Equity Analyst, LightStream Research

Shifara Samsudeen, FCMA, CGMA

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/tokyo-electron-ltd/overview" target="_blank" rel="noopener">Tokyo Electron (8035 JP/TEL)</a> reported its 1QFY03/2020 earnings on Friday (26th July) which saw its revenue declining 26.8% YoY while operating profit decreased at a much higher rate of 41.2% YoY which resulted in a 480bps decline in OPM. Both revenue and operating profit fell below consensus expectations. The Semiconductor Production Equipment Segment's revenue (SPE) declined almost 30% YoY while the Flat Panel Display (FPD) segment saw 20.6% YoY increase in revenue. For FY03/2020, TEL expects decline in revenue and operating profits compared to the previous year, however, it suggests that the company is expecting the second half of the year to be stronger than the first half. However, an analysis on the company’s earnings over the past two semiconductor cycles suggests that the company earnings were impacted for almost 8 quarters before it started recovering. The market too does not expect the semiconductor demand to resume a recovery anytime this year but towards mid-2020. Based on our valuation, we believe the company is overvalued at its current prices.We discuss the details below.

Tokyo Electron (8035 JP/TEL) reported its 1QFY03/2020 earnings on Friday (26th July) which saw its revenue declining 26.8% YoY while operating profit decreased at a much higher rate of 41.2% YoY which resulted in a 480bps decline in OPM. Both revenue and operating profit fell below consensus expectations. The Semiconductor Production Equipment Segment's revenue (SPE) declined almost 30% YoY while the Flat Panel Display (FPD) segment saw 20.6% YoY increase in revenue. For FY03/2020, TEL expects decline in revenue and operating profits compared to the previous year, however, it suggests that the company is expecting the second half of the year to be stronger than the first half. However, an analysis on the company’s earnings over the past two semiconductor cycles suggests that the company earnings were impacted for almost 8 quarters before it started recovering. The market too does not expect the semiconductor demand to resume a recovery anytime this year but towards mid-2020. Based on our valuation, we believe the company is overvalued at its current prices.We discuss the details below.

TEL: 1Q Earnings Down, Expects Recovery in 2H but Past Downturns Suggest It Could Take Longer

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

The Japan Exchange Group (JPX) publishes a daily report that details the short sell activity by market participants. JPX aggregates broker short sell reports and discloses information such as the short sale positions and the names of the investors whose short sale positions reach 0.5% of the outstanding shares. Here is some information on short positions for the week ended 19 July.The short notional in the market for the week ended 19 July is US$23.7bn with the largest short names being <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a>, <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1:1">Canon Inc (7751 JP)</a>, <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a>, <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-gr" target="_blank" rel="noopener" data-smartkarma-citation="entities:217:1">Sumitomo Mitsui Financial (8316 JP)</a> and <a href="https://www.smartkarma.com/entities/kddi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:639:1">KDDI Corp (9433 JP)</a>. Most shorted stocks as a percentage of free float are <a href="https://www.smartkarma.com/entities/leopalace21-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:8244:1">Leopalace21 Corp (8848 JP)</a>, <a href="https://www.smartkarma.com/entities/tokai-carbon-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9145:1">Tokai Carbon (5301 JP)</a> and <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a> while names with the most days to cover are <a href="https://www.smartkarma.com/entities/katakura-industries-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:2007:1">Katakura Industries (3001 JP)</a>, <a href="https://www.smartkarma.com/entities/mirait-holdings-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:7034:1">Mirait Holdings (1417 JP)</a> and <a href="https://www.smartkarma.com/entities/vital-ksk-holdings-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:7398:1">Vital Ksk Holdings (3151 JP)</a>.  The largest increases in short notional over the week were <a href="https://www.smartkarma.com/entities/ricoh-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:15359:1">Ricoh Co Ltd (7752 JP)</a>, <a href="https://www.smartkarma.com/entities/cyberagent-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:8197:1">Cyberagent Inc (4751 JP)</a>, <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a> and <a href="https://www.smartkarma.com/entities/monotaro-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:15441:1">Monotaro Co Ltd (3064 JP)</a> while the largest short covering was seen in <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-gr" target="_blank" rel="noopener" data-smartkarma-citation="entities:217:1">Sumitomo Mitsui Financial (8316 JP)</a>, <a href="https://www.smartkarma.com/entities/ms-ad-insurance-group-holdin" target="_blank" rel="noopener" data-smartkarma-citation="entities:631:1">Ms&amp;Ad Insurance Group Holdin (8725 JP)</a>, <a href="https://www.smartkarma.com/entities/advantest-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18107:1">Advantest Corp (6857 JP)</a> and <a href="https://www.smartkarma.com/entities/dic-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:7343:1">Dic Corp (4631 JP)</a>.

