'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

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.

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/149/834/original/2020-08-02_06-39-22.png?1596317982" class="editor-image img-responsive" data-smartkarma-image-id="149834"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>CORRECTION</strong> - The last day of July saw the TOPIX index fall by 2.8% to reach a new two-month low, 8.2% below the closing high of June 8th. A combination of a strong yen, peak COVID-19 cases, the continuing unedifying stream of results &amp; revisions, and month-end portfolio 'adjustments' proved toxic. Our Results Score lost a further 57 basis points, while bullish initial full-year forecasts from <a href="https://www.smartkarma.com/entities/takeda-pharmaceutical-co-ltd" target="_blank" data-smartkarma-citation="entities:11747:1" rel="noopener">Takeda Pharmaceutical (4502 JP)</a> and <a href="https://www.smartkarma.com/entities/denso-corp" target="_blank" data-smartkarma-citation="entities:18703:1" rel="noopener">Denso (6902 JP)</a> helped the Forecast/Revision Score recover by 51 basis points. Nevertheless, the market's correlation with earnings and revisions momentum remains distorted by central bank liquidity. As noted in<a href="https://www.smartkarma.com/insights/japan-market-update-tired" target="_blank" data-smartkarma-citation="insights:41562" rel="noopener"> Tired</a>, we expect both our Scores to bottom nearer the 2009 lows, in which case the Bank of Japan's cumulative purchases could reach over 10% of market value.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/149/839/original/2020-08-02_07-35-10.png?1596321328" class="editor-image img-responsive" data-smartkarma-image-id="149839"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>DOWNFALL</strong> - After one-third of quarterly earnings announcements, at the current pace forward aggregate operating and net income could reach ¥35 trillion and ¥20 trillion, respectively by the end of the month, taking the market multiple to 30x, absent any further correction in share prices. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/149/840/original/2020-08-02_07-52-16.png?1596322358" class="editor-image img-responsive" data-smartkarma-image-id="149840"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>SECTOR SCORES</strong> - As in past cycles, the <strong>Information Technology</strong>,<strong> Internet</strong>, and<strong> Healthcare</strong> Sectors have proved to be the most resilient. On the downside, the breadth of the lowest-scoring Sectors is abnormal, with <strong>Consumer Services</strong> and <strong>Transport &amp; Logistics</strong> joining <strong>Metals</strong>, <strong>Autos</strong>, <strong>Eletcial Equipment</strong> and<strong> Machinery</strong>. The trailing-twelve-month (TTM) results in the table below confirm the chart above but suggests some caution over <strong>Internet</strong> Sector margins.   </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/149/842/original/2020-08-02_07-59-45.png?1596322803" class="editor-image img-responsive" data-smartkarma-image-id="149842"></figure><div class="content-caption">Source • Japan Analytics</div><hr><p style="text-align: center;"><strong>•BEST &amp; WORST 31st JULY •</strong></p><p style="text-align: left;"><strong>BEST &amp; WORST</strong> - Combining the day's results, revisions and forecasts, we select the 'best' and the 'worst' announcements according to our scoring. On the podium were <a href="https://www.smartkarma.com/entities/takeda-pharmaceutical-co-ltd" target="_blank" data-smartkarma-citation="entities:11747:1" rel="noopener">Takeda Pharmaceutical (4502 JP)</a> and <a href="https://www.smartkarma.com/entities/infocom-corp" target="_blank" data-smartkarma-citation="entities:8412:1" rel="noopener">Infocom (4348 JP)</a>. In the pits were <a href="https://www.smartkarma.com/entities/casio-computer-co-ltd" target="_blank" data-smartkarma-citation="entities:18338:1" rel="noopener">Casio Computer (6952 JP)</a> and three railway lines - <a href="https://www.smartkarma.com/entities/odakyu-electric-railway-co" target="_blank" data-smartkarma-citation="entities:5405:1" rel="noopener">Odakyu (9007 JP)</a>, <a href="https://www.smartkarma.com/entities/west-japan-railway-co" target="_blank" data-smartkarma-citation="entities:12077:1" rel="noopener">West Japan (9021 JP)</a> and <a href="https://www.smartkarma.com/entities/central-japan-railway-co" target="_blank" data-smartkarma-citation="entities:13520:1" rel="noopener">Central Japan (9022 JP)</a> for which we will show the Peer Group's record-low long-term Scores.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/149/913/original/2020-08-02_08-30-42.png?1596324654" class="editor-image img-responsive" data-smartkarma-image-id="149913"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/149/914/original/2020-08-02_08-31-29.png?1596324699" class="editor-image img-responsive" data-smartkarma-image-id="149914"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/149/915/original/2020-08-02_08-33-28.png?1596324818" class="editor-image img-responsive" data-smartkarma-image-id="149915"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/149/916/original/2020-08-02_08-40-22.png?1596325251" class="editor-image img-responsive" data-smartkarma-image-id="149916"></figure><div class="content-caption">Source • Japan Analytics</div><div>
<hr>
<p style="text-align: center;"><strong>DAILY STATS</strong></p>
<p style="text-align: left;"><strong>PERCENTAGES</strong> - <strong>66%</strong> of quarterly results,  <strong>71%</strong> of annual forecasts/revisions and <strong>75%</strong> of interim forecasts have negative Scores and <strong>26%</strong> of companies reporting lost money for the quarter.</p>
</div><hr><div><p style="text-align: center;"><strong>429 Quarterly Results</strong></p></div><div><ul>
<li>
<strong>Results Score:</strong> 28% Positive / 6% Neutral / 66% Negative</li>
<li>
<strong>Average Results Score Change:</strong> -3.1 points</li>
<li>
<strong>Average % Change in Revenue:</strong> -9.3% Quarter YoY / -2.0% Rolling TTM YoY </li>
<li>
<strong>Average Operating Profit Margin Change:</strong> -1.0 ppt</li>
<li>
<strong>Percentage Making Quarterly Losses:</strong> 26%</li>
</ul></div><hr><div><p style="text-align: center;"><br><strong>153 Annual • 115 Interim Forecasts/Revisions</strong></p></div><div><ul>
<li>
<strong>Annual Forecast/Revision Score:</strong> 26% Positive / 3% Neutral / 71% Negative</li>
<li>
<strong>Interim Forecast/Revision Score Change</strong>: 24% Positive / 1% Neutral / 75% Negative</li>
<li>
<strong>Average Forecast/Revision Score Change:</strong> -8.4 points</li>
</ul></div>

