Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

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

The <a href="https://asia.nikkei.com/Business/Nissan-s-Ghosn-crisis/Nissan-to-slash-global-production-by-15" target="_blank">Nikkei reported</a> this morning that <a href="https://www.smartkarma.com/entities/72" target="_blank" data-smartkarma-citation="entities:72:1">Nissan Motor (7201 JP)</a> will cut global production by 15% for the coming FY03/20. Domestic production will remain at about 900k units but overseas production will drop 20% to 3.7m units.This appears to be the next step in a comprehensive overhaul of the company that the post-Ghosn management is pushing through. The article notes that sales incentives in the US will be cut while in China, the currently struggling market for smaller sedans will be deemphasised.The concern is the dividend, however, as the last time Nissan cut production so drastically, it was the financial crisis and the dividend was cut entirely. We do not expect such a serious result this time around but with Nissan looking like it has fully shifted towards a stance of strengthening its core operations we believe funds will be rerouted from shareholder returns to investment in the short-term.

The Nikkei reported this morning that Nissan Motor (7201 JP) will cut global production by 15% for the coming FY03/20. Domestic production will remain at about 900k units but overseas production will drop 20% to 3.7m units.This appears to be the next step in a comprehensive overhaul of the company that the post-Ghosn management is pushing through. The article notes that sales incentives in the US will be cut while in China, the currently struggling market for smaller sedans will be deemphasised.The concern is the dividend, however, as the last time Nissan cut production so drastically, it was the financial crisis and the dividend was cut entirely. We do not expect such a serious result this time around but with Nissan looking like it has fully shifted towards a stance of strengthening its core operations we believe funds will be rerouted from shareholder returns to investment in the short-term.

Nissan: Production Cut May Presage Dividend Cut Opening Up Downside

Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

February SAAR sequentially weakened to 16.6m units from 16.7m units in January 2019, and declined on YoY basis from 17.0m units in February 2018.  Media reports have attributed bad weather, government shutdown and consumer uncertainty about this year's tax refunds as some key reasons for the drop in SAAR.  While the jury is out, we believe these claims should be tested against March actuals in a month's time.  In the meantime, here are some of our initial observations regarding the February numbers:<ul>
<li>Average YTD incentive spending fell 4.8% YoY, which we believe can at least partially explain the drop in February SAAR.  Anecdotal evidence suggests that the industry has been moving away from zero percent financing in favor of cash deals in a rising interest rate environment.  Overall, there will be fewer new product launches in 2019 compared with 2018 in the industry so it remains to be seen how the incentive spendings go for the remainder of the year.  As for now there may be further needs to de-stock in the coming months.</li>
<li>Days supply rose sharply for light trucks while days supply for cars declined in February.  However, on a 3 month moving average basis days supply for both are rising, with higher light truck days supply.  </li>
<li>Light trucks in the industry mix climbed marginally to 69.4% in February from 68.1% in January but it was still down from December's  71.6%.  While it is too early to tell, we would begin to monitor whether the light truck mix has peaked.</li>
<li>Based on LMC Automotive's observations during the first 14 selling days of February, retail SAAR should have been about 75% of the total, suggesting that retail sales weakened while fleet sales sequentially strengthened in February.  On a YoY basis, fleet sales seems to have been flat while retail sales were down.</li>
<li>On the macro front there were some strong economic data points that could have led to a stronger SAAR: the 4.1% unemployment rate, and real disposable income rising by 2.3% sequentially from January.  However, the sequential improvement in consumer confidence based on the Univ. of Michigan Consumer Sentiment Index (CSI) still showed that sentiment remained at depressed levels from a year ago.   Mixed signals from the housing market, however, could be creating headwinds as we discussed in January (see <a href="https://www.smartkarma.com/insights/us-autos-looking-back-on-2018-and-musing-on-2019" target="_blank" data-smartkarma-citation="insights:27115">US Autos: Looking Back on 2018 and Musing on 2019</a>).  </li>
<li>In terms of brand performance in February, nearly every brand increased sales sequentially but generally lost volumes in YoY terms.  BMW, Hyundai-Kia, JLR, Mitsubishi, Porsche and Subaru managed to gain on YoY basis.  Tesla seems to have had a similar pattern based on third party estimates (Tesla does not release monthly sales figures).  On a cumulative YTD basis FCA, Ford, Honda, Hyundai-Kia, JLR, Mitsubishi, Porsche, Subaru and Tesla (again based on third party estimates) managed to achieve share gains against the backdrop of a 2.4% YoY industry decline.</li>
</ul>Based on our observations of the February figures, we maintain our cautious view on U.S. light vehicle demand in 2019.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/782/original/Screen%20Shot%202019-03-03%20at%208.46.31%20PM.png?1551613614" class="editor-image img-responsive" data-smartkarma-image-id="80782"></figure><div class="content-caption">Source: Autodata</div>

