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

<p>We spoke to Yaskawa this afternoon to get further colour on regional trends within its businesses. In our last note we said:</p><blockquote><ul><li>We would also note that margins for the motion control segment have also started outperforming our model again. <ul>
<li>The previous peak in China resulted in very strong outperformance compared to our earnings model and given that the current nascent recovery is also very China-focused, it stands to reason that we could see outperformance again.</li>
<li>Due to these positive moves at the underlying OPM level, we believe our thinking that OP could exceed ¥30bn for the fiscal year is not unrealistic. Consensus at ¥24.4bn is too low here.</li>
</ul>
</li></ul></blockquote><p>Consensus has belatedly moved up to ¥28.1bn for estimates made after 3Q earnings, following the typical pattern of being just slightly above guidance which has now moved up to ¥27.2bn from ¥24.2bn. We stick with our previous estimate and expect OP to come in slightly above ¥30bn for the year. This should be both a positive surprise and nowhere close to being enough to justify current prices. The question then is how to trade this.</p>

We spoke to Yaskawa this afternoon to get further colour on regional trends within its businesses. In our last note we said:We would also note that margins for the motion control segment have also started outperforming our model again. 
The previous peak in China resulted in very strong outperformance compared to our earnings model and given that the current nascent recovery is also very China-focused, it stands to reason that we could see outperformance again.
Due to these positive moves at the underlying OPM level, we believe our thinking that OP could exceed ¥30bn for the fiscal year is not unrealistic. Consensus at ¥24.4bn is too low here.

Consensus has belatedly moved up to ¥28.1bn for estimates made after 3Q earnings, following the typical pattern of being just slightly above guidance which has now moved up to ¥27.2bn from ¥24.2bn. We stick with our previous estimate and expect OP to come in slightly above ¥30bn for the year. This should be both a positive surprise and nowhere close to being enough to justify current prices. The question then is how to trade this.

Yaskawa – Overvalued, But Is It Time to Long Yaskawa, Short Fanuc Again?

<p>As with other FA names, Keyence benefitted from strong demand from China in 2Q which propelled a YoY increase in overseas revenue even as the domestic market dropped almost 20%. Nevertheless, rates of decline the US and Europe were not as steep in 2Q and the company’s earnings call also suggested a positive outlook</p>

As with other FA names, Keyence benefitted from strong demand from China in 2Q which propelled a YoY increase in overseas revenue even as the domestic market dropped almost 20%. Nevertheless, rates of decline the US and Europe were not as steep in 2Q and the company’s earnings call also suggested a positive outlook

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Thematic (Sector/Industry)

<div><p style="text-align: center;"><strong>• BEST &amp; WORST •</strong></p></div><p>Our best and worst pair from yesterday's announcements is <a href="https://www.smartkarma.com/entities/fanuc-corp" target="_blank" data-smartkarma-citation="entities:752:1" rel="noopener">Fanuc (6954 JP)</a> and <a href="https://www.smartkarma.com/entities/omron-corp" target="_blank" data-smartkarma-citation="entities:15904:1" rel="noopener">Omron (6645 JP)</a>. </p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/168/334/original/2020-10-30_06-23-20.png?1604006632" class="editor-image img-responsive" data-smartkarma-image-id="168334"></figure></section><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/168/335/original/2020-10-30_06-29-10.png?1604006963" class="editor-image img-responsive" data-smartkarma-image-id="168335"></figure></section><div class="content-caption">Source for all charts &amp; tables: Japan Analytics</div><hr><div><p style="text-align: center;"><strong>DAILY STATS</strong></p></div><hr><div><p style="text-align: center;"><strong>156 Quarterly Results</strong></p></div><div><ul style="list-style-type: disc;">
<li><p><strong>Results Score:</strong> 51% Positive / 4% Neutral / 45% Negative</p></li>
<li><p>A<strong>verage Results Score Change:</strong> +0.2 points</p></li>
<li><p><strong>Average % Change in Revenue:</strong> -5.7% Quarter YoY / -5.3% Rolling TTM YoY </p></li>
<li><p><strong>Average Operating Profit Margin Change:</strong> -1.1ppt</p></li>
<li><p><strong>Percentage Making Quarterly Losses:</strong> 15%</p></li>
</ul></div><hr><div><p style="text-align: center;"><strong>84 Annual • 35 Interim Forecasts/Revisions</strong></p></div><div><ul style="list-style-type: disc;">
<li><p><strong>Annual Forecast/Revision Score:</strong> 45% Positive / 6% Neutral / 51% Negative</p></li>
<li><p><strong>Interim Forecast/Revision Score Change:</strong> 51% Positive / 3% Neutral / 46% Negative</p></li>
<li><p><strong>Average Forecast/Revision Score Change:</strong> -0.0 points</p></li>
</ul></div>

