Вы находитесь на странице: 1из 7
April 18, 2011 Equity Research

April 18, 2011

Equity Research

Japan Equity Strategy

Market Commentary/Strategy

Move early to capture expectations of earnings recovery from FY12

Fumiyuki Takahashi BCJL, Tokyo 81 3 4530 2943 fumiyuki.takahashi@barcap.com

Investment Strategy & Macro Japan Equity Strategy

Arisa Mori BCJL, Tokyo 81 3 4530 2918 arisa.mori@barcap.com

Move early to capture expectations of earnings recovery from FY12

FY11 earnings outlook remains uncertain, but we expect market to price in FY12 recovery from around summer

We estimate that the stock market has now priced in the upheaval and near-term earnings impact of the Tohoku Pacific Coast Earthquake, and will steadily rise as the prospects of longer-term recovery become clear. The outlook for FY11 (FY3/12) earnings remains uncertain, but we expect the market to price in the likelihood of recovery in FY12 (FY3/13) from around the summer.

The disruption of Japanese supply chains for industrial products in areas such as automobiles, electronic components, and high-functional materials is now having worldwide repercussions. However, we do not believe Japanese products will easily lose their reputation for performance and quality. The earthquake should have a relatively major short-term impact on earnings, but we remain confident that exports will continue to drive a recovery.

Identify profit recovery candidates by screening for FCF and ROIC

Given the uncertainty over the profit outlook, we screen for free cash flow (FCF) and return on invested capital (ROIC). We see the greatest prospect of profit recovery among companies that both generate adequate FCF and have high ROIC. Many companies with high ROIC also tend to have healthy balance sheets.

Many of the stocks identified through this screening are in export sectors such as transportation equipment, chemicals, and electric appliances.

Equity Research

Equity Research

FY11 earnings outlook remains uncertain, but we expect market to price in FY12 recovery from around summer

We estimate that the stock market has now priced in the upheaval and near-term earnings impact of the Tohoku Pacific Coast Earthquake, and will steadily rise as the prospects of longer-term recovery become clear. The outlook for FY11 (FY3/12) earnings remains uncertain, but we expect the market to price in the likelihood of recovery in FY12 (FY3/13) from around the summer.

We forecast major disruption to production and the economy in the near term, caused both by direct damage to facilities and the power shortages resulting from the nuclear accident. The stock market has become largely static, both because it is not yet clear how long it will take to restore severed industrial supply chains and because investors do not yet have enough information to quantify the impact on the economy and earnings.

Several pieces of good news have appeared: many of the factories damaged in