16.png?1593374573" class="editor-image img-responsive" data-smartkarma-image-id="142848"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>LEADING INDICATOR LEADS</strong> - The Cabinet Office's Leading Indicator of Business Conditions is suggesting that earnings and revisions (as represented above by our Results Score and Forecast/Revision Score) have some significant downside, perhaps closer to the low of 2009. The degree to which the market has already discounted the recovery of 2021 is moot; however, the current level of confidence is about to be put to the test, as was evident from Friday's announcements.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/142/853/original/2020-06-29_05-11-32.png?1593375116" class="editor-image img-responsive" data-smartkarma-image-id="142853"></figure><div class="content-caption">Source • Tokyo Metropolitan Government</div><p></p><p><strong>FAR FROM NORMAL</strong> - As a reminder that Tokyo's levels of social activity have yet to recover -passenger numbers on Toei subway lines are still 30% below January levels at peak office-worker commuting times.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/142/854/original/2020-06-29_05-17-39.png?1593375481" class="editor-image img-responsive" data-smartkarma-image-id="142854"></figure><div class="content-caption">Source • Japan Analytics</div><p style="text-align: left;"><strong>GRAPHIC DETAIL</strong> - In an attempt to highlight absolute and relative company-specific trends, we have added some additional graphic material in the <strong>DETAIL</strong> section below. As always, comments and feedback are welcome.</p><hr><p style="text-align: center;"><strong>DAILY STATS</strong></p><p style="text-align: center;"><strong>14 Quarterly Results</strong></p><ul>
<li>
<strong>Results Score:</strong> 12 Negative / 2 Positive</li>
<li>
<strong>Average Results Score Change:</strong>-5.0</li>
<li>
<strong>Average % Change in Revenue: </strong>-16% Quarter YoY / -5% Rolling TTM YoY</li>
<li>
<strong>Average Operating Profit Margin Change:</strong> -2.2ppt</li>
</ul><hr><p></p><p style="text-align: center;"><strong>7 Annual 6 Interim Forecasts Revisions</strong></p><ul>
<li>
<strong><strong>Forecast Revision Score:</strong></strong> 6 Positive / 7 Negative</li>
<li>
<strong>Average Forecast/Revision Score Change:</strong> -2.7</li>
</ul>

eRESULTS &amp; REVISIONS UPDATE SERIES - After a month's gap, we shall now resume daily coverage of Japan's results, forecasts and revisions announcements as the 420 companies with February, May, August and November year-ends start to report. Initially, we shall cover all companies irrespective of market capitalisation, to highlight the financial impact of COVID-19  on specific Sectors and Peer Groups.Source • Japan AnalyticsLEADING INDICATOR LEADS - The Cabinet Office's Leading Indicator of Business Conditions is suggesting that earnings and revisions (as represented above by our Results Score and Forecast/Revision Score) have some significant downside, perhaps closer to the low of 2009. The degree to which the market has already discounted the recovery of 2021 is moot; however, the current level of confidence is about to be put to the test, as was evident from Friday's announcements.Source • Tokyo Metropolitan GovernmentFAR FROM NORMAL - As a reminder that Tokyo's levels of social activity have yet to recover -passenger numbers on Toei subway lines are still 30% below January levels at peak office-worker commuting times.Source • Japan AnalyticsGRAPHIC DETAIL - In an attempt to highlight absolute and relative company-specific trends, we have added some additional graphic material in the DETAIL section below. As always, comments and feedback are welcome.DAILY STATS14 Quarterly Results

Results Score: 12 Negative / 2 Positive

Average Results Score Change:-5.0

Average % Change in Revenue: -16% Quarter YoY / -5% Rolling TTM YoY

Average Operating Profit Margin Change: -2.2ppt
7 Annual 6 Interim Forecasts Revisions