The Japan Exchange Group (JPX) publishes a daily report that details the short sell activity by market participants. JPX aggregates broker short sell reports and discloses information such as the short sale positions and the names of the investors whose short sale positions reach 0.5% of the outstanding shares. Here is some information on short positions for the week ended 19 July.The short notional in the market for the week ended 19 July is US$23.7bn with the largest short names being Itochu Corp (8001 JP), Canon Inc (7751 JP), Taiyo Yuden (6976 JP), Sumitomo Mitsui Financial (8316 JP) and KDDI Corp (9433 JP). Most shorted stocks as a percentage of free float are Leopalace21 Corp (8848 JP), Tokai Carbon (5301 JP) and Taiyo Yuden (6976 JP) while names with the most days to cover are Katakura Industries (3001 JP), Mirait Holdings (1417 JP) and Vital Ksk Holdings (3151 JP).  The largest increases in short notional over the week were Ricoh Co Ltd (7752 JP), Cyberagent Inc (4751 JP), Taiyo Yuden (6976 JP) and Monotaro Co Ltd (3064 JP) while the largest short covering was seen in Sumitomo Mitsui Financial (8316 JP), Ms&amp;Ad Insurance Group Holdin (8725 JP), Advantest Corp (6857 JP) and Dic Corp (4631 JP).   

Short Sell Reporting - Insights for the Week Ended July 19

Event-Driven

<a href="https://www.smartkarma.com/entities/applied-materials-inc/overview" target="_blank" rel="noopener">Applied Materials (AMAT US)</a> on Monday (01st July 2019) announced that it is to acquire all outstanding shares of Japanese peer Kokusai Electric in a deal which is expected to be worth JPY250bn (US$2.2bn) and expects to close the deal within the next 12 months. The acquisition is expected to expand Applied Materials’ product line-up and thus make it easier for the company to develop new devices as well as build up technological know-how. AMAT expects the acquisition to be EPS accretive (non-GAAP EPS) immediately upon closing the transaction.
In our opinion, the acquisition will likely help AMAT expand its current production line-up of semiconductor equipment with Kokusai’s leading-edge technology on semiconductor deposition. We also believe that the deal will help the company achieve its aim of developing more advanced chips to accommodate applications such as 5G networks and artificial intelligence at a time where the entire semiconductor industry is going through a cyclical downturn. Kokusai is owned by KKR, a US-based buy-out firm and we believe, the deal will provide Kokusai with a comfortable home to continue its operations and to share the two companies’ technological expertise and distribution channels.
We discuss the details below.

Applied Materials (AMAT US) on Monday (01st July 2019) announced that it is to acquire all outstanding shares of Japanese peer Kokusai Electric in a deal which is expected to be worth JPY250bn (US$2.2bn) and expects to close the deal within the next 12 months. The acquisition is expected to expand Applied Materials’ product line-up and thus make it easier for the company to develop new devices as well as build up technological know-how. AMAT expects the acquisition to be EPS accretive (non-GAAP EPS) immediately upon closing the transaction.
In our opinion, the acquisition will likely help AMAT expand its current production line-up of semiconductor equipment with Kokusai’s leading-edge technology on semiconductor deposition. We also believe that the deal will help the company achieve its aim of developing more advanced chips to accommodate applications such as 5G networks and artificial intelligence at a time where the entire semiconductor industry is going through a cyclical downturn. Kokusai is owned by KKR, a US-based buy-out firm and we believe, the deal will provide Kokusai with a comfortable home to continue its operations and to share the two companies’ technological expertise and distribution channels.
We discuss the details below.

Applied Materials to Acquire Kokusai Electric; The Businesses Complement Each Other Well

<ul>
<li>
<a href="https://www.smartkarma.com/entities/tokyo-electron-ltd/overview" target="_blank">Tokyo Electron (8035 JP/TEL)</a>reported its 4QFY03/19 and full-year FY03/19 results on 26th of April. The company reported a solid full-year with double-digit growth in revenue and operating profit due to strong demand for semiconductors mainly during the first half of the year.</li>
<li>However, the fourth quarter numbers failed to impress with both revenue and operating profit declining YoY, providing the indication that the semiconductor downturn has started impacting the company’s results.</li>
<li>Moreover, the management is expecting the FY03/2020 to have the worst impact from the memory market decline with revenue and operating profit forecasted to decline 13.9% YoY and 29.2% YoY respectively. This did not come in as a surprise to us as the semiconductor market has already been decelerating and the market expects the inventory adjustments to continue well into 2019.</li>
<li>We feel the stock is still overvalued at its current price of JPY17,645 per share and it could decline further once the market witnesses the severity of the down-cycle. Despite management being positive about the future business prospects, we feel it is too soon to establish a bullish view on the stock given the current decline in the semiconductor market.</li>
</ul>



