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

Almost nine months ago when Harmonic Drive released its ¥1bn OP guidance for the year we said:<blockquote>“That ¥1bn OP estimate may look exceedingly conservative on the surface, but in reality it may not be and it is not impossible for HDS to make an operating loss this FY in our opinion.</blockquote><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/397/original/image_46663124421581465016919.png?1581465016" class="editor-image img-responsive"></figure><figure class="editor-figure mceNonEditable"></figure><div style="text-align: left;" class="content-caption">Source: Company disclosures</div><blockquote>A simple way to illustrate this is using the above chart. If we assume all depreciation is part of COGS and effectively look at cash gross margin we can see that it has trended around 50%, rising above that recently but now looking to be reverting. If it is 50% this FY then on ¥42bn in sales that is ¥21bn in gross profit excluding depreciation. Quarterly depreciation rose from ¥1.33bn to ¥1.87bn over the course of last year. If it remains at 4Q's level this FY that is ¥7.5bn in depreciation. SG&amp;A costs have been elevated following the acquisition of Harmonic Drive AG and were between ¥3.2bn and ¥3.6bn per quarter last year. If SG&amp;A remains at last year's level that implies ¥13.5bn in costs. Together with depreciation that is ¥21bn in costs to offset cash gross profit. This still ignores the potential impact of inventory reductions.”</blockquote>With three quarters now passed, GP excluding depreciation looks to be on track to hit about ¥19bn, depreciation looks set to hit about ¥7.5bn and SG&amp;A costs look set to hit about ¥11.5bn. Ultimately the ¥42bn sales guidance proved too optimistic, and we believe the next concern should be next year’s OP where consensus’ ¥4.4bn OP on ¥43bn in sales looks optimistic.

Almost nine months ago when Harmonic Drive released its ¥1bn OP guidance for the year we said:“That ¥1bn OP estimate may look exceedingly conservative on the surface, but in reality it may not be and it is not impossible for HDS to make an operating loss this FY in our opinion.Source: Company disclosuresA simple way to illustrate this is using the above chart. If we assume all depreciation is part of COGS and effectively look at cash gross margin we can see that it has trended around 50%, rising above that recently but now looking to be reverting. If it is 50% this FY then on ¥42bn in sales that is ¥21bn in gross profit excluding depreciation. Quarterly depreciation rose from ¥1.33bn to ¥1.87bn over the course of last year. If it remains at 4Q's level this FY that is ¥7.5bn in depreciation. SG&amp;A costs have been elevated following the acquisition of Harmonic Drive AG and were between ¥3.2bn and ¥3.6bn per quarter last year. If SG&amp;A remains at last year's level that implies ¥13.5bn in costs. Together with depreciation that is ¥21bn in costs to offset cash gross profit. This still ignores the potential impact of inventory reductions.”With three quarters now passed, GP excluding depreciation looks to be on track to hit about ¥19bn, depreciation looks set to hit about ¥7.5bn and SG&amp;A costs look set to hit about ¥11.5bn. Ultimately the ¥42bn sales guidance proved too optimistic, and we believe the next concern should be next year’s OP where consensus’ ¥4.4bn OP on ¥43bn in sales looks optimistic.

Harmonic Drive – Margin Deterioration Hurts Even LT Story

Keyence reported relatively weak 3Q numbers with revenue down 8.4% YoY (consensus -3.4%) although OP was down just -4.9% (consensus -8.1%). We believe the “less bad” OP result is more pertinent than the weaker than expected revenue number and believe that consensus fails to recognise the early indicators for this stock. We discuss why below.

Keyence reported relatively weak 3Q numbers with revenue down 8.4% YoY (consensus -3.4%) although OP was down just -4.9% (consensus -8.1%). We believe the “less bad” OP result is more pertinent than the weaker than expected revenue number and believe that consensus fails to recognise the early indicators for this stock. We discuss why below.

Keyence – Valuations a Risk but Increasingly Attractive Relative to Peers

'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. 

