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

Fanuc beat consensus with OP reaching ¥112.5bn (¥107.7bn consensus) on revenue of ¥551bn (¥535bn consensus). The 4.5% OP surprise on a revenue beat of 3.0% is actually on the small side and the details point to some minor concerns. The major concern though is the read through to Fanuc’s expectations for China in the second half.

Fanuc beat consensus with OP reaching ¥112.5bn (¥107.7bn consensus) on revenue of ¥551bn (¥535bn consensus). The 4.5% OP surprise on a revenue beat of 3.0% is actually on the small side and the details point to some minor concerns. The major concern though is the read through to Fanuc’s expectations for China in the second half.

Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

On January 10, we wrote that demand for semiconductor equipment could exceed SEMI's growth forecast for 2021, that Tokyo Electron's guidance for FY Mar-21 was probably conservative, and that Investors in Tokyo Electron (TEL)... should benefit, even if the shares appear to be overbought. (see<a href="https://www.smartkarma.com/insights/tokyo-electron-8035-jp-semiconductor-shortage-points-to-stronger-year-ahead" target="_blank" data-smartkarma-citation="insights:46893" rel="noopener">Tokyo Electron (8035 JP): Semiconductor Shortage Points to Stronger Year Ahead </a> ).  Since then, TEL has raised guidance, Intel and TSMC have announced big new capital spending plans, SEMI has raised its forecast of semiconductor equipment demand, and TEL's share price has risen by 24%. How much more upside is there?The shares are now selling at 34x management's EPS guidance for FY Mar-21 and 31x our estimate for FY Mar-22. These multiples are not high compared with those of other first-rate Japanese  precision manufacturing companies, but they are double what they were two or three years ago. It is tempting to say that valuations are extended in what remains a cyclical industry, but the greater risk to earnings growth, in our estimation, is high and rising depreciation and R&amp;D expenses as the company expands capacity and develops technology for the 2 nanometer node and beyond (See <a href="https://www.smartkarma.com/insights/screen-holdings-7735-jp-aiming-at-2nm-process-technology" target="_blank" data-smartkarma-citation="insights:49767" rel="noopener">Screen Holdings (7735 JP): Aiming at 2nm Process Technology</a> ).

On January 10, we wrote that demand for semiconductor equipment could exceed SEMI's growth forecast for 2021, that Tokyo Electron's guidance for FY Mar-21 was probably conservative, and that Investors in Tokyo Electron (TEL)... should benefit, even if the shares appear to be overbought. (seeTokyo Electron (8035 JP): Semiconductor Shortage Points to Stronger Year Ahead  ).  Since then, TEL has raised guidance, Intel and TSMC have announced big new capital spending plans, SEMI has raised its forecast of semiconductor equipment demand, and TEL's share price has risen by 24%. How much more upside is there?The shares are now selling at 34x management's EPS guidance for FY Mar-21 and 31x our estimate for FY Mar-22. These multiples are not high compared with those of other first-rate Japanese  precision manufacturing companies, but they are double what they were two or three years ago. It is tempting to say that valuations are extended in what remains a cyclical industry, but the greater risk to earnings growth, in our estimation, is high and rising depreciation and R&amp;D expenses as the company expands capacity and develops technology for the 2 nanometer node and beyond (See Screen Holdings (7735 JP): Aiming at 2nm Process Technology ).

