Japan

In this briefing:

1. NTT Corp: The Rising Dividend Story Is Playing Out.
2. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19
3. NCsoft: Major Highlights of 4Q18 Earnings Conference Call
4. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

1. NTT Corp: The Rising Dividend Story Is Playing Out.

As we wrote about in Preference for NTT Retained on Its Commitment to a Substantial Long Term Profit Increase, we like the long term story at NTT (Nippon Telegraph & Telephone) (9432 JP) given its relatively low payout ration, long term opportunities for cost reductions as their workforce shrinks through retirements. While government action and the announced price cuts announced by NTT Docomo Inc (9437 JP) hurt sentiment to the sector in 2H18, Chris Hoare remains positive. The recent 3Q results were decent with the key positives being a rising dividend and strong cash flow growth which is in line with our long term positive thesis on the stock. We remain Buyers with a target price of ¥7,150.

2. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19

• Tsubakimoto Chain Co’s (6371 JP) 3QFY03/19 results were strong, with revenue continuing to witness double-digit growth at +13.1% YoY, although fell slightly below consensus estimates. On OP, Tsubakimoto witnessed only +5.2% YoY growth for 3Q. This was, however, above consensus and our estimates.
• Nine-months cumulative figures look attractive as well, with both revenue and OP witnessing double-digit growth rates at 13.2% YoY and 16.0% YoY respectively as of The company’s revenue continues to trend upwards in a healthy fashion, while margins managed to reach 10.1% this quarter slightly below the 10.8% OPM achieved in 3Q last year.
• A majority of revenue growth came from the company’s Materials Handling Equipment segment, which has witnessed strong recovery thanks to the recently acquired Central Conveyor Company in this segment. The growth was followed by the company’s steadily growing business segments, Chain segment and Power Transmission segment. This was true for the company’s OP as well. The Materials Handling Equipment segment continued to make operating profits this quarter, followed by the Chain segment and the Power Transmission segment. The Auto Parts segment, however, continued to witness slow growth in revenue and pressure in its margins this quarter as well.
• Despite strong results, post-release, Tsubakimoto opened -9.9% down on Friday from Thursday’s close. The stock, however, rallied 8% by Tuesday’s close.

3. NCsoft: Major Highlights of 4Q18 Earnings Conference Call

• NCsoft Corp (036570 KS)‘s 4Q18 earnings fell short of the consensus earnings estimates. In 4Q18, NCsoft reported sales of 399.7 billion won (down 25.1% YoY and 1.1% lower than consensus), operating profit of 112.6 billion won (down 40.5% YoY and 13.3% lower than the consensus), and net profit of 67.6 billion won (down 44% YoY and 32.9% lower than the consensus). 
• Three different analysts raised questions about why the company changed the timing of the launch of the Lineage2M game. In the 3Q18 earnings conference call, the company previously mentioned that it will most likely launch the Lineage2M mobile MMORPG game in 2Q19. In the most recent 4Q18 earnings conference call, the company mentioned that it will launch Lineage2M by the end of 2019. 
• We expect little change to the consensus earnings estimates of NCsoft in 2019 and 2020. Although Tencent consortium acquiring Nexon could pose greater competitive threats to NCsoft in Korea, it could also lead to a consolidation of the gaming sector in Asia, which would be a positive for the company. NCsoft is currently trading at P/E multiples of 15x in 2019 and 12x in 2020, based on the consensus earnings estimates, which are attractive. We maintain our positive view of the company following its 4Q18 earnings. 

4. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

Fashion industry is a leading polluter of water, air and land and its rapid growth has inflicted serious environmental damage in manufacturing bases across Asia. With increased consumer awareness and public scrutiny, leading brands globally have committed to adopt sustainable practices. This can mean a rise in operating costs, margin pressures which can lead to higher prices and/or lower volumes. What does that mean for corporate earnings growth and stock valuations? Our report attempts to arrive at some ballpark estimations based on a scenario analysis. Leading branded apparel companies can suffer market value destruction ranging  up to 30% if their long term margins and growth assumptions are reset at lower levels following a shake-up of their existing low cost model. And, those who refuse to adapt and adopt sustainable processes could soon be shunned by ESG-led investors and environmentally mindful consumers alike, leading to valuation discounts. Investors Beware.

Over the past decades, corporate growth and profitability agenda overshadowed environmental considerations, and apparel brands have grown in an environmentally unsustainable manner. Beneath the façade of glitzy fashion magazines lies the dirty underbelly of pesticide use, water mismanagement, irresponsible effluent discharge, chemical poisoning, greenhouse gas emissions, energy overuse, micro-plastic pollution and landfill dumping. Until recently, the notion that apparel retailers should be responsible and accountable for the environmental infringements in their highly fragmented but globalised supply chain was an unwelcome idea. Under pressure from consumers and activists, this is now changing. With ESG-led investing going mainstream, investors too may start to take notice.

The detailed report below includes:

1. Summary and conclusions from the study on Fast Fashion’s environmental footprint in Asia and impact of rise in consumer awareness on global apparel companies
2. Understanding Fast fashion
3. Fast Fashion trends in Asia – Survey findings on consumer attitudes to shopping and environmental issues
4. Environmental issues in Asia due to Fast fashion
5. Sustainable clothing – an emerging trend, and what can turn it mainstream

6. Investing in Fast fashion: between a rock and a hard place – a Valuation vulnerability analysis

7. Sustainability & 13 leading fast Fashion players – how future ready are they?

In this briefing:

1. NTT Corp: The Rising Dividend Story Is Playing Out.
2. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19
3. NCsoft: Major Highlights of 4Q18 Earnings Conference Call
4. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware
5. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps

1. NTT Corp: The Rising Dividend Story Is Playing Out.

As we wrote about in Preference for NTT Retained on Its Commitment to a Substantial Long Term Profit Increase, we like the long term story at NTT (Nippon Telegraph & Telephone) (9432 JP) given its relatively low payout ration, long term opportunities for cost reductions as their workforce shrinks through retirements. While government action and the announced price cuts announced by NTT Docomo Inc (9437 JP) hurt sentiment to the sector in 2H18, Chris Hoare remains positive. The recent 3Q results were decent with the key positives being a rising dividend and strong cash flow growth which is in line with our long term positive thesis on the stock. We remain Buyers with a target price of ¥7,150.

2. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19

• Tsubakimoto Chain Co’s (6371 JP) 3QFY03/19 results were strong, with revenue continuing to witness double-digit growth at +13.1% YoY, although fell slightly below consensus estimates. On OP, Tsubakimoto witnessed only +5.2% YoY growth for 3Q. This was, however, above consensus and our estimates.
• Nine-months cumulative figures look attractive as well, with both revenue and OP witnessing double-digit growth rates at 13.2% YoY and 16.0% YoY respectively as of The company’s revenue continues to trend upwards in a healthy fashion, while margins managed to reach 10.1% this quarter slightly below the 10.8% OPM achieved in 3Q last year.
• A majority of revenue growth came from the company’s Materials Handling Equipment segment, which has witnessed strong recovery thanks to the recently acquired Central Conveyor Company in this segment. The growth was followed by the company’s steadily growing business segments, Chain segment and Power Transmission segment. This was true for the company’s OP as well. The Materials Handling Equipment segment continued to make operating profits this quarter, followed by the Chain segment and the Power Transmission segment. The Auto Parts segment, however, continued to witness slow growth in revenue and pressure in its margins this quarter as well.
• Despite strong results, post-release, Tsubakimoto opened -9.9% down on Friday from Thursday’s close. The stock, however, rallied 8% by Tuesday’s close.

3. NCsoft: Major Highlights of 4Q18 Earnings Conference Call

• NCsoft Corp (036570 KS)‘s 4Q18 earnings fell short of the consensus earnings estimates. In 4Q18, NCsoft reported sales of 399.7 billion won (down 25.1% YoY and 1.1% lower than consensus), operating profit of 112.6 billion won (down 40.5% YoY and 13.3% lower than the consensus), and net profit of 67.6 billion won (down 44% YoY and 32.9% lower than the consensus). 
• Three different analysts raised questions about why the company changed the timing of the launch of the Lineage2M game. In the 3Q18 earnings conference call, the company previously mentioned that it will most likely launch the Lineage2M mobile MMORPG game in 2Q19. In the most recent 4Q18 earnings conference call, the company mentioned that it will launch Lineage2M by the end of 2019. 
• We expect little change to the consensus earnings estimates of NCsoft in 2019 and 2020. Although Tencent consortium acquiring Nexon could pose greater competitive threats to NCsoft in Korea, it could also lead to a consolidation of the gaming sector in Asia, which would be a positive for the company. NCsoft is currently trading at P/E multiples of 15x in 2019 and 12x in 2020, based on the consensus earnings estimates, which are attractive. We maintain our positive view of the company following its 4Q18 earnings. 

4. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

Fashion industry is a leading polluter of water, air and land and its rapid growth has inflicted serious environmental damage in manufacturing bases across Asia. With increased consumer awareness and public scrutiny, leading brands globally have committed to adopt sustainable practices. This can mean a rise in operating costs, margin pressures which can lead to higher prices and/or lower volumes. What does that mean for corporate earnings growth and stock valuations? Our report attempts to arrive at some ballpark estimations based on a scenario analysis. Leading branded apparel companies can suffer market value destruction ranging  up to 30% if their long term margins and growth assumptions are reset at lower levels following a shake-up of their existing low cost model. And, those who refuse to adapt and adopt sustainable processes could soon be shunned by ESG-led investors and environmentally mindful consumers alike, leading to valuation discounts. Investors Beware.

Over the past decades, corporate growth and profitability agenda overshadowed environmental considerations, and apparel brands have grown in an environmentally unsustainable manner. Beneath the façade of glitzy fashion magazines lies the dirty underbelly of pesticide use, water mismanagement, irresponsible effluent discharge, chemical poisoning, greenhouse gas emissions, energy overuse, micro-plastic pollution and landfill dumping. Until recently, the notion that apparel retailers should be responsible and accountable for the environmental infringements in their highly fragmented but globalised supply chain was an unwelcome idea. Under pressure from consumers and activists, this is now changing. With ESG-led investing going mainstream, investors too may start to take notice.

The detailed report below includes:

1. Summary and conclusions from the study on Fast Fashion’s environmental footprint in Asia and impact of rise in consumer awareness on global apparel companies
2. Understanding Fast fashion
3. Fast Fashion trends in Asia – Survey findings on consumer attitudes to shopping and environmental issues
4. Environmental issues in Asia due to Fast fashion
5. Sustainable clothing – an emerging trend, and what can turn it mainstream

6. Investing in Fast fashion: between a rock and a hard place – a Valuation vulnerability analysis

7. Sustainability & 13 leading fast Fashion players – how future ready are they?

5. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps

We see oil exploration making a comeback in 2019, as drilling spending sees an increase and on the back of encouraging well results year to date. Already in 2019 there have been 4 high impact discoveries in the UK, South Africa and Guyana. Given the need of companies, especially the majors, to replenish their portfolios, there will still be a number of frontier, high impact wells being drilled. The areas where we see material exploration wells being drilled this year are Guyana, US GoM, Mexico, Brazil the Eastern Mediterranean and West Africa.

If there is some exploration success, the pure-play exploration companies will be good performers, especially those that have exposure to several wells that could be material relative to their size. A pick up in drilling will also be positive for the offshore drilling companies and seismic names. We look at the merits and pitfalls of investing in exploration, performance in 2018, outlook for 2019, the debate over exploring for resource versus buying it, how the economics of exploration have improved and the impact of the time value of money. 

In this briefing:

1. Daiwa House REIT Placement – Well-Flagged but Barely Accretive to DPU
2. GMO Internet Reports Solid FY12/18 Despite Heavy Losses Incurred in Crypto Mining Business
3. Parco: 4 New Shopping Centres This Year, 28% Rise in Revenue in 5 Years to 2021
4. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q
5. Nomura Real Estate Master Fund Placement – Past Deal Did Well Only After a Slight Correction

1. Daiwa House REIT Placement – Well-Flagged but Barely Accretive to DPU

Daiwa House Reit Investment (8984 JP) (DHR) is raising about US$329m in its placement to fund the acquisition of properties.

