'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

THANKSGIVING RALLY - Japan's equity markets have recovered by 2.4% since 16th November and are now 5% above the October 29th low, but the market composite still needs to break above the previous rally-high of 9th November for the rally to be sustained. In US$ terms the recovery has been more muted, and the market is 9% below the October high and US$1 trillion or 14.5% down from January 23rd. Relative Strength has risen to the highest point since October 26th and suggests a short-term peak is nearing and the market has yet to exit from the 'Death Cross'.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/071/846/original/2018-12-02_07-34-53.png?1543703710" class="editor-image img-responsive" data-smartkarma-image-id="71846"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/071/847/original/2018-12-02_07-49-25.png?1543704574" class="editor-image img-responsive" data-smartkarma-image-id="71847"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/071/848/original/2018-12-02_07-54-12.png?1543704863" class="editor-image img-responsive" data-smartkarma-image-id="71848"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<div class="content-highlight">
OUTLOOK - Japanese equities are attractively priced relative to trailing earnings. However, the market is in the process of discounting the end of the current eight-quarter-long upcycle. The Bank of Japan (BoJ) appears to be slowing the rate of an intended tapering of its ultra-loose monetary policy while the US Federal Reserve is, at least verbally, tempering the pace of its quantitative tightening. As a result, the USD/JPY exchange rate should continue to weaken, as has been the case in recent weeks, although other cross-rates will be supportive of corporate earnings. One-quarter of market operating income comes from companies in the auto and telecommunications sectors and are under threat from global and local 'forces', respectively. A further 15% of operating profits are attributed to financial sectors and cannot be expected to rise while under the 'yolk' of the BoJ's 'ZIRP' policies. Aside from the many stock-specific investments that are on offer in Japan, the market overall should remain underweighted in global portfolios.  
</div>
In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on <a href="https://www.smartkarma.com/entities/2287" target="_blank" data-smartkarma-citation="entities:2287:1">Pola Orbis (4927 JP)</a> and <a href="https://www.smartkarma.com/entities/753" target="_blank" data-smartkarma-citation="entities:753:1">Kyocera (6971 JP)</a>.

THANKSGIVING RALLY - Japan's equity markets have recovered by 2.4% since 16th November and are now 5% above the October 29th low, but the market composite still needs to break above the previous rally-high of 9th November for the rally to be sustained. In US$ terms the recovery has been more muted, and the market is 9% below the October high and US$1 trillion or 14.5% down from January 23rd. Relative Strength has risen to the highest point since October 26th and suggests a short-term peak is nearing and the market has yet to exit from the 'Death Cross'.



Source: Japan Analytics

OUTLOOK - Japanese equities are attractively priced relative to trailing earnings. However, the market is in the process of discounting the end of the current eight-quarter-long upcycle. The Bank of Japan (BoJ) appears to be slowing the rate of an intended tapering of its ultra-loose monetary policy while the US Federal Reserve is, at least verbally, tempering the pace of its quantitative tightening. As a result, the USD/JPY exchange rate should continue to weaken, as has been the case in recent weeks, although other cross-rates will be supportive of corporate earnings. One-quarter of market operating income comes from companies in the auto and telecommunications sectors and are under threat from global and local 'forces', respectively. A further 15% of operating profits are attributed to financial sectors and cannot be expected to rise while under the 'yolk' of the BoJ's 'ZIRP' policies. Aside from the many stock-specific investments that are on offer in Japan, the market overall should remain underweighted in global portfolios.  

In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on Pola Orbis (4927 JP) and Kyocera (6971 JP).

Japan: Fortnightly Update - Thanksgiving Rally

Asia Healthcare Analyst, Pathology Associates Limited

Dion Stéfan Büchner M.D., FCAP

Asia Healthcare Analyst

Pathology Associates Limited

Equity Bottom-Up

Key highlights<ul>
<li>Brisk Opdivo domestic (+12% to ¥45.4b) and overseas (estimated royalty of ~¥28b, up 63% y-o-y) sales led robust topline growth of 19% (to ¥144b) which more than compensated for gross margin deterioration and a marginal increase in SG&amp;A and R&amp;D expenses.</li>
<li>As a result, Core EBIT and EPS grew 32% and 38% to ¥35b and ¥56 / share respectively</li>
<li>The company revised FY18 sales guidance by +1.7% to ¥280b, leading to almost proportionate upwards revision in Reported EBIT and EPS</li>
</ul>

