Category

Japan

Japan: Mazda Motor, Oriental Land, Sysmex Corp and more

By | Daily Briefs, Japan

In today’s briefing:

  • Conviction Call Mazda – Blowout Comes Through
  • Oriental Land: Too Expensive to Benefit From Japan’s COVID-19 Vaccination Drive
  • Japan’s Governance: Board Director Training

Conviction Call Mazda – Blowout Comes Through

By Mio Kato

Mazda results came in barely below our estimates but blew away consensus. Revenue hit ¥803bn (LSR ¥817bn and consensus ¥750bn) while OP hit ¥26.1bn (LSR¥28bn and consensus ¥5.2bn). We believe conditions in North America and Australia will continue to drive robust performance and 1Q was in fact held back by extremely weak volumes in Japan which should rebound. These positives could also result in upside surprises on dividends.


Oriental Land: Too Expensive to Benefit From Japan’s COVID-19 Vaccination Drive

By Oshadhi Kumarasiri

Oriental Land (4661 JP) delivered 1QFY22 results late last week with revenue surpassing the consensus estimate by more than 42%. The company’s 1QFY22 operating loss was ¥8.8bn compared to the consensus operating loss estimate of ¥21.5bn.

We have been highlighting the fact that Oriental Land’s consensus estimates have been out of touch with reality since the beginning of the COVID-19 pandemic. Initially, consensus was late to downgrade earnings estimates and it took them till 4QFY21 to catch up.

Although, this time around they were quick to react as consensus estimates were lowered rather quickly after reimposing restrictions on park attendance.

Nevertheless, Japan’s rapid vaccination drive in preparation for Olympics would mean that attendance restrictions are likely to be very lifted soon. If Japan follows a similar trend to the US reopening story, Tokyo Disney Land, Disney Sea and Disney Hotels are likely likely to experience the guest numbers that’s never been seen before. Yet, the upside potential to Oriental Land shares are rather low as the company is currently trading at extremely expensive multiples. 


Japan’s Governance: Board Director Training

By Aki Matsumoto

Following the previous article “Board Evaluation”, “Board Director Training”, which is dealt with in this article, is also a modest part of the “Disclosure based on each principle of the Corporate Governance Code” in the Corporate Governance Report. Therefore, it seems to be treated as an extremely small item among the evaluation items of corporate governance. It is never mentioned in analyst meetings, and I don’t recall any explanation from the company side regarding it. However, “training of board directors” is definitely one of the necessary elements in terms of improving the quality of board discussions and the quality of each board director in order to function more effectively.


Before it’s here, it’s on Smartkarma

Japan: Keyence Corp, KDDI Corp, Money Forward and more

By | Daily Briefs, Japan

In today’s briefing:

  • Keyence – Showing Its Quality
  • KDDI (Buy): Q1 21 Results – Weak Consumer Offset by Solid Corporate Sales
  • TOPIX Inclusion Trade Summary: July 2021

Keyence – Showing Its Quality

By Mio Kato

Keyence revenue growth surprised to the upside like peers with a 10.7% positive surprise vs. consensus. Just as importantly, OPM was also strong as the unusually high SG&A burden the company has been experiencing over the last two years continues to ease.


KDDI (Buy): Q1 21 Results – Weak Consumer Offset by Solid Corporate Sales

By Kirk Boodry

KDDI posted mixed Q1 results with revenue modestly below expectations but profitability higher. Recent operational trends remain unchanged as demonstrated by 18% growth in new DX business sales but a 3% decline in core mobile communication sales.  Profitability growth stands out especially as KDDI did that whilst lapping the toughest comps for FY20 when emergency coronavirus measures kept marketing spend down. With financial results on track to meet FY21 expectations, we remain at Buy.


TOPIX Inclusion Trade Summary: July 2021

By Janaghan Jeyakumar, CFA

In this insight, we take a look at the monthly performance of the trading opportunities surrounding TOPIX Index Rebalance events. During the month, we witnessed the Inclusion Events of cloud-based business accounting software company Money Forward (3994 JP), water treatment technology company Nomura Micro Science (6254 JP), and printed circuit board manufacturer Meiko Electronics (6787 JP)

Furthermore, as discussed by Travis Lundy in July TOPIX FFW Rebalancing Trade, there were quarterly float adjustments for some constituents of the TOPIX Index which opened up a few trading opportunities. 

Below is a closer look at each of these situations. 


