Japan

In today’s briefing:

Softbank Group – Q1 22 Results Reaction: So Many Surprises…a Few Were Positive
Inpex (1605 JP) – Earnings, Forecasts and a BIGLY Buyback
FTSE Japan: Potential Inclusions in March Following TSE Restructure
Inpex (1605) | Blockbuster Buyback
NTT (Buy) – Q1 22 Results Reaction: Forex Gains Flatter Top-Line; Signs of Mobile Stability
Mercari (4385) | No Path to Profitability

Softbank Group – Q1 22 Results Reaction: So Many Surprises…a Few Were Positive

Softbank posted record quarterly losses again ($23bn this time) after an aggressive writedown of private investments in the portfolio
Vision Fund’s cumulative returns since FY17 are now less than $1bn and valuation losses for WeWork at the parent mean VF and related have lost money
The good news is Softbank valuations are more closely aligned with reality whilst a ¥400bn buyback takes some of the sting away but tech values (and ARM) remain a risk

Inpex (1605 JP) – Earnings, Forecasts and a BIGLY Buyback

Today Inpex Corp (1605 JP) announced Q2 earnings (results, presentation), a revised full-year forecast due to higher crude and lower yen, an 11%-above-guidance dividend, and a big buyback.
The buyback is for up to 120mm shares spending up to ¥120bn, to run through year-end. Practically speaking, it is limited to 80mm shares or so at current price.
This should be a non-negligible portion of Real World Float, and I expect the buyback to have impact over the next five months.

FTSE Japan: Potential Inclusions in March Following TSE Restructure

Stocks that migrated from the JASDAQ and Mothers Boards to the Standard Market in April will be eligible for inclusion in the FTSE All-World/All-Cap indices at the March 2023 SAIR.
Currently, we see 4 potential inclusions to the All-World Index and 12 potential inclusions to the All-Cap Index. There are some close adds on market cap and liquidity.
The potential adds underperformed the TOPIX Index from April to June, but there has been a significant outperformance since then.

Inpex (1605) | Blockbuster Buyback

Inpex reported strong Q2 financial results with operating income rising 161% to ¥584 billion
The company revised its full-year OP guidance by 23% to ¥1,133 billion. It is still conservative
Inpex also announced a blockbuster buyback of 120 million shares, or 8.65% of its outstanding capital

NTT (Buy) – Q1 22 Results Reaction: Forex Gains Flatter Top-Line; Signs of Mobile Stability

Q1 revenue growth was the highest since Q3 17, helped by forex tailwinds and stability in the mobile segment
Core telecom results were also positive as mobile erosion was less intensive than peers on better subscriber growth whilst DX demand has kept enterprise sales healthy
Management did not change full-year guidance but this almost never happens with a Q1 report and we expect this report is enough to nudge consensus higher

Mercari (4385) | No Path to Profitability

Mercari reported full year operating loss of ¥3.7b on sales of ¥147b, while providing no guidance for the coming year
We remain most concerned about the US business, where GMV is declining and losses look entrenched
Mercari JP is also clearly slowing, partly due to post-Covid, but also due to rising competition

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Aug 08

Daily Brief Japan: Marui Group, DISCO Corp, Komatsu Ltd, Eisai Co Ltd and more

In today’s briefing:

Marui (8252 JP) – Increases Size of Delayed-Start Buyback, Cuts Yutai
Disco (6146 JP): YoY Growth Headed Toward Zero
Komatsu (6301) | Back Test Suggests 56% Upside from Here
Make Us Consider the Issues on Anti-Takeover in a Company with Reduced Stake of Founding Family

Marui (8252 JP) – Increases Size of Delayed-Start Buyback, Cuts Yutai

Marui Group (8252 JP) was a long-suffering Japanese retailer with generally sub-standard locations and “different” customer base, and much of its income came from consumer credit.
Since a decade ago, helped by the rise of foreign tourism income, Marui has been redeveloping itself. Michael Causton‘s insights are a great help to understanding the background.
They are aiming at non-stuff retailing. Friday saw earnings, cancellation of the yutai program, a slight div hike, and an increase in the already large buyback program. It’s interesting!

Disco (6146 JP): YoY Growth Headed Toward Zero

By Scott Foster

After beating guidance every quarter last fiscal year, Disco fell short in the three months to June.
Management is guiding for the usual seasonal rebound in 2Q, but year-on-year growth rates are forecast to drop sharply – most likely on their way to negative territory in 2H.
Disco has stopped disclosing orders data, reducing visibility for investors. 2Q results are likely to be the next catalyst. We see no reason to jump in now.

