Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

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

<a href="https://www.smartkarma.com/entities/meiji-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:15996:1" rel="noopener">Meiji Holdings (2269 JP)</a> generates over 83% of revenues from the Food segment while the rest comes from the Pharmaceuticals segment. Irrespective of the economic situation, the company’s revenue has grown at low single digits YoY throughout its trading history, apart from two instances where it declined marginally compared to the prior year. Furthermore, the OCF grew at a CAGR of 12% over the last five years while OP and DPS grew at 22% and 28% CAGRs respectively. Therefore, on the surface, Meiji looks like a perfect defensive stock.

Meiji Holdings (2269 JP) generates over 83% of revenues from the Food segment while the rest comes from the Pharmaceuticals segment. Irrespective of the economic situation, the company’s revenue has grown at low single digits YoY throughout its trading history, apart from two instances where it declined marginally compared to the prior year. Furthermore, the OCF grew at a CAGR of 12% over the last five years while OP and DPS grew at 22% and 28% CAGRs respectively. Therefore, on the surface, Meiji looks like a perfect defensive stock.

Quantamental Analysis Shows Meiji’s Perception as a Defensive Stock Could Be a Delusion

'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/000/061/034/original/2018-08-16_19-07-34.png?1534672507" class="editor-image img-responsive" data-smartkarma-image-id="61034"></figure><div class="content-caption">Source: Japan Analytics</div>A GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in earnings.  However, the score has only declined by 31 basis points since last quarter showing a degree of 'stability' seen only in 2011 in recent years.  The aggregate Forecast/Revision score has also continued to decline and is now lower for the fourth straight month. As would be expected, this score is a reliable leading indicator for the Results Score and suggests further weakening in the rate of earnings growth in the months ahead.  Neither score is, as yet, suggesting a decline in earnings before the end of the fiscal year.YEN CORRELATION WEAKENING - This quarter's earnings' stability was surprising given the relative strength of the Yen compared to a year ago. In the past and even as recently as 2016, a 5 per cent year-on-year decline has resulted in negative Results Scores. The year-on-year change in now positive so any negative impact will dissipate over the next two quarters.MARKET FOLLOWS MOMENTUM LOWER - The All Market Composite peaked on 23rd January and has since fallen by 11% despite a continuation of the Bank of Japan's ETF purchasing programme. Weakening earnings momentum and the overvaluation of many of the leading stocks, as in our '<a href="https://www.smartkarma.com/insights/japan-most-overbought-most-oversold-the-relative-price-score" target="_blank" data-smartkarma-citation="insights:21149">Nifty 50</a>' portfolio, have been contributing factors. With prospects for a much weaker Yen limited by the current trade negotiations between Japan and the United States, and with global growth slowing, we expect both Results and Revision Scores to trend lower, but to end the fiscal year in positive territory. Historically, the market has not risen during periods when both the Results and Forecast/Revision Scores have been trending down.<div class="content-highlight">MARKET RECOMMENDATION - Within a global portfolio, we would market-weight Japanese equities with a bias towards domestic sectors and not hedge the currency exposure.