Report

PSA Japan Market Strategy for Q3 2021

Pelham Smithers presents his strategy for Q3 2021 and the changes to PSA's stock Focus List
Table of Contents
Overview 3
Background 4
Valuations & Value 5
The Case for “Muddle Through” 6
Consumer Spending 7
The Labour Market 7
The Currency and the Carry Trade 8
The BoJ and Policy 9
Japan’s Stuttering Economy 10
Stock Performance and Earnings Expectations 12
Catalysts: Digital Transformation, Semiconductors, Price Hikes 13
Potential Positive Surprises and Sustainability of Earnings 15
Semiconductors – Now Data Creators 15
Pro-Cyclical Risk-On Plays 16
Winners and Losers 17
Management’s Role in Performance 18
Conclusion 19
PSA Focus List 20
Performance Review 20
Changes to the Focus List for Q3 2021 21
Focus List Names By Theme: 22
New Focus List for 3Q 2021 23
Underlyings
Advantest Corp.

Advantest and its consolidated subsidiaries manufacture and sell semiconductor and component test system products and mechatronics-related products such as test handlers and device interfaces. Co. also engages in research and development activities and provides maintenance and support services associated with these products. Co.'s principal business segments are semiconductor and component test system; mechatronics system; and services, support and others. Product lines include test systems for memory semiconductors and non-memory semiconductors; test handlers, mechatronic-applied products, and for handling semiconductor devices.

Amazon.com Inc.

Amazon.com serves consumers through its online and physical stores. The company also manufactures and sells electronic devices, including Kindle, Fire tablet, Fire TV, Echo, and Ring, and the company develops and produces media content. The company operates customer service centers and provides programs that enable sellers to grow their businesses, sell their products in its stores, and fulfill orders through the company The company serves developers and enterprises of various sizes, including start-ups, government agencies, and academic institutions, through its Amazon Web Services segment, which provides a set of global compute, storage, database, and other service offerings. The company also provides services, such as advertising.

Anritsu Corporation

Anritsu is engaged in the manufacture and sale of measuring instruments and testing equipment. Test and Measurement segment offers testing and measuring instruments and systems for digital communications and IP networks, optical communications, mobile communications, RF and microwave communications and millimeter wave communications. PQA (Products Quality Assurance) segment offers checkweighers, automatic combination weighers, package inspection equipment, contamination detectors and production management systems for food, pharmaceutical and cosmetics manufacturers. Co. is also engaged in the manufacture of network appliances and optical devices, as well as the real estate leasing.

Asahi Kasei Corporation

Asahi Kasei is a holding company. Co., through its affiliates, operates in three principal business segments. Material segment manufactures and sells petrochemicals, synthetic rubber, performance materials, household products (plastic wrap and storage bags), cleaning agents, elastic polyurethane filament, and battery separators. Homes segment is engaged in the development, construction and sale of unit houses and apartment buildings; and the provision of construction materials. Health Care segment manufactures and sells pharmaceuticals, diagnostic reagents, and critical care devices. In addition, Co. is engaged in the electricity supply, engineering, and employment agency businesses.

Astellas Pharma Inc.

Astellas Pharma is engaged in the development, research, manufacture, and sale of pharmaceuticals. Co. operates its operation in Japan, Americas, Europe, and Asia/Oceania. Co.'s principal product for the global market include "Xtandi" a therapeutic agent for prostatic cancer, "Eligard" a luteinizing hormone-releasing hormone (LHRH) agonist for the treatment of prostate cancer,"Prograf" an immunosuppressant used to prevent rejection in organ transplants, "Vesicare" a treatment for overactive bladder, "Harnal ( "Omnic" in the U.S. and Europe)" an 1 blocking agent for prostatic and urethral smooth muscle, and "Fungurad ("Mycamine" in the U.S. and Europe)" a candin-type antifungal agent.

Canon Inc.

