'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

• RELATIVE PRICE SCORE •<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/178/original/2019-09-06_09-42-35.png?1567730614" class="editor-image img-responsive" data-smartkarma-image-id="98178"></figure><div class="content-caption">Source: Japan Analytics</div>INTRODUCTION - The Relative Price Score (RPS) is a measure of stock price performance relative to TOPIX calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices. As all companies are thus on a comparable scale, 'Overbought' and 'Oversold' outliers and changes in scoring can reveal short-term and longer-term trading opportunities. Company outlier thresholds are set at +4 &amp; -2 and equate to the top and bottom first-to-second percentiles of historical observations from which mean reversion takes a matter of months. RPS outliers with a Score of greater than 10.0 are rare outside of the 2000 tech 'bubble'. <a href="https://www.smartkarma.com/entities/lasertec-corp" target="_blank" data-smartkarma-citation="entities:4126:1" rel="noopener">Lasertec (6920 JP)</a> has just joined <a href="https://www.smartkarma.com/entities/goldwin-inc" target="_blank" data-smartkarma-citation="entities:410:1" rel="noopener">Goldwin (8111 JP)</a> in being only the second large-cap RPS 'ten-baggers' in the last twenty years. <div class="content-highlight">This insight updates our list of Overbought and Oversold companies, reviews the best and worst-performing companies in terms of RPS over the last three months and adds some specific comments on stocks on each category.</div><div></div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/046/original/2019-09-05_12-46-46.png?1567655232" class="editor-image img-responsive" data-smartkarma-image-id="98046"></figure><div class="content-caption">Source: Japan Analytics</div>STATISTICS - Currently, of the 3,706 listed companies for which monthly RPS data is available, 81 companies are 'Overbought', and 133 are 'Oversold' - 2.45% and 3.8%, respectively of the total. For the 737 companies with a market capitalisation of over ¥100b, there are 44 'Overbought' and 37 'Oversold' companies, 6% and 5%, respectively.<hr>• RELATIVE PRICE SCORE 'TOPS' •<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/055/original/2019-09-05_13-06-30.png?1567656423" class="editor-image img-responsive" data-smartkarma-image-id="98055"></figure><div class="content-caption">Source: Japan Analytics</div>RPS 'TOPS' - In the last two years, 388 companies have achieved an RPS of '4' or more and the average Overbought 'persistence' is 42 days. 1.26% of the total of 1.94 million traded stock days were by companies with an RPS of over 4. For companies with a market capitalisation higher than ¥100b, the numbers are 95 companies and 74 days - demonstrating the superior persistence of large capitalisation companies in this regard. The chart above highlights the track record of all 95 large caps which are some point were Overbought in the last twenty-four months and illustrates the extreme outlier status of Goldwin and Lasertec.RPS NEGATIVE MEAN REVERSION - Some examples of RPS mean reversion in the last three months have been <a href="https://www.smartkarma.com/entities/suzuken-co-ltd" target="_blank" data-smartkarma-citation="entities:14996:1" rel="noopener">Suzuken (9987 JP)</a>, <a href="https://www.smartkarma.com/entities/infomart-corp" target="_blank" data-smartkarma-citation="entities:1301:1" rel="noopener">Infomart (2492 JP)</a>, <a href="https://www.smartkarma.com/entities/nichirei-corp" target="_blank" data-smartkarma-citation="entities:7168:1" rel="noopener">Nichirei (2871 JP)</a>, and <a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl (4921 JP)</a>. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/096/original/2019-09-05_16-25-39.png?1567668352" class="editor-image img-responsive" data-smartkarma-image-id="98096"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/097/original/2019-09-05_16-27-09.png?1567668441" class="editor-image img-responsive" data-smartkarma-image-id="98097"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/098/original/2019-09-05_16-28-42.png?1567668548" class="editor-image img-responsive" data-smartkarma-image-id="98098"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/099/original/2019-09-05_16-30-29.png?1567668640" class="editor-image img-responsive" data-smartkarma-image-id="98099"></figure><div class="content-caption">Source: Japan Analytics</div><hr>• RELATIVE PRICE SCORE 'BOTTOMS' •<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/056/original/2019-09-05_13-12-52.png?1567656806" class="editor-image img-responsive" data-smartkarma-image-id="98056"></figure><div class="content-caption">Source: Japan Analytics</div>
</div>RPS 'BOTTOMS' - 259 companies have seen their RPS fall to '-2' or below in the last two years, and the average Oversold 'persistence' is 83 days. 1.46% of the total of 1.94 million traded stock days were by companies with an RPS of less than -2.  For larger capitalisation companies, the numbers are 79 companies and 94 days. The chart above highlights the track record of the 79 large caps which are some point were Oversold in the last twenty-four months and illustrates the strong recovery in the REITs Sector and the continuing demise of Regional Banks.RPS POSITIVE MEAN REVERSION - Some recent examples of positive RPS mean reversions are <a href="https://www.smartkarma.com/entities/otsuka-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:12292:1" rel="noopener">Otsuka Holdings (4578 JP) </a>and <a href="https://www.smartkarma.com/entities/line-corp" target="_blank" data-smartkarma-citation="entities:22772:1" rel="noopener">LINE (3938 JP)</a>.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/100/original/2019-09-05_16-35-47.png?1567668972" class="editor-image img-responsive" data-smartkarma-image-id="98100"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/102/original/2019-09-05_16-36-50.png?1567669047" class="editor-image img-responsive" data-smartkarma-image-id="98102"></figure><div class="content-caption">Source: Japan Analytics</div>As we noted in our June <a href="https://www.smartkarma.com/insights/japan-relative-price-scores-overbought-oversold-companies-june-2019" target="_blank" data-smartkarma-citation="insights:30393" rel="noopener">Insight: -</a><blockquote><a href="https://www.smartkarma.com/entities/line-corp" target="_blank" data-smartkarma-citation="entities:22772:1" rel="noopener">LINE (3938 JP)</a>- Line has performed poorly since being featured in last year's Sohn Conference and has had negative and worsening Operating Income for each of the previous five quarters. Although there is a possibility of a double-bottom RPS 'bounce' and the company is now the most-Oversold non-financial large-cap over one year, there are no fundamental reasons to own the shares.   </blockquote>In the DETAIL section below, we list the current Very Overbought (RPS&gt;5), Too-Late-To-Buy (RPS &gt;4&lt;5) and Oversold (RPS &lt;-2) stocks as well as the most substantial three-month positive and negative changes in RPS.

