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

Harmonic Drive Systems / Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/10238" target="_blank" data-smartkarma-citation="entities:10238:1">Harmonic Drive Systems (6324 JP)</a> reported earnings after the close on Friday with results being largely in line with consensus while guidance was frankly quite grim.</p><table class="table table-striped"><tbody>
<tr>
<td>¥m</td>
<td>Revenue</td>
<td>OP</td>
</tr>
<tr>
<td>FY18 results</td>
<td style="text-align: right;">67,809</td>
<td style="text-align: right;">16,903</td>
</tr>
<tr>
<td>FY18 consensus</td>
<td style="text-align: right;">67,349</td>
<td style="text-align: right;">16,730</td>
</tr>
<tr>
<td>Beat/miss</td>
<td style="text-align: right;">+0.7%</td>
<td style="text-align: right;">+1.0%</td>
</tr>
<tr>
<td>FY19 guidance</td>
<td style="text-align: right;">42,000</td>
<td style="text-align: right;">1,000</td>
</tr>
<tr>
<td>FY19 consensus</td>
<td style="text-align: right;">55,772</td>
<td style="text-align: right;">10,240</td>
</tr>
<tr>
<td>Beat/miss</td>
<td style="text-align: right;">-24.7%</td>
<td style="text-align: right;">-90.2%</td>
</tr>
<tr>
<td></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
</tr>
<tr>
<td>1HFY19 guidance</td>
<td style="text-align: right;">21,000</td>
<td style="text-align: right;">450</td>
</tr>
</tbody></table><div style="text-align: left;" class="content-caption">Source: Company disclosures, Bloomberg</div><p>Although we felt the robotics stocks had been oversold at the beginning of the year, following their strong rebound we had started to feel that risk-reward was once again starting to skew negative. For Harmonic Drive in particular, we were more cautious due to the sheer size of the jump in revenue and orders that the company faced when demand was strong, but even we were not expecting guidance to be quite this pessimistic.</p><p>We examine the numbers in more detail below.</p>

Harmonic Drive Systems (6324 JP) reported earnings after the close on Friday with results being largely in line with consensus while guidance was frankly quite grim.

¥m
Revenue
OP


FY18 results
67,809
16,903


FY18 consensus
67,349
16,730


Beat/miss
+0.7%
+1.0%


FY19 guidance
42,000
1,000


FY19 consensus
55,772
10,240


Beat/miss
-24.7%
-90.2%







1HFY19 guidance
21,000
450

Source: Company disclosures, BloombergAlthough we felt the robotics stocks had been oversold at the beginning of the year, following their strong rebound we had started to feel that risk-reward was once again starting to skew negative. For Harmonic Drive in particular, we were more cautious due to the sheer size of the jump in revenue and orders that the company faced when demand was strong, but even we were not expecting guidance to be quite this pessimistic.We examine the numbers in more detail below.