Forecast Revision Score: 6 Positive / 7 Negative

Average Forecast/Revision Score Change: -2.7


🇯🇵 JAPAN • Results & Revisions 26th June

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/362/original/File%202020-04-04%208%2045%2047.jpeg?1585957595" class="editor-image img-responsive" data-smartkarma-image-id="126362"></figure><div class="content-caption">Source • stopcovid19.jp</div><p><strong>OVERSHOOT</strong> - This Insight will be longer than usual with more above the paywall 'fold' as Friday saw several significant developments in Japan's response to COVID-19. The English-language word 'overshoot' is used widely in Japan to refer to the situation in which more than 100% of available intensive care hospital beds are in use. Although the occupancy rate for Japan is still only 48%, Kyoto and Kanagawa Prefectures are already in 'overshoot', and Tokyo is again close to being so even after increasing capacity by 50% this week. As can be seen above, the country has sufficient ventilator capacity to deal with ten times the current cases (28,197); the shortage is in hospital beds for infectious diseases (4,089). The Tokyo Metropolitan Government (TMG) is now aiming to secure over 4,000 beds for severe COVID-19 cases, including 3,300 with oxygen. Of the 635 patients currently hospitalised in the capital, 80% do not need intensive care. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/377/original/IMG_1102.jpg?1585958777" class="editor-image img-responsive" data-smartkarma-image-id="126377"></figure><div class="content-caption">Source • NHK</div><p><strong>REGIME CHANGE</strong> - As we have noted in an earlier <a href="https://www.smartkarma.com/insights/japan-market-update-hit-the-boj-bid-and-wait-for-the-absolute-value-opportunity" target="_blank" data-smartkarma-citation="insights:37670" rel="noopener">Insight</a>, Japan has been slow to increase testing for COVID-19 as there was a Health Ministry guideline that all positive cases were to be hospitalised however mild the symptoms. Large-scale testing would result in the healthcare system being overwhelmed by a large number of relatively-mild cases. Also, the social convention of avoiding '<em>meiwaku</em>' or trouble to others has resulted in many of those with symptoms avoiding seeking confirmation. The Ministry is also resisting the designation of deaths from pneumonia as related to COVID-19 and is refusing to release data on the number of pneumonia deaths which are rumoured to be 'significantly higher' than in previous years in Tokyo. Whether by design or neglect, Japan lulled itself into a false sense of 'corona-superiority' which has delayed many of the responses that other developed countries have been taking. In the face of increased pressure from the medical profession, the bureaucrats have now relented and, at least in Tokyo, less-severe cases will be able to stay at home or will be billeted in hotels. The rule that patients could only be released from the hospital after two negative tests is also to be 'relaxed'. The rule that new cases must be reported to the Ministry by fax still, however, remains in place.</p><p><strong>HOTELS &amp; HOMES</strong> - Given the size of most homes in the capital, isolation in homes with multiple residents will be hazardous, The TMG is, therefore, moving quickly to requisition or acquire the necessary hotel space.  The infamously-xenophobic APA Hotel chain has been quick to offer their services to lightly-symptomatic patients and is offering a 50% discount to health care workers.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/380/original/2020-04-04_10-51-38.png?1585965120" class="editor-image img-responsive" data-smartkarma-image-id="126380"></figure><div class="content-caption">Source outbreak.info</div><p><strong>ASIAN OUTLIER</strong> - Japan is now the outlier in Asia in seeing an increasing rate of daily new cases (353 on April 3rd),  including a six-month-old baby against whom medical staff did not think to take any precautions forcing 44 staff into two weeks of self-isolation. Using a simple measure proposed by Messrs <a href="https://medium.com/@ekohlberg_47501/a-simple-score-to-tell-if-we-are-beating-the-virus-49e74b707e35" target="_blank" rel="noopener">Kohlberg, Neyman, and Tepper</a>, Japan's R Score is 2.09. With both Singapore and Hong Kong introducing stricter social constraints over the last two days, Japan's Swedish-style response is facing increasing domestic criticism. Several LDP politicians and supporters have distanced themselves from PM Abe's two-masks policy. Although far from disinterested parties, <a href="https://www.smartkarma.com/entities/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten (4755 JP)</a>'s @hmikitani and <a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a>'s @masason have both taken to Twitter to urge for the declaration of a state of emergency. The former has however been slow to prevent price-gouging for masks sold on the Rakuten platform. Even the influential Keidanren business federation has now accepted that a state of emergency is 'acceptable' on condition that 'vital services' are not too severely disrupted.