• RELATIVE PRICE SCORE •Source: Japan AnalyticsINTRODUCTION - The Relative Price Score (RPS) is a measure of stock price performance relative to TOPIX calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices. As all companies are thus on a comparable scale, 'Overbought' and 'Oversold' outliers and changes in scoring can reveal short-term and longer-term trading opportunities. Company outlier thresholds are set at +4 &amp; -2 and equate to the top and bottom first-to-second percentiles of historical observations from which mean reversion takes a matter of months. RPS outliers with a Score of greater than 10.0 are rare outside of the 2000 tech 'bubble'. Lasertec (6920 JP) has just joined Goldwin (8111 JP) in being only the second large-cap RPS 'ten-baggers' in the last twenty years. This insight updates our list of Overbought and Oversold companies, reviews the best and worst-performing companies in terms of RPS over the last three months and adds some specific comments on stocks on each category.Source: Japan AnalyticsSTATISTICS - Currently, of the 3,706 listed companies for which monthly RPS data is available, 81 companies are 'Overbought', and 133 are 'Oversold' - 2.45% and 3.8%, respectively of the total. For the 737 companies with a market capitalisation of over ¥100b, there are 44 'Overbought' and 37 'Oversold' companies, 6% and 5%, respectively.• RELATIVE PRICE SCORE 'TOPS' •Source: Japan AnalyticsRPS 'TOPS' - In the last two years, 388 companies have achieved an RPS of '4' or more and the average Overbought 'persistence' is 42 days. 1.26% of the total of 1.94 million traded stock days were by companies with an RPS of over 4. For companies with a market capitalisation higher than ¥100b, the numbers are 95 companies and 74 days - demonstrating the superior persistence of large capitalisation companies in this regard. The chart above highlights the track record of all 95 large caps which are some point were Overbought in the last twenty-four months and illustrates the extreme outlier status of Goldwin and Lasertec.RPS NEGATIVE MEAN REVERSION - Some examples of RPS mean reversion in the last three months have been Suzuken (9987 JP), Infomart (2492 JP), Nichirei (2871 JP), and Fancl (4921 JP). Source: Japan Analytics• RELATIVE PRICE SCORE 'BOTTOMS' •
Source: Japan Analytics
RPS 'BOTTOMS' - 259 companies have seen their RPS fall to '-2' or below in the last two years, and the average Oversold 'persistence' is 83 days. 1.46% of the total of 1.94 million traded stock days were by companies with an RPS of less than -2.  For larger capitalisation companies, the numbers are 79 companies and 94 days. The chart above highlights the track record of the 79 large caps which are some point were Oversold in the last twenty-four months and illustrates the strong recovery in the REITs Sector and the continuing demise of Regional Banks.RPS POSITIVE MEAN REVERSION - Some recent examples of positive RPS mean reversions are Otsuka Holdings (4578 JP) and LINE (3938 JP).Source: Japan AnalyticsAs we noted in our June Insight: -LINE (3938 JP)- Line has performed poorly since being featured in last year's Sohn Conference and has had negative and worsening Operating Income for each of the previous five quarters. Although there is a possibility of a double-bottom RPS 'bounce' and the company is now the most-Oversold non-financial large-cap over one year, there are no fundamental reasons to own the shares.   In the DETAIL section below, we list the current Very Overbought (RPS&gt;5), Too-Late-To-Buy (RPS &gt;4&lt;5) and Oversold (RPS &lt;-2) stocks as well as the most substantial three-month positive and negative changes in RPS.