Komatsu (6301) | Back Test Suggests 56% Upside from Here

At 1.1x PB, Komatsu’s stock price has already discounted a severe recession
Our back test suggests a 56% return over 12-months from this level (100% hit rate)
We see little risk of balance sheet impairment and believe the stock is trading at attractive valuations for long-term investors

Make Us Consider the Issues on Anti-Takeover in a Company with Reduced Stake of Founding Family

Eisai, which had more than 30% of foreign shareholdings, had retained anti-takeover measures while incorporating the opinions of foreign shareholders, and has background of seeking reconciliation through enhancing its governance.
While foreign shareholders had voted against Mr. Naito, president who retained anti-takeover provision, most Japanese shareholders had voted in favor, showing “support” him at the shareholders’ meeting.
It’s likely that Eisai will retain “contingency” anti-takeover, but if the founding family will use it to retain its position, this isn’t consistent with the goal of maximizing corporate value.

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Aug 07

Daily Brief Japan: Softbank Corp and more

In today’s briefing:

JPX Nikkei 400 Index Rebalance: Some Biggish Impact Stocks
Index Rebalance & ETF Flow Recap: NKY, JPXNK400, FTSE CH50/A50/TW50, SenseTime, Orica

JPX Nikkei 400 Index Rebalance: Some Biggish Impact Stocks

There are 36 adds and 34 deletes for the JPX Nikkei 400 Index to bring the number of index constituents back to 400. Some of the changes are interesting.
Based on the adds, deletes and capping changes, we estimate one way turnover of 4.75% and a two-way trade of JPY 444.45bn (US$3.3bn).
Oriental Land (4661 JP) is a delete from the JPX Nikkei 400 Index but a high probability inclusion to the Nikkei 225 (NKY INDEX) at the September rebalance.

Index Rebalance & ETF Flow Recap: NKY, JPXNK400, FTSE CH50/A50/TW50, SenseTime, Orica

The rebalances of the Philippines Stock Exchange PSEi Index (PCOMP INDEX) and NIFTY100 Index were implemented at the close on Friday.
MSCI will announce the results of the August QIR pre-market on 12 August (Asia time). This is the last QIR to use the current methodology before we move to QCIRs.
There were large outflows from KraneShares CSI China Internet ETF (KWEB US) during the week as investors pulled US$267m from the ETF.

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Aug 06

Daily Brief Japan: Canon Inc, Softbank Corp, Internet Initiative Japan and more

In today’s briefing:

Canon (7751) – Second Buyback This Year – Last Happened in 2014
2022 JPX Nikkei 400 Rebal – 36 IN, 34 OUT, 4.9% One Way
IIJ (Buy) – Q1 22 Results Reaction: Solid Results and Share Split

Canon (7751) – Second Buyback This Year – Last Happened in 2014

Canon Inc (7751 JP) reported Q2 earnings early last week. Shares dropped 4% the next day but closed down only 1%. Now they are above the prior close.
They biked the dividend nicely (was ¥45/share last year, guided to ¥50 this year, but made ¥60/share instead.
And now they have announced another ¥50bn buyback on top of the one announced in May. Fourth time in 14 years a second tranche is announced in one year.

2022 JPX Nikkei 400 Rebal – 36 IN, 34 OUT, 4.9% One Way

The Ninth Annual JPX Nikkei 400 Index Review was announced on Friday 5 August. There are 36 Inclusions, 34 Deletions. They are mostly in line with Janaghan Jeyakumar, CFA‘s predictions.
The “BIG SELL” is Oriental Land (4661 JP). The “BIG BUY” is Softbank Corp (9434 JP) as he predicted 11 months ago. There are some down-weights from capping.
Oriental Land is also a potential Nikkei 225 Inclusion as discussed in Nikkei 225 Sep22 Annual Review; Data Final, Predictions Unch’d; Strategy Involved.

IIJ (Buy) – Q1 22 Results Reaction: Solid Results and Share Split

IIJ posted solid results including double-digit revenue and operating profit growth as corporate DX demand drive cloud and security growth at rates well above larger rivals
Shares sold off 7% after the mid-day announcement which reflects modestly aggressive consensus forecasts and/or disappointment on lack of a guidance raise
The company did announce its second share split in three years which tells us management remains confident on the mid- to long-term track

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Aug 05

Daily Brief Japan: Hoya Corp, Softbank Corp, Toyota Motor, Bunka Shutter, Yamaha Corp, Nextage Co Ltd, Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

