Japan-Weekly Strategy Report “Will a string of good news for Japanese stocks absorb concerns?” April 24, 2023 368

Report type: Weekly Strategy

Will a string of good news for Japanese stocks absorb concerns?

The Nikkei Average has continued its upward trend since hitting a low of 26,632 points on 9/3. There are plenty of positive factors for Japanese stocks, including the following eight points:

① Robust trend of the number of foreign visitors to Japan in March, as announced by the Japan National Tourism Organization (JNTO), and the per capita travel spending of visitors to Japan from January to March, as announced by the Japan Tourism Agency, ② PM Kishida’s decision to present an “action plan” within this month that includes numerical targets for the establishment of supply chains in areas such as semiconductors as part of measures to promote investment from abroad, ③ Concerns about the earnings of US financial stocks were eased by the results of major banks and regional banks, as well as by the decision of Sumitomo Mitsui Financial Group (8316) to issue 140 billion yen in AT1 bonds (perpetual subordinated bonds), similar to bonds issued by Credit Suisse in Europe that had become worthless as a result of the acquisition by UBS, and as a sign of dispelling concerns over the financial system, Japanese financial and insurance stocks have bounced back and entered a rising phase, ④ Amid the global CPI growth rate remaining at a high level, investment money has been pouring into food, marine products, beverage and other related stocks on a global scale, as it has become easier to pass on increased costs to selling prices, ⑤ Companies such as NOK (7240), which produces oil seals for automobiles, are responding to the TSE’s request for improvement of low PBRs by announcing new medium-term management plans. Similar trends are expected to accelerate in the earnings announcements of Japanese companies, which are about to get into full swing, ⑥ The Jan-Mar GDP and March retail sales figures for China announced on 18/4 provide clues to a recovery in the Chinese economy, which is expected to benefit stocks with a high percentage of sales in China.

⑦ Factors that have been weighing down medical device makers, such as the tight management of medical facilities due to the Covid-19 pandemic, are improving, as seen in the earnings announcement of Intuitive Surgical, the maker of the da Vinci Surgical System in the US, ⑧ Nintendo (7974) has recorded record-high initial box office revenue for its animated movie based on the “Super Mario” game franchise, indicating that its business model transition to the use of abundant intellectual properties (IP) from its pillar of game operations is likely to show up in its financial results.

On the other hand, negative factors include: ① Concerns that aggressive price reductions by Tesla, a US electric vehicle (EV) company, will lead to lower profit margins for other automakers with relatively poor profit margins in the EV business, and ② some reasons for concern about overbuying in the short term could include the high “up-down ratio”, which represents the “number of rising stocks in 25 days divided by the number of falling stocks in 25 days” on the TSE Prime Market, as well as the “Nikkei Stock Average Volatility Index”, which is considered a fear index, hitting its lowest level since February 2020 on 19/4.

In the 24/4 issue, we will be covering Nisshin Seifun Group (2002), Toyo Suisan (2875), Olympus (7733), and Graphite Design (7847).

 

Nisshin Seifun Group Inc (2002)          1,617 yen (21/4 closing price)

・Founded Tatebayashi Flour Milling in 1900 in Gunma Prefecture (now Tatebayashi City). Operates a Flour Milling business handling flour, etc, a Processed Food business that manufactures and sells pasta, frozen foods, premixes, etc, a Prepared Dishes and Other Prepared Foods business, and an Engineering business.

・For 9M (Apr-Dec) results of FY2023/3 announced on 30/1, net sales increased by 18.7% to 600.0 billion yen compared to the same period the previous year, operating income decreased by 2.6% to 25.462 billion yen, and net income fell into the red to -22.9 billion yen due to impairment losses on the Australian flour milling business. The Flour Milling business remained strong both domestically and overseas with price increases, but in the Processed Food business, cost increases led to subsequent price revisions.

・For its full year plan, net sales is expected to increase by 14.8% to 780.0 billion yen compared to the previous year, operating income to increase by 12.1% to 33.0 billion yen, and annual dividend to remain unchanged at 39 yen. The flour milling industry has an advantage in terms of profitability as a business model that can easily pass on cost increases due to inflationary pressures through price increases. Last year, Kumamoto Flour Milling, which has a rice flour production line, became a subsidiary. Rice flour is attracting attention as a substitute for wheat when the market price of wheat soars, and the Ministry of Agriculture, Forestry and Fisheries (MAFF) is also aiming to promote rice flour to increase rice consumption.

Toyo Suisan Kaisha, Ltd (2875)          5,760 yen (21/4 closing price)

・Established in 1953 at Tsukiji Fish Market as Yokosuka Suisan. Operates six main businesses, namely seafood products, overseas instant noodles, domestic instant noodles, chilled foods, processed foods and refrigeration business. Ranks first in the US and Mexico for overseas instant noodle business, and second in the domestic instant noodle business.

・For 9M (Apr-Dec) results of FY2023/3 announced on 31/1, net sales increased by 21.3% to 325.3 billion yen compared to the same period the previous year, and operating income increased by 28.5% to 31.8 billion yen. In the overseas instant noodles business, which accounts for about 40% of total sales, sales increased 62% YoY and segment income increased 2.3x YoY due to strong sales of bagged noodles “Ramen” and cup noodles “Instant Lunch” in the US.

・For its full year plan, net sales is expected to increase by 22.5% to 443.0 billion yen compared to the previous year, operating income to increase by 37.9% to 41.0 billion yen, and annual dividend to remain unchanged at 90 yen. Demand for instant noodles continues to be high in the US, Mexico, and other overseas markets due to increasing levels of thriftiness associated with high levels of inflation. Aggressive efforts to strengthen the production system have been successful. US composite consumer price index (CPI) slowed to 5.0% YoY in March, but grain and grain product prices rose 13.6% YoY.

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