'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. 

Quantitative Analysis

<p style="text-align: center;"><strong>• MARKET COMPOSITE - AGGREGATE RESULTS •</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/865/original/2019-08-16_06-45-04.png?1565905530" class="editor-image img-responsive" data-smartkarma-image-id="95865"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>THIRD DOWN QUARTER</strong> - This Insight will review the aggregate results for the 3774 listed Japanese companies for the quarter just ended and updated our Results &amp; Revision Scores for the Market Composite and each of our 30 Sectors. Operating Income has declined by 1.8% since the end of May and is now 5.1% below the peak of December 21st last year. The decline in Net Income has been more significant - 15.7% from the peak and 3.5% since May.  Japan's aggregate trailing-twelve-month (TTM) Net Income will end this year at a lower level than two years ago. </p><p><strong>FORECASTS STILL OPTIMISTIC</strong> -  The 'gap' between current and forecast results is now the widest in two years; however, the 'roles' are reversed. Aggregate forecasts have declined by 1.4% for Operating Income and 1.6% for Net Income and the forecast 'improvements' by year-end are 3% and 6%, respectively, which we consider optimistic. </p><p><strong>UPSIDE LIMITED</strong> - The decline in the market in recent weeks has taken the forward multiple to the second-lowest level this year at 13.7 times. Alternatively, the market is implying a further 17% decline in Net Income, assuming a 'normal' market multiple of 16.7 times. We are more inclined to the latter possibility.</p><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/770/original/2019-08-15_12-05-51.png?1565838392" class="editor-image img-responsive" data-smartkarma-image-id="95770"></figure><p>Source: Japan Analytics </p>
</div><p><strong>MARGIN ROLLOVER</strong> - Revenues are still increasing by 3.8% a year; however, the rolling quarterly rate of increase is slowing to just 0.4% in the quarter just ended while the forecast-implied growth rate for the next nine months is 2%.  Operating margins peaked at 7.78% one year ago and have since declined by 61 basis points since then.  TTM Net Margins are now 4.83% and have declined by 102 basis points in the last three quarters.</p><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/772/original/2019-08-15_12-26-32.png?1565839621" class="editor-image img-responsive" data-smartkarma-image-id="95772"></figure><p>Source: Japan Analytics </p>
</div><p><strong>SECTOR MARGINS - TOP</strong> - <strong>Bank</strong> Sector margins continue to slide, but have yet to lose their leading position to <strong>Telecoms</strong> despite the latter's margins being unchanged over three months. <strong>Internet</strong> and b both saw large margins contractions as did <strong>Chemicals</strong> which may slip out of this group next quarter. The most robust performance came from our long-time preferred Sector, <strong>Infomation Technology</strong>.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/773/original/2019-08-15_12-44-16.png?1565840676" class="editor-image img-responsive" data-smartkarma-image-id="95773"></figure><div class="content-caption">Source: Japan Analytics </div><p><strong>SECTOR MARGINS - MID</strong> - The <strong>Market Composite</strong> OPM has declined by 27 basis points in the last three months to 7.2%, and only nine of 29 Sectors have higher margins. Of the mid-ranked Sectors by margins, only <strong>Multi-Industry</strong> and <strong>Consumer Services</strong> saw margin increases of more than ten basis points. The worst-performing in this group were <strong>Food, Beverage &amp; Tobacco</strong> and <strong>Technology Hardwar</strong>e. Over a longer-term period, there has been a notable decline in <strong>Construction</strong> and<strong> Non-Bank Finance</strong> Sector margins. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/774/original/2019-08-15_12-52-37.png?1565841201" class="editor-image img-responsive" data-smartkarma-image-id="95774"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>SECTOR MARGINS - BOTTOM </strong>- Only <strong>Utilities</strong> of the bottom-nine OPM Sectors saw a margin improvement in the last three months, while<strong> Building Materials</strong>, <strong>Autos</strong>,<strong> Metals</strong>, <strong>Energy</strong>, and <strong>Other Materials</strong> all had double-digit declines. <strong>Retail</strong> margins are the most stable amongst this group,</p><p><strong>OUTLOOK</strong> - Aggregate results are a lagging indicator for the market, having peaked one year after the market peak of January 2018 - which is why we prefer to rely more on our scoring methodology (see below). Accordingly, we expect the trend in profits and margins to continue to be negative for the rest of the fiscal year and look for revenues to join the trend next quarter.  