In this briefing:
- Shin-Etsu Reports Double-Digit Growth in Revenue and Operating Profit; Stock Is Clearly Undervalued
- Kumho Tire (073240): Tough Times Ahead Still…
- Japan’s Top 100 Shopping Centres Outperforming: Who Owns What
- Market Largely Untroubled by Kao’s Troubles
- Uncertain Global Economic Outlook Produces Corporate Profit Expectations of Varying Credibility
1. Shin-Etsu Reports Double-Digit Growth in Revenue and Operating Profit; Stock Is Clearly Undervalued
Shin-Etsu reported its 3QFY03/19 results yesterday (29th January 2019) which saw the company revenue growing at 13.4% YoY in 3QFY03/19 while its operating profit increased at a stellar 32.5% YoY during the quarter. Shin-Etsu has witnessed positive performance across all its segments while the Semiconductor Silicon segment reported the highest growth in revenue and operating profit. Further, the company beat consensus revenue and operating profit estimates by 1.5% and 6.4% respectively.
3QFY03/19 (JPYbn) | Actual | YoY Change | Consensus Median | Actual Vs. Consensus |
Revenue | 415.1 | 13.40% | 409.0 | 1.50% |
Operating Profit | 115.3 | 32.50% | 108.3 | 6.44% |
2. Kumho Tire (073240): Tough Times Ahead Still…
Weak car sales in China, Nissan’s removal of Carlos Ghosn, Akebono Brake Industry share price plunge – facts that make everyone cringe at the sound of it. High indebtedness, low margin and weak sales growth were the chief reasons why Akebono’s share price plunge. Kumho Tire’s high debt to equity ratio has been reduced by an equity investment from a Chinese group but will that help to turn the company around?
3. Japan’s Top 100 Shopping Centres Outperforming: Who Owns What
The average growth among the top 100 shopping centres (SCs) in Japan in 2017-18 was 2.6% compared to 2.3% for the shopping centre market overall.
The top 100 SCs had average sales densities of ¥86,230 per sqm per month, compared to ¥50,833 per sqm per month for the sector overall, showing the stark contrast in performance between the best SCs (and the better developers) and the rest.
The improvement in sales by outlet malls after a retreat in 2016-17 was the big story in SC retailing last year – among the top 30 SCs by sales growth, 10 were outlet malls and all posted growth of more than 5% compared to just a single SC in 2016.
A number of developers look set to continue to perform better compared to the SC sector overall, at least in terms of tenant revenues and shopping centre operating profits: Aeon (8267 JP), Aeon Mall (8905 JP), Mitsui Fudosan (8801 JP), and Mitsubishi Estate (8802 JP) as well as East Japan Railway (9020 JP) – 12 of the top 30 most efficient SCs in the country are operated by East Japan Railway.
4. Market Largely Untroubled by Kao’s Troubles
After an article appeared on Nikkei Asian Review on 29th January 2019 stating that Kao Corp (4452 JP) is going to miss its revenue and profit projections for FY2018E, we witnessed no panic in the market. Kao Corporation shares opened trading at JPY 7,621.00 per share up by 0.1% from the previous close price of JPY 7,610.00. The price increased further to JPY 7,657.00 before decreasing towards the day’s low of JPY 7,521.00 and it closed at JPY 7,583.00 which was about 0.4% down from the previous day’s closing price. However, the volume traded had an impact because of this news. For the past 3 months, the average daily volume traded has been around 1.73m shares a day, but declined 27.2% on 29th Jan 2019.
This news came to light from a third-party source, but Kao responded to it on its investor relations website saying:
“The article in the Nikkei on Jan. 29 regarding the earning forecast consolidated results, is not based on any announcement made by Kao Corporation.”
In their latest release to their investor relations website, Kao Corporation keeps quiet on its ability to meet its 2018E guidance.
This has been happening at Kao for the past few years. Each time a news article has been released regarding Kao’s annual results, by a third party a few days prior to the official announcement.
5. Uncertain Global Economic Outlook Produces Corporate Profit Expectations of Varying Credibility
Despite elevated uncertainty and lowered growth expectations for 2019, the International Monetary Fund (IMF) still expects continued global economic expansion, thereby potentially placing it at variance with the expectations embedded in financial markets.
The remaining efficacy of monetary policy in the Eurozone is being undermined by the conspicuous absence of an interest rate buffer that could ultimately be detrimental to any future attempts to support aggregate demand.
Meanwhile, the Bank of Japan will continue its ultra-accommodative policy stance due to downside risks to medium and long-term inflationary expectations, but low corporate profits growth expectations limit downside equity market risks.
Current expectations for corporate profits growth in the Eurozone and China require downgrading due to their respective economic outlooks, implying downward pressure on equity prices.
Crucially, US corporate profit expectations have been scaled back to match revenue expansion, thereby indicating that analysts have finally embraced a more realistic approach towards the future path of operating margins.
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