🇯🇵 Japan • September Relative Price Scores - Life at the Poles Part 2: Companies

Equity Analyst, LightStream Research

Shifara Samsudeen, FCMA, CGMA

Equity Analyst

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

<a href="https://www.smartkarma.com/entities/21097/overview" target="_blank" rel="noopener">ASML (ASML NA)</a> is the market leader in the semiconductor lithography segment with a share of about 85% and is the only maker of EUV lithography globally. The company has spent more than 10 years developing the EUV technology has been going mainstream since the beginning of 2019. We expect the company revenues to grow significantly over the next 5-7 years given the increasing demand for EUV systems. The shift in the company’s product mix towards EUV should support higher revenues as EUV systems command a higher average selling price and the company’s monopolistic state in the EUV market should help boost the company’s top-line. Lithography as a percentage of semiconductor equipment spending declined briefly during 2014-2017 due to lack of EUV lithography while NAND is mainly driven by deposition and etch. With wider adoption of EUV systems particularly in logic and according to ASML, the DRAM segment starting to adopt EUV towards the second half of 2019, we expect a higher fraction of semiconductor capex spending moving towards lithography. We believe, the company is well positioned to reap the benefits of its investment in EUV over the next couple of years. While the current negative sentiment surrounding the semiconductor market could impact the company’s share price in the short-term, the long-term structural changes in the semiconductor lithography market should bode well for the company.

ASML (ASML NA) is the market leader in the semiconductor lithography segment with a share of about 85% and is the only maker of EUV lithography globally. The company has spent more than 10 years developing the EUV technology has been going mainstream since the beginning of 2019. We expect the company revenues to grow significantly over the next 5-7 years given the increasing demand for EUV systems. The shift in the company’s product mix towards EUV should support higher revenues as EUV systems command a higher average selling price and the company’s monopolistic state in the EUV market should help boost the company’s top-line. Lithography as a percentage of semiconductor equipment spending declined briefly during 2014-2017 due to lack of EUV lithography while NAND is mainly driven by deposition and etch. With wider adoption of EUV systems particularly in logic and according to ASML, the DRAM segment starting to adopt EUV towards the second half of 2019, we expect a higher fraction of semiconductor capex spending moving towards lithography. We believe, the company is well positioned to reap the benefits of its investment in EUV over the next couple of years. While the current negative sentiment surrounding the semiconductor market could impact the company’s share price in the short-term, the long-term structural changes in the semiconductor lithography market should bode well for the company.

