'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/000/080/728/original/2019-03-02_20-40-55.png?1551526871" class="editor-image img-responsive" data-smartkarma-image-id="80728"></figure>Source: Japan Analytics
</div>LIQUIDITY RULES - Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the strongest in over two years, and much of this 'boom' is flowing into risk assets. Large-scale repatriation of offshore funds by US companies has also helped boost the US dollar against the yen. The Market Composite responded by rising 2.3% over the last two weeks, although only by 1% in US dollar terms.WEAK MACRO - Net exports and higher inventories offset private investment and consumption during the fourth quarter, resulting in flat GDP growth year-on-year. January industrial production fell to the lowest level in 30 months, and, with the manufacturing PMI nearing 50, the prospect is for further weakness this quarter. Inventories continue to rise and, in North Asia, to levels last seen in 2005. Combined with the sharp fall in exports in Japan, Korea and Taiwan, export pricing in back in deflationary territory, putting further upward pressure on real interest rates.  Meanwhile, January retail sales saw the largest month-on-month decline in over three years as department stores saw fewer Chinese tourists over the New Year.  Equity markets are living on 'borrowed time'.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/722/original/2019-03-02_18-02-59.png?1551517390" class="editor-image img-responsive" data-smartkarma-image-id="80722"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/724/original/2019-03-02_18-07-56.png?1551517689" class="editor-image img-responsive" data-smartkarma-image-id="80724"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/729/original/2019-03-02_20-41-51.png?1551526925" class="editor-image img-responsive" data-smartkarma-image-id="80729"></figure><div class="content-caption">Source: Japan Analytics</div>HOLD FOR NOW - This bear market rally is two months old and is maturing. The Value Traded ratio is below trend again, the RSI is neutral, and the Toraku is signalling caution. We expect another month of liquidity/weak Yen-driven strength before the economic realities begin to prevail.MARKET/SECTOR STRATEGY- We continue to recommend an underweight position in Japan in global portfolios and favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, Transportation, Healthcare and Telecommunications sectors. We would avoid or short the financial sectors Banks, Non-Bank Finance and Multi-Industry. We would underweight the Auto, Retail and Other Consumer Products sectors as consumer spending contracts further in the US, Europe, China and Japan. In the DETAIL section below, we will review Sector performance, company results, revisions and stock performance over the previous two weeks, as well as adding some brief comments on <a href="https://www.smartkarma.com/entities/10020" target="_blank" data-smartkarma-citation="entities:10020:1">Sakai Moving Service (9039 JP)</a>, <a href="https://www.smartkarma.com/entities/20269" target="_blank" data-smartkarma-citation="entities:20269:1">Sumitomo Chemical (4005 JP)</a>, <a href="https://www.smartkarma.com/entities/8431" target="_blank" data-smartkarma-citation="entities:8431:1">Parco (8251 JP)</a>, <a href="https://www.smartkarma.com/entities/4489" target="_blank" data-smartkarma-citation="entities:4489:1">Chugai Pharmaceutical (4519 JP)</a>, <a href="https://www.smartkarma.com/entities/14674" target="_blank" data-smartkarma-citation="entities:14674:1">Nichias (5393 JP)</a>, <a href="https://www.smartkarma.com/entities/27043" target="_blank" data-smartkarma-citation="entities:27043:1">Raksul (4384 JP)</a>, <a href="https://www.smartkarma.com/entities/10503" target="_blank" data-smartkarma-citation="entities:10503:1">Daito Trust (1878 JP)</a>, and <a href="https://www.smartkarma.com/entities/14502" target="_blank" data-smartkarma-citation="entities:14502:1">Benefit One (2412 JP)</a>.


