'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

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.

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/129/661/original/2020-04-26_07-20-46.png?1587853286" class="editor-image img-responsive" data-smartkarma-image-id="129661"></figure><div class="content-caption">Source • Japan Analytics</div>THE WEDGE - Both Japanese equities and the $/¥ exchange rate have traded in a narrow range over the last two weeks. Undeterred, the Bank of Japan intervened through ETF purchases three times last week. In total, since the low of March 16th, the central bank has bought ETFs equivalent to 3.5% of market value, and have supported a 15% 29-day rally. As the markets consolidate in anticipation of the impending 'rendezvous with reality' in the form of quarterly earnings, the resolution of the 'wedge' formations above will be to the downside.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/129/662/original/2020-04-26_07-39-05.png?1587854366" class="editor-image img-responsive" data-smartkarma-image-id="129662"></figure><div class="content-caption">Source • Japan Analytics</div>CANARIES - As we noted in Friday's <a href="https://www.smartkarma.com/insights/japan-revisions-results-23rd-april-getting-worse-rapidly-obics-tgas-canon-omron" target="_blank" data-smartkarma-citation="insights:38697" rel="noopener">Results Review</a>, interim forecasts are a useful 'canary' and, with some help from <a href="https://www.smartkarma.com/entities/fanuc-corp" target="_blank" data-smartkarma-citation="entities:752:1" rel="noopener">Fanuc (6954 JP)</a>, our composite Score is heading lower rapidly. A growing number of companies lacking Fanuc's candour are refusing to make initial full-year or interim forecasts this year leaving the market, and the sell-side, to 'fly blind'. The lack of foresight is resulting in a degree of misplaced optimism, as amply demonstrated by Friday's 7.5% gain in <a href="https://www.smartkarma.com/entities/omron-corp" target="_blank" data-smartkarma-citation="entities:15904:1" rel="noopener">Omron (6645 JP)</a> for 'beating' a six-month-old forecast for a mostly pre-COVID-19 year.     <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/129/665/original/File%202020-04-26%205%2006%2033.jpeg?1587856452" class="editor-image img-responsive" data-smartkarma-image-id="129665"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/129/666/original/File%202020-04-26%205%2007%2018.jpeg?1587856466" class="editor-image img-responsive" data-smartkarma-image-id="129666"></figure>PERSISTENCE - Japan is still 'behind' the world and ahead of the rest of Asia in COVID-19 metrics - Marco Piani's excellent global timeline chart is attached as an Appendix in the DETAIL below. The number of confirmed new cases is persistent at around 300, of which, alarmingly, an increasing number are outside Tokyo, while the rolling 3-day number of deaths is moving more towards Europe than the rest of Asia. The northern island of Hokkaido which saw some of the earliest case clusters in Japan is experiencing a second wave of infections.  Nishimura, the Cabinet minister in charge of the response to COVID-19, is now in quarantine at home after one of his aides tested positive. Sunday has brought some welcome good news - the nationwide daily case count has declined to 140. Nevertheless, with just ten days until the proposed end of the states of emergency, at least one extension is likely, possibly until the end of May. Such a declaration is not yet discounted in the equity market.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/129/667/original/IMG_1515.jpg?1587857128" class="editor-image img-responsive" data-smartkarma-image-id="129667"></figure><div class="content-caption">Source • NHK</div>PREVALENCE - Although a lack of widespread testing biases this data, the detected rates of infection by age cohort (descending in the chart above) and sex (male blue/female red) reveal the consequences of Japan's version of social distancing. The highest rates of infection are amongst those that have to commute or come into contact with others, men between the ages of 20 and 50 and childless women in their twenties, many of whom work in hospitals or check-out counters. 10% of all COVID-19 cases in Japan are medical staff or patients who were infected nosocomially.  