Daily Japan: Global Semiconductor Sales Fall In November 2018. This Is Not A Good Sign. and more

In this briefing:

1. Global Semiconductor Sales Fall In November 2018. This Is Not A Good Sign.
2. THK (6481 JP): Downturn Discounted, Recovery Depends on New Orders
3. Nintendo: Is the Hype Surrounding the Switch Slowly Dying Down?
4. Recruit Holdings Down 30% From October; Still Not Cheap
5. Japan: 2018 Market Review – Bear Market Rally Ahead

1. Global Semiconductor Sales Fall In November 2018. This Is Not A Good Sign.

The Semiconductor Industry Association (SIA) just announced that worldwide sales of semiconductors reached $41.4 billion for the month of November 2018, an increase of 9.8% YoY, but down 1.1% MoM, the first such decline since February 2018. While the decline is modest and total 2018 total semiconductor sales are on track to reach ~$470 billion for a YoY increase of 15.7%, any decline in what should be peak holiday season is not a good sign. 

Semiconductor sales historically track Wafer Fab Equipment (WFE) sales with a roughly six month time lag. North American WFE sales have been declining each month for the past six months meaning that this latest semiconductor MoM sales decline is right on schedule.  

Leveraging a decade’s worth of historical data, we analyse two key questions that are likely on every investors mind. Firstly,for how long should we expect semiconductor sales to continue their decline. Secondly, how steep should we expect that decline to be?    

2. THK (6481 JP): Downturn Discounted, Recovery Depends on New Orders

After dropping 60% from a high of ¥4,830 last February 27 to a 52-week low of ¥1,945 on December 26, THK closed at ¥2,062 on December 28, the last trading day of 2018.  

New orders peaked in the three months to Dec-17. The order backlog peaked in the three months to Mar-18, and so did the share price. Sales and operating profit peaked in the three months to Jun-18. Demand from the company’s top three user categories – electronics (semiconductor production equpment in particular), machine tools, and general industry – has been moving in parallel. By region, new orders from China have dropped most rapidly, followed by orders from Taiwan and Japan. 

After double-digit positive comparisons in the nine months to Sep-18, management is guiding for a 30% year-on-year decline in operating profit in 4Q of FY Dec-18. Judging from the orders trend and economic situation, substantial declines in sales and profits are likely in FY Dec-19. If demand from China picks up following a trade agreement with the U.S. sometime next year, there should be a moderate recovery going into FY Dec-20.

The shares are now selling at 7.7x management’s EPS guidance for FY Dec-18 and 0.9x book value at the end of Sep-18. Our forecast puts the shares on 11.9x earnings for FY Dec-19 and 10.4x earnings for FY Dec-20E. Valuations are at the bottom of their recent historical ranges. When orders recover, the stock price should, too.

3. Nintendo: Is the Hype Surrounding the Switch Slowly Dying Down?

Nintendo reported their 2QFY03/19 in October with results showing growth at both the top line and bottom line albeit not living up to consensus expectations. Top line grew by 4.0% YoY to JPY388.9bn in 1H03/19 while OP grew by 53.9% YoY to JPY61.4bn. OP in the last quarter (2QFY03/19) was the second highest the company has experienced over the last five years. This growth has been mainly driven by the sales of Nintendo Switch hardware which sold just over 5m units in 1HFY03/19. However, YoY growth remained at 3.4% compared to 4.9m units sold in 1HFY03/18. This has left investors worried about Nintendo’s aggressive target of selling 20m units of the Switch for FY03/19. Of this target, the company has managed to achieve only around 25.0% in 1H. Nintendo’s financial performance follows a seasonal trend with the December quarter showing stronger performance due to increased sales during Christmas. While the company’s current quarter is likely to show strong results, we remain skeptical about the company reaching the aforementioned target for FY03/19.

Switch Sales Have Caused an Improvement in Nintendo’s OP….

….Despite a Slowdown in the Growth of Units Sales

Nintendo’s Last Quarter Has Also Failed to Live Up To Consensus Expectations

4. Recruit Holdings Down 30% From October; Still Not Cheap

The share price of Recruit Holdings (6098 JP) has fallen by around 30% over the past three months from an all-time high of JPY3,826 (on 1^st October 2018) to JPY2,705 on 24^th December 2018. Prior to this, Recruit’s share price saw a strong upward rally during May-September following the company’s announcement that it would acquire Glassdoor Inc. (the company which operates the employment information website glassdoor.com).

We expect Recruit’s consolidated revenue to grow 7.7% and 6.5% YoY in FY03/19E and FY03/20E respectively, driven by the acquisition of Glassdoor and steady growth in Japanese staffing operations, partially offset by a likely slowdown in global labour market activity. We also expect Recruit’s consolidated EBITDA margin to improve by around 50bps due to higher margin from Glassdoor.

Despite the recent dip in share price and steady topline and bottom line growth over the forecast period, at a FY2 EV/EBITDA multiple of 14.0x, Recruit doesn’t look particularly attractive to us. Recruit’s internet advertising business and employment business peers, Yahoo Japan (4689 JP) and Persol Holdings (2181 JP) are trading at FY2 EV/EBITDAs of 7.7x and 9.6x respectively.

5. Japan: 2018 Market Review – Bear Market Rally Ahead

2018 MARKET REVIEW – In this Insight, we shall review the performance of the Japanese stock market, during 2018 and look forward to the coming year. We shall look back at the year from a Sectors, Peer Group and Company perspective in separate Insights to follow next week.

BEAR MARKET RALLY AHEAD – From the January 23rd peak to the December 25th low, the All Market Composite declined 24.5% in Yen terms and 24.9% in US$ terms placing Japan in a bear market for the seventh time since the bursting of the 1989 stock market ‘bubble’. The average stock is now 35% below its one-year high compared with just 10% below at the beginning of the year. Total Market Value is still ¥123t above the low of 12th February 2016, and the question remains – are we replaying March 2008 or February 2016? In both cases, there were bear market rallies (25% and 17%) before the final downward leg – which entailed further declines of 50% and 13%, respectively. In our recent Insight on 21st December – Ticking the Bear Market Boxes – we commented that it was too early for contrarians to start ‘nibbling’. The 1,000 point Nikkei 225 (NKY INDEX) decline the next trading day, and the rebound into the year-end suggests that a case can now be made for, at least, a short-term rally. In the charts in the DETAIL below, we shall explore the case for (✓) and against (✕), and attempt to answer the question of the 2008 or 2016 reprise.