A breach of the December market low would be required to keep the market multiple below 'normal' levels, and we would advise patience for all but the most committed investors in Japanese equities.  </p><hr><p style="text-align: center;"><strong>• RESULTS &amp; REVISION SCORE •</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/869/original/2019-08-16_06-50-04.png?1565905842" class="editor-image img-responsive" data-smartkarma-image-id="95869"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>RESULT &amp; REVISION SCORE </strong>- After peaking in November 2017, our Results &amp; Revision Score has declined for six of the last seven quarters, the exception being the previous quarter which was 'supported' by the optimistic full-year forecasts made in May, As shown below, the Annual forecasts were at 'odds' with the more pessimistic forecasts for the half-year - half-way through the half-year, the latter are proving to be more reliable. Ove the last two years, the correlation between the Results &amp; Revision Score and Total Market Cap ex REITs has been 0.78.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/838/original/2019-08-15_18-08-12.png?1565860115" class="editor-image img-responsive" data-smartkarma-image-id="95838"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>28-MONTH LOW</strong> - The Results &amp; Revision Score has three components, Results, Annual Forecasts &amp; Revisions and Interim Forecasts &amp; Revisions, and the last two can be combined to derive a Forecast &amp; Revision Score. The Forecast &amp; Revision Score is a good leading indicator for the Results Score with a lead-time of four to six months. Although still positive, the Results Score is at a new twenty-eight low of 1.25. The Score has only been negative for ten months since May 2010 reaching a nine-year low in December 2016. If current global macro indicators are correct, the Results Score should be heading into negative territory by the third-quarter results which will be released in February next year.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/839/original/2019-08-15_18-23-10.png?1565861002" class="editor-image img-responsive" data-smartkarma-image-id="95839"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>INTERIM v FULL-YEAR FORECASTS</strong> - The Forecast &amp; Revision Score is a weighted combination of two forecast series based on the official company forecasts released and updated by most Japanese companies throughout the year. The Annual forecasts tend to receive more senior management attention than the Interim, which are often delegated to the CFO. As a result, the latter series is more volatile, leading on the downside from peaks and lagging on the upside from toughs. The current Interim Score is the second-lowest in nine years, after April 2016 and has offset the optimism implied in the uptick in the Annual Score this May. <strong>If the precedents of 2011 and 2016 are to be followed, the Results Score should bottom out eight months from now, in April 2020.</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/870/original/2019-08-16_06-58-00.png?1565906307" class="editor-image img-responsive" data-smartkarma-image-id="95870"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>CURRENCY IN THE DRIVING SEAT</strong> - The importance of the currency as a key driver in the earnings cycle in Japan is well illustrated above where the peaks and troughs of the year-on-year change in the US$/Yen exchange rate lagged by six months align well with the changes the Results &amp; Revision Score (RRS), where the correlation is 0.79 since the beginning of 2014. The recent strengthening of the Yen suggests a new low for the RRS in the first half of 2020.</p><p>In the <strong>DETAIL</strong> section below, we shall examine the detailed trends in earnings results and forecasts for the 29 Sectors that make up our Market Composite as well as the Sector Results &amp; Revisions Scores.</p>