Hoya (7741) – Record Revenues/Earnings, a Small Buyback, but Nikkei 225 Flows May Dominate
Softbank Corp (Buy) – Q1 22 Results Reaction: Largely In-Line with Reduced Expectations
Toyota’s Q1 EBIT Missed by 28%; FY3/23 Guidance Effectively Lowered
Bunka Shutter (5930 JP) – Big Buyback Vs Big CB Means No Accretion, Minimal Flow Impact
Yamaha Corporation: Guidance Seems Optimistic With Inflation Starting to Affect Demand Conditions
Nextage (3186 JP): Long-Term Potential Not Yet Discounted
Share Buybacks Exceed BOJ’s ETF Purchases, but BOJ’s Presence Is Significant in Another Aspect

Hoya (7741) – Record Revenues/Earnings, a Small Buyback, but Nikkei 225 Flows May Dominate

Hoya Corp (7741 JP) today announced great Q1 earnings and a bullish above-consensus revenue forecast for this fiscal year. It also announced a small share buyback.
However, the dominant factor in flows near-term will be pre-positioning for a possible Nikkei 225 inclusion in September. That is what will push the stock around. In or not.
Hoya has recently outperformed a Peer Basket despite forward expected EPS and EBIT not seeing relative improvement. That suggests some relative risk if it doesn’t get selected for Nikkei 225.

Softbank Corp (Buy) – Q1 22 Results Reaction: Largely In-Line with Reduced Expectations

Softbank Corp (9434 JP) results were weak as expected as mobile price reductions carved into the consumer revenue base
Management released some further details on PayPay including a revenue number that implies continued improvement in take rates and plans to carve out a new segment for financial services
Both KDDI and Softbank net adds were weaker sequentially v Q4 which bodes well for NTT and possibly Rakuten

Toyota’s Q1 EBIT Missed by 28%; FY3/23 Guidance Effectively Lowered

By SC Capital

Toyota’s Q1 operating profit was 28% below consensus estimates, while pretax profit only undershot by 4%. Support for 2nd & 3rd-tier suppliers was the main cause.
While full-year operating profit target was maintained & EPS slightly raised, this was due to bigger forex tailwinds. Ex-forex, FY3/23 operating profit was lowered by 28%.
Much of FY3/23’s negatives are one-off, which paves the way for higher profits in FY3/24. But support for suppliers while rivals grow earnings is somewhat of a concern.

Bunka Shutter (5930 JP) – Big Buyback Vs Big CB Means No Accretion, Minimal Flow Impact

Today Bunka Shutter (5930 JP) reported iffy, if predictably seasonal Q1 earnings, and FY22 forecasts. They also announced a big buyback which caused the stock to pop, then come back.
It came back because the stock has a decently large slightly in-the-money CB with 13 months to maturity. A big pop will get a big re-hedge.
Over the next year, despite the large buyback, EPS accretion and net buyback flow impact should be minimal. And the stock isn’t as cheap as it “looks.”

Yamaha Corporation: Guidance Seems Optimistic With Inflation Starting to Affect Demand Conditions

By Oshadhi Kumarasiri

Even though Q1 topped consensus through favourable FX movements, it seems inflationary pressure is starting to affect all business units of Yamaha Corp (7951 JP).
The company raised revenue guidance due to favourable FX movements but maintained the OP at the previous level due to rising procurement and energy costs.
However, with inflation starting to affect demand, these estimates are likely to be revised down over the next few quarters.

Nextage (3186 JP): Long-Term Potential Not Yet Discounted

By Scott Foster

The July 4 upward revision to FY Nov-22 sales and profit guidance appears to have been discounted, but the company’s long-term growth potential has not.
Sales could more than double over the next several years as Nextage takes share in Japan’s highly fragmented and consolidating used car market. Margins also have room to expand.
Prospective P/E ratio headed down from 18x this fiscal year to 12x and below on a medium-term view.

Share Buybacks Exceed BOJ’s ETF Purchases, but BOJ’s Presence Is Significant in Another Aspect

Of course, When the BOJ’s ETF purchases were active, there were concerns about their impact on stock price formation, but now the impact is much smaller.
However, the BOJ has a presence in listed companies as a silent major shareholder, it is highly questionable whether its voting rights are being properly exercised.
While the silent major shareholder exists, overseas investors have played major role in enhancing corporate governance. In addition to cross-shareholding structures, they also have to contend with the silent shareholder.