February SAAR sequentially weakened to 16.6m units from 16.7m units in January 2019, and declined on YoY basis from 17.0m units in February 2018.  Media reports have attributed bad weather, government shutdown and consumer uncertainty about this year's tax refunds as some key reasons for the drop in SAAR.  While the jury is out, we believe these claims should be tested against March actuals in a month's time.  In the meantime, here are some of our initial observations regarding the February numbers:
Average YTD incentive spending fell 4.8% YoY, which we believe can at least partially explain the drop in February SAAR.  Anecdotal evidence suggests that the industry has been moving away from zero percent financing in favor of cash deals in a rising interest rate environment.  Overall, there will be fewer new product launches in 2019 compared with 2018 in the industry so it remains to be seen how the incentive spendings go for the remainder of the year.  As for now there may be further needs to de-stock in the coming months.
Days supply rose sharply for light trucks while days supply for cars declined in February.  However, on a 3 month moving average basis days supply for both are rising, with higher light truck days supply.  
Light trucks in the industry mix climbed marginally to 69.4% in February from 68.1% in January but it was still down from December's  71.6%.  While it is too early to tell, we would begin to monitor whether the light truck mix has peaked.
Based on LMC Automotive's observations during the first 14 selling days of February, retail SAAR should have been about 75% of the total, suggesting that retail sales weakened while fleet sales sequentially strengthened in February.  On a YoY basis, fleet sales seems to have been flat while retail sales were down.
On the macro front there were some strong economic data points that could have led to a stronger SAAR: the 4.1% unemployment rate, and real disposable income rising by 2.3% sequentially from January.  However, the sequential improvement in consumer confidence based on the Univ. of Michigan Consumer Sentiment Index (CSI) still showed that sentiment remained at depressed levels from a year ago.   Mixed signals from the housing market, however, could be creating headwinds as we discussed in January (see US Autos: Looking Back on 2018 and Musing on 2019).  
In terms of brand performance in February, nearly every brand increased sales sequentially but generally lost volumes in YoY terms.  BMW, Hyundai-Kia, JLR, Mitsubishi, Porsche and Subaru managed to gain on YoY basis.  Tesla seems to have had a similar pattern based on third party estimates (Tesla does not release monthly sales figures).  On a cumulative YTD basis FCA, Ford, Honda, Hyundai-Kia, JLR, Mitsubishi, Porsche, Subaru and Tesla (again based on third party estimates) managed to achieve share gains against the backdrop of a 2.4% YoY industry decline.
Based on our observations of the February figures, we maintain our cautious view on U.S. light vehicle demand in 2019.Source: Autodata

February U.S. Auto Demand: Lower Incentives for Lower SAAR?

<a href="https://www.smartkarma.com/entities/5439" target="_blank" data-smartkarma-citation="entities:5439:1">Subaru Corp (7270 JP)</a> issued yet another recall notice last night, this time for the Impreza and Forester due to faulty brake lights. The recall affects vehicles manufactured between Sep 2008 and Mar 2017, but is minor in scope relative to the Nov 2018 valve spring recall and thus did not prompt a revision of the company's guidance.

Subaru Corp (7270 JP) issued yet another recall notice last night, this time for the Impreza and Forester due to faulty brake lights. The recall affects vehicles manufactured between Sep 2008 and Mar 2017, but is minor in scope relative to the Nov 2018 valve spring recall and thus did not prompt a revision of the company's guidance.

