'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/000/080/728/original/2019-03-02_20-40-55.png?1551526871" class="editor-image img-responsive" data-smartkarma-image-id="80728"></figure>Source: Japan Analytics
</div>LIQUIDITY RULES - Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the strongest in over two years, and much of this 'boom' is flowing into risk assets. Large-scale repatriation of offshore funds by US companies has also helped boost the US dollar against the yen. The Market Composite responded by rising 2.3% over the last two weeks, although only by 1% in US dollar terms.WEAK MACRO - Net exports and higher inventories offset private investment and consumption during the fourth quarter, resulting in flat GDP growth year-on-year. January industrial production fell to the lowest level in 30 months, and, with the manufacturing PMI nearing 50, the prospect is for further weakness this quarter. Inventories continue to rise and, in North Asia, to levels last seen in 2005. Combined with the sharp fall in exports in Japan, Korea and Taiwan, export pricing in back in deflationary territory, putting further upward pressure on real interest rates.  Meanwhile, January retail sales saw the largest month-on-month decline in over three years as department stores saw fewer Chinese tourists over the New Year.  Equity markets are living on 'borrowed time'.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/722/original/2019-03-02_18-02-59.png?1551517390" class="editor-image img-responsive" data-smartkarma-image-id="80722"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/724/original/2019-03-02_18-07-56.png?1551517689" class="editor-image img-responsive" data-smartkarma-image-id="80724"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/729/original/2019-03-02_20-41-51.png?1551526925" class="editor-image img-responsive" data-smartkarma-image-id="80729"></figure><div class="content-caption">Source: Japan Analytics</div>HOLD FOR NOW - This bear market rally is two months old and is maturing. The Value Traded ratio is below trend again, the RSI is neutral, and the Toraku is signalling caution. We expect another month of liquidity/weak Yen-driven strength before the economic realities begin to prevail.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, Transportation, Healthcare and Telecommunications sectors. We would avoid or short the financial sectors Banks, Non-Bank Finance and Multi-Industry. We would underweight the Auto, Retail and Other Consumer Products sectors as consumer spending contracts further in the US, Europe, China and Japan. 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/10020" target="_blank" data-smartkarma-citation="entities:10020:1">Sakai Moving Service (9039 JP)</a>, <a href="https://www.smartkarma.com/entities/20269" target="_blank" data-smartkarma-citation="entities:20269:1">Sumitomo Chemical (4005 JP)</a>, <a href="https://www.smartkarma.com/entities/8431" target="_blank" data-smartkarma-citation="entities:8431:1">Parco (8251 JP)</a>, <a href="https://www.smartkarma.com/entities/4489" target="_blank" data-smartkarma-citation="entities:4489:1">Chugai Pharmaceutical (4519 JP)</a>, <a href="https://www.smartkarma.com/entities/14674" target="_blank" data-smartkarma-citation="entities:14674:1">Nichias (5393 JP)</a>, <a href="https://www.smartkarma.com/entities/27043" target="_blank" data-smartkarma-citation="entities:27043:1">Raksul (4384 JP)</a>, <a href="https://www.smartkarma.com/entities/10503" target="_blank" data-smartkarma-citation="entities:10503:1">Daito Trust (1878 JP)</a>, and <a href="https://www.smartkarma.com/entities/14502" target="_blank" data-smartkarma-citation="entities:14502:1">Benefit One (2412 JP)</a>.


Source: Japan Analytics
LIQUIDITY RULES - Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the strongest in over two years, and much of this 'boom' is flowing into risk assets. Large-scale repatriation of offshore funds by US companies has also helped boost the US dollar against the yen. The Market Composite responded by rising 2.3% over the last two weeks, although only by 1% in US dollar terms.WEAK MACRO - Net exports and higher inventories offset private investment and consumption during the fourth quarter, resulting in flat GDP growth year-on-year. January industrial production fell to the lowest level in 30 months, and, with the manufacturing PMI nearing 50, the prospect is for further weakness this quarter. Inventories continue to rise and, in North Asia, to levels last seen in 2005. Combined with the sharp fall in exports in Japan, Korea and Taiwan, export pricing in back in deflationary territory, putting further upward pressure on real interest rates.  Meanwhile, January retail sales saw the largest month-on-month decline in over three years as department stores saw fewer Chinese tourists over the New Year.  Equity markets are living on 'borrowed time'.  Source: Japan AnalyticsHOLD FOR NOW - This bear market rally is two months old and is maturing. The Value Traded ratio is below trend again, the RSI is neutral, and the Toraku is signalling caution. We expect another month of liquidity/weak Yen-driven strength before the economic realities begin to prevail.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, Transportation, Healthcare and Telecommunications sectors. We would avoid or short the financial sectors Banks, Non-Bank Finance and Multi-Industry. We would underweight the Auto, Retail and Other Consumer Products sectors as consumer spending contracts further in the US, Europe, China and Japan. 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 Sakai Moving Service (9039 JP), Sumitomo Chemical (4005 JP), Parco (8251 JP), Chugai Pharmaceutical (4519 JP), Nichias (5393 JP), Raksul (4384 JP), Daito Trust (1878 JP), and Benefit One (2412 JP).   