Harmonic Drive: Nothing Harmonic About the Guidance

'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/000/086/182/original/2019-04-29_12-24-09.png?1556508262" class="editor-image img-responsive" data-smartkarma-image-id="86182"></figure><p>Source: Japan Analytics</p>
</div><p><strong>EARLY DAYS</strong> - In the last seven trading days, 473 Japanese companies have reported quarterly results, 11% of the 3,830 that are currently listed. Of this 76 % have been annual results for the fiscal year ended March 2019.  Also, there have been 328 initial forecasts for the year to March 2020, 227 initial interim forecasts and 228 intra-year revisions. With the long holiday break, there will be an avalanche of announcements from the 7th May onwards. In this Insight, we shall look at the trends apparent in the results so far released.  In the last month, our Market Composite trailing-twelve-month (TTM) data series is unchanged for Operating Income, while Net Income has increased by ¥0.2t. <strong>With 13% of March-year-end companies have issued FY2020 forecasts, aggregate forecast Operating Income is ¥0.7t lower and is in line with TTM Operating Income. Forecast Net Income is ¥0.6 lower and is 4% below TTM Net Income. </strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/086/411/original/2019-04-30_13-26-24.png?1556598396" class="editor-image img-responsive" data-smartkarma-image-id="86411"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/086/412/original/File%202019-04-30%2013%2010%2017.jpeg?1556598417" class="editor-image img-responsive" data-smartkarma-image-id="86412"></figure><div class="content-caption">Source: Japan Analytics, Pictet Asset Management</div><p><strong>MARGIN SLIPPAGE</strong> -<strong> </strong>With revenues remaining relatively robust, margins are declining fast that at any time since 2016. The forecast operating margin is now 42 basis points below the 2018 peak level, while the slippage in net margins is 78 basis points. Although the sample is not the same, to IBES consensus estimates have current downtrend bottoming out in the second half of the year with net margins recovering to 6.6% in 2021. We consider this overly optimistic. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/086/187/original/2019-04-29_12-32-53.png?1556508784" class="editor-image img-responsive" data-smartkarma-image-id="86187"></figure><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/086/190/original/2019-04-29_12-51-24.png?1556509893" class="editor-image img-responsive" data-smartkarma-image-id="86190"></figure><p>Source: Japan Analytics</p>
</div><p style="text-align: left;"><strong>RESULTS &amp; REVISION SCORES</strong> - Our scoring methodology for results and forecasts/revisions incorporates rates of change and other momentum factors and has historically provided a better fit with changes in aggregate market value. Although the Market Composite Results Score has remained stable in the last week at 2.21, we expect the score to end this results 'season' closer to zero as indicated by the trend in the Forecast/Revision Score. The latter has declined for six quarters in a row and the current quarter will make it seven. <strong>Although our data series only covers the last forty quarters and is perhaps too short for generalisations, it would be unusual for the Forecasts/Revision Score series to have an eighth down quarter in a row. Perhaps the market's robust recovery from the Christmas Day low is anticipating such an outcome. </strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/086/193/original/2019-04-29_13-17-03.png?1556511439" class="editor-image img-responsive" data-smartkarma-image-id="86193"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>USDJPY NEUTRAL</strong> - In the past, one of the principal drivers of both scores has been changes in the US dollar/Yen exchange rate. The chart above merges both scores to create a cleaner timeline, and key turning points in <a href="https://www.smartkarma.com/entities/22826" target="_blank" data-smartkarma-citation="entities:22826:1">JUSDJPY CURNCY</a> highlighted. With the currency cross trading in a narrow range, there is little support or stimulus in the next six months. However, any sustained weakness in the Yen, such as occurred from September 2016, will be another confirmation that a cycle low has been reached. </p><div class="content-highlight"><p>In the<strong> DETAIL</strong> section below, we update our  Sector Results &amp; Revision Scores and look at the best and worst large-cap company results over the seven trading days.</p></div>


