'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><strong>LOWER LOW</strong> - Japanese equities reached a new 52-week low on 29th October but rebounded on the subsequent four trading days to close the fortnight down 2.2% - 3.6% below its 50-day moving average. From peak to trough, Total Market Value declined by 16% and 18% in Yen and US$ terms, respectively. The Value Traded Ratio spiked to its 4th-highest point this year, the number of 52-week new lows reached a two-year high and the Toraku advance-decline indicator an eighteen-month low. All of these indicators suggest that we have seen an intermediate-term market low. A longer-term signal will require confirmation from the current results announcements that earnings momentum is still positive and a degree of stability in overseas markets.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/610/original/2018-11-03_15-06-55.png?1541225537" class="editor-image img-responsive" data-smartkarma-image-id="68610"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/612/original/2018-11-03_15-17-47.png?1541225881" class="editor-image img-responsive" data-smartkarma-image-id="68612"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/619/original/2018-11-03_16-26-07.png?1541229982" class="editor-image img-responsive" data-smartkarma-image-id="68619"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/620/original/2018-11-03_15-38-35.png?1541230008" class="editor-image img-responsive" data-smartkarma-image-id="68620"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>EARNINGS MOMENTUM CONTINUES TO SLOW</strong> - 37% of companies have now reported since the end of September and, in aggregate, revenues and operating profits continue to grow at a high single-digit annual pace. Quarter-on-Quarter trends in trailing-twelve-month (TTM) data are showing a declining trend with TTM QoQ operating profits showing no change. Operating margins have declined by 17 basis points since the final quarter of calendar 2017.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/632/original/2018-11-03_20-35-56.png?1541245010" class="editor-image img-responsive" data-smartkarma-image-id="68632"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>ALL COMPANY PROFIT TIMELINE ►</strong> - As a result, aggregate realised TTM profits for all listed companies have yet to see the 'uplift' that has been a feature of the last seven quarters. More importantly, forecasts for the current year are largely unchanged from May when the bulk of the forecasts were released. Revisions since then have only added 0.5% and 0.9% to forecast Operating and Net Income, respectively, compared with 'uplifts' of 6.2% and 4.7% over the same period in 2017. The 3.2% gap between TTM Net Income and Forecast Net Income for six months ahead persists and provides, depending on your outlook, either 'cover' for the coming weak second half or potential for upward surprises. Our preference is for the former. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/628/original/2018-11-03_19-43-15.png?1541241826" class="editor-image img-responsive" data-smartkarma-image-id="68628"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>RESULTS SCORE TIMELINE</strong> <strong>TURNS ▼</strong>- As measured by our Results Score, earnings momentum peaked on 1st February at 7.51 and has since declined 43% to 4.31, with the most significant declines being in May and October. The complimentary Forecast/Revision Score has followed a similar path to May but has since moved sideways. We anticipate further weakness in both scores. However, we expect both to remain positive for the next two quarters. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/630/original/2018-11-03_20-25-15.png?1541244334" class="editor-image img-responsive" data-smartkarma-image-id="68630"></figure><div style="text-align: center;" class="content-caption"><em>Source: Japan Analytics </em></div><div style="text-align: left;" class="content-caption"><em>NB: Results and Forecast/Revision Scores measure quarterly results, initial forecasts and any subsequent revisions for every company on a scale of +30 to -30 for 167,763 reported quarters since 2006. The Results Score covers the last eight quarters and measures quarter-on-quarter and year-on-year changes as well as the rate of change. The Forecast/Revision Score compares the initial or revised forecast with the previous forecast and the trailing-twelve-month results. Scores are aggregated based on market capitalisation into Peer Group, Sector and All Market Scores.</em></div><p><strong>SEASONALITY</strong> - Yesterday was Culture Day in Japan, and we would refer back to our earlier insight <a href="https://www.smartkarma.com/insights/japan-seasonality-sell-in-july-and-say-goodbye-please-come-back-on-culture-day" target="_blank" data-smartkarma-citation="insights:23682">Japan: Seasonality - "Sell in July and Say Goodbye...Please Come Back on Culture Day"</a> as a reminder that the next eight months are usually the best regarding market returns, although November is normally a 'large-cap' month - small caps have declined on average.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/643/original/2018-09-05_20-00-36.png?1541286434" class="editor-image img-responsive" data-smartkarma-image-id="68643"></figure><div class="content-highlight">
<p><strong>OUTLOOK</strong> - With now one-third of this quarter's results and revision announcements having been made, the outlook is far more muted. Of the 1,493 results released since 22nd September, 53% have been positive in terms of Results Score and 55% regarding Revision Score. However, the average scores are now declining.  So far companies have forgone two opportunities (the Q1 and now the Q2 results) to address the 3% 'shortfall' between TTM and FY19 Forecast Net Income. Forecasts for Operating Income in six months' time are also not seeing the customary mid-year uptick. In such circumstances, the fact that the market's PER multiple is at a three-year low of 13.7x should not be considered a mitigating factor. Having broken down and out of a nine-month trading range, and as noted in more detail <a href="https://www.smartkarma.com/insights/japan-market-update-oversold-however" target="_blank" data-smartkarma-citation="insights:25370">here</a>, a decisive low has yet to be reached. </p>
<p><strong>SECTOR RECOMMENDATIONS</strong> - Although we maintain a cautious outlook, we will reduce our implied net short in terms of our sector selection (see below) and revert to our standard 6-long 6-short recommendations from last month's 5/9 ratio.</p>
</div>