🇯🇵 Japan • Fortnightly Update - Liquidity Rules

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/074/237/original/2019-01-01_09-45-52.png?1546303583" class="editor-image img-responsive" data-smartkarma-image-id="74237"></figure>

Source: Japan Analytics
</div>
DOWN, DOWN, DEEPER &amp; DOWN - Japanese equities were as unfashionable as the venerable 'Quo' in 2018, although all of the year's decline occurred in the fourth quarter. Our All-Market-Composite fell by 16.1%, only three sectors - REITs, Utilities and Telecoms - rose and four sectors - Metals, Building Materials, Technology Hardware and Machinery - fell by more than 30%. All of the sixteen outperforming sectors are domestically-orientated, and only two - Other Commercial Products and Other Consumer Products are manufacturing sectors. With no end in sight to the Bank of Japan's accommodation, interest rates remained at historically-depressed levels and provided no respite to financial sectors. Construction and Building Materials declined as the pre-Olympic construction order cycle peaked out, although Real Estate outperformed as office vacancy rates and rents reached three-decade new lows and new highs, respectively. The largest fourth-quarter declines were in the Energy, Internet, Information Technology and Commercial Services sectors and now offer some attractive stock-specific opportunities.




Source: Japan Analytics

DOWN, DOWN, DEEPER &amp; DOWN - Japanese equities were as unfashionable as the venerable 'Quo' in 2018, although all of the year's decline occurred in the fourth quarter. Our All-Market-Composite fell by 16.1%, only three sectors - REITs, Utilities and Telecoms - rose and four sectors - Metals, Building Materials, Technology Hardware and Machinery - fell by more than 30%. All of the sixteen outperforming sectors are domestically-orientated, and only two - Other Commercial Products and Other Consumer Products are manufacturing sectors. With no end in sight to the Bank of Japan's accommodation, interest rates remained at historically-depressed levels and provided no respite to financial sectors. Construction and Building Materials declined as the pre-Olympic construction order cycle peaked out, although Real Estate outperformed as office vacancy rates and rents reached three-decade new lows and new highs, respectively. The largest fourth-quarter declines were in the Energy, Internet, Information Technology and Commercial Services sectors and now offer some attractive stock-specific opportunities.

Japan: 2018 Sector Review - Down, Down, Deeper & Down

Asia Healthcare Analyst, Pathology Associates Limited

Dion Stéfan Büchner M.D., FCAP

Asia Healthcare Analyst

Pathology Associates Limited

Thematic (Sector/Industry)

<ul>
<li>While <a href="https://www.smartkarma.com/entities/13076" target="_blank" data-smartkarma-citation="entities:13076:1">Gni Group Ltd (2160 JP)</a> is our high risk-high return pick, <a href="https://www.smartkarma.com/entities/6311" target="_blank" data-smartkarma-citation="entities:6311:1">Mitsubishi Tanabe Pharma (4508 JP)</a>  is a contrarian call in anticipation of value accretive utilization of cash and Eq. (~40% of market cap.)</li>
<li>
<a href="https://www.smartkarma.com/entities/11747" target="_blank" data-smartkarma-citation="entities:11747:1">Takeda Pharmaceutical (4502 JP)</a> continues to remain our favourite pick from a medium to long term investment perspective</li>
<li>Rest are event / catalyst driven trading ideas... (see attachment)</li>
</ul>


While Gni Group Ltd (2160 JP) is our high risk-high return pick, Mitsubishi Tanabe Pharma (4508 JP)  is a contrarian call in anticipation of value accretive utilization of cash and Eq. (~40% of market cap.)

Takeda Pharmaceutical (4502 JP) continues to remain our favourite pick from a medium to long term investment perspective
Rest are event / catalyst driven trading ideas... (see attachment)