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Aug 04

Daily Brief Japan: Appier Group, Joyful Honda, Toyota Motor, Z Holdings and more

In today’s briefing:

TOPIX Inclusions: Who Is Ready (Aug 2022)
Joyful Honda Conducts Japan’s First* Official ASR – And It Remains Cheap on an MBO Framework
Toyota Motor’s Bad Q1 Is a Buying Opportunity
Z Holdings (Neutral) – Q1 22 Results Reaction: Weak Results Highlight Tough Year Ahead
Z Holdings (4689) | Transformation Is Clearly Underway

TOPIX Inclusions: Who Is Ready (Aug 2022)

By Janaghan Jeyakumar, CFA

Quiddity’s “Who is Ready” series of insights aims to objectively identify names listed on the Tokyo Stock Exchange that are potential additions to the TOPIX Index in future.
In this insight, I have defined six key Segment Transfer requirements which prove to be decisive in this process.
At present, there are 51 names that satisfy all of these conditions and there are more names that are close to being that group.

Joyful Honda Conducts Japan’s First* Official ASR – And It Remains Cheap on an MBO Framework

The “Accelerated Share Repurchase” construct for share repurchases is used with some degree of regularity in the United States. It is theoretically legal, but heretofore unused, in Japan to-date.
Home improvement retailer Joyful Honda (3191 JP) today announced a buyback of ¥2.5bn, in line with the Share Repurchase Plan announcement made in early June. That’s the first step.
The rest is pretty easy and straight-forward, but given its novelty, it may deserve explanation.

Toyota Motor’s Bad Q1 Is a Buying Opportunity

By SC Capital

Toyota announces June quarter results at 13:25 JST on Thursday, August 4th JST. We think any dip is a buying opportunity.
Contrary to consensus, Q1’s constraints were due to supplier lockdowns in Shanghai, not the chip shortage. In fact, Toyota is seeing larger than expected chip supplies.
Toyota’s full-year guidance is the most low-balled in the industry, which is why it’s underperformed peers. Better Q2 chip supply should lead to a sharp upward revision after 1H FY3/23.

Z Holdings (Neutral) – Q1 22 Results Reaction: Weak Results Highlight Tough Year Ahead

In the first quarter where full YoY comps are available, ZHD missed Redex and consensus expectations as demand for eCommerce and online ads slowed
Management has kept FY22 financial guidance intact for now but economic uncertainty and the consolidation of loss-making PayPay in October makes an already-disappointing EBITDA target more challenging
We think FY22 EBITDA guidance is likely to be revised down heading into Q2 results

Z Holdings (4689) | Transformation Is Clearly Underway

The sell-side continues to focus on near-term quarterly numbers, while missing the long-term transformation of the Group
The combination of Yahoo, Line and PayPay gives Z HD the best first-party data access in the whole of Japan – a clear winner in online advertising
Perfect timing of the PayPay consolidation as losses have peaked.

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Aug 03

Daily Brief Japan: Oriental Land, Tokyo Stock Exchange Tokyo Price Index Topix, Kubota Corp and more

In today’s briefing:

Nikkei 225 Sep22 Annual Review; Data Final, Predictions Unch’d; Strategy Involved
Isn’t Performance of Japanese Stocks, After All, the Reason for Declining % Individual Shareholders?
Kubota (6326) | Small Tractors…big Problem

Nikkei 225 Sep22 Annual Review; Data Final, Predictions Unch’d; Strategy Involved

The data is largely unchanged since the Nikkei 225 Sep Annual Review Predictions – 3 In, 3 Out set of predictions published 15 days ago.
The consultation results are out. They are as expected too. This has the hallmarks of a VERY well-signalled trade. But it’s a biggie. The funding trade alone is ¥600bn.
Because of the data, market conditions, and the variability of choice at the edges, I believe that warrants particular strategy.

Isn’t Performance of Japanese Stocks, After All, the Reason for Declining % Individual Shareholders?

The Nikkei suggests that the aging population may be the cause. However, performance is assumed to be factor, even when young people open accounts, they investment mostly in foreign stocks.
In the end, what matters most is that the listed company presents growth expectations. This is what leads to stock performance.
While tax and other support are one of the factors that motivate individuals to invest, if companies aren’t attractive for investment, their investments are likely to be in foreign stocks.

Kubota (6326) | Small Tractors…big Problem

Kubota was a key beneficiary of stay-at-home demand in the US over the past two years
The pull-forward in demand is now normalising, while the macro environment has also turned more difficult
We think Kubota will miss full year analyst numbers and expect the stock to trade lower to 1.2x book

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Aug 02

Daily Brief Japan: Oriental Land, HS Holdings, Yaoko Co Ltd, Daikin Industries and more

In today’s briefing:

Nikkei 225 Index Rebalance Preview: Consultation Conclusions & Potential Changes in Sep & March
HS Holdings (8699 JP) – Huge Q1, Even Better Q2 Ahead, The 2nd To Last Asset Sale… And a Pawnshop?
Discount Retail Gets Mainstream Support: Yaoko Expands Discount Supermarket
Daikin (6367) | Keep Cool and Carry On

Nikkei 225 Index Rebalance Preview: Consultation Conclusions & Potential Changes in Sep & March

With the review period for the September rebalance of the Nikkei 225 (NKY INDEX) complete, we take a look at the potential inclusions and exclusions for the index.
The conclusions of the market consultation have been announced and that will mean we switch to a semi-annual rebalance. So we take a look at potential changes in March 2023.
The announcement of the changes for the next rebalance should be made in the first week of September and will be implemented at the close on 30 September.

