Japan-Weekly Strategy Report “ Political stability after the Upper House election, demand for a low-cost second line, commodities ” July 20, 2022 226

Report type: Weekly Strategy

■Political stability after the Upper House election, demand for a low-cost second line, commodities
According to trading trends by investment category on 14/7, foreign investors bought a total of 1.185 trillion yen of Japanese
stocks in spot trades and futures during the first week of July, the highest level since October, 2019. While there is a strong
belief that overseas investor sentiment has improved with the lull in the rise of long-term US interest rates, expectations for
the ruling party which had won in the Upper House election, and a stable Kishida administration are also apparent. On 14/7,
PM Kishida announced that up to nine nuclear power plants would be put into operation this winter. As of 14/7, the number
of nuclear power plants in operation, including those in adjustment operation, was limited to six, viz Kansai Electric Power’s
Ooi Units 3 and 4, Shikoku Electric Power’s Ikata Unit 3, Kyushu Electric Power’s Genkai Unit 4, and Sendai Nuclear Power
Plant Units 1 and 2. In response, on 13/7, the Board of Regulation finalized a draft review of the anti-terrorism facilities at the
Nos. 6 and 7 reactors at the Kashiwazaki-Kariwa Nuclear Power Plant in Niigata Prefecture, effectively passing the test. In the
process, the target of “maximum of 9 units” is getting closer.
Compared to the Biden administration, which is feared to be losing political influence ahead of the midterm elections in
early November, Japan has a higher degree of political stability than the US, and this may be a factor supporting Japanese
stocks in the second half of the year. President Biden’s approval rating slumped to 37%, according to a 13/7 release by a US
think tank (Pew Research Center). In contrast, PM Kishida, backed by his high approval rating, announced at a press
conference on 14/7 his intention to “move forward with efforts to put the constitutional amendment into effect as soon as
possible”. The LDP’s election campaign manifesto calls for an increase in spending in the defense budget to more than 2% of
GDP, and expectations for such a constitutional amendment are likely to move defense-related stocks higher.

The communications outage caused by telecommunications giant KDDI on 2/7 was the largest in history, taking 86 hours to
fully recover, affecting not only cell phones but also a wide range of industries, from regional weather observation systems to
logistics and medical services. In addition to problems with “Voice over LTE (VoLTE)” technology, which uses data
communications to make voice calls, the spread of the Internet of Things (IoT), in which various “things” are connected to the
internet and exchange information, has brought to light the issue of data convergence, called “congestion,” which can easily
lead to large-scale failures. Assuming the possibility of large-scale communication failures, users are likely to demand second
lines with low-cost “SIMs” (chips that record subscriber information) and “eSIMs” built into handsets.
WTI crude oil futures prices fell to levels prior to Russia’s invasion of Ukraine, due in part to the prospect of shrinking oil
demand from monetary tightening in developed countries overseas, as well as increased imports of sanctioned Russian crude
oil by China and Russia. Meanwhile, US investor Warren Buffett has increased his stake in US petroleum/coal mining and
production company Occidental Petroleum, reaching 18.7% this month. Rising commodity prices, including energy, will need
to be viewed from a medium- to long-term perspective.
In the 19/7 issue, we will be covering AEON REIT Investment Corp (3292), JMC (5704), Mitsubishi Heavy Industries (7011),
and Yamada Holdings (9831).

AEON REIT Investment Corp (3292) 152,800 yen (15/7 closing price)
A J-REIT sponsored by the AEON Group, a major retailer. Portfolio policy of at
least 80% large-scale commercial facilities, up to 20% other commercial facilities,
and up to 10% logistics facilities. Owns two commercial facilities overseas in
Malaysia.
For its FY2022/1 (2021/8-2022/1) results announced on 17/3, operating revenue
increased by 12.6% to 19.928 billion yen compared to the previous period
(FY2021/7), operating income increased by 14.0% to 7.691 billion yen, and
distribution per unit increased by 3.6% to 3,283 yen. Acquired four properties,
namely “AEON MALL Takasaki”, “AEON MALL Narita”, “AEON MALL ShinKomatsu”, and “AEON MALL Saga Yamato” (acquisition price: 50.2 billion yen).
For FY2022/7 (Feb-Jul) plan, operating revenue is expected to remain unchanged
at 19.933 billion yen compared to the previous period (FY2022/1), operating
income to decrease by 2.4% to 7.505 billion yen, and distribution per unit to
decrease by 0.4% to 3,270 yen. Company’s forecasted annual distribution yield
through FY2023/1 at the closing price on 14/7 is 4.26%. Has secured stable rents
through master lease contracts based on fixed rents with AEON Group
companies. AEON (8267)’s general merchandise store (GMS) business returned
to quarterly profitability in the March-May period for the first time in nine years.

JMC Corp (5704) 839 yen (15/7 closing price)
Established in 1992 as a growth stock on the TSE. Using 3D CAD technology,
company provides comprehensive support for “monozukuri” (manufacturing)
from prototypes to final products, based on both molding methods of sand mold
production using metal as raw material, and 3D printing using resin as raw material.
For 1Q (Jan-Mar) results of FY2022/12 announced on 13/5, net sales increased by
22.1% to 657 million yen compared to the same period the previous year, and
operating income turned to a profit of 95 million yen from a loss of 4 million yen
in the same period of the previous year. Company’s mainstay casting business,
casting parts for mass production of factory automation (FA) cooperative robots,
and the Computer Tomography (CT) business handling inspection of product
defects, performed well.
For its full year plan, net sales is expected to increase by 24.1% to 3.0 billion yen
compared to the previous year, and operating income to increase 2.7 times to 273
million yen. While mainly handling prototypes of casting parts for FA equipment,
company moved into full-scale mass production as demand for automation and
manpower saving increased against the backdrop of the Covid pandemic.
Company is also expected to win an order for mass-produced electric vehicle (EV)-
related parts from its client Toyota Motor Corp (7203). The CT business is
expanding recognition of industrial CT through the NHK program “Gyo-gyo, Sakana
Star” and other programs.

Important Information

This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.

By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.

The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.

Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.

This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.

Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.

Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.

Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.

To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.

The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.

This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.

This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.

IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE

Where the report contains research analyses or reports from a foreign research house, please note:

  1. recipients of the analyses or reports are to contact Phillip Securities Research (and not the relevant foreign research house) in Singapore at 250 North Bridge Road, #06-00 Raffles City Tower, Singapore 179101, telephone number +65 6533 6001, in respect of any matters arising from, or in connection with, the analyses or reports; and
  2. to the extent that the analyses or reports are delivered to and intended to be received by any person in Singapore who is not an accredited investor, expert investor or institutional investor, Phillip Securities Research accepts legal responsibility for the contents of the analyses or reports.

Get access to all the latest market news, reports, technical analysis
by signing up for a free account today!