Before it’s here, it’s on Smartkarma

Japan: Advantest Corp, Capcom Co Ltd, CyberAgent Inc, M3 Inc, Shiseido Company, ZOZO Inc, Shin Etsu Chemical and more

By | Daily Briefs, Japan

In today’s briefing:

  • Breaking Down Advantest’s Big Buyback
  • Capcom – On Track for ¥60bn in OP This Year
  • CyberAgent 3Q: Recurring Strong Results Ease Concerns over Gaming Revenues; Guidance Revised Upwards
  • M3: Medlive IPO Helped OP Surge in 1Q; Expect Earnings Weakness to Come Through in 2H
  • Japanese Cosmetics Industry: 2Q21 Statistics Update
  • Conviction Call Zozo – Spend Per Member Refuses to Drop but Hurdles Get Steeper Going Forward
  • Japan’s Governance: Board Evaluation

Breaking Down Advantest’s Big Buyback

By Travis Lundy

On 28 July after the close, semiconductor & components test systems manufacturer Advantest Corp (6857 JP) reported Q1 results (with slides), revised its earnings forecast for the full year (revenues +10% vs end-April forecast for the year to 31 March 2022, OP and NP +17% and change), revised its “forecast” for its dividends, raising the H1 div from ¥38 to ¥50/share. This increase, even if the regular portion of the H2 div is kept flat, would raise the annual dividend to above the level of last year’s (which included a ¥10 commemorative dividend in H2). 

It also announced a plan to buy back shares – with a buyback program of up to 10 million shares (5.1% of shares out ex-treasury stock), spending up to ¥70 billion, with the program scheduled to run from 2 August 2021 through 24 March 2022. 

The reasoning is that in the Second Mid-Term Management Plan announced 24 May 2021, the total shareholder return ratio including treasury stock acquisition was targeted at a base rate of 50% or higher. The revision of the earnings forecast along with expected stronger operating cashflow prods the company to launch a buyback.  

So they have, and the dynamics are interesting because despite MSCI suggesting the company has 100% float, I see a Real World Float far, far below that. 


Capcom – On Track for ¥60bn in OP This Year

By Mio Kato

Capcom handily beat consensus estimates at 1Q with revenue of ¥48.4bn (+27.8%) and OP of ¥23.6bn (+37.4%). Consensus had been as low as ¥13.4bn in early May so the beat is significant. Yet, it failed to meet our ¥25-30bn on account of a write-off of some game assets (“several billion yen”) and deferring revenue for RE8 due to free DLC which we had not expected. Without those factors we believe OP would have come extremely close to ¥30bn. We remain confident that ¥60bn in OP is on the cards for the full year though it is plausible that Capcom could push out sales into next FY and come in slightly below that.


CyberAgent 3Q: Recurring Strong Results Ease Concerns over Gaming Revenues; Guidance Revised Upwards

By Shifara Samsudeen, ACMA, CGMA

CyberAgent Inc (4751 JP) reported its 3Q FY09/21 financial results after market on 28th. CyberAgent’s revenue for the quarter increased 70.3% YoY while operating profit grew 23.2% YoY during the period. Revenue beat consensus by 8.9% while OP beat consensus by 53.9%. The company has once again revised its FY2021 forecasts upwards given that it has already reached its OP target for the year which was set in 2Q FY09/2021.


M3: Medlive IPO Helped OP Surge in 1Q; Expect Earnings Weakness to Come Through in 2H

By Shifara Samsudeen, ACMA, CGMA

M3 Inc (2413 JP)  reported 1QFY03/2022 results on Wednesday which saw revenues growing 30.8% YoY while reported operating profit grew 38.2%YoY during the quarter (excl. the impact from stake disposal of Medlive Technology (2192 HK)). M3’s operating profits during 1QFY03/2022 benefitted from the IPO of Medlive Technology on Hong Kong Stock Exchange in July 2021 with a profit attribution of JPY9.1bn (19.6% of total revenues in 1Q and 36.9% of operating profits excl. Medlive IPO impact).

Source: Company disclosures

The reported revenue was 3.8% higher than consensus estimates while reported operating profits beat consensus by a huge margin of about 50%.


Japanese Cosmetics Industry: 2Q21 Statistics Update

By Oshadhi Kumarasiri

Cosmetics exports grew 32.8% YoY and 15% QoQ in 2Q21 to more than offset the weaknesses in the domestic cosmetics market which remained 26% and 31% below the pre-COVID level in April and May 2021 respectively.

The earnings season of the Japanese cosmetics commences with quarterly results from Pola Orbis Holdings (4927 JP) and Kose Corp (4922 JP) on 30th July 2021. Kao Corp (4452 JP), Fancl Corp (4921 JP) and Shiseido Company (4911 JP) are scheduled to report their quarterly results early next week.

