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

We visited <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" data-smartkarma-citation="entities:73:1" rel="noopener">Toyota Motor (7203 JP)</a> and <a href="https://www.smartkarma.com/entities/aisin-seiki-co-ltd" target="_blank" data-smartkarma-citation="entities:11809:1" rel="noopener">Aisin Seiki (7259 JP)</a> on Wednesday to assess conditions the companies were experience in China and the US as well as update on the progress of the numerous reforms ongoing within the Toyota Group.Our takeaway is that macro conditions remain relatively tough but that progress was continuing steadily with internal reforms. Overall, we believe Toyota should make some incremental progress raising profitability in the US and growing volume and profit in China in the face of macro headwinds and that investment costs for CASE could be controlled better than the market generally expects. Aisin's outlook for China has not worsened as such, but while the company was initially guiding conservatively but open to the possibility of a moderate recovery in 2H, current conditions look like the 2H will be relatively flat compared to the 1H.We discuss the details below.

We visited Toyota Motor (7203 JP) and Aisin Seiki (7259 JP) on Wednesday to assess conditions the companies were experience in China and the US as well as update on the progress of the numerous reforms ongoing within the Toyota Group.Our takeaway is that macro conditions remain relatively tough but that progress was continuing steadily with internal reforms. Overall, we believe Toyota should make some incremental progress raising profitability in the US and growing volume and profit in China in the face of macro headwinds and that investment costs for CASE could be controlled better than the market generally expects. Aisin's outlook for China has not worsened as such, but while the company was initially guiding conservatively but open to the possibility of a moderate recovery in 2H, current conditions look like the 2H will be relatively flat compared to the 1H.We discuss the details below.

Toyota: Visit to Toyota City/Aisin Points to Fading Optimism for a China Recovery

<a href="https://www.smartkarma.com/entities/fuji-heavy-industries-ltd" target="_blank" data-smartkarma-citation="entities:5439:1">Subaru Corp (7270 JP)</a> just <a href="https://www.subaru.co.jp/press/news-en/2019_06_06_7336/" target="_blank">announced a partnership with Toyota</a> to develop a BEV dedicated platform for mid and large sized passenger vehicles, applying Subaru's all-wheel-drive technologies in combination with Toyota's electrification know-how. The first target for this partnership is a C-segment SUV that will be sold under each company's brand. While this announcement has limited impact in the short-run, it opens up some nice possibilities for Subaru and also makes Toyota's grand plan for taking on the CASE era more clear. We go through the details below.

Subaru Corp (7270 JP) just announced a partnership with Toyota to develop a BEV dedicated platform for mid and large sized passenger vehicles, applying Subaru's all-wheel-drive technologies in combination with Toyota's electrification know-how. The first target for this partnership is a C-segment SUV that will be sold under each company's brand.  While this announcement has limited impact in the short-run, it opens up some nice possibilities for Subaru and also makes Toyota's grand plan for taking on the CASE era more clear. We go through the details below.

Subaru: Joint BEV Development with Toyota Matters; Toyota's CASE Strategy Becoming Clearer

Equity Analyst, LightStream Research

Aqila Ali

Equity Analyst

<a href="https://www.smartkarma.com/entities/18703" target="_blank" data-smartkarma-citation="entities:18703:1">Denso Corp (6902 JP)</a> reported revenue of JPY5,362bn (+5.0% YoY) close to their revenue target for FY03/19, thanks to the increase in sales volume and expansion in sales following the consolidation of its new subsidiary- Denso TEN.  However, the company reported OP of JPY316.2bn down by -23.4% YoY. Based on the revised guidance as of 3Q Denso optimistically expected only around a -8% YoY decline in OP but ended up with an OP significantly below their expectation and market expectations. The company repeatedly states that the decline in profit was on the back of the increasing investments for future growth alongside the comparative transient profit made in the last FY.  As we previously mentioned, the company’s recent moves in restructuring the business and its announcement on changes to the business model, and investments in relation to this aim on focusing on software-based solutions in addition to its hardware expertise confirm the key reason for the decline in OP.   
Despite the steady growth in top-line, Denso’s FY03/19 earnings did not look very attractive with both revenue and OP falling below consensus estimates. Despite the release of rather disappointing financial results, especially in terms of OP, the company has forecasted a high level of OP growth for the next FY. Denso expects +2.6% YoY growth in revenue for FY03/20E, and 20.2% YoY growth in OP for the same period. Although Denso’s target for FY03/20 looks too optimistic on the profit side, it still stands below the consensus average (OP:400bn, +26.6% YoY). Following the release, Denso closed -0.1% down on Friday from Thursday’s close.

Denso Corp (6902 JP) reported revenue of JPY5,362bn (+5.0% YoY) close to their revenue target for FY03/19, thanks to the increase in sales volume and expansion in sales following the consolidation of its new subsidiary- Denso TEN.  However, the company reported OP of JPY316.2bn down by -23.4% YoY. Based on the revised guidance as of 3Q Denso optimistically expected only around a -8% YoY decline in OP but ended up with an OP significantly below their expectation and market expectations. The company repeatedly states that the decline in profit was on the back of the increasing investments for future growth alongside the comparative transient profit made in the last FY.  As we previously mentioned, the company’s recent moves in restructuring the business and its announcement on changes to the business model, and investments in relation to this aim on focusing on software-based solutions in addition to its hardware expertise confirm the key reason for the decline in OP.   
Despite the steady growth in top-line, Denso’s FY03/19 earnings did not look very attractive with both revenue and OP falling below consensus estimates. Despite the release of rather disappointing financial results, especially in terms of OP, the company has forecasted a high level of OP growth for the next FY. Denso expects +2.6% YoY growth in revenue for FY03/20E, and 20.2% YoY growth in OP for the same period. Although Denso’s target for FY03/20 looks too optimistic on the profit side, it still stands below the consensus average (OP:400bn, +26.6% YoY). Following the release, Denso closed -0.1% down on Friday from Thursday’s close.

FY03/19 Results Underwhelming, Still Guides For 20% Increase in FY03/20E OP

<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"

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)

Toyota: Visit to Toyota City/Aisin Points to Fading Optimism for a China Recovery

We visited Toyota Motor (7203 JP) and Aisin Seiki (7259 JP) on Wednesday to assess conditions the companies were experience in China and the US as...

Mio Kato

Subaru: Joint BEV Development with Toyota Matters; Toyota's CASE Strategy Becoming Clearer

Subaru Corp (7270 JP) just announced a partnership with Toyota to develop a BEV dedicated platform for mid and large sized passenger vehicles,...

Mio Kato

FY03/19 Results Underwhelming, Still Guides For 20% Increase in FY03/20E OP

Denso Corp (6902 JP) reported revenue of JPY5,362bn (+5.0% YoY) close to their revenue target for FY03/19, thanks to the increase in sales volume...

Aqila Ali

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

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