Source • Japan AnalyticsCORRECTION - The last day of July saw the TOPIX index fall by 2.8% to reach a new two-month low, 8.2% below the closing high of June 8th. A combination of a strong yen, peak COVID-19 cases, the continuing unedifying stream of results &amp; revisions, and month-end portfolio 'adjustments' proved toxic. Our Results Score lost a further 57 basis points, while bullish initial full-year forecasts from Takeda Pharmaceutical (4502 JP) and Denso (6902 JP) helped the Forecast/Revision Score recover by 51 basis points. Nevertheless, the market's correlation with earnings and revisions momentum remains distorted by central bank liquidity. As noted in Tired, we expect both our Scores to bottom nearer the 2009 lows, in which case the Bank of Japan's cumulative purchases could reach over 10% of market value.Source • Japan AnalyticsDOWNFALL - After one-third of quarterly earnings announcements, at the current pace forward aggregate operating and net income could reach ¥35 trillion and ¥20 trillion, respectively by the end of the month, taking the market multiple to 30x, absent any further correction in share prices. Source • Japan AnalyticsSECTOR SCORES - As in past cycles, the Information Technology, Internet, and Healthcare Sectors have proved to be the most resilient. On the downside, the breadth of the lowest-scoring Sectors is abnormal, with Consumer Services and Transport &amp; Logistics joining Metals, Autos, Eletcial Equipment and Machinery. The trailing-twelve-month (TTM) results in the table below confirm the chart above but suggests some caution over Internet Sector margins.   Source • Japan Analytics•BEST &amp; WORST 31st JULY •BEST &amp; WORST - Combining the day's results, revisions and forecasts, we select the 'best' and the 'worst' announcements according to our scoring. On the podium were Takeda Pharmaceutical (4502 JP) and Infocom (4348 JP). In the pits were Casio Computer (6952 JP) and three railway lines - Odakyu (9007 JP), West Japan (9021 JP) and Central Japan (9022 JP) for which we will show the Peer Group's record-low long-term Scores.Source • Japan Analytics

DAILY STATS
PERCENTAGES - 66% of quarterly results,  71% of annual forecasts/revisions and 75% of interim forecasts have negative Scores and 26% of companies reporting lost money for the quarter.
429 Quarterly Results

Results Score: 28% Positive / 6% Neutral / 66% Negative

Average Results Score Change: -3.1 points

Average % Change in Revenue: -9.3% Quarter YoY / -2.0% Rolling TTM YoY 

Average Operating Profit Margin Change: -1.0 ppt

Percentage Making Quarterly Losses: 26%
 153 Annual • 115 Interim Forecasts/Revisions