We analyse the 2Q21 cosmetic industry statistics, using the monthly data released by the Ministry of Economy, Trade and Industry (METI) and the Ministry of Finance.


Conviction Call Zozo – Spend Per Member Refuses to Drop but Hurdles Get Steeper Going Forward

By Mio Kato

Zozo posted strong results with revenue beating consensus by 3.4% and OP beating by 10.9%. We had expected revenue to be weaker than consensus based on weak data points on web traffic but revenue growth of +15.4% YoY was materially stronger than our +4% estimate (consensus +11.7%) thanks to elevated spend per member driven by state of emergency declarations. Despite the strong results, guidance remains challenging and a clear miss remains on the cards if spend per member normalises.


Japan’s Governance: Board Evaluation

By Aki Matsumoto

Board evaluation seems to be a minor item among the corporate governance evaluation items. Recently, I have had many opportunities to hear analysts ask questions about governance at analyst meetings, but I have not heard any questions about board evaluation, perhaps because of the limited time available. The composition of the board of directors and the number of committees can be evaluated numerically, which makes it easier to evaluate relative to other companies and the overall average. However, since this item is one of the items mentioned in the preamble of the Corporate Governance Report, it has to be read sequentially in order to evaluate it, which may be one of the reasons why it is not as prominent as the other items. In this sense, I strongly hope that the disclosure of corporate governance reports in English will be further advanced.


Before it’s here, it’s on Smartkarma

Japan: Invesco Office J Reit, Nissan Motor, Rakuten Inc, Hitachi Construction Machinery, United Arrows, Suzuki Motor, Tokyo Stock Exchange Tokyo Price Index Topix and more

By | Daily Briefs, Japan

In today’s briefing:

  • Invesco Real Estate Deal for Invesco Office (3298) Successful – Now For the Aftermath
  • Nissan Motor – Dependant on Its Finance Business
  • Rakuten Group (Neutral) – Credit Downgrade, Network Delays as Company Enters Toughest Stretch
  • HCM – Miss on Margins
  • United Arrows Unveils Online Brand
  • Suzuki – Maruti Weakness Makes Our Predicted Miss Likely
  • Japan’s Governance: Disclosure Factor for Annual General Shareholders Meeting and Investor Relations

Invesco Real Estate Deal for Invesco Office (3298) Successful – Now For the Aftermath

By Travis Lundy

The bid by the Invesco parent company (Invesco Real Estate and affiliates) for Invesco Office J Reit (3298 JP) turned out successful, and the bidders gained 5,727,676 units out of the 8,802,650 units out in the float. They now own 65.07% (having started with 6%) so this will end up going to an EGM.

As described in the original Notice concerning the Statement of Opinion (Support) on Tender Offer by Invesco Group released by IOR on 17 June and in line with my earlier insights, there will be an EGM which will aim to squeeze out minorities. That would theoretically require a two-thirds vote to change the Articles of Incorporation. 

The key date is 31 October 2021 because that is the end of the current (15th) fiscal period. The buyer should try to get the squeezeout accomplished by the end of that period, and if possible, to push it onward to a new fund on or before that date which can be declared to be distributed so that the tax conduit remains in place. 

The language in the Opinion says… 

Additionally, the Tender Offerors intend to request the Investment Corporation to convene an extraordinary unitholders’ meeting before the end of October 2021, which is the end of the 15th fiscal period of the Investment Corporation (meaning the last day of the fiscal period, hereinafter the same), and amend its articles of incorporation to change the end of the 15th fiscal period from October 31, 2021 to April 30, 2022.

There is separate language which says there will be no more dividends for the period ended 31 October 2021. Investors who hold on to the other 34.93% are now long a thing which will not earn anything in future for them. 

Who still owns units? What does that mean? Is there an arb? Are there index trades? 

The answers to this and more below the fold. 


Nissan Motor – Dependant on Its Finance Business

By Mio Kato

Nissan reported 1QFY22 results on Wednesday generating revenue of ¥2,008bn (-21.1% QoQ, +71% YoY) and OP of ¥75.7bn (for an OPM of 3.8% compared to OPM of -13.5% and -0.9% respectively in 1QFY21 and 4QFY21). The improvement of Nissan’s profitability compared to its previous quarter was mainly due decreases in SG&A expenses which were 12.8% of revenue compared to 15.1% and 21.9% respectively in 1QFY21 and 4QFY21. The reported revenue was 6.5% higher than consensus estimates while OP beat by ¥130bn, thanks in large part to the finance business.