Canon and its subsidiaries are engaged in the manufacture and sale of office multifunction devices, plain paper copying machines, laser printers, inkjet printers, cameras and lithography equipment. Co. sells its products principally under the Canon brand name and through sales subsidiaries. Each of these subsidiaries is responsible for marketing and distribution to retail dealers in an assigned territory. As of Dec. 31, 2017, Co.'s manufacturing is conducted primarily at 30 plants in Japan and 18 plants overseas. Co. operates its business in four segments: Office Business Unit, Imaging System Business Unit, Medical System Business Unit, and Industry and Others Business Unit.

Capcom Co. Ltd.

Capcom is engaged in the development, manufacture and sales of video games, online games, mobile games and arcade games, as well as the operation of amusement arcades. Co.'s business segments are digital contents, amusement facility and amusement equipment. Co. is engaged in the planning, development, manufacture and sales of home video games, online games and mobile games including "Rockman," "Monster Hunter World" and "Dragons Dogma"; the operation of "Plaza Capcom" amusement facilities in Japan; and the development, production and distribution of arcade games for amusement facilities. Co. is also engaged in the licensing business of game characters and the real estate leasing business.

Chugai Pharmaceutical Co. Ltd.

Chugai Pharmaceutical is a pharmaceutical company. Along with its subsidiaries, Co. is engaged in the research and development of new prescription medicines and the subsequent manufacturing, marketing and distribution activities. Co. sells its pharmaceutical products to the nationwide appointed stores in Japan, as well as in overseas, such as Germany, the U.K., France, Taiwan, China, South Korea and the U.S. Co., through its subsidiaries, is also involved in the management of research facilities, and the research on drug discovery, as well as the provision of literature research services for pharmaceutical information, and pharmaceutical academic information.

CyberAgent Inc.

CyberAgent is an information technology company. Media segment is engaged in the operation of internet TV station "AbemaTV," free live streaming programs without subscription "FRESH!," blog service "Ameba," matching services "Tapple" and music streaming service "AWA." Game segment offers a variety of games for smartphones such as "GRANBLUE FANTASY." Internet Advertisement segment is engaged in the provision of internet advertising agency services. Investment Development is engaged in the corporate venture capital business, as well as the establishment and operation of investment fund. Others segment is engaged in the operation of smartphone media.

Dexerials Corp.

Dexerials Corp is a Japan-based company mainly engaged in the manufacture and sale of optical materials, electronic materials and bonding materials. The Company operates in two business segments. The Optical Material Products segment is divided into three categories: optical films, optical resin materials and optical solutions. Main products are ultraviolet curable resins for optical discs, optical elastic resins and antireflection films. The Electronic Material Products segment is divided into four categories: bonding materials, anisotropic conductive films, surface mount fuses and microdevices.

Expedia Group Inc.

Expedia Group is an online travel company. The company's portfolio of brands includes: Expedia.com?, an online travel brand; Hotels.com?, a global lodging company operating websites with its Hotels.com? Rewards loyalty program; Vrbo?, a global online marketplace with a focus on providing lodging options for families; Egencia?, a corporate travel management company; Hotwire?, an online travel website providing spontaneous travel through its Hot Rate? deals; trivago?, an online hotel metasearch platform; and SilverRail Technologies, Inc., provider of a global rail retail and distribution platform connecting rail carriers and suppliers to both online and offline travel distributors.

Fanuc Corporation

Fanuc is engaged in the development, manufacture and sale of CNC systems as well as application products based on its engineering. Co.'s principal products include Factory Automation (FA) products such as computer numeric control (CNC) systems and laser products; The Robot including collaborative robot, arc welding robot, palletizing robot, mini/small/medium/large size robot and paint robot; and the he Robo-machine such as robodrill(compact machining center), roboshot (electric injection molding machine), robocut (wire-cut electric discharge machine) and robonano (ultra precision machine).

Fuji Electric Co. Ltd.

