Japan-Weekly Strategy Report Things to Consider in the Midst of the COVID-19 Market Situation March 5, 2020 212

Report type: Weekly Strategy

Things to Consider in the Midst of the COVID-19 Market Situation

COVID-19 infection has spread to the US, and US stocks, which until recently had been performing solidly, plunged, thereby also inducing a big plunge in the Japanese stock market. On 27/2, PM Abe made an unusual request for elementary, junior and senior high schools nationwide to close simultaneously from 2/3. On 28/2, the Nikkei Average fell from the previous day’s closing of 21,948 points to below 21,000 points. On 28/2, the Nikkei Average volatility index (an index showing investors’ expectations of future fluctuations in the Nikkei Average) came within the 40% range since 2016/1 when it was shaken by the China shock. The approximate value of the Nikkei Average weighted average BPS (Book-value Per Share) considering market capitalization and equity capital was 20,738 points at the closing price on 27/2. This is approaching the 1.0 times weighted average PBR (Price Book-value Ratio) attained on 26/12/2018 and 16/8/2019. A weighted average PBR at closing price of below 0.99 times will be a first since 21/11/2012, before the inauguration of the second Abe administration. The Nikkei Average closing price at that time was 9,222 points (the approximate weighted average BPS was 9,507 points), meaning that the net assets of the Nikkei Average stocks had increased 2.2 times over a period of 7 years and 3 months.  Normally, if net profits are not in the red, net assets are expected to increase even if profits were to decrease. We need to stay cool and consider whether the impact of COVID-19 is so great or not that the corporate profits of the Nikkei 225 leading Japanese companies will turn red on average.

It has been reported that the number of new infected and deceased people in China has been increasing at a slower pace since mid-February. As a result, the number of new infections worldwide between 25-27/2 had been 1,429, 1,093 and 637, while the number of new deaths during the same period had been 36, 40 and 13 people, with both showing decreasing trends. Despite criticism of the surveillance system from a human rights perspective, it appears that China has achieved some success in containing the spread of infection through the usage of the latest acquired big data technology. In addition, we are also seeing efforts to develop therapeutics to counter COVID-19 from drugs treating Ebola hemorrhagic fever, influenza and HIV. On 27/2, Director General Tedros of the World Health Organization (WHO) warned that all nations must “prepare for everything” in order to avoid pandemics, and advocated the securing of medical equipment, training of medical personnel and tests at airports and borders. Therefore, investment sentiments for the time being shall most likely be centering on stocks related to securing of medical equipment, and those involved with testing equipment used for the detection of infections. 

 In the 2/3 issue, we will be covering Teikoku Sen-I (3302), Healthcare & Medical Investment Corp (3455), Nissui Pharmaceutical (4550), and INES (9742).

  • Teikoku Sen-I Co., Ltd (3302)   1,921 yen (28/2 closing price)

・Founded in 1887 and established in 1907 by Teikoku Seima, its predecessor. Major business segments include the Disaster Prevention & Preparedness Business, which deals with various types of fire hoses, disaster prevention equipment, search equipment and alarms, and the Textile Business which deals with hemp and functional fibers.  

・For FY2019/12 results announced on 14/2, net sales increased by 19.3% to 35.393 billion yen compared to the previous year, and operating income increased by 25.4% to 5.612 billion yen. Sales of the Disaster Prevention & Preparedness Business increased 31.4% to 28.235 billion yen, contributing to increased sales and profit. In addition to the expansion in sales of large-scale disaster prevention materials and security equipment for airports, sales of rescue work vehicles and airport chemical fire trucks were also firm. 

・For its FY2020/12 plan, net sales is expected to decrease by 9.6% to 32.0 billion yen, and operating income to decrease by 34.1% to 3.7 billion yen. There is a consideration for a decline due to a temporary upside in the initial plan for the previous fiscal year (net sales of 30.0 billion yen and operating income of 45.0 billion yen). In addition to sales expansion of large-scale water supply and drainage systems for flood-related social problems, the products of the Disaster Prevention & Preparedness Business, namely pandemic (new infectious diseases)-related products as well as products for decontamination outside hospitals, that cater to prevention of the spread of COVID-19 deserve our attention. 

  • Healthcare & Medical Investment Corp (3455)   122,400 yen (28/2 closing price)

・A healthcare-focused J-REIT that has Sumitomo Mitsui Banking Corp and NEC Capital Solutions as major sponsors in addition to Ship Healthcare Holdings, which engages in the nursing care business.  Acquired a J-REIT-first hospital asset in 2017/11.

・For the FY2019/7 (Feb-July) results announced on 13/9, operating revenue increased by 54.4% to 2.008 billion yen compared to the previous period (FY2019/1), operating income increased by 83.9% to 1.189 billion yen and distribution per unit including excess profit was 3,643 yen (distribution in excess of profit per unit was 318 yen). Acquired 8 properties in 2019/2 for a total acquisition price of 22.691 billion yen.  Has a total of 35 properties at end of fiscal year. 

・For FY2020/1 plan, operating revenue is expected to increase by 0.2% to 2.012 billion yen compared to the previous period (FY2019/7), operating income to decrease by 7.4% to 1.101 billion yen, and distribution per unit including excess profit to decrease by 8.3% to 3,304 yen. The annual distribution yield (based on the closing price on 27/2) based on the company forecast for FY2020/7 is 4.83%.  With the ageing of society and the declining population providing nursing care, it is expected that more healthcare facilities will need to be established and society’s demand for nursing care and medical services will increase.

 

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