Tokyo Electron (8035 JP): Getting Ahead of Itself

On February 2, we wrote <a href="https://www.smartkarma.com/insights/misumi-group-9962-jp-upward-revision-ahead-after-strong-3q-results" target="_blank" data-smartkarma-citation="insights:47529" rel="noopener">Misumi Group (9962 JP): Upward Revision Ahead After Strong 3Q Results</a> . This was realized on March 25, when management raided sales guidance for FY Mar-21 by 3.0%, operating profit guidance by 29.2% and net profit guidance by 7.4%. The upward revision was based on strong sales in China and efficiency gains at the operating level, with the gain in net profit reduced by impairment charges. The share price also peaked on February 2, at ¥3,655. It then dropped by 16% to ¥3,075 on March 11 before rebounding. On Friday, March 26, it was up 2.1% to ¥3,335.As Campbell Gunn wrote in <a href="https://www.smartkarma.com/insights/japan-revisions-03-25-misumi-j-front-retailing" target="_blank" data-smartkarma-citation="insights:49676" rel="noopener">🇯🇵 JAPAN • Revisions 03/​​​​​​25 &gt; Misumi &amp; J. Front Retailing</a> , the market reaction to this announcement could well be muted, particularly given the very modest revision to net income relative to the TTM results. It was.Misumi Group should continue to benefit from a recovery in demand for factory automation equipment, but with the shares selling at 59x management's new EPS guidance for FY Mar-21, this prospect is largely in the price.Rather than hope for multiple expansion in a rising interest rate environment, we favor Mio Kato's pair trade: <a href="https://www.smartkarma.com/insights/yaskawa-overvalued-but-is-it-time-to-long-yaskawa-short-fanuc-again" target="_blank" data-smartkarma-citation="insights:47187" rel="noopener">Yaskawa – Overvalued, But Is It Time to Long Yaskawa, Short Fanuc Again?</a>

On February 2, we wrote Misumi Group (9962 JP): Upward Revision Ahead After Strong 3Q Results . This was realized on March 25, when management raided sales guidance for FY Mar-21 by 3.0%, operating profit guidance by 29.2% and net profit guidance by 7.4%. The upward revision was based on strong sales in China and efficiency gains at the operating level, with the gain in net profit reduced by impairment charges. The share price also peaked on February 2, at ¥3,655. It then dropped by 16% to ¥3,075 on March 11 before rebounding. On Friday, March 26, it was up 2.1% to ¥3,335.As Campbell Gunn wrote in 🇯🇵 JAPAN • Revisions 03/​​​​​​25 &gt; Misumi &amp; J. Front Retailing , the market reaction to this announcement could well be muted, particularly given the very modest revision to net income relative to the TTM results. It was.Misumi Group should continue to benefit from a recovery in demand for factory automation equipment, but with the shares selling at 59x management's new EPS guidance for FY Mar-21, this prospect is largely in the price.Rather than hope for multiple expansion in a rising interest rate environment, we favor Mio Kato's pair trade: Yaskawa – Overvalued, But Is It Time to Long Yaskawa, Short Fanuc Again? 