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/396/original/File%202020-04-03%2019%2016%2000.jpeg?1585974026" class="editor-image img-responsive" data-smartkarma-image-id="126396"></figure><div class="content-caption">Source • NHK</div><p><strong>TOKYO AT THE TIPPING POINT</strong> - Even the normally-quiescent NHK fired up their graphic team for last night's '7 NEWS'  to illustrate that Tokyo is 18 days away from an exponential explosion unless there is an 80% reduction in social activities. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/386/original/File%202020-04-04%200%2030%2052.jpeg?1585968614" class="editor-image img-responsive" data-smartkarma-image-id="126386"></figure><div class="content-caption">Source • NHK</div><p><strong>GOVERNOR KOIKE -</strong> Although firmly stating that a full lockdown of Tokyo is legally 'impossible', Gov. Koike is gently prodding the national government towards stricter measures and continues to warn businesses to make the necessary preparations as only grocery stores, bank and medical facilities would remain open. She has requested residents to stay at home this weekend and is recommending avoiding the three "<strong>C'</strong>s" - <strong>C</strong>rowded, <strong>C</strong>onfined spaces where <strong>C</strong>onversations take place until further notice. Taking a leaf from Governor Cuomo's book, she is now giving daily updates on YouTube, including one in English. Having harboured ambitions for higher office in the past, the contrast she is drawing with the apparently-hapless Prime Minister is being made abundantly clear. Many LDP officials, however, remain wary of her 'un-Japanese' opportunism and her authoritarian and unpredictable nature. As in the United States, personal and political rivalries are obstructing to sensible policy-making.   </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/387/original/2020-04-04_12-01-17.png?1585969302" class="editor-image img-responsive" data-smartkarma-image-id="126387"></figure><div class="content-caption">Source • Google</div><p><strong>PARTIAL LOCKDOWN</strong> - Many restaurant chains including <a href="https://www.smartkarma.com/entities/torikizoku-co-ltd" target="_blank" data-smartkarma-citation="entities:17718:1" rel="noopener">Torikizoku (3193 JP)</a>, <a href="https://www.smartkarma.com/entities/kushikatsu-tanaka-co" target="_blank" data-smartkarma-citation="entities:26733:1" rel="noopener">Kushikatsu Tanaka (3547 JP)</a>  and <a href="https://www.smartkarma.com/entities/hub-co-ltd" target="_blank" data-smartkarma-citation="entities:11892:1" rel="noopener">Hub (3030 JP)</a> and karaoke and entertainment facilities such as <a href="https://www.smartkarma.com/entities/daiichikosho-co-ltd" target="_blank" data-smartkarma-citation="entities:8629:1" rel="noopener">Daiichikosho (7458 JP)</a>, <a href="https://www.smartkarma.com/entities/koshidaka-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:14191:1" rel="noopener">Koshidaka (2157 JP)</a> and <a href="https://www.smartkarma.com/entities/round-one-corp" target="_blank" data-smartkarma-citation="entities:7057:1" rel="noopener">Round One (4680 JP)</a> have announced the closure of their facilities for several weeks and join the department stores and cinemas that closed last and will be so again this weekend. Even the Spring Sumo tournament has been delayed for at least two weeks. As confirmed by Google's excellent Community Mobility Reports above, Tokyo is gradually heeding the call. The March Services PMI for Japan suggests a year-on-year contraction of 8%. The onus will now pass to the national government to mitigate the losses.