Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

On Friday 11 June, the TSE published its final revisions to the Corporate Governance Code which had been undergoing review by the Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code and subsequently comment for the past many months. The new Code went into effect as of 11 June. The first revision to the Guidelines for Investor and Company Engagement were published as well. The new version of Japan's Corporate Governance Code is <a href="https://www.jpx.co.jp/english/news/1020/b5b4pj0000046kxj-att/b5b4pj0000046l07.pdf" target="_blank" rel="noopener">here</a> with the tracked change version <a href="https://www.jpx.co.jp/english/news/1020/b5b4pj0000046kxj-att/b5b4pj0000046l0c.pdf" target="_blank" rel="noopener">here</a>. This is the second revision of the Code (the first revision was in 2018).The revisions to the JFSA Guidelines for Investor and Company Engagement are <a href="https://www.jpx.co.jp/english/news/1020/b5b4pj0000046kxj-att/b5b4pj0000046l3e.pdf" target="_blank" rel="noopener">here</a>. Tracked changes are <a href="https://www.jpx.co.jp/english/news/1020/b5b4pj0000046kxj-att/b5b4pj0000046l50.pdf" target="_blank" rel="noopener">here</a>.The major changes to the Code recommend enhancements to Board independence, diversity, Sustainability and ESG, and also recommend improvements to investor accessibility and voting and a small change to listed parent-listed subsidiary relationships which unfortunately will not do much to counter abuse by companies of listed sub minority shareholders. Below is more discussion of the changes and what they mean.But I remind investors, these changes are almost all box-ticking exercises. They will not improve governance for shareholders except at the margins. Companies which "get" good governance are still rare. And those which don't get it seem to abuse shareholders on a regular basis. And for that, investors still need more cowbell.

On Friday 11 June, the TSE published its final revisions to the Corporate Governance Code which had been undergoing review by the Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code and subsequently comment for the past many months. The new Code went into effect as of 11 June. The first revision to the Guidelines for Investor and Company Engagement were published as well. The new version of Japan's Corporate Governance Code is here with the tracked change version here. This is the second revision of the Code (the first revision was in 2018).The revisions to the JFSA Guidelines for Investor and Company Engagement are here. Tracked changes are here.The major changes to the Code recommend enhancements to Board independence, diversity, Sustainability and ESG, and also recommend improvements to investor accessibility and voting and a small change to listed parent-listed subsidiary relationships which unfortunately will not do much to counter abuse by companies of listed sub minority shareholders. Below is more discussion of the changes and what they mean.But I remind investors, these changes are almost all box-ticking exercises. They will not improve governance for shareholders except at the margins. Companies which "get" good governance are still rare. And those which don't get it seem to abuse shareholders on a regular basis. And for that, investors still need more cowbell.

TSE Prime: Japan's Corporate Governance Code Finalized So Boxes Will Be Furiously Ticked

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

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

SMC reported its 4QFY21 results on Friday and posted revenue of ¥160bn (+14.6% QOQ, +23.2% YoY) and operating profit of ¥47bn (for an OPM of 29.6% compared to the OPM of 27.8% in 4QFY20).The reported 4QFY21 revenue and OP were higher than consensus estimates by 10.5% and 15.3% respectively, but the stock fell today due to weak looking guidance.<table class="table table-striped"><tbody>
<tr>
<td style="width: 129.0pt;">In ¥bn</td>
<td style="width: 107.0pt;">Revenue </td>
<td style="width: 110.0pt;">OP</td>
<td style="width: 83.0pt;">OPM</td>
</tr>
<tr>
<td style="width: 129.0pt;">Actual Results - 4QFY21</td>
<td style="width: 107.0pt;">160</td>
<td style="width: 110.0pt;">47</td>
<td style="width: 83.0pt;">29.6%</td>
</tr>
<tr>
<td style="width: 129.0pt;">Consensus - 4QFY21</td>
<td style="width: 107.0pt;">145</td>
<td style="width: 110.0pt;">41</td>
<td style="width: 83.0pt;">28.4%</td>
</tr>
<tr>
<td style="width: 129.0pt;">Surprise</td>
<td style="width: 107.0pt;">10.5%</td>
<td style="width: 110.0pt;">15.3%</td>
<td style="width: 83.0pt;">1.2%</td>
</tr>
<tr>
<td style="width: 129.0pt;"> </td>
<td style="width: 107.0pt;"> </td>
<td style="width: 110.0pt;"> </td>
<td style="width: 83.0pt;"> </td>
</tr>
<tr>
<td style="width: 129.0pt;">Actual - FY21</td>
<td style="width: 107.0pt;">552</td>
<td style="width: 110.0pt;">153</td>
<td style="width: 83.0pt;">27.8%</td>
</tr>
<tr>
<td style="width: 129.0pt;">Guidance - FY21</td>
<td style="width: 107.0pt;">525</td>
<td style="width: 110.0pt;">141</td>
<td style="width: 83.0pt;">26.9%</td>
</tr>
<tr>
<td style="width: 129.0pt;">Surprise</td>
<td style="width: 107.0pt;">5.2%</td>
<td style="width: 110.0pt;">8.8%</td>
<td style="width: 83.0pt;">0.9%</td>
</tr>
</tbody></table><div style="text-align: left;" class="content-caption">Source: Company disclosures, CapIQ</div>

