'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

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/363/original/2019-01-11_14-16-49.png?1547292773" class="editor-image img-responsive" data-smartkarma-image-id="75363"></figure>

Source: Japan Analytics</div>
CURRENCY DRIVER - The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX and technical specialists (including <a href="https://www.smartkarma.com/profiles/381" target="_blank" data-smartkarma-citation="accounts:381">Thomas Schroeder </a> <a href="https://www.smartkarma.com/insights/dollar-yen-big-short-phase-ii" target="_blank" data-smartkarma-citation="insights:27163">here</a> on Smartkarma) to call for a more sustained bout of US$ weakness. A period of Yen strength is far from a consensus forecast for most Japanese equity investors, and historically a stronger Yen has resulted in a weaker Japanese equity market. The three Yen 'peaks' highlighted by the vertical lines in the chart above all coincided with medium-term lows in TOPIX.  
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/287/original/2019-01-11_14-44-07.png?1547185462" class="editor-image img-responsive" data-smartkarma-image-id="75287"></figure>
<div class="content-caption">Source: Japan Analytics</div>
¥ &lt; 100 - If we isolate only the 1,484 days in the last forty years when the USDJPY cross has traded above ¥100, the average TOPIX index is 975, which would imply 36% downside for Japanese equities were the Yen to rise above ¥90. Nevertheless, the three Yen peaks we have isolated have proved to be excellent entry points with the subsequent trough-to-peak performance being 28% in 1995~1996, 108% in 2011~2015 and 48% in 2016~2018. Long-term Japan 'bulls' should welcome the coming US dollar bear market. 
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/313/original/2019-01-12_10-50-14.png?1547257825" class="editor-image img-responsive" data-smartkarma-image-id="75313"></figure>
<div class="content-caption">Source: Japan Analytics</div>
EARNINGS DRIVER - The USDJPY cross remains an important driver of earnings and earnings momentum in Japan. As measured by our Results and Revision Scores, there is a good correlation between the trends in both scores and the year-on-year change in USDJPY lagged by six months, especially around significant turning points for the cross rate (marked by the vertical lines). The Results and Revision Scores have declined since January 2018 in line with the stronger Yen. A move up to above the ¥90 level would, without doubt, take both scores into negative territory again- the only question being, are we replaying 2009/10 or 2016/17? 
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/319/original/2019-01-12_13-40-19.png?1547268030" class="editor-image img-responsive" data-smartkarma-image-id="75319"></figure>
<div class="content-caption">Source: Japan Analytics</div>
CURRENCY CORRELATIONS - In the DETAIL below, we list the larger capitalisation companies whose share price performance most closely correlated with the dollar-yen cross rate. As a preview, the most correlated larger capitalisation company that has been listed since 2006 is, unsurprisingly, <a href="https://www.smartkarma.com/entities/73" target="_blank" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a>.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/318/original/2019-01-12_13-15-40.png?1547266553" class="editor-image img-responsive" data-smartkarma-image-id="75318"></figure>
<div class="content-caption">Source: Japan Analytics</div>
THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT - We also go one step further and use the 'Foreign Currency Translation Adjustment' that forms part of Other Comprehensive Income (which has been disclosed in corporate balance sheets and income statements since 2001 and 2011, respectively) to measure the extent of each company's global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight after adding two-month lag for the reporting cycle. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders' Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored.




Source: Japan Analytics
CURRENCY DRIVER - The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX and technical specialists (including Thomas Schroeder  here on Smartkarma) to call for a more sustained bout of US$ weakness. A period of Yen strength is far from a consensus forecast for most Japanese equity investors, and historically a stronger Yen has resulted in a weaker Japanese equity market. The three Yen 'peaks' highlighted by the vertical lines in the chart above all coincided with medium-term lows in TOPIX.  

Source: Japan Analytics
¥ &lt; 100 - If we isolate only the 1,484 days in the last forty years when the USDJPY cross has traded above ¥100, the average TOPIX index is 975, which would imply 36% downside for Japanese equities were the Yen to rise above ¥90. Nevertheless, the three Yen peaks we have isolated have proved to be excellent entry points with the subsequent trough-to-peak performance being 28% in 1995~1996, 108% in 2011~2015 and 48% in 2016~2018. Long-term Japan 'bulls' should welcome the coming US dollar bear market. 

