PSA Japan Weekly Research Round-Up (to June 15)

The PSA Japan Research Round-Up for the Week Ending June 15, 2018
The Weekly Comment by Pelham Smithers
We review our market strategy over the last quarter to date and assess the performance of the five groups of stocks we expected would do well, and the one group we thought would underperform.
Reports / Flash Notes Summaries
1. Canon (7751 JP) Concerns Lead us to Trim our Forecasts
Company / Sector / Thematic Comments
1. Sony (6758 JP) vs Microsoft at E3 2018
2. Nintendo (7974 JP) also Disappoints at E3
3. Square Enix (9684 JP) Sets Date for Kingdom Hearts III, Capcom (9697 JP) for Resident Evil 2
4. Blemishes Showing Up at Ya-Man (6630 JP)
5. Implications for Panasonic’s (6752 JP) Battery Business from CATL IPO
6. Spotlight on MLCC-Plays: Murata (6981 JP) / TDK (67632 JP) / Taiyo Yuden (6976 JP)
7. Another Crypto Exchange Hack
8. Why Nissan Chemical (4021 JP) is Priced for Perfection
9. Ohara’s (5218 JP) Prospects Brighten Significantly
10. Taiyo Nippon Sanso’s (4091 JP) Odds to Acquire Assets Improve
11. Will Toyota (7203 JP) Kill the Barista?
12. Toyota (7203 JP) Acquires Grab Stake
13. Nissan-Renault-Mitsubishi Motors Alliance Reports an Increase in Synergies
14. Akebono’s (7238 JP) Exciting New Brake Caliper Design
15. KDDi’s (9433 JP) Stock Market Rehabilitation
16. US Media Assets Set for Further M&A Boom
17. Solid Numbers from Two Internet Support Firms
18. LINE (3938 JP) Introduces LIFF; Implications for LINE Pay
19. CyberAgent (4751 JP) Introduces REQU
20. Rakuten (4755 JP) to Cut Rakuten Mobile’s Prices
21. Are Sales at MonotaRO (3064 JP) Accelerating?
PSA Company Visits, Tours and Interviews
• Visited Nissan Chemical (4021 JP)
• Attended earnings meetings at Ohara Inc. (5218 JP)
• Attended information meeting at Konica Minolta (4902 JP)
Weekly Market Comment by Pelham Smithers
As we do not cover financials unless there is a fintech angle, it had rather passed me by how poorly Japanese bank shares had performed of late. At one level this shouldn’t be surprising, what with interest rates being negative, but at another level it doesn’t feel that things are worse now than they were in mid-2016, when the world and his wife was panicking that monetary policy would bankrupt Japan’s banking industry. Indeed, not only did the 2H 2016 bounce in banking shares suggest a realization that we’d got into an oversold situation, but even if some of those 2H 2016 gains were reversed, it seemed unlikely that we’d reverse the lot. Yet we have reversed the move, at least in relative terms. Using 1983=100 as a base, Japanese banks relative to Topix fell to 34.28 today (15 June) versus 35.05 in June 2016. Now, in absolute terms, Japanese banks have done pretty well over the past two years, with the banking sector rising from 129.26 to 181.56 – that is a decent 40% increase. It is just that the Japanese stock market, overall has done better and for good reason: Japanese bank earnings have bounced in the two years, but not as much as most. Furthermore, the outlook for banking profits in FY18 are pretty poor, while those for the rest of the market are decent if not exceptional.
Banking shares aren’t alone in this regard. Other risk-on sectors, such as steel and shipping, are also at / close to relative lows, having more than given back their outperformance gains from 2H 2016. Not doing all that great either are asset-backed rather than earnings-driven sectors like real estate and warehousing. These sectors are not quite at their relative lows right now, but they have hit that point at some stage in 2018.
For a firm like us that focuses on technology names, this of course has been a godsend. There’s been a massive stylistic direction to the market over a lengthy period of time, during which among the worst performing sectors are ones that we don’t follow. If stock-picking is the equivalent of the monkey and the dartboard, then this particular monkey has had several of the low scoring segments of the board removed. With that in mind, then, it should not be too surprising that, generally, the stocks we’ve been focusing on over the past few months have done well, both in absolute and relative terms. Should we go into another China-driven commodity / basic-material / low-quality-loan-boom market then we may need to be making excuses as to why our favourite tech names are being by-passed. Consequently, I am not now as excited about those names that we’ve been positive on as those names that we’ve been negative on.