Testing is still a major bottleneck due to excessive fax-centric bureaucracy and reliance on only non-private institutions. Only 6,000 tests are being carried out every day, two-thirds of total capacity, and the results take one week to obtain. PLEASE DIE AT HOME - A number of those infected with COVID-19 who have been told to 'stay home' as the hospitals are full are now dying in situ or on the street. Some local governments are being forced to change tack. All newly-confirmed patients that cannot be accommodated in hospitals are to be moved to hotels with medical staff in attendance. However, there is now a severe shortage of such personnel. Hospitals in Tokyo are still turning away suspected COVID-19 patients. Aichi prefecture has resorted to offering 'subsidies' of up to ¥4 million to hospitals for accepting new patients.ANTI-SOCIAL BEHAVIOUR - Japan is not immune to anti-social behaviour at the worst of times. Cars with license plates from other prefectures have been vandalised when parked or tailgated or verbally-abused on the road. Child care facilities are turning away children of hospital staff for fear they may already be asymptomatic carriers, prompting many medical workers to quit their jobs. Some companies are requiring employees who are working from home to be monitored by video during working hours to ensure they are at their desks and not helping out with the housework.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/129/670/original/title_1.jpg?1587859428" class="editor-image img-responsive" data-smartkarma-image-id="129670"></figure><div class="content-caption">Source • Sharp</div>ABE-'NO-MASKS'AND THE SHARP LOTTERY - The government has had to recall the small washable cloth masks that PM Abe planned to distribute two of per household due to mould, stains and insects being found in up to one-third of early batches. The roll-out of these much-criticised 'Abe masks' will be further delayed. Meanwhile, demand for <a href="https://www.smartkarma.com/entities/sharp-corp" target="_blank" data-smartkarma-citation="entities:391:1" rel="noopener">Sharp (6753 JP)</a>'s newly-manufactured higher quality single-use masks so overwhelmed the company's website, that Sharp has decided to hold a lottery as a way of rationing demand.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/129/725/original/2020-04-26_15-42-04.png?1587883347" class="editor-image img-responsive" data-smartkarma-image-id="129725"></figure><div class="content-caption">Source ♦ Japan Analytics</div>In the DETAIL below, we shall review the results, revisions and initial forecast announcements made on Friday by larger-cap companies.  The positive/neutral/negative balance for Friday's 28 results announcements was 13:1:14, and the net change in Results Score was -1. For the 47 revisions/forecasts, the split was 21:2:24 but the net change in Revision Score totalled -170. Of the eighteen companies declaring full-year results, only half made interim or annual forecasts for the current year. As we shall see below the 'worst' forecasts were from <a href="https://www.smartkarma.com/entities/fanuc-corp" target="_blank" data-smartkarma-citation="entities:752:1" rel="noopener">Fanuc (6954 JP)</a>, <a href="https://www.smartkarma.com/entities/amano-corp" target="_blank" data-smartkarma-citation="entities:8135:1" rel="noopener">Amano (6436 JP)</a>, <a href="https://www.smartkarma.com/entities/ana-holdings-inc" target="_blank" data-smartkarma-citation="entities:5308:1" rel="noopener">ANA (9202 JP)</a>, and <a href="https://www.smartkarma.com/entities/denso-corp" target="_blank" data-smartkarma-citation="entities:18703:1" rel="noopener">Denso (6902 JP)</a> (see chart above). Large=caps with improved Revisions Scores were <a href="https://www.smartkarma.com/entities/mochida-pharmaceutical-co" target="_blank" data-smartkarma-citation="entities:3655:1" rel="noopener">Mochida Pharmaceutical (4534 JP)</a>, <a href="https://www.smartkarma.com/entities/okinawa-cellular-telephone" target="_blank" data-smartkarma-citation="entities:6517:1" rel="noopener">Okinawa Cellular Telephone (9436 JP)</a> and <a href="https://www.smartkarma.com/entities/acom-co-ltd" target="_blank" data-smartkarma-citation="entities:8897:1" rel="noopener">Acom (8572 JP)</a>. <a href="https://www.smartkarma.com/entities/shionogi-co-ltd" target="_blank" data-smartkarma-citation="entities:19535:1" rel="noopener">Shionogi (4507 JP)</a> and two other companies raised dividends; none cut their payouts.

