Japan Weekly Strategy Report – Star performers turning into laggards? November 27, 2018

Star performers turning into laggards?

Apple (AAPL) and NVIDIA (NVDA), market-leading companies which had responded successfully to investor expectations and the stock prices of which had been rising sharply, are now depressing global stock prices.  In particular, AAPL, the first US Company with market capitalization exceeding one trillion dollars, is a blue-chip company with stock prices recording a highest 233.47 dollars on 3/10.  Being a constituent company of the NY Dow which is a simple average of the share prices of constituent companies, its impact on the index is indeed significant.  On 21/11, its share price dropped 24.3% from its highest value to reach 176.78 dollars.  In the process, various indices like the S&P500 and NASDAQ also dropped sharply.

Financial results announced on 1/11 revealed that iPhone’s unit sales and sales forecast had both fallen below market expectations. On 12/11, Lumentum Holdings (LITE) was asked to greatly reduce its shipment of laser diodes for 3D sensors presumably for AAPL, and as a result had to revise its business forecast for the Oct-Dec period downwards.  That accelerated AAPL’s stock price decline.  According to a WSJ report of 20/11, AAPL had sought out suppliers for the production of “iPhone XR (10R)” for the period from 2018/9-2019/2, and it seems that the production plan was subsequently cut by 1/3 in late October. 

Furthermore, according to input from related parties, it was reported that AAPL had informed several suppliers of its plan to further reduce the production of XR.  AAPL had avoided comments, but Luca Maestri, the CFO, had commented during an interview with WSJ this year that “Suppliers are also manufacturing products for other companies.  Therefore, misunderstandings may arise if you judge iPhone’s demand based on supplier information”. 

According to several related parties familiar with the circumstances, sales of new models of iPhones had been more sluggish than expected.  Furthermore, with sales models increasing, it has become increasingly difficult to forecast the quantity of parts and terminals needed, resulting in confusion arising in the supply chain.  When new products are released in each fall season, various speculations will fly around in a typical year.  It is therefore unusual to have such detailed negative press coverage this year.  However, factoring in these bad news, it is possible that selloffs by institutional investors are reaching an end.  The forecasts and ratings of analysts have already been lowered, and the PER based on 2019/9 full-year forecast based on Bloomberg aggregation as of 21/11 has lowered to 13.09 times.  There are signs that the decline in stock prices is stopping.  As the Christmas shopping season goes full steam, expectations for a Christmas rally will be further heightened if AAPL and NVDA stock prices reverse upwards. 

In the 26/11 issue, we will be covering Sony (6758), Nintendo (7974), Nipro (8086), Kintetsu Department Store (8244), Aoyama Zaisan Networks (8929) and Softbank Group (9984).

Selected Stocks

Sony Corp (6758)

・Established in 1946 by Masaru Ibuka and others as “Tokyo Tsushin Kogyo”.  Business operations include TV & video, audio, digital camera, professional equipment and solution, medical, FeliCa (contactless IC card), semiconductor, smart phone / internet, game and network service, movies, music and financial services.

・For 1H (Apr-Sept) results of FY2019/3 announced on 30/10, net sales increased by 5.5% to 4.1363 trillion yen compared to the same period the previous year, operating income increased by 20.1% to 434.517 billion yen, and net income increased by 88.7% to 399.448 billion yen.  Sales of smartphones were sluggish, but services using “PlayStation 4” performed well.  Extended profits for both the financial and movie businesses. 

・As a result of good performance in the games sector, and the impact of the share acquisition in EMI Music Publishing, company has revised its full year plan upwards.  Net sales is expected to increase by 1.8% to 8.7 trillion yen compared to the previous year (original plan 8.6 trillion yen), operating income to increase by 18.4% to 870.0 billion yen (original plan 670.0 billion yen), and net income to increase by 43.6% to 705.0 billion yen (original plan 500.0 billion yen.

Nintendo Co., Ltd (7974)

・Established in 1889.  Develops, manufactures and sells entertainment products etc in the home entertainment sector.  Main products are “gaming machines” which are entertainment equipment using computers, as well as playing cards and karuta, etc.  Company’s gaming machines include the “Nintendo Switch”, “Nintendo 3DS/Nintendo 2DS”, etc.  

・For 1H (Apr-Sept) results of FY2019/3 announced on 30/10, net sales increased by 4.0% to 388.905 billion yen compared to the same period the previous year, operating income increased by 53.7% to 61.405 billion yen, and net income increased by 25.4% to 64.576 billion yen.  Hardware sales grew at Nintendo Switch, and sales of software grew by 91.3%, contributed by million-seller titles. 

・For full-year plan, net sales is expected to increase by 13.7% to 1.2 trillion yen compared to the previous year, operating income to increase by 26.7% to 225.0 billion yen, and net income to increase by 18.2% to 165.0 billion yen.  Company released “Pokémon: Let’s Go, Pikachu! And Let’s Go, Eevee!” on 16/11.  Aiming to attract “Pokémon GO” players.

 

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