Report type: Weekly Strategy

Three risks and emerging trends that surface beyond the halfway point of the year?

After passing the halfway point of the year (calendar year), it seems that new investment risks are starting to surface as we move towards the second half of the year.

Firstly, there is a risk surrounding the semiconductor market. Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest semiconductor foundry, announced its financial results for the period of April to June 2023, revising its performance outlook downward. The company attributed the impact of the global economic slowdown and weak semiconductor demand, emphasizing that the expected increase in demand for interactive generative AI (Artificial Intelligence) would not be sufficient to offset the overall business decline. As a result, stocks of related companies, such as semiconductor manufacturing and inspection equipment, which had been bought in anticipation of an increase in demand for generative AI, experienced a decline in their share prices. The focus of stock selection is now shifting to distinguish between companies likely to benefit from the growth in generative AI demand and companies that continue to be affected by the overall market’s sluggish demand. There is also a possibility of a shift towards actual service providers rather than semiconductor companies.

Secondly, amid the ongoing real estate downturn in China, Chinese property giant Evergrande Group, which is undergoing a business restructuring, announced its financial results for the past two years, including the previous fiscal year. The total net loss for the two-year period amounted to approximately 11 trillion yen, and the total debt at the end of 2022 reached a massive sum equivalent to about 47 trillion yen. Concerns about systemic risks may intensify as the management crisis surrounding unpaid funds to construction companies and material suppliers could have broad implications on related industries and the financial system. In such a situation, while there has been a recovery in June with a 72% increase in foreign visitors to Japan compared to the same month four years ago, China, being the largest contributor to inbound tourism, has not yet lifted the ban on individual group travel to Japan. From the perspective of maintaining the financial system and avoiding capital outflows, the regulatory barriers for lifting the ban may surprisingly be high, and this could potentially act as a hindrance for inbound tourism to Japan.

Thirdly, there is an issue with the sluggishness of the commercial real estate market in the United States. Particularly, office properties are experiencing an increase in vacancy rates due to the widespread adoption of remote work. As mentioned in the “ASEAN Stock Weekly Strategy,” there have been disturbances in Real Estate Investment Trusts (REITs) listed in Singapore but investing in office properties located in the United States. The problems in the U.S. financial system should raise caution about the risks associated with the downward valuation of office real estate properties. Additionally, if there are reassessments of property valuations, there is a need to be attentive to the potential ripple effects of risks, which could unexpectedly propagate through loan covenant violations.

Japan’s trade balance in June turned into a surplus for the first time in 23 months. This can be attributed to the stabilization of resource prices and the recovery in automobile production, driven by the easing of semiconductor supply constraints, which led to an increase in automobile exports. Amid the production recovery, electric vehicles (EVs) are experiencing a surge in demand, not only for electric and electronic components due to their increased functionality but also for new demands related to component light weighting and cost reduction. This trend is likely to provide a tailwind for companies in the automotive parts sector.

In the July 24th issue, the following companies were featured: Maezawa Industries, Inc. (6489), Thine Electronics, Inc. (6769), Enex Infrastructure Investment Corporation (9286), and Okinawa Cellular Telephone Company (9436).

Maezawa Industries, Inc. (6489.JP)　　　　　　900 yen (21/7 closing price)

※Listed on TSE Standard

・Founded in 1937 as the predecessor “Showa Manufacturing Company,” the company initially engaged in the manufacturing and sales of equipment for water supply and wastewater systems, and later expanded its focus to environmental infrastructure development and purification projects. It primarily operates three businesses: environmental, valves, and maintenance.

・For the fiscal year ending in May 2023, as of the July 14th announcement, the company reported a 25.8% increase in order intake, reaching ¥37.661 billion, a 4.7% increase in revenue, reaching ¥32.369 billion, and a 6.2% increase in operating profit, reaching ¥3.226 billion compared to the previous year. The company’s operations involve sales of water treatment machinery and industrial wastewater treatment solutions, with a primary focus on meeting the demand for the renewal and reconstruction of aging facilities.

・For the fiscal year ending in May 2024, the company’s planned figures include a 9.7% increase in revenue, reaching ¥35.5 billion, an 11.6% increase in operating profit, reaching ¥3.6 billion, and an unchanged annual dividend of ¥28. Issues surrounding water pipes with a statutory useful life exceeding 40 years have become a social problem, with approximately 22% in use for water supply and wastewater systems and approximately half for industrial water supply. Moreover, from April of this year, the Ministry of Land, Infrastructure, Transport, and Tourism and the Ministry of the Environment have taken over the related responsibilities of water supply and wastewater services that were previously handled by the Ministry of Health, Labour, and Welfare, leading to a reevaluation of the segmented administrative structure.

Thine Electronics, Inc. (6769.JP)　　　　　　　　　915 yen (21/7 closing price)

※Listed on TSE Standard

・Established in 1991, this semiconductor manufacturer is a self-branded fab-less (without manufacturing facilities) company. It operates in the LSI (Large Scale Integration) business for ASSP (Application Specific Standard Products) and is also involved in the AIOT (Artificial Intelligence and Internet of Things) business.

・For the first quarter of the fiscal year ending in December 2023, as of the May 8th announcement, the company reported a 14.3% increase in revenue, reaching ¥1.394 billion, and a 40.7% decrease in operating profit, reaching ¥106 million compared to the previous year. The LSI business experienced a 7% decrease in revenue, reaching ¥951 million, and a 65% decrease in operating profit, reaching ¥77 million, due to inventory adjustments in the Chinese-Asian market. On the other hand, the AIOT business expanded, with revenue reaching ¥442 million, a growth of 2.3 times.

・For the fiscal year ending in December 2023, the company’s planned figures include a 22.9% increase in revenue, reaching ¥6.705 billion, a 17.4% increase in operating profit, reaching ¥705 million, and an unchanged annual dividend of ¥15 per share. On the 18th, the company upwardly revised its earnings forecast for the first half of the fiscal year (January to June). The growth is expected to come from their unique analog and logic design technologies, focusing on LSIs utilized in embedded systems for AI and IoT applications in vehicles. Being a fab-less company, the limited risk of asset impairment suggests that the company’s PBR is relatively undervalued, hovering around 1x.