• MARKET COMPOSITE - AGGREGATE RESULTS •Source: Japan AnalyticsTHIRD DOWN QUARTER - This Insight will review the aggregate results for the 3774 listed Japanese companies for the quarter just ended and updated our Results &amp; Revision Scores for the Market Composite and each of our 30 Sectors. Operating Income has declined by 1.8% since the end of May and is now 5.1% below the peak of December 21st last year. The decline in Net Income has been more significant - 15.7% from the peak and 3.5% since May.  Japan's aggregate trailing-twelve-month (TTM) Net Income will end this year at a lower level than two years ago. FORECASTS STILL OPTIMISTIC -  The 'gap' between current and forecast results is now the widest in two years; however, the 'roles' are reversed. Aggregate forecasts have declined by 1.4% for Operating Income and 1.6% for Net Income and the forecast 'improvements' by year-end are 3% and 6%, respectively, which we consider optimistic. UPSIDE LIMITED - The decline in the market in recent weeks has taken the forward multiple to the second-lowest level this year at 13.7 times. Alternatively, the market is implying a further 17% decline in Net Income, assuming a 'normal' market multiple of 16.7 times. We are more inclined to the latter possibility.
Source: Japan Analytics 
MARGIN ROLLOVER - Revenues are still increasing by 3.8% a year; however, the rolling quarterly rate of increase is slowing to just 0.4% in the quarter just ended while the forecast-implied growth rate for the next nine months is 2%.  Operating margins peaked at 7.78% one year ago and have since declined by 61 basis points since then.  TTM Net Margins are now 4.83% and have declined by 102 basis points in the last three quarters.
Source: Japan Analytics 
SECTOR MARGINS - TOP - Bank Sector margins continue to slide, but have yet to lose their leading position to Telecoms despite the latter's margins being unchanged over three months. Internet and b both saw large margins contractions as did Chemicals which may slip out of this group next quarter. The most robust performance came from our long-time preferred Sector, Infomation Technology.Source: Japan Analytics SECTOR MARGINS - MID - The Market Composite OPM has declined by 27 basis points in the last three months to 7.2%, and only nine of 29 Sectors have higher margins. Of the mid-ranked Sectors by margins, only Multi-Industry and Consumer Services saw margin increases of more than ten basis points. The worst-performing in this group were Food, Beverage &amp; Tobacco and Technology Hardware. Over a longer-term period, there has been a notable decline in Construction and Non-Bank Finance Sector margins. Source: Japan AnalyticsSECTOR MARGINS - BOTTOM - Only Utilities of the bottom-nine OPM Sectors saw a margin improvement in the last three months, while Building Materials, Autos, Metals, Energy, and Other Materials all had double-digit declines. Retail margins are the most stable amongst this group,OUTLOOK - Aggregate results are a lagging indicator for the market, having peaked one year after the market peak of January 2018 - which is why we prefer to rely more on our scoring methodology (see below). Accordingly, we expect the trend in profits and margins to continue to be negative for the rest of the fiscal year and look for revenues to join the trend next quarter.  A breach of the December market low would be required to keep the market multiple below 'normal' levels, and we would advise patience for all but the most committed investors in Japanese equities.  • RESULTS &amp; REVISION SCORE •Source: Japan AnalyticsRESULT &amp; REVISION SCORE - After peaking in November 2017, our Results &amp; Revision Score has declined for six of the last seven quarters, the exception being the previous quarter which was 'supported' by the optimistic full-year forecasts made in May, As shown below, the Annual forecasts were at 'odds' with the more pessimistic forecasts for the half-year - half-way through the half-year, the latter are proving to be more reliable. Ove the last two years, the correlation between the Results &amp; Revision Score and Total Market Cap ex REITs has been 0.78.Source: Japan Analytics28-MONTH LOW - The Results &amp; Revision Score has three components, Results, Annual Forecasts &amp; Revisions and Interim Forecasts &amp; Revisions, and the last two can be combined to derive a Forecast &amp; Revision Score. The Forecast &amp; Revision Score is a good leading indicator for the Results Score with a lead-time of four to six months. Although still positive, the Results Score is at a new twenty-eight low of 1.25. The Score has only been negative for ten months since May 2010 reaching a nine-year low in December 2016. If current global macro indicators are correct, the Results Score should be heading into negative territory by the third-quarter results which will be released in February next year.Source: Japan AnalyticsINTERIM v FULL-YEAR FORECASTS - The Forecast &amp; Revision Score is a weighted combination of two forecast series based on the official company forecasts released and updated by most Japanese companies throughout the year. The Annual forecasts tend to receive more senior management attention than the Interim, which are often delegated to the CFO. As a result, the latter series is more volatile, leading on the downside from peaks and lagging on the upside from toughs. The current Interim Score is the second-lowest in nine years, after April 2016 and has offset the optimism implied in the uptick in the Annual Score this May. If the precedents of 2011 and 2016 are to be followed, the Results Score should bottom out eight months from now, in April 2020.Source: Japan AnalyticsCURRENCY IN THE DRIVING SEAT - The importance of the currency as a key driver in the earnings cycle in Japan is well illustrated above where the peaks and troughs of the year-on-year change in the US$/Yen exchange rate lagged by six months align well with the changes the Results &amp; Revision Score (RRS), where the correlation is 0.79 since the beginning of 2014. The recent strengthening of the Yen suggests a new low for the RRS in the first half of 2020.In the DETAIL section below, we shall examine the detailed trends in earnings results and forecasts for the 29 Sectors that make up our Market Composite as well as the Sector Results &amp; Revisions Scores.