Annual Forecast/Revision Score: 26% Positive / 3% Neutral / 71% Negative

Interim Forecast/Revision Score Change: 24% Positive / 1% Neutral / 75% Negative

Average Forecast/Revision Score Change: -8.4 points


🇯🇵 JAPAN • Results & Revisions 31st July - Takeda, Yamato/SG, Seria, FP, Keyence, Dai-Ichi Sankyo

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/068/original/2020-07-09_13-43-33.png?1594269841" class="editor-image img-responsive" data-smartkarma-image-id="145068"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>WHAT CURRENCY RISK?</strong> - It seems rather old-fashioned to raise the topic of currency risk in relation to potential stressors on Japanese listed companies. Compared to the thirty-five years to 2015, the last five years have been a period of benign calm in the USD/JPY exchange rate, aided and abetted by the action of central banks to eliminate interest rates and the functioning of the bond markets. Most observers expect this currency stability regime to continue and COVID-19 has so far only seen one short 'blip' to ¥102.36 on 9th March.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/095/original/2020-07-09_15-04-02.png?1594274675" class="editor-image img-responsive" data-smartkarma-image-id="145095"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>¥ BELOW 100</strong> -  If we isolate only the 1,484 days in the last forty years when Yen has traded above ¥100, the average TOPIX index is 975. The three Yen 'peaks' we have highlighted above in 1995, 2011, and 2016 proved excellent entry points. The subsequent trough-to-peak performance was 43%, 139%, and 60%, respectively. The COVID-19-induced trough-to-peak is, so far, just 31%.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/101/original/2020-07-09_15-13-11.png?1594275216" class="editor-image img-responsive" data-smartkarma-image-id="145101"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>KEY DRIVER </strong>- Nevertheless, for an increasingly-global Japan, the USDJPY exchange rate remains a key driver of earnings. With a lag of six months, the peaks and troughs of the USDJPY exchange rate have coincided with turning points in the earnings cycle as measured by our Results &amp; Revision Score. The six-month lag suggests that ignoring the impact of COVID-19, the exchange rate is mildly supportive of earnings momentum for the balance of 2020.</p><hr><p style="text-align: center;"><strong>• CORRELATION ANALYSIS •</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/499/original/2020-07-12_12-55-49.png?1594526165" class="editor-image img-responsive" data-smartkarma-image-id="145499"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/500/original/2020-07-12_13-13-53.png?1594527254" class="editor-image img-responsive" data-smartkarma-image-id="145500"></figure><div class="content-caption">Source • Japan Analytics</div><div class="content-caption"></div><p><strong>CORRELATIONS</strong> - Our analysis of the currency risk of specific companies will be in two parts. The first and simplest is to examine the long-term positive and negative correlations of each listed larger-capitalisation company against the US dollar and Euro for the split-adjusted share price. This analysis will yield some surprising results, including the positive US Dollar correlation of <a href="https://www.smartkarma.com/entities/nippon-express-co-ltd" target="_blank" data-smartkarma-citation="entities:18582:1" rel="noopener">Nippon Express (9062 JP)</a>, while <a href="https://www.smartkarma.com/entities/nikon-corp" target="_blank" data-smartkarma-citation="entities:7117:1" rel="noopener">Nikon (7731 JP)</a> is negatively correlated. </p><hr><p style="text-align: center;"><strong>• THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT •</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/502/original/2020-07-12_13-22-12.png?1594527750" class="editor-image img-responsive" data-smartkarma-image-id="145502"></figure><div class="content-caption">Source • Japan Analytics</div><p style="text-align: left;"><strong>FCTA </strong>- The second part is perhaps more abstruse, however but is a more accurate estimation of the actual currency risk embedded in the business model.  The Foreign Currency Translation Adjustment (FCTA) is part of Other Comprehensive Income and has been disclosed in Japanese GAAP-based balance sheets and income statements since 2001 and 2011, respectively to measure the extent of each company's global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders' Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored. For example, the decline in the US dollar from ¥123 to ¥101 in 2016 resulted in a six-quarter ¥53 trillion negative FCTA adjustment, 65% of the gap between Net Income and CITC over that period.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/273/original/2020-07-10_16-08-25.png?1594364929" class="editor-image img-responsive" data-smartkarma-image-id="145273"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>CITC &amp; NET INCOME</strong> - Comprehensive Income adds a series of adjustments to Net Income to reflect as-yet-unrealised changes from currency translations, securities valuation differences, pensions, and deferred hedges. These adjustments are subsequently 'recycled' as and when realisations occur. In aggregate over the last seven years, Comprehensive Income has exceeded Net Income by a cumulative ¥56 trillion or 7%. However, as Comprehensive Income is inherently a more volatile data series, it is eschewed or overlooked by most analysts despite the direct impact on Shareholders' Equity. Nevertheless, Comprehensive Income illustrates that, as a result of increased globalisation and investments in marketable securities, the underlying earnings of Japanese corporates have become riskier than is implied by Net Income. In 2017, the FCTA resulted in an aggregate loss for Comprehensive Income to Common (CITC) and a corresponding decline in Shareholders' Equity for non-financial Japanese companies.  In the last two reported quarters, the 'gap' between Net Income and CITC has begun to widen again as both Valuation Differences and the FCTA have turned negative.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/447/original/2020-07-12_10-58-45.png?1594519146" class="editor-image img-responsive" data-smartkarma-image-id="145447"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>FCTA BY SECTOR</strong> - Two-thirds of the total absolute FCTA over the last seven years comes from seven Sectors - <strong>Autos</strong>, <strong>Wholesale</strong>, <strong>Electrical Equipment</strong>,<strong> Technology Hardware</strong>, <strong>Machinery</strong>, <strong>Other Consumer Products</strong> and <strong>Telecommunications </strong>(Softbank Group). The least-exposed Sectors are<strong> Services</strong>, <strong>IT</strong> &amp;<strong> Internet</strong>,<strong> Multi-Industry</strong> and<strong> Restaurants</strong>.</p><hr><p>In the<strong> DETAIL</strong> section below, we shall look at the Accumulated Balance Sheet Foreign Currency Adjustments where <a href="https://www.smartkarma.com/entities/eisai-co-ltd" target="_blank" data-smartkarma-citation="entities:21001:1" rel="noopener">Eisai Co Ltd (4523 JP)</a> and <a href="https://www.smartkarma.com/entities/dic-corp" target="_blank" data-smartkarma-citation="entities:7343:1" rel="noopener">Dic Corp (4631 JP)</a> have the most significant amounts of positive and negative Accumulated FCTA's relative to Equity, respectively.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/448/original/2020-07-12_11-12-20.png?1594519955" class="editor-image img-responsive" data-smartkarma-image-id="145448"></figure><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/617/original/2020-07-13_15-35-04.png?1594622118" class="editor-image img-responsive" data-smartkarma-image-id="145617"></figure><p>Source • Japan Analytics</p>
</div><div class="content-highlight"><p><strong>This Part 6 concludes our Stress Test series. However, forthcoming Insights will look at the Valuation Differences component of Other Comprehensive Income and those companies with the most substantial CITC/Net Income 'gaps'.</strong></p></div>