'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/000/079/068/original/2019-02-17_10-57-33.png?1550368676" class="editor-image img-responsive" data-smartkarma-image-id="79068"></figure><div class="content-caption">Source: Japan Analytics</div>PEAK CYCLE EARNINGS - In our <a href="https://www.smartkarma.com/insights/japan-winter-results-revisions-flash-cycle-earnings-peak-was-december-26th" target="_blank" data-smartkarma-citation="insights:28022">Winter Results &amp; Revisions Flash</a> Insight of yesterday, we noted that Japanese listed corporate earnings, after nine consecutive 'up' quarters, peaked on December 26th, two days before the market reached a twenty-month low having declined 22.5% in the preceding three months. Forecast earnings peaked on November 7th and have led reported earnings to the downside since August last year.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/079/069/original/2019-02-17_11-06-28.png?1550369207" class="editor-image img-responsive" data-smartkarma-image-id="79069"></figure><div class="content-caption">Source: Japan Analytics</div>ONE-YEAR LAG - Reported and forecast earnings are a lagging indicator and, in this instance, lagged by just under one year. Our preferred leading indicator, the Results &amp; Revision Score which includes earnings momentum factors, peaked on 11th November 2017, 44 trading days ahead of the peak in the Market Composite. As of Friday's close and with 99% of this quarters' announcements made, the Results &amp; Revisions Score is at a new 21-month. The score has now fallen by 70% and has halved since October 26th last year. We will cover the outlook in more detail in our upcoming quarterly Results and Revision review. However, the last two cycles (2009 and 2016) saw 'trough' scores of -9.6 and -2.1, respectively. There is ample room on the downside as export volumes continue to decline and the increase in the consumption tax in October tips Japan into a recession by year-end.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/079/070/original/2019-02-17_11-59-44.png?1550372400" class="editor-image img-responsive" data-smartkarma-image-id="79070"></figure><div class="content-caption">Source: Japan Analytics</div>SIDEWAYS - The market has moved sideways through the reporting window rising 0.7% in Yen terms and falling 0.7% in US$ terms. The weakness in the currency has helped offset the slide in profits.MARKET/SECTOR STRATEGY- We continue to recommend an underweight position in Japan in global portfolios and favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, and Telecommunications sectors. We would avoid or short the financial sectors Banks, Non-Bank Finance and Multi-Industry (Japan Post). We would underweight the Auto and Other Consumer Products sectors as consumer spending contracts further in the US, Europe, China and in Japan later in the year. In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of company results, revisions and stock performance over the previous two weeks, including brief comments on <a href="https://www.smartkarma.com/entities/5439" target="_blank" data-smartkarma-citation="entities:5439:1">Subaru (7270 JP)</a>, <a href="https://www.smartkarma.com/entities/1301" target="_blank" data-smartkarma-citation="entities:1301:1">Infomart (2492 JP)</a>, <a href="https://www.smartkarma.com/entities/16576" target="_blank" data-smartkarma-citation="entities:16576:1">Lion (4912 JP)</a>, <a href="https://www.smartkarma.com/entities/4102" target="_blank" data-smartkarma-citation="entities:4102:1">Nissan Chemical (4021 JP)</a>, <a href="https://www.smartkarma.com/entities/3077" target="_blank" data-smartkarma-citation="entities:3077:1">Keyence (6861 JP)</a>, <a href="https://www.smartkarma.com/entities/6267" target="_blank" data-smartkarma-citation="entities:6267:1">Suruga Bank (8358 JP)</a>, and <a href="https://www.smartkarma.com/entities/27149" target="_blank" data-smartkarma-citation="entities:27149:1">Mercari (4385 JP)</a>.

Source: Japan AnalyticsPEAK CYCLE EARNINGS - In our Winter Results &amp; Revisions Flash Insight of yesterday, we noted that Japanese listed corporate earnings, after nine consecutive 'up' quarters, peaked on December 26th, two days before the market reached a twenty-month low having declined 22.5% in the preceding three months. Forecast earnings peaked on November 7th and have led reported earnings to the downside since August last year.Source: Japan AnalyticsONE-YEAR LAG - Reported and forecast earnings are a lagging indicator and, in this instance, lagged by just under one year. Our preferred leading indicator, the Results &amp; Revision Score which includes earnings momentum factors, peaked on 11th November 2017, 44 trading days ahead of the peak in the Market Composite. As of Friday's close and with 99% of this quarters' announcements made, the Results &amp; Revisions Score is at a new 21-month. The score has now fallen by 70% and has halved since October 26th last year. We will cover the outlook in more detail in our upcoming quarterly Results and Revision review. However, the last two cycles (2009 and 2016) saw 'trough' scores of -9.6 and -2.1, respectively. There is ample room on the downside as export volumes continue to decline and the increase in the consumption tax in October tips Japan into a recession by year-end.Source: Japan AnalyticsSIDEWAYS - The market has moved sideways through the reporting window rising 0.7% in Yen terms and falling 0.7% in US$ terms. The weakness in the currency has helped offset the slide in profits.MARKET/SECTOR STRATEGY- We continue to recommend an underweight position in Japan in global portfolios and favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, and Telecommunications sectors. We would avoid or short the financial sectors Banks, Non-Bank Finance and Multi-Industry (Japan Post). We would underweight the Auto and Other Consumer Products sectors as consumer spending contracts further in the US, Europe, China and in Japan later in the year. In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of company results, revisions and stock performance over the previous two weeks, including brief comments on Subaru (7270 JP), Infomart (2492 JP), Lion (4912 JP), Nissan Chemical (4021 JP), Keyence (6861 JP), Suruga Bank (8358 JP), and Mercari (4385 JP). 