In ¥bn

Revenue

OP

OPM

Actual Results – 1QFY22

2,008

              76

3.8%

Consensus – 1QFY22

1,886

–            55

-2.9%

Surprise

6.5%

NM

6.7% points

 

 

 

 

Guidance – FY22

9,750

150

1.5%

Consensus – FY22

          9,114

            4.6

0.1%

Difference

7.0%

3183%

1.5% points

Source: Company disclosures, CapIQ

Rakuten Group (Neutral) – Credit Downgrade, Network Delays as Company Enters Toughest Stretch

By Kirk Boodry

Rakuten shares are down 8% this week on credit concerns and delays in network expansion. The S&P credit downgrade is a lagging indicator but slower network deployment could have future consequences. A key theme for Rakuten Mobile this year is customer retention as it converts free trial users to revenue-generating subs and network quality is by far Rakuten’s biggest weakness. That mobile revenue is needed to offset aggressive marketing costs now that the pricing playing field has been defined. We expect peak operating losses over the next few quarters and that keeps us cautious on the story. We remain at Neutral.


HCM – Miss on Margins

By Mio Kato

HCM announced slightly concerning 1Q results yesterday as despite a strong revenue beat (12% above consensus), OP missed by 10%. This is a result of gross margin continuing to undershoot and it is unclear when this issue might be resolved.


United Arrows Unveils Online Brand

By Michael Causton

United Arrows core (and original) customer is now in their 40s and 50s with a large wallet and a willingness to spend on premium fashions. The venerable select shop retailer doesn’t want to age alongside its first customers and has unveiled a new brand targeting younger consumers with its lowest prices yet. United Arrows has faced tough trading during the pandemic but should benefit from a rebound given its strong brand and improving supply chains delivering better cost performance.


Suzuki – Maruti Weakness Makes Our Predicted Miss Likely

By Mio Kato

Maruti reported 1Q results yesterday missing consensus as the company narrowly avoided generating an operating loss. OP was just INR0.78bn and in addition to material cost inflation we pointed to, labour cost was also surprisingly high, illustrating Maruti’s negative sensitivity to inflationary pressures.


Japan’s Governance: Disclosure Factor for Annual General Shareholders Meeting and Investor Relations

By Aki Matsumoto

Metrical uses a variety of evaluation criteria to score the corporate governance of listed companies. One of the evaluation criteria is the disclosure factor regarding disclosure of information on annual shareholders meetings and investor relations. It is important to know whether a listed company is actively communicating information to its shareholders and investors, and whether its disclosure efforts are moving in the right direction. It makes a huge difference for shareholders and investors to make investment decisions if the company does not disclose information in a positive manner. This is because the disclosure of information that can be used to make decisions about the risk-return of a company’s business and the location of its management risks can help reduce investment risks. It has also been confirmed that the AGM and IR disclosure scores (AGM/IR scores) are statistically correlated with ROA (actual performance) and Tobin’s Q.


Before it’s here, it’s on Smartkarma

Japan: Sakai Ovex, Tokyo Stock Exchange Tokyo Price Index Topix, Mitsubishi Motors and more

By | Daily Briefs, Japan

In today’s briefing:

  • Sakai Ovex MBO Reloaded – Up 27% from Last Weak Bump But Still Cheap
  • Japan’s Governance: Disclosure of Corporate Governance Report in English
  • Mitsubishi Motors – Kicking Off 1QFY22 Auto Earnings in Style

Sakai Ovex MBO Reloaded – Up 27% from Last Weak Bump But Still Cheap

By Travis Lundy

In early February 2021, the CEO of Sakai Ovex (3408 JP), who owned very few shares, and an activist investor decided to launch an MBO for the company at ¥2,850/share. 

The stock had been trading cheap, and the price was “high” but the price was wrong. It needed to be 40% higher – at a minimum – in my opinion. I wrote a detailed breakdown of why I thought so in Sakai Ovex MBO – Wrong Price (And the Bidder Knows It). The management forecasts had been low-balled and I called that out, and the equity affiliate earnings somewhat ignored. Get rid of the financial assets and the Offer Price was at negative enterprise value.  

My conclusions on 9 February were as follows:

Not long after that, the bidders offered a very weak bump to ¥3,000/share, discussed in Savai Ovex MBO – A Very Weak Bump. This was not enough. The shares traded above terms and revised terms, only falling below when the Tender Offer went ex-. 