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/397/original/2020-04-04_13-51-59.png?1585975942" class="editor-image img-responsive" data-smartkarma-image-id="126397"></figure><div class="content-caption">Source • US Embassy, Tokyo</div><p><strong>'GET-OUT-OF-EDO-BABY-GO'</strong> - The US Embassy in Japan is recommending that any US citizens who are not prepared to stay in Japan for several months or who are concerned about not being able to receive appropriate medical care should leave immediately. Those who do will, however, not be allowed to return for an as-yet-unspecified period.  Even Japanese nationals are now required to spend fourteen days in quarantine. All residence visas that expire before the end of June be extended by three months. From April 3rd and until further notice, non-Japanese of any residence status, including permanent and spouses of Japanese nationals, are to be denied re-entry if they leave Japan. Welcome to the lock-in without a lockdown!</p><p><strong>RELIEF MEASURES</strong> - A potpourri of relief measures and new policies are doing the rounds in government circles including some or all of the following:- </p><ul>
<li>
<strong>¥300,000 </strong>- A one-time non-taxable payment will be made to qualified households that are suffering financially from a loss of income. About 10 million households are expected to qualify. It has already been necessary to make clear that the adult entertainment industry will not be eligible for public funds. ¥300,000 is equivalent to the annual amount spent on a pet dog in Japan.</li>
<li>
<strong>PREFERENCE SHARES</strong> - Large firms such as airlines, shippers and auto manufacturers may be eligible for rescue packages in the form of preference shares issued to the Development Bank of Japan of up to ¥400 billion each. The allocation of such funds will be a subject of much political jostling, while smaller businesses that lack the right connections may not be deemed eligible. We would now be wary of being aggressively 'short' these sectors.</li>
<li>
<strong>FIVE-YEAR INTEREST-FREE LOANS</strong> - While a welcome measure for some SMEs, this measure may not be sufficient for those already-indebted businesses with large numbers of regular employees operating out of rented accommodation, of which Japan's legion of wholesalers is a prime example.</li>
<li>
<strong>TAX MORATORIA</strong> - The government is to grant a moratorium on tax payments by companies that have seen their monthly revenues fall by more than 20% from the previous year due to COVID-19.</li>
<li>
<strong>WRITE-DOWNS</strong> - The Japanese ASB and the FSA have announced that companies will be allowed greater leniency regarding asset writedowns for idle plants and stores</li>
<li>
<strong>SUBSIDIES</strong> - The government will fully-subsidise the increase in production 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 Avigan drug and ventilators from a variety of manufacturers. Avigan will be offered for free to other countries.</li>
<li>
<strong>DE-GLOBALISATION</strong> - <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" data-smartkarma-citation="entities:73:1" rel="noopener">Toyota Motor (7203 JP)</a> and <a href="https://www.smartkarma.com/entities/honda-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:154:1" rel="noopener">Honda Motor (7267 JP)</a> are in talks with the Ministry of Economy, Trade and Industry to move some or all of their supply chains our of China. <a href="https://www.smartkarma.com/entities/nissan-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:72:1" rel="noopener">Nissan Motor (7201 JP)</a> is seemingly no longer considered relevant in this regard. Japanese corporates will also begin a process of unwinding unprofitable overseas operations to support their domestic activities, a move that will help keep the Yen relatively stable over the medium term.</li>
</ul><p>While large Japanse corporations are relatively well-placed to weather this storm, the Japanese government is fiscally constrained and grossly indebted relative to GDP. Given the now-inflationary global outlook, we would expect the Bank of Japan to be the least generous of the central banks in response to COVID-19, which will also be supportive of the Yen.</p><p>In the <strong>DETAIL</strong> section below, we shall review our targets for our Results and Revisions Scores, and the market overall, look at our updated trailing aggregate actual profits and multiples and review Fridays' Results and Revisions. Finally, we shall suggest that Japan is well-placed for the emergent post-COVID economic world order and conclude that we would be buyers of Japanse equities into the second wave of the COVID-19 downturn.</p>