🇯🇵 JAPAN • Summer Results & Revisions - Market Composite & Sectors - Third Down

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

<p><a href="https://www.smartkarma.com/entities/harmonic-drive-systems-inc" target="_blank" data-smartkarma-citation="entities:10238:1" rel="noopener">Harmonic Drive Systems (6324 JP)</a> reported 1Q earnings on Friday with results surpassing consensus as the revenue decline was milder than expected, falling 29.1% YoY compared to 1H guidance which is for a 39.1% YoY decline. As a result, OP surprised to the upside at ¥1.5bn, which is above the company's full year guidance of ¥1.0bn. This drove a sharp rebound in the stock but we remain unconvinced about the short-term prospects. We discuss our reasoning below.</p>

Harmonic Drive Systems (6324 JP) reported 1Q earnings on Friday with results surpassing consensus as the revenue decline was milder than expected, falling 29.1% YoY compared to 1H guidance which is for a 39.1% YoY decline. As a result, OP surprised to the upside at ¥1.5bn, which is above the company's full year guidance of ¥1.0bn. This drove a sharp rebound in the stock but we remain unconvinced about the short-term prospects. We discuss our reasoning below.

<p><a href="https://www.smartkarma.com/entities/yaskawa-electric-corp" target="_blank" data-smartkarma-citation="entities:2458:1" rel="noopener">Yaskawa Electric (6506 JP)</a> reported 1Q earnings today, kicking off the season for the factory automation space in rather dour fashion with revenue down 16.2% YoY and OP down 58.2% YoY. Revenue was ¥107.4bn, 10% below consensus and we estimate about 4-5% below the company's own plan, while OP was ¥7.2bn, about 30% below consensus.</p><p>The results look rather dire and are likely to pour cold water on hopes for a quick rebound for the sector. We are turning more constructive on the name but are increasingly concerned for peer <a href="https://www.smartkarma.com/entities/harmonic-drive-systems-inc" target="_blank" data-smartkarma-citation="entities:10238:1" rel="noopener">Harmonic Drive Systems (6324 JP)</a>. We discuss the details below.</p>

Yaskawa Electric (6506 JP) reported 1Q earnings today, kicking off the season for the factory automation space in rather dour fashion with revenue down 16.2% YoY and OP down 58.2% YoY. Revenue was ¥107.4bn, 10% below consensus and we estimate about 4-5% below the company's own plan, while OP was ¥7.2bn, about 30% below consensus.The results look rather dire and are likely to pour cold water on hopes for a quick rebound for the sector. We are turning more constructive on the name but are increasingly concerned for peer Harmonic Drive Systems (6324 JP). We discuss the details below.

Yaskawa: Poor 1Q Should Correct Expectations and Share Price But Start Searching for an Entry Point

<p><a href="https://www.smartkarma.com/entities/10238" target="_blank" data-smartkarma-citation="entities:10238:1">Harmonic Drive Systems (6324 JP)</a> reported earnings after the close on Friday with results being largely in line with consensus while guidance was frankly quite grim.</p><table class="table table-striped"><tbody>
<tr>
<td>¥m</td>
<td>Revenue</td>
<td>OP</td>
</tr>
<tr>
<td>FY18 results</td>
<td style="text-align: right;">67,809</td>
<td style="text-align: right;">16,903</td>
</tr>
<tr>
<td>FY18 consensus</td>
<td style="text-align: right;">67,349</td>
<td style="text-align: right;">16,730</td>
</tr>
<tr>
<td>Beat/miss</td>
<td style="text-align: right;">+0.7%</td>
<td style="text-align: right;">+1.0%</td>
</tr>
<tr>
<td>FY19 guidance</td>
<td style="text-align: right;">42,000</td>
<td style="text-align: right;">1,000</td>
</tr>
<tr>
<td>FY19 consensus</td>
<td style="text-align: right;">55,772</td>
<td style="text-align: right;">10,240</td>
</tr>
<tr>
<td>Beat/miss</td>
<td style="text-align: right;">-24.7%</td>
<td style="text-align: right;">-90.2%</td>
</tr>
<tr>
<td></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
</tr>
<tr>
<td>1HFY19 guidance</td>
<td style="text-align: right;">21,000</td>
<td style="text-align: right;">450</td>
</tr>
</tbody></table><div style="text-align: left;" class="content-caption">Source: Company disclosures, Bloomberg</div><p>Although we felt the robotics stocks had been oversold at the beginning of the year, following their strong rebound we had started to feel that risk-reward was once again starting to skew negative. For Harmonic Drive in particular, we were more cautious due to the sheer size of the jump in revenue and orders that the company faced when demand was strong, but even we were not expecting guidance to be quite this pessimistic.</p><p>We examine the numbers in more detail below.</p>

Harmonic Drive Systems (6324 JP) reported earnings after the close on Friday with results being largely in line with consensus while guidance was frankly quite grim.

