Brief Japan: Consumer Electronics Chains Set for Major Boost This Year – But It Will Be Temporary and more

In this briefing:

1. Consumer Electronics Chains Set for Major Boost This Year – But It Will Be Temporary
2. Lasertec (6920 JP): Pricing in Long-Term Growth
3. Gold May Rise on Lower Real Ylds; Canada Leads Fall in Real Ylds; Aust Inflation Expectations Slump
4. Japanese Convenience Stores: Shorter Hours
5. Hankyu Invests ¥1.75 Billion in Hankyu Men’s Tokyo

1. Consumer Electronics Chains Set for Major Boost This Year – But It Will Be Temporary

Consumer electronics retailers have struggled since 2014, with 2018 proving a rare respite from decline as sales remained flat.

The consumption tax increase in October, along with some other factors, means the market is expected to grow this year, but it could be a while before that happens again.

2. Lasertec (6920 JP): Pricing in Long-Term Growth

Lasertec hit a new high in the semiconductor stock rally that followed Micron Technology’s March 20 earnings call. On Friday, March 22 (March 21 was a holiday in Japan), Lasertec was up 8.4% to ¥4,900. At this price, the shares are selling at 42x our EPS estimate for FY Jun-19, 36x our estimate for FY Jun-20 and 31x our estimate for FY Jun-21. On a 5-year view, earnings growth could bring the projected P/E multiple down to 21x, in our estimation.

Following strong 1H results, management left FY Jun-19 sales and profit guidance unchanged, but raised semiconductor-related orders guidance by 13% while cutting  orders guidance for FPD-related and other products by nearly 40%. Total new orders guidance was raised from ¥37 billion to ¥39 billion, compared with sales guidance of ¥28 billion, implying an increase in the order backlog from ¥39.9 billion to ¥50.9 billion.

With this in mind, we have raised our sales and profit estimates for FY Jun-20 and added new, higher estimates for FY Jun-21 and beyond. Rising demand for EUV mask blank and mask defect inspection equipment should drive an increase in total sales from ¥29 billion this fiscal year to ¥38 billion in FY Jun-21, and approximately ¥50 billion in FY Jun-23. Over the same period, operating profit should rise from ¥7.0 billion to ¥9.5 billion, and then to approximately ¥14 billion.

Risks for investors include the potential delay or reduction of orders and shipments (as just happened with FPD inspection equipment), high volatility in quarterly orders, sales and profits, and extended valuations.

3. Gold May Rise on Lower Real Ylds; Canada Leads Fall in Real Ylds; Aust Inflation Expectations Slump

• The broad decline in global bond yields and curve flattening suggest that the market has become more concerned about weak global economic growth.
• The fall in yields is at odds with the rise in equity and commodity prices this year, but the later may have lost upward momentum.
• Safe haven currencies, gold and JPY, have strengthened this week and are likely to perform well if yields remain low.
• US real yields have fallen more than nominal yields this year, with a partial recovery in inflation expectations from their fall in Q4 last year. Lower real yields point to weaker fundamental support for the USD, and further support safe havens like gold.
• Canadian real long term yields have fallen more abruptly than in the USA, into negative territory, suggesting the outlook for the Canadian economy has deteriorated more than most. This may relate to concern over a peaking in the Canadian housing market. The fall in real yields suggests further downside risk for the CAD.
• Long term inflation breakevens have fallen in Australia sharply since September last year to now well below the RBA’s 2.5% inflation target.
• Australian leading indicators of the labour market have turned lower, albeit from solid levels, and may be enough, combined with broader evidence of weaker growth, for the RBA to announce an easing bias as soon as April.
• Asian trade data and flash PMI data for major countries point to ongoing and significant weakness in global trade.

4. Japanese Convenience Stores: Shorter Hours

Today almost all the 50,000 stores run by the big three convenience store chains operate 24-hours a day, but franchise owners everywhere are struggling to find enough staff.

Last month, the owners’ union of the biggest chain, Seven Eleven, issued a demand that each store be allowed to set its own hours.

This move has implications for a retail industry struggling with labour shortages and higher part-time wages.

5. Hankyu Invests ¥1.75 Billion in Hankyu Men’s Tokyo

Hankyu Hanshin has outperformed the department store sector in the last few years and continues to invest to lock in its dominance of the Osaka market.

It is now about to unveil a major new update to its Tokyo store, creating a more luxurious Men’s Emporium.

The investment is an example of how the better department stores are repositioning individual buildings to better meet target market needs and find relevance in an e-commerce age.