The deal scores well on our framework owing to strong price and earnings momentum. The assets to be acquired are a good mix of logistics, retail, and hotel. 

However, the properties to be acquired mostly have an NOI yield lower than the average NOI yield of DHR’s existing assets in the respective asset classes. Despite increasing the portfolio value by almost 10%, the ten properties are only expected to be 1.37% accretive to DPU. 

That said, DHR’s acquisition has been well-flagged as it was highlighted in its September presentation.

2. GMO Internet Reports Solid FY12/18 Despite Heavy Losses Incurred in Crypto Mining Business

GMO Internet, Inc. (9449 JP) announced its consolidated financial results for its full-year FY12/18 yesterday (12^th February). Despite heavy losses incurred in the cryptocurrency mining business in FY12/18, GMO managed to achieve a solid year with 20% YoY growth in top-line alongside a 23.5% YoY growth in operating profits. Excluding the crypto losses, the operating profit increased 35.7% YoY, with an OPM of 13.2% compared to 11.4% reported a year ago. For the full-year, the company has reported a net loss of JPY20.7bn as opposed to a net profit of JPY8bn in FY12/17, blaming the crypto losses for the decline. For FY12/18, the management has proposed a dividend of JPY29.5 per share (compared to JPY23 paid in FY12/17) in spite of reporting net losses for the fiscal year. Further, the company has also allocated JPY1.36bn (equivalent to 0.7% of outstanding shares at the current price) for share repurchases in FY2019.

GMO is currently trading at JPY1,741 per share which we believe is undervalued compared to its combined equity stake in 8 listed subsidiaries. The company share price has lost more than 40% since it peaked in June last year due to the negativity surrounding its cryptocurrency and mining segment. However, we believe further downside is limited as the company has closed down a majority of its mining related business which weighs very little on the consolidated performance of the company. Further, the company’s key businesses, Internet Infrastructure, Online Advertising & Media and Internet Finance generate solid recurring revenues, which should help the company achieve strong growth. Following its earnings announcement, the share price gained 5.6% from the previous days close.

3. Parco: 4 New Shopping Centres This Year, 28% Rise in Revenue in 5 Years to 2021

Parco (8251 JP) is enjoying a new lease of life under J Front Retailing (3086 JP) ownership, investing assiduously in updating existing buildings and showing a decisiveness to rebuild entirely where location merits it and even closing down stores that don’t work.

It will celebrate its 50th anniversary this year by opening four new buildings, including the flagship Parco Shibuya and is forecasting a 28% rise in revenue for 2016-2021.

4. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q

Fujimi’s sales and operating profit increased by only 1.2% and 2.3% year-on-year, respectively, in the three months to December. Sales of hard disc and industrial polishing materials declined. Sales of silicon wafer lapping and polishing materials, and CMP slurry, continued to rise, but at slower rates than in 2Q.

Full-year FY Mar-19 guidance was left unchanged, implying year-on-year declines in both sales and profits in 4Q. We believe that guidance is conservative, but we also expect the slowdown to continue.

At ¥2,368 (Wednesday, February 13, closing price), the shares are selling at 13.3x our EPS estimate for FY Mar-19 and 12.7x our estimate for FY Mar-20. These and other projected valuations are not at the bottom of their historical ranges, but should be low enough to support the share price as long as a U.S.-China trade deal – and, therefore, the implementation of deferred investment plans – seems likely.

5. Nomura Real Estate Master Fund Placement – Past Deal Did Well Only After a Slight Correction

Nomura Real Estate Master Fund, (3462 JP) plans to raise around US$300m to partially fund the acquisition of ten assets. 

The assets are a mix of office, retail and logistics and all were completed only in 2018. The cap rates for the acquisition look reasonable versus the existing assets that the REIT owns and the acquisition will likely be DPU accretive despite the relatively larger share of equity financing in the acquisition.

The deal scores well on our framework. However, the stock hasn’t really corrected post the deal announcement and the prior deal provided decent returns only post a correction in the share price.

In this briefing:

1. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19
2. NCsoft: Major Highlights of 4Q18 Earnings Conference Call
3. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware
4. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps

1. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19

• Tsubakimoto Chain Co’s (6371 JP) 3QFY03/19 results were strong, with revenue continuing to witness double-digit growth at +13.1% YoY, although fell slightly below consensus estimates. On OP, Tsubakimoto witnessed only +5.2% YoY growth for 3Q. This was, however, above consensus and our estimates.
• Nine-months cumulative figures look attractive as well, with both revenue and OP witnessing double-digit growth rates at 13.2% YoY and 16.0% YoY respectively as of The company’s revenue continues to trend upwards in a healthy fashion, while margins managed to reach 10.1% this quarter slightly below the 10.8% OPM achieved in 3Q last year.
• A majority of revenue growth came from the company’s Materials Handling Equipment segment, which has witnessed strong recovery thanks to the recently acquired Central Conveyor Company in this segment. The growth was followed by the company’s steadily growing business segments, Chain segment and Power Transmission segment. This was true for the company’s OP as well. The Materials Handling Equipment segment continued to make operating profits this quarter, followed by the Chain segment and the Power Transmission segment. The Auto Parts segment, however, continued to witness slow growth in revenue and pressure in its margins this quarter as well.
• Despite strong results, post-release, Tsubakimoto opened -9.9% down on Friday from Thursday’s close. The stock, however, rallied 8% by Tuesday’s close.

2. NCsoft: Major Highlights of 4Q18 Earnings Conference Call

• NCsoft Corp (036570 KS)‘s 4Q18 earnings fell short of the consensus earnings estimates. In 4Q18, NCsoft reported sales of 399.7 billion won (down 25.1% YoY and 1.1% lower than consensus), operating profit of 112.6 billion won (down 40.5% YoY and 13.3% lower than the consensus), and net profit of 67.6 billion won (down 44% YoY and 32.9% lower than the consensus). 
• Three different analysts raised questions about why the company changed the timing of the launch of the Lineage2M game. In the 3Q18 earnings conference call, the company previously mentioned that it will most likely launch the Lineage2M mobile MMORPG game in 2Q19. In the most recent 4Q18 earnings conference call, the company mentioned that it will launch Lineage2M by the end of 2019. 
• We expect little change to the consensus earnings estimates of NCsoft in 2019 and 2020. Although Tencent consortium acquiring Nexon could pose greater competitive threats to NCsoft in Korea, it could also lead to a consolidation of the gaming sector in Asia, which would be a positive for the company. NCsoft is currently trading at P/E multiples of 15x in 2019 and 12x in 2020, based on the consensus earnings estimates, which are attractive. We maintain our positive view of the company following its 4Q18 earnings. 

3. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

Fashion industry is a leading polluter of water, air and land and its rapid growth has inflicted serious environmental damage in manufacturing bases across Asia. With increased consumer awareness and public scrutiny, leading brands globally have committed to adopt sustainable practices. This can mean a rise in operating costs, margin pressures which can lead to higher prices and/or lower volumes. What does that mean for corporate earnings growth and stock valuations? Our report attempts to arrive at some ballpark estimations based on a scenario analysis. Leading branded apparel companies can suffer market value destruction ranging  up to 30% if their long term margins and growth assumptions are reset at lower levels following a shake-up of their existing low cost model. And, those who refuse to adapt and adopt sustainable processes could soon be shunned by ESG-led investors and environmentally mindful consumers alike, leading to valuation discounts. Investors Beware.

Over the past decades, corporate growth and profitability agenda overshadowed environmental considerations, and apparel brands have grown in an environmentally unsustainable manner. Beneath the façade of glitzy fashion magazines lies the dirty underbelly of pesticide use, water mismanagement, irresponsible effluent discharge, chemical poisoning, greenhouse gas emissions, energy overuse, micro-plastic pollution and landfill dumping. Until recently, the notion that apparel retailers should be responsible and accountable for the environmental infringements in their highly fragmented but globalised supply chain was an unwelcome idea. Under pressure from consumers and activists, this is now changing. With ESG-led investing going mainstream, investors too may start to take notice.

The detailed report below includes:

1. Summary and conclusions from the study on Fast Fashion’s environmental footprint in Asia and impact of rise in consumer awareness on global apparel companies
2. Understanding Fast fashion
3. Fast Fashion trends in Asia – Survey findings on consumer attitudes to shopping and environmental issues
4. Environmental issues in Asia due to Fast fashion
5. Sustainable clothing – an emerging trend, and what can turn it mainstream

6. Investing in Fast fashion: between a rock and a hard place – a Valuation vulnerability analysis

7. Sustainability & 13 leading fast Fashion players – how future ready are they?

4. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps

We see oil exploration making a comeback in 2019, as drilling spending sees an increase and on the back of encouraging well results year to date. Already in 2019 there have been 4 high impact discoveries in the UK, South Africa and Guyana. Given the need of companies, especially the majors, to replenish their portfolios, there will still be a number of frontier, high impact wells being drilled. The areas where we see material exploration wells being drilled this year are Guyana, US GoM, Mexico, Brazil the Eastern Mediterranean and West Africa.

If there is some exploration success, the pure-play exploration companies will be good performers, especially those that have exposure to several wells that could be material relative to their size. A pick up in drilling will also be positive for the offshore drilling companies and seismic names. We look at the merits and pitfalls of investing in exploration, performance in 2018, outlook for 2019, the debate over exploring for resource versus buying it, how the economics of exploration have improved and the impact of the time value of money. 

In this briefing:

1. GMO Internet Reports Solid FY12/18 Despite Heavy Losses Incurred in Crypto Mining Business
2. Parco: 4 New Shopping Centres This Year, 28% Rise in Revenue in 5 Years to 2021
3. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q
4. Nomura Real Estate Master Fund Placement – Past Deal Did Well Only After a Slight Correction
5. NTT Corp: The Rising Dividend Story Is Playing Out.

1. GMO Internet Reports Solid FY12/18 Despite Heavy Losses Incurred in Crypto Mining Business

GMO Internet, Inc. (9449 JP) announced its consolidated financial results for its full-year FY12/18 yesterday (12^th February). Despite heavy losses incurred in the cryptocurrency mining business in FY12/18, GMO managed to achieve a solid year with 20% YoY growth in top-line alongside a 23.5% YoY growth in operating profits. Excluding the crypto losses, the operating profit increased 35.7% YoY, with an OPM of 13.2% compared to 11.4% reported a year ago. For the full-year, the company has reported a net loss of JPY20.7bn as opposed to a net profit of JPY8bn in FY12/17, blaming the crypto losses for the decline. For FY12/18, the management has proposed a dividend of JPY29.5 per share (compared to JPY23 paid in FY12/17) in spite of reporting net losses for the fiscal year. Further, the company has also allocated JPY1.36bn (equivalent to 0.7% of outstanding shares at the current price) for share repurchases in FY2019.

GMO is currently trading at JPY1,741 per share which we believe is undervalued compared to its combined equity stake in 8 listed subsidiaries. The company share price has lost more than 40% since it peaked in June last year due to the negativity surrounding its cryptocurrency and mining segment. However, we believe further downside is limited as the company has closed down a majority of its mining related business which weighs very little on the consolidated performance of the company. Further, the company’s key businesses, Internet Infrastructure, Online Advertising & Media and Internet Finance generate solid recurring revenues, which should help the company achieve strong growth. Following its earnings announcement, the share price gained 5.6% from the previous days close.

2. Parco: 4 New Shopping Centres This Year, 28% Rise in Revenue in 5 Years to 2021

Parco (8251 JP) is enjoying a new lease of life under J Front Retailing (3086 JP) ownership, investing assiduously in updating existing buildings and showing a decisiveness to rebuild entirely where location merits it and even closing down stores that don’t work.

It will celebrate its 50th anniversary this year by opening four new buildings, including the flagship Parco Shibuya and is forecasting a 28% rise in revenue for 2016-2021.

3. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q

Fujimi’s sales and operating profit increased by only 1.2% and 2.3% year-on-year, respectively, in the three months to December. Sales of hard disc and industrial polishing materials declined. Sales of silicon wafer lapping and polishing materials, and CMP slurry, continued to rise, but at slower rates than in 2Q.

Full-year FY Mar-19 guidance was left unchanged, implying year-on-year declines in both sales and profits in 4Q. We believe that guidance is conservative, but we also expect the slowdown to continue.