Fuji Electric is a holding company. Co., through its affiliates, is engaged in the manufacture, sale and service of electric machinery. Co.'s principal products include steam turbine, power generation facilities, fuel cells, electric power storage systems, rectification equipment, industrial drive system, monitoring control systems, industrial measuring instruments, general-purpose and industrial inverters, synchronous drive systems, EV systems (quick chargers), magnetic switches, molded-case circuit breakers, power semiconductors, organic photoconductive drums, magnetic disks, vending machines, food service equipment, freezer and refrigerated showcases, and distribution systems.

FUJIFILM Holdings Corp

FUJIFILM Holdings is a holding company engaged in the manufacture and sale of imaging information products. Co.'s principal businesses are divided into three segments: imagining solution, information solution and document solution. Co.'s principal products and services are color films, digital cameras "FinePix," photofinishing equipment, color paper, as well as chemicals and services for photofinishing; equipment and materials for medical systems and life sciences, equipment and materials for graphic arts, flat panel display materials, recording media and optical devices; office copy machines/MFPs, printers, as well as production systems and services.

GMO Financial Gate (4051 JT)

GMO Internet Inc.

GMO Internet is mainly engaged in the provision of Internet services. Along with its subsidiaries, Co. is engaged in the provision of services including domain registration, Web hosting, SaaS base services for online stores, a marketplace operation, EC support, Website construction, Internet security, credit card settlement, consumer Internet provider, online advertising, advertising space on Co.'s own media properties, Search Engine Optimization, and Internet research. Co. is also engaged in the provision of online securities and foreign exchange margin trading businesses, and venture capital business, and the development and operation of games for smartphone as well as online games.

Hitachi Ltd.

Hitachi and its subsidiaries are engaged in the development, manufacture and sale of diversified product mix ranging from electricity generation systems to consumer products and electronic devices. Co.'s businesses are diverse, and include information and telecommunication systems, social infrastructure and industrial systems, electronic systems and equipment, construction machinery, high functional materials and components, automotive systems, life & eco systems, financial services, and others including logistics services, optical disk drive, as well as real estate business.

HOYA CORPORATION

HOYA and its affiliates are mainly engaged in the manufacture and sale of electronics-related products, imaging products, health care products and medical products. Co.'s principal products are photomasks/maskblanks for semiconductors, photomasks/maskblanks and devices for liquid crystal displays ("LCDs"), glass disks for hard disk drives ("HDDs"), optical lenses/glasses, and electro optical glasses; eyeglass lenses, eyeglass frames, contact lenses and accessories, intraocular lenses, endoscopes, bone prosthesis, and medical accessories; cameras, interchangeable lenses, digital camera modules, micro lenses, and CCTV lenses; and crystal glass products.

Internet Initiative Japan

Internet Initiative Japan is engaged in the provision of a comprehensive range of Internet connectivity services, WAN services, outsourcing services, systems integration and equipment sales to Co.'s customers mainly in Japan. Co.'s principal services are full-spec IP service, closed-network services, security-related outsourcing services, web server hosting and e-mail security service, as well as systems construction and systems operation and maintenance. Co., through its subsidiary, is engaged in the operation of ATMs and its network systems and receives a commission for each bank withdrawal transaction when a customer uses its serviced ATMs. As of March 31, 2018, Co. has 1,096 ATMs.

Mercari Inc.

Mitsubishi Heavy Industries Ltd.

Mitsubishi Heavy Industries is a manufacturer of heavy machinery. Along with its affiliates, Co. is engaged in the design, manufacture, installation, sale and after-sales services of boilers, turbines, diesel engines, power generation facilities, passenger ships, liquefied natural gas ("LNG") ships, liquefied petroleum gas ("LPG") ships, container ships, oil tankers, offshore structure, civil aircraft and aero engine, defense equipment, space equipment, waste treatment systems, traffic systems, cranes, forklifts, construction and agricultural machinery, and others. Co. is also engaged in the sale, purchase and leasing of properties and the printing business.

Murata Manufacturing Co. Ltd.

