'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

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/363/original/2019-01-11_14-16-49.png?1547292773" class="editor-image img-responsive" data-smartkarma-image-id="75363"></figure>
<p></p>
Source: Japan Analytics</div>
<p style="text-align: left;"><strong>CURRENCY DRIVER</strong> - The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX and technical specialists (including <a href="https://www.smartkarma.com/profiles/381" target="_blank" data-smartkarma-citation="accounts:381">Thomas Schroeder </a> <a href="https://www.smartkarma.com/insights/dollar-yen-big-short-phase-ii" target="_blank" data-smartkarma-citation="insights:27163">here</a> on Smartkarma) to call for a more sustained bout of US$ weakness. A period of Yen strength is far from a consensus forecast for most Japanese equity investors, and historically a stronger Yen has resulted in a weaker Japanese equity market. The three Yen 'peaks' highlighted by the vertical lines in the chart above all coincided with medium-term lows in TOPIX.  </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/287/original/2019-01-11_14-44-07.png?1547185462" class="editor-image img-responsive" data-smartkarma-image-id="75287"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>¥ &lt; 100</strong> - If we isolate only the 1,484 days in the last forty years when the USDJPY cross has traded above ¥100, the average TOPIX index is 975, which would imply 36% downside for Japanese equities were the Yen to rise above ¥90. Nevertheless, the three Yen peaks we have isolated have proved to be excellent entry points with the subsequent trough-to-peak performance being 28% in 1995~1996, 108% in 2011~2015 and 48% in 2016~2018. Long-term Japan 'bulls' should welcome the coming US dollar bear market. </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/313/original/2019-01-12_10-50-14.png?1547257825" class="editor-image img-responsive" data-smartkarma-image-id="75313"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>EARNINGS DRIVER</strong> - The USDJPY cross remains an important driver of earnings and earnings momentum in Japan. As measured by our Results and Revision Scores, there is a good correlation between the trends in both scores and the year-on-year change in USDJPY lagged by six months, especially around significant turning points for the cross rate (marked by the vertical lines). The Results and Revision Scores have declined since January 2018 in line with the stronger Yen. A move up to above the ¥90 level would, without doubt, take both scores into negative territory again- the only question being, are we replaying 2009/10 or 2016/17? </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/319/original/2019-01-12_13-40-19.png?1547268030" class="editor-image img-responsive" data-smartkarma-image-id="75319"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>CURRENCY CORRELATIONS</strong> - In the <strong>DETAIL</strong> below, we list the larger capitalisation companies whose share price performance most closely correlated with the dollar-yen cross rate. As a preview, the most correlated larger capitalisation company that has been listed since 2006 is, unsurprisingly, <a href="https://www.smartkarma.com/entities/73" target="_blank" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a>.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/318/original/2019-01-12_13-15-40.png?1547266553" class="editor-image img-responsive" data-smartkarma-image-id="75318"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT </strong>- We also go one step further and use the 'Foreign Currency Translation Adjustment' that forms part of Other Comprehensive Income (which has been disclosed in corporate balance sheets and income statements since 2001 and 2011, respectively) to measure the extent of each company's global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight after adding two-month lag for the reporting cycle. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders' Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored.</p>




Source: Japan Analytics
CURRENCY DRIVER - The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX and technical specialists (including Thomas Schroeder  here on Smartkarma) to call for a more sustained bout of US$ weakness. A period of Yen strength is far from a consensus forecast for most Japanese equity investors, and historically a stronger Yen has resulted in a weaker Japanese equity market. The three Yen 'peaks' highlighted by the vertical lines in the chart above all coincided with medium-term lows in TOPIX.  

Source: Japan Analytics
¥ &lt; 100 - If we isolate only the 1,484 days in the last forty years when the USDJPY cross has traded above ¥100, the average TOPIX index is 975, which would imply 36% downside for Japanese equities were the Yen to rise above ¥90. Nevertheless, the three Yen peaks we have isolated have proved to be excellent entry points with the subsequent trough-to-peak performance being 28% in 1995~1996, 108% in 2011~2015 and 48% in 2016~2018. Long-term Japan 'bulls' should welcome the coming US dollar bear market. 

Source: Japan Analytics
EARNINGS DRIVER - The USDJPY cross remains an important driver of earnings and earnings momentum in Japan. As measured by our Results and Revision Scores, there is a good correlation between the trends in both scores and the year-on-year change in USDJPY lagged by six months, especially around significant turning points for the cross rate (marked by the vertical lines). The Results and Revision Scores have declined since January 2018 in line with the stronger Yen. A move up to above the ¥90 level would, without doubt, take both scores into negative territory again- the only question being, are we replaying 2009/10 or 2016/17? 

Source: Japan Analytics
CURRENCY CORRELATIONS - In the DETAIL below, we list the larger capitalisation companies whose share price performance most closely correlated with the dollar-yen cross rate. As a preview, the most correlated larger capitalisation company that has been listed since 2006 is, unsurprisingly, Toyota Motor (7203 JP).

