Japan Weekly Strategy Report Faint hope of foreign investors continuing to buy? April 23, 2018 780

“Faint hope of foreign investors continuing to buy?”

As of 20th April, the Nikkei Average had fallen by 2.65% since the beginning of the year, remaining in negative territory.  However, it had risen 3.30% since the beginning of April and is recouping losses.  Markets had been turbulent in February and March, but the Nikkei Average managed to keep above Yen20,000. BOJ’s purchase of ETF in March was Yen833.3 billion per month, which was the highest ever recorded, representing a buying support.

Subsequent to that, foreign investors staged two continuous weeks of net buying, with Yen443.1 billion in the first week of April (Yen158.4 billion yen of spot trades + Yen284.7 billion in futures), and Yen572.9 billion in the second week (Yen84.5 billion in spot trades + Yen488.4 billion in futures).  There were net selling of Yen9.4 trillion in spots / futures from the second week of January to the fourth week of March (▲Yen3.1 trillion in spot trades + ▲Yen 6.3 trillion in futures).  However, the spot trades for the net purchase amount is small compared to that for the net sales amount.  Buyback of futures by short-term speculators such as hedge funds may also have played a role.   We need to continue to pay attention to the behavior of foreign investors.

There was agreement during the Japan-US Summit on 18-19 April to continue to exert “maximum pressure” on the denuclearization of North Korea.  In terms of trade policy, there was agreement to establish a new trade agreement while not excluding Japan from import restrictions on iron and aluminum.  Economic & Finance Recovery State Minister Motegi and USTR Lighthizer will proceed with practical consultation.  While agreement was reached in the trade talks, PM Abe commented that “the return of the US to the TPP will benefit both Japan and the US”, and indicated that the FTA (Japan-US Free Trade Agreement) was not in his mind.  On the other hand, President Trump said that “bilateral trade agreement is desirable”, and indicated his desire to negotiate including FTA. Indeed, we again discern a big gap between the expectations of both countries.

President Trump could be striving to reduce the US deficit as he faces the mid-term elections.    As Japan is the third largest trade deficit country after China and Mexico,  there seems to be great dissatisfaction against automobiles, which account for about 30% of imports.  Going forward, we need to pay attention to future activities, including remarks on

currency exchanges etc.  Currently, owing to concerns about slowing demand for smartphones, semiconductor stocks centering on semiconductor manufacturing equipment are being sold. Nevertheless, we are expecting good results from high-tech companies.  We should examine performance results and narrow down investment targets accordingly.   

In the 4/23 issue, we will be covering Toda Corporation  (1860),  Tsugami Corporation (6101),  MODEC (6269),  Daifuku (6383), Fanuc (6954) and  Kintetsu Department Store (8244)


Selected Stocks

Toda Corporation (1860)

・Established in 1881.  Involved with construction business, civil engineering and real estate business etc. Strengths in medical & welfare facilities, educational facilities, urban & transportation infrastructure, disaster prevention and conservation facilities, etc.  Constructed the following in recent years:  Marunouchi OAZO, W Comfort Towers, Konohana Dome, hospital affiliated to the Medical Dept of Tokai University, Minatomirai Line Bashamichi Station, and Yamadagawa Dam.

・For 3Q (Apr-Dec) of FY2018/3, net sales reduced by 5.9% to 289.657 billion yen compared to the same period the previous year,  operating income increased by 4.8% to 20.31 billion yen, and net income decreased by 19.5% to 16.358 billion yen.  Increase in operating income even with reduction in net sales through reduction in construction completion amount and thorough execution of orders with emphasis on profitability.  Net income decreased due to increase in corporate tax burden.

・Company has revised FY2018/3 performance upwards.  Net sales is expected to increase by 1.2% to 428 billion yen (original plan 421 billion yen) compared to the same period the previous year, operating income to increase by 22.0%  to 30.5 billion yen (original plan 24.8 billion yen), and net income to increase by 39.7% to 25.4 billion yen (original plan 19.8 billion yen).  Operating income is expected to hit new records thanks to robust private construction demand.


Tsugami Corporation (6101)

・Comprehensive manufacturer of compact ultra-precision machine tools established in 1937.  Development, design, manufacture and sales of precision machine tools (mother machines), such as precision automatic lathes, precision grinding machines, precision machining centers, precision thread and form rolling machines, etc, used for processing components of various products.  Has established an integrated production system that enables the company to carry out development, design, production and inspection all by itself.

・For 3Q (Apr-Dec) of FY2018/3, net sales increased by 38.6% to 42.269 billion yen compared to the same period the previous year,  operating income increased 2.4 times to 4.976 billion yen, and net income increased by 48.7% to 3.14 billion yen. Sales of automatic lathes for the automotive industry had been strong.

・Company has revised FY2018/3 performance upwards as market conditions continue to be favorable.  Net sales is expected to increase by 40.3% to 57.6 billion yen (original plan 52.0 billion yen) compared to the same period the previous year, operating income to increase by 2.3 times to 7.0 billion yen (original plan 6.0 billion yen), and net income to increase by 59.7% to 4.2 billion yen (original plan 3.6 billion yen).   FY2018/3 full year results expected on 5/11.    

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