Thematic (Sector/Industry)

• Department stores managed a partial rebound in 2021-22 but remain around 19% behind pre-Covid levels overall. As a result, profits remain elusive and the shake up in the industry continues. 
• On the plus side, luxury sales continue to surge and management is now more engaged than for years.
• Although we remain negative on the sector overall, some companies will bounce back strongly as detailed in this in-depth review of the sector.

• Google will invest $735mn (¥105bn) through 2023 on Japan infrastructure including its first local data center and additional subsea capacity
• The Google CEO met with Prime Minister Kishida and the announcement scores political points but it also makes sense with a material JP business and the weak yen
• Google is probably Japan’s largest Internet advertising company with an estimated ¥685bn in FY21 sales

• At the September meeting, the FOMC raised their fed funds rate target by 75bps, or 3% in the last 7 months.
• Powell has been quite clear that his intention is to put the long-term health of the economy top of his mind in his effort to quash inflation before it gets out of hand; remarking that “I wish there were a painless way to do that. There isn’t. We have to get supply and demand back into alignment. The way we do that is by slowing the economy.”
• The last meeting demonstrated a hawkish shift in economic projections.

• The Nikkei rose 4.5% over the week as the yen weakened slightly to 145 yen versus the dollar
• The buoyant mood may not last after U.S. stocks closed sharply lower on Friday after a strong jobs report
• The US commerce department announced restrictions to bar US companies from exporting critical SPE tools to China

• It is estimated that a large number of biotech companies will be liquidated or willing to be acquired at low prices starting from the second half of 2023.
• If strictly speaking, the so-called import substitution is not really good logic, but investors need to know “when to participate in this story” and “when to exit”.
• Economic downturn would lead to consumption downgrade. We suggest that investors temporarily avoid medical companies with consumption attributes, since we have concerns on their performance.

• We compare how a portfolio composed of our top five picks in each of our thematic reports based on datamining technical publications would have performed versus Indices
• The size of outperformance for various periods suggests that incorporating innovation quality index that we use to rank companies can be a solid tool to generate alpha.   
• We understand that much of the outperformance is generated by positive skew but even backing out the largest two contributors we see solid outperformance.

• Japan’s telecom regulator has raised the issue of mobile spectrum auctions and is now soliciting public comments
• We think this conflicts with national policies to boost ICT exports after years of trade deficits whilst new entrant Rakuten, which MIC supports to promote competition, would suffer
• The proposals are for new spectrum only and current licenses and associated annual payments would not be affected. We remain overweight JP telcos, particularly NTT and KDDI

• Topix down 4.2% on persistent concerns about surging inflation, rising interest rates and a highly uncertain global economic outlook
• The Nikkei index shed 7.7% in September, its biggest monthly decline since March 2020.
• Disappointing commentary from NIKE, APPLE and automakers not helping sentiment

• Last week, centralized procurement results of orthopedic spinal consumables were released, with an average price reduction of 84%. We analyzed the impact on related companies. 
• If medical insurance reimbursement standards of Hunan Provincial are followed, there will be few real clinical needs for surgical robots for many hospitals, mainly to meet scientific research needs instead.
• Under the appearance of the popularity of CGT CDMO, there are some hidden worries. Investors are recommended to be rational due to the overcapacity issue in the future.

• Chinese banks remain broadly out of favour due to growth and property sector concerns; we see some value opportunities
• We like PingAn Bank, in particular, for its attractive valuations, compelling PEG ratio and potential for higher returns; we also remain positive on CCB
• We remain negative on China Minsheng due to its low ROE, poor delinquency and NPL coverage

• The plunge in medical beauty sector last week was due to the industry-wide overhaul and investigation resulting from the increase in business bribery/tax evasion/medical malpractice/customer complaints.
• We found an interesting phenomenon – Investors dare not buy biotech, opting instead for Traditional Chinese Medicine (TCM) companies, scientific research service companies and medical service companies.
• If investors still want to trade CXO, here are two suggestions.

• We may look back several months from now at the past week as the pivotal point where the market lost hope that the Fed could actually achieve a “soft landing” from the current monetary policy tightening cycle and instead began planning for how painful of a recession is coming.
• Before beginning the question and answer session of the Federal Reserve meeting on Wednesday, Fed Chair Powell clarified that “nothing had changed” from his hawkish message delivered during the Jackson Hole meeting back in August.
• However, things did change in that instead the Fed goalposts for rate expectations got ratcheted up yet again for 2023 via their internal “dot plot,” which is their survey of where each Fed member thinks rates should be.

In our next Webinar, we welcome Analyst Shifara Samsudeen, ACMA, CGMA , who will take us through the landscape of HR Tech and its investment opportunities.

The webinar will be hosted on Wednesday, 28 September 2022, 17:00 SGT/HKT.

Shifara Samsudeen, ACMA, CGMA, is a chartered management accountant with more than 10 years of rich experience in investment research and financial analysis. She has worked as an equity analyst for one of the world’s largest asset managers with USD2.5 trillion in AUM covering numerous sectors including chemicals, retail, tech, autos, telco, real-estate and banks, globally. She is experienced in fundamental equity research, industry research, commodity studies, forensic accounting, and due diligence reviews.

• China’s distressed property firms are scrambling for a share of a 200 billion yuan ($28.5 billion) government loan program
• The loan program planned by the central government aims to help developers resume construction of apartments that have already been bought but are unfinished due to an industrywide shortage of funds
• Developers have this month been urging their regional branches to file loan applications as soon as possible and local authorities are conducting audits to select the first batch of projects to finance

• Chinese exports of solar panels to Europe have surged this year as countries hunt for alternative energy sources to fill the gap left by Russian natural gas.
• In the first seven months of 2022, China shipped photovoltaic (PV) modules with a combined capacity of 51.5 gigawatts to Europe, 25.9% more than the whole of last year
• China is the world’s largest supplier of photovoltaic products and the trade with Europe, including non-European Union countries

• Japanese auto makers have agreed to pay patent fees for mobile technology in connected cars, a win for equipment vendors
• It is also positive for NTT’s DoCoMo, which is a global leader in network technology R&D (fourth overall and largest in Japan) despite being a network operator
• KDDI also benefits as it already generates meaningful IoT revenue supported in part by automobile connectivity

• Major wholesalers in food, pharmaceuticals and books continue to prosper due to their role in both serving and protecting fragmented distribution channels.
• Profits returned last year as clients picked themselves up after Covid, but as inflation sets in, these middlemen are being squeezed by both manufacturers and retailers and profits may slump.
• They now need to offer an ever increasing array of value-added services to continue to grow and not all have the capability. More M&A may be on the cards.

• 5G-Capable devices now account for 25% of total devices in Japan. So far, 5G take-up appears to be quicker than 4G although that doesn’t translate into higher revenue
• MVNO subscriptions continue to grow despite former leader Rakuten moving users to its own network. IIJ remains the segment leader
• Rakuten Mobile’s subscriber woes have been well-flagged but another issue may be ahead as the migration of MVNO subs to the MNO platform has slowed in recent quarters.

• China’s 20th Party Congress opens on the 16th October 2022. 
• The Party Congress can give Xi Jinping a third term as General Secretary; not confer him a third term as President as is often incorrectly reported in the media.
• The apparent confusion between Party and State positions requires some clarification, which hopefully this insight achieves.