SMC reported its 4QFY21 results on Friday and posted revenue of ¥160bn (+14.6% QOQ, +23.2% YoY) and operating profit of ¥47bn (for an OPM of 29.6% compared to the OPM of 27.8% in 4QFY20).The reported 4QFY21 revenue and OP were higher than consensus estimates by 10.5% and 15.3% respectively, but the stock fell today due to weak looking guidance.

In ¥bn
Revenue 
OP
OPM


Actual Results - 4QFY21
160
47
29.6%


Consensus - 4QFY21
145
41
28.4%


Surprise
10.5%
15.3%
1.2%


 
 
 
 


Actual - FY21
552
153
27.8%


Guidance - FY21
525
141
26.9%


Surprise
5.2%
8.8%
0.9%

Source: Company disclosures, CapIQ

SMC – OP Guidance May Not Be Conservative

SMC’s business turned around sharply in 3Q with revenue of ¥140bn (+12.8% QOQ, +6.4% YoY) and operating profit of ¥41bn (for an OPM of 29.2% compared to the OPM of 26.6% in 3QFY20).<table class="table table-striped"><tbody>
<tr>
<td style="width: 30.06%;">In ¥bn</td>
<td style="width: 24.94%;">Revenue </td>
<td style="width: 25.64%;">OP</td>
<td style="width: 19.34%;">OPM</td>
</tr>
<tr>
<td style="width: 30.06%;">Actual Results - 3QFY21</td>
<td style="width: 24.94%;">140</td>
<td style="width: 25.64%;">41</td>
<td style="width: 19.34%;">29.2%</td>
</tr>
<tr>
<td style="width: 30.06%;">Consensus - 3QFY21</td>
<td style="width: 24.94%;">131</td>
<td style="width: 25.64%;">35</td>
<td style="width: 19.34%;">26.4%</td>
</tr>
<tr>
<td style="width: 30.06%;">Surprise</td>
<td style="width: 24.94%;">6.7%</td>
<td style="width: 25.64%;">18.1%</td>
<td style="width: 19.34%;">2.8% points</td>
</tr>
<tr>
<td style="width: 30.06%;"> </td>
<td style="width: 24.94%;"> </td>
<td style="width: 25.64%;"> </td>
<td style="width: 19.34%;"> </td>
</tr>
<tr>
<td style="width: 30.06%;">Guidance</td>
<td style="width: 24.94%;">525</td>
<td style="width: 25.64%;">141</td>
<td style="width: 19.34%;">26.9%</td>
</tr>
<tr>
<td style="width: 30.06%;">Consensus</td>
<td style="width: 24.94%;">514</td>
<td style="width: 25.64%;">138</td>
<td style="width: 19.34%;">26.8%</td>
</tr>
<tr>
<td style="width: 30.06%;">Difference</td>
<td style="width: 24.94%;">2.1%</td>
<td style="width: 25.64%;">2.4%</td>
<td style="width: 19.34%;">0.1% points</td>
</tr>
<tr>
<td style="width: 30.06%;"> </td>
<td style="width: 24.94%;"> </td>
<td style="width: 25.64%;"> </td>
<td style="width: 19.34%;"> </td>
</tr>
<tr>
<td style="width: 30.06%;">Implied Guidance- 4QFY21</td>
<td style="width: 24.94%;">133</td>
<td style="width: 25.64%;">35</td>
<td style="width: 19.34%;">26.4%</td>
</tr>
<tr>
<td style="width: 30.06%;">Consensus - 4QFY21</td>
<td style="width: 24.94%;">139</td>
<td style="width: 25.64%;">40</td>
<td style="width: 19.34%;">28.6%</td>
</tr>
<tr>
<td style="width: 30.06%;">Difference</td>
<td style="width: 24.94%;">-3.9%</td>
<td style="width: 25.64%;">-11.3%</td>
<td style="width: 19.34%;">-2.2% points</td>
</tr>
</tbody></table><div style="text-align: left;" class="content-caption">Source: Company disclosures, CapIQ</div>Revenue guidance was revised up by 9.4% while OP guidance was revised up by 21.5% to ¥141bn.