Source • Japan AnalyticsTHE WEDGE - Both Japanese equities and the $/¥ exchange rate have traded in a narrow range over the last two weeks. Undeterred, the Bank of Japan intervened through ETF purchases three times last week. In total, since the low of March 16th, the central bank has bought ETFs equivalent to 3.5% of market value, and have supported a 15% 29-day rally. As the markets consolidate in anticipation of the impending 'rendezvous with reality' in the form of quarterly earnings, the resolution of the 'wedge' formations above will be to the downside.Source • Japan AnalyticsCANARIES - As we noted in Friday's Results Review, interim forecasts are a useful 'canary' and, with some help from Fanuc (6954 JP), our composite Score is heading lower rapidly. A growing number of companies lacking Fanuc's candour are refusing to make initial full-year or interim forecasts this year leaving the market, and the sell-side, to 'fly blind'. The lack of foresight is resulting in a degree of misplaced optimism, as amply demonstrated by Friday's 7.5% gain in Omron (6645 JP) for 'beating' a six-month-old forecast for a mostly pre-COVID-19 year.     PERSISTENCE - Japan is still 'behind' the world and ahead of the rest of Asia in COVID-19 metrics - Marco Piani's excellent global timeline chart is attached as an Appendix in the DETAIL below. The number of confirmed new cases is persistent at around 300, of which, alarmingly, an increasing number are outside Tokyo, while the rolling 3-day number of deaths is moving more towards Europe than the rest of Asia. The northern island of Hokkaido which saw some of the earliest case clusters in Japan is experiencing a second wave of infections.  Nishimura, the Cabinet minister in charge of the response to COVID-19, is now in quarantine at home after one of his aides tested positive. Sunday has brought some welcome good news - the nationwide daily case count has declined to 140. Nevertheless, with just ten days until the proposed end of the states of emergency, at least one extension is likely, possibly until the end of May. Such a declaration is not yet discounted in the equity market.Source • NHKPREVALENCE - Although a lack of widespread testing biases this data, the detected rates of infection by age cohort (descending in the chart above) and sex (male blue/female red) reveal the consequences of Japan's version of social distancing. The highest rates of infection are amongst those that have to commute or come into contact with others, men between the ages of 20 and 50 and childless women in their twenties, many of whom work in hospitals or check-out counters. 10% of all COVID-19 cases in Japan are medical staff or patients who were infected nosocomially.  Testing is still a major bottleneck due to excessive fax-centric bureaucracy and reliance on only non-private institutions. Only 6,000 tests are being carried out every day, two-thirds of total capacity, and the results take one week to obtain. PLEASE DIE AT HOME - A number of those infected with COVID-19 who have been told to 'stay home' as the hospitals are full are now dying in situ or on the street. Some local governments are being forced to change tack. All newly-confirmed patients that cannot be accommodated in hospitals are to be moved to hotels with medical staff in attendance. However, there is now a severe shortage of such personnel. Hospitals in Tokyo are still turning away suspected COVID-19 patients. Aichi prefecture has resorted to offering 'subsidies' of up to ¥4 million to hospitals for accepting new patients.ANTI-SOCIAL BEHAVIOUR - Japan is not immune to anti-social behaviour at the worst of times. Cars with license plates from other prefectures have been vandalised when parked or tailgated or verbally-abused on the road. Child care facilities are turning away children of hospital staff for fear they may already be asymptomatic carriers, prompting many medical workers to quit their jobs. Some companies are requiring employees who are working from home to be monitored by video during working hours to ensure they are at their desks and not helping out with the housework.Source • SharpABE-'NO-MASKS'AND THE SHARP LOTTERY - The government has had to recall the small washable cloth masks that PM Abe planned to distribute two of per household due to mould, stains and insects being found in up to one-third of early batches. The roll-out of these much-criticised 'Abe masks' will be further delayed. Meanwhile, demand for Sharp (6753 JP)'s newly-manufactured higher quality single-use masks so overwhelmed the company's website, that Sharp has decided to hold a lottery as a way of rationing demand.Source ♦ Japan AnalyticsIn the DETAIL below, we shall review the results, revisions and initial forecast announcements made on Friday by larger-cap companies.  The positive/neutral/negative balance for Friday's 28 results announcements was 13:1:14, and the net change in Results Score was -1. For the 47 revisions/forecasts, the split was 21:2:24 but the net change in Revision Score totalled -170. Of the eighteen companies declaring full-year results, only half made interim or annual forecasts for the current year. As we shall see below the 'worst' forecasts were from Fanuc (6954 JP), Amano (6436 JP), ANA (9202 JP), and Denso (6902 JP) (see chart above). Large=caps with improved Revisions Scores were Mochida Pharmaceutical (4534 JP), Okinawa Cellular Telephone (9436 JP) and Acom (8572 JP). Shionogi (4507 JP) and two other companies raised dividends; none cut their payouts.