In the end, the bid was not successful. They ended up missing by 3% of the shares. BUT…. in the process, they gained an activist in Murakami-san, who did indeed pop in to own 6.9%, through City Index Eleventh, discussed in Sakai Ovex Tender Offer Fails But The Stock Gains an Activistafter the Tender failed. CIE later revised their position to 7.93% which meant they were the fulcrum investor to get this deal over the line the next time, and now they own 8.33% according to today’s document.

Since Then…

The shares have traded at or around ¥3,000/share ± ¥100/share for the past three months, trading in lower-than-pre-announcement volumes.

Earnings were decent when reported in May. And the forecast for the year to March 2022 turned out to be substantially higher (revenues nearly 10% higher than the management forecast included in the Tender Offer documentation, and OP 35% higher).

And today we have new news.

The Bidders are back. And now City Index Eleventh is joining them. It pays to be the fulcrum investor. 

And now they are bidding ¥3,810. Which is still cheap. 

Much more below the fold. 


Japan’s Governance: Disclosure of Corporate Governance Report in English

By Aki Matsumoto

In recent years, more and more companies have begun to provide and disclose notices of general meetings of shareholders in English. In addition, an increasing number of companies are allowing electromagnetic voting, although this requires changes to the company’s articles of incorporation. These are very good initiatives for shareholders and investors. On the other hand, the number of companies submitting their corporate governance reports to the Tokyo Stock Exchange in English is still limited. As of June 2021, only 306 of the 3,752 listed companies have submitted their corporate governance reports in English. The chart below shows the number of companies that have filed their corporate governance reports in English on a monthly basis since May 2018. You can see from the bar chart that the number has increased at a very moderate pace.


Mitsubishi Motors – Kicking Off 1QFY22 Auto Earnings in Style

By Mio Kato

Mitsubishi Motor reported 1QFY22 results on 27th July which saw revenues of ¥432bn (-14% QoQ, +88% YoY) and OP of ¥10.6bn (OPM of 2.5% compared to the OPM of -1.7% in 4QFY21).

The reported revenue was 4.1% higher than consensus estimates while OP beat consensus estimates for a loss of ¥6.9bn. This is the first datapoint for Japanese automotive earnings this quarter and points to our call for broad beats across the industry being correct.

Guidance was revised up from ¥30bn in OP to ¥40bn but remains conservative.

In ¥bn

Revenue

OP

OPM

Results – 1QFY22

               432

                10.6

2.5%

Consensus – 1QFY22

415

              -6.9

-1.7%

Surprise

4.1%

NM

4.1% points

 

 

 

 

Guidance – FY22

           2,080

                    40

1.9%

Consensus – FY22

           1,889

2.5

0.1%

Difference

10.1%

1516.4%

1.8% points

Source: Company disclosures, CapIQ

Before it’s here, it’s on Smartkarma

Japan: Softbank Group, Roland Corp, Koei Tecmo Holdings, Okamoto Industries, Tokyo Stock Exchange Tokyo Price Index Topix, Nidec Corp and more

By | Daily Briefs, Japan

In today’s briefing:

  • Softbank Group – China Has Just Blown a Hole in Vision Fund’s Rapid Listing Theme
  • JAPAN PASSIVE: Who Owns What 2021?
  • Short Roland/Long Yamaha as Roland May Fail to Meet Demand Due to Production Shortages
  • Koei Tecmo – Beats Consensus but Is That Enough?
  • Deep-Dive: Okamoto Industries (5122 JP)
  • Japan’s Governance: The Problem of Copy and Paste Allegations
  • Nidec (6594 JP): Good 1Q, but EV Motors Face Tough Competition and Severe Pricing

Softbank Group – China Has Just Blown a Hole in Vision Fund’s Rapid Listing Theme

By Kirk Boodry

Softbank has been touting Vision Fund’s IPO flywheel for almost all of 2021 but expect that to fade as the reality of China’s crackdown sinks in. It’s stake in Didi is worth $8bn as of Friday down from $10.6bn invested at the parent and $12bn total whilst other recent IPOs (YMM -28% on 23 July, ZME -35%, DDL -8%) are also under pressure. The good news is Vision Fund China assets are <10% of total China exposure and Alibaba has been through the regulatory wringer already. That limits China downside but it does call into question Vision Fund hopes for valuation gains from liquidity events. There is a direct read across with Zuoyebang and VIPThink which are banned from going public whilst three of the largest private investments remaining in Vision Fund 1 (Bytedance, ele.me and Guazi) are likely to remain on the sidelines. We expect the holding company discount is likely to remain in the 44% range.


JAPAN PASSIVE: Who Owns What 2021?