HS Holdings (8699 JP) – Huge Q1, Even Better Q2 Ahead, The 2nd To Last Asset Sale… And a Pawnshop?

Thursday post-close, HS announced Q1 earnings, and Khan Bank Q2 earnings. Both magnificent. Book Value is up HUGE, and combined HS Q1-Khan Q2 is ¥7.7bn – 20% of mkt cap.
On Friday 29 July, HS Holdings (8699 JP) announced it had sold HS Debt Collection Agency – the last “earning asset” except for the 55% stake in Khan Bank.
This lifts shadow book value even higher… Deep value with a catalyst. BUT… in an otherwise unannounced postscript to Q1 earnings, HS announced it bought a stake in a… pawnshop?

Discount Retail Gets Mainstream Support: Yaoko Expands Discount Supermarket

By Michael Causton

Yaoko opened a discount supermarket last year and added a second in March, using knowhow acquired from the Ave chain it bought in 2017.
The new store is purpose built to save costs and offer lower prices, and should prove popular as inflation rises, while delivering higher margins than supermarkets typically achieve.
The format stands in marked contrast to other discounters such as Kobe Bussan (3038 JP)’s Gyomu Super but both formats show that discounters can make more money than other supermarkets.

Daikin (6367) | Keep Cool and Carry On

We turn bullish on Daikin ahead of Q1 results as we become less concerned about growth risks in China and the US
Peer results suggest that air conditioner demand is stronger than expected due to record high global temperatures
Company management has a good track record of pushing through price hikes and cutting costs. We expect the company to beat guidance this year

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Aug 01

Daily Brief Japan: Honda Tsushin Kogyo, iShares MSCI ACWI ETF, Tokyo Stock Exchange Tokyo Price Index Topix, Lasertec Corp and more

In today’s briefing:

Minebea Mitsumi Tender for Honda Tsushin Kogyo (6826)
Europe, MSCI ACWI Bullish Downtrend Reversals as Japan Tests Resistance; Tech, Health Care Buys
It Is Very Important to Review ESG Investing Before the Risks Become Evident
Lasertec (6920) | Mind the Guidance Gap

Minebea Mitsumi Tender for Honda Tsushin Kogyo (6826)

Electronics Parts and Devices manufacturer Minebea Mitsumi (6479 JP) has announced a 25% premium Tender Offer to take over connector-maker Honda Tsushin Kogyo (6826 JP).
It is not an overwhelming bid, but is supported by Panasonic Corp (6752 JP) which owns an equity affiliate stake, and crossholders and friendly shareholders hold a lot.
This looks like it will complete, despite being a little light on price.

Europe, MSCI ACWI Bullish Downtrend Reversals as Japan Tests Resistance; Tech, Health Care Buys

By Joe Jasper

In last week’s Int’l Compass (July 21) we discussed positive signals that suggested the lows for this bear market may have already been established, or that downside is limited.
But we also noted that various downtrends remained firmly intact, and that we needed to see indexes reverse their downtrends in order to get more constructive at the index level.
It appears the bullish reversals have begun, as the SPX, MSCI ACWI (ACWI-US), and STOXX 600 are the first three major indexes to reverse topside their 4-month and YTD downtrends.

It Is Very Important to Review ESG Investing Before the Risks Become Evident

The reason for the limited increase in GPIF’s ESG investments must be thought of separately in terms of GPIF-specific factors and the overall trend in ESG investing.
Because investors consider which combination of managers in their asset allocation will work best for the overall portfolio, there are factors that cannot be determined by individual ESG investing alone.
ESG investing has been expanding, but with so many ESG indices and vendors in disarray, some problems are pointed out. It’s important to review the effectiveness of the ESG indices.

Lasertec (6920) | Mind the Guidance Gap

We turn tactically bearish on Lasertec as we expect the stock to dip on weak order guidance
After an exceptionally strong past year, we expect the order outlook to normalise
Risks include weaker macro, Intel capex delays and restrictions on equipment sales in China

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Jul 31

Daily Brief Japan: SCREEN Holdings and more