🇯🇵 JAPAN MARKET (& COVID-19) UPDATE 26th April - Thin End of the Wedge

Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

Mitsubishi UFJ Financial (MUFG) / Equity Bottom-Up

* ACOM’s Chronic Kaburai Underestimation: After the market close on April 24th, Mitsubishi UFJ Financial Holdings Group’s (8306.JP) [MUFG] subsidiary ACOM (8572.JP) announced a revisions to its FY (March) 2020 earnings forecasts, lowering its operating profit by JPY 12 bn (13.7%) reflecting a JPY 19.7 bn in kaburai interest repayment provisions; and* Pig Piling At MUFG: ACOM is far from the only headache at MUFG: post-COVID-19, we calculate that MUFG America’s will have a regulatory capital shortfall of up to USD 6.5 bn or 40% of MUFG America’s stated equity; impairments on subsidiaries; significant Softbank (9984.JP) exposure; and Morgan Stanley’s (MS.US) MUFG dilutive E*Trade (ETFC.US) transaction.

* ACOM’s Chronic Kaburai Underestimation: After the market close on April 24th, Mitsubishi UFJ Financial Holdings Group’s (8306.JP) [MUFG] subsidiary ACOM (8572.JP) announced a revisions to its FY (March) 2020 earnings forecasts, lowering its operating profit by JPY 12 bn (13.7%) reflecting a JPY 19.7 bn in kaburai interest repayment provisions; and* Pig Piling At MUFG: ACOM is far from the only headache at MUFG: post-COVID-19, we calculate that MUFG America’s will have a regulatory capital shortfall of up to USD 6.5 bn or 40% of MUFG America’s stated equity; impairments on subsidiaries; significant Softbank (9984.JP) exposure; and Morgan Stanley’s (MS.US) MUFG dilutive E*Trade (ETFC.US) transaction.

<ul><li>
Monthly Business Data Release Was Boring: ACOM released its monthly business data for February 2020, where the last week of the month witnessed the first week of self quarantine for the corona virus. Much to our chagrin, as yet there appears to be no discernible impact of the corona virus on growth and/or credit quality. </li></ul><ul><li>
Other Negative Factors:Inability of ACOM to further reduce funding costs in this even lower interest rate environment; kaburai claims to reverse course; and IFRS 9 impact on credit costs at Thai subsidiary. </li></ul>


Monthly Business Data Release Was Boring: ACOM released its monthly business data for February 2020, where the last week of the month witnessed the first week of self quarantine for the corona virus. Much to our chagrin, as yet there appears to be no discernible impact of the corona virus on growth and/or credit quality. 
Other Negative Factors:Inability of ACOM to further reduce funding costs in this even lower interest rate environment; kaburai claims to reverse course; and IFRS 9 impact on credit costs at Thai subsidiary. 

ACOM - Slowing Vice Spend & Kaburai Claim Trend Reversals

<ul>
<li>
Morgan Stanely/E*Trade Transaction: Morgan Stanley (MS.US) announced its intention to acquire ETFC.US for approximately USD 13 bn in an all stock transaction. According to Morgan Stanley, this deal is expected to be earnings accretive once ETFC is fully integrated and the aforementioned synergies are realized. In other words, over the next three years, ETFC will be earnings dilutive to Morgan Stanley.</li>
<li>
MUFG Should Worry About EPS Dilution: Given that Mitsubishi UFJ Financial Group (8306.JP) [MUFG] collectively owns 22.6% of the outstanding shares of Morgan Stanley on a fully diluted basis, and prior to this transaction Morgan Stanley represented an estimated and outsized 25.4% of MUFG's FY (March) 2019 bottom-line - despite MUFG's high reliance on gains. The ETFC transaction dilutes MUFG's Morgan Stanley stake by 2.55% to 20.01%. This transaction is anticipated to dilute MUFG's earnings attributable to Morgan Stanley by USD 160 mn or close to 8.0% YOY or 2% overall for MUFG in FY 2020.   </li>
<li>
MUFG Already Has Enough Headaches: Earnings at MUFG is quite tenuous. Outside of its high reliance on volatile sources of securities trading, impairment losses associated with its ownership stake in Bank Danamon (BNMN.IJ),  earnings pressures at Union Bank in California,  the re-jigging of the systems integration at MUFG NICOS too will weigh on future results. </li>
</ul>



Morgan Stanely/E*Trade Transaction: Morgan Stanley (MS.US) announced its intention to acquire ETFC.US for approximately USD 13 bn in an all stock transaction. According to Morgan Stanley, this deal is expected to be earnings accretive once ETFC is fully integrated and the aforementioned synergies are realized. In other words, over the next three years, ETFC will be earnings dilutive to Morgan Stanley.