• BEST &amp; WORST •Our best and worst pair from yesterday's announcements is Fanuc (6954 JP) and Omron (6645 JP). Source for all charts &amp; tables: Japan AnalyticsDAILY STATS156 Quarterly Results
Results Score: 51% Positive / 4% Neutral / 45% Negative
Average Results Score Change: +0.2 points
Average % Change in Revenue: -5.7% Quarter YoY / -5.3% Rolling TTM YoY 
Average Operating Profit Margin Change: -1.1ppt
Percentage Making Quarterly Losses: 15%
84 Annual • 35 Interim Forecasts/Revisions
Annual Forecast/Revision Score: 45% Positive / 6% Neutral / 51% Negative
Interim Forecast/Revision Score Change: 51% Positive / 3% Neutral / 46% Negative
Average Forecast/Revision Score Change: -0.0 points


🇯🇵 JAPAN • Results & Revisions 10/​​​​​​​​​​​​​​​​​​​​29 - Fanuc, Takeda, Panasonic, Kyocera

<p>Fanuc delivered strong 2Q numbers with ¥122bn in sales (+6.6% vs. consensus) and ¥21.2bn in OP (+52.8% vs. consensus). They also raised FY guidance for revenue (¥423.3bn to ¥502.5bn) and OP (¥38.5bn to ¥85.4bn). These are very strong numbers relative to 1Q which looked dismal, however, the question long-term picture still looks very questionable in our opinion.</p>

Fanuc delivered strong 2Q numbers with ¥122bn in sales (+6.6% vs. consensus) and ¥21.2bn in OP (+52.8% vs. consensus). They also raised FY guidance for revenue (¥423.3bn to ¥502.5bn) and OP (¥38.5bn to ¥85.4bn). These are very strong numbers relative to 1Q which looked dismal, however, the question long-term picture still looks very questionable in our opinion.

Fanuc – Is a Robomachine Rally Sustainable?

Event-Driven

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/033/original/2020-09-15_10-23-17.png?1600133037" class="editor-image img-responsive" data-smartkarma-image-id="159033"></figure><div class="content-caption">Source for all charts &amp; tables: Japan Analytics</div><p><strong>THE BUFFETT TRADE</strong> - Much has already written on <a href="https://www.smartkarma.com/entities/berkshire-hathaway-inc-cl-b" target="_blank" data-smartkarma-citation="entities:8635:1" rel="noopener">Berkshire Hathaway</a>'s purchase of stakes in Japan's sogo shosha, including on this <a href="https://www.smartkarma.com/insights/a-quick-look-at-the-buffet-trade-and-the-most-obvious-follow-ons" target="_blank" data-smartkarma-citation="insights:43125" rel="noopener">platform</a>. The Japanese trading houses have a long and proud tradition and continue to attract the best talent from at home and abroad. In many respects, they have similarities with BH given their long-term approach to investing and focus on free cash flow generation. The differences are as striking, particularly the exposure to commodities and Asia, and the implications for both BH and Japan are profound.</p><p>In this<strong> DETAIL</strong> section, we examine: -</p><ul>
<li>the macro 'logic' driving these investments,</li>
<li>a more appropriate analytical and valuation methodology for these companies</li>
<li>the historically most-correlated peer groups and companies from both a technical and fundamental perspective if this trade were to be applied more broadly to the Japanese market. </li>
</ul><div class="content-highlight"><p><strong>We can summarise our approach to understanding the rationale behind the Buffett trade in the chart below. The sogo shosha are, in aggregate, significant generators of Residual Comprehensive Income, particularly relative to their current market valuations. Priced at a historically low 0.93x book, Japan's trading houses are one of the world's better deep value trades.</strong></p></div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/053/original/2020-09-15_13-42-01.png?1600144936" class="editor-image img-responsive" data-smartkarma-image-id="159053"></figure>

