In this briefing:
- 🇯🇵 Japan • Largest QoQ Decline in Operating Cash Flow in a Decade – Free Cash Flow Turns Negative
- SMC (6273 JP): Profit Decline Accelerates
- Japan – Chinese Flu
- Japan Stock Weekly
- UUUM (3990)Â Phenomenal Growth but at a Price.
1. 🇯🇵 Japan • Largest QoQ Decline in Operating Cash Flow in a Decade – Free Cash Flow Turns Negative
![](https://static-prod.smartkarma.com/images/media/000/081/407/original/2019-03-09_14-25-50.png?1552109168)
Source: Japan Analytics
JAPAN CORPORATE CASH FLOW UPDATE – This insight updates our previous Insight with data from all of the most recent quarterly reports. Our market composite cash flow model reformulates disclosed cash flows into four categories which sum to Change in Cash: –
- Operating Cash Flow
- Investing Cash Flow (which includes Inventory Cash Flow)Â
- Free Cash Flow (Operating Cash Flow less Investing Cash Flow)
- Financing Cash Flow
- Shareholder Cash Flow  (Equity Cash Flow and Dividend Cash Flow)Â
   = Change in Cash (including Minorities Cash Flow)
OCF COLLAPSES – In the last three months, Japan’s non-financial companies generated only Â¥2.1t in Operating Cash Flow (OCF), Â¥10.1t less than the previous quarter. Â¥2.1t is the lowest quarterly OCF since 2016-Q2, and the quarter-on-quarter decline is the largest since 2009 and represents a substantial ‘red flag’ for the market.
FCF NEGATIVE – Aggregate spending on fixed assets shrunk by Â¥4.5t qoq to Â¥4.6t resulting in Free Cash Flow for the quarter of -Â¥2.5t, the first negative Free Cash Flow quarter since 2012-Q4. Softbank Group (9984 JP), NTT Docomo (9437 JP) and Fast Retailing (9983 JP) together generated Â¥3.3t in positive Free Cash Flow for the quarter. Excluding these three companies, the aggregate total quarterly FCF was -Â¥5.8t, equivalent to an annualised Free Cash Flow yield of -4.3% for the universe of listed non-financial companies.
BACK TO BORROWING – To finance Â¥4.5t in dividend payments, Japanese non-financial companies borrowed Â¥4.8t in new debt, sold investment securities worth Â¥1.9t (the most significant reduction since 2016-Q2) and raised 0.28t in new equity net of share buybacks. This increase in financing cash flow was the largest in any quarter since 2009.
SECTORS & STOCKS – In the DETAIL below, we also look at sector cash flow trends and provide brief comments on some of the most significant changes in individual cash flows over the last three months including Toyota Motor (7203 JP), Softbank Group (9984 JP), Pan Pacific International (7532 JP), Lawson (2651 JP), and IDOM (7599 JP)
2. SMC (6273 JP): Profit Decline Accelerates
Downturns in the semiconductor, auto and other user industries have caught up with SMC. Sales were down 4.0% year-on-year in the three months to December (the first decline in more than two years) and the decline in profits accelerated, with gross profit down 5.4%, operating profit down 10.6% and net profit down 18.8%. Year-on-year comparisons are likely to remain difficult for at least another two quarters.
In December, we wrote: “Management reports that semiconductor-related demand is down in all markets and that auto-related demand is down in the U.S. Auto sales are also declining in China.” (SMC (6273 JP): Profits Start to Decline ) Last week, WSTS reported the first decline in semiconductor sales in 30 months and the Nikkei newspaper reported that “Japanese chipmaker Renesas Electronics will temporarily halt work at 13 of the company’s 14 production facilities, including all nine domestic plants, due to high inventory levels and possible impact as Chinese demand for automotive and machinery tools plummets.” On Friday, March 8, SMC’s share price dropped by 3%.Â
SMC has left FY Mar-19 guidance unchanged, implying a 4.1% decline in sales and a 2.9% decline in operating profit in 4Q. In view of current trends, this looks over-optimistic. The shares are now selling at 17.8x our EPS estimate for FY Mar-19 and 18.6x our estimate for FY Mar-20. These multiples compare with a 5-year historical P/E range of 13.8x – 28.5x.Â
SMC is a leading supplier of pneumatic and other automated control equipment for the electronics, auto, machine tool and other industries.Â
3. Japan – Chinese Flu
By Konstantinos Venetis, Senior Economist
- Japan skirts recession but near-term prospects remain weak
- Deflationary headwinds to persist in H1, threatening business spending
- Recovery likely in late 2019 as world trade finds a firmer footing
4. Japan Stock Weekly
NSK (6471) – operating environment poor, analysts revising down but are we close to the bottom for the share price?
UUUM (3990) – great performer, and business will continue to grow fast. A buy for those who have believe in the growth of internet advertising, and do not mind a lofty valuation.Â
Rakuten (4755) – announced IPO of Lyft has helped share price rally. Sum of parts makes this look cheap to us, and we believe they have a sporting chance as a mobile operator. Market is overly negative in our view.Â
5. UUUM (3990)Â Phenomenal Growth but at a Price.
This has been a fantastic performer. Since our buy note one year ago, the shares are up just over 3 times. Earnings growth has been very strong, and much better than we had anticipated. The story is even better now than it was then. Unfortunately, the valuations are not! The company is very focussed on growing revenue for the time being. If one is happy to buy a very fast growing new business, then this is still worth looking at.
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