SMC’s business turned around sharply in 3Q with revenue of ¥140bn (+12.8% QOQ, +6.4% YoY) and operating profit of ¥41bn (for an OPM of 29.2% compared to the OPM of 26.6% in 3QFY20).

In ¥bn
Revenue 
OP
OPM


Actual Results - 3QFY21
140
41
29.2%


Consensus - 3QFY21
131
35
26.4%


Surprise
6.7%
18.1%
2.8% points


 
 
 
 


Guidance
525
141
26.9%


Consensus
514
138
26.8%


Difference
2.1%
2.4%
0.1% points


 
 
 
 


Implied Guidance- 4QFY21
133
35
26.4%


Consensus - 4QFY21
139
40
28.6%


Difference
-3.9%
-11.3%
-2.2% points

Source: Company disclosures, CapIQRevenue guidance was revised up by 9.4% while OP guidance was revised up by 21.5% to ¥141bn.

SMC – Expensive but Looking Better Than Peers

SMC’s 2Q results were less than stellar as revenue was in line with consensus but margins disappointed resulting in a miss by 6.6%. This is in contrast to many FA peers which have outperformed expectations we would not be surprised to see a rotation away from SMC towards other FA names.

SMC’s 2Q results were less than stellar as revenue was in line with consensus but margins disappointed resulting in a miss by 6.6%. This is in contrast to many FA peers which have outperformed expectations we would not be surprised to see a rotation away from SMC towards other FA names.

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Thematic (Sector/Industry)