</div>SECTOR RESULTS SCORES -The good news is that only one sector, (Multi-Industry - 75% of which is <a href="https://www.smartkarma.com/entities/359" target="_blank" data-smartkarma-citation="entities:359:1">Japan Post [6178 JP</a>]) has a negative score - and its score is less negative than last quarter. Both the Media and Consumer Services sectors' scores turned positive and each increased by more than two points.  On the other hand, over half of our 29 sectors saw declining scores, although the number was lower than last quarter.  The top sectors in terms of quarter-on-quarter change were Energy, Consumer Services, Media, Information Technology and Other Commercial Products while the laggards were Non-Bank Finance, Chemicals, Construction, Machinery and Utilities. SECTOR REVISION SCORES - Five sectors have negative Forecast/Revision Scores with Utilities now joining Media, Multi-Industry, Autos and Banks from last quarter. The highest scores are in the Energy, Technology Hardware, Electrical Equipment, Retail and Information Technology sectors. Improvements of greater than one point were seen in Energy, Media and Machinery while Food, Beverages &amp; Tobacco, Chemicals, Utilities, Other Materials and Technology Hardware all lost more than one point. Overall eighteen sectors saw declines.REVISION V. RESULTS SCORES - The difference between the Results and Revision Scores is a good indicator of corporate expectations compared with the trailing-twelve-month reality. In some cases (e.g. Restaurants) the 'optimism' is due to a failure to revise forecasts in the light of weaker results. In others, such as Telecommunications, there is scope for upward revisions in the coming quarters.<div class="content-highlight">
THE OPTIMISTS
Restaurants • Other Materials • Electrical Equipment • Technology Hardware • Retail
THE PESSIMISTS
Banks • Autos • Telecommunications • Utilities • Media • Chemicals
</div>SECTOR PERFORMANCE - Over the last three months, our Japan Market Composite declined by 5.8%. Only four sectors saw an increase in value led by Telecommunications, Energy, Commercial Services and Information Technology. The largest declines were in the Building Materials, Metals, Real Estate Construction and Machinery sectors. Nine sectors are now negative over one year led by Building Materials, Metals and Food, Beverages &amp; Tobacco and only eight are up in double-digits led by Services and Information Technology. For the time being, Domestic Non-Manufacturing sectors 'rules the roost' and Domestic Cyclical sectors have taken over from Global Cyclicals in the 'doghouse'.'.<div class="content-highlight">
SECTOR RECOMMENDATIONS
Our most-preferred sectors are currently Energy, Healthcare, Telecommunications, Other Commercial Products and Information Technology.
Least-preferred sectors are Metals, Chemicals, Machinery, Autos, Construction, Real Estate, Building Materials, Food Beverages &amp; Tobacco and Utilities.
</div>TOP 5 LARGER PEER GROUPS - The top five Peer Groups capitalised at over ¥1 trillion are Machine Tools &amp; Presses, PC &amp; Computer Peripherals, Oil &amp; Gas Refining &amp; Marketing, Telecom Distribution Services and Sporting &amp; Outdoor Goods. The top twenty larger Peer Groups have gained 16% over one year but have declined by 4% on average the last three months.BOTTOM 5 LARGER PEER GROUPS - The bottom five Peer Groups capitalised at over ¥1 trillion are Audio/Visual Content, LCD/LED Materials &amp; Equipment, Electrical Engineering, General Contractors and Real Estate - Leasing. The bottom twenty larger Peer Groups have lost 2% over one year and 9% over the last three months. Only Security Services and Tobacco have risen since May.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/038/original/2018-08-19_19-33-03.png?1534674804" class="editor-image img-responsive" data-smartkarma-image-id="61038"></figure>