ASML: Transition to EUV Lithography Should Boost Company’s Top-Line and Margins

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

The short notional in the market for the week ended 23 August is US$24.95bn with the largest short positions in <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a>, <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a>, <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1:1">Canon Inc (7751 JP)</a>,  <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a> and <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-gr" target="_blank" rel="noopener" data-smartkarma-citation="entities:217:1">Sumitomo Mitsui Financial (8316 JP)</a> . Most shorted stocks as a percentage of free float are Amazia, <a href="https://www.smartkarma.com/entities/extreme-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5311:1">Extreme Co Ltd (6033 JP)</a>, <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a> and <a href="https://www.smartkarma.com/entities/leopalace21-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:8244:1">Leopalace21 Corp (8848 JP)</a> while the stocks with the highest days to cover are <a href="https://www.smartkarma.com/entities/katakura-industries-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:2007:1">Katakura Industries (3001 JP)</a>, <a href="https://www.smartkarma.com/entities/vital-ksk-holdings-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:7398:1">Vital Ksk Holdings (3151 JP)</a>, <a href="https://www.smartkarma.com/entities/mirait-holdings-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:7034:1">Mirait Holdings (1417 JP)</a> and <a href="https://www.smartkarma.com/entities/aruhi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:26072:1">Aruhi Corp (7198 JP)</a>.The largest increases in short notional over the week were <a href="https://www.smartkarma.com/entities/recruit-holdings-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:15070:1">Recruit Holdings (6098 JP)</a>, <a href="https://www.smartkarma.com/entities/tokyo-electron-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:280:1">Tokyo Electron (8035 JP)</a>, <a href="https://www.smartkarma.com/entities/familymart-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:320:1">Familymart UNY Holdings (8028 JP)</a> and <a href="https://www.smartkarma.com/entities/rakuten-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:31:1">Rakuten Inc (4755 JP)</a>  <a href="https://www.smartkarma.com/entities/advantest-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18107:1"></a>while shorts were covered in <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a>,<a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:27445:1">Softbank Corp (9434 JP)</a>, <a href="https://www.smartkarma.com/entities/zozo-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:18379:1">ZOZO Inc (3092 JP)</a> and <a href="https://www.smartkarma.com/entities/renesas-electronics-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:15933:1">Renesas Electronics (6723 JP)</a>.  Sectorally, new short positions were built in Industrials, Financials and Materials, while shorts were covered in Consumer Discretionary and Communication Services.

The short notional in the market for the week ended 23 August is US$24.95bn with the largest short positions in Itochu Corp (8001 JP), Toyota Motor (7203 JP), Canon Inc (7751 JP),  Taiyo Yuden (6976 JP) and Sumitomo Mitsui Financial (8316 JP) . Most shorted stocks as a percentage of free float are Amazia, Extreme Co Ltd (6033 JP), Taiyo Yuden (6976 JP) and Leopalace21 Corp (8848 JP) while the stocks with the highest days to cover are Katakura Industries (3001 JP), Vital Ksk Holdings (3151 JP), Mirait Holdings (1417 JP) and Aruhi Corp (7198 JP).The largest increases in short notional over the week were Recruit Holdings (6098 JP), Tokyo Electron (8035 JP), Familymart UNY Holdings (8028 JP) and Rakuten Inc (4755 JP)  while shorts were covered in Fast Retailing (9983 JP),Softbank Corp (9434 JP), ZOZO Inc (3092 JP) and Renesas Electronics (6723 JP).  Sectorally, new short positions were built in Industrials, Financials and Materials, while shorts were covered in Consumer Discretionary and Communication Services.