Source • Japan AnalyticsWHAT CURRENCY RISK? - It seems rather old-fashioned to raise the topic of currency risk in relation to potential stressors on Japanese listed companies. Compared to the thirty-five years to 2015, the last five years have been a period of benign calm in the USD/JPY exchange rate, aided and abetted by the action of central banks to eliminate interest rates and the functioning of the bond markets. Most observers expect this currency stability regime to continue and COVID-19 has so far only seen one short 'blip' to ¥102.36 on 9th March.Source • Japan Analytics¥ BELOW 100 -  If we isolate only the 1,484 days in the last forty years when Yen has traded above ¥100, the average TOPIX index is 975. The three Yen 'peaks' we have highlighted above in 1995, 2011, and 2016 proved excellent entry points. The subsequent trough-to-peak performance was 43%, 139%, and 60%, respectively. The COVID-19-induced trough-to-peak is, so far, just 31%.Source • Japan AnalyticsKEY DRIVER - Nevertheless, for an increasingly-global Japan, the USDJPY exchange rate remains a key driver of earnings. With a lag of six months, the peaks and troughs of the USDJPY exchange rate have coincided with turning points in the earnings cycle as measured by our Results &amp; Revision Score. The six-month lag suggests that ignoring the impact of COVID-19, the exchange rate is mildly supportive of earnings momentum for the balance of 2020.• CORRELATION ANALYSIS •Source • Japan AnalyticsCORRELATIONS - Our analysis of the currency risk of specific companies will be in two parts. The first and simplest is to examine the long-term positive and negative correlations of each listed larger-capitalisation company against the US dollar and Euro for the split-adjusted share price. This analysis will yield some surprising results, including the positive US Dollar correlation of Nippon Express (9062 JP), while Nikon (7731 JP) is negatively correlated. • THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT •Source • Japan AnalyticsFCTA - The second part is perhaps more abstruse, however but is a more accurate estimation of the actual currency risk embedded in the business model.  The Foreign Currency Translation Adjustment (FCTA) is part of Other Comprehensive Income and has been disclosed in Japanese GAAP-based balance sheets and income statements since 2001 and 2011, respectively to measure the extent of each company's global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders' Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored. For example, the decline in the US dollar from ¥123 to ¥101 in 2016 resulted in a six-quarter ¥53 trillion negative FCTA adjustment, 65% of the gap between Net Income and CITC over that period.Source • Japan AnalyticsCITC &amp; NET INCOME - Comprehensive Income adds a series of adjustments to Net Income to reflect as-yet-unrealised changes from currency translations, securities valuation differences, pensions, and deferred hedges. These adjustments are subsequently 'recycled' as and when realisations occur. In aggregate over the last seven years, Comprehensive Income has exceeded Net Income by a cumulative ¥56 trillion or 7%. However, as Comprehensive Income is inherently a more volatile data series, it is eschewed or overlooked by most analysts despite the direct impact on Shareholders' Equity. Nevertheless, Comprehensive Income illustrates that, as a result of increased globalisation and investments in marketable securities, the underlying earnings of Japanese corporates have become riskier than is implied by Net Income. In 2017, the FCTA resulted in an aggregate loss for Comprehensive Income to Common (CITC) and a corresponding decline in Shareholders' Equity for non-financial Japanese companies.  In the last two reported quarters, the 'gap' between Net Income and CITC has begun to widen again as both Valuation Differences and the FCTA have turned negative.Source • Japan AnalyticsFCTA BY SECTOR - Two-thirds of the total absolute FCTA over the last seven years comes from seven Sectors - Autos, Wholesale, Electrical Equipment, Technology Hardware, Machinery, Other Consumer Products and Telecommunications (Softbank Group). The least-exposed Sectors are Services, IT &amp; Internet, Multi-Industry and Restaurants.In the DETAIL section below, we shall look at the Accumulated Balance Sheet Foreign Currency Adjustments where Eisai Co Ltd (4523 JP) and Dic Corp (4631 JP) have the most significant amounts of positive and negative Accumulated FCTA's relative to Equity, respectively.
Source • Japan Analytics
This Part 6 concludes our Stress Test series. However, forthcoming Insights will look at the Valuation Differences component of Other Comprehensive Income and those companies with the most substantial CITC/Net Income 'gaps'.

