Equity Analyst, LightStream Research

Aqila Ali

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/11809" target="_blank" data-smartkarma-citation="entities:11809:1">Aisin Seiki (7259 JP)</a> reported revenue of JPY4,043bn (+3.4% YoY) above their revenue target for FY03/19 (by +1.6%), driven by the increase in AT, Brake and Body parts sales. However, the company reported OP of JPY205.6bn down by -19.0% YoY. Despite revising its guidance downwards following the 3Q earnings release (expected -17.3% YoY instead of -7.8% YoY), Aisin still could not achieve its target reporting an OP below their expectation (by -2.4%) and market expectations (by -6.4%). As we mentioned in <a href="https://www.smartkarma.com/insights/key-takeaways-from-our-visit-to-aisin-seiki" target="_blank" data-smartkarma-citation="insights:29142">Key Takeaways from Our Visit to Aisin Seiki</a>, the key reason for this was the increase in R&amp;D cost for advanced investment and quality control, alongside the ‘China effect’.
Thus, despite the steady growth in top-line, Aisin’s FY03/19 earnings appeared to be quite disappointing with both revenue and OP falling below consensus estimates. Moreover, although Aisin stated to us that the quality control costs are already expensed and should not affect profits further, the company guided for a notable OP decline again for FY03/20. As we previously mentioned this could be due to the slow-down impacts stemming from China given the country’s unfavourable and unstable macro-economic conditions alongside the company’s expected increase in R&amp;D and fixed costs. Aisin expects a marginal decline of -0.1% YoY in revenue for FY03/20E, and a -12.4% YoY decline in OP for the same period. Although we believe that business in China will have a notable impact on the company’s overall profitability ( given the company's 25% downwards revision in automatic transmission (AT) sales in China for FY03/20), we also feel that Aisin is being quite conservative in its guidance possibly to keep market expectations low. Following the release, Aisin closed -2.8% down on Friday from Thursday’s close.

Aisin Seiki (7259 JP) reported revenue of JPY4,043bn (+3.4% YoY) above their revenue target for FY03/19 (by +1.6%), driven by the increase in AT, Brake and Body parts sales. However, the company reported OP of JPY205.6bn down by -19.0% YoY. Despite revising its guidance downwards following the 3Q earnings release (expected -17.3% YoY instead of -7.8% YoY), Aisin still could not achieve its target reporting an OP below their expectation (by -2.4%) and market expectations (by -6.4%). As we mentioned in Key Takeaways from Our Visit to Aisin Seiki, the key reason for this was the increase in R&amp;D cost for advanced investment and quality control, alongside the ‘China effect’.
Thus, despite the steady growth in top-line, Aisin’s FY03/19 earnings appeared to be quite disappointing with both revenue and OP falling below consensus estimates. Moreover, although Aisin stated to us that the quality control costs are already expensed and should not affect profits further, the company guided for a notable OP decline again for FY03/20. As we previously mentioned this could be due to the slow-down impacts stemming from China given the country’s unfavourable and unstable macro-economic conditions alongside the company’s expected increase in R&amp;D and fixed costs. Aisin expects a marginal decline of -0.1% YoY in revenue for FY03/20E, and a -12.4% YoY decline in OP for the same period. Although we believe that business in China will have a notable impact on the company’s overall profitability ( given the company's 25% downwards revision in automatic transmission (AT) sales in China for FY03/20), we also feel that Aisin is being quite conservative in its guidance possibly to keep market expectations low. Following the release, Aisin closed -2.8% down on Friday from Thursday’s close.