Source • stopcovid19.jpOVERSHOOT - This Insight will be longer than usual with more above the paywall 'fold' as Friday saw several significant developments in Japan's response to COVID-19. The English-language word 'overshoot' is used widely in Japan to refer to the situation in which more than 100% of available intensive care hospital beds are in use. Although the occupancy rate for Japan is still only 48%, Kyoto and Kanagawa Prefectures are already in 'overshoot', and Tokyo is again close to being so even after increasing capacity by 50% this week. As can be seen above, the country has sufficient ventilator capacity to deal with ten times the current cases (28,197); the shortage is in hospital beds for infectious diseases (4,089). The Tokyo Metropolitan Government (TMG) is now aiming to secure over 4,000 beds for severe COVID-19 cases, including 3,300 with oxygen. Of the 635 patients currently hospitalised in the capital, 80% do not need intensive care. Source • NHKREGIME CHANGE - As we have noted in an earlier Insight, Japan has been slow to increase testing for COVID-19 as there was a Health Ministry guideline that all positive cases were to be hospitalised however mild the symptoms. Large-scale testing would result in the healthcare system being overwhelmed by a large number of relatively-mild cases. Also, the social convention of avoiding 'meiwaku' or trouble to others has resulted in many of those with symptoms avoiding seeking confirmation. The Ministry is also resisting the designation of deaths from pneumonia as related to COVID-19 and is refusing to release data on the number of pneumonia deaths which are rumoured to be 'significantly higher' than in previous years in Tokyo. Whether by design or neglect, Japan lulled itself into a false sense of 'corona-superiority' which has delayed many of the responses that other developed countries have been taking. In the face of increased pressure from the medical profession, the bureaucrats have now relented and, at least in Tokyo, less-severe cases will be able to stay at home or will be billeted in hotels. The rule that patients could only be released from the hospital after two negative tests is also to be 'relaxed'. The rule that new cases must be reported to the Ministry by fax still, however, remains in place.HOTELS &amp; HOMES - Given the size of most homes in the capital, isolation in homes with multiple residents will be hazardous, The TMG is, therefore, moving quickly to requisition or acquire the necessary hotel space.  The infamously-xenophobic APA Hotel chain has been quick to offer their services to lightly-symptomatic patients and is offering a 50% discount to health care workers.Source outbreak.infoASIAN OUTLIER - Japan is now the outlier in Asia in seeing an increasing rate of daily new cases (353 on April 3rd),  including a six-month-old baby against whom medical staff did not think to take any precautions forcing 44 staff into two weeks of self-isolation. Using a simple measure proposed by Messrs Kohlberg, Neyman, and Tepper, Japan's R Score is 2.09. With both Singapore and Hong Kong introducing stricter social constraints over the last two days, Japan's Swedish-style response is facing increasing domestic criticism. Several LDP politicians and supporters have distanced themselves from PM Abe's two-masks policy. Although far from disinterested parties, Rakuten (4755 JP)'s @hmikitani and Softbank Group (9984 JP)'s @masason have both taken to Twitter to urge for the declaration of a state of emergency. The former has however been slow to prevent price-gouging for masks sold on the Rakuten platform. Even the influential Keidanren business federation has now accepted that a state of emergency is 'acceptable' on condition that 'vital services' are not too severely disrupted.Source • NHKTOKYO AT THE TIPPING POINT - Even the normally-quiescent NHK fired up their graphic team for last night's '7 NEWS'  to illustrate that Tokyo is 18 days away from an exponential explosion unless there is an 80% reduction in social activities. Source • NHKGOVERNOR KOIKE - Although firmly stating that a full lockdown of Tokyo is legally 'impossible', Gov. Koike is gently prodding the national government towards stricter measures and continues to warn businesses to make the necessary preparations as only grocery stores, bank and medical facilities would remain open. She has requested residents to stay at home this weekend and is recommending avoiding the three "C's" - Crowded, Confined spaces where Conversations take place until further notice. Taking a leaf from Governor Cuomo's book, she is now giving daily updates on YouTube, including one in English. Having harboured ambitions for higher office in the past, the contrast she is drawing with the apparently-hapless Prime Minister is being made abundantly clear. Many LDP officials, however, remain wary of her 'un-Japanese' opportunism and her authoritarian and unpredictable nature. As in the United States, personal and political rivalries are obstructing to sensible policy-making.   Source • GooglePARTIAL LOCKDOWN - Many restaurant chains including Torikizoku (3193 JP), Kushikatsu Tanaka (3547 JP)  and Hub (3030 JP) and karaoke and entertainment facilities such as Daiichikosho (7458 JP), Koshidaka (2157 JP) and Round One (4680 JP) have announced the closure of their facilities for several weeks and join the department stores and cinemas that closed last and will be so again this weekend. Even the Spring Sumo tournament has been delayed for at least two weeks. As confirmed by Google's excellent Community Mobility Reports above, Tokyo is gradually heeding the call. The March Services PMI for Japan suggests a year-on-year contraction of 8%. The onus will now pass to the national government to mitigate the losses.Source • US Embassy, Tokyo'GET-OUT-OF-EDO-BABY-GO' - The US Embassy in Japan is recommending that any US citizens who are not prepared to stay in Japan for several months or who are concerned about not being able to receive appropriate medical care should leave immediately. Those who do will, however, not be allowed to return for an as-yet-unspecified period.  Even Japanese nationals are now required to spend fourteen days in quarantine. All residence visas that expire before the end of June be extended by three months. From April 3rd and until further notice, non-Japanese of any residence status, including permanent and spouses of Japanese nationals, are to be denied re-entry if they leave Japan. Welcome to the lock-in without a lockdown!RELIEF MEASURES - A potpourri of relief measures and new policies are doing the rounds in government circles including some or all of the following:- 

