PSA Japan Weekly Research Round-Up (for the week ending Aug 3)

 The Weekly Comment
At the moment it really is important to think carefully about the BoJ’s current reasoning, argues Pelham Smithers, who points out a pathway for investment.
 Reports / Flash Notes Summaries at a Glance
1. TDK: Impressive 1Q Numbers 5
 Company / Sector / Thematic Comments 6 at a Glance
1. TDK 1Q OP Up 53% 6
2. Panasonic Ups LiB Capacity at Tesla 6
3. The Panasonic Conundrum 6
4. Sony 1Q Smashes Forecasts 7
5. Capcom Delivers Record 1Q 8
6. Capcom Establishes eSports Division 8
7. Nintendo Doubles OP 9
8. Sega 1Q in the Black 9
9. GungHo Reported Another Quarter of Contraction 10
10. Murata 1Q OP Up 15% 10
11. Readthrough from Apple’s 3Q 11
12. Foster Electric in Weak 1Q, Revises Down 11
13. 5G Engineering Plays Report 1Q 12
14. Fantastic 1Q Results from SBI 12
15. Fujifilm and Xerox Still at Loggerheads 13
16. Comments on Q1 Figures from JSR and Dexerials 13
17. Teijin up on Announced Share Buyback 14
18. Nitto Denko’s Strong 1Q 14
19. Whistle-stop Round the Chemicals 14
20. Konica Minolta’s 1Q surge in OP 14
21. Nippon Shokubai’s Strong 1Q; Higher 2Q Costs Loom 14
22. Honda: Decent Q1 Performance but Mexico Plant Flood and Currency to Hurt FY18 Results 15
23. Mazda 1Q: Rising Expenses Weigh on Profitability 15
24. Toyota Delivers Excellent 1Q Results 15
25. Cautious Excavator Sentiment 16
26. KHI Q1 Issues Temporary 16
27. Aisin Q1 Positive, Denso Disappoints 16
28. Nabtesco Takes H1 Write-off 17
29. NOK: Continued Weak 1Q FPC Earnings 17
30. KDDi in 1Q “Miss” 17
31. Yahoo Japan’s Q1 FY18 Beats 18
32. Start Today’s 1Q: Positive Development of ZOZO Continues 18
33. Kakaku.com: 1Q Missed 18
34. Eisai Considering Conditional Approval Application for BAN-2401 19
PSA Company Visits, Tours and Interviews
• Visited: TDK (6762 JP), Hitachi Chemical (4217 JP)
• Attended earnings meetings at: Sekisui Chemical (4204 JP), TDK (6762 JP), Nippon Electric Glass (4214 JP), Zeon Corp (4205 JP), Konica Minolta (4902 JP), Hoya Corp (7741 JP), iStyle (3660 JP), Megachips (6875 JP), Nihon M&A Center (2127 JP), Murata (6981 JP)
• London meeting with Nidec (6594 JP)
• Interview / Conference Call with: LINE (3938 JP)
• Participated in earnings call with: Start Today (3092 JP), Dexerials (4980 JP), Sumitomo Chemical (4005 JP), Nitto Denko (6988 JP), Taiyo Nippon Sanso (4091 JP), Mitsubishi Chemical Holdings (4188 JP), Teijin (3401 P), Asahi Kasei (3407 JP), Mitsui Chemicals (4183 JP), Minebea-Mitsumi (6479 JP), Denso (6902 JP), Aisin Seiki (7259 JP), KHI (7012 JP), Toyoda Gosei (7282 JP).
Weekly Market Comment by Pelham Smithers
Seven months into 2018 and the key to performance in Japanese equities has generally been micro and not macro. You can get a bit of alpha from macro-related stock selection, but the record is patchy. A look at the best- performing Topix 100 stocks this year gives the market a strong defensive feel with Daiichi Sankyo [DSK] (4568 JP), Eisai (4523 JP), Yamato Holdings (9064), Shiseido (4911 JP) and Astellas (4502 JP) at the top. However, you’ve got Takeda (4502 JP) down at the bottom, and the likes of JT (2914 JP), Ajinomoto (2802 JP) and JR East (9020 JP) doing poorly. Conversely, deep cyclicals are probably worse for choice, as the likes of Nippon Steel (5401 JP) and Sumitomo Metal Mining (5713 JP) are at the bottom, but offsetting that you’ve got good performances from JXTG (5020 JP), Marubeni (8002 JP) and Asahi Kasei (3407 JP). As for tech, it really has been all over the place. Murata (6981 JP), Hoya (7741 JP) and Sony (6758 JP) are in the Top 10, but Rakuten (4755 JP), SMC (6273 JP) and Mitsubishi Electric (6503 JP) are in the bottom 10.
Hindsight being a powerful investment tool, it is easy to identify micro factors that drive most of these major stock price moves, positive or negative. Eisai and DSK have both been beneficiaries of positive development news for drugs with significant potential indications (Alzheimer and cancer respectively), Yamato has enjoyed a significant price hike, while Murata (MLCCs) and Hoya (EUV photomasks) are seeing strong demand for specific product lines. A recent downward revision by Nippon Steel underscores how tough the steel industry is finding things at present, while Takeda and Rakuten are two companies facing tougher competition and whose solutions are probably scarier than the original threat.
It is probably understandable that micro rather than macro has excelled this year, because the macro story has been very wishy-washy. It is probably easier to say which direction the market thinks the economic situation is going in (worse) than it is to say where the market thinks it has been, and that probably accounts for the macro element in performance. Meanwhile, you’ve had these flatlining bond and currency markets that have given very little clue about what might happen next.
Is this about to change? This past week has seen a very different bond market, with rates yoyoing on a daily basis as sentiment swings as to the BoJ’s next move. Peer through that volatility, though, and the trend does appear to have reversed, with 10yr JGBs hitting a 30-month high at one point. Has the BoJ changed policy / will it change policy? Despite an official BoJ denial, some commentators are answering “yes” to either of these questions. Now, while it does appear that the media is having its head turned by senior officials in the banking industry keen on seeing higher rates and / or a steeper yield curve, some do appear to have reached this viewpoint independently.
Arguably the case for changing interest rate policy is unproven at this point. We don’t have 2% inflation and the economy isn’t accelerating. However, we are closer to these scenarios than we were. Inflation has been all over the place this year, but the average, at 0.9%, is well above the average of 2017 (0.2%) and even further above 2016’s negative figure. Indeed, from 2016 we have travelled half the necessary distance to getting to the 2% inflation mark.