FY03/19 Results Quite Disappointing; Medium-Long Term Growth Prospects Hint A Possible Rebound

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Quantitative Analysis

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/347/original/2019-04-20_09-59-40.png?1555722056" class="editor-image img-responsive" data-smartkarma-image-id="85347"></figure><div class="content-caption">Source: Japan Analytics</div>UnCh - Japanese equities are unchanged in US dollar terms over both three and six months. The Bank of Japan has intervened on 42 of the 121 trading days since October 22nd or an average of 1.6 times a week as foreigners remain underweight. As corporate results and macro data continue to disappoint, the outlook for the market is muted ahead of the upcoming ten-day holiday which combines the traditional Golden Week holidays with the accession of the new Emperor and the beginning of the Reiwa era (令和時代).  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/405/original/2019-04-21_07-28-03.png?1555799330" class="editor-image img-responsive" data-smartkarma-image-id="85405"></figure><div class="content-caption">Source: Investing.com</div>CURRENCY RISK? - "UnCh" also applies to <a href="https://www.smartkarma.com/entities/22826" target="_blank" data-smartkarma-citation="entities:22826:1">JPY (USDJPY CURNCY)</a>  Implied volatility for 9-month USDJPY options reached a new 25-year low last week of 6.11. The previous two lows were in 2006 and 2015 and were followed by periods of sustained Yen strength. The equity market currently appears to be discounting precisely the opposite.   <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/350/original/2019-04-20_10-21-58.png?1555723331" class="editor-image img-responsive" data-smartkarma-image-id="85350"></figure><div class="content-caption">Source: Japan Analytics</div>VTR - The ratio of the value of stocks traded to the total market value continues to decline. The average for 2019 is 11% below that for the same period last year and is unchanged at 39bps in each month year-to-date.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/381/original/2019-04-20_14-34-11.png?1555738458" class="editor-image img-responsive" data-smartkarma-image-id="85381"></figure><div class="content-caption">Source: Japan Analytics</div>VOLUME SCORE TIMELINE - Volumes have been highest in the Internet, Retail, and Telecoms sectors, while the Materials, Transportation, Utilities and Real Estate Sectors have seen the lowest.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/352/original/2019-04-20_10-29-59.png?1555723806" class="editor-image img-responsive" data-smartkarma-image-id="85352"></figure><div class="content-caption">Source: Japan Analytics</div>LOWS &gt; HIGHS - With a deficit of positive news at the individual company level, the number of new 52-week highs has exceeded the number of new 52-week lows on only one-third of the last 31 trading days. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/363/original/2019-04-20_12-34-06.png?1555731278" class="editor-image img-responsive" data-smartkarma-image-id="85363"></figure><div class="content-caption">Source: Japan Analytics</div>DRIFTING LOWER - TTM and Forecasts Aggregate Operating and Net Income continue to drift lower ahead of the full-year results for March year-end companies which are due in a more-concentrated-than-usual period either side of the long break.   <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/384/original/2019-04-20_17-30-47.png?1555749055" class="editor-image img-responsive" data-smartkarma-image-id="85384"></figure><div class="content-caption">Source: Japan Analytics 
</div>MIND THE GAP - Based on our Scoring methodology for aggregate Results &amp; Revisions, the 'gap' between total market value and earnings momentum is now as wide as at the two previous 'peaks' in January 2018 and September 2018.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/435/original/File%202019-04-21%2015%2055%2018.jpeg?1555829876" class="editor-image img-responsive" data-smartkarma-image-id="85435"></figure><div class="content-caption">Source: Bank of America Merrill Lynch</div>GLOBAL WAVE - The market is implying that the earnings cycle is close to a bottom which is in accord with BAML's Global Earnings Revision Ratio having ticked up last month for the first time in 14 months. BAML has yet to call a Trough in their Global Wave and, were they to do so, such a Trough would be the first above '50' since 2006.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/378/original/2019-04-20_14-00-43.png?1555736454" class="editor-image img-responsive" data-smartkarma-image-id="85378"></figure>FORECASTS LEADING EARNINGS LOWER - Separating our the Results Score and the Forecast &amp; Revision Score, the latter is continuing to lead the former to the downside, although both Scores are in aggregate still positive. Reported earnings and forecasts are still growing year-on-year; however, the momentum is slowing rapidly.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/379/original/2019-04-20_14-04-23.png?1555736670" class="editor-image img-responsive" data-smartkarma-image-id="85379"></figure><div class="content-caption">Source: Japan Analytics</div>INTERIM LEADING ANNUAL LOWER -  Between February and September in each year, there is a statistically significant number of Interim Forecasts that they can be compared to the Annual Forecasts with which they are combined to derive the score in the previous chart. Interim Forecasts are often prepared by the divisional heads are not accorded the same 'reverence' as the Annual Forecasts. As a result, the Interim numbers offer a good leading indicator of short-term trends. In recent weeks, the aggregate Interim Forecast/Revision Score has turned sharply lower and is now at the lowest point in almost two years.   In the DETAIL section below, we will review Sector performance, company results, revisions and stock performance over the previous two weeks, as well as adding some brief comments on <a href="https://www.smartkarma.com/entities/14191" target="_blank" data-smartkarma-citation="entities:14191:1">Koshidaka (2157 JP)</a>, <a href="https://www.smartkarma.com/entities/2765" target="_blank" data-smartkarma-citation="entities:2765:1">Ryohin Keikaku (7453 JP)</a>, Drugstores, <a href="https://www.smartkarma.com/entities/237" target="_blank" data-smartkarma-citation="entities:237:1">Daiwa House (1925 JP)</a>, Toyota Parts companies, and <a href="https://www.smartkarma.com/entities/2" target="_blank" data-smartkarma-citation="entities:2:1">Yamato Holdings (9064 JP)</a>.

