Japan Weekly Strategy Report – Challenging the 23,000 point barrier as we prepare for results announcement! July 24, 2018

Since hitting a bottom of 21,462.95 points on 7/5, the Nikkei Average has rebounded by 1277.05 points (5.95%) to 22,740 points on 7/17.  The US has entered the earnings release season, and domestically, we are also preparing for 1Q (April-June) FY2019/3 results.  Indeed, market interest is zeroing in upon performance trends. 

In the US, major banks such as JP Morgan Chase (JPM) and Bank of America (BAC) are benefitting from tax reduction measures, and have announced favourable results across the board, with ensuing stock price increases.  Driven by its strong trading business, the 2Q (April-June) FY2018/12 results of Morgan Stanley (MS), which is approximately 24% owned by Mitsubishi UFJ Financial Group (8306, hereinafter “MUFG”), showed results beyond market expectations, with net operating revenue increasing by 12% to 10.61 billion dollars compared to the same period the previous year, and net income increasing by 39% to 2.437 billion dollars.  This was the largest increase in Wall Street.  In addition, Bank of Ayudhya (BAY), a subsidiary of MUFG and whose business expansion is still continuing, announced good results for the 2Q (April-June) period, with net operating revenue increasing by 10.5% to 26.916 billion THB (Thai baht) compared to the same period the previous year, and net income increasing by 6.8% to 6.382 billion THB.  We recommend to pay attention to further developments relating to MUFG which has managed to evolve its overseas business.

At its results announcement on 7/12, Yaskawa Electric (6506) announced that orders for motion controls for 1Q (March-May) FY2019/2 had dropped 1% compared to the previous period.  As a result of concerns over the US-China trade war, its stock price dropped even further, achieving a record low since the beginning of the year.   However, the stock price level with expected PER below 20 times is considered somewhat oversold.  In addition to Fanuc, whose stock price has fallen due to similar concerns, Nidec (6594), Shin-Etsu Chemical (4063), Hitachi Construction Machinery (6305) and LINE (3938) are expected to announce results on 7/25.  Indeed, we need to pay attention to the business results and stock price trends of these companies. 

US GDP (preliminary figures) for April-June will be announced on 7/27.  As of 7/18, GDPNow forecasted by the Federal Reserve Bank of Atlanta is expected to rise 4.5% annually compared with the previous quarter, and the market forecast is a very strong prospect of 4.0% increase.  This is likely to be a supporting factor for the market.  We expect global stock price increases centering on developed countries to take a break in the short-term, but owing to tax reduction effects in the US, good business results are expected.  Therefore, we expect an improvement in investor sentiments, especially for overseas investors.  We anticipate that domestic markets will also continue to grow steadily.  We may like to pay attention to see whether the Nikkei Average will rise again to the 23,000 point level. 

In the 7/23 issue, we will be covering TKP (3479),   Media Do Holdings (3678), LINE (3938), ELAN (6099), OSG (6136) and Kintetsu Department Store (8244).

 

Selected Stocks

TKP Corp (3479)

・Established in 2005.  Starting with rental meeting rooms, company generates space through effective usage of under-utilized real estates and executes a space regeneration and distribution business that creates comfortable “place”, “space” and “time” as added values.   Has 2,004 meeting rooms both in Japan and overseas. Able to undertake large-scale projects such as university entrance examinations and country-wide recruitment operations of major companies.

・For 1Q (Mar-May) of FY2019/2, net sales increased by 25.7% to 9.111 billion yen compared to the same period the previous year, operating income increased by 24.8% to 1.765 billion yen, and net income increased by 32.7% to 992 million yen.  Growth of high-grade facilities / accommodation centering on “Garden City PREMIUM” had driven performance.  In terms of sales mix, value added sales other than room charges had increased.   ・For FY2019/2 plan, net sales is expected to increase by 20.4% to 34.55 billion yen compared to the previous year, operating income to increase by 16.1% to 4.004 billion yen, and net income to increase by 2.4% to 2.12 billion yen.  Although sales will increase owing to aggressive recruitment activities for new graduates and an increase in employee trainings, we expect profit to remain only modestly higher stemming from the recognition of gains on sales of fixed assets in the previous fiscal year. 

Media Do Holdings Co., Ltd (3678)

・Established in 1996.  Involved with distribution of digital content. Implementing “EBook Distribution Business” handling EBooks on behalf of publishers and sales through company-operated EBook stores, promotion support for EBook stores, “Media Promotion Business” providing information to encourage users to purchase EBooks, and “other business”. 

・For 1Q (Mar-May) of FY2019/2, net sales increased by 38.2% to 10.708 billion yen compared to the same period the previous year, operating income increased by 25.4% to 186 million yen, and net income was 62 million yen, turning positive from a loss of 21 million yen for the same period the previous year.  Significant increase in sales owing to closure of pirated sites and consolidation of results with Digital Publishing Initiatives Japan Co., Ltd.   Also secured profits by overcoming increases in SG&A.

・For FY2019/2 plan, net sales is expected to increase by 20.9% to 45.0 billion yen compared to the previous year, operating income to remain the same at 930 million yen, and net income to increase by 25.6% to 450 million yen.  Sales will recover as the impact of pirated sites diminishes, but operating income is expected to remain flat due to staff recruitment for new business development and investment in R&D. 

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