Key highlights
Brisk Opdivo domestic (+12% to ¥45.4b) and overseas (estimated royalty of ~¥28b, up 63% y-o-y) sales led robust topline growth of 19% (to ¥144b) which more than compensated for gross margin deterioration and a marginal increase in SG&amp;A and R&amp;D expenses.
As a result, Core EBIT and EPS grew 32% and 38% to ¥35b and ¥56 / share respectively
The company revised FY18 sales guidance by +1.7% to ¥280b, leading to almost proportionate upwards revision in Reported EBIT and EPS


Ono 1H FY18 (YE Mar'19) Results - First Glance

We reiterate our “Equal-weight” rating on the stock after reviewing our model post FY17 (YE Mar-18) earningsKey Highlights<ul><li>Brisk Opdivo royalty income (up 52.4% to ¥39.8b) led FY17 top-line growth by 7% to ¥261.8b</li></ul>Our Take<ul>
<li>
<a href="https://www.smartkarma.com/entities/8979" target="_blank" data-smartkarma-citation="entities:8979:1">Ono Pharmaceutical Co Ltd (4528 JP)</a>'s Opdivo (in alliance with <a href="https://www.smartkarma.com/entities/1133" target="_blank" data-smartkarma-citation="entities:1133:1">Bristol Myers Squibb Co (BMY US)</a>) was viewed as leading the checkpoint inhibitor landscape until it disappointed with Ph III data, as a monotherapy in 1L NSCLC (accounting for 14% of all new cancers).</li>
<li>Opdivo in combination with Yervoy as 1L treatment in NSCLC is in trials (code named CM-227) currently, however, it is focused only on the sub-group of ~40% of tumor mutation burden (TMB) patients, implying a restricted addressable market size.</li>
<li>On the other hand, recently announced back-to-back positive clinical data (code named KN-189/407/042) reinforces <a href="https://www.smartkarma.com/entities/1130" target="_blank" data-smartkarma-citation="entities:1130:1">Merck &amp; Co. Inc. (MRK US)</a>'s Keytruda (Opdivo’s key competitor) as monotherapy in 1L NSCLC, implying a higher population to cater to and significantly higher sales potential.</li>
<li>Furthermore, with October 30, 2018 PDUFA in squamous NSCLC, Keytruda’s potential approval in 1L NSCLC to come much ahead of Opdivo, for which the full data (CM-227 trail) is expected only in 2H FY18.</li>
<li>Net-net, despite both, Opdivo and Keytruda, being approved in advanced NSCLC, Opdivo will have to be content with lower market share (specific to high TMB population) in 1L NSCLC.</li>
<li>Back home, Opdivo has been one of the worst affected victims of the ongoing price reforms in Japan and as such, its domestic sales declined by 13% to ¥90.1b in FY17, affected by the recently implemented “large-seller” price cuts (targeting drugs with sales &gt; ¥100b)</li>
</ul>Given Keytruda competition globally and pricing pressures in the domestic market, we project Opdivo<ul>
<li>Global sales potential of $7-8b in FY22e assuming positive CM-227 data</li>
<li>Contribution to Ono of FY17-22e sales and royalty CAGR of 3.8% and 6.8% respectively, to ¥110b and ¥55b respectively in FY22e.</li>
</ul>

We reiterate our “Equal-weight” rating on the stock after reviewing our model post FY17 (YE Mar-18) earningsKey HighlightsBrisk Opdivo royalty income (up 52.4% to ¥39.8b) led FY17 top-line growth by 7% to ¥261.8bOur Take

Ono Pharmaceutical Co Ltd (4528 JP)'s Opdivo (in alliance with Bristol Myers Squibb Co (BMY US)) was viewed as leading the checkpoint inhibitor landscape until it disappointed with Ph III data, as a monotherapy in 1L NSCLC (accounting for 14% of all new cancers).
Opdivo in combination with Yervoy as 1L treatment in NSCLC is in trials (code named CM-227) currently, however, it is focused only on the sub-group of ~40% of tumor mutation burden (TMB) patients, implying a restricted addressable market size.
On the other hand, recently announced back-to-back positive clinical data (code named KN-189/407/042) reinforces Merck &amp; Co. Inc. (MRK US)'s Keytruda (Opdivo’s key competitor) as monotherapy in 1L NSCLC, implying a higher population to cater to and significantly higher sales potential.
Furthermore, with October 30, 2018 PDUFA in squamous NSCLC, Keytruda’s potential approval in 1L NSCLC to come much ahead of Opdivo, for which the full data (CM-227 trail) is expected only in 2H FY18.
Net-net, despite both, Opdivo and Keytruda, being approved in advanced NSCLC, Opdivo will have to be content with lower market share (specific to high TMB population) in 1L NSCLC.
Back home, Opdivo has been one of the worst affected victims of the ongoing price reforms in Japan and as such, its domestic sales declined by 13% to ¥90.1b in FY17, affected by the recently implemented “large-seller” price cuts (targeting drugs with sales &gt; ¥100b)
Given Keytruda competition globally and pricing pressures in the domestic market, we project Opdivo
Global sales potential of $7-8b in FY22e assuming positive CM-227 data
Contribution to Ono of FY17-22e sales and royalty CAGR of 3.8% and 6.8% respectively, to ¥110b and ¥55b respectively in FY22e.