Source: Japan AnalyticsUnCh - Japanese equities are unchanged in US dollar terms over both three and six months. The Bank of Japan has intervened on 42 of the 121 trading days since October 22nd or an average of 1.6 times a week as foreigners remain underweight. As corporate results and macro data continue to disappoint, the outlook for the market is muted ahead of the upcoming ten-day holiday which combines the traditional Golden Week holidays with the accession of the new Emperor and the beginning of the Reiwa era (令和時代).  Source: Investing.comCURRENCY RISK? - "UnCh" also applies to JPY (USDJPY CURNCY)  Implied volatility for 9-month USDJPY options reached a new 25-year low last week of 6.11. The previous two lows were in 2006 and 2015 and were followed by periods of sustained Yen strength. The equity market currently appears to be discounting precisely the opposite.   Source: Japan AnalyticsVTR - The ratio of the value of stocks traded to the total market value continues to decline. The average for 2019 is 11% below that for the same period last year and is unchanged at 39bps in each month year-to-date.Source: Japan AnalyticsVOLUME SCORE TIMELINE - Volumes have been highest in the Internet, Retail, and Telecoms sectors, while the Materials, Transportation, Utilities and Real Estate Sectors have seen the lowest.Source: Japan AnalyticsLOWS &gt; HIGHS - With a deficit of positive news at the individual company level, the number of new 52-week highs has exceeded the number of new 52-week lows on only one-third of the last 31 trading days. Source: Japan AnalyticsDRIFTING LOWER - TTM and Forecasts Aggregate Operating and Net Income continue to drift lower ahead of the full-year results for March year-end companies which are due in a more-concentrated-than-usual period either side of the long break.   Source: Japan Analytics 
MIND THE GAP - Based on our Scoring methodology for aggregate Results &amp; Revisions, the 'gap' between total market value and earnings momentum is now as wide as at the two previous 'peaks' in January 2018 and September 2018.Source: Bank of America Merrill LynchGLOBAL WAVE - The market is implying that the earnings cycle is close to a bottom which is in accord with BAML's Global Earnings Revision Ratio having ticked up last month for the first time in 14 months. BAML has yet to call a Trough in their Global Wave and, were they to do so, such a Trough would be the first above '50' since 2006.FORECASTS LEADING EARNINGS LOWER - Separating our the Results Score and the Forecast &amp; Revision Score, the latter is continuing to lead the former to the downside, although both Scores are in aggregate still positive. Reported earnings and forecasts are still growing year-on-year; however, the momentum is slowing rapidly.Source: Japan AnalyticsINTERIM LEADING ANNUAL LOWER -  Between February and September in each year, there is a statistically significant number of Interim Forecasts that they can be compared to the Annual Forecasts with which they are combined to derive the score in the previous chart. Interim Forecasts are often prepared by the divisional heads are not accorded the same 'reverence' as the Annual Forecasts. As a result, the Interim numbers offer a good leading indicator of short-term trends. In recent weeks, the aggregate Interim Forecast/Revision Score has turned sharply lower and is now at the lowest point in almost two years.   In the DETAIL section below, we will review Sector performance, company results, revisions and stock performance over the previous two weeks, as well as adding some brief comments on Koshidaka (2157 JP), Ryohin Keikaku (7453 JP), Drugstores, Daiwa House (1925 JP), Toyota Parts companies, and Yamato Holdings (9064 JP).