Source: Japan Analytics
EARLY DAYS - In the last seven trading days, 473 Japanese companies have reported quarterly results, 11% of the 3,830 that are currently listed. Of this 76 % have been annual results for the fiscal year ended March 2019.  Also, there have been 328 initial forecasts for the year to March 2020, 227 initial interim forecasts and 228 intra-year revisions. With the long holiday break, there will be an avalanche of announcements from the 7th May onwards. In this Insight, we shall look at the trends apparent in the results so far released.  In the last month, our Market Composite trailing-twelve-month (TTM) data series is unchanged for Operating Income, while Net Income has increased by ¥0.2t. With 13% of March-year-end companies have issued FY2020 forecasts, aggregate forecast Operating Income is ¥0.7t lower and is in line with TTM Operating Income. Forecast Net Income is ¥0.6 lower and is 4% below TTM Net Income. Source: Japan Analytics, Pictet Asset ManagementMARGIN SLIPPAGE - With revenues remaining relatively robust, margins are declining fast that at any time since 2016. The forecast operating margin is now 42 basis points below the 2018 peak level, while the slippage in net margins is 78 basis points. Although the sample is not the same, to IBES consensus estimates have current downtrend bottoming out in the second half of the year with net margins recovering to 6.6% in 2021. We consider this overly optimistic. 
Source: Japan Analytics
RESULTS &amp; REVISION SCORES - Our scoring methodology for results and forecasts/revisions incorporates rates of change and other momentum factors and has historically provided a better fit with changes in aggregate market value. Although the Market Composite Results Score has remained stable in the last week at 2.21, we expect the score to end this results 'season' closer to zero as indicated by the trend in the Forecast/Revision Score. The latter has declined for six quarters in a row and the current quarter will make it seven. Although our data series only covers the last forty quarters and is perhaps too short for generalisations, it would be unusual for the Forecasts/Revision Score series to have an eighth down quarter in a row. Perhaps the market's robust recovery from the Christmas Day low is anticipating such an outcome. Source: Japan AnalyticsUSDJPY NEUTRAL - In the past, one of the principal drivers of both scores has been changes in the US dollar/Yen exchange rate. The chart above merges both scores to create a cleaner timeline, and key turning points in JUSDJPY CURNCY highlighted. With the currency cross trading in a narrow range, there is little support or stimulus in the next six months. However, any sustained weakness in the Yen, such as occurred from September 2016, will be another confirmation that a cycle low has been reached. In the DETAIL section below, we update our  Sector Results &amp; Revision Scores and look at the best and worst large-cap company results over the seven trading days.

🇯🇵 Japan • Spring Results & Revisions Flash - Early Days

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

<p>Our positive outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains intact and we believe a “buy the dip” strategy is warranted. We recommend taking advantage of recent weakness -- where applicable -- by adding exposure to cyclical Sectors.<strong> </strong>Today’s recommendations focus on autos, auto parts, and machinery which span the Consumer Discretionary and Manufacturing Sectors. </p>

Our positive outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains intact and we believe a “buy the dip” strategy is warranted. We recommend taking advantage of recent weakness -- where applicable -- by adding exposure to cyclical Sectors. Today’s recommendations focus on autos, auto parts, and machinery which span the Consumer Discretionary and Manufacturing Sectors. 

Global Equity Strategy: Overweight Cyclicals

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/828/original/2019-04-25_12-26-58.png?1556162828" class="editor-image img-responsive" data-smartkarma-image-id="85828"></figure><p>Source: Japan Analytics</p>
</div><p><strong><a href="https://www.smartkarma.com/entities/752" target="_blank" data-smartkarma-citation="entities:752:1">FANUC (6954 JP)</a>'s</strong> FY2019 results were released on 25th April, and the detail and the downside risk has been well-covered by Lightstream's <a href="https://www.smartkarma.com/profiles/713" target="_blank" data-smartkarma-citation="accounts:713">Mio Kato</a> in <a href="https://www.smartkarma.com/insights/fanuc-profitability-deterioration-and-share-price-rebound-open-up-significant-downside" target="_blank" data-smartkarma-citation="insights:29386">Fanuc: Profitability Deterioration and Share Price Rebound Open Up Significant Downside</a>. This Insight will look instead at the company's earnings cycle and its relationship with Fanuc's Relative Price Score. In the <strong>DETAIL</strong> section below, we shall also look at the company's forecast history, Comprehensive Income, cash flows, shareholder returns and historical valuation trends. Although we share some of Mio's concerns, we do not share his view that <em>"the stock can trade down towards 1.0-1.5x PB - it does not strike us as impossible for the stock to halve". </em><strong>Although the upside may be constrained, we believe the 25th December 2018 low of ¥15,760 will be the current cycle low point.</strong></p>


Source: Japan Analytics
FANUC (6954 JP)'s FY2019 results were released on 25th April, and the detail and the downside risk has been well-covered by Lightstream's Mio Kato in Fanuc: Profitability Deterioration and Share Price Rebound Open Up Significant Downside. This Insight will look instead at the company's earnings cycle and its relationship with Fanuc's Relative Price Score. In the DETAIL section below, we shall also look at the company's forecast history, Comprehensive Income, cash flows, shareholder returns and historical valuation trends. Although we share some of Mio's concerns, we do not share his view that "the stock can trade down towards 1.0-1.5x PB - it does not strike us as impossible for the stock to halve". Although the upside may be constrained, we believe the 25th December 2018 low of ¥15,760 will be the current cycle low point.