🇯🇵 JAPAN • Stress Tests Part 6: Currency Risk

<p><strong>FROM OPERATING TO FINANCING CASH FLOWS</strong> -  Having examined Operating Cash Flow in our previous <a href="https://www.smartkarma.com/insights/japan-stress-tests-part-2-operating-cash-flow-accruals" target="_blank" data-smartkarma-citation="insights:40321" rel="noopener">Insight</a>, we shall look into the 'stressors' between Operating Cash Flow and Financing Cash Flow. In our reformulated Cash Flow Statements, cash flows relating to operating activities are divided into Operating Cash Flows and Investing Cash Flows, which comprise Fixed Asset and Inventory Cash Flows.  Free Cash Flow is the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow. Inventories are not included in Operating Cash Flow as they are considered discretionary, are often related to Fixed asset Cash Flows, and can be highly seasonal.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/141/225/original/2020-06-21_08-34-07.png?1592698079" class="editor-image img-responsive" data-smartkarma-image-id="141225"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>JAPAN WAS FCF POSITIVE IN Q4..</strong> - Despite the decline in Operating Cash Flow in the last quarter (the final quarter of the Fiscal Year for most Japanese companies), Investing Cash Flow was more positive than in any quarter since FY2016-Q4, which also coincided with the last business cycle low. As a result, the aggregate Free Cash Flow for the 3,639 listed non-financial companies (excluding<a href="https://www.smartkarma.com/entities/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener"> Rakuten (4755 JP)</a>, <a href="https://www.smartkarma.com/entities/z-holdings-corp" target="_blank" data-smartkarma-citation="entities:19603:1" rel="noopener">Z Holdings (4689 JP)</a>, <a href="https://www.smartkarma.com/entities/japan-post-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:359:1" rel="noopener">Japan Post (6178 JP)</a>, <a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a> and <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony (6758 JP)</a>) was an impressive ¥8.4 trillion or an annualised yield of 6.4%.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/141/223/original/2020-06-21_08-51-12.png?1592697088" class="editor-image img-responsive" data-smartkarma-image-id="141223"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>..AS CAPEX WAS PUT ON HOLD</strong> - Seasonally Japanese companies capital expenditures are higher in the second half of the fiscal year- in FY2019, ¥21trillion was added to Operating Assets. In contrast, FY2020 saw a 79% decline in capex to ¥4.4 trillion, all of which was spent in the third quarter. This decline is the most substantial second-half quarter-on-quarter contraction in fixed asset outflows since 2009.   </p><p>In the <strong>DETAIL</strong> below, we shall highlight those 'outlier' large-cap companies which are either end of the capex, inventory and Free Cash Flow tables, and focus on those with the greatest intimations of business 'stress'. We have excluded the Real Estate Sector from this analysis due to the inherent volatility of fixed assets and inventory cash flows fo these companies.</p>

