PSA Weekly Japan Research Round-Up for the Week Ending June 1, 2018

The Weekly Comment by Pelham Smithers
With the Euro representing Japan Inc’s largest net currency exposure, Italy’s political crisis takes centre stage this week.
Reports / Flash Notes Summaries
1. Will Nissan (7201 JP) Surprise on the Upside in FY2018?
Company / Sector / Thematic Comments
1. Where Now for Bandai Namco (7832 JP)?
2. Sega Sammy (6460 JP) Targeting Yokohama Casino
3. PSA Sniffs the Air at KLab (3656 JP)
4. Canon (7751 JP) Visit Feedback: Not Increasing OLED Depot Capacity
5. Ube’s (4208 JP) Shares Resilient on Cautious Guidance
6. Japan Display (6740 JP) Weakness on OLEDs Appears Overdone
7. Maxell (6810 JP) Outlines a Thoughtful Business Plan
8. 300mm Wafer Additions May Avert Large Shortages
9. Auto Sector Hurt by Political Uncertainty; Production Numbers Improve
10. Suzuki (7269 JP), Toyota (7203 JP) Extend Co-operation
11. Nissan Cuts North America Production
12. Global EV Fleet Set to Expand
13. SoftBank (9984 JP) Invests in GM’s Self-Driving Business
14. A Sensible EV Component Move by Toyota (7203 JP) and Denso (6902 JP)
15. Upbeat Guidance from TEL (8035 JP) a Positive for SMC (6273 JP)
16. First Thoughts on KDDi (9433 JP) Visit
17. IIJ (3774 JP), Rakuten (4755 JP) and the Battle of the MNVOs
PSA Company Visits, Tours and Interviews
• Visited TDK (6762 JP), Sega Sammy Holdings (6460 JP), Chugai Pharmaceutical (4519 JP), KLab (3656 JP), TIS (3626 JP), KDDi (9433 JP), Canon (7751 JP), Nitto Denko (6988 JP), Comsys Holdings (1721 JP), Nexon (3659 JP), IIJ (3774 JP), Universal Entertainment (6425 JP), Ube Industries (4208 JP), Hoya (7741 JP)
• Attended earnings meetings at Soken Chemical (4972 JP), Sinfonia (6507 JP), Kyoritsu Maintenance (9616 JP)
• Attended information meeting at Asahi Kasei (3407 JP), Maxell (6810 JP), Mitsui Chemicals (4183 JP), Sumitomo Chemical (4005 JP), Mitsubishi Chemical Holdings (4188 JP)

Weekly Market Comment by Pelham Smithers
The Italian political crisis has added the Euro to the list of troubled currencies. While the chances of the Euro suffering a similar run to that seen with the Turkish Lira or Argentine Peso are slight, any weakness poses a problem for the Japanese stock market. This is because although Japan Inc’s largest gross exposure is to the dollar, the euro represents its largest net exposure. Unlike with the dollar, Japanese manufacturers don’t have much in the way of euro input costs, so euro weakness represents outright financial hardship. Therefore, Japanese manufacturers have to either raise prices, or else operate on thinner margins. As Europe’s economies are only marginally less fragile than their politics, the first isn’t really an option.
Traditionally, most exposed to the euro are camera makers and video game companies. Nintendo’s (7974 JP) approximately €1bil in Euro deposits means its quarterly non-operating performance is as vulnerable as its operating performance; and with non-operating performance under the microscope because of Pokémon, that is a problem. For camera makers Canon (7751 JP) and Nikon (7731 JP), struggling with a renewed collapse in compact camera sales, this could have been better timed. One silver lining here is that the weak Euro should encourage Chinese tourism, which represents a significant component of local camera sales.
The situation is probably most frustrating for Japan’s auto makers since continental Europe is currently one of the strongest markets, albeit from a low base. It doesn’t help either, that while automakers do have sizeable local production, a lot of it is based in the U.K. and sterling hasn’t weakened as much as the euro.
The worry for Japan is that whether or not the crisis in Italy is resolved, the euro is at risk. If Italy’s populist coalition is blocked by the establishment, this would hurt the euro – as would the fiscally expansionist policies that the coalition wishes to pursue if they are allowed to govern. Obviously if a crisis is averted that should be a boost to the equity market as a whole. However, the gains are likely to be more limited for those Euro-sensitive names. Conversely, they are likely to be most vulnerable if the situation were to deteriorate. This makes the European situation very different from the one created by Trump’s antics, as there, the outcome for the dollar is more binary. Dollar-oriented exporters are potential beneficiaries if Trump gets his way, but euro-oriented ones look vulnerable either way.