Source: Japan Analytics
EARNINGS DRIVER - The USDJPY cross remains an important driver of earnings and earnings momentum in Japan. As measured by our Results and Revision Scores, there is a good correlation between the trends in both scores and the year-on-year change in USDJPY lagged by six months, especially around significant turning points for the cross rate (marked by the vertical lines). The Results and Revision Scores have declined since January 2018 in line with the stronger Yen. A move up to above the ¥90 level would, without doubt, take both scores into negative territory again- the only question being, are we replaying 2009/10 or 2016/17? 

Source: Japan Analytics
CURRENCY CORRELATIONS - In the DETAIL below, we list the larger capitalisation companies whose share price performance most closely correlated with the dollar-yen cross rate. As a preview, the most correlated larger capitalisation company that has been listed since 2006 is, unsurprisingly, Toyota Motor (7203 JP).

Source: Japan Analytics
THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT - We also go one step further and use the 'Foreign Currency Translation Adjustment' that forms part of Other Comprehensive Income (which has been disclosed in corporate balance sheets and income statements since 2001 and 2011, respectively) to measure the extent of each company's global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight after adding two-month lag for the reporting cycle. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders' Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored.

Japan: What to Buy & Sell if the ¥ Rises to 90

Global Automotive Stocks/EV Focus/Event Driven, SC Capital

SC Capital

Global Automotive Stocks/EV Focus/Event Driven

Over 22 years covering Japanese equities on both the sell side and the buy side. 

Bottom-up Japan Equities Research

Equity Bottom-Up

<ul><li>Yamaha Corp (7951) had a weaker than expected Q1 due to one-off inventory valuation issues, but momentum should be strong from Q2, which is scheduled to be announced on November 1st. The company is forecasting Q2 OP of Y14.9bn and consensus is at Y15.3bn. Our estimates are at Y16.5bn due to higher currency gains and stronger digital piano sales. </li><li>Yamaha is one of the greatest "bad company becomes good company" stories we've seen in Japan, having shed many loss-making businesses and focused on growing its prestigious musical equipment brand name and market share. The company has gone from generating only 3.5% OP margins back in FY10 to around 12% this fiscal year, while RoE has gone from 2% to 11% during the same period. And there is ample room for further improvements.</li><li>Profits should continue growing higher than consensus due to Yamaha's dominance in the digital piano and professional sound equipment markets in the developed world, while China and other emerging markets provide growth for Yamaha's musical instrument sales. Sales in China--where household budgets for musical education is growing--should have grown by +40% between FY12 and the end of FY17. </li><li>Because of this, valuations are increasing at Yamaha, with the FY17 PER at 20x (in line with the 5-year average) and the EV/EBITDA multiple at 11x versus the 5-year average of 7x. </li><li>There could be a further increase in valuations due to rising pressure for Yamaha to unload some of its massive cash and securities holdings. Yamaha has roughly Y100bn ($885m) in net cash and a Y203bn ($1.8bn) investment securities account (of which legacy holdings of Yamaha Motor accounts for $1.4bn).</li><li>Combined, this amounts to 77% of shareholders equity. Free cash flow as a percentage of equity has averaged at 7% over the past 5 years, so we expect some type of major shareholder return event by the time the company's current mid-term plan comes to an end in FY19.  </li><li>While the stock is trading near all-time highs, we would be buyers at Y3,800, roughly 13% lower than where it is now. Yamaha is the largest musical equipment maker in the world and continues to grow its brand value and market share at the behest of rivals, who are all much smaller players. </li></ul>