On a relative basis we have been positive on <a href="https://www.smartkarma.com/entities/73" target="_blank" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a>  and negative on <a href="https://www.smartkarma.com/entities/5439" target="_blank" data-smartkarma-citation="entities:5439:1">Subaru Corp (7270 JP)</a>  since early 2017 as we consider Toyota's underlying earnings strength to be superior to the majority of its peers and consider hybrids to be moving towards the mass adoption stage while we also feel that Subaru, after a purple patch when it led the automotive industry in terms of margins, is now falling back to Earth and the sell side remains behind the curve on the depth of issues and underspend that needs to be addressed at the company. The ratio between the two returned about 40% in 2018 but is down about 12% so far this year.In the case of <a href="https://www.smartkarma.com/entities/20528" target="_blank" data-smartkarma-citation="entities:20528:1">Mazda Motor (7261 JP)</a> and <a href="https://www.smartkarma.com/entities/732" target="_blank" data-smartkarma-citation="entities:732:1">Suzuki Motor (7269 JP)</a>, in Mar 2018 we took the contrarian view of preferring Mazda over Suzuki despite earnings momentum being significantly stronger for Suzuki than for Mazda. This proved to be "early" as the ratio declined 16% during the year and at one point fell as much as 30%, but we continue to feel that our thesis has merit and would note that the ratio is now up 2% relative to its value at our initial recommendation. Our thesis is simply that Mazda's earnings are under pressure due to forward investments in technology (extremely high efficiency gasoline and diesel engines) and distribution and after sales which have traditionally been a Mazda weakness and are in our opinion the main difference between Mazda and a much stronger company like Honda. In the case of Suzuki, while the long-term growth outlook due to the India exposure remains bright, we felt that momentum was likely to decelerate and that Suzuki could face headwinds in the short-term as consumer upgraded from mini-vehicles in which it is dominant, to compact and mid-size cars where Suzuki is strong in India, but not the force of nature that it is in the mini-vehicle segment. While it has taken time, recent results suggest this thesis is starting to play out.

On a relative basis we have been positive on Toyota Motor (7203 JP)  and negative on Subaru Corp (7270 JP)  since early 2017 as we consider Toyota's underlying earnings strength to be superior to the majority of its peers and consider hybrids to be moving towards the mass adoption stage while we also feel that Subaru, after a purple patch when it led the automotive industry in terms of margins, is now falling back to Earth and the sell side remains behind the curve on the depth of issues and underspend that needs to be addressed at the company. The ratio between the two returned about 40% in 2018 but is down about 12% so far this year.In the case of Mazda Motor (7261 JP) and Suzuki Motor (7269 JP), in Mar 2018 we took the contrarian view of preferring Mazda over Suzuki despite earnings momentum being significantly stronger for Suzuki than for Mazda. This proved to be "early" as the ratio declined 16% during the year and at one point fell as much as 30%, but we continue to feel that our thesis has merit and would note that the ratio is now up 2% relative to its value at our initial recommendation. Our thesis is simply that Mazda's earnings are under pressure due to forward investments in technology (extremely high efficiency gasoline and diesel engines) and distribution and after sales which have traditionally been a Mazda weakness and are in our opinion the main difference between Mazda and a much stronger company like Honda. In the case of Suzuki, while the long-term growth outlook due to the India exposure remains bright, we felt that momentum was likely to decelerate and that Suzuki could face headwinds in the short-term as consumer upgraded from mini-vehicles in which it is dominant, to compact and mid-size cars where Suzuki is strong in India, but not the force of nature that it is in the mini-vehicle segment. While it has taken time, recent results suggest this thesis is starting to play out.

Auto Earnings: Positive Toyota/Mazda, Negative Subaru/Suzuki

Japan

Subaru Corp manufactures passenger cars, buses, motor vehicle parts, and industrial machinery.  The Company also produces aircraft parts and supplies it to defense agency and Boeing Co.  The Company sells its passenger cars under the Subaru brand name.

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Subaru Corp (7270 JP)

Nissan: Production Cut May Presage Dividend Cut Opening Up Downside

The Nikkei reported this morning that Nissan Motor (7201 JP) will cut global production by 15% for the coming FY03/20. Domestic production will...

Mio Kato

February U.S. Auto Demand: Lower Incentives for Lower SAAR?

February SAAR sequentially weakened to 16.6m units from 16.7m units in January 2019, and declined on YoY basis from 17.0m units in February 2018. ...

Henry Kwon

Subaru: Another Month, Another Recall

Subaru Corp (7270 JP) issued yet another recall notice last night, this time for the Impreza and Forester due to faulty brake lights. The recall...

Mio Kato

Japan: Fortnightly Update: Past the Peak

PEAK CYCLE EARNINGS - In our Winter Results & Revisions Flash Insight of yesterday, we noted that Japanese listed corporate earnings, after...

Campbell Gunn

Auto Earnings: Positive Toyota/Mazda, Negative Subaru/Suzuki

On a relative basis we have been positive on Toyota Motor (7203 JP) and negative on Subaru Corp (7270 JP) since early 2017 as we consider...

Mio Kato

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