Murata Manufacturing is mainly engaged in the development, manufacture and sale of electronic components and modules in Japan, North America and certain other Asian and European countries. Co.'s products are sold mainly to electronics companies for use as components in telecommunication, computer, audio, video, automotive electronics and other electronic products. Co. is engaged in the development, manufacture and sale of electronic parts and related products, including components for capacitors and piezoelectric products, as well as modules products; the provision of welfare services, personnel services, education and training services, as well as the leasing and management of real estate.

NEC Corp.

NEC is the parent company of a group engaged in the manufacture and sale of computers, software, communications equipment, and electric devices. Co. operates in four business segments: public, enterprise, telecom carrier, and system platform. Co. supplies integration, maintenance and support, and outsourcing services and system equipment for government, public and enterprises; network infrastructure to telecom carriers; hardware such as servers and mainframes, software, enterprise networks solutions. In addition, Co. also provides smart energy such as electrodes and energy storage systems, as well as smartphones, mobile phones, "BIGLOBE" Internet services and lighting equipment.

Nintendo Co. Ltd.

Nintendo is mainly engaged in the development, manufacture, and sale of home-use game hardware/software and peripheral equipment as well as software under the name of "Nintendo DS," "Nintendo 3DS," "Game Boy," "Nintendo 64,"" Game Boy Advance," "Wii," "Nintendo GameCube," "Game Boy Color" and "e-Reader (trading card games)." Co.'s principal software trademarks include "Pokemon," "Super Mario Bros.," "The Legend of Zelda," "STARFOX64" and others. Co. also provides online games and repair services. In addition, Co. is involved in the manufacture and sale of Japanese playing cards called "Karuta," playing cards and board games, as well as the management of intellectual property rights.

Nissan Motor Co. Ltd.

Nissan Motor, along with its subsidiaries and associated companies, is engaged in the manufacture and sale of vehicles, marine products and related parts; and the provision of finance services throughout world. Co.'s principal businesses are automobile and sales financing. Automobile segment manufactures electric vehicles, sedans, sport coupes, compact cars, mini vans, SUVs, pick-up trucks, and station wagons. Co.'s principal brand names include "Leaf," "Infiniti," "Murano," "Altima," "Maxima," "Sentra," "Quest," "Cedric," "Days Roox," "e-NV200," "Note e-Power," "Caravan," "Wingroad," "GT-R," "Farilady Z, among others. Sales Financing segment provides sales financing services..

Nissha Co.Ltd.

Nissha is engaged in the production of general printed matter in the fields of art and commercial printing as well as surface decoration of products technology. Co. manufactures IMD and IML, metallized paper, and heat transfer foils used for simultaneous molding and printing of plastic products and decorations for mobile phones, notebook PCs, automotive interiors and home appliances; and manufactures functional devices such as film based Touch Sensors "Fine Touch" used in tablet devices, smartphones, game consoles, industrial equipment and automotive. Co. also manufactures and sells its own brand products to medical institutions and provides marketing and sales promotion materials.

Nomura Research Institute Ltd.

Nomura Research Institute is mainly engaged in the provision of consulting, financial and industrial IT services, and IT platform services. Consulting Services segment offers management consulting and system consulting services. Financial IT Solutions segment provides IT services including system development, operation outsourcing, and shared-online services for securities, insurance, banking, and other financial industries. Industrial IT Solutions segment provides IT services for distribution, manufacturing, service, and healthcare industries. IT Platform Services segment offers IT infrastructure services, managed services, and advanced information technology services.

NTT DATA Corporation

NTT Data is an information technology ("IT") company mainly engaged in the provision of system integration and network system services. Along with its affiliates, Co. operates in five business segments: public & social infrastructure, financial, enterprise & solutions, North America, and EMEA & LATAM. Co. provides IT services including system integration, network information, consulting, business solution, and system support services to its customers in various industries both domestic and overseas. Co.'s principal products and services are "Accel-Mart," "Aggregate Master®," "Tableau™," "IMDA®," "IsleLinX®," "BRIMOS®," "RemoteOne®," "WinActor," "ANSER," and "AnserDATAPORT®."