At ¥2,368 (Wednesday, February 13, closing price), the shares are selling at 13.3x our EPS estimate for FY Mar-19 and 12.7x our estimate for FY Mar-20. These and other projected valuations are not at the bottom of their historical ranges, but should be low enough to support the share price as long as a U.S.-China trade deal – and, therefore, the implementation of deferred investment plans – seems likely.

4. Nomura Real Estate Master Fund Placement – Past Deal Did Well Only After a Slight Correction

Nomura Real Estate Master Fund, (3462 JP) plans to raise around US$300m to partially fund the acquisition of ten assets. 

The assets are a mix of office, retail and logistics and all were completed only in 2018. The cap rates for the acquisition look reasonable versus the existing assets that the REIT owns and the acquisition will likely be DPU accretive despite the relatively larger share of equity financing in the acquisition.

The deal scores well on our framework. However, the stock hasn’t really corrected post the deal announcement and the prior deal provided decent returns only post a correction in the share price.

5. NTT Corp: The Rising Dividend Story Is Playing Out.

As we wrote about in Preference for NTT Retained on Its Commitment to a Substantial Long Term Profit Increase, we like the long term story at NTT (Nippon Telegraph & Telephone) (9432 JP) given its relatively low payout ration, long term opportunities for cost reductions as their workforce shrinks through retirements. While government action and the announced price cuts announced by NTT Docomo Inc (9437 JP) hurt sentiment to the sector in 2H18, Chris Hoare remains positive. The recent 3Q results were decent with the key positives being a rising dividend and strong cash flow growth which is in line with our long term positive thesis on the stock. We remain Buyers with a target price of ¥7,150.

In this briefing:

1. NCsoft: Major Highlights of 4Q18 Earnings Conference Call
2. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware
3. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps

1. NCsoft: Major Highlights of 4Q18 Earnings Conference Call

• NCsoft Corp (036570 KS)‘s 4Q18 earnings fell short of the consensus earnings estimates. In 4Q18, NCsoft reported sales of 399.7 billion won (down 25.1% YoY and 1.1% lower than consensus), operating profit of 112.6 billion won (down 40.5% YoY and 13.3% lower than the consensus), and net profit of 67.6 billion won (down 44% YoY and 32.9% lower than the consensus). 
• Three different analysts raised questions about why the company changed the timing of the launch of the Lineage2M game. In the 3Q18 earnings conference call, the company previously mentioned that it will most likely launch the Lineage2M mobile MMORPG game in 2Q19. In the most recent 4Q18 earnings conference call, the company mentioned that it will launch Lineage2M by the end of 2019. 
• We expect little change to the consensus earnings estimates of NCsoft in 2019 and 2020. Although Tencent consortium acquiring Nexon could pose greater competitive threats to NCsoft in Korea, it could also lead to a consolidation of the gaming sector in Asia, which would be a positive for the company. NCsoft is currently trading at P/E multiples of 15x in 2019 and 12x in 2020, based on the consensus earnings estimates, which are attractive. We maintain our positive view of the company following its 4Q18 earnings. 

2. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

Fashion industry is a leading polluter of water, air and land and its rapid growth has inflicted serious environmental damage in manufacturing bases across Asia. With increased consumer awareness and public scrutiny, leading brands globally have committed to adopt sustainable practices. This can mean a rise in operating costs, margin pressures which can lead to higher prices and/or lower volumes. What does that mean for corporate earnings growth and stock valuations? Our report attempts to arrive at some ballpark estimations based on a scenario analysis. Leading branded apparel companies can suffer market value destruction ranging  up to 30% if their long term margins and growth assumptions are reset at lower levels following a shake-up of their existing low cost model. And, those who refuse to adapt and adopt sustainable processes could soon be shunned by ESG-led investors and environmentally mindful consumers alike, leading to valuation discounts. Investors Beware.

Over the past decades, corporate growth and profitability agenda overshadowed environmental considerations, and apparel brands have grown in an environmentally unsustainable manner. Beneath the façade of glitzy fashion magazines lies the dirty underbelly of pesticide use, water mismanagement, irresponsible effluent discharge, chemical poisoning, greenhouse gas emissions, energy overuse, micro-plastic pollution and landfill dumping. Until recently, the notion that apparel retailers should be responsible and accountable for the environmental infringements in their highly fragmented but globalised supply chain was an unwelcome idea. Under pressure from consumers and activists, this is now changing. With ESG-led investing going mainstream, investors too may start to take notice.

The detailed report below includes:

1. Summary and conclusions from the study on Fast Fashion’s environmental footprint in Asia and impact of rise in consumer awareness on global apparel companies
2. Understanding Fast fashion
3. Fast Fashion trends in Asia – Survey findings on consumer attitudes to shopping and environmental issues
4. Environmental issues in Asia due to Fast fashion
5. Sustainable clothing – an emerging trend, and what can turn it mainstream

6. Investing in Fast fashion: between a rock and a hard place – a Valuation vulnerability analysis

7. Sustainability & 13 leading fast Fashion players – how future ready are they?

3. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps

We see oil exploration making a comeback in 2019, as drilling spending sees an increase and on the back of encouraging well results year to date. Already in 2019 there have been 4 high impact discoveries in the UK, South Africa and Guyana. Given the need of companies, especially the majors, to replenish their portfolios, there will still be a number of frontier, high impact wells being drilled. The areas where we see material exploration wells being drilled this year are Guyana, US GoM, Mexico, Brazil the Eastern Mediterranean and West Africa.

If there is some exploration success, the pure-play exploration companies will be good performers, especially those that have exposure to several wells that could be material relative to their size. A pick up in drilling will also be positive for the offshore drilling companies and seismic names. We look at the merits and pitfalls of investing in exploration, performance in 2018, outlook for 2019, the debate over exploring for resource versus buying it, how the economics of exploration have improved and the impact of the time value of money. 

In this briefing:

1. NCsoft: Major Highlights of 4Q18 Earnings Conference Call
2. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware
3. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps
4. Sony: Mispriced, Misunderstood, or Both?