Tokyo Electron (8035 JP/TEL)reported its 4QFY03/19 and full-year FY03/19 results on 26th of April. The company reported a solid full-year with double-digit growth in revenue and operating profit due to strong demand for semiconductors mainly during the first half of the year.
However, the fourth quarter numbers failed to impress with both revenue and operating profit declining YoY, providing the indication that the semiconductor downturn has started impacting the company’s results.
Moreover, the management is expecting the FY03/2020 to have the worst impact from the memory market decline with revenue and operating profit forecasted to decline 13.9% YoY and 29.2% YoY respectively. This did not come in as a surprise to us as the semiconductor market has already been decelerating and the market expects the inventory adjustments to continue well into 2019.
We feel the stock is still overvalued at its current price of JPY17,645 per share and it could decline further once the market witnesses the severity of the down-cycle. Despite management being positive about the future business prospects, we feel it is too soon to establish a bullish view on the stock given the current decline in the semiconductor market.


Tokyo Electron Reports Strong FY03/19 Results; Outlook for FY03/20 Looks Weak but Nothing Surprising

'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. 

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/086/182/original/2019-04-29_12-24-09.png?1556508262" class="editor-image img-responsive" data-smartkarma-image-id="86182"></figure>Source: Japan Analytics
</div>EARLY DAYS - In the last seven trading days, 473 Japanese companies have reported quarterly results, 11% of the 3,830 that are currently listed. Of this 76 % have been annual results for the fiscal year ended March 2019.  Also, there have been 328 initial forecasts for the year to March 2020, 227 initial interim forecasts and 228 intra-year revisions. With the long holiday break, there will be an avalanche of announcements from the 7th May onwards. In this Insight, we shall look at the trends apparent in the results so far released.  In the last month, our Market Composite trailing-twelve-month (TTM) data series is unchanged for Operating Income, while Net Income has increased by ¥0.2t. With 13% of March-year-end companies have issued FY2020 forecasts, aggregate forecast Operating Income is ¥0.7t lower and is in line with TTM Operating Income. Forecast Net Income is ¥0.6 lower and is 4% below TTM Net Income. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/086/411/original/2019-04-30_13-26-24.png?1556598396" class="editor-image img-responsive" data-smartkarma-image-id="86411"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/086/412/original/File%202019-04-30%2013%2010%2017.jpeg?1556598417" class="editor-image img-responsive" data-smartkarma-image-id="86412"></figure><div class="content-caption">Source: Japan Analytics, Pictet Asset Management</div>MARGIN SLIPPAGE - With revenues remaining relatively robust, margins are declining fast that at any time since 2016. The forecast operating margin is now 42 basis points below the 2018 peak level, while the slippage in net margins is 78 basis points. Although the sample is not the same, to IBES consensus estimates have current downtrend bottoming out in the second half of the year with net margins recovering to 6.6% in 2021. We consider this overly optimistic. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/086/187/original/2019-04-29_12-32-53.png?1556508784" class="editor-image img-responsive" data-smartkarma-image-id="86187"></figure><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/086/190/original/2019-04-29_12-51-24.png?1556509893" class="editor-image img-responsive" data-smartkarma-image-id="86190"></figure>Source: Japan Analytics
</div>RESULTS &amp; REVISION SCORES - Our scoring methodology for results and forecasts/revisions incorporates rates of change and other momentum factors and has historically provided a better fit with changes in aggregate market value. Although the Market Composite Results Score has remained stable in the last week at 2.21, we expect the score to end this results 'season' closer to zero as indicated by the trend in the Forecast/Revision Score. The latter has declined for six quarters in a row and the current quarter will make it seven. Although our data series only covers the last forty quarters and is perhaps too short for generalisations, it would be unusual for the Forecasts/Revision Score series to have an eighth down quarter in a row. Perhaps the market's robust recovery from the Christmas Day low is anticipating such an outcome. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/086/193/original/2019-04-29_13-17-03.png?1556511439" class="editor-image img-responsive" data-smartkarma-image-id="86193"></figure><div class="content-caption">Source: Japan Analytics</div>USDJPY NEUTRAL - In the past, one of the principal drivers of both scores has been changes in the US dollar/Yen exchange rate. The chart above merges both scores to create a cleaner timeline, and key turning points in <a href="https://www.smartkarma.com/entities/22826" target="_blank" data-smartkarma-citation="entities:22826:1">JUSDJPY CURNCY</a> highlighted. With the currency cross trading in a narrow range, there is little support or stimulus in the next six months. However, any sustained weakness in the Yen, such as occurred from September 2016, will be another confirmation that a cycle low has been reached. <div class="content-highlight">In the DETAIL section below, we update our  Sector Results &amp; Revision Scores and look at the best and worst large-cap company results over the seven trading days.</div>