Source: Japan Analytics
THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT - We also go one step further and use the 'Foreign Currency Translation Adjustment' that forms part of Other Comprehensive Income (which has been disclosed in corporate balance sheets and income statements since 2001 and 2011, respectively) to measure the extent of each company's global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight after adding two-month lag for the reporting cycle. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders' Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored.

Japan: What to Buy & Sell if the ¥ Rises to 90

Director, Pearl Hill Advisors

Nicholas Tanner

Director

Pearl Hill Advisors

Equity Bottom-Up

<p>First half results were better than expected and full year results were revised up but are still conservative. Over the next two years operating profit will grow from Y50bn this year towards Y70bn plus as losses on new businesses fall and the existing portfolio shows some modest improvements. The shares are now too cheap. They trade at below book, yield 2.8% and on an EV/ebitda multiple of 5.5x. IR is hardly inspiring, and we suspect this is partly behind the recent poor performance of the…</p>

First half results were better than expected and full year results were revised up but are still conservative. Over the next two years operating profit will grow from Y50bn this year towards Y70bn plus as losses on new businesses fall and the existing portfolio shows some modest improvements. The shares are now too cheap. They trade at below book, yield 2.8% and on an EV/ebitda multiple of 5.5x. IR is hardly inspiring, and we suspect this is partly behind the recent poor performance of the…

Konica Minolta (4902) Too Cheap with Good Mid-Term Growth Prospects.

Global Automotive Stocks/EV Focus/Event Driven, SC Capital

SC Capital

Global Automotive Stocks/EV Focus/Event Driven

Over 22 years covering Japanese equities on both the sell side and the buy side. 

Bottom-up Japan Equities Research

Event-Driven

<ul><li>Sharp's Q2 results on October 27<sup>th</sup> could coincide with an announcement that Sharp's stock will be elevated from the TSE-2 (Tokyo Stock Exchange Second Section) to the TSE-1 (Tokyo Stock Exchange First Section), which could cause a short squeeze of significant size due to the need for passive funds to buy Sharp's shares.</li><li>Based on the information we've gleaned from various stock loan desks in Tokyo, the current short interest in Sharp is around 20 days of its average daily trading volume and the cost of borrowing the shares is around 20% (versus normal cost of borrow at around 0.5% for less shorted names).</li><li>While it's hard to get real clarity on how much of the short interest is actually being utilized--rather than simply held to use once the stock pops on the TSE-1 re-listing news--we were told that roughly 93% of the Sharp's stock borrow is currently utilized.</li><li>If this is true, there could be a significant short squeeze when the TSE-1 news comes out, as passive funds would need to buy around $500m or 10 days of volume if Sharp is elevated from TSE-2 to TSE-1.</li><li>Fundamentals at Sharp are worse than consensus, however, so we would expect a quick sell off after the passive buying has subsided. Ever since Hon Hai management took control of Sharp in August 2016, there have been two quarters of a consensus beat, while the last quarterly results were just in line (see <a href="https://www.smartkarma.com/insights/sharp-q1-is-first-lackluster-set-of-results-since-hon-hai-takeover" target="_blank" data-smartkarma-citation="insights:12451">Sharp--Q1 Is First Lackluster Set of Results Since Hon Hai Takeover</a>).</li><li>Consensus OP estimates for Sharp's Q2 are currently at Y22bn, which would be around 15% higher than the company's target of Q2 OP of Y19.5bn, but our gut feeling is that Sharp should only just make its own Q2 target, which would mark the first quarterly consensus miss since Hon Hai took over (see details below).</li><li>There is no valuation support given Sharp's fragile earnings structure. The stock currently trades at a PER of 17x FY18 consensus EPS estimates (we get a PER of 19x, as we expect a decline in profits), while consumer electronics rivals like Sony and Panasonic--both of which have more stable and growing product segments--both trade at16x and generate much higher profitability.  </li></ul>

Sharp's Q2 results on October 27th could coincide with an announcement that Sharp's stock will be elevated from the TSE-2 (Tokyo Stock Exchange Second Section) to the TSE-1 (Tokyo Stock Exchange First Section), which could cause a short squeeze of significant size due to the need for passive funds to buy Sharp's shares.Based on the information we've gleaned from various stock loan desks in Tokyo, the current short interest in Sharp is around 20 days of its average daily trading volume and the cost of borrowing the shares is around 20% (versus normal cost of borrow at around 0.5% for less shorted names).While it's hard to get real clarity on how much of the short interest is actually being utilized--rather than simply held to use once the stock pops on the TSE-1 re-listing news--we were told that roughly 93% of the Sharp's stock borrow is currently utilized.If this is true, there could be a significant short squeeze when the TSE-1 news comes out, as passive funds would need to buy around $500m or 10 days of volume if Sharp is elevated from TSE-2 to TSE-1.Fundamentals at Sharp are worse than consensus, however, so we would expect a quick sell off after the passive buying has subsided. Ever since Hon Hai management took control of Sharp in August 2016, there have been two quarters of a consensus beat, while the last quarterly results were just in line (see Sharp--Q1 Is First Lackluster Set of Results Since Hon Hai Takeover).Consensus OP estimates for Sharp's Q2 are currently at Y22bn, which would be around 15% higher than the company's target of Q2 OP of Y19.5bn, but our gut feeling is that Sharp should only just make its own Q2 target, which would mark the first quarterly consensus miss since Hon Hai took over (see details below).There is no valuation support given Sharp's fragile earnings structure. The stock currently trades at a PER of 17x FY18 consensus EPS estimates (we get a PER of 19x, as we expect a decline in profits), while consumer electronics rivals like Sony and Panasonic--both of which have more stable and growing product segments--both trade at16x and generate much higher profitability.  

