Japan Weekly Strategy Report – Capture opportunities for selecting good stocks even as concerns re-emerge! August 8, 2018

With the extremely hot weather striking the Japanese archipelago, corporate earnings releases of major companies are at their peak.  Indeed, the market is getting hot, what with Apple (AAPL) achieving market capitalization of 1 trillion dollars.  The US is showing strong economic performance, with GDP for the April-June quarter increasing by 4.1%.  At the same time, monetary policy tweaks by the BOJ is also making strong impact on interest rate and forex movements.  However, hardline US trade policy against China has thrown cold water onto the market, affecting Japanese stock movements. 

On 7/31, President Trump announced that, as a third step of additional tariffs on China, he was considering imposing 25% additional duties on 200 billion dollars’ worth of imports to the US.  It seems that he is of the view that the original 10% tariff was not enough owing to the depreciation of the RMB, and has therefore given instructions to raise the tariff to 25%.  He is seeking industry input regarding this 25% tariff, and a final decision is due after September.  On 7/6, the US fired the first shot with a 25% tariff on 34 billion dollars’ worth of imports from China.  Following that, it is currently planning another round for 16 billion dollars’ worth of imports.  US sanctions on Chinse imports amounted to 250 billion dollars, largely exceeding total imports from the US.  As a result, China is currently not taking any countermeasures in the meantime. 

While refraining from the Beidaihe meeting where important matters are usually informally discussed, and with trade pressures from the US in mind, the meeting of the Political Bureau of the Central Committee of the CPC chaired by President Xi Jinping decided on a policy to prop up the economy through proactive fiscal policies in the second half of 2018.  The plan is apparently to expand public investment such as rural infrastructure improvement.  Monetary policy seems to be aiming for maintenance of reasonable adequate liquidity, and moving towards monetary easing.  On the working level, US Treasury Secretary Mnuchin and Chinese Vice Premier Liu He are leading the trade negotiations.  At the same time, some US officials and corporate executives have requested Chinese officials to get Vice President Wang Qishan to visit the US for negotiations so as to resolve the trade friction. Since the 1990s, he has been interacting with many US stakeholders both as a banker and a senior government official, and is well looked upon by the financial and political circles in the US. For the time being, the progress of trade negotiations will be a factor influencing market fluctuations. 

Although the outlook is uncertain, companies such as Konica Minolta (4902), Sony (6758) and Tokyo Electron (8035) have either announced good results for the period from April-June, or adjusted their full-year performance upwards.  Good progress towards full-year performance had also been confirmed for Mitsubishi Corporation (8058) and Mitsubishi UFJFG (8306).   We need to identify investment targets including expected PER levels.

In the 8/6 issue, we will be covering Konica Minolta (4902),   MODEC (6269), Japan Cash Machine (6418), Sony (6758), Mitsubishi Corp (8058) and Mitsubishi UFJ Financial Group  (8306).

 

Selected Stocks:

Konica Minolta, Inc (4902)

・Founded in 1873.  Handling office, professional print, health care, industrial materials and equipment businesses.  Involved in multifunction machines, digital printing systems, image diagnostic systems (digital X-ray diagnostic imaging, diagnostic ultrasound systems, etc), TAC films, OLED lightings, and industrial inkjet heads, etc.  

・For 1Q (Apr-June) of FY2019/3, net sales increased by 9.8% to 255.214 billion yen compared to the same period the previous year, operating income increased by 77.2% to 15.445 billion yen, and net income increased by 2.1 times to 11.18 billion yen.  Office business had performed well.  In Europe, strong growth mainly in color 65/75 ppm machines.  Sales have grown in all regions including North America, Japan, China and SE Asia, etc. 

・As revenue from securitization of assets has increased more than anticipated, company has revised its FY2019/3 plan upwards.  Net sales is expected to maintain that of the original plan, increasing by 4.7% to 1.08 trillion yen compared to the previous year, operating income to increase by 15.1% to 65.0 billion yen (original plan 60.0 billion yen), and net income to increase by 19.4% to 38.5 billion yen (original plan 37.0 billion yen).  Premise exchange rate remains unchanged.

MODEC, Inc (6269)

・Founded in 1968.  Core business includes design, construction, installation, leasing and operation servicing of floating marine oil and gas production facilities such as FPSO, FSO, TLP and semi-submersibles.  Providing total service relating to marine oil and gas exploration projects to petroleum exploration companies around the world.  Has No.2 global share of the FPSO business.

・For 1H (Jan-June) of FY2018/12, net sales increased by 10.9% to 112.843 billion yen compared to the same period the previous year, operating income increased by 4.0 times to 10.844 billion yen, and net income increased by 61.4% to 10.207 billion yen.  Gross profit increased by 6.8 billion yen owing to realization of previously unrealized profit accompanying the start of MV29 charter.  ROI temporarily declined due to accounting treatment of affiliates. ・Company has revised FY2018/12 plan upwards. Net sales is expected to maintain that of the original plan,  increasing by 15.1% to 220.0 billion yen compared to the previous year, operating income to increase by 4.8% to 12.0 billion yen (original plan 10.0 billion yen), and net income to decrease by 22.9% to 15.0 billion yen (original plan 14.0 billion yen).  Company plans to pay an annual dividend of 42.5 yen per share.  Excluding special dividends, this is an increase for 14 consecutive years.

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