By Travis Lundy

A few years ago I started this series, and I updated it last year. Since last year, it has been a top 10 insight in terms of views. 

I personally think it is important for investors of all types to understand WHO OWNS WHAT. 

Many fundamental investors are reticent to spend any time on this but there are many reasons why active investors in Japan should be interested in understanding the ownership and shareholder dynamics of passive investors in Japan.

Some of the places active investors will see their influence are:

  • Stories intermittently published about the BOJ’s presence in Japanese ETFs (especially the fact that it owns 85+% of the outstanding ETF market),
  • Relatively constant interest in Nikkei 225 rebalances like the one we saw in July 2020, which helped push up Japan Exchange Group (8697 JP) by 30+% from May to July, then helped it slide 13% in a week, or the changes in the Nikkei 225 review rules published earlier this year which may change what happens this September to a few large caps, and the announcement of the BOJ that it would no longer buy Nikkei 225 ETFs which started a long slide in Fast Retailing (9983 JP) shares against comps and the Nikkei itself. Long “held up” by ‘market inventory’ and Nikkei 225 ETF buying, when the BOJ stopped, it removed the cushion and existing inventory holders had to sell out. 
  • Then if you look at the shareholder structure of Fast Retailing today, you will see that it is STILL fundamentally a serious problem for large foreign active investors who would actually wish to take an active (but not activist) position. Real World Float on the stock is, by my calculation, less than 15% of shares outstanding. 
  • The relatively recent policy of increased stewardship regarding the passive management portion of the GPIF (the Government Pension Investment Fund) – an investing heavyweight in Japan.
  • The timing and quantum of after-event support or overhang on corporate actions such as buybacks, secondary offerings, primary offerings, mergers, etc. 
  • Index inclusions mean big flows. If you follow the insights on TOPIX Inclusions by Janaghan Jeyakumar, CFA and myself, you will often see big moves. Sometimes these stocks move 50% between when we write about them and when they go into the index. If you own them and are considering an exit, you need to know when to take profits, and the dynamic of the liquidity. If you are thinking about getting in for fundamental reasons, it pays to know early so you can get ahead of the major flow.
  • The return of Toshiba Corp (6502 JP) to the TSE First Section in Q1 this year changed the foreign shareholder percentage ownership, lowering it by 10%. Smartkarma readers knew this last year and in January, which prepared them for the June AGM when the shareholder category ownership was released.
  • The changes to the TSE’s market structure, which will affect TOPIX membership, which will affect many companies’ issuance, buyback, share cancellation, etc decisions over the next several months. They are doing this because of the TSE Prime listing rules which will effectively also determine whether or not they will be included in TOPIX in future, or whether they will fall out of TSE Prime and will see constant selling over late 2022 to early 2025. 

Of course, TOPIX is just over half of the passive tracking AUM in Japan. There’s more. 

Find out WHO OWNS WHAT in Japan Passive below the fold. 


Short Roland/Long Yamaha as Roland May Fail to Meet Demand Due to Production Shortages

By Oshadhi Kumarasiri

Roland Corp (7944 JP), a global leader in the electronic musical instruments industry, has been shifting production away from China and Japan to concentrate most of the production activities to the Malaysian plant established in 2014 as a part of the business turnaround process that followed a vicious downward spiral in the post-global financial crisis (GFC) environment.

While demand for musical instruments soars across the world, COVID-19 lockdowns in Malaysia continues to affect Roland’s production capabilities. We believe Roland may fail to meet demand amidst disruptions to the main production facility in Malaysia while Yamaha Corp (7951 JP) seems to be well placed to outperform the market through capturing Roland’s lost demand.


Koei Tecmo – Beats Consensus but Is That Enough?

By Mio Kato

Koei Tecmo posted some stellar results today with ¥20.5bn in revenue (consensus ¥14.5) and OP of ¥9.7bn (consensus ¥5.9bn), putting the company on track to hit our ¥34-39bn FY OP target vs. consensus at ¥28.5bn. ¥8.7bn in income below the OP line was also a notable positive surprise thanks to strong investment income. How much of this is priced in though?


Deep-Dive: Okamoto Industries (5122 JP)

By Michael Fritzell

Okamoto (5122 JP) is a family-run household products and industrial materials company based in Japan.

The company is best known for its condom business, which ranks as the #3 globally. The brand name is strong in Asia, where Okamoto dominates the premium segment. The operating margin for Okamoto’s condom business is around 30%, and it has a clear technological leadership that protects it from the competition.


