Brief Japan: Semiconductor Downturn Hurts Tokyo Electron; Stock Is Still Overvalued and more

In this briefing:

1. Semiconductor Downturn Hurts Tokyo Electron; Stock Is Still Overvalued
2. Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)
3. This Week in Blockchain & Cryptos: Revisiting LINE’s Crypto Plans
4. Confluence of Politics – China Bans Australian Coal Imports (Flash Note)

1. Semiconductor Downturn Hurts Tokyo Electron; Stock Is Still Overvalued

• Tokyo Electron (8035 JP) is a semiconductor equipment manufacturer based in Japan. The company has been operating in the semiconductor space for several decades and generates nearly 90.0% of its revenue from the sale of semiconductor equipment.
• The company revenues are highly correlated with worldwide semiconductor revenues. The current softness in the semiconductor market has already caused a decline in company earnings for 3QFY03/19 and we expect the company earnings to deteriorate further as the market has just begun witnessing the demand decline.
• Even though IoT, cloud, big data, 5G and AI are expected to drive semiconductor revenues and make up for the declining demand from smartphones, tablets and PCs, we do not expect this to drive a significant change in semiconductor demand for another few years as the technologies are still not fully developed.
• Based on our valuation, the company share price is still overvalued despite the stock losing more than 20% to-date since the market started decelerating in mid-2018. As the current semiconductor cycle nears its worst, we feel the company share price will dip further with the earnings outlook deteriorating.

2. Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)

If one were looking for evidence of the inherent dangers of risk concentration in the banking industry, one need only look to tiny secondary regional bank Tochigi Bank (8550 JP), which reported its earnings for the nine months to end-December 2018 on 31 January 2019.  Having made consolidated net profits of ¥1.57 billion in 1H FY3/2019, the bank plunged into the red in 3Q by ¥1.80 billion as a result of losses on disposing of fixed-rate US$-denominated securities.  Rather surprisingly, foreign investors own just over 21% of outstanding shares.  Tochigi Bank may not be the only small Japanese bank to run into trouble with its foreign securities portfolio in CY2019.  Caveat emptor!  (May the buyer beware)!

3. This Week in Blockchain & Cryptos: Revisiting LINE’s Crypto Plans

LINE Corp (3938 JP) is one of the top Japanese names in our “Watchlist” of listed companies in Japan and South Korea that are adopting blockchain technologies or have exposure to cryptocurrencies. 

Since being added to the “Watchlist” in May last year (2018), LINE has launched a cryptocurrency, a cryptocurrency exchange, and a blockchain venture fund. In this note, we revisit LINE’s blockchain and cryptocurrency plans.

4. Confluence of Politics – China Bans Australian Coal Imports (Flash Note)

• China implements coal import caps specifically targeting Australian producers
• Unclear as to how widespread these restrictions will eventually be
• Thermal and metallurgical coal exports affected
• Impacting ~A$8.4Bn of metallurgical coal exports; or 4.4% of national income
• Thermal coal exports affected worth ~A$3.8Bn; or an additional 2% of national income
• Collectively, thermal and metallurgical exports equate to ~0.9% of Australian annual GDP 
• Actions appear to be a response to blocking Huawei bidding for the 5G network
• Recent Chinese cyber-attacks harden Australian Government’s resolve
• Expect similar Chinese measures (in time) to be applied to other commodities and industries