<p><a href="https://www.smartkarma.com/entities/752" target="_blank" data-smartkarma-citation="entities:752:1">Fanuc Corp (6954 JP)</a> reported earnings today with results of ¥163bn OP beating consensus of ¥157bn. For the second year in a row guidance was shocking at ¥75bn vs. consensus at ¥133bn. Our immediate reaction was that it was just Fanuc being Fanuc and our back of the envelope guesstimate had us suggesting that maybe consensus needed to come down about 10%. After taking a deeper look at the numbers however, we have significant concerns.</p><p>Guidance still looks conservative, but we feel consensus may have to come down significantly more than 10%.</p>

Fanuc Corp (6954 JP) reported earnings today with results of ¥163bn OP beating consensus of ¥157bn. For the second year in a row guidance was shocking at ¥75bn vs. consensus at ¥133bn. Our immediate reaction was that it was just Fanuc being Fanuc and our back of the envelope guesstimate had us suggesting that maybe consensus needed to come down about 10%. After taking a deeper look at the numbers however, we have significant concerns.Guidance still looks conservative, but we feel consensus may have to come down significantly more than 10%.

Fanuc: Profitability Deterioration and Share Price Rebound Open Up Significant Downside

Japan

FANUC CORPORATION manufactures factory automation (FA) systems and equipments, and robots. The Company's products include computerized numerically-controlled (CNC) equipment, servo motors, laser systems, industrial robots, wire-cut electric discharge machines, and CNC drill.  Fanuc participates in a joint venture with General Electric in the FA field.

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Fanuc Corp Unsp Adr (FANUY US)

Harmonic Drive: Nothing Harmonic About the Guidance

Harmonic Drive Systems (6324 JP) reported earnings after the close on Friday with results being largely in line with consensus while guidance was...

Mio Kato

🇯🇵 Japan • Spring Results & Revisions Flash - Early Days

EARLY DAYS - In the last seven trading days, 473 Japanese companies have reported quarterly results, 11% of the 3,830 that are currently listed. Of...

Campbell Gunn

Global Equity Strategy: Overweight Cyclicals

Our positive outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains intact and we believe a “buy the dip” strategy is warranted. We...

Vermilion Research

6954 🇯🇵 Fanuc • Timing the Cycle

FANUC (6954 JP)'s FY2019 results were released on 25th April, and the detail and the downside risk has been well-covered by Lightstream's Mio...

Campbell Gunn

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Harmonic Drive: Nothing Harmonic About the Guidance

Harmonic Drive Systems (6324 JP) reported earnings after the close on Friday with results being largely in line with consensus while guidance was...

Mio Kato

🇯🇵 Japan • Spring Results & Revisions Flash - Early Days

EARLY DAYS - In the last seven trading days, 473 Japanese companies have reported quarterly results, 11% of the 3,830 that are currently listed. Of...

Campbell Gunn

Global Equity Strategy: Overweight Cyclicals

Our positive outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains intact and we believe a “buy the dip” strategy is warranted. We...

Vermilion Research

6954 🇯🇵 Fanuc • Timing the Cycle

FANUC (6954 JP)'s FY2019 results were released on 25th April, and the detail and the downside risk has been well-covered by Lightstream's Mio...

Campbell Gunn

Fanuc: Profitability Deterioration and Share Price Rebound Open Up Significant Downside

Fanuc Corp (6954 JP) reported earnings today with results of ¥163bn OP beating consensus of ¥157bn. For the second year in a row guidance was...

Mio Kato