Japan’s Governance: The Problem of Copy and Paste Allegations

By Aki Matsumoto

In my previous article, “Human Rights Policy,” I discussed the fact that the management of TamaHome (1419) has acted and behaved in a manner that is inconsistent with respect for human rights and is not in line with the “Human Rights Policy” posted on the company’s website. It is not uncommon for Japanese companies to put too much emphasis on formalities and not enough on actual actions. I often see allegations of copy and paste in the corporate governance reports that the Tokyo Stock Exchange requires listed companies to submit.


Nidec (6594 JP): Good 1Q, but EV Motors Face Tough Competition and Severe Pricing

By Scott Foster

Nidec’s share price jumped 2.4% to ¥1,300 on Wednesday, July 21 – the last trading day before Japan’s national holidays, when the company announced results for 1Q of FY Mar-22 – but fell back 3.2% to ¥12,580 today.

This reflects the positives and negatives facing the company as it ramps up production of EV motors and drive systems.

Results for the three months to June looked good, with operating profit up 60% year-on-year on a 33% increase in sales. 1Q sales, operating profit and net profit were all about 56% of 1H guidance.

On top of that, Nidec and Hon Hai announced plans to establish a joint venture to develop Nidec E-axle traction motor systems for EVs made by Hon Hai subsidiary Foxtron Vehicle Technologies.

However, competitor Hitachi (6501 JP) announced plans to build EV component factories in Japan China and the U.S. to expand capacity by about 6 times; and price competition in China is severe.

At 53x management’s EPS guidance and 50x our own EPS estimate for FY Mar-22, and 40x our estimate for FY Mar-24, a lot of potential growth is already in the price.

We reiterate our previous conclusion: Guidance is probably conservative, but the shares are still overvalued.


Before it’s here, it’s on Smartkarma

Japan: Honda Motor and more

By | Daily Briefs, Japan

In today’s briefing:

  • Japan’s Governance: Environment of ESG

Japan’s Governance: Environment of ESG

By Aki Matsumoto

In this article, I would like to focus on E in ESG. There are more and more opportunities to see the ESG initiatives of companies in analyst meetings, CSR reports, and integrated reports. In the latter half of analyst meetings at the time of earnings announcements, listed companies often make a presentation on their ESG initiatives following their earnings projections. If I may dare to say so, companies are seen to be happy when describing E compared to the somewhat less talkative S and G explanations. S and G, as mentioned in the previous article “Social and Human Rights,” are progressing at a much slower pace than investors expect. On the other hand, Japanese companies have always had a strong interest in E, as they are mainly listed in the manufacturing industry. In the end of the 1990s, when the ISO (International Organization for Standardization) standard was introduced, all Japanese companies obtained certification, and they are very keen on environmental issues. Therefore, in some cases, when E is explained at an analyst meeting, it is not only a presentation of their environmental initiatives but also a presentation of their new environmental technology products.


Before it’s here, it’s on Smartkarma

Japan: Anritsu Corp and more

By | Daily Briefs, Japan

In today’s briefing:

  • Anritsu (6754 JP): 5G Business to Expand Until FY Mar-24

Anritsu (6754 JP): 5G Business to Expand Until FY Mar-24

By Scott Foster

Down nearly 30% since January 28, the shares are now selling at 17x management’s EPS guidance for FY Mar-21 and 13x our EPS estimate for FY Mar-24, when management expects 5G-related sales and profits to peak.

Premature concern over the next cyclical downturn appears to have been discounted. Delays to 5G roll-outs caused by the pandemic should also be in the price.

Over the coming three years, sales should rise by more than 20% and operating profit by more than 30%, driven by 5G and growing economies of scale in the company’s other businesses.

Buy back in for the long term.


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Japan: Tama Home and more

By | Daily Briefs, Japan

In today’s briefing:

  • Japan’s Governance: Human Rights Policy

Japan’s Governance: Human Rights Policy

By Aki Matsumoto

The share price of Tama Home (1419) plunged this week after unfortunate comments about human rights surfaced. The mid-sized custom home builder announced earnings above consensus in its May 2021 results released on July 12. Amid falling stock market prices, the share price rose sharply as the strong performance in the previous fiscal year’s positive earnings highlighted the undervalued aspects of the company’s previously low P/E (there are many companies in this industry with low P/Es), but this comment, combined with profit-taking selling, caused the share price to drop sharply.