🇯🇵 Japan • Fortnightly Update - "UnCh"

This Insight is following our visit to <a href="https://www.smartkarma.com/entities/11809" target="_blank" data-smartkarma-citation="entities:11809:1">Aisin Seiki (7259 JP)</a> last month. Our focus in the meeting was to mainly cover our key areas of concern, which include the company’s significant decline in OP during 3Q (Aisin Takes a 50% Cut in OP This Quarter; A Downward Revision in FY03/19E Target), its business performance in China and the US, and its stance on the competitive landscape having noted a significant takeover this year (<a href="https://www.smartkarma.com/insights/wabco-confirms-being-a-takeover-target-of-the-private-german-auto-parts-maker-zf" target="_blank" data-smartkarma-citation="insights:28324">WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF</a>). Although our meeting with the company was a relatively short one this time, we did leave the company strongly convinced about our long-held initial view on the company.

This Insight is following our visit to Aisin Seiki (7259 JP) last month. Our focus in the meeting was to mainly cover our key areas of concern, which include the company’s significant decline in OP during 3Q (Aisin Takes a 50% Cut in OP This Quarter; A Downward Revision in FY03/19E Target), its business performance in China and the US, and its stance on the competitive landscape having noted a significant takeover this year (WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF). Although our meeting with the company was a relatively short one this time, we did leave the company strongly convinced about our long-held initial view on the company.

Key Takeaways from Our Visit to Aisin Seiki

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

<a href="https://asia.nikkei.com/Business/Companies/Toyota-seeks-to-keep-hybrids-relevant-by-releasing-trove-of-patents" target="_blank">The Nikkei announced this morning</a> that <a href="https://www.smartkarma.com/entities/73" target="_blank" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a> was considering opening up its portfolio of hybrid patents for outside use, possibly for free.We recently visited Toyota at its Toyota city headquarters and spent some time discussing this very topic. We believe this move is being made with an eye towards China in particular and to an extent the US. We would also highlight <a href="https://asia.nikkei.com/Business/Toyota-tech-to-power-Suzuki-hybrids-worldwide" target="_blank">the continuing development of Toyota's relationship with Suzuki</a>. As the automakers move slowly towards what is likely to be an eventual union, the sharing of hybrid technology with Suzuki could have a significant impact on the medium-term prospects of both automakers.

The Nikkei announced this morning that Toyota Motor (7203 JP) was considering opening up its portfolio of hybrid patents for outside use, possibly for free.We recently visited Toyota at its Toyota city headquarters and spent some time discussing this very topic. We believe this move is being made with an eye towards China in particular and to an extent the US. We would also highlight the continuing development of Toyota's relationship with Suzuki. As the automakers move slowly towards what is likely to be an eventual union, the sharing of hybrid technology with Suzuki could have a significant impact on the medium-term prospects of both automakers.