Source: Japan AnalyticsA GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in earnings.  However, the score has only declined by 31 basis points since last quarter showing a degree of 'stability' seen only in 2011 in recent years.  The aggregate Forecast/Revision score has also continued to decline and is now lower for the fourth straight month. As would be expected, this score is a reliable leading indicator for the Results Score and suggests further weakening in the rate of earnings growth in the months ahead.  Neither score is, as yet, suggesting a decline in earnings before the end of the fiscal year.YEN CORRELATION WEAKENING - This quarter's earnings' stability was surprising given the relative strength of the Yen compared to a year ago. In the past and even as recently as 2016, a 5 per cent year-on-year decline has resulted in negative Results Scores. The year-on-year change in now positive so any negative impact will dissipate over the next two quarters.MARKET FOLLOWS MOMENTUM LOWER - The All Market Composite peaked on 23rd January and has since fallen by 11% despite a continuation of the Bank of Japan's ETF purchasing programme. Weakening earnings momentum and the overvaluation of many of the leading stocks, as in our 'Nifty 50' portfolio, have been contributing factors. With prospects for a much weaker Yen limited by the current trade negotiations between Japan and the United States, and with global growth slowing, we expect both Results and Revision Scores to trend lower, but to end the fiscal year in positive territory. Historically, the market has not risen during periods when both the Results and Forecast/Revision Scores have been trending down.MARKET RECOMMENDATION - Within a global portfolio, we would market-weight Japanese equities with a bias towards domestic sectors and not hedge the currency exposure.SECTOR RESULTS SCORES -The good news is that only one sector, (Multi-Industry - 75% of which is Japan Post [6178 JP]) has a negative score - and its score is less negative than last quarter. Both the Media and Consumer Services sectors' scores turned positive and each increased by more than two points.  On the other hand, over half of our 29 sectors saw declining scores, although the number was lower than last quarter.  The top sectors in terms of quarter-on-quarter change were Energy, Consumer Services, Media, Information Technology and Other Commercial Products while the laggards were Non-Bank Finance, Chemicals, Construction, Machinery and Utilities. SECTOR REVISION SCORES - Five sectors have negative Forecast/Revision Scores with Utilities now joining Media, Multi-Industry, Autos and Banks from last quarter. The highest scores are in the Energy, Technology Hardware, Electrical Equipment, Retail and Information Technology sectors. Improvements of greater than one point were seen in Energy, Media and Machinery while Food, Beverages &amp; Tobacco, Chemicals, Utilities, Other Materials and Technology Hardware all lost more than one point. Overall eighteen sectors saw declines.REVISION V. RESULTS SCORES - The difference between the Results and Revision Scores is a good indicator of corporate expectations compared with the trailing-twelve-month reality. In some cases (e.g. Restaurants) the 'optimism' is due to a failure to revise forecasts in the light of weaker results. In others, such as Telecommunications, there is scope for upward revisions in the coming quarters.
THE OPTIMISTS
Restaurants • Other Materials • Electrical Equipment • Technology Hardware • Retail
THE PESSIMISTS
Banks • Autos • Telecommunications • Utilities • Media • Chemicals
SECTOR PERFORMANCE - Over the last three months, our Japan Market Composite declined by 5.8%. Only four sectors saw an increase in value led by Telecommunications, Energy, Commercial Services and Information Technology. The largest declines were in the Building Materials, Metals, Real Estate Construction and Machinery sectors. Nine sectors are now negative over one year led by Building Materials, Metals and Food, Beverages &amp; Tobacco and only eight are up in double-digits led by Services and Information Technology. For the time being, Domestic Non-Manufacturing sectors 'rules the roost' and Domestic Cyclical sectors have taken over from Global Cyclicals in the 'doghouse'.'.
SECTOR RECOMMENDATIONS
Our most-preferred sectors are currently Energy, Healthcare, Telecommunications, Other Commercial Products and Information Technology.
Least-preferred sectors are Metals, Chemicals, Machinery, Autos, Construction, Real Estate, Building Materials, Food Beverages &amp; Tobacco and Utilities.
TOP 5 LARGER PEER GROUPS - The top five Peer Groups capitalised at over ¥1 trillion are Machine Tools &amp; Presses, PC &amp; Computer Peripherals, Oil &amp; Gas Refining &amp; Marketing, Telecom Distribution Services and Sporting &amp; Outdoor Goods. The top twenty larger Peer Groups have gained 16% over one year but have declined by 4% on average the last three months.BOTTOM 5 LARGER PEER GROUPS - The bottom five Peer Groups capitalised at over ¥1 trillion are Audio/Visual Content, LCD/LED Materials &amp; Equipment, Electrical Engineering, General Contractors and Real Estate - Leasing. The bottom twenty larger Peer Groups have lost 2% over one year and 9% over the last three months. Only Security Services and Tobacco have risen since May.