Misumi Group (9962): Muted Response to Upward Revision

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

The Nikkei wrote an article last Thursday 18 March 2021 saying the BOJ would change its monetary/quantitative easing policy after having commenced a review in December.
The general idea was a slight curve steepening allowance made "to allow banks to be more profitable" and a change to the way ETF buying was conducted. 
<div class="content-highlight">
I published a quick analysis of the <a href="https://www.smartkarma.com/insights/changes-in-boj-etf-buying-which-stocks-impacted-and-how" target="_blank" data-smartkarma-citation="insights:49331" rel="noopener">Changes In BOJ ETF Buying - Which Stocks Impacted and How?</a> 
</div>
On Friday 19 March, the BOJ met and after the MPC Meeting published...
<ul>
<li>The policy statement for this release, <a href="https://www.boj.or.jp/en/announcements/release_2021/k210319a.pdf" target="_blank" rel="noopener">Further Effective and Sustainable Monetary Easing</a>
</li>
<li>a <a href="https://www.boj.or.jp/en/announcements/release_2021/k210319c.pdf" target="_blank" rel="noopener">Background</a> to the policy change which discussed the work they did called the Assessment for Further Effective and Sustainable Monetary Easing.
</li>
<li>a nifty <a href="https://www.boj.or.jp/en/announcements/release_2021/k210319b.pdf" target="_blank" rel="noopener">two-pager powerpoint presentation</a> of the Background</li>
<li>and a document called <a href="https://www.boj.or.jp/en/announcements/release_2021/rel210319c.pdf" target="_blank" rel="noopener">Establishment of "Principal Terms and Conditions of the Interest Scheme to Promote Lending"</a> which also contains the change in wording for the QQE</li>
</ul>
This showed there was some subtlety in the methodology, but it also showed some of the restrictions that the BOJ would place on itself in how it decided when and how much ETF buying to do. 
<div class="content-highlight">
I looked at the methodology and numbers and proposed a model in <a href="https://www.smartkarma.com/insights/quantifying-the-boj-change-in-etf-policy-assessing-future-etf-buying-methodology" target="_blank" data-smartkarma-citation="insights:49434" rel="noopener">Quantifying the BOJ Change in ETF Policy: Assessing Future ETF Buying Methodology</a> 
</div>
The market reaction on some high-Nikkei weight stocks on Thursday afternoon and particularly Friday afternoon was striking. <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" data-smartkarma-citation="entities:751:1" rel="noopener">Fast Retailing (9983 JP)</a> fell 5.2% in significant volume in the 30 minutes after the announcement.
The balance of ETF buying since the BOJ lifted its buying amount from ¥6 trillion annually to ¥12 trillion in mid-March 2020 in the covid-crash has been as would have been expected. From the 20th of March 2020 through the 19th of March 2021, the BOJ bought ¥5.29trln of regular ETFs of these three indices (and ¥290bn of ETFs to Support Investment in Physical &amp; Human Capital).
In <a href="https://www.smartkarma.com/insights/boj-etf-buying-composition-clarified" target="_blank" data-smartkarma-citation="insights:38898" rel="noopener">BOJ ETF Buying Composition Clarified</a> in April 2020, I noted the mix was at that time likely to be 90.5% TOPIX, 8.9% Nikkei 225, and 0.6% JPX Nikkei 400. By my calculation, reconstructing the purchases every day based on the rules, the purchase amount over the past year has been 90.4% TOPIX, 9.1% Nikkei 225, and 0.6% JPX Nikkei 400. Given that the BOJ owns most of the ETFs outstanding of these three indices, it would have been difficult to see substantial deviation from that rate.
<div class="content-highlight">
The question is whether the change dramatically impacts stocks going forward.
The easy arithmetic answer is.... no. 
</div>
<ul>
<li>Assuming the BOJ were to buy the same amount, TOPIX would see a 10.7% increase in allocations to TOPIX ETFs (from 90.4% to 100.0%)</li>
<li>Nikkei 225 and JPX Nikkei 400 ETFs get nothing. But Nikkei 225 stocks are, by definition, also members of TOPIX, and the vast majority of JPX Nikkei 400 stocks are too. </li>
</ul>
But there is some subtlety here too.
What it really means, however, is that traders and investors cannot count on incremental BOJ demand over the next year to be a material part of remaining Real World Float. This is more a problem of expected support being withdrawn.
Analysis on this below the fold.

The Nikkei wrote an article last Thursday 18 March 2021 saying the BOJ would change its monetary/quantitative easing policy after having commenced a review in December.
The general idea was a slight curve steepening allowance made "to allow banks to be more profitable" and a change to the way ETF buying was conducted. 

I published a quick analysis of the Changes In BOJ ETF Buying - Which Stocks Impacted and How? 

On Friday 19 March, the BOJ met and after the MPC Meeting published...

The policy statement for this release, Further Effective and Sustainable Monetary Easing

a Background to the policy change which discussed the work they did called the Assessment for Further Effective and Sustainable Monetary Easing.

a nifty two-pager powerpoint presentation of the Background
and a document called Establishment of "Principal Terms and Conditions of the Interest Scheme to Promote Lending" which also contains the change in wording for the QQE

This showed there was some subtlety in the methodology, but it also showed some of the restrictions that the BOJ would place on itself in how it decided when and how much ETF buying to do. 