MUFG Should Worry About EPS Dilution: Given that Mitsubishi UFJ Financial Group (8306.JP) [MUFG] collectively owns 22.6% of the outstanding shares of Morgan Stanley on a fully diluted basis, and prior to this transaction Morgan Stanley represented an estimated and outsized 25.4% of MUFG's FY (March) 2019 bottom-line - despite MUFG's high reliance on gains. The ETFC transaction dilutes MUFG's Morgan Stanley stake by 2.55% to 20.01%. This transaction is anticipated to dilute MUFG's earnings attributable to Morgan Stanley by USD 160 mn or close to 8.0% YOY or 2% overall for MUFG in FY 2020.   

MUFG Already Has Enough Headaches: Earnings at MUFG is quite tenuous. Outside of its high reliance on volatile sources of securities trading, impairment losses associated with its ownership stake in Bank Danamon (BNMN.IJ),  earnings pressures at Union Bank in California,  the re-jigging of the systems integration at MUFG NICOS too will weigh on future results. 


Mitsubishi UFJ Financial Group - MS Deal Compounds Earnings Challenges

<ul>
<li>Shinsei Bank (8303.JP) [Shinsei] reported that FY 3Q19 cumulative consolidated net earnings increased 8.5% YOY to JPY 45.1 bn, primarily as a result of the FY 3Q19 tax rate of 2.9% during the quarter.</li>
<li>Aplus released a statement on possible irregularities in documentation for investment condominium loans that were introduced by Aruhi, which appear to be concentrated. Further,  Aruhi introduced loans amount to only 14% of Aplus receivables or just 1.5% of Shinsei receivables.   </li>
</ul>


Shinsei Bank (8303.JP) [Shinsei] reported that FY 3Q19 cumulative consolidated net earnings increased 8.5% YOY to JPY 45.1 bn, primarily as a result of the FY 3Q19 tax rate of 2.9% during the quarter.
Aplus released a statement on possible irregularities in documentation for investment condominium loans that were introduced by Aruhi, which appear to be concentrated. Further,  Aruhi introduced loans amount to only 14% of Aplus receivables or just 1.5% of Shinsei receivables.   


Shinsei Bank - Use of Tax Loss Carryforwards Aid Results

Japan

ACOM CO., LTD is a consumer financing company.  The Company provides financial services such as secured/unsecured loans and consumer installment credits.

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Acom Co Ltd (8572 JP)

🇯🇵 JAPAN MARKET (& COVID-19) UPDATE 26th April - Thin End of the Wedge

THE WEDGE - Both Japanese equities and the $/¥ exchange rate have traded in a narrow range over the last two weeks. Undeterred, the Bank of Japan...

Campbell Gunn

MUFG – When It Rains, It Pours

* ACOM’s Chronic Kaburai Underestimation: After the market close on April 24th, Mitsubishi UFJ Financial Holdings Group’s (8306.JP) [MUFG]...

Thomas J. Monaco

ACOM - Slowing Vice Spend & Kaburai Claim Trend Reversals

Monthly Business Data Release Was Boring: ACOM released its monthly business data for February 2020, where the last week of the month witnessed...

Thomas J. Monaco

Mitsubishi UFJ Financial Group - MS Deal Compounds Earnings Challenges

Morgan Stanely/E*Trade Transaction: Morgan Stanley (MS.US) announced its intention to acquire ETFC.US for approximately USD 13 bn in an all stock...

Thomas J. Monaco

Shinsei Bank - Use of Tax Loss Carryforwards Aid Results

Shinsei Bank (8303.JP) [Shinsei] reported that FY 3Q19 cumulative consolidated net earnings increased 8.5% YOY to JPY 45.1 bn, primarily as a...

Thomas J. Monaco

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