Equity Bottom-Up

Our take…<ul>
<li>Reiterating our positive view, we think the deal could help Takeda on several fronts, including: <ul>
<li>Sizeable footprint in the strategically important US market</li>
<li>Enhanced resilience to pricing pressure across markets on the back of differentiated rare disease drug portfolio</li>
<li>Technical know-how, especially in the case of plasma derived therapies</li>
</ul>
</li>
<li> We appreciate concerns about the evolving competitive landscape, especially for Shire’s hemophilia franchise given Hemlibra’s (Chugai) favorable positioning due to: <ul><li>Positive overall data, convenient dosage (once-a-week) and significantly lower annual bleeding rate (ABR rate 68% lower) compared to existing drugs which makes the case for a patient shift</li></ul>
</li>
<li> However, we continue to model only gradual market share transfer of 30-40% at best over the next 3-5 years as: <ul>
<li>Shire’s drugs have an established safety record (&gt;15 years on market) as compared to Hemlibra with perhaps unknown safety issues, such as development of anti-drug antibodies.</li>
<li>Patient shift to be faster only in inhibitor patients (10-20% of hemophilia A population), which is a high unmet need and where Shire’s Feiba has limitations as a bypassing agent.</li>
<li>Shire’s Advate / Adynovate have a well-established safety record in real-world clinical settings and are gold standard therapy in non-inhibitor patients (the remaining 80-90).</li>
</ul>
</li>
<li> In addition to robust operating cash flow generation capability as a combined entity, Takeda has options at its disposal to deal with the un-precedented leverage generated by the acquisition to get Net Debt / EBITDA within its comfort range of 2-2.5x over the next 3-5 years. Some of the options include: <ul>
<li>Non-core asset monetization opportunity worth $5-10b</li>
<li>Average cost synergies of at least $1b / year (against the guidance of $1.4b)</li>
</ul>
</li>
<li> Management’s ability to meet its divestment and cost synergy goals will start becoming apparent with quarterly results in FY19 and will either strengthen confidence or doubt in its ability to de-lever.</li>
</ul>Financials<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/072/571/original/4502_20181209_Financials.JPG?1544366968" class="editor-image img-responsive" data-smartkarma-image-id="72571"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/072/572/original/4502_20181209_Key%20catalysts.JPG?1544366994" class="editor-image img-responsive" data-smartkarma-image-id="72572"></figure>Valuation<ul>
<li>We revise down our Core EBIT and EPS estimates, especially to account for conservative cost synergy assumptions.</li>
<li>Consequently, we revise down our fair value estimate by ~12% to ¥ 6,000, which implies ~15x (40-45% discount to industry average to account for integration risk) our FY20e combined entity core EPS estimate of ~¥ 400 / share.</li>
</ul>

Our take…
Reiterating our positive view, we think the deal could help Takeda on several fronts, including: 
Sizeable footprint in the strategically important US market
Enhanced resilience to pricing pressure across markets on the back of differentiated rare disease drug portfolio
Technical know-how, especially in the case of plasma derived therapies


 We appreciate concerns about the evolving competitive landscape, especially for Shire’s hemophilia franchise given Hemlibra’s (Chugai) favorable positioning due to: Positive overall data, convenient dosage (once-a-week) and significantly lower annual bleeding rate (ABR rate 68% lower) compared to existing drugs which makes the case for a patient shift

 However, we continue to model only gradual market share transfer of 30-40% at best over the next 3-5 years as: 
Shire’s drugs have an established safety record (&gt;15 years on market) as compared to Hemlibra with perhaps unknown safety issues, such as development of anti-drug antibodies.
Patient shift to be faster only in inhibitor patients (10-20% of hemophilia A population), which is a high unmet need and where Shire’s Feiba has limitations as a bypassing agent.
Shire’s Advate / Adynovate have a well-established safety record in real-world clinical settings and are gold standard therapy in non-inhibitor patients (the remaining 80-90).


 In addition to robust operating cash flow generation capability as a combined entity, Takeda has options at its disposal to deal with the un-precedented leverage generated by the acquisition to get Net Debt / EBITDA within its comfort range of 2-2.5x over the next 3-5 years. Some of the options include: 
Non-core asset monetization opportunity worth $5-10b
Average cost synergies of at least $1b / year (against the guidance of $1.4b)


 Management’s ability to meet its divestment and cost synergy goals will start becoming apparent with quarterly results in FY19 and will either strengthen confidence or doubt in its ability to de-lever.
FinancialsValuation
We revise down our Core EBIT and EPS estimates, especially to account for conservative cost synergy assumptions.
Consequently, we revise down our fair value estimate by ~12% to ¥ 6,000, which implies ~15x (40-45% discount to industry average to account for integration risk) our FY20e combined entity core EPS estimate of ~¥ 400 / share.