Yamaha Corp (7951) had a weaker than expected Q1 due to one-off inventory valuation issues, but momentum should be strong from Q2, which is scheduled to be announced on November 1st. The company is forecasting Q2 OP of Y14.9bn and consensus is at Y15.3bn. Our estimates are at Y16.5bn due to higher currency gains and stronger digital piano sales. Yamaha is one of the greatest "bad company becomes good company" stories we've seen in Japan, having shed many loss-making businesses and focused on growing its prestigious musical equipment brand name and market share. The company has gone from generating only 3.5% OP margins back in FY10 to around 12% this fiscal year, while RoE has gone from 2% to 11% during the same period. And there is ample room for further improvements.Profits should continue growing higher than consensus due to Yamaha's dominance in the digital piano and professional sound equipment markets in the developed world, while China and other emerging markets provide growth for Yamaha's musical instrument sales. Sales in China--where household budgets for musical education is growing--should have grown by +40% between FY12 and the end of FY17. Because of this, valuations are increasing at Yamaha, with the FY17 PER at 20x (in line with the 5-year average) and the EV/EBITDA multiple at 11x versus the 5-year average of 7x. There could be a further increase in valuations due to rising pressure for Yamaha to unload some of its massive cash and securities holdings. Yamaha has roughly Y100bn ($885m) in net cash and a Y203bn ($1.8bn) investment securities account (of which legacy holdings of Yamaha Motor accounts for $1.4bn).Combined, this amounts to 77% of shareholders equity. Free cash flow as a percentage of equity has averaged at 7% over the past 5 years, so we expect some type of major shareholder return event by the time the company's current mid-term plan comes to an end in FY19.  While the stock is trading near all-time highs, we would be buyers at Y3,800, roughly 13% lower than where it is now. Yamaha is the largest musical equipment maker in the world and continues to grow its brand value and market share at the behest of rivals, who are all much smaller players. 

Yamaha Corp (7951)--Stronger Momentum to Lead to Better Shareholder Returns

Director, Pearl Hill Advisors

Nicholas Tanner

Director

Pearl Hill Advisors

We can see no reason to buy this name now. There is too much that is unknown and uncertain for us to make any sensible projections as to the future direction of earnings.Last year operating profit came in at Y30.6bn, way below the original forecast of Y48bn. There were a number of factors, the strong yen, BREXIT, weaker than expected watch sales, front loading of costs ahead of new product launches (mainly for watches) this year for example. This year management forecast Y34bn. This assumes…

We can see no reason to buy this name now. There is too much that is unknown and uncertain for us to make any sensible projections as to the future direction of earnings.Last year operating profit came in at Y30.6bn, way below the original forecast of Y48bn. There were a number of factors, the strong yen, BREXIT, weaker than expected watch sales, front loading of costs ahead of new product launches (mainly for watches) this year for example. This year management forecast Y34bn. This assumes…

Asian Insight Provider - Actionable ideas, CrossASEAN Research

Henry Soediarko

Asian Insight Provider - Actionable ideas

<a href="https://www.smartkarma.com/entities/5206" target="_blank" data-smartkarma-citation="entities:5206:1">Singapore Myanmar Investco Ltd (SMI SP)</a> has 5 main business units (tourism, heavy machinery, car rental, telecommunication, and storage) that fulfill at least one of the following criteria; leadership position, early-mover advantage, and monopoly position. Despite the small market capitalization, the company boasts market leadership and monopoly in the business areas they operate combined with a highly adequate management team with previous experience that is transportable to the current SMI business. An hour spent on face to face meeting with the CEO has shed more lights on how the company operates its various business units and its market position in Myanmar. Some of the internationally acclaimed names SMI has managed to bring to Myanmar include Crystal Jade, Ramen Ippudo, Sany Heavy, EuropCar and Duty-Free Shop.

Singapore Myanmar Investco Ltd (SMI SP) has 5 main business units (tourism, heavy machinery, car rental, telecommunication, and storage) that fulfill at least one of the following criteria; leadership position, early-mover advantage, and monopoly position. Despite the small market capitalization, the company boasts market leadership and monopoly in the business areas they operate combined with a highly adequate management team with previous experience that is transportable to the current SMI business. An hour spent on face to face meeting with the CEO has shed more lights on how the company operates its various business units and its market position in Myanmar. Some of the internationally acclaimed names SMI has managed to bring to Myanmar include Crystal Jade, Ramen Ippudo, Sany Heavy, EuropCar and Duty-Free Shop. 

Want to Make Money in Myanmar? Visit Sing-Myanmar Please...