FROM OPERATING TO FINANCING CASH FLOWS -  Having examined Operating Cash Flow in our previous Insight, we shall look into the 'stressors' between Operating Cash Flow and Financing Cash Flow. In our reformulated Cash Flow Statements, cash flows relating to operating activities are divided into Operating Cash Flows and Investing Cash Flows, which comprise Fixed Asset and Inventory Cash Flows.  Free Cash Flow is the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow. Inventories are not included in Operating Cash Flow as they are considered discretionary, are often related to Fixed asset Cash Flows, and can be highly seasonal.Source: Japan AnalyticsJAPAN WAS FCF POSITIVE IN Q4.. - Despite the decline in Operating Cash Flow in the last quarter (the final quarter of the Fiscal Year for most Japanese companies), Investing Cash Flow was more positive than in any quarter since FY2016-Q4, which also coincided with the last business cycle low. As a result, the aggregate Free Cash Flow for the 3,639 listed non-financial companies (excluding Rakuten (4755 JP), Z Holdings (4689 JP), Japan Post (6178 JP), Softbank Group (9984 JP) and Sony (6758 JP)) was an impressive ¥8.4 trillion or an annualised yield of 6.4%.Source: Japan Analytics..AS CAPEX WAS PUT ON HOLD - Seasonally Japanese companies capital expenditures are higher in the second half of the fiscal year- in FY2019, ¥21trillion was added to Operating Assets. In contrast, FY2020 saw a 79% decline in capex to ¥4.4 trillion, all of which was spent in the third quarter. This decline is the most substantial second-half quarter-on-quarter contraction in fixed asset outflows since 2009.   In the DETAIL below, we shall highlight those 'outlier' large-cap companies which are either end of the capex, inventory and Free Cash Flow tables, and focus on those with the greatest intimations of business 'stress'. We have excluded the Real Estate Sector from this analysis due to the inherent volatility of fixed assets and inventory cash flows fo these companies.

🇯🇵 JAPAN - Stress Tests Part 3 - Inventory, Fixed Asset & Free Cash Flows

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/133/055/original/2020-05-13_05-37-45.png?1589315906" class="editor-image img-responsive" data-smartkarma-image-id="133055"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>CASCADE</strong> - As expected, with many more of the larger listed companies reporting, our three Scores are falling in unison and at the fastest rate since 2008/9. With still over two-thirds of companies yet to report, there is more 'pain' ahead in this elongated 'season' of announcements. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/133/056/original/2020-05-13_06-21-24.png?1589318495" class="editor-image img-responsive" data-smartkarma-image-id="133056"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/133/057/original/2020-05-13_06-22-14.png?1589318598" class="editor-image img-responsive" data-smartkarma-image-id="133057"></figure><div class="content-caption">Source • Japan Analytics</div><p>In the <strong>DETAIL</strong> below, we shall review the results, revisions and initial forecast announcements made by larger-cap (¥75b+) companies yesterday:-</p><div><ul>
<li>The balance between positive/neutral/negative of the<strong> 269</strong> results announcements was <strong>117:23:129</strong>. The average change in Results Score was<strong> -0.8</strong>.</li>
<li>For the <strong>129</strong> revisions/initial forecasts, the split was <strong>39:7:83</strong>, and the average Revision Score was <strong>-4.6</strong>. Of the <strong>213</strong> companies declaring full-year results, <strong>46%</strong> made forecasts for the current year.</li>
<li>
<strong>313</strong> companies will announce on today, the largest of which by market capitalisation will be <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony (6758 JP)</a>, <a href="https://www.smartkarma.com/entities/takeda-pharmaceutical-co-ltd" target="_blank" data-smartkarma-citation="entities:11747:1" rel="noopener">Takeda Pharmaceutical (4502 JP)</a>,  and <a href="https://www.smartkarma.com/entities/eisai-co-ltd" target="_blank" data-smartkarma-citation="entities:21001:1" rel="noopener">Eisai (4523 JP)</a>. </li>
<li>Tuesday's 'best' and 'worst' scoring results were from  <a href="https://www.smartkarma.com/entities/gmo-internet-inc" target="_blank" data-smartkarma-citation="entities:13631:1" rel="noopener">GMO Internet (9449 JP)</a>  and <a href="https://www.smartkarma.com/entities/nissin-electric-co-ltd" target="_blank" data-smartkarma-citation="entities:18567:1" rel="noopener">Nissin Electric (6641 JP)</a>, respectively. </li>
</ul></div>