Japan: Results & Revision Scores Summer 2018 Update - Market Composite, Sectors & Peer Groups

Making sense of the Global Market, Euromonitor International Ltd.

Yu Mitsuhashi

Making sense of the Global Market

Euromonitor International Ltd.

We are a global market research company focused on industries, countries, economies and consumers worldwide. Our cross-country comparable research helps your organisation identify opportunities and develop growth strategies in countries and regions across the globe. With offices around the world, 1,200 analysts in 100 countries and market research on every key trend and driver, we give you powerful access to the real story behind consumer change.

<ul><li>Off-trade sales of RTD tea increased by 3% in current value terms to reach JPY1,519.4 billion and increased by 4% in volume terms to reach 6,490 million litres in 2017.</li><li>RTD tea reached its largest size ever in 2017, supported by consumers’ growing health awareness.</li><li>On-trade sales of RTD tea declined by 1% in both volume and current value terms in 2017, to JPY77.1 billion and 131 million litres.</li><li>ITO EN maintained its lead in RTD tea in 2017, with a 28% retail volume share.</li><li>Over the forecast period RTD tea will record off-trade CAGRs of 3% in both volume terms and at constant 2017 prices to reach JPY1,743.4 billion and 7,531 million litres in 2022.</li></ul>

Off-trade sales of RTD tea increased by 3% in current value terms to reach JPY1,519.4 billion and increased by 4% in volume terms to reach 6,490 million litres in 2017.RTD tea reached its largest size ever in 2017, supported by consumers’ growing health awareness.On-trade sales of RTD tea declined by 1% in both volume and current value terms in 2017, to JPY77.1 billion and 131 million litres.ITO EN maintained its lead in RTD tea in 2017, with a 28% retail volume share.Over the forecast period RTD tea will record off-trade CAGRs of 3% in both volume terms and at constant 2017 prices to reach JPY1,743.4 billion and 7,531 million litres in 2022.

Sector Capsule: Rtd (Ready to Drink) Tea in Japan

<ul><li>Population decline encourages focus on value-added products and automation</li><li>Players target products at increasing number of elderly consumers</li><li>Concerns over lifestyle diseases boost interest in FFC packaged food</li><li>Consumers seek healthy vegetables amidst busy lifestyles</li></ul>

Population decline encourages focus on value-added products and automationPlayers target products at increasing number of elderly consumersConcerns over lifestyle diseases boost interest in FFC packaged foodConsumers seek healthy vegetables amidst busy lifestyles

Sector Briefing: Packaged Food in Japan  (Key Trends and Development) - Part 2

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

<ul><li>Meiji Holdings will get slammed by government price cuts on pharmaceuticals in Japan from this April and then begin to see a massive decline in profitability of its anti-psychosis drug once its patent expires in December.</li><li>Combined, this should be at least a 10% drag on FY3/19 OP, raising the risks that the company guides for substantially lower numbers than consensus. Our estimates are for FY3/19 OP of Y94bn (-4% YoY), while consensus is at Y102bn (+4% YoY).</li><li>While this gap is not large and we expect management to guide for roughly flat profits YoY in FY3/19 (but miss in the end), the difference between OP growth and OP decline should be a big psychological swing factor for the share price. Meiji's share price has gone up by 3.9x over the past five years, as earnings have grown by a CAGR of +34% over that time.</li><li>Meiji's core earnings come from probiotic yogurt drinks and chocolates, which are performing well, but slowing as OP in this division has already doubled over the past 3 years. Nearly 90% of the +5% YoY OP growth seen in the Food division's 1H of FY3/18 came from cost-cutting efforts, which management says has largely run its course. Underlying sales were actually down a bit from last year's 1H.</li><li>The company announced last month that it aims to acquire a 49% stake in a blood plasma products/vaccine producer Kaketsuken, which it plans to consolidate onto its books from the 2H of FY3/19. While this could boost pharma sales by roughly 8% (based on 6 months of Kaketsuken's FY3/17 sales), the OP contribution may not be that significant as Kaketsuken had a recall of problematic plasma products in 2016. On its Japanese website (but not in the English version), Kaketsuken has a huge banner saying "Aiming to Restore Trust". </li><li>Furthermore, in recent talks with the company, they stressed that they've picked all the low-hanging fruit in terms of cost cuts and would now have to begin a multi-year phase of "investments for higher efficiencies". This sounded like a caveat that capex burdens could weigh on earnings over the next several years. Consensus estimates call for Meiji's capex falling by -4% to Y62bn in FY3/19.   </li><li>Valuations--based on our estimates, which are 7% lower than the Street but imply negative growth in FY3/19--are not demanding for a food company, with an FY3/19 PER of 22x and an EV/EBITDA of 9.8x.  But with a declining RoE (from 13.7% this fiscal year to 12.5% in FY3/19), the prospective PBR of 2.5x doesn't provide much support for the share price.</li><li>Our analysis of what Meiji could be worth if it were to sell its pharmaceutical division implies a value of at least Y12,000 per share, or 30% upside from current levels. It makes one wonder why activists haven't targeted Meiji yet but does explain why value investors like Capital have recently begun building positions.</li></ul>