LOWER LOW - Japanese equities reached a new 52-week low on 29th October but rebounded on the subsequent four trading days to close the fortnight down 2.2% - 3.6% below its 50-day moving average. From peak to trough, Total Market Value declined by 16% and 18% in Yen and US$ terms, respectively. The Value Traded Ratio spiked to its 4th-highest point this year, the number of 52-week new lows reached a two-year high and the Toraku advance-decline indicator an eighteen-month low. All of these indicators suggest that we have seen an intermediate-term market low. A longer-term signal will require confirmation from the current results announcements that earnings momentum is still positive and a degree of stability in overseas markets.Source: Japan AnalyticsEARNINGS MOMENTUM CONTINUES TO SLOW - 37% of companies have now reported since the end of September and, in aggregate, revenues and operating profits continue to grow at a high single-digit annual pace. Quarter-on-Quarter trends in trailing-twelve-month (TTM) data are showing a declining trend with TTM QoQ operating profits showing no change. Operating margins have declined by 17 basis points since the final quarter of calendar 2017.Source: Japan AnalyticsALL COMPANY PROFIT TIMELINE ► - As a result, aggregate realised TTM profits for all listed companies have yet to see the 'uplift' that has been a feature of the last seven quarters. More importantly, forecasts for the current year are largely unchanged from May when the bulk of the forecasts were released. Revisions since then have only added 0.5% and 0.9% to forecast Operating and Net Income, respectively, compared with 'uplifts' of 6.2% and 4.7% over the same period in 2017. The 3.2% gap between TTM Net Income and Forecast Net Income for six months ahead persists and provides, depending on your outlook, either 'cover' for the coming weak second half or potential for upward surprises. Our preference is for the former. Source: Japan AnalyticsRESULTS SCORE TIMELINE TURNS ▼- As measured by our Results Score, earnings momentum peaked on 1st February at 7.51 and has since declined 43% to 4.31, with the most significant declines being in May and October. The complimentary Forecast/Revision Score has followed a similar path to May but has since moved sideways. We anticipate further weakness in both scores. However, we expect both to remain positive for the next two quarters. Source: Japan Analytics NB: Results and Forecast/Revision Scores measure quarterly results, initial forecasts and any subsequent revisions for every company on a scale of +30 to -30 for 167,763 reported quarters since 2006. The Results Score covers the last eight quarters and measures quarter-on-quarter and year-on-year changes as well as the rate of change. The Forecast/Revision Score compares the initial or revised forecast with the previous forecast and the trailing-twelve-month results. Scores are aggregated based on market capitalisation into Peer Group, Sector and All Market Scores.SEASONALITY - Yesterday was Culture Day in Japan, and we would refer back to our earlier insight Japan: Seasonality - "Sell in July and Say Goodbye...Please Come Back on Culture Day" as a reminder that the next eight months are usually the best regarding market returns, although November is normally a 'large-cap' month - small caps have declined on average.
OUTLOOK - With now one-third of this quarter's results and revision announcements having been made, the outlook is far more muted. Of the 1,493 results released since 22nd September, 53% have been positive in terms of Results Score and 55% regarding Revision Score. However, the average scores are now declining.  So far companies have forgone two opportunities (the Q1 and now the Q2 results) to address the 3% 'shortfall' between TTM and FY19 Forecast Net Income. Forecasts for Operating Income in six months' time are also not seeing the customary mid-year uptick. In such circumstances, the fact that the market's PER multiple is at a three-year low of 13.7x should not be considered a mitigating factor. Having broken down and out of a nine-month trading range, and as noted in more detail here, a decisive low has yet to be reached. 
SECTOR RECOMMENDATIONS - Although we maintain a cautious outlook, we will reduce our implied net short in terms of our sector selection (see below) and revert to our standard 6-long 6-short recommendations from last month's 5/9 ratio.


Japan Fortnightly Update: Lower Low as Earnings Slow

Japan

NAKANISHI INC. manufactures gyration equipment for dental and industry use. The Company's products include precision spindles and hand-held grinders.

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Nakanishi Inc (7716 JP)

Japan Fortnightly Update: Lower Low as Earnings Slow

LOWER LOW - Japanese equities reached a new 52-week low on 29th October but rebounded on the subsequent four trading days to close the...

Campbell Gunn

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