Source • Japan AnalyticsCASCADE - As expected, with many more of the larger listed companies reporting, our three Scores are falling in unison and at the fastest rate since 2008/9. With still over two-thirds of companies yet to report, there is more 'pain' ahead in this elongated 'season' of announcements. Source • Japan AnalyticsIn the DETAIL below, we shall review the results, revisions and initial forecast announcements made by larger-cap (¥75b+) companies yesterday:-
The balance between positive/neutral/negative of the 269 results announcements was 117:23:129. The average change in Results Score was -0.8.
For the 129 revisions/initial forecasts, the split was 39:7:83, and the average Revision Score was -4.6. Of the 213 companies declaring full-year results, 46% made forecasts for the current year.

313 companies will announce on today, the largest of which by market capitalisation will be Sony (6758 JP), Takeda Pharmaceutical (4502 JP),  and Eisai (4523 JP). 
Tuesday's 'best' and 'worst' scoring results were from  GMO Internet (9449 JP)  and Nissin Electric (6641 JP), respectively. 


🇯🇵 JAPAN • Results & Revisions 12th May - Secom, Shiseido, Toyota, Sysmex, Mitsui Fudosan

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. 

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/403/original/2020-02-18_08-44-22.png?1581983074" class="editor-image img-responsive" data-smartkarma-image-id="118403"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/404/original/2020-02-18_08-42-56.png?1581983098" class="editor-image img-responsive" data-smartkarma-image-id="118404"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>THREE-YEAR LOW</strong> - With <a href="https://www.smartkarma.com/entities/bridgestone-corp" target="_blank" data-smartkarma-citation="entities:8914:1" rel="noopener">Bridgestone (5108 JP)</a>'s results and revision now added, our final tally for this season is a 196 basis point decline in our <strong>Results Sore</strong> - the lowest since March 2017.  In contrast, the Forecast/Revision Score reached a three-month high as the 470 companies with December year-ends put an optimistic gloss on their medium-term outlook. As we have noted in our recent daily roundups, a normal precondition for a cycle low is for the <strong>Forecast/Revision Score</strong> to rise above the <strong>Results Score</strong>. <strong>Forecast/Revision Score</strong> peaks and troughs usually occur one to two quarters ahead of those for the <strong>Results Score</strong>.  Covid-19's impact will likely see the 2016 'playbook' repeated next quarter with a lower Results Score and a 'sideways' Forecast/Results Score. The <strong>Results Score</strong> cycle low point will be reached with the mostly-interim results to be released in six months. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/405/original/2020-02-18_09-29-28.png?1581985792" class="editor-image img-responsive" data-smartkarma-image-id="118405"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>LEADING INDICATOR</strong> - By including several momentum factors into our Scoring (see below), we can provide a better indication of future business conditions. Indeed there is a 0.83 correlation between the Cabinet Office's Business Condition Leading Indicator and the<strong> Forecast/Revision Score</strong>. Reported earnings, as well as company forecasts, are <em>lagging</em> indicators and, as shown in Part 1 of this Insight. Both data series peaked one year after our Scores and the market peaked in early 2018. </p><p><strong>SCORING METHODOLOGY</strong> - For those new to these Insights, we briefly recap our scoring methodology below:-</p><ul>
<li><p><strong>Results Scores</strong> are calculated using the most recent eight quarters of company data for Revenues, Operating Income and Operating Margin and, for each, measure the rate, degree and consistency of change. The Results Score has a maximum of +30 and a minimum of -30 for each period. Our data series commences from the time a particular company issues quarterly results. The sample size becomes significant from March 2005.</p></li>
<li><p>The <strong>Forecast/Revision Score</strong> is based on both Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month (TTM) or previous first-half results, with annual forecasts being double-weighted. This Score also has a maximum of +30 and a minimum of -30 for each period.  For this series, our data samples start from August 2008.</p></li>
<li><p>The combined <strong>Results &amp; Revision Score (RRS)</strong> is the average of the <strong>Results Score</strong> and the<strong> Forecasts/Revision Score</strong>.</p></li>
<li>
<p>All company Scores are then cap-weight-aggregated into <strong>Sector</strong>, <strong>Peer Group</strong> and <strong>Market Composite</strong> Scores for which the seventeen-year monthly and two-year daily track records are shown above. Only currently listed-companies are covered in the aggregate Scores, and the Total Market Capitalisation excludes delisted entities. REITs are not included.</p>
<hr>
<p style="text-align: center;"><strong>• SECTOR SCORES •</strong></p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/410/original/2020-02-18_09-55-29.png?1581987489" class="editor-image img-responsive" data-smartkarma-image-id="118410"></figure><div class="content-caption">Source • Japan Analytics</div>
<p>In the <strong>DETAIL</strong> Section below, we provide a detailed breakdown of our RRS Scoring for Sectors, Peer Groups and individual companies, highlighting this quarter's 'winners' and 'losers'. The chart above shows a  seventeen-year 'timeline' of the cap-weight-aggregated Sector RRS Scores and the ebbs and flows around the business cycles. The <strong>Metals</strong> Sector is the most volatile on the downside and has yet to 'bottom' this cycle. <strong>Technology Hardware</strong> appears to have already rebounded; however, Covid-19 suggests this Sector may relapse. On the upside, the<strong> Information Technology</strong> Sector has replaced the <strong>Internet</strong> and <strong>Telecoms</strong> Sectors as the contra-cyclical 'champion'. </p>
</li>
</ul>