Rakuten Inc.

Rakuten is mainly engaged in the Internet-related business. Along with its affiliates, Co. operates in two business segments. The Internet Services segment is engaged in the operation of electronic commerce sites, including an Internet shopping mall "Rakuten Ichiba," an online cash back site, a travel booking site, portal sites and digital contents sites; the sale of advertising on Co.'s sites; the provision of messaging and communication services; and the management of a professional baseball team "Tohoku Rakuten Golden Eagles." FinTech segment is engaged in the provision of Internet banking services and online securities trading services, and the credit card and life insurance businesses.

Rohm Co. Ltd.

ROHM is mainly engaged in the manufacture and sale of electronic components. ICs segment offers analog switches, multiplexers, logic ICs, memory ICs, amplifiers, clocks and timers, sensor ICs, data converters, interface ICs communication LSIs, audio and video ICs and other ICs. The segment also provides foundry services. Discrete Semiconductor Devices segment offers diodes, transistors, light emitting diodes and laser diodes. Modules segment offers print heads, optical modules and power modules. Co. is also engaged in the manufacture and sale of resistors and tantalum capacitors.

SBI Holdings Inc.

SBI Holdings is a holding company engaged in the control and management of its group through share ownership. Through its subsidiaries, Co. is engaged in the provision of securities, banking, insurance, housing loan, financial media, real estate financial, forex margin trading businesses, and overseas financial services; the operation and management of investment partnership, the investment in domestic and international venture companies, and the provision of investment advisory services. Co. is also engaged in the 5-aminolaevulinic acid-related business, as well as the research, development, and sale of drugs, cosmetics and health foods.

Shin-Etsu Chemical Co Ltd

Shin-Etsu Chemical is mainly engaged in the manufacturing and sales of polyvinyl chloride and organic chemicals, silicon, functional chemicals, semiconductor silicon, electronic and functional materials, and others. Co.'s principal products include polyvinyl chloride, caustic soda products, methanol, chloromethane, silicon products, cellulose derivatives, silicon metal, poval (polyvinyl alcohol), synthetic pheromones, semiconductor silicon products, rare earth magnets, encapsulation materials, photoresists, photomask blanks, synthetic quartz products, epoxy molding compounds, pellicles, and resin processed products. Co. is also engaged in the export of plant equipment and others.

Shinko Electric (6967 JT)

Square Enix Holdings Co. Ltd.

Square Enix Holdings is a holding company that is mainly engaged in the entertainment industry. Co., through its subsidiaries, operates in four business segments. The Digital Entertainment business is engaged in the design, development, sale, licensed sale and operation of digital entertainment contents focusing on computer games. The Amusement segment is engaged in the operation of amusement facilities, the design, development, manufacture, sale and rental of amusement equipment. The Publishing segment is involved in the publication of comic magazines, books and game related books. The Rights Property segment is involved design, production, sale and grant of secondary works.

SUBARU CORP

SUBARU and its affiliates are mainly engaged in the manufacture and sale of automobiles and aerospace-related equipment. The Automobiles segment is engaged in the manufacture, sale and repair of passenger cars and their components under the name of "SUBARU." The Aerospace segment is engaged in the manufacture, sale and repair of commercial and defense aircrafts, helicopters, unmanned aerial vehicles and their components. In addition, Co. is engaged in the manufacture, sale and repair of generators, engine-equipped machinery, agricultural machinery, construction machinery and their components; the leasing of real estate; and the manufacture and sale of temporary houses.

TDK Corporation

TDK is a manufacturer of recording media, ferrite products and recording device products, and a producer of inductor, ceramic capacitor, magnet, HDD head and other components. Co.'s principal business segments are passive components, sensor application products, magnetic application products, film application products and others. Co.'s principal products include ceramic capacitors, aluminum electrolytic capacitors, film capacitors, inductive devices, high-frequency components, piezoelectric materials and circuit protection components, sensors, HDD head suspension, recording devices, power supplies and magnets, and mechatronics.