• MARKET COMPOSITE - AGGREGATE RESULTS •<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/865/original/2019-08-16_06-45-04.png?1565905530" class="editor-image img-responsive" data-smartkarma-image-id="95865"></figure><div class="content-caption">Source: Japan Analytics</div>THIRD DOWN QUARTER - This Insight will review the aggregate results for the 3774 listed Japanese companies for the quarter just ended and updated our Results &amp; Revision Scores for the Market Composite and each of our 30 Sectors. Operating Income has declined by 1.8% since the end of May and is now 5.1% below the peak of December 21st last year. The decline in Net Income has been more significant - 15.7% from the peak and 3.5% since May.  Japan's aggregate trailing-twelve-month (TTM) Net Income will end this year at a lower level than two years ago. FORECASTS STILL OPTIMISTIC -  The 'gap' between current and forecast results is now the widest in two years; however, the 'roles' are reversed. Aggregate forecasts have declined by 1.4% for Operating Income and 1.6% for Net Income and the forecast 'improvements' by year-end are 3% and 6%, respectively, which we consider optimistic. UPSIDE LIMITED - The decline in the market in recent weeks has taken the forward multiple to the second-lowest level this year at 13.7 times. Alternatively, the market is implying a further 17% decline in Net Income, assuming a 'normal' market multiple of 16.7 times. We are more inclined to the latter possibility.<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/770/original/2019-08-15_12-05-51.png?1565838392" class="editor-image img-responsive" data-smartkarma-image-id="95770"></figure>Source: Japan Analytics 
</div>MARGIN ROLLOVER - Revenues are still increasing by 3.8% a year; however, the rolling quarterly rate of increase is slowing to just 0.4% in the quarter just ended while the forecast-implied growth rate for the next nine months is 2%.  Operating margins peaked at 7.78% one year ago and have since declined by 61 basis points since then.  TTM Net Margins are now 4.83% and have declined by 102 basis points in the last three quarters.<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/772/original/2019-08-15_12-26-32.png?1565839621" class="editor-image img-responsive" data-smartkarma-image-id="95772"></figure>Source: Japan Analytics 
</div>SECTOR MARGINS - TOP - Bank Sector margins continue to slide, but have yet to lose their leading position to Telecoms despite the latter's margins being unchanged over three months. Internet and b both saw large margins contractions as did Chemicals which may slip out of this group next quarter. The most robust performance came from our long-time preferred Sector, Infomation Technology.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/773/original/2019-08-15_12-44-16.png?1565840676" class="editor-image img-responsive" data-smartkarma-image-id="95773"></figure><div class="content-caption">Source: Japan Analytics </div>SECTOR MARGINS - MID - The Market Composite OPM has declined by 27 basis points in the last three months to 7.2%, and only nine of 29 Sectors have higher margins. Of the mid-ranked Sectors by margins, only Multi-Industry and Consumer Services saw margin increases of more than ten basis points. The worst-performing in this group were Food, Beverage &amp; Tobacco and Technology Hardware. Over a longer-term period, there has been a notable decline in Construction and Non-Bank Finance Sector margins. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/774/original/2019-08-15_12-52-37.png?1565841201" class="editor-image img-responsive" data-smartkarma-image-id="95774"></figure><div class="content-caption">Source: Japan Analytics</div>SECTOR MARGINS - BOTTOM - Only Utilities of the bottom-nine OPM Sectors saw a margin improvement in the last three months, while Building Materials, Autos, Metals, Energy, and Other Materials all had double-digit declines. Retail margins are the most stable amongst this group,OUTLOOK - Aggregate results are a lagging indicator for the market, having peaked one year after the market peak of January 2018 - which is why we prefer to rely more on our scoring methodology (see below). Accordingly, we expect the trend in profits and margins to continue to be negative for the rest of the fiscal year and look for revenues to join the trend next quarter.  