Source • Japan AnalyticsTHREE-YEAR LOW - With Bridgestone (5108 JP)'s results and revision now added, our final tally for this season is a 196 basis point decline in our Results Sore - the lowest since March 2017.  In contrast, the Forecast/Revision Score reached a three-month high as the 470 companies with December year-ends put an optimistic gloss on their medium-term outlook. As we have noted in our recent daily roundups, a normal precondition for a cycle low is for the Forecast/Revision Score to rise above the Results Score. Forecast/Revision Score peaks and troughs usually occur one to two quarters ahead of those for the Results Score.  Covid-19's impact will likely see the 2016 'playbook' repeated next quarter with a lower Results Score and a 'sideways' Forecast/Results Score. The Results Score cycle low point will be reached with the mostly-interim results to be released in six months. Source • Japan AnalyticsLEADING INDICATOR - By including several momentum factors into our Scoring (see below), we can provide a better indication of future business conditions. Indeed there is a 0.83 correlation between the Cabinet Office's Business Condition Leading Indicator and the Forecast/Revision Score. Reported earnings, as well as company forecasts, are lagging indicators and, as shown in Part 1 of this Insight. Both data series peaked one year after our Scores and the market peaked in early 2018. SCORING METHODOLOGY - For those new to these Insights, we briefly recap our scoring methodology below:-
Results Scores are calculated using the most recent eight quarters of company data for Revenues, Operating Income and Operating Margin and, for each, measure the rate, degree and consistency of change. The Results Score has a maximum of +30 and a minimum of -30 for each period. Our data series commences from the time a particular company issues quarterly results. The sample size becomes significant from March 2005.
The Forecast/Revision Score is based on both Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month (TTM) or previous first-half results, with annual forecasts being double-weighted. This Score also has a maximum of +30 and a minimum of -30 for each period.  For this series, our data samples start from August 2008.
The combined Results &amp; Revision Score (RRS) is the average of the Results Score and the Forecasts/Revision Score.

All company Scores are then cap-weight-aggregated into Sector, Peer Group and Market Composite Scores for which the seventeen-year monthly and two-year daily track records are shown above. Only currently listed-companies are covered in the aggregate Scores, and the Total Market Capitalisation excludes delisted entities. REITs are not included.

• SECTOR SCORES •
Source • Japan Analytics
In the DETAIL Section below, we provide a detailed breakdown of our RRS Scoring for Sectors, Peer Groups and individual companies, highlighting this quarter's 'winners' and 'losers'. The chart above shows a  seventeen-year 'timeline' of the cap-weight-aggregated Sector RRS Scores and the ebbs and flows around the business cycles. The Metals Sector is the most volatile on the downside and has yet to 'bottom' this cycle. Technology Hardware appears to have already rebounded; however, Covid-19 suggests this Sector may relapse. On the upside, the Information Technology Sector has replaced the Internet and Telecoms Sectors as the contra-cyclical 'champion'. 



🇯🇵 JAPAN • IT’S A WRAP! Part 2: 2020-Q1 Results & Revision Scores

Japan

Takeda Pharmaceutical Co Ltd focuses on the Research & Development, Manufacturing, Sales and Marketing and Import/Export of Pharmaceutical Drugs. The Company focuses on the following core therapeutic areas: Cardiovascular & Metabolic, Oncology, Central Nervous System, Respiratory & Immunology, General Medicine (Gastrointestinal & Genitourinary) and Vaccine.

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Takeda Pharmaceutical (4502 JP)

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