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

Download the Morningstar Fact Sheet : http://corporate.morningstar.com/US/documents/MarketingFactSheets/AboutMorningstarFactsheet.pdf

We view Casio Computer’s June quarter result as somewhat mixed, but this does not affect our long-term view that Casio’s share price is underpinned by the rich cash flow from its distinctive products. Therefore, we maintain our fair value estimate of JPY 1,800, along with our no-moat rating. We are concerned about the slowdown in watch revenue, as well as the loss recorded in weak businesses such as camera and music instruments. On the other hand, we view the recovery of the system equipment segment as encouraging, stemming from the restructuring from the previous fiscal year. In addition, Casio maintains high profitability for its major businesses: watches and calculators. Overall, we see our long-term forecast for Casio’s cash flow as intact.Casio’s operating income for the June quarter was JPY 6.6 billion, which was below the previous year's number of JPY 7.1 billion. The company explained that most of the decline is derived from cameras and music instruments, and it is focusing on delivery of new competitive models, necessitating increased research, development, and marketing expense. While we expect recovery in the second half of this fiscal year, owing to the launch of new models, we are concerned that new products may not deliver sustainable returns, as we think these industries are quite competitive.Meanwhile, we view watches and calculators as healthy. Operating margin for watches and calculators on the June quarter was 23% and 19%, respectively; both figures are toward the historical high level. While watches have recorded a revenue decline for four consecutive quarters, the decline in the first two quarters was derived from appreciation of the Japanese yen, and the decline in the latter two quarters is owing to the skewed nature of the new models' launch schedule. As Casio is planning a big promotion for most of its new models in the second half of 2017, we think sales momentum will turn over in the upcoming quarters.Analyst: Kazunori Ito

We view Casio Computer’s June quarter result as somewhat mixed, but this does not affect our long-term view that Casio’s share price is underpinned by the rich cash flow from its distinctive products. Therefore, we maintain our fair value estimate of JPY 1,800, along with our no-moat rating. We are concerned about the slowdown in watch revenue, as well as the loss recorded in weak businesses such as camera and music instruments. On the other hand, we view the recovery of the system equipment segment as encouraging, stemming from the restructuring from the previous fiscal year. In addition, Casio maintains high profitability for its major businesses: watches and calculators. Overall, we see our long-term forecast for Casio’s cash flow as intact.Casio’s operating income for the June quarter was JPY 6.6 billion, which was below the previous year's number of JPY 7.1 billion. The company explained that most of the decline is derived from cameras and music instruments, and it is focusing on delivery of new competitive models, necessitating increased research, development, and marketing expense. While we expect recovery in the second half of this fiscal year, owing to the launch of new models, we are concerned that new products may not deliver sustainable returns, as we think these industries are quite competitive.Meanwhile, we view watches and calculators as healthy. Operating margin for watches and calculators on the June quarter was 23% and 19%, respectively; both figures are toward the historical high level. While watches have recorded a revenue decline for four consecutive quarters, the decline in the first two quarters was derived from appreciation of the Japanese yen, and the decline in the latter two quarters is owing to the skewed nature of the new models' launch schedule. As Casio is planning a big promotion for most of its new models in the second half of 2017, we think sales momentum will turn over in the upcoming quarters.Analyst: Kazunori Ito

Mixed Impressions From Casio's June Results, but Watches and Calculators Remain Healthy

Japan

CASIO COMPUTER CO., LTD. manufactures various consumer electronics such as calculators, electronic dictionaries, digital cameras, and watches.  The Company also makes mobile phone sets, office computers, and electronic musical instruments.  Casio Computer exports its products to North America, Europe, and Asia.

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Casio Computer (6952 JP)

Japan: What to Buy & Sell if the ¥ Rises to 90

CURRENCY DRIVER - The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX...

Campbell Gunn

Yamaha Corp (7951)--Stronger Momentum to Lead to Better Shareholder Returns

Yamaha Corp (7951) had a weaker than expected Q1 due to one-off inventory valuation issues, but momentum should be strong from Q2, which is...

SC Capital

Casio (6952) No Visibility Whatsoever

We can see no reason to buy this name now. There is too much that is unknown and uncertain for us to make any sensible projections as to the future...

Pearl Hill Advisors

Want to Make Money in Myanmar? Visit Sing-Myanmar Please...

Singapore Myanmar Investco Ltd (SMI SP) has 5 main business units (tourism, heavy machinery, car rental, telecommunication, and storage) that...

Henry Soediarko

Mixed Impressions From Casio's June Results, but Watches and Calculators Remain Healthy

We view Casio Computer’s June quarter result as somewhat mixed, but this does not affect our long-term view that Casio’s share price is underpinned...

Morningstar, Inc.

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