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 spoke to <a href="https://www.smartkarma.com/entities/renesas-electronics-corp" target="_blank" data-smartkarma-citation="entities:15933:1">Renesas Electronics (6723 JP)</a> today to gauge conditions regarding their inventory and the shorter than expected production stoppage in May - the stoppage only lasted 30-40% of the duration it was supposed to. In addition we assessed the company's take on the recently announced offer for <a href="https://www.smartkarma.com/entities/cypress-semiconductor-corp" target="_blank" data-smartkarma-citation="entities:609:1">Cypress Semiconductor (CY US)</a> by key competitor <a href="https://www.smartkarma.com/entities/infineon-technologies-ag" target="_blank" data-smartkarma-citation="entities:21653:1">Infineon Technologies Ag (IFX GR)</a>, and gained some read-through to business conditions in the automotive and factory automation sectors, among others.<ul>
<li>Internal inventory levels have reached healthy levels and further "unseasonal" production stoppages are unlikely.</li>
<li>Channel inventory for FA and end product inventory for aircons in China are still high.</li>
<li>Toyota is outperforming other auto manufacturers, particularly in China.</li>
<li>Infineon's acquisition of Cypress Semiconductor puts the former Fujitsu MCU business under its umbrella giving it a better chance to penetrate Japanese manufacturers.</li>
<li>PB is at a five year low.</li>
</ul>It appears that 2Q could flush out the remaining bad news and while a strong recovery is not yet in sight, we are probably moving through the bottom here.

We spoke to Renesas Electronics (6723 JP) today to gauge conditions regarding their inventory and the shorter than expected production stoppage in May - the stoppage only lasted 30-40% of the duration it was supposed to. In addition we assessed the company's take on the recently announced offer for Cypress Semiconductor (CY US) by key competitor Infineon Technologies Ag (IFX GR), and gained some read-through to business conditions in the automotive and factory automation sectors, among others.
Internal inventory levels have reached healthy levels and further "unseasonal" production stoppages are unlikely.
Channel inventory for FA and end product inventory for aircons in China are still high.
Toyota is outperforming other auto manufacturers, particularly in China.
Infineon's acquisition of Cypress Semiconductor puts the former Fujitsu MCU business under its umbrella giving it a better chance to penetrate Japanese manufacturers.
PB is at a five year low.
It appears that 2Q could flush out the remaining bad news and while a strong recovery is not yet in sight, we are probably moving through the bottom here.

Renesas: Factory Automation and Aircon Inventory Adjustments to Take Time

<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

Asian Insight Provider - Actionable ideas, CrossASEAN Research

Henry Soediarko

Asian Insight Provider - Actionable ideas

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

<a href="https://www.smartkarma.com/entities/11506" target="_blank" data-smartkarma-citation="entities:11506:1">Hanon Systems (018880 KS)</a> share price has outperformed its peers in the past 12 months and still command a valuation premium to its peers. In this report, we will discuss the following:<ul>
<li>1Q 2019 update</li>
<li>A look into its largest customers to date - <a href="https://www.smartkarma.com/entities/155" target="_blank" data-smartkarma-citation="entities:155:1">Hyundai Motor Co (005380 KS)</a>, how its market share in China has dwindled in the past few years.</li>
<li>
Diversification effort - the company has recently launched a customer diversification effort in its new business</li>
<li>Is it really Overvalued? We'll compare Hanon with its bigger, more profitable and higher inventory peers to see whether overvaluation is justifiable. </li>
</ul>

Hanon Systems (018880 KS) share price has outperformed its peers in the past 12 months and still command a valuation premium to its peers. In this report, we will discuss the following:
1Q 2019 update
A look into its largest customers to date - Hyundai Motor Co (005380 KS), how its market share in China has dwindled in the past few years.

Diversification effort - the company has recently launched a customer diversification effort in its new business
Is it really Overvalued? We'll compare Hanon with its bigger, more profitable and higher inventory peers to see whether overvaluation is justifiable. 


Hanon Systems (018880): Thesis Is Still Valid - Short.

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

'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

DENSO CORPORATION manufactures electronic parts for automobiles.  The Company's products include automobile air conditioners, air bags, ignition systems, generators, power steering systems, and spark plugs with iridium electrode. The Company also produces communication equipment for mobile navigation system.

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Denso Corp (6902 JP)

Renesas: Factory Automation and Aircon Inventory Adjustments to Take Time

We spoke to Renesas Electronics (6723 JP) today to gauge conditions regarding their inventory and the shorter than expected production stoppage in...

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

Hanon Systems (018880): Thesis Is Still Valid - Short.

Hanon Systems (018880 KS) share price has outperformed its peers in the past 12 months and still command a valuation premium to its peers. In this...

Henry Soediarko

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

🇯🇵 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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