Source: Japan Analytics
LIQUIDITY RULES - Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the strongest in over two years, and much of this 'boom' is flowing into risk assets. Large-scale repatriation of offshore funds by US companies has also helped boost the US dollar against the yen. The Market Composite responded by rising 2.3% over the last two weeks, although only by 1% in US dollar terms.WEAK MACRO - Net exports and higher inventories offset private investment and consumption during the fourth quarter, resulting in flat GDP growth year-on-year. January industrial production fell to the lowest level in 30 months, and, with the manufacturing PMI nearing 50, the prospect is for further weakness this quarter. Inventories continue to rise and, in North Asia, to levels last seen in 2005. Combined with the sharp fall in exports in Japan, Korea and Taiwan, export pricing in back in deflationary territory, putting further upward pressure on real interest rates.  Meanwhile, January retail sales saw the largest month-on-month decline in over three years as department stores saw fewer Chinese tourists over the New Year.  Equity markets are living on 'borrowed time'.  Source: Japan AnalyticsHOLD FOR NOW - This bear market rally is two months old and is maturing. The Value Traded ratio is below trend again, the RSI is neutral, and the Toraku is signalling caution. We expect another month of liquidity/weak Yen-driven strength before the economic realities begin to prevail.MARKET/SECTOR STRATEGY- We continue to recommend an underweight position in Japan in global portfolios and favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, Transportation, Healthcare and Telecommunications sectors. We would avoid or short the financial sectors Banks, Non-Bank Finance and Multi-Industry. We would underweight the Auto, Retail and Other Consumer Products sectors as consumer spending contracts further in the US, Europe, China and Japan. In the DETAIL section below, we will review Sector performance, company results, revisions and stock performance over the previous two weeks, as well as adding some brief comments on Sakai Moving Service (9039 JP), Sumitomo Chemical (4005 JP), Parco (8251 JP), Chugai Pharmaceutical (4519 JP), Nichias (5393 JP), Raksul (4384 JP), Daito Trust (1878 JP), and Benefit One (2412 JP).   

🇯🇵 Japan • Fortnightly Update - Liquidity Rules

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

The JPX-Nikkei 400 Index was <a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20130514E_1.pdf" target="_blank">announced</a> in mid 2013 as an effort between the JPX and Nikkei (with the Nikkei newspaper and others suggesting significant input from the GPIF) to create an index with the "goal of promoting Japanese companies with high investment appeal at home and abroad."<blockquote>Constituent selection and calculation rules will be developed using a holistic corporate analysis approach, including a focus on efficient capital usage and sustainable corporate value creation as well as qualitative elements that meet the standards of global investors.</blockquote>That was cute. When they announced the index at the end of July, they said...<blockquote>We have high hopes that the new index will contribute to improved capital efficiency and corporate value, and promote innovation of the listed companies. In addition, by serving as a new investment benchmark for domestic and overseas investors, we expect the new index to stimulate the qualitative improvement and revitalization of the Japanese stock market.</blockquote>In early November 2013, the JPX announced the <a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20131106E_4.pdf" target="_blank">guidelines</a> and methodology of the index.<h2>It's A Pretty Awful Index</h2><ul><li>My first thought back then, unchanged until now, is that this index was designed to fail. The construction methodology suggested a significant number of changes every year, and was designed to kick out companies after a bad year or two, when the stock price was low, then let them back in a couple of years later after results had rebounded.</li><li>The index had an inherent ability to sell low and buy high. Any appeal to the underlying selection criteria which included some governance measures (and the arithmetic average ROE is higher), and the benefit of capping index weights at a very low level (1.5%) allowing for a weighting methodology closer to arithmetic rather than pure market-cap weighted was offset by the ability of astute traders to estimate the likely inclusion basket long in advance.  <ul><li>Index construction starts with selecting a universe of the highest liquidity stocks among the top 1200 market caps. It selects 1000 stocks. Then it ranks those 1000 stocks by ROE, by Operating Profit, and by Market Cap. 40% of the score is 3yr average ROE rank. 40% is 3yr total OP rank. 20% is MarketCap rank.</li><li>There is an alternate set of criteria designed to promote "good features". A company gets a qualitative score added if it adopts IFRS, if it releases earnings information in English, and if one-third of directors are independent (with a minimum of 3 directors). But this set of criteria is designed to only change about 10 names in and out of the index (i.e. 2.5% of 400 members).</li><li>All of these "qualitative" measures are likely to be characteristics of larger companies, so it in effect rewards companies which are in the area of say a 301-600 rank according to market cap and a 401-800 rank in 3-year average ROE and 3-year total OP - companies on the bubble of not being selected. THOSE companies, if they really desire, can get themselves higher up the ranking by changing director policy, adopting IFRS, and/or releasing earnings in English. All of that costs, mentally if not much practically. Those who do not do it already who decide to do it to become an index constituent are perhaps should think twice. Investors to whom that extra effort for index constituency appeals would be advised to think twice too. They only get in because they don't meet the other measures.</li></ul></li></ul><h2>But It Is An Index, And It Rebalances, So We Look At It</h2>Today after the close, the JPX <a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20170807E_1.pdf" target="_blank">announced</a> the annual rebalance results of the JPNK400 Index. 31 names will be added and 28 removed. Total one-way turnover to rebalance this year is 5.0% (last year 4.5%, 2015 was 5.9%, and 2014 was 6.2%) using price data at the end of July. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/031/184/original/20170807_JPNK400_Changes.png?1502120257" class="editor-image img-responsive" data-smartkarma-image-id="31184"></figure><hr>Below the fold, I dig into some of the interesting characteristics of the JPNK400 rebalance, how much tracks the index in terms of hard trackers, and we look at liquidity impact on the trade.