1. NCsoft: Major Highlights of 4Q18 Earnings Conference Call

• NCsoft Corp (036570 KS)‘s 4Q18 earnings fell short of the consensus earnings estimates. In 4Q18, NCsoft reported sales of 399.7 billion won (down 25.1% YoY and 1.1% lower than consensus), operating profit of 112.6 billion won (down 40.5% YoY and 13.3% lower than the consensus), and net profit of 67.6 billion won (down 44% YoY and 32.9% lower than the consensus). 
• Three different analysts raised questions about why the company changed the timing of the launch of the Lineage2M game. In the 3Q18 earnings conference call, the company previously mentioned that it will most likely launch the Lineage2M mobile MMORPG game in 2Q19. In the most recent 4Q18 earnings conference call, the company mentioned that it will launch Lineage2M by the end of 2019. 
• We expect little change to the consensus earnings estimates of NCsoft in 2019 and 2020. Although Tencent consortium acquiring Nexon could pose greater competitive threats to NCsoft in Korea, it could also lead to a consolidation of the gaming sector in Asia, which would be a positive for the company. NCsoft is currently trading at P/E multiples of 15x in 2019 and 12x in 2020, based on the consensus earnings estimates, which are attractive. We maintain our positive view of the company following its 4Q18 earnings. 

2. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

Fashion industry is a leading polluter of water, air and land and its rapid growth has inflicted serious environmental damage in manufacturing bases across Asia. With increased consumer awareness and public scrutiny, leading brands globally have committed to adopt sustainable practices. This can mean a rise in operating costs, margin pressures which can lead to higher prices and/or lower volumes. What does that mean for corporate earnings growth and stock valuations? Our report attempts to arrive at some ballpark estimations based on a scenario analysis. Leading branded apparel companies can suffer market value destruction ranging  up to 30% if their long term margins and growth assumptions are reset at lower levels following a shake-up of their existing low cost model. And, those who refuse to adapt and adopt sustainable processes could soon be shunned by ESG-led investors and environmentally mindful consumers alike, leading to valuation discounts. Investors Beware.

Over the past decades, corporate growth and profitability agenda overshadowed environmental considerations, and apparel brands have grown in an environmentally unsustainable manner. Beneath the façade of glitzy fashion magazines lies the dirty underbelly of pesticide use, water mismanagement, irresponsible effluent discharge, chemical poisoning, greenhouse gas emissions, energy overuse, micro-plastic pollution and landfill dumping. Until recently, the notion that apparel retailers should be responsible and accountable for the environmental infringements in their highly fragmented but globalised supply chain was an unwelcome idea. Under pressure from consumers and activists, this is now changing. With ESG-led investing going mainstream, investors too may start to take notice.

The detailed report below includes:

1. Summary and conclusions from the study on Fast Fashion’s environmental footprint in Asia and impact of rise in consumer awareness on global apparel companies
2. Understanding Fast fashion
3. Fast Fashion trends in Asia – Survey findings on consumer attitudes to shopping and environmental issues
4. Environmental issues in Asia due to Fast fashion
5. Sustainable clothing – an emerging trend, and what can turn it mainstream

6. Investing in Fast fashion: between a rock and a hard place – a Valuation vulnerability analysis

7. Sustainability & 13 leading fast Fashion players – how future ready are they?

3. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps

We see oil exploration making a comeback in 2019, as drilling spending sees an increase and on the back of encouraging well results year to date. Already in 2019 there have been 4 high impact discoveries in the UK, South Africa and Guyana. Given the need of companies, especially the majors, to replenish their portfolios, there will still be a number of frontier, high impact wells being drilled. The areas where we see material exploration wells being drilled this year are Guyana, US GoM, Mexico, Brazil the Eastern Mediterranean and West Africa.

If there is some exploration success, the pure-play exploration companies will be good performers, especially those that have exposure to several wells that could be material relative to their size. A pick up in drilling will also be positive for the offshore drilling companies and seismic names. We look at the merits and pitfalls of investing in exploration, performance in 2018, outlook for 2019, the debate over exploring for resource versus buying it, how the economics of exploration have improved and the impact of the time value of money. 

4. Sony: Mispriced, Misunderstood, or Both?

• Forward earnings will focus heavily on the debut of PS5, the performance of the new Spider-Man movie and other core content revenue streams for the company this year.
• Some see Sony as coasting on historically successes of the past, others see recent Disney and ATT deals acquiring content competitors, as a prelude to a play on Sony this year.
• Investor pressure to sell or spin off non-content businesses growing due to continued poor performance in mobile and possible profitable departure from semiconductor sector.

In this briefing:

1. Parco: 4 New Shopping Centres This Year, 28% Rise in Revenue in 5 Years to 2021
2. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q
3. Nomura Real Estate Master Fund Placement – Past Deal Did Well Only After a Slight Correction
4. NTT Corp: The Rising Dividend Story Is Playing Out.
5. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19

1. Parco: 4 New Shopping Centres This Year, 28% Rise in Revenue in 5 Years to 2021

Parco (8251 JP) is enjoying a new lease of life under J Front Retailing (3086 JP) ownership, investing assiduously in updating existing buildings and showing a decisiveness to rebuild entirely where location merits it and even closing down stores that don’t work.

It will celebrate its 50th anniversary this year by opening four new buildings, including the flagship Parco Shibuya and is forecasting a 28% rise in revenue for 2016-2021.

2. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q

Fujimi’s sales and operating profit increased by only 1.2% and 2.3% year-on-year, respectively, in the three months to December. Sales of hard disc and industrial polishing materials declined. Sales of silicon wafer lapping and polishing materials, and CMP slurry, continued to rise, but at slower rates than in 2Q.

Full-year FY Mar-19 guidance was left unchanged, implying year-on-year declines in both sales and profits in 4Q. We believe that guidance is conservative, but we also expect the slowdown to continue.

At ¥2,368 (Wednesday, February 13, closing price), the shares are selling at 13.3x our EPS estimate for FY Mar-19 and 12.7x our estimate for FY Mar-20. These and other projected valuations are not at the bottom of their historical ranges, but should be low enough to support the share price as long as a U.S.-China trade deal – and, therefore, the implementation of deferred investment plans – seems likely.

3. Nomura Real Estate Master Fund Placement – Past Deal Did Well Only After a Slight Correction

Nomura Real Estate Master Fund, (3462 JP) plans to raise around US$300m to partially fund the acquisition of ten assets. 