Meiji Holdings will get slammed by government price cuts on pharmaceuticals in Japan from this April and then begin to see a massive decline in profitability of its anti-psychosis drug once its patent expires in December.Combined, this should be at least a 10% drag on FY3/19 OP, raising the risks that the company guides for substantially lower numbers than consensus. Our estimates are for FY3/19 OP of Y94bn (-4% YoY), while consensus is at Y102bn (+4% YoY).While this gap is not large and we expect management to guide for roughly flat profits YoY in FY3/19 (but miss in the end), the difference between OP growth and OP decline should be a big psychological swing factor for the share price. Meiji's share price has gone up by 3.9x over the past five years, as earnings have grown by a CAGR of +34% over that time.Meiji's core earnings come from probiotic yogurt drinks and chocolates, which are performing well, but slowing as OP in this division has already doubled over the past 3 years. Nearly 90% of the +5% YoY OP growth seen in the Food division's 1H of FY3/18 came from cost-cutting efforts, which management says has largely run its course. Underlying sales were actually down a bit from last year's 1H.The company announced last month that it aims to acquire a 49% stake in a blood plasma products/vaccine producer Kaketsuken, which it plans to consolidate onto its books from the 2H of FY3/19. While this could boost pharma sales by roughly 8% (based on 6 months of Kaketsuken's FY3/17 sales), the OP contribution may not be that significant as Kaketsuken had a recall of problematic plasma products in 2016. On its Japanese website (but not in the English version), Kaketsuken has a huge banner saying "Aiming to Restore Trust". Furthermore, in recent talks with the company, they stressed that they've picked all the low-hanging fruit in terms of cost cuts and would now have to begin a multi-year phase of "investments for higher efficiencies". This sounded like a caveat that capex burdens could weigh on earnings over the next several years. Consensus estimates call for Meiji's capex falling by -4% to Y62bn in FY3/19.   Valuations--based on our estimates, which are 7% lower than the Street but imply negative growth in FY3/19--are not demanding for a food company, with an FY3/19 PER of 22x and an EV/EBITDA of 9.8x.  But with a declining RoE (from 13.7% this fiscal year to 12.5% in FY3/19), the prospective PBR of 2.5x doesn't provide much support for the share price.Our analysis of what Meiji could be worth if it were to sell its pharmaceutical division implies a value of at least Y12,000 per share, or 30% upside from current levels. It makes one wonder why activists haven't targeted Meiji yet but does explain why value investors like Capital have recently begun building positions.

Meiji Holdings--Healthy Food Ops Have Heavy Drug Problems

Japan

Morinaga Milk Industry Co., Ltd. produces and sells milk and related dairy products such as ice cream and yogurt.  The Company also develops biochemical product and pharmaceutical.

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Morinaga Milk Industry Co (2264 JP)

Quantamental Analysis Shows Meiji’s Perception as a Defensive Stock Could Be a Delusion

Meiji Holdings (2269 JP) generates over 83% of revenues from the Food segment while the rest comes from the Pharmaceuticals segment. Irrespective...

Oshadhi Kumarasiri

Japan: Results & Revision Scores Summer 2018 Update - Market Composite, Sectors & Peer Groups

A GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in...

Campbell Gunn

Sector Capsule: Rtd (Ready to Drink) Tea in Japan

Off-trade sales of RTD tea increased by 3% in current value terms to reach JPY1,519.4 billion and increased by 4% in volume terms to reach 6,490...

Euromonitor International Ltd.

Sector Briefing: Packaged Food in Japan (Key Trends and Development) - Part 2

Population decline encourages focus on value-added products and automation Players target products at increasing number of elderly...

Euromonitor International Ltd.

Meiji Holdings--Healthy Food Ops Have Heavy Drug Problems

Meiji Holdings will get slammed by government price cuts on pharmaceuticals in Japan from this April and then begin to see a massive decline in...

SC Capital

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