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/115/540/original/2020-01-30_04-53-40.png?1580327644" class="editor-image img-responsive" data-smartkarma-image-id="115540"></figure><div class="content-caption">Source • Japan Analytics</div>29TH JANUARY ROUNDUP - Thre were 74 results and 30 forecasts or revisions announcements yesterday. Of the 32 larger-cap companies reporting results, seven saw year-on-year declines in their quarterly OP of greater than 25%, while three - <a href="https://www.smartkarma.com/entities/nec-corp" target="_blank" data-smartkarma-citation="entities:17084:1" rel="noopener">NEC (6701 JP)</a>, <a href="https://www.smartkarma.com/entities/cyberagent-inc" target="_blank" data-smartkarma-citation="entities:8197:1" rel="noopener">CyberAgent(4751 JP)</a>, and <a href="https://www.smartkarma.com/entities/valuecommerce-co-ltd" target="_blank" data-smartkarma-citation="entities:7970:1" rel="noopener">ValueCommerce (2491 JP)</a> grew profits by more than 25%, with the last of the three showing the strongest revenue growth. <a href="https://www.smartkarma.com/entities/omron-corp" target="_blank" data-smartkarma-citation="entities:15904:1" rel="noopener">Omron (6645 JP)</a> saw sales fall by 23%. Our market composite cap-weighted Results Score declined by 8bps to 0.99FORECASTS - <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" data-smartkarma-citation="entities:1:1" rel="noopener">Canon (7751 JP)</a> released the most optimistic forecasts and account for the 24bps uptick in our Forecast/Revision Score; however, in terms of OP the FY2020 forecast is the same as the FY2016 actual result which was the second-worst outcome in the last decade after FY2019. The weakest outlook came from <a href="https://www.smartkarma.com/entities/screen-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:5563:1" rel="noopener">Screen (7735 JP)</a> (-28% v TTM OP), which, when combined with <a href="https://www.smartkarma.com/entities/advantest-corp" target="_blank" data-smartkarma-citation="entities:18107:1" rel="noopener">Advantest (6857 JP)</a>'s third-quarter results, should go some way to puncturing the current fad for owning SPE companies.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/115/543/original/2020-01-30_05-28-22.png?1580329720" class="editor-image img-responsive" data-smartkarma-image-id="115543"></figure><div class="content-caption">Source • Japan Analytics</div>POST-RELEASE RPS CHANGES - Of the larger-cap companies announcing the day before yesterday or pre-close yesterday, <a href="https://www.smartkarma.com/entities/obic-co-ltd" target="_blank" data-smartkarma-citation="entities:1273:1" rel="noopener">OBIC (4684 JP)</a>, <a href="https://www.smartkarma.com/entities/obic-business-consultants" target="_blank" data-smartkarma-citation="entities:17383:1" rel="noopener">Obic Business Consultants (4733 JP)</a>, and <a href="https://www.smartkarma.com/entities/sakai-moving-service-co-ltd" target="_blank" data-smartkarma-citation="entities:10020:1" rel="noopener">Sakai Moving Service (9039 JP)</a> saw Relative Price Score declines. In contrast, the two Canon group companies, <a href="https://www.smartkarma.com/entities/m3-inc" target="_blank" data-smartkarma-citation="entities:13316:1" rel="noopener">M3 (2413 JP)</a>, and <a href="https://www.smartkarma.com/entities/sekisui-jushi-corp" target="_blank" data-smartkarma-citation="entities:7654:1" rel="noopener">Sekisui Jushi (4212 JP)</a> rose.  In the DETAIL below, we review our Sector Timelines and the announcements from <a href="https://www.smartkarma.com/entities/fanuc-corp" target="_blank" data-smartkarma-citation="entities:752:1" rel="noopener">Fanuc (6954 JP)</a>, <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" data-smartkarma-citation="entities:1:1" rel="noopener">Canon (7751 JP)</a>, <a href="https://www.smartkarma.com/entities/nec-corp" target="_blank" data-smartkarma-citation="entities:17084:1" rel="noopener">NEC (6701 JP)</a>, <a href="https://www.smartkarma.com/entities/cyberagent-inc" target="_blank" data-smartkarma-citation="entities:8197:1" rel="noopener">CyberAgent (4751 JP)</a>, <a href="https://www.smartkarma.com/entities/omron-corp" target="_blank" data-smartkarma-citation="entities:15904:1" rel="noopener">Omron (6645 JP)</a>, and <a href="https://www.smartkarma.com/entities/advantest-corp" target="_blank" data-smartkarma-citation="entities:18107:1" rel="noopener">Advantest(6857 JP)</a>.

