Report type: Weekly Strategy
Hearing of Nominee for next BOJ Governor and situation in Ukraine
The 24th of this month is likely to be an important day for the stock market. First, it is the day when the Diet will hold a policy hearing and Q&A session with Mr Ueda, the nominee for the next BOJ governor. Second, it is exactly one year to the day since the Russian invasion of Ukraine. While the stock market was in a state of increasing deadlock, the closing price of the Nikkei Stock Average Volatility Index (Nikkei VI), also known as the Japanese version of the fear index, began to rise from 14.71 points on 16/2 to the 17 points level on 22/2, just before 24/2.
On the morning of 24/2, after the national holiday on 23/2, Mr Ueda indicated that the BOJ would continue its current monetary easing policy, saying that “the monetary policy being conducted by the BOJ is appropriate”, and stressed the need to basically achieve a 2% inflation rate, saying that the current consumer price increase was not sustainable. In addition, he stated that there was no need to change the wording of the joint statement by the government and the BOJ for the time being. This was perceived by the market as a proactive “dovish” stance with regards monetary easing, and the stock market responded by rising. In the bond market, although trading of newly-issued 10-year JGBs was not concluded in the morning, long-term JGB futures (March contract) with the 10-year JGB as the standard contract reacted with higher bond prices (lower yields), with the morning closing price 21.00 points higher than the previous day.
Trading volume also swelled at the close of trading on 22/2, especially for stocks with large market capitalization. It can be inferred that long-term funds such as pensions are buying at a bargain due to the feeling that fundamentals are underpriced. Furthermore, TSE’s strong request for disclosure by “companies with PBRs (price-to-net-worth ratio) consistently below 1x” from this spring is expected to accelerate expectations of medium-term management plan reviews for stocks with low PBRs. This suggests that for the time being, there is room for Japanese equities as a whole to see a firming up of the market.
The overseas situation is likely to remain a risk factor. While Russian President Vladimir Putin announced in his annual State of the Union address his intention to suspend the nuclear disarmament treaty and increase nuclear forces, US President Joe Biden made a historic visit to the Ukrainian capital of Kiev. There is therefore growing concern that the hardline stance of both sides may prolong and deepen the current state of war. The UN General Assembly’s adoption of a resolution for the immediate withdrawal of Russian troops and peace in Ukraine may lead to stronger economic sanctions against Russia in the future, and there are concerns about the negative impact on European stocks in particular, where major stock indices are near record highs amid growing optimism.
China’s top diplomat, Wang Yi, had visited Russia and met with President Putin. China risk is likely to increase for G7 countries amid the ongoing fragmentation of the international economy, and the importance of India with a neutral stance will increase.
In the 27/2 issue, we will be covering TerraSky (3915), Nippon Paint Holdings (4612), Sumitomo Rubber (5110), and Honda Motor (7267).
TerraSky Corp (3915) 1,943 yen (24/2 closing price)
・Established in 2006. Comprises the solutions business based on the cloud systems of Salesforce and AWS (Amazon Web Service), and the product business that provides cloud services in Japan and overseas as a SaaS vendor.
・For 9M (Mar-Nov) results of FY2023/2 announced on 16/1, net sales increased by 25.6% to 11.405 billion yen compared to the same period the previous year, and operating income increased by 2.4% to 460 million yen. Sales in the Solutions business, which accounts for approximately 90% of sales, increased 29% YoY due to increase in cloud implementation development and cloud migration business. Segment income also increased 13% YoY, absorbing increased expenses caused by aggressive investments.
・Company maintained its full-year forecasts for net sales of 15.646 billion yen (up 24.4% YoY) and operating income of 328 million yen (down 50.1% YoY), but 3Q results had already exceeded the full-year operating income forecast. While growth in the US public cloud market is slowing, the domestic market is expected to continue to benefit from increased corporate digital transformation (DX) demand. Spread of interactive searches such as ChatGPT will also increase the demand for cloud services through the use of artificial intelligence (AI).
Nippon Paint Holdings Co., Ltd (4612) 1,195 yen (24/2 closing price)
・Comprehensive paint manufacturer founded in 1881 as the first paint and pigment manufacturer in Japan. Nipsea International, a subsidiary of Singapore investment company Wuthelam, is the largest shareholder with 54.5%. Leader in paint industry in Japan and the fourth largest in the world.
・For FY2022/12 results announced on 14/2, net sales increased by 31.1% to 1.309 trillion yen compared to the previous year, and operating income increased by 27.7% to 111.8 billion yen. Acquisition of two European paint manufacturers (Cromology and JUB) as subsidiaries and price increases for general-use paints in China contributed to higher sales. Gross profit margin declined only 0.7 points YoY to 37.1% despite the sharp rise in raw material prices.
・For FY2023/12 plan, net sales is expected to increase by 7.0% to 1.4 trillion yen compared to the previous year, operating income to increase by 25.1% to 144.0 billion yen, and annual dividend to increase by 2 yen to 13 yen. Optimism around the effects of product price increases, especially for construction, a recovery in the automotive market, and an improvement in raw material cost ratio. Based on its scale and strong branding as the largest paint manufacturer in Asia, company plans to become a world-class company through aggressive acquisitions. Focusing on construction sector applications, which are expected to be in more solid demand than automotive applications.