The JPX-Nikkei 400 Index was announced in mid 2013 as an effort between the JPX and Nikkei (with the Nikkei newspaper and others suggesting significant input from the GPIF) to create an index with the "goal of promoting Japanese companies with high investment appeal at home and abroad."Constituent selection and calculation rules will be developed using a holistic corporate analysis approach, including a focus on efficient capital usage and sustainable corporate value creation as well as qualitative elements that meet the standards of global investors.That was cute. When they announced the index at the end of July, they said...We have high hopes that the new index will contribute to improved capital efficiency and corporate value, and promote innovation of the listed companies. In addition, by serving as a new investment benchmark for domestic and overseas investors, we expect the new index to stimulate the qualitative improvement and revitalization of the Japanese stock market.In early November 2013, the JPX announced the guidelines and methodology of the index.It's A Pretty Awful IndexMy first thought back then, unchanged until now, is that this index was designed to fail. The construction methodology suggested a significant number of changes every year, and was designed to kick out companies after a bad year or two, when the stock price was low, then let them back in a couple of years later after results had rebounded.The index had an inherent ability to sell low and buy high. Any appeal to the underlying selection criteria which included some governance measures (and the arithmetic average ROE is higher), and the benefit of capping index weights at a very low level (1.5%) allowing for a weighting methodology closer to arithmetic rather than pure market-cap weighted was offset by the ability of astute traders to estimate the likely inclusion basket long in advance.  Index construction starts with selecting a universe of the highest liquidity stocks among the top 1200 market caps. It selects 1000 stocks. Then it ranks those 1000 stocks by ROE, by Operating Profit, and by Market Cap. 40% of the score is 3yr average ROE rank. 40% is 3yr total OP rank. 20% is MarketCap rank.There is an alternate set of criteria designed to promote "good features". A company gets a qualitative score added if it adopts IFRS, if it releases earnings information in English, and if one-third of directors are independent (with a minimum of 3 directors). But this set of criteria is designed to only change about 10 names in and out of the index (i.e. 2.5% of 400 members).All of these "qualitative" measures are likely to be characteristics of larger companies, so it in effect rewards companies which are in the area of say a 301-600 rank according to market cap and a 401-800 rank in 3-year average ROE and 3-year total OP - companies on the bubble of not being selected. THOSE companies, if they really desire, can get themselves higher up the ranking by changing director policy, adopting IFRS, and/or releasing earnings in English. All of that costs, mentally if not much practically. Those who do not do it already who decide to do it to become an index constituent are perhaps should think twice. Investors to whom that extra effort for index constituency appeals would be advised to think twice too. They only get in because they don't meet the other measures.But It Is An Index, And It Rebalances, So We Look At ItToday after the close, the JPX announced the annual rebalance results of the JPNK400 Index. 31 names will be added and 28 removed. Total one-way turnover to rebalance this year is 5.0% (last year 4.5%, 2015 was 5.9%, and 2014 was 6.2%) using price data at the end of July. Below the fold, I dig into some of the interesting characteristics of the JPNK400 rebalance, how much tracks the index in terms of hard trackers, and we look at liquidity impact on the trade.

Small and mid-cap Asia, Thematic, Corporate Access, Glorious Day, Ltd.

Glorious Day Asia

Small and mid-cap Asia, Thematic, Corporate Access

Glorious Day, Ltd.

Equity Bottom-Up

Global Wafer (6488 TT): Purchase of Sun Edison Semi (Semi US) will move GWC to #3 global supplier and 17% market share, after Shin-Etsu and Sumco and ahead of Siltronics (Wacker Chemie). Semi wafer prices are set to show a modest rebound on industry consolidation and no material increases in industry capacity. Industry growth and market addressing synergies from the merger offset the lack of initial profit accretion.

Global Wafer (6488 TT): Purchase of Sun Edison Semi (Semi US) will move GWC to #3 global supplier and 17% market share, after Shin-Etsu and Sumco and ahead of Siltronics (Wacker Chemie). Semi wafer prices are set to show a modest rebound on industry consolidation and no material increases in industry capacity. Industry growth and market addressing synergies from the merger offset the lack of initial profit accretion.