Before it’s here, it’s on Smartkarma

Japan: Toshiba Corp, Rakuten Inc, NTT (Nippon Telegraph & Telephone), Internet Initiative Japan, Suzuki Motor, Matsumotokiyoshi Holdings Co., Ltd., Isetan Mitsukoshi Holdings Ltd and more

By | Daily Briefs, Japan

In today’s briefing:

  • Toshiba Support Cracked
  • Seiyu: Back in the Mainstream Thanks to Rakuten
  • NTT (Buy) – Olympic Promotions Almost Over; Meanwhile We Have Updated Numbers
  • Internet Initiative Japan (Buy) Well-Positioned for Corporate IT Spend, Raising Forecasts/Valuation
  • Suzuki – Could Be the Only J-Auto to Miss at 1Q
  • Japan’s Governance: Founder Family Ownership / Case of Drugstore Industry
  • Isetan-Mitsukoshi Targets Wealthy

Toshiba Support Cracked

By Thomas Schroeder

Toshiba Corp (6502 JP) short sell call at 4,800-900 is starting to work and has broken pattern support and seeing downside gaps unfolding. Fresh resistance lies at 4,800.

Rising wedge support and trendline support break on July 16,  was the catalyst for Toshiba to roll over to to pressure initial support at 4,500. We like selling a bounce.

Bear targets at 4,000 and 3,750.


Seiyu: Back in the Mainstream Thanks to Rakuten

By Michael Causton

In 2002, Seiyu was saved by the foreign might of Walmart. Today it is about 25% smaller but over the same 20 years, it has gone from a ¥90 billion loss to an estimated ¥40 billion operating profit last year. Now, with the backing of its new majority owners, KKR & Co Inc (KKR US) and Rakuten Inc (4755 JP), Seiyu has announced ambitious plans to become Japan’s largest online supermarket by 2025. This is increasingly likely thanks to Rakuten’s new reach through its new joint venture with Japan Post Holdings (6178 JP). 

Right now, online food retailing is a two horse race between Amazon and Rakuten, with Z Holdings nowhere in sight.


NTT (Buy) – Olympic Promotions Almost Over; Meanwhile We Have Updated Numbers

By Kirk Boodry

NTT senior management will not attend the Olympic opening ceremonies and with consumer-linked product demonstrations less relevant with no spectators, NTT’s promotional activity is winding down. On balance, Olympic sponsorship does not impact the valuation or investment case – any PR spend here would have went elsewhere – but we did enjoy following their participation in the torch relay on Twitter and their 2020 Olympic website is worth a look. We have tweaked our forecasts for FY21 based on management Q4 guidance and we remain at Buy with a ¥3,600 FY21-end target price.   


Internet Initiative Japan (Buy) Well-Positioned for Corporate IT Spend, Raising Forecasts/Valuation

By Kirk Boodry

Internet Initiative Japan (3774 JP) (IIJ) has moved from strength to strength over the last 12-18 months as long-term relationships with corporate customers translate into higher revenue as new services are introduced and corporate IT budgets increase. Just as impressive, results for FY20 indicate margin improvement will come along more quickly than expected and we have raised our forecasts to reflect that with c. 30% higher operating income over the next three years driving a corresponding increase in our target price from ¥3,270 to ¥4,300. With 21% potential upside, we remain at Buy.


Suzuki – Could Be the Only J-Auto to Miss at 1Q

By Mio Kato

While we expect results to be broadly strong for Japanese automakers thanks to favourable forex trends and strong unit volumes in North America, Suzuki unfortunately does not benefit greatly from these. Rather, it is highly negatively impacted by commodity prices, and we believe consensus does not adequately reflect this.


Japan’s Governance: Founder Family Ownership / Case of Drugstore Industry

By Aki Matsumoto

As I mentioned in my previous article, “Japan’s Governance: Unclear Medium-Term Management Plan – Kusuri No Aoki (3549),” I would like to focus on the drugstore industry, which continues to grow among retailers. 1990s was the starting point for the growth of drugstore chains in Japan, and although the industry continues to grow at a high rate, it is now entering a phase of consolidation. After more than 20 years since their inception in the 1990s, many major drugstore chains have reached a point where the founders are stepping down and handing over management to their successors.


Isetan-Mitsukoshi Targets Wealthy

By Michael Causton

Isetan-Mitsukoshi is one of Japan’s most prestigious retailers – or at least it was up until the advent of the pandemic. Facing ongoing sales falls as customers are kept away from its stores, the company knows it has to evolve if it is to survive. As well as more online sales and a few merchandise tweaks, it is going after the rich like never before. Given that the wealth market is one of the few growing segments in Japan, this makes sense but the venerable department store still has a long journey ahead to improve returns.


Before it’s here, it’s on Smartkarma