A breach of the December market low would be required to keep the market multiple below 'normal' levels, and we would advise patience for all but the most committed investors in Japanese equities.  <hr>• RESULTS &amp; REVISION SCORE •<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/869/original/2019-08-16_06-50-04.png?1565905842" class="editor-image img-responsive" data-smartkarma-image-id="95869"></figure><div class="content-caption">Source: Japan Analytics</div>RESULT &amp; REVISION SCORE - After peaking in November 2017, our Results &amp; Revision Score has declined for six of the last seven quarters, the exception being the previous quarter which was 'supported' by the optimistic full-year forecasts made in May, As shown below, the Annual forecasts were at 'odds' with the more pessimistic forecasts for the half-year - half-way through the half-year, the latter are proving to be more reliable. Ove the last two years, the correlation between the Results &amp; Revision Score and Total Market Cap ex REITs has been 0.78.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/838/original/2019-08-15_18-08-12.png?1565860115" class="editor-image img-responsive" data-smartkarma-image-id="95838"></figure><div class="content-caption">Source: Japan Analytics</div>28-MONTH LOW - The Results &amp; Revision Score has three components, Results, Annual Forecasts &amp; Revisions and Interim Forecasts &amp; Revisions, and the last two can be combined to derive a Forecast &amp; Revision Score. The Forecast &amp; Revision Score is a good leading indicator for the Results Score with a lead-time of four to six months. Although still positive, the Results Score is at a new twenty-eight low of 1.25. The Score has only been negative for ten months since May 2010 reaching a nine-year low in December 2016. If current global macro indicators are correct, the Results Score should be heading into negative territory by the third-quarter results which will be released in February next year.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/839/original/2019-08-15_18-23-10.png?1565861002" class="editor-image img-responsive" data-smartkarma-image-id="95839"></figure><div class="content-caption">Source: Japan Analytics</div>INTERIM v FULL-YEAR FORECASTS - The Forecast &amp; Revision Score is a weighted combination of two forecast series based on the official company forecasts released and updated by most Japanese companies throughout the year. The Annual forecasts tend to receive more senior management attention than the Interim, which are often delegated to the CFO. As a result, the latter series is more volatile, leading on the downside from peaks and lagging on the upside from toughs. The current Interim Score is the second-lowest in nine years, after April 2016 and has offset the optimism implied in the uptick in the Annual Score this May. If the precedents of 2011 and 2016 are to be followed, the Results Score should bottom out eight months from now, in April 2020.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/095/870/original/2019-08-16_06-58-00.png?1565906307" class="editor-image img-responsive" data-smartkarma-image-id="95870"></figure><div class="content-caption">Source: Japan Analytics</div>CURRENCY IN THE DRIVING SEAT - The importance of the currency as a key driver in the earnings cycle in Japan is well illustrated above where the peaks and troughs of the year-on-year change in the US$/Yen exchange rate lagged by six months align well with the changes the Results &amp; Revision Score (RRS), where the correlation is 0.79 since the beginning of 2014. The recent strengthening of the Yen suggests a new low for the RRS in the first half of 2020.In the DETAIL section below, we shall examine the detailed trends in earnings results and forecasts for the 29 Sectors that make up our Market Composite as well as the Sector Results &amp; Revisions Scores.