Source • Japan Analytics29TH JANUARY ROUNDUP - Thre were 74 results and 30 forecasts or revisions announcements yesterday. Of the 32 larger-cap companies reporting results, seven saw year-on-year declines in their quarterly OP of greater than 25%, while three - NEC (6701 JP), CyberAgent(4751 JP), and ValueCommerce (2491 JP) grew profits by more than 25%, with the last of the three showing the strongest revenue growth. Omron (6645 JP) saw sales fall by 23%. Our market composite cap-weighted Results Score declined by 8bps to 0.99FORECASTS - Canon (7751 JP) released the most optimistic forecasts and account for the 24bps uptick in our Forecast/Revision Score; however, in terms of OP the FY2020 forecast is the same as the FY2016 actual result which was the second-worst outcome in the last decade after FY2019. The weakest outlook came from Screen (7735 JP) (-28% v TTM OP), which, when combined with Advantest (6857 JP)'s third-quarter results, should go some way to puncturing the current fad for owning SPE companies.Source • Japan AnalyticsPOST-RELEASE RPS CHANGES - Of the larger-cap companies announcing the day before yesterday or pre-close yesterday, OBIC (4684 JP), Obic Business Consultants (4733 JP), and Sakai Moving Service (9039 JP) saw Relative Price Score declines. In contrast, the two Canon group companies, M3 (2413 JP), and Sekisui Jushi (4212 JP) rose.  In the DETAIL below, we review our Sector Timelines and the announcements from Fanuc (6954 JP), Canon (7751 JP), NEC (6701 JP), CyberAgent (4751 JP), Omron (6645 JP), and Advantest(6857 JP). 

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 29th January - 6954▲ 7751► 6701▲ 4751▲ 6645▼6857▼

Fanuc’s 3Q results beat consensus as revenue of ¥125.5bn was 1.4% above consensus at ¥123.8bn and OP of ¥19.6bn beat consensus’ ¥16.8bn by 16.7%. On a QoQ basis, profitability decreased 4% but we feel conditions have now bottomed. Despite this, valuations look stretched and we remain most negative on Fanuc out of the FA names including Keyence, Yaskawa and Harmonic Drive.

Fanuc’s 3Q results beat consensus as revenue of ¥125.5bn was 1.4% above consensus at ¥123.8bn and OP of ¥19.6bn beat consensus’ ¥16.8bn by 16.7%. On a QoQ basis, profitability decreased 4% but we feel conditions have now bottomed. Despite this, valuations look stretched and we remain most negative on Fanuc out of the FA names including Keyence, Yaskawa and Harmonic Drive.

Stock performance and financial performance for Yaskawa continue to diverge. The stock continues to rise in absolute terms though outperformance vs. TOPIX ended in late October. We continue to believe that the market is pricing in too strong of a recovery too early and so far, financial results have been poor. The market has looked past this deterioration in anticipation of the next recovery, but we remain unconvinced about the strength of a potential recovery. As such we remain highly cautious on the sector and heavily favour the more robust earnings structure and greater potential for overseas growth of Keyence within the FA space.

Stock performance and financial performance for Yaskawa continue to diverge. The stock continues to rise in absolute terms though outperformance vs. TOPIX ended in late October. We continue to believe that the market is pricing in too strong of a recovery too early and so far, financial results have been poor. The market has looked past this deterioration in anticipation of the next recovery, but we remain unconvinced about the strength of a potential recovery. As such we remain highly cautious on the sector and heavily favour the more robust earnings structure and greater potential for overseas growth of Keyence within the FA space.

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 (6954 JP)

Harmonic Drive – Margin Deterioration Hurts Even LT Story

Almost nine months ago when Harmonic Drive released its ¥1bn OP guidance for the year we said:“That ¥1bn OP estimate may look exceedingly...

Mio Kato

Keyence – Valuations a Risk but Increasingly Attractive Relative to Peers

Keyence reported relatively weak 3Q numbers with revenue down 8.4% YoY (consensus -3.4%) although OP was down just -4.9% (consensus -8.1%). We...

Mio Kato

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 29th January - 6954▲ 7751► 6701▲ 4751▲ 6645▼6857▼

29TH JANUARY ROUNDUP - Thre were 74 results and 30 forecasts or revisions announcements yesterday. Of the 32 larger-cap companies reporting...

Campbell Gunn

Fanuc – Still the Ugly Duckling

Fanuc’s 3Q results beat consensus as revenue of ¥125.5bn was 1.4% above consensus at ¥123.8bn and OP of ¥19.6bn beat consensus’ ¥16.8bn by 16.7%....

Mio Kato

Yaskawa – No Signs of Recovery

Stock performance and financial performance for Yaskawa continue to diverge. The stock continues to rise in absolute terms though outperformance...

Mio Kato

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