Tokyo Electron Ltd.

Tokyo Electron is a supplier of semiconductor production equipment ("SPE") and flat panel display ("FPD") selling through global network that spans Japan, the U.S., Europe and Asia. Co.'s principal products are coater/developers, plasma etch systems, thermal processing systems, single wafer deposition systems, cleaning systems (auto wet station, single wafer cleaning system, pre-clean system and scrubber system), wafer prober, FPD coater/developers and FPD plasma etch/ash systems. In addition, Co., through its subsidiaries, is engaged in the provision of transportation services, insurance services, as well as the support services for Co.'s photovoltaic cell ("PV") production equipment.

Toshiba Corporation

Toshiba is engaged in the manufacture and sale of electronics and energy products. Along with its affiliates, Co. operates in six business segments: energy systems & solutions, infrastructure systems & solutions, retail & printing solutions, storage & electronic devices solutions, industrial ICT solutions, and others. Co. provides thermal power generation systems, nuclear power generation systems, water supply and sewerage systems, instrumentation and control systems, environmental systems, automatic railroad station equipment, transportation equipment, POS systems, small-signal devices, information technology ("IT") solution services, personal computers, tablets, televisions, and others.

Toyota Motor Corp.

Toyota Motor is an automobile manufacturer. Co. is primarily engaged in the design, manufacture, and sale of sedans, minivans, compact cars, sport-utility vehicles, trucks and related parts and accessories throughout the world. Co. provides financing, vehicle and equipment leasing and certain other financial services primarily to its dealers and their customers to support the sales of vehicles and other products manufactured by Co. Co.'s principal business segments are automotive operations, financial services operations and other operations. Co. sells its vehicles in approximately 190 countries and regions, and markets for its automobiles in Japan, North America, Europe and Asia.

Uber Technologies Inc.

Uber Technologies provides ride hailing services. The company develops application for road transportation, navigation, ride sharing, and payment processing solutions. The company serves customers in the United States and Canada, Latin America, Europe, Middle East, and Asia Pacific markets, excluding its discontinued China operations.

Walmart Inc.

Walmart is engaged in global operations of retail, wholesale and other units, as well as eCommerce, located throughout the U.S., Africa, Argentina, Canada, Central America, Chile, China, India, Japan, Mexico and the U.K. The company's operations are conducted in three reportable segments: Walmart U.S., which is a mass merchandiser of consumer products, operating under the Walmart and Walmart Neighborhood Market brands, as well as walmart.com, jet.com and other eCommerce brands; Walmart International, which includes various formats divided into retail, wholesale and other categories; and Sam's Club, which is a membership-only warehouse club that also operates samsclub.com.

ZOZO Inc.

Start Today is mainly engaged in the electronic commerce ("EC") business. Along with its subsidiaries, Co. operates in three principal businesses: ZOZOTOWN, B to B, and FURIMA. The ZOZOTOWN business operates brand's online shop on ZOZOTOWN by handling their inventory on a consignment based contract. Co. also purchases fashion items from brands and resell them on each brand's online shop on ZOZOTOWN. Additionally, Co. purchases/resales used fashion products from/to its users. The B to B business supports the brands to operate their individual online stores. The FURIMA business offers users a smartphone application called "ZOZO FURIMA" to sell and purchase personal fashion items.

Provider
Pelham Smithers Associates Ltd
Pelham Smithers Associates Ltd

Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods. 

PSA produces both company and sector reports. The focus of PSA’s research is to identify winners and losers as new technologies impact the top and bottom lines of corporations. Critical to our research is the clear explanation of how these new technologies work and how they impact companies and industries. 

The founding partners have worked closely together for twenty years and the team has more than doubled in size since 2012. 

Analysts
Pelham Smithers

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