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

'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/000/117/227/original/2020-02-11_05-05-13.png?1581376613" class="editor-image img-responsive" data-smartkarma-image-id="117227"></figure><div class="content-caption">Source • Japan Analytics</div>10TH FEBRUARY ROUNDUP - 189 results and 93 revision announcements had little impact on our aggregate Scores, although decliners still outweighed improvers by a factor of two times. Amongst larger caps, <a href="https://www.smartkarma.com/entities/mitsubishi-estate-co-ltd" target="_blank" data-smartkarma-citation="entities:566:1" rel="noopener">Mitsubishi Estate (8802 JP)</a> produced the best quarter-on-quarter change in Score, with <a href="https://www.smartkarma.com/entities/sundrug-co-ltd" target="_blank" data-smartkarma-citation="entities:12615:1" rel="noopener">Sundrug (9989 JP)</a> being one of the worst. Today is a public holiday (kenkoku kinen no hi), and so the next roundup will appear on Wednesday morning. <hr>• SECTOR TIMELINE •<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/228/original/2020-02-11_05-08-14.png?1581377317" class="editor-image img-responsive" data-smartkarma-image-id="117228"></figure><div class="content-caption">Source • Japan Analytics</div>SECTOR TIMELINE - Monday's main moves were upwards for Real Estate and Media (<a href="https://www.smartkarma.com/entities/hakuhodo-dy-holdings-inc" target="_blank" data-smartkarma-citation="entities:8736:1" rel="noopener">Hakuhodo DY (2433 JP)</a>) and downwards (again) for Other Commercial Products (<a href="https://www.smartkarma.com/entities/hamamatsu-photonics-kk" target="_blank" data-smartkarma-citation="entities:14074:1" rel="noopener">Hamamatsu Photonics (6965 JP)</a>) and Building Materials (<a href="https://www.smartkarma.com/entities/nichias-corp" target="_blank" data-smartkarma-citation="entities:14674:1" rel="noopener">Nichias (5393 JP)</a>).

Source • Japan Analytics10TH FEBRUARY ROUNDUP - 189 results and 93 revision announcements had little impact on our aggregate Scores, although decliners still outweighed improvers by a factor of two times. Amongst larger caps, Mitsubishi Estate (8802 JP) produced the best quarter-on-quarter change in Score, with Sundrug (9989 JP) being one of the worst. Today is a public holiday (kenkoku kinen no hi), and so the next roundup will appear on Wednesday morning. • SECTOR TIMELINE •Source • Japan AnalyticsSECTOR TIMELINE - Monday's main moves were upwards for Real Estate and Media (Hakuhodo DY (2433 JP)) and downwards (again) for Other Commercial Products (Hamamatsu Photonics (6965 JP)) and Building Materials (Nichias (5393 JP)). 

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 10th February ▲7003 8802 2433 ▼6965 9989 6324

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.

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

MSCI Emerging Markets Index / Technical Analysis

The laundry list of current market conditions consistent with the profile of a bull market continues to grow, helping support our ongoing belief that global equities are in the early stages of a broad-based advance. We explore and highlight actionable investment themes and opportunities across the EM space and within materials, Energy, Manufacturing, Health care and Apparel/Luxury Goods

The laundry list of current market conditions consistent with the profile of a bull market continues to grow, helping support our ongoing belief that global equities are in the early stages of a broad-based advance. We explore and highlight actionable investment themes and opportunities across the EM space and within materials, Energy, Manufacturing, Health care and Apparel/Luxury Goods

Japan

Harmonic Drive Systems Inc. manufactures speed reducers used in industrial robots, semiconductor manufacturing equipment, and other precision instruments. The Company offers cup type, hollow-shaft type, and rotary type speed reducers. Harmonic Drive Systems also produces gear heads and harmonic drive actuators.

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Harmonic Drive Systems (6324 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

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 10th February ▲7003 8802 2433 ▼6965 9989 6324

10TH FEBRUARY ROUNDUP - 189 results and 93 revision announcements had little impact on our aggregate Scores, although decliners still outweighed...

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

EM Breakout -- Add Exposure

The laundry list of current market conditions consistent with the profile of a bull market continues to grow, helping support our ongoing belief...

Vermilion Research

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