¥300,000 - A one-time non-taxable payment will be made to qualified households that are suffering financially from a loss of income. About 10 million households are expected to qualify. It has already been necessary to make clear that the adult entertainment industry will not be eligible for public funds. ¥300,000 is equivalent to the annual amount spent on a pet dog in Japan.

PREFERENCE SHARES - Large firms such as airlines, shippers and auto manufacturers may be eligible for rescue packages in the form of preference shares issued to the Development Bank of Japan of up to ¥400 billion each. The allocation of such funds will be a subject of much political jostling, while smaller businesses that lack the right connections may not be deemed eligible. We would now be wary of being aggressively 'short' these sectors.

FIVE-YEAR INTEREST-FREE LOANS - While a welcome measure for some SMEs, this measure may not be sufficient for those already-indebted businesses with large numbers of regular employees operating out of rented accommodation, of which Japan's legion of wholesalers is a prime example.

TAX MORATORIA - The government is to grant a moratorium on tax payments by companies that have seen their monthly revenues fall by more than 20% from the previous year due to COVID-19.

WRITE-DOWNS - The Japanese ASB and the FSA have announced that companies will be allowed greater leniency regarding asset writedowns for idle plants and stores

SUBSIDIES - The government will fully-subsidise the increase in production of Fujifilm (4901 JP)'s Avigan drug and ventilators from a variety of manufacturers. Avigan will be offered for free to other countries.

DE-GLOBALISATION - Toyota Motor (7203 JP) and Honda Motor (7267 JP) are in talks with the Ministry of Economy, Trade and Industry to move some or all of their supply chains our of China. Nissan Motor (7201 JP) is seemingly no longer considered relevant in this regard. Japanese corporates will also begin a process of unwinding unprofitable overseas operations to support their domestic activities, a move that will help keep the Yen relatively stable over the medium term.
While large Japanse corporations are relatively well-placed to weather this storm, the Japanese government is fiscally constrained and grossly indebted relative to GDP. Given the now-inflationary global outlook, we would expect the Bank of Japan to be the least generous of the central banks in response to COVID-19, which will also be supportive of the Yen.In the DETAIL section below, we shall review our targets for our Results and Revisions Scores, and the market overall, look at our updated trailing aggregate actual profits and multiples and review Fridays' Results and Revisions. Finally, we shall suggest that Japan is well-placed for the emergent post-COVID economic world order and conclude that we would be buyers of Japanse equities into the second wave of the COVID-19 downturn.

🇯🇵 JAPAN MARKET UPDATE 5th April 2020 • Overshoot

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. 