<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/171/527/original/2020-11-14_11-37-16.png?1605390226" class="editor-image img-responsive" data-smartkarma-image-id="171527"></figure><div class="content-caption">Source for all charts &amp; tables: Japan Analytics</div></section>EUPHORIC UP VOLUME - In the wake of the US election, volume reached the highest levels since March this week and the 'breakout' of the deeply-flawed <a href="https://www.smartkarma.com/entities/nikkei-225" target="_blank" data-smartkarma-citation="entities:22909:1" rel="noopener">Nikkei 225 </a>index attracted some attention.<a href="https://www.smartkarma.com/entities/tokyo-stock-exchange-tokyo-price-index-topix" target="_blank" data-smartkarma-citation="entities:22910:1" rel="noopener"></a><img src="https://static-prod.smartkarma.com/images/media/000/171/528/original/2020-11-14_11-41-14.png?1605390632" class="editor-image img-responsive" data-smartkarma-image-id="171528"><section class="figure"><figure class="editor-figure mceNonEditable"></figure></section>LOWER HIGHS - <a href="https://www.smartkarma.com/entities/tokyo-stock-exchange-tokyo-price-index-topix" target="_blank" data-smartkarma-citation="entities:22910:1" rel="noopener">Topix</a> has a few more false summits to overcome to return to the 1980s. A failure to rise above the 2019 high would result in a technically-unhelpful third 'lower high'. Meanwhile, the Yen continues to drift higher against the US dollar. A breach of the ¥100 level would not be supportive of further market upside.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/171/534/original/2020-11-15_07-35-54.png?1605393369" class="editor-image img-responsive" data-smartkarma-image-id="171534"></figure></section>RSI &gt;80 - The 5-day Relative Strenght Index also rallied to above 80 for only the third time this year, and suggests a period of consolidation is ahead.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/171/538/original/2020-11-15_07-45-36.png?1605394410" class="editor-image img-responsive" data-smartkarma-image-id="171538"></figure></section>DISCONNECTED - Unusally, the RSI peak was not matched by a corresponding peak in the Toraku advance/decline ratio. This rally is narrowly concentrated and vulnerable to correction without a broader base of support. Absolute breadth has been steadily falling since the beginning of September and is a bearish signal for the market overall.<img src="https://static-prod.smartkarma.com/images/media/000/171/539/original/2020-11-14_11-30-48.png?1605394669" class="editor-image img-responsive" data-smartkarma-image-id="171539"><section class="figure"><figure class="editor-figure mceNonEditable"></figure></section><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/171/540/original/2020-11-14_09-56-01.png?1605395057" class="editor-image img-responsive" data-smartkarma-image-id="171540"></figure></section>TOPIX SMALL LAGS AGAIN - Lastly, the spread between TOPIX and TOPIX Small has fallen to close to a six-month low suggesting an over-concentration in index 'heavyweights'.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/171/541/original/2020-11-15_08-10-28.png?1605395444" class="editor-image img-responsive" data-smartkarma-image-id="171541"></figure></section>NOT CHEAP - With only <a href="https://www.smartkarma.com/entities/recruit-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:15070:1" rel="noopener">Recruit (6098 JP)</a> left to report among large caps, the mostly-interim results 'season' has concluded. Trailing operating income has reached a six-year low of ¥40 trillion and a further 10% decline is projected over the next four months. More optimistically, forecast Net Income is within ¥0.5 trillion of the trailing total and has risen by ¥1.8 trillion over the last week. Trailing and forecast multiples are just above 30 times and discount a return to a pre-COVID economy by the summer. <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/171/582/original/2020-11-15_12-53-24.png?1605412418" class="editor-image img-responsive" data-smartkarma-image-id="171582"></figure></section>TURNING THE TIDE - As in the past, the Cabinet Office Leading Indicator bottomed out in sync (allowing for the reporting lag) with the bottoming out of trailing and forecast earnings momentum for our cap-weighted universe of listed companies. A forthcoming Insight will review the Sector, Peer Group and company highlights of the lastest results and revisions.<hr><div>• BEST &amp; WORST •</div><div>
Our best and worst pairing from Friday's announcements is IT security specialist <a href="https://www.smartkarma.com/entities/change-inc" target="_blank" data-smartkarma-citation="entities:27414:1" rel="noopener">Change (3962 JP)</a> and <a href="https://www.smartkarma.com/entities/olympus-corp" target="_blank" data-smartkarma-citation="entities:356:1" rel="noopener">Olympus (7733 JP)</a>.
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/171/583/original/2020-11-15_13-06-16.png?1605413211" class="editor-image img-responsive" data-smartkarma-image-id="171583"></figure></section><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/171/584/original/2020-11-15_13-07-40.png?1605413274" class="editor-image img-responsive" data-smartkarma-image-id="171584"></figure></section><div>
<hr>
DAILY STATS
<hr>
</div>
<div>540 Quarterly Results</div>
<div><ul style="list-style-type: disc;">
<li>Results Score: 42% Positive / 12% Neutral / 46% Negative</li>
<li>Average Results Score Change: -0.3 points</li>
<li>Average % Change in Revenue: -7.7% Quarter YoY / -5.3% Rolling TTM YoY </li>
<li>Average Operating Profit Margin Change: -2.4ppt</li>
<li>Percentage Making Quarterly Losses: 25%</li>
</ul></div>
<hr>
<div>216 Annual • 29 Interim Forecasts/Revisions</div>
<div><ul style="list-style-type: disc;">
<li>Annual Forecast/Revision Score: 46% Positive / 14% Neutral / 40% Negative</li>
<li>Interim Forecast/Revision Score Change: 31% Positive / 17% Neutral / 52% Negative</li>
<li>Average Forecast/Revision Score Change: +0.1 points</li>
</ul></div>
</div>