Global Wafer Corp (6488 TT): Imminent Industry Consolidation a Positive; Company Visit Note Summary

NS Solutions (2327 JP) is a listed IT systems and services provider. It was originally the IT division for Nippon Steel but was spun out many years ago and now 86+% of its revenue comes from non-Nippon Steel customers (retail service, finance, telecommunication, public and academic service, etc). It recently conducted a large buyback.WHIY THIS REPORT? &nbsp;There is a chance NSSOL shareholders&nbsp;see "good news" substantially better than consensus expects when it reports on April 28 (scheduled for 11am Japan time).&nbsp;&nbsp;<ol><li>CONSENSUS MAY BE LOW: &nbsp;A study of seasonality of quarterly sales, gross profit, and net profit of the company over the past 12 years suggests the current consensus Q4 number is well off the average. Minimising divergence from historical patterns would mean Q4 is 42% higher than the current 3.1bn net profit estimate.&nbsp;</li><li>DIVIDENDS COULD BE BOOSTED: The company has maintained a payout ratio of 27% over the past 12 years (including this year's forecast 45 yen/share, but not including the buyback). The average is 31% over the past 8 years (in 2008 the payout ratio went above 20% and hasn't looked back since). Because earnings are up, and because share count is down, the stock could be in line for a HUGE dividend hike for fiscal 2016. <ul><li>Using consensus and a 25% payout ratio, next year's dividend&nbsp;would be 59&nbsp;yen/share.</li><li>At consensus EPS and 30%, it would be 70&nbsp;yen.&nbsp;</li><li>Normally the H1/interim dividend is announced at earnings (i.e. next Tuesday).</li></ul></li></ol>Readers may be better placed to know the fundamentals of the company and should decide on valuations themselves, but the numbers&nbsp;suggest there is&nbsp;a potential upside surprise here to some parts.

NS Solutions (2327 JP) is a listed IT systems and services provider. It was originally the IT division for Nippon Steel but was spun out many years ago and now 86+% of its revenue comes from non-Nippon Steel customers (retail service, finance, telecommunication, public and academic service, etc). It recently conducted a large buyback.WHIY THIS REPORT? &nbsp;There is a chance NSSOL shareholders&nbsp;see "good news" substantially better than consensus expects when it reports on April 28 (scheduled for 11am Japan time).&nbsp;&nbsp;CONSENSUS MAY BE LOW: &nbsp;A study of seasonality of quarterly sales, gross profit, and net profit of the company over the past 12 years suggests the current consensus Q4 number is well off the average. Minimising divergence from historical patterns would mean Q4 is 42% higher than the current 3.1bn net profit estimate.&nbsp;DIVIDENDS COULD BE BOOSTED: The company has maintained a payout ratio of 27% over the past 12 years (including this year's forecast 45 yen/share, but not including the buyback). The average is 31% over the past 8 years (in 2008 the payout ratio went above 20% and hasn't looked back since). Because earnings are up, and because share count is down, the stock could be in line for a HUGE dividend hike for fiscal 2016. Using consensus and a 25% payout ratio, next year's dividend&nbsp;would be 59&nbsp;yen/share.At consensus EPS and 30%, it would be 70&nbsp;yen.&nbsp;Normally the H1/interim dividend is announced at earnings (i.e. next Tuesday).Readers may be better placed to know the fundamentals of the company and should decide on valuations themselves, but the numbers&nbsp;suggest there is&nbsp;a potential upside surprise here to some parts.

NS Solutions (2327 JP): Quantitative  EPS surprise? Arithmetic potential for a huge div hike?

Japan

NS Solutions Corporation operates system consulting services and proposal of solutions.  The Company also manages operation and maintenance of engineering systems and develops software.

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NS Solutions (2327 JP)

🇯🇵 Japan • Fortnightly Update - Liquidity Rules

LIQUIDITY RULES - Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the...

Campbell Gunn

JPX Nikkei 400 Rebalance Announced

The JPX-Nikkei 400 Index was announced in mid 2013 as an effort between the JPX and Nikkei (with the Nikkei newspaper and others suggesting...

Travis Lundy

Global Wafer Corp (6488 TT): Imminent Industry Consolidation a Positive; Company Visit Note Summary

Global Wafer (6488 TT): Purchase of Sun Edison Semi (Semi US) will move GWC to #3 global supplier and 17% market share, after Shin-Etsu and Sumco...

Glorious Day Asia

NS Solutions (2327 JP): Quantitative EPS surprise? Arithmetic potential for a huge div hike?

NS Solutions (2327 JP) is a listed IT systems and services provider. It was originally the IT division for Nippon Steel but was spun out many years...

Travis Lundy

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