• MARKET COMPOSITE - AGGREGATE RESULTS •Source: Japan AnalyticsTHIRD DOWN QUARTER - This Insight will review the aggregate results for the 3774 listed Japanese companies for the quarter just ended and updated our Results &amp; Revision Scores for the Market Composite and each of our 30 Sectors. Operating Income has declined by 1.8% since the end of May and is now 5.1% below the peak of December 21st last year. The decline in Net Income has been more significant - 15.7% from the peak and 3.5% since May.  Japan's aggregate trailing-twelve-month (TTM) Net Income will end this year at a lower level than two years ago. FORECASTS STILL OPTIMISTIC -  The 'gap' between current and forecast results is now the widest in two years; however, the 'roles' are reversed. Aggregate forecasts have declined by 1.4% for Operating Income and 1.6% for Net Income and the forecast 'improvements' by year-end are 3% and 6%, respectively, which we consider optimistic. UPSIDE LIMITED - The decline in the market in recent weeks has taken the forward multiple to the second-lowest level this year at 13.7 times. Alternatively, the market is implying a further 17% decline in Net Income, assuming a 'normal' market multiple of 16.7 times. We are more inclined to the latter possibility.
Source: Japan Analytics 
MARGIN ROLLOVER - Revenues are still increasing by 3.8% a year; however, the rolling quarterly rate of increase is slowing to just 0.4% in the quarter just ended while the forecast-implied growth rate for the next nine months is 2%.  Operating margins peaked at 7.78% one year ago and have since declined by 61 basis points since then.  TTM Net Margins are now 4.83% and have declined by 102 basis points in the last three quarters.
Source: Japan Analytics 
SECTOR MARGINS - TOP - Bank Sector margins continue to slide, but have yet to lose their leading position to Telecoms despite the latter's margins being unchanged over three months. Internet and b both saw large margins contractions as did Chemicals which may slip out of this group next quarter. The most robust performance came from our long-time preferred Sector, Infomation Technology.Source: Japan Analytics SECTOR MARGINS - MID - The Market Composite OPM has declined by 27 basis points in the last three months to 7.2%, and only nine of 29 Sectors have higher margins. Of the mid-ranked Sectors by margins, only Multi-Industry and Consumer Services saw margin increases of more than ten basis points. The worst-performing in this group were Food, Beverage &amp; Tobacco and Technology Hardware. Over a longer-term period, there has been a notable decline in Construction and Non-Bank Finance Sector margins. Source: Japan AnalyticsSECTOR MARGINS - BOTTOM - Only Utilities of the bottom-nine OPM Sectors saw a margin improvement in the last three months, while Building Materials, Autos, Metals, Energy, and Other Materials all had double-digit declines. Retail margins are the most stable amongst this group,OUTLOOK - Aggregate results are a lagging indicator for the market, having peaked one year after the market peak of January 2018 - which is why we prefer to rely more on our scoring methodology (see below). Accordingly, we expect the trend in profits and margins to continue to be negative for the rest of the fiscal year and look for revenues to join the trend next quarter.  A breach of the December market low would be required to keep the market multiple below 'normal' levels, and we would advise patience for all but the most committed investors in Japanese equities.  • RESULTS &amp; REVISION SCORE •Source: Japan AnalyticsRESULT &amp; REVISION SCORE - After peaking in November 2017, our Results &amp; Revision Score has declined for six of the last seven quarters, the exception being the previous quarter which was 'supported' by the optimistic full-year forecasts made in May, As shown below, the Annual forecasts were at 'odds' with the more pessimistic forecasts for the half-year - half-way through the half-year, the latter are proving to be more reliable. Ove the last two years, the correlation between the Results &amp; Revision Score and Total Market Cap ex REITs has been 0.78.Source: Japan Analytics28-MONTH LOW - The Results &amp; Revision Score has three components, Results, Annual Forecasts &amp; Revisions and Interim Forecasts &amp; Revisions, and the last two can be combined to derive a Forecast &amp; Revision Score. The Forecast &amp; Revision Score is a good leading indicator for the Results Score with a lead-time of four to six months. Although still positive, the Results Score is at a new twenty-eight low of 1.25. The Score has only been negative for ten months since May 2010 reaching a nine-year low in December 2016. If current global macro indicators are correct, the Results Score should be heading into negative territory by the third-quarter results which will be released in February next year.Source: Japan AnalyticsINTERIM v FULL-YEAR FORECASTS - The Forecast &amp; Revision Score is a weighted combination of two forecast series based on the official company forecasts released and updated by most Japanese companies throughout the year. The Annual forecasts tend to receive more senior management attention than the Interim, which are often delegated to the CFO. As a result, the latter series is more volatile, leading on the downside from peaks and lagging on the upside from toughs. The current Interim Score is the second-lowest in nine years, after April 2016 and has offset the optimism implied in the uptick in the Annual Score this May. If the precedents of 2011 and 2016 are to be followed, the Results Score should bottom out eight months from now, in April 2020.Source: Japan AnalyticsCURRENCY IN THE DRIVING SEAT - The importance of the currency as a key driver in the earnings cycle in Japan is well illustrated above where the peaks and troughs of the year-on-year change in the US$/Yen exchange rate lagged by six months align well with the changes the Results &amp; Revision Score (RRS), where the correlation is 0.79 since the beginning of 2014. The recent strengthening of the Yen suggests a new low for the RRS in the first half of 2020.In the DETAIL section below, we shall examine the detailed trends in earnings results and forecasts for the 29 Sectors that make up our Market Composite as well as the Sector Results &amp; Revisions Scores.

🇯🇵 JAPAN • Summer Results & Revisions - Market Composite & Sectors - Third Down

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

We highlight attractive and actionable themes within developed international markets, including actionable set-ups across among: Non-bank Financials, Japanese Technology stocks, and within European Discretionary, Industrial, Health Care, and Staples sectors.

We highlight attractive and actionable themes within developed international markets, including actionable set-ups across among: Non-bank Financials, Japanese Technology stocks, and within European Discretionary, Industrial, Health Care, and Staples sectors.

Developed International Equity Strategy: Favor EAFE over EM

Japan

Tokyo Electron Limited manufactures and sells industrial electronics products, such as semiconductor manufacturing machines, computer system, and electronic components.  The Company products are sold in US, Taiwan, and others as well as in Japan.

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