Source for all charts &amp; tables: Japan AnalyticsEUPHORIC UP VOLUME - In the wake of the US election, volume reached the highest levels since March this week and the 'breakout' of the deeply-flawed Nikkei 225 index attracted some attention.LOWER HIGHS - Topix has a few more false summits to overcome to return to the 1980s. A failure to rise above the 2019 high would result in a technically-unhelpful third 'lower high'. Meanwhile, the Yen continues to drift higher against the US dollar. A breach of the ¥100 level would not be supportive of further market upside.RSI &gt;80 - The 5-day Relative Strenght Index also rallied to above 80 for only the third time this year, and suggests a period of consolidation is ahead.DISCONNECTED - Unusally, the RSI peak was not matched by a corresponding peak in the Toraku advance/decline ratio. This rally is narrowly concentrated and vulnerable to correction without a broader base of support. Absolute breadth has been steadily falling since the beginning of September and is a bearish signal for the market overall.TOPIX SMALL LAGS AGAIN - Lastly, the spread between TOPIX and TOPIX Small has fallen to close to a six-month low suggesting an over-concentration in index 'heavyweights'.NOT CHEAP - With only Recruit (6098 JP) left to report among large caps, the mostly-interim results 'season' has concluded. Trailing operating income has reached a six-year low of ¥40 trillion and a further 10% decline is projected over the next four months. More optimistically, forecast Net Income is within ¥0.5 trillion of the trailing total and has risen by ¥1.8 trillion over the last week. Trailing and forecast multiples are just above 30 times and discount a return to a pre-COVID economy by the summer. TURNING THE TIDE - As in the past, the Cabinet Office Leading Indicator bottomed out in sync (allowing for the reporting lag) with the bottoming out of trailing and forecast earnings momentum for our cap-weighted universe of listed companies. A forthcoming Insight will review the Sector, Peer Group and company highlights of the lastest results and revisions.• BEST &amp; WORST •
Our best and worst pairing from Friday's announcements is IT security specialist Change (3962 JP) and Olympus (7733 JP).


DAILY STATS


540 Quarterly Results

Results Score: 42% Positive / 12% Neutral / 46% Negative
Average Results Score Change: -0.3 points
Average % Change in Revenue: -7.7% Quarter YoY / -5.3% Rolling TTM YoY 
Average Operating Profit Margin Change: -2.4ppt
Percentage Making Quarterly Losses: 25%


216 Annual • 29 Interim Forecasts/Revisions

Annual Forecast/Revision Score: 46% Positive / 14% Neutral / 40% Negative
Interim Forecast/Revision Score Change: 31% Positive / 17% Neutral / 52% Negative
Average Forecast/Revision Score Change: +0.1 points



🇯🇵 JAPAN • Market Update & Results & Revisions 11/​​​​​​​​​​​​​​​​​​​​​​13 - Euphoria!

Japan

SMC CORPORATION manufactures directional control devices such as power, hand, and air valves.  The Company also produces air filters, cylinders, and actuators along with other pneumatic equipment.  SMC seeks to become a comprehensive maker of automated equipment through the market demand of information and communications products.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

SMC Corp (6273 JP)

TSE Prime: Japan's Corporate Governance Code Finalized So Boxes Will Be Furiously Ticked

The TSE on Friday announced the revisions to the Governance Code. This codifies the "governance thresholds" required to join TSE Prime next year....

Travis Lundy

SMC – OP Guidance May Not Be Conservative

SMC beat consensus on both revenue and OP but still saw its stock fall 2.6% due to weak guidance. While the company traditionally guides...

Mio Kato

SMC – Expensive but Looking Better Than Peers

SMC surprised positively with significant revenue growth coming through from China, setting the stage for significant OP growth next FY.

Mio Kato

SMC – Middling to Disappointing

While SMC's performance has not been especially bad, prospects for a strong rebound in earnings seem more limited than peers and this could prompt...

Mio Kato

🇯🇵 JAPAN • Market Update & Results & Revisions 11/13 - Euphoria!

EUPHORIC UP VOLUME - In the wake of the US election, volume reached the highest levels since March this week and the 'breakout' of the deeply...

Campbell Gunn

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

TSE Prime: Japan's Corporate Governance Code Finalized So Boxes Will Be Furiously Ticked

The TSE on Friday announced the revisions to the Governance Code. This codifies the "governance thresholds" required to join TSE Prime next year....

Travis Lundy

SMC – OP Guidance May Not Be Conservative

SMC beat consensus on both revenue and OP but still saw its stock fall 2.6% due to weak guidance. While the company traditionally guides...

Mio Kato

SMC – Expensive but Looking Better Than Peers

SMC surprised positively with significant revenue growth coming through from China, setting the stage for significant OP growth next FY.

Mio Kato

SMC – Middling to Disappointing

While SMC's performance has not been especially bad, prospects for a strong rebound in earnings seem more limited than peers and this could prompt...

Mio Kato

🇯🇵 JAPAN • Market Update & Results & Revisions 11/​​​​​​​​​​​​​​​​​​​​​​13 - Euphoria!

EUPHORIC UP VOLUME - In the wake of the US election, volume reached the highest levels since March this week and the 'breakout' of the deeply...

Campbell Gunn

🇯🇵 JAPAN • Market Update & Results & Revisions 11/13 - Euphoria!