Japan Weekly Strategy Report – A Healthy Correction? October 10, 2018

The Nikkei average, which temporarily recorded a high value of 24,448.07 points on 2/10, last seen about 27 years ago on 11/1991, rose from its recent low on 7/9 by 2,275.17 points (+10.3%) in only less than a month. In the US, trade negotiations with Canada have reached an agreement, while Italy has made a partial concession to the EU and cut the deficit target to GDP in 2020 and 2021, which caused a growing movement in risk-taking by investors worldwide. On 3/10, Dow hit record high for second day and the US dollar rapidly strengthened against the Japanese yen to 114.55 points on 4/10 from 110.38 points on 7/9.

However, on 4/10, the NY Dow temporarily plunged from 356 points and ended the fall of 200.91 points (0.74%) from the previous day. On 4/10, the US 10-year bond yields rose temporarily by 3.23% in 7 years and 4 months ago since 5/2011, which has caused investors’ caution. A speech by Fed Chairman Powell on 3/10 made references to a possibility of more rate hikes that will go beyond a neutral, which has greatly pushed up interest rates. In the FOMC held at the end of September, the Fed hiked the neutral interest rate from the previous 2.90% in June to 3.00%. 

September’s ISM Non-Manufacturing Index announced in early October rose to 61.6 which was the highest since 62.0 in 8/1997, and September’s ADP employment statistics announced the employment increased by 230k in the private sector compared to the previous month, which was the highest in 7 months. The US economy is looking very good, as the Fed’s PCE core that estimates the rate of consumer prices, has already hit its target of 2%. Employment statistics in Aug have confirmed wage rate growth, inflation indexes such as the September’s PPI core to be announced on 10/10 (excluding food and energy, market prediction has gone up by 2.6% as compared to the same month of the previous year) and the September’s CPI core to be announced on 11/10 (excluding food and energy, similarly gone up by 2.3%), are expected to gather much attention.

Japanese stocks may see a temporary readjustment, but it is likely the heated market will cool down due to a healthy correction. Many corporations, such as Itochu Corporation (8001), are expected to revise their annual performance upwards. As the Nikkei’s average’s current term P/E ratio is still low at the upper end of 13.0, there is a lot more room for Japanese stocks to rise. The Apr-Jun supply and demand gap announced on 3/10 by the Bank of Japan increased by 1.86%, widening the gap of the demand’s excess, and the continuous increase in 7 quarters has brought it back to the level of 10-12/2007. We want to pay attention to reevaluate value stocks which P/E and P/B is relatively undervalued, such as trading companies and banks.

In the 9/10 issue, we will  be covering Edion Corporation (2730), Isuzu Motors, Ltd. (7202), Mitsubishi Corporation (8058), Nippon Gas Co., Ltd. (8174), Mitsubishi UFJ Financial Group, Inc. (8306) and K.R.S. Corporation (9369).

 

Selected Stocks:

Edion Corporation (2730)

・Established in 2002 via a merger between DEODEO Corporation based in Chugoku, Shikoku and Kyushu region, together with Edion Corporation based in Chugoku region. Selling household appliances as its main business, it has expanded with its household appliance retail stores spanning a wide area from Hokkaido to Okinawa. It runs businesses such as stores specializing in the sale of mobile phones, e-commerce and internet service provision, etc.

 ・For 1Q (Apr-Jun) of FY2019/3, net sales increased by 4.8% to 157.154 billion yen as compared to the same period the previous year, operating income increased by 8.2 times to 1.09 billion yen, and net income increased by 7.5 times to 652 million yen. Sales of TVs increased due to the World Cup being held. In addition, the rise of temperatures from the later half of June led to favourable sales centred on high value-add products, such as air conditioners, refrigerators and washing machines.

・For FY2019/3 plan, net sales increased by 3.5% to 710 billion yen as compared to the previous period, operating income increased by 20.3% to 185 billion yen, and current income increased by 23.0% to 11 billion yen. Company announced on 1/10 of the opening of their biggest store “Edion Namba Store”, in Namba, Chuo Ward, Osaka City, which will open in summer 2019. Range of products offered are also geared towards tourists visiting Japan.

Isuzu Motors, Ltd. (7202)

・Founded in 1916, established in 1937. At present, it boasts the longest history among automobile manufacturers in Japan. Company deals with commercial vehicles with a focus on trucks/buses and pickup trucks, in addition to LCV and engine/components. Employing Diesel technology, its commercial vehicle technology is of the highest standard in the world. Retails its products in hundreds and several tens of countries and regions.

・For 1Q (Apr-Jun) of FY2019/3, net sales increased by 5.2% to 488.119 billion yen as compared to the same period the previous year, operating income increased by 32.4% to 52.444 billion yen and net income increased by 16.0% to 38.103 billion yen. Although domestic sales of automobiles fell by 6.8% to 15,473 units, overseas vehicle unit sales based in Asia and Africa rose by 6.6% to 118,932 units.

・For FY2019/3 plan, net sales increased by 3.4% to 2.14 trillion yen as compared to the previous period, operating income increased by 5.5% to 176 billion yen, and current income increased by 4.1% to 110 billion yen. On 4/10, company announced a business tie-up with Cummins, Inc. on the powertrain project, and will see a joint development on the next-generation diesel engine which will feature low environmental impact.

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