Toyota: Hitting the Hybrid Accelerator and Towing Suzuki and Mazda in Its Wake

Event-Driven

Last morning the listed brake supplier, <a href="https://www.smartkarma.com/entities/10259" target="_blank" data-smartkarma-citation="entities:10259:1">Wabco Holdings (WBC US)</a> confirmed that it is in takeover talks with one of the leading auto parts suppliers in Germany, ZF Friedrichshafen AG. Following the news of being possibly bought by a private company, WABCO’s stock surged almost 10% during the day, reaching USD130.5 by the day’s close.  This positive market reaction for WABCO was purely based on its confirmation about having preliminary takeover discussions with its rival company, ZF. There were no further details released on the possible deal price or about the plans that either company has after the takeover. Further, ZF in a news report stated that no decision has been taken yet and that it was the preliminary discussions that were being done. However, we do note the following:
<ul>
<li>ZF is known to have made such strategic acquisitions in aiding the long-term development of the company. A similar strategic move was made by ZF back in 2015, when it took over TRW Automotive Holding to expand its exposure to sensors and electronic components.</li>
<li>In June last year, ZF stated in a news report that it is not prioritising interest in brake suppliers, as its focus is to pursue investments in developing components to support next generation technologies and reported its plan to further invest more than EUR12bn into e-mobility and the autonomous driving field. This could indicate that WABCO takeover discussions may involve reasonable price discipline from ZF, and we would note that ZF had previously desired to acquire Wabco for about €6-8bn. However, we believe that the buyout does look attractive for both companies, especially for ZF, given the possible synergistic effects that could support ZF’s next gen technologies.</li>
<li>In the last go around, ZF had just completed its acquisition of TRW and the balance sheet made a further large acquisition difficult. Now, much of the additional debt from the TRW has been digested and although levering up again could place considerable financial pressure on ZF in the short term, the company’s history makes up believe that it has the capability to handle any such pressure once synergies kick-in and restore its balance sheet in short order.</li>
</ul>

Last morning the listed brake supplier, Wabco Holdings (WBC US) confirmed that it is in takeover talks with one of the leading auto parts suppliers in Germany, ZF Friedrichshafen AG. Following the news of being possibly bought by a private company, WABCO’s stock surged almost 10% during the day, reaching USD130.5 by the day’s close.  This positive market reaction for WABCO was purely based on its confirmation about having preliminary takeover discussions with its rival company, ZF. There were no further details released on the possible deal price or about the plans that either company has after the takeover. Further, ZF in a news report stated that no decision has been taken yet and that it was the preliminary discussions that were being done. However, we do note the following:

ZF is known to have made such strategic acquisitions in aiding the long-term development of the company. A similar strategic move was made by ZF back in 2015, when it took over TRW Automotive Holding to expand its exposure to sensors and electronic components.
In June last year, ZF stated in a news report that it is not prioritising interest in brake suppliers, as its focus is to pursue investments in developing components to support next generation technologies and reported its plan to further invest more than EUR12bn into e-mobility and the autonomous driving field. This could indicate that WABCO takeover discussions may involve reasonable price discipline from ZF, and we would note that ZF had previously desired to acquire Wabco for about €6-8bn. However, we believe that the buyout does look attractive for both companies, especially for ZF, given the possible synergistic effects that could support ZF’s next gen technologies.
In the last go around, ZF had just completed its acquisition of TRW and the balance sheet made a further large acquisition difficult. Now, much of the additional debt from the TRW has been digested and although levering up again could place considerable financial pressure on ZF in the short term, the company’s history makes up believe that it has the capability to handle any such pressure once synergies kick-in and restore its balance sheet in short order.


WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF

Japan

Aisin Corporation manufactures and distributes motor vehicle parts. The Company produces drive train, transmissions, clutches, disc brakes, anti-skid brake system, suspensions, oil pumps, power windows, power door locks, and more. Aisin operates sales and production subsidiaries worldwide.

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Aisin (7259 JP)

FY03/19 Results Quite Disappointing; Medium-Long Term Growth Prospects Hint A Possible Rebound

Aisin Seiki (7259 JP) reported revenue of JPY4,043bn (+3.4% YoY) above their revenue target for FY03/19 (by +1.6%), driven by the increase in AT,...

Aqila Ali

🇯🇵 Japan • Fortnightly Update - "UnCh"

UnCh - Japanese equities are unchanged in US dollar terms over both three and six months. The Bank of Japan has intervened on 42 of the 121 trading...

Campbell Gunn

Key Takeaways from Our Visit to Aisin Seiki

This Insight is following our visit to Aisin Seiki (7259 JP) last month. Our focus in the meeting was to mainly cover our key areas of concern,...

Aqila Ali

Toyota: Hitting the Hybrid Accelerator and Towing Suzuki and Mazda in Its Wake

The Nikkei announced this morning that Toyota Motor (7203 JP) was considering opening up its portfolio of hybrid patents for outside use, possibly...

Mio Kato

WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF

Last morning the listed brake supplier, Wabco Holdings (WBC US) confirmed that it is in takeover talks with one of the leading auto parts suppliers...

Aqila Ali

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