<p><strong>RELATIVE PRICE SCORE SHORT PORTFOLIOS</strong> - Our recent insight Japan: Most Overbought &amp; Most Oversold - The Relative Price Score introduced our methodology for identifying overbought and oversold outliers based on their Relative Price Score (RPS).  Following on from our "Long Portfolios" insight, we will now focus on generating short ideas based on changes in the monthly closing Relative Price Scores.</p><p><strong>HISTORICAL SIMULATION</strong> - Simulations of trading strategies should be viewed with caution, and the usual caveats apply to what follows. 78% of the 287 'trades' generated since 1992 would have been profitable if held and then sold after twelve months. The average 'outcome' for the 26-year period was a 'gain' of 30%. After the cost of borrowing and slippage are subtracted, a 'result' of 20-25% would be more realistic.  In five periods (1993, 2010, 2012 and 20171H) the average gain before borrowing costs was less than 10%.  In 2016 the strategy lost 3% before costs.  As with all mechanical trading rules, they are times when they cease to work. From August 2016 to November 2017, the number of 'losing' trades outweighs 'winning' trades by 27 to 21. During this period, the TOPIX index rose by 39% and so a small single digit 'loss' from shorting is acceptable. However, we would caution that this strategy has been and will, no doubt, again be fallible.</p><div class="content-highlight">
<p style="text-align: center;"><strong>THE 2014 PORTFOLIO</strong></p>
<ul>
<li>22 'positions' in 18 companies produced an average 'return' of 26% before borrowing costs with only three positions stopped out.</li>
<li>The most successful positions were in <a href="https://www.smartkarma.com/entities/18683" target="_blank" data-smartkarma-citation="entities:18683:1">Nihon Trim (6788 JP)</a>, <a href="https://www.smartkarma.com/entities/5568" target="_blank" data-smartkarma-citation="entities:5568:1">Zuiko (6279 JP)</a> and <a href="https://www.smartkarma.com/entities/11666" target="_blank" data-smartkarma-citation="entities:11666:1">D.Western Therapeutics (4576 JP)</a>.</li>
<li>
<a href="https://www.smartkarma.com/entities/3322" target="_blank" data-smartkarma-citation="entities:3322:1">Micronics Japan (6871 JP)</a> is a good illustration of the need for a stop-loss discipline but also the common feature of overbought stocks to have a second 'wind' within a year of the first set-up.</li>
</ul>
</div><div class="content-highlight">
<p style="text-align: center;"><strong>THE 2015 PORTFOLIO</strong></p>
<ul>
<li>11 'positions' in 10 companies produced an average 'return' of 25% with three positions stopped out.</li>
<li>
<a href="https://www.smartkarma.com/entities/15064" target="_blank" data-smartkarma-citation="entities:15064:1">Toyo Tire &amp; Rubber (5105 JP)</a> was another example of a double top.</li>
</ul>
</div><p></p><div class="content-highlight">
<p style="text-align: center;"><strong>THE 2016 PORTFOLIO</strong></p>
<ul>
<li>2016 was the worst year for this strategy in the 28-year period of the simulation. 20 of 41 trades were stopped out and only eight trades in the final quarter added value. For the period, the average 12-month result was a 3% loss before borrowing costs - which compares with a 2016 loss of 2% for the TOPIX Index.</li>
<li>
<a href="https://www.smartkarma.com/entities/10372" target="_blank" data-smartkarma-citation="entities:10372:1">Ezaki Glico (2206 JP)</a> is an example of the persistence of stocks in the overbought zone during this period - in this case with a triple top.</li>
<li>The strategy can also be helpful in identifying trends in sectors and peer groups which can lead to action in other stocks and overall sector positioning - the large number of biotechnology, pharmaceutical and food companies in the 2016 list coincided with multi-year relative peaks in those sectors.</li>
</ul>
</div><p></p><div class="content-highlight">
<p style="text-align: center;"><strong>THE 2017/2018 PORTFOLIOS</strong></p>
<ul>
<li>At this point, most risk control reviews would have shut down trading.  However, performance gradually improved during 2017 despite TOPIX gaining 20%</li>
<li>The 20171H portfolio closed out with a 9% 'return' before costs and four out of seven positions adding value.</li>
<li>There are currently 36 open positions, and 11 stopped out positions with an average return before costs of 8%</li>
<li>The most successful open positions are <a href="https://www.smartkarma.com/entities/3453" target="_blank" data-smartkarma-citation="entities:3453:1">Fukui Computer (9790 JP)</a> and <a href="https://www.smartkarma.com/entities/16888" target="_blank" data-smartkarma-citation="entities:16888:1">Ivy Cosmetics (4918 JP)</a>
</li>
<li>Of the larger capitalisation open positions, a number have been covered by Smartkarma insight providers:- <ul>
<li>
<a href="https://www.smartkarma.com/entities/26074" target="_blank" data-smartkarma-citation="entities:26074:1">Macnica Fuji Electronics (3132 JP)</a> / <a href="https://www.smartkarma.com/insights/macnica-fuji-electronics-3132-jp-fye-update-recommendation-still-an-avoid" target="_blank" data-smartkarma-citation="insights:19959">STILL AN AVOID</a>
</li>
<li>
<a href="https://www.smartkarma.com/entities/10238" target="_blank" data-smartkarma-citation="entities:10238:1">Harmonic Drive Systems (6324 JP)</a> / <a href="https://www.smartkarma.com/insights/harmonic-drive-4q-margins-look-weak-but-this-is-a-one-off-still-expensive-though" target="_blank" data-smartkarma-citation="insights:20261">Q4 Margins Look Weak - Still Expensive Though</a>
</li>
<li>
<a href="https://www.smartkarma.com/entities/13173" target="_blank" data-smartkarma-citation="entities:13173:1">Izumi (8273 JP)</a> / <a href="https://www.smartkarma.com/insights/izumi-and-seven-i-join-forces-to-foil-aeon" target="_blank" data-smartkarma-citation="insights:20012">Izumi and Seven &amp; I Join Forces to Foil Aeon</a>
</li>
</ul>
</li>
</ul>
<p>The most recently added position is boiler-maker <a href="https://www.smartkarma.com/entities/20185" target="_blank" data-smartkarma-citation="entities:20185:1">Miura (6005 JP)</a> which has seen an exceptional period of profitability but is at an extreme valuation relative to its history. At a current TTM EV/OP of 20.5x, the stock has 34% downside to a no-growth valuation.</p>
</div>