Takeda and Shire Shareholders Unanimously Agree to $64b Deal

THANKSGIVING RALLY - Japan's equity markets have recovered by 2.4% since 16th November and are now 5% above the October 29th low, but the market composite still needs to break above the previous rally-high of 9th November for the rally to be sustained. In US$ terms the recovery has been more muted, and the market is 9% below the October high and US$1 trillion or 14.5% down from January 23rd. Relative Strength has risen to the highest point since October 26th and suggests a short-term peak is nearing and the market has yet to exit from the 'Death Cross'.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/071/846/original/2018-12-02_07-34-53.png?1543703710" class="editor-image img-responsive" data-smartkarma-image-id="71846"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/071/847/original/2018-12-02_07-49-25.png?1543704574" class="editor-image img-responsive" data-smartkarma-image-id="71847"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/071/848/original/2018-12-02_07-54-12.png?1543704863" class="editor-image img-responsive" data-smartkarma-image-id="71848"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<div class="content-highlight">
OUTLOOK - Japanese equities are attractively priced relative to trailing earnings. However, the market is in the process of discounting the end of the current eight-quarter-long upcycle. The Bank of Japan (BoJ) appears to be slowing the rate of an intended tapering of its ultra-loose monetary policy while the US Federal Reserve is, at least verbally, tempering the pace of its quantitative tightening. As a result, the USD/JPY exchange rate should continue to weaken, as has been the case in recent weeks, although other cross-rates will be supportive of corporate earnings. One-quarter of market operating income comes from companies in the auto and telecommunications sectors and are under threat from global and local 'forces', respectively. A further 15% of operating profits are attributed to financial sectors and cannot be expected to rise while under the 'yolk' of the BoJ's 'ZIRP' policies. Aside from the many stock-specific investments that are on offer in Japan, the market overall should remain underweighted in global portfolios.  
</div>
In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on <a href="https://www.smartkarma.com/entities/2287" target="_blank" data-smartkarma-citation="entities:2287:1">Pola Orbis (4927 JP)</a> and <a href="https://www.smartkarma.com/entities/753" target="_blank" data-smartkarma-citation="entities:753:1">Kyocera (6971 JP)</a>.

THANKSGIVING RALLY - Japan's equity markets have recovered by 2.4% since 16th November and are now 5% above the October 29th low, but the market composite still needs to break above the previous rally-high of 9th November for the rally to be sustained. In US$ terms the recovery has been more muted, and the market is 9% below the October high and US$1 trillion or 14.5% down from January 23rd. Relative Strength has risen to the highest point since October 26th and suggests a short-term peak is nearing and the market has yet to exit from the 'Death Cross'.



Source: Japan Analytics

OUTLOOK - Japanese equities are attractively priced relative to trailing earnings. However, the market is in the process of discounting the end of the current eight-quarter-long upcycle. The Bank of Japan (BoJ) appears to be slowing the rate of an intended tapering of its ultra-loose monetary policy while the US Federal Reserve is, at least verbally, tempering the pace of its quantitative tightening. As a result, the USD/JPY exchange rate should continue to weaken, as has been the case in recent weeks, although other cross-rates will be supportive of corporate earnings. One-quarter of market operating income comes from companies in the auto and telecommunications sectors and are under threat from global and local 'forces', respectively. A further 15% of operating profits are attributed to financial sectors and cannot be expected to rise while under the 'yolk' of the BoJ's 'ZIRP' policies. Aside from the many stock-specific investments that are on offer in Japan, the market overall should remain underweighted in global portfolios.  

In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on Pola Orbis (4927 JP) and Kyocera (6971 JP).

Japan: Fortnightly Update - Thanksgiving Rally

Japan

Chugai Pharmaceutical Company Ltd., manufactures and sells pharmaceuticals in the domestic and international markets through its subsidiaries. The Company develops drugs in the fields of cancer, infectious diseases, bone, blood, and circulatory systems. Chugai Pharmaceutical also conducts research studies on drugs with private and public medical research institutions.

Price Gauge
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Chugai Pharmaceutical (4519 JP)

🇯🇵 Japan • Fortnightly Update - Liquidity Rules

LIQUIDITY RULES - Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the...

Campbell Gunn

Japan: 2018 Sector Review - Down, Down, Deeper & Down

DOWN, DOWN, DEEPER & DOWN - Japanese equities were as unfashionable as the venerable 'Quo' in 2018, although all of the year's decline...

Campbell Gunn

Japan Pharma - Top Picks

While Gni Group Ltd (2160 JP) is our high risk-high return pick, Mitsubishi Tanabe Pharma (4508 JP) is a contrarian call in anticipation of value...

Dion Stéfan Büchner M.D., FCAP

Takeda and Shire Shareholders Unanimously Agree to $64b Deal

Our take… Reiterating our positive view, we think the deal could help Takeda on several fronts, including: Sizeable footprint in the strategically...

Dion Stéfan Büchner M.D., FCAP

Japan: Fortnightly Update - Thanksgiving Rally

THANKSGIVING RALLY - Japan's equity markets have recovered by 2.4% since 16th November and are now 5% above the October 29th low, but the market...

Campbell Gunn

Price Gauge

52-week Range

Market Cap (USDm)

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