I looked at the methodology and numbers and proposed a model in Quantifying the BOJ Change in ETF Policy: Assessing Future ETF Buying Methodology 

The market reaction on some high-Nikkei weight stocks on Thursday afternoon and particularly Friday afternoon was striking. Fast Retailing (9983 JP) fell 5.2% in significant volume in the 30 minutes after the announcement.
The balance of ETF buying since the BOJ lifted its buying amount from ¥6 trillion annually to ¥12 trillion in mid-March 2020 in the covid-crash has been as would have been expected. From the 20th of March 2020 through the 19th of March 2021, the BOJ bought ¥5.29trln of regular ETFs of these three indices (and ¥290bn of ETFs to Support Investment in Physical &amp; Human Capital).
In BOJ ETF Buying Composition Clarified in April 2020, I noted the mix was at that time likely to be 90.5% TOPIX, 8.9% Nikkei 225, and 0.6% JPX Nikkei 400. By my calculation, reconstructing the purchases every day based on the rules, the purchase amount over the past year has been 90.4% TOPIX, 9.1% Nikkei 225, and 0.6% JPX Nikkei 400. Given that the BOJ owns most of the ETFs outstanding of these three indices, it would have been difficult to see substantial deviation from that rate.

The question is whether the change dramatically impacts stocks going forward.
The easy arithmetic answer is.... no. 


Assuming the BOJ were to buy the same amount, TOPIX would see a 10.7% increase in allocations to TOPIX ETFs (from 90.4% to 100.0%)
Nikkei 225 and JPX Nikkei 400 ETFs get nothing. But Nikkei 225 stocks are, by definition, also members of TOPIX, and the vast majority of JPX Nikkei 400 stocks are too. 

But there is some subtlety here too.
What it really means, however, is that traders and investors cannot count on incremental BOJ demand over the next year to be a material part of remaining Real World Float. This is more a problem of expected support being withdrawn.
Analysis on this below the fold. 

Quantifying BOJ Change in ETF Policy: Affecting Single Stocks

Fanuc’s 3Q results were strong with revenue of ¥145bn (consensus ¥128bn) and OP of ¥32.9bn (consensus ¥22.0bn) and the company revised up guidance to ¥105.8bn in OP (20.5% above consensus). These are excellent results and new guidance is above our projection of ¥93.3bn. There are some positives here to be sure, but we are unconvinced that this changes the potential peak earnings in this next cycle which we expect to be about ¥185bn over the next fiscal year.

Fanuc’s 3Q results were strong with revenue of ¥145bn (consensus ¥128bn) and OP of ¥32.9bn (consensus ¥22.0bn) and the company revised up guidance to ¥105.8bn in OP (20.5% above consensus). These are excellent results and new guidance is above our projection of ¥93.3bn. There are some positives here to be sure, but we are unconvinced that this changes the potential peak earnings in this next cycle which we expect to be about ¥185bn over the next fiscal year.

Fanuc – Great Results but FA Segment Continues to Worry Us

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)

Fanuc – Early Warning Signs in China

While Fanuc's results beat, sales guidance missed and even ignoring Fanuc's unrealistically conservative margin assumptions, prospects for a demand...

Mio Kato

Tokyo Electron (8035 JP): Getting Ahead of Itself

The shared are up 33% so far this year, discounting record semiconductor capital spending and an upward revision to guidance. Peak earnings...

Scott Foster

Misumi Group (9962): Muted Response to Upward Revision

As expected, management raised FY Mar-21 guidance. But the market response was muted, probably due to excessive valuations. In factory automation,...

Scott Foster

Quantifying BOJ Change in ETF Policy: Affecting Single Stocks

BOJ Policy Changes are dramatic in price and volatility space. Vol goes up near space, down far space, skew flattens. Fast Retailing and others are...

Travis Lundy

Fanuc – Great Results but FA Segment Continues to Worry Us

While Fanuc's results were extremely strong and we expect continued growth over the next few quarters, valuations are highly stretched and the next...

Mio Kato

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