Report type: Weekly Strategy

Are These Movements Indicating a Turning Point in the Market?

Japanese stocks in the week of 13/8 were toyed with concerns of an “inverted yield curve” in the US bond market with the 10-year bond yields falling below the 2-year bond yields. Although the US bond yields saw a rapid decline overall due to announcements on 14/8 such as China’s economic indicators for July (retail sales, industrial production, etc.) and Germany’s Apr-Jun term GDP remaining stagnant, etc., on 14/8, the US bond market saw the materialization of the same “inverted yield curve” last seen 12 years ago in 2007. Taking this as a signal for an approaching recession in the near future based on past experience, the NY Dow plummeted and marked the low price of 25,339 points on 15/8 (from the high price of 26,413 points on 9/8), which also influenced Japanese stocks with the Nikkei average plunging from the high price of 20,782 points on 9/8 and marking the low of 20,184 points on 15/8.

On the other hand, there are indications of improvements in the demand environment surrounding Japanese stocks. Despite the continued decrease in the unsettled buying balance of arbitrage involving the arbitrage between futures options and selling on balance by foreign investors, based on the “2 market outstanding margin transactions”, comparing the selling balance of 955 billion yen and the buying balance of 2.1112 trillion yen based on the 5/7 standard, on the 9/8 standard, the selling balance became 863.1 billion yen and the buying balance became 2.3624 trillion yen. By dividing the buying balance by the selling balance and expressing them as a ratio of multiples, it increased from 2.21 times on 5/7 to 2.73 times on 9/8, which indicates a trend in decreasing selling balance and increasing buying balance. For 10 consecutive business days from 30/7, the trading value of the First Section of the TSE exceeded 2 trillion yen, and with the Nikkei average’s weighted average PBR (price-to-book ratio) falling to 1.0 times around 20,000 points, we can infer that there is a rise in investors who view this as an “opportunity to buy”.   

In addition, despite sluggish investment intent in semiconductor facilities due to the US-China friction dragging out, there are firm predictions that inventory adjustments of semiconductor memory will proceed ahead of schedule from late July onwards. While the trend of decreasing selling balance and increasing buying balance continues, in particular, we can expect the return market of semiconductor-related stocks with “a greater selling balance” and a margin balance ratio far under 1.0 times.

Furthermore, towards the approaching 5G era, with preparations of “digital twins”, which collect data in real-time from physical spaces, such as manufacturing sites and business bases, and simulate them as digital information in virtual space, in the future, there will be attention on “IoT platforms”, which will promote a business reform in the manufacturing industry. There is a need to pay attention to IoT-related platform trends such as, Hitachi (6501)’s “Lumada”, Mitsubishi Electric (6503)’s “Edgecross” based on their “FA-IT Open Platform Concept”, and FANUC (6954)’s “FIELD system”, etc.

In the 19/8 issue, we will be covering Morinaga (2201), Bronco Billy (3091), Sosei Group (4565), Round One (4680), Hitachi (6501), and Tokio Marine Holdings (8766).

• Morinaga & Co., Ltd. (2201)　　　5,300 yen (16/8 closing price)

・Founded in 1899 as Japan’s first factory specializing in western confectionery, “Morinaga’s Western Confectionery Shop”. Carries out the manufacture, purchasing, and retail of confectionery (caramels, biscuits, chocolates, etc.), foodstuff (cocoa, cake mixes, etc.), chilled desserts (ice cream, etc.) and health foods (jelly beverages, etc.). Has expanded bases in the US, China, Taiwan and Thailand.

・For 1Q (Apr-Jun) results of FY2020/3 announced on 9/8, net sales increased by 4.3% to 52.43 billion yen compared to the same period the previous year, operating income increased by 21.8% to 6.177 billion yen, and net income increased by 52.7% to 4.455 billion yen. In addition to the increase in sales of popular chocolate products with a high cocoa content, etc. such as “Carré de chocolat”, “HI-CHEW” has also grown due to a diversification in their packaging form. An improvement in cost rate has also contributed.

・For its full year plan, net sales is expected to increase by 7.9% to 207 billion yen compared to the previous year, operating income to increase by 3.9% to 21 billion yen, and net income to increase by 13.1% to 14.5 billion yen. Company’s policy is to focus on their 8 mainstay brands, which are “DARS”, “Chocoball”, “Carré de chocolat”, “MOONLIGHT”, “Canned Amazake”, “HI-CHEW”, “Choco Monaka Jumbo”, and “in Jelly”.

• Bronco Billy Co., Ltd. (3091)　　　2,220 yen (16/8 closing price)

・Founded in Nagoya in 1983. Expands 135 only directly-managed restaurants in Tokyo, Osaka and Kyoto prefecture, and 9 other prefectures. Uses mainly Australian beef in their steaks and hamburger steaks. Their style of offering it together with a salad bar buffet is popular.

・For 1H (Jan-Jun) results of FY2019/12 announced on 16/7, net sales decreased by 0.1% to 11.145 billion yen compared to the same period the previous year, and operating income decreased by 17.4% to 1.168 billion yen. Revising their course in rapid outlet expansion to a policy that focuses on profitability, by closing 2 outlets after opening 2 new outlets, along with the 9.5% decrease in net sales of existing stores have affected and resulted in a decrease in income and profit. 

・For FY2019/12 plan, net sales is expected to increase by 4.8% to 23.5 billion yen compared to the previous year, and operating income to decrease by 6.4% to 2.43 billion yen. As all outlets are directly-managed, in order to go back to expanding outlets, there is a need to strengthen employee training of new staff which requires time. As a reinforcement measure for their existing outlets, their first investment in the “super thick-cut aged sirloin steak” from Uruguay in chain restaurants nationwide in 5/2019 have been selling very well. We can expect further reform in their existing outlets.