The assets are a mix of office, retail and logistics and all were completed only in 2018. The cap rates for the acquisition look reasonable versus the existing assets that the REIT owns and the acquisition will likely be DPU accretive despite the relatively larger share of equity financing in the acquisition.

The deal scores well on our framework. However, the stock hasn’t really corrected post the deal announcement and the prior deal provided decent returns only post a correction in the share price.

4. NTT Corp: The Rising Dividend Story Is Playing Out.

As we wrote about in Preference for NTT Retained on Its Commitment to a Substantial Long Term Profit Increase, we like the long term story at NTT (Nippon Telegraph & Telephone) (9432 JP) given its relatively low payout ration, long term opportunities for cost reductions as their workforce shrinks through retirements. While government action and the announced price cuts announced by NTT Docomo Inc (9437 JP) hurt sentiment to the sector in 2H18, Chris Hoare remains positive. The recent 3Q results were decent with the key positives being a rising dividend and strong cash flow growth which is in line with our long term positive thesis on the stock. We remain Buyers with a target price of ¥7,150.

5. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19

• Tsubakimoto Chain Co’s (6371 JP) 3QFY03/19 results were strong, with revenue continuing to witness double-digit growth at +13.1% YoY, although fell slightly below consensus estimates. On OP, Tsubakimoto witnessed only +5.2% YoY growth for 3Q. This was, however, above consensus and our estimates.
• Nine-months cumulative figures look attractive as well, with both revenue and OP witnessing double-digit growth rates at 13.2% YoY and 16.0% YoY respectively as of The company’s revenue continues to trend upwards in a healthy fashion, while margins managed to reach 10.1% this quarter slightly below the 10.8% OPM achieved in 3Q last year.
• A majority of revenue growth came from the company’s Materials Handling Equipment segment, which has witnessed strong recovery thanks to the recently acquired Central Conveyor Company in this segment. The growth was followed by the company’s steadily growing business segments, Chain segment and Power Transmission segment. This was true for the company’s OP as well. The Materials Handling Equipment segment continued to make operating profits this quarter, followed by the Chain segment and the Power Transmission segment. The Auto Parts segment, however, continued to witness slow growth in revenue and pressure in its margins this quarter as well.
• Despite strong results, post-release, Tsubakimoto opened -9.9% down on Friday from Thursday’s close. The stock, however, rallied 8% by Tuesday’s close.

In this briefing:

1. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware
2. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps
3. Sony: Mispriced, Misunderstood, or Both?
4. Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf

1. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

Fashion industry is a leading polluter of water, air and land and its rapid growth has inflicted serious environmental damage in manufacturing bases across Asia. With increased consumer awareness and public scrutiny, leading brands globally have committed to adopt sustainable practices. This can mean a rise in operating costs, margin pressures which can lead to higher prices and/or lower volumes. What does that mean for corporate earnings growth and stock valuations? Our report attempts to arrive at some ballpark estimations based on a scenario analysis. Leading branded apparel companies can suffer market value destruction ranging  up to 30% if their long term margins and growth assumptions are reset at lower levels following a shake-up of their existing low cost model. And, those who refuse to adapt and adopt sustainable processes could soon be shunned by ESG-led investors and environmentally mindful consumers alike, leading to valuation discounts. Investors Beware.

Over the past decades, corporate growth and profitability agenda overshadowed environmental considerations, and apparel brands have grown in an environmentally unsustainable manner. Beneath the façade of glitzy fashion magazines lies the dirty underbelly of pesticide use, water mismanagement, irresponsible effluent discharge, chemical poisoning, greenhouse gas emissions, energy overuse, micro-plastic pollution and landfill dumping. Until recently, the notion that apparel retailers should be responsible and accountable for the environmental infringements in their highly fragmented but globalised supply chain was an unwelcome idea. Under pressure from consumers and activists, this is now changing. With ESG-led investing going mainstream, investors too may start to take notice.

The detailed report below includes:

1. Summary and conclusions from the study on Fast Fashion’s environmental footprint in Asia and impact of rise in consumer awareness on global apparel companies
2. Understanding Fast fashion
3. Fast Fashion trends in Asia – Survey findings on consumer attitudes to shopping and environmental issues
4. Environmental issues in Asia due to Fast fashion
5. Sustainable clothing – an emerging trend, and what can turn it mainstream

6. Investing in Fast fashion: between a rock and a hard place – a Valuation vulnerability analysis

7. Sustainability & 13 leading fast Fashion players – how future ready are they?

2. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps

We see oil exploration making a comeback in 2019, as drilling spending sees an increase and on the back of encouraging well results year to date. Already in 2019 there have been 4 high impact discoveries in the UK, South Africa and Guyana. Given the need of companies, especially the majors, to replenish their portfolios, there will still be a number of frontier, high impact wells being drilled. The areas where we see material exploration wells being drilled this year are Guyana, US GoM, Mexico, Brazil the Eastern Mediterranean and West Africa.

If there is some exploration success, the pure-play exploration companies will be good performers, especially those that have exposure to several wells that could be material relative to their size. A pick up in drilling will also be positive for the offshore drilling companies and seismic names. We look at the merits and pitfalls of investing in exploration, performance in 2018, outlook for 2019, the debate over exploring for resource versus buying it, how the economics of exploration have improved and the impact of the time value of money. 

3. Sony: Mispriced, Misunderstood, or Both?

• Forward earnings will focus heavily on the debut of PS5, the performance of the new Spider-Man movie and other core content revenue streams for the company this year.
• Some see Sony as coasting on historically successes of the past, others see recent Disney and ATT deals acquiring content competitors, as a prelude to a play on Sony this year.
• Investor pressure to sell or spin off non-content businesses growing due to continued poor performance in mobile and possible profitable departure from semiconductor sector.

4. Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf

Tokyo Kiraboshi Financial Group (7173 JP) (TKFG) progresses from bad to worse, and its stock price is behaving accordingly.  Amidst volatile trading, the share price is gradually sinking back towards the 52-week intra-day low of ¥1,454 that was reached on Christmas Day 2018 before closing that day at ¥1,504.  3Q FY3/2019 (9 months to 31 December 2018) consolidated results represented a decline of over 56% YoY at the recurring profit level, with net profits down 34% YoY after tax adjustments.  On a quarterly basis, Q3 (October-December 2018) net operating profits collapsed 96% to just ¥66 million, while recurring profits fell 68% YoY to just ¥565 million with a small net loss of ¥9 million as a result of lower fee income and sharply higher credit costs.  Hardly a ‘glittering’ performance.