Source for all charts &amp; tables: Japan AnalyticsTHE BUFFETT TRADE - Much has already written on Berkshire Hathaway's purchase of stakes in Japan's sogo shosha, including on this platform. The Japanese trading houses have a long and proud tradition and continue to attract the best talent from at home and abroad. In many respects, they have similarities with BH given their long-term approach to investing and focus on free cash flow generation. The differences are as striking, particularly the exposure to commodities and Asia, and the implications for both BH and Japan are profound.In this DETAIL section, we examine: -
the macro 'logic' driving these investments,
a more appropriate analytical and valuation methodology for these companies
the historically most-correlated peer groups and companies from both a technical and fundamental perspective if this trade were to be applied more broadly to the Japanese market. 
We can summarise our approach to understanding the rationale behind the Buffett trade in the chart below. The sogo shosha are, in aggregate, significant generators of Residual Comprehensive Income, particularly relative to their current market valuations. Priced at a historically low 0.93x book, Japan's trading houses are one of the world's better deep value trades.

🇯🇵 JAPAN • Analysing The "Buffett Trade", Valuing the Sogo Shosha & The Return of Asian Inflation

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.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Fanuc Corp (6954 JP)

Yaskawa – Overvalued, But Is It Time to Long Yaskawa, Short Fanuc Again?

We expect the strength of Chinese demand to support Yaskawa's earnings growth and believe that this regional skew will favour Yaskawa over more US...

Mio Kato

Keyence – Recovery Inbound

China drove an improvement in Keyence's 2Q results just like its competitors. We continue to prefer the name vs. peers but that does not mean the...

Mio Kato

🇯🇵 JAPAN • Results & Revisions 10/29 - Fanuc, Takeda, Panasonic, Kyocera

• BEST & WORST • Our best and worst pair from yesterday's announcements is Fanuc (6954 JP) and Omron (6645 JP). Source for all charts & tables:...

Campbell Gunn

Fanuc – Is a Robomachine Rally Sustainable?

Fanuc put up strong 2Q numbers and raised guidance more than 100% to ¥85.4bn, however, we remain more concerned with long-term prospects as we feel...

Mio Kato

🇯🇵 JAPAN • Analysing The "Buffett Trade", Valuing the Sogo Shosha & The Return of Asian Inflation

THE BUFFETT TRADE - Much has written on $ber

Campbell Gunn

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Yaskawa – Overvalued, But Is It Time to Long Yaskawa, Short Fanuc Again?

We expect the strength of Chinese demand to support Yaskawa's earnings growth and believe that this regional skew will favour Yaskawa over more US...

Mio Kato

Keyence – Recovery Inbound

China drove an improvement in Keyence's 2Q results just like its competitors. We continue to prefer the name vs. peers but that does not mean the...

Mio Kato

🇯🇵 JAPAN • Results & Revisions 10/​​​​​​​​​​​​​​​​​​​​29 - Fanuc, Takeda, Panasonic, Kyocera

• BEST & WORST • Our best and worst pair from yesterday's announcements is Fanuc (6954 JP) and Omron (6645 JP). Source for all charts & tables:...

Campbell Gunn

Fanuc – Is a Robomachine Rally Sustainable?

Fanuc put up strong 2Q numbers and raised guidance more than 100% to ¥85.4bn, however, we remain more concerned with long-term prospects as we feel...

Mio Kato

🇯🇵 JAPAN • Analysing The "Buffett Trade", Valuing the Sogo Shosha & The Return of Asian Inflation

THE BUFFETT TRADE - Much has written on $ber

Campbell Gunn

🇯🇵 JAPAN • Results & Revisions 10/29 - Fanuc, Takeda, Panasonic, Kyocera