RELATIVE PRICE SCORE SHORT PORTFOLIOS - Our recent insight Japan: Most Overbought &amp; Most Oversold - The Relative Price Score introduced our methodology for identifying overbought and oversold outliers based on their Relative Price Score (RPS).  Following on from our "Long Portfolios" insight, we will now focus on generating short ideas based on changes in the monthly closing Relative Price Scores.HISTORICAL SIMULATION - Simulations of trading strategies should be viewed with caution, and the usual caveats apply to what follows. 78% of the 287 'trades' generated since 1992 would have been profitable if held and then sold after twelve months. The average 'outcome' for the 26-year period was a 'gain' of 30%. After the cost of borrowing and slippage are subtracted, a 'result' of 20-25% would be more realistic.  In five periods (1993, 2010, 2012 and 20171H) the average gain before borrowing costs was less than 10%.  In 2016 the strategy lost 3% before costs.  As with all mechanical trading rules, they are times when they cease to work. From August 2016 to November 2017, the number of 'losing' trades outweighs 'winning' trades by 27 to 21. During this period, the TOPIX index rose by 39% and so a small single digit 'loss' from shorting is acceptable. However, we would caution that this strategy has been and will, no doubt, again be fallible.
THE 2014 PORTFOLIO

22 'positions' in 18 companies produced an average 'return' of 26% before borrowing costs with only three positions stopped out.
The most successful positions were in Nihon Trim (6788 JP), Zuiko (6279 JP) and D.Western Therapeutics (4576 JP).

Micronics Japan (6871 JP) is a good illustration of the need for a stop-loss discipline but also the common feature of overbought stocks to have a second 'wind' within a year of the first set-up.


THE 2015 PORTFOLIO

11 'positions' in 10 companies produced an average 'return' of 25% with three positions stopped out.

Toyo Tire &amp; Rubber (5105 JP) was another example of a double top.


THE 2016 PORTFOLIO

2016 was the worst year for this strategy in the 28-year period of the simulation. 20 of 41 trades were stopped out and only eight trades in the final quarter added value. For the period, the average 12-month result was a 3% loss before borrowing costs - which compares with a 2016 loss of 2% for the TOPIX Index.

Ezaki Glico (2206 JP) is an example of the persistence of stocks in the overbought zone during this period - in this case with a triple top.
The strategy can also be helpful in identifying trends in sectors and peer groups which can lead to action in other stocks and overall sector positioning - the large number of biotechnology, pharmaceutical and food companies in the 2016 list coincided with multi-year relative peaks in those sectors.


THE 2017/2018 PORTFOLIOS

At this point, most risk control reviews would have shut down trading.  However, performance gradually improved during 2017 despite TOPIX gaining 20%
The 20171H portfolio closed out with a 9% 'return' before costs and four out of seven positions adding value.
There are currently 36 open positions, and 11 stopped out positions with an average return before costs of 8%
The most successful open positions are Fukui Computer (9790 JP) and Ivy Cosmetics (4918 JP)

Of the larger capitalisation open positions, a number have been covered by Smartkarma insight providers:- 

Macnica Fuji Electronics (3132 JP) / STILL AN AVOID


Harmonic Drive Systems (6324 JP) / Q4 Margins Look Weak - Still Expensive Though


Izumi (8273 JP) / Izumi and Seven &amp; I Join Forces to Foil Aeon




The most recently added position is boiler-maker Miura (6005 JP) which has seen an exceptional period of profitability but is at an extreme valuation relative to its history. At a current TTM EV/OP of 20.5x, the stock has 34% downside to a no-growth valuation.


Japan: Relative Price Score Short Portfolios

Japan

ZUIKO CORPORATION manufactures machinery for producing sanitary supplies such as diapers and napkins.  The Company also manufactures pulp crushing machines and provides consulting services in new product engineering.

Price Gauge
52-week Range	0.00 - 0.00
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Zuiko Corp (6279 JP)

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Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

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