Trading on a forward-looking price/earnings multiple of 11.7x (using the bank’s current FY3/2019 guidance) and a price/book ratio of 0.19x, TKFG is expensive compared to peer regional banks.  Indeed, adjusting the group’s earnings per share (EPS) for the ¥55 billion (US$507 million) in two still-outstanding preference share issues raises the annualised PER to over 19x: roughly twice that of peer banks.  TKFG’s RoA and RoE ratios are woefully low at 0.09% and 1.71% respectively, loan growth has shrunk to just +0.5% YoY, deposits have fallen alarmingly (down 4.5% YoY), and the overhead ratio has shot up to 95% in Q3.  Yet, despite all these ‘red flags’, TKFG still managed to attract an aggregate foreign ownership of 17.4% as of 31 March 2018 (the most recent data publicly available): a strange choice.  Caveat emptor (may the buyer beware) !

In this briefing:

1. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q
2. Nomura Real Estate Master Fund Placement – Past Deal Did Well Only After a Slight Correction
3. NTT Corp: The Rising Dividend Story Is Playing Out.
4. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19
5. NCsoft: Major Highlights of 4Q18 Earnings Conference Call

1. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q

Fujimi’s sales and operating profit increased by only 1.2% and 2.3% year-on-year, respectively, in the three months to December. Sales of hard disc and industrial polishing materials declined. Sales of silicon wafer lapping and polishing materials, and CMP slurry, continued to rise, but at slower rates than in 2Q.

Full-year FY Mar-19 guidance was left unchanged, implying year-on-year declines in both sales and profits in 4Q. We believe that guidance is conservative, but we also expect the slowdown to continue.

At ¥2,368 (Wednesday, February 13, closing price), the shares are selling at 13.3x our EPS estimate for FY Mar-19 and 12.7x our estimate for FY Mar-20. These and other projected valuations are not at the bottom of their historical ranges, but should be low enough to support the share price as long as a U.S.-China trade deal – and, therefore, the implementation of deferred investment plans – seems likely.

2. Nomura Real Estate Master Fund Placement – Past Deal Did Well Only After a Slight Correction

Nomura Real Estate Master Fund, (3462 JP) plans to raise around US$300m to partially fund the acquisition of ten assets. 

The assets are a mix of office, retail and logistics and all were completed only in 2018. The cap rates for the acquisition look reasonable versus the existing assets that the REIT owns and the acquisition will likely be DPU accretive despite the relatively larger share of equity financing in the acquisition.

The deal scores well on our framework. However, the stock hasn’t really corrected post the deal announcement and the prior deal provided decent returns only post a correction in the share price.

3. NTT Corp: The Rising Dividend Story Is Playing Out.

As we wrote about in Preference for NTT Retained on Its Commitment to a Substantial Long Term Profit Increase, we like the long term story at NTT (Nippon Telegraph & Telephone) (9432 JP) given its relatively low payout ration, long term opportunities for cost reductions as their workforce shrinks through retirements. While government action and the announced price cuts announced by NTT Docomo Inc (9437 JP) hurt sentiment to the sector in 2H18, Chris Hoare remains positive. The recent 3Q results were decent with the key positives being a rising dividend and strong cash flow growth which is in line with our long term positive thesis on the stock. We remain Buyers with a target price of ¥7,150.

4. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19

• Tsubakimoto Chain Co’s (6371 JP) 3QFY03/19 results were strong, with revenue continuing to witness double-digit growth at +13.1% YoY, although fell slightly below consensus estimates. On OP, Tsubakimoto witnessed only +5.2% YoY growth for 3Q. This was, however, above consensus and our estimates.
• Nine-months cumulative figures look attractive as well, with both revenue and OP witnessing double-digit growth rates at 13.2% YoY and 16.0% YoY respectively as of The company’s revenue continues to trend upwards in a healthy fashion, while margins managed to reach 10.1% this quarter slightly below the 10.8% OPM achieved in 3Q last year.
• A majority of revenue growth came from the company’s Materials Handling Equipment segment, which has witnessed strong recovery thanks to the recently acquired Central Conveyor Company in this segment. The growth was followed by the company’s steadily growing business segments, Chain segment and Power Transmission segment. This was true for the company’s OP as well. The Materials Handling Equipment segment continued to make operating profits this quarter, followed by the Chain segment and the Power Transmission segment. The Auto Parts segment, however, continued to witness slow growth in revenue and pressure in its margins this quarter as well.
• Despite strong results, post-release, Tsubakimoto opened -9.9% down on Friday from Thursday’s close. The stock, however, rallied 8% by Tuesday’s close.

5. NCsoft: Major Highlights of 4Q18 Earnings Conference Call

• NCsoft Corp (036570 KS)‘s 4Q18 earnings fell short of the consensus earnings estimates. In 4Q18, NCsoft reported sales of 399.7 billion won (down 25.1% YoY and 1.1% lower than consensus), operating profit of 112.6 billion won (down 40.5% YoY and 13.3% lower than the consensus), and net profit of 67.6 billion won (down 44% YoY and 32.9% lower than the consensus). 
• Three different analysts raised questions about why the company changed the timing of the launch of the Lineage2M game. In the 3Q18 earnings conference call, the company previously mentioned that it will most likely launch the Lineage2M mobile MMORPG game in 2Q19. In the most recent 4Q18 earnings conference call, the company mentioned that it will launch Lineage2M by the end of 2019. 
• We expect little change to the consensus earnings estimates of NCsoft in 2019 and 2020. Although Tencent consortium acquiring Nexon could pose greater competitive threats to NCsoft in Korea, it could also lead to a consolidation of the gaming sector in Asia, which would be a positive for the company. NCsoft is currently trading at P/E multiples of 15x in 2019 and 12x in 2020, based on the consensus earnings estimates, which are attractive. We maintain our positive view of the company following its 4Q18 earnings.