Source: Japan Analytics
EARLY DAYS - In the last seven trading days, 473 Japanese companies have reported quarterly results, 11% of the 3,830 that are currently listed. Of this 76 % have been annual results for the fiscal year ended March 2019.  Also, there have been 328 initial forecasts for the year to March 2020, 227 initial interim forecasts and 228 intra-year revisions. With the long holiday break, there will be an avalanche of announcements from the 7th May onwards. In this Insight, we shall look at the trends apparent in the results so far released.  In the last month, our Market Composite trailing-twelve-month (TTM) data series is unchanged for Operating Income, while Net Income has increased by ¥0.2t. With 13% of March-year-end companies have issued FY2020 forecasts, aggregate forecast Operating Income is ¥0.7t lower and is in line with TTM Operating Income. Forecast Net Income is ¥0.6 lower and is 4% below TTM Net Income. Source: Japan Analytics, Pictet Asset ManagementMARGIN SLIPPAGE - With revenues remaining relatively robust, margins are declining fast that at any time since 2016. The forecast operating margin is now 42 basis points below the 2018 peak level, while the slippage in net margins is 78 basis points. Although the sample is not the same, to IBES consensus estimates have current downtrend bottoming out in the second half of the year with net margins recovering to 6.6% in 2021. We consider this overly optimistic. 
Source: Japan Analytics
RESULTS &amp; REVISION SCORES - Our scoring methodology for results and forecasts/revisions incorporates rates of change and other momentum factors and has historically provided a better fit with changes in aggregate market value. Although the Market Composite Results Score has remained stable in the last week at 2.21, we expect the score to end this results 'season' closer to zero as indicated by the trend in the Forecast/Revision Score. The latter has declined for six quarters in a row and the current quarter will make it seven. Although our data series only covers the last forty quarters and is perhaps too short for generalisations, it would be unusual for the Forecasts/Revision Score series to have an eighth down quarter in a row. Perhaps the market's robust recovery from the Christmas Day low is anticipating such an outcome. Source: Japan AnalyticsUSDJPY NEUTRAL - In the past, one of the principal drivers of both scores has been changes in the US dollar/Yen exchange rate. The chart above merges both scores to create a cleaner timeline, and key turning points in JUSDJPY CURNCY highlighted. With the currency cross trading in a narrow range, there is little support or stimulus in the next six months. However, any sustained weakness in the Yen, such as occurred from September 2016, will be another confirmation that a cycle low has been reached. In the DETAIL section below, we update our  Sector Results &amp; Revision Scores and look at the best and worst large-cap company results over the seven trading days.

🇯🇵 Japan • Spring Results & Revisions Flash - Early Days

Japan

ADVANTEST CORPORATION produces semiconductor testing devices and electronic measuring instruments.  The Company's products include large-scale integration (LSI) test systems, memory test systems, dynamic test handlers, network analyzers, electronic meters, optical testing devices, and signal sources.

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Advantest Corp (6857 JP)

TEL: 1Q Earnings Down, Expects Recovery in 2H but Past Downturns Suggest It Could Take Longer

Tokyo Electron (8035 JP/TEL) reported its 1QFY03/2020 earnings on Friday (26th July) which saw its revenue declining 26.8% YoY while operating...

Shifara Samsudeen, FCMA, CGMA

Short Sell Reporting - Insights for the Week Ended July 19

The Japan Exchange Group (JPX) publishes a daily report that details the short sell activity by market participants. JPX aggregates broker short...

Brian Freitas

Applied Materials to Acquire Kokusai Electric; The Businesses Complement Each Other Well

Applied Materials (AMAT US) on Monday (01st July 2019) announced that it is to acquire all outstanding shares of Japanese peer Kokusai Electric in...

Shifara Samsudeen, FCMA, CGMA

Tokyo Electron Reports Strong FY03/19 Results; Outlook for FY03/20 Looks Weak but Nothing Surprising

Tokyo Electron (8035 JP/TEL)reported its 4QFY03/19 and full-year FY03/19 results on 26th of April. The company reported a solid full-year with...

Shifara Samsudeen, FCMA, CGMA

🇯🇵 Japan • Spring Results & Revisions Flash - Early Days

EARLY DAYS - In the last seven trading days, 473 Japanese companies have reported quarterly results, 11% of the 3,830 that are currently listed. Of...

Campbell Gunn

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