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 Yaskawa this afternoon to get further colour on regional trends within its businesses. In our last note we said:<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>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.

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?

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

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

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 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?

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

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>THE BUFFETT TRADE - 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.In this DETAIL section, we examine: -<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">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.</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

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

With the bulk of the dividends for 2020 announced and guidance provided for the rest of the year by most constituent companies, the Nikkei225 2020 dividend futures have little upside and a bit more downside from the current trading level of 400 index points. From the time we published our last <a href="https://www.smartkarma.com/insights/nikkei225-dividend-futures-trading-near-our-bull-case" target="_blank" rel="noopener">Insight</a> highlighting that the dividend futures were trading near our bull case, the market is 10 points lower.The 2020 dividend futures briefly rallied on hopes of a special dividend from <a href="https://www.smartkarma.com/entities/familymart-co-ltd" target="_blank" data-smartkarma-citation="entities:320:1" rel="noopener">FamilyMart Co Ltd (8028 JP)</a>, but has come off again. With companies having announced their quarterly results and guidance, the focus now shifts to the 2021 dividend futures.At current levels, we do not see any significant opportunity on the 2021 div futures. However, we provide estimates for our bear case, base case and bull case scenarios that can be used to enter/exit positions on moves in the dividend futures due to large changes in the <a href="https://www.smartkarma.com/entities/nikkei-225" target="_blank" data-smartkarma-citation="entities:22909:1" rel="noopener">Nikkei 225 (NKY INDEX)</a>, in macroeconomic indicators, and/or hopes of a COVID-19 vaccine.

With the bulk of the dividends for 2020 announced and guidance provided for the rest of the year by most constituent companies, the Nikkei225 2020 dividend futures have little upside and a bit more downside from the current trading level of 400 index points. From the time we published our last Insight highlighting that the dividend futures were trading near our bull case, the market is 10 points lower.The 2020 dividend futures briefly rallied on hopes of a special dividend from FamilyMart Co Ltd (8028 JP), but has come off again. With companies having announced their quarterly results and guidance, the focus now shifts to the 2021 dividend futures.At current levels, we do not see any significant opportunity on the 2021 div futures. However, we provide estimates for our bear case, base case and bull case scenarios that can be used to enter/exit positions on moves in the dividend futures due to large changes in the Nikkei 225 (NKY INDEX), in macroeconomic indicators, and/or hopes of a COVID-19 vaccine.

Nikkei225 Dividend Futures: Focus Shifts to 2021

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)

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

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

Nikkei225 Dividend Futures: Focus Shifts to 2021

With the bulk of the dividends for 2020 announced and guidance provided for the rest of the year by most constituent companies, the Nikkei225 2020...

Brian Freitas

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