Opdivo Potential Capped Due to Pricing Pressure and Keytruda Competition

We upgrade <a href="https://www.smartkarma.com/entities/21001" target="_blank" data-smartkarma-citation="entities:21001:1">Eisai Co Ltd (4523 JP)</a> to “Equal-weight” after reviewing our model post FY17 (YE Mar-18) earnings, in light of the augmented peak sales potential of Lenvima led by the Merck alliance.Merck alliance around Lenvima to help soften the blow from possible adverse outcome on its high-risk AD R&amp;D in FY19<ul>
<li>Big pharma has faced several setbacks (including Eli Lilly’s solanezumab and Merck’s verubecestat failed in a late-stage clinical trial, Boehringer’s BI 409306 failed a Ph II trial) in its efforts to develop novel anti-Alzheimer’s treatments.</li>
<li>Euphoria around Eisai is primarily driven by the possibility of positive outcome from its anti-Alzheimer’s program, BIIB037 (aducanumab), being developed in collaboration with Biogen.</li>
<li>Eisai stock price, therefore, is extremely sensitive to any development/s around anti-Alzheimer’s R&amp;D globally.</li>
<li>Consequently, the Merck alliance around Lenvima will provide much required stability, especially given Eisai’s key upcoming catalyst in the form of a Ph III data release for BIIB037, scheduled for 2H FY19, and help soften the blow from any possible adverse outcome, in our view.</li>
</ul>

We upgrade Eisai Co Ltd (4523 JP) to “Equal-weight” after reviewing our model post FY17 (YE Mar-18) earnings, in light of the augmented peak sales potential of Lenvima led by the Merck alliance.Merck alliance around Lenvima to help soften the blow from possible adverse outcome on its high-risk AD R&amp;D in FY19
Big pharma has faced several setbacks (including Eli Lilly’s solanezumab and Merck’s verubecestat failed in a late-stage clinical trial, Boehringer’s BI 409306 failed a Ph II trial) in its efforts to develop novel anti-Alzheimer’s treatments.
Euphoria around Eisai is primarily driven by the possibility of positive outcome from its anti-Alzheimer’s program, BIIB037 (aducanumab), being developed in collaboration with Biogen.
Eisai stock price, therefore, is extremely sensitive to any development/s around anti-Alzheimer’s R&amp;D globally.
Consequently, the Merck alliance around Lenvima will provide much required stability, especially given Eisai’s key upcoming catalyst in the form of a Ph III data release for BIIB037, scheduled for 2H FY19, and help soften the blow from any possible adverse outcome, in our view.


Merck Alliance Provides Stability to Deal With the Outcome of High Risk Alzheimer’s R&D in FY19

Japan

ONO PHARMACEUTICAL CO., LTD. manufactures and sells pharmaceutical products. The Company mainly researches and develops prescription drugs.

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Ono Pharmaceutical (4528 JT)

🇯🇵 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

Japan: Fortnightly Update - Thanksgiving Rally

THANKSGIVING RALLY - Japan's equity markets have recovered by 2.4% since 16th November and are now 5% above the October 29th low, but the market...

Campbell Gunn

Ono 1H FY18 (YE Mar'19) Results - First Glance

Key highlights Brisk Opdivo domestic (+12% to ¥45.4b) and overseas (estimated royalty of ~¥28b, up 63% y-o-y) sales led robust topline growth of...

Dion Stéfan Büchner M.D., FCAP

Opdivo Potential Capped Due to Pricing Pressure and Keytruda Competition

We reiterate our “Equal-weight” rating on the stock after reviewing our model post FY17 (YE Mar-18) earningsKey HighlightsBrisk Opdivo royalty...

Dion Stéfan Büchner M.D., FCAP

Merck Alliance Provides Stability to Deal With the Outcome of High Risk Alzheimer’s R&D in FY19

We upgrade Eisai Co Ltd (4523 JP) to “Equal-weight” after reviewing our model post FY17 (YE Mar-18) earnings, in light of the augmented peak sales...

Dion Stéfan Büchner M.D., FCAP

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