¥m
Revenue
OP


FY18 results
67,809
16,903


FY18 consensus
67,349
16,730


Beat/miss
+0.7%
+1.0%


FY19 guidance
42,000
1,000


FY19 consensus
55,772
10,240


Beat/miss
-24.7%
-90.2%







1HFY19 guidance
21,000
450

Source: Company disclosures, BloombergAlthough we felt the robotics stocks had been oversold at the beginning of the year, following their strong rebound we had started to feel that risk-reward was once again starting to skew negative. For Harmonic Drive in particular, we were more cautious due to the sheer size of the jump in revenue and orders that the company faced when demand was strong, but even we were not expecting guidance to be quite this pessimistic.We examine the numbers in more detail below.

Harmonic Drive: Nothing Harmonic About the Guidance

<p>After visiting <a href="https://www.smartkarma.com/entities/2458" target="_blank" data-smartkarma-citation="entities:2458:1">Yaskawa Electric (6506 JP)</a> today we believe we were probably too negative on the Motion Control segment earlier and that the company's forecasts for FY02/20 are relatively reasonable. We remain bullish on the Robotics segment and continue to expect margins to outperform company guidance significantly. With that said, we still feel that the stock price has gotten ahead of itself and that the market may be pricing in a recovery in Motion Control margins that just will not happen.</p>

After visiting Yaskawa Electric (6506 JP) today we believe we were probably too negative on the Motion Control segment earlier and that the company's forecasts for FY02/20 are relatively reasonable. We remain bullish on the Robotics segment and continue to expect margins to outperform company guidance significantly. With that said, we still feel that the stock price has gotten ahead of itself and that the market may be pricing in a recovery in Motion Control margins that just will not happen.

Yaskawa: Positive Impression from Our Visit but Too Early for 30x PE

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.

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

Harmonic Drive Systems (6324 JP)

🇯🇵 JAPAN • Summer Results & Revisions - Market Composite & Sectors - Third Down

• MARKET COMPOSITE - AGGREGATE RESULTS •THIRD DOWN QUARTER - This Insight will review the aggregate results for the 3774 listed Japanese companies...

Campbell Gunn

Harmonic Drive: Not Out of the Woods

Harmonic Drive Systems (6324 JP) reported 1Q earnings on Friday with results surpassing consensus as the revenue decline was milder than expected,...

Mio Kato

Harmonic Drive: Nothing Harmonic About the Guidance

Harmonic Drive Systems (6324 JP) reported earnings after the close on Friday with results being largely in line with consensus while guidance was...

Mio Kato

Yaskawa: Positive Impression from Our Visit but Too Early for 30x PE

After visiting Yaskawa Electric (6506 JP) today we believe we were probably too negative on the Motion Control segment earlier and that the...

Mio Kato

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

🇯🇵 JAPAN • Summer Results & Revisions - Market Composite & Sectors - Third Down

• MARKET COMPOSITE - AGGREGATE RESULTS •THIRD DOWN QUARTER - This Insight will review the aggregate results for the 3774 listed Japanese companies...

Campbell Gunn

Harmonic Drive: Not Out of the Woods

Harmonic Drive Systems (6324 JP) reported 1Q earnings on Friday with results surpassing consensus as the revenue decline was milder than expected,...

Mio Kato

Yaskawa: Poor 1Q Should Correct Expectations and Share Price But Start Searching for an Entry Point

Yaskawa Electric (6506 JP) reported 1Q earnings today, kicking off the season for the factory automation space in rather dour fashion with revenue...

Mio Kato

Harmonic Drive: Nothing Harmonic About the Guidance

Harmonic Drive Systems (6324 JP) reported earnings after the close on Friday with results being largely in line with consensus while guidance was...

Mio Kato

Yaskawa: Positive Impression from Our Visit but Too Early for 30x PE

After visiting Yaskawa Electric (6506 JP) today we believe we were probably too negative on the Motion Control segment earlier and that the...

Mio Kato