Sharp (6753)--Potential Short Squeeze Ahead

Japan TMT Analyst

Pelham Smithers

Market Intel on Asian Tech with a Japan focus

Pelham Smithers Associates

Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods. 

Research is provided by the following:
Pelham Smithers: Macro, consumer electronics, telecoms & pharma
Joel Scheiman: Electronics materials / components
Julie Boote: Autos
Will Nestuk: Capital goods, machinery & transportation equipment parts
Thao Nguyen: eCommerce, internet content, marketing & advertising

<p>When we visited <a href="https://www.smartkarma.com/entities/16353" target="_blank" data-smartkarma-citation="entities:16353:1">Fujifilm Holdings Corp (4901 JP)</a>, recently, our contact did not appear particularly pleased about an article the Nikkei ran on the same day which attributed the weak share prices of Fujifilm and <a href="https://www.smartkarma.com/entities/17287" target="_blank" data-smartkarma-citation="entities:17287:1">Konica Minolta Inc (4902 JP)</a> to earnings declines in their copier businesses. Better performance has been generated over the last six months by <a href="https://www.smartkarma.com/entities/16793" target="_blank" data-smartkarma-citation="entities:16793:1">Seiko Epson Corp (6724 JP)</a>, <a href="https://www.smartkarma.com/entities/1" target="_blank" data-smartkarma-citation="entities:1:1">Canon Inc (7751 JP)</a> and <a href="https://www.smartkarma.com/entities/15359" target="_blank" data-smartkarma-citation="entities:15359:1">Ricoh Co Ltd (7752 JP)</a>. While a strict grammatical reading of the article might indeed…</p>

When we visited Fujifilm Holdings Corp (4901 JP), recently, our contact did not appear particularly pleased about an article the Nikkei ran on the same day which attributed the weak share prices of Fujifilm and Konica Minolta Inc (4902 JP) to earnings declines in their copier businesses. Better performance has been generated over the last six months by Seiko Epson Corp (6724 JP), Canon Inc (7751 JP) and Ricoh Co Ltd (7752 JP). While a strict grammatical reading of the article might indeed…

<p style="text-align: justify;">Might we be saying goodbye to the Pentax camera? While the brand is set to live on in the medical equipment arena under the ownership of <a href="https://www.smartkarma.com/entities/8990" target="_blank" data-smartkarma-citation="entities:8990:1">Hoya (7741 JP)</a>, <a href="https://www.smartkarma.com/entities/15359" target="_blank" data-smartkarma-citation="entities:15359:1">Ricoh (7752 JP)</a> has announced that it is reviewing its personal camera business, including the potential (likelihood?) of closing down the business line. Given the implosion of the digital camera market and <a href="https://www.smartkarma.com/entities/15359" target="_blank" data-smartkarma-citation="entities:15359:1">Ricoh's </a> 6th ranked position, it is hard to think that it can come up with a solution other than closure. However, if one was to be frank…</p>

Might we be saying goodbye to the Pentax camera? While the brand is set to live on in the medical equipment arena under the ownership of Hoya (7741 JP), Ricoh (7752 JP) has announced that it is reviewing its personal camera business, including the potential (likelihood?) of closing down the business line. Given the implosion of the digital camera market and Ricoh's  6th ranked position, it is hard to think that it can come up with a solution other than closure. However, if one was to be frank…

Ricoh Exits Cameras…Bigger Problems to Consider

Japan

Konica Minolta Inc is mainly engaged in manufacturing office equipment and performance materials. It also operates health care businesses. The Company also makes copiers, personal computer peripherals, optical lenses, and measuring instruments.

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Konica Minolta (4902 JP)

Japan: What to Buy & Sell if the ¥ Rises to 90

CURRENCY DRIVER - The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX...

Campbell Gunn

Konica Minolta (4902) Too Cheap with Good Mid-Term Growth Prospects.

First half results were better than expected and full year results were revised up but are still conservative. Over the next two years operating...

Pearl Hill Advisors

Sharp (6753)--Potential Short Squeeze Ahead

Sharp's Q2 results on October 27th could coincide with an announcement that Sharp's stock will be elevated from the TSE-2 (Tokyo Stock Exchange...

SC Capital

Fujifilm - Unloved, but Not Unlovable

When we visited Fujifilm Holdings Corp (4901 JP), recently, our contact did not appear particularly pleased about an article the Nikkei ran on the...

Pelham Smithers Associates

Ricoh Exits Cameras…Bigger Problems to Consider

Might we be saying goodbye to the Pentax camera? While the brand is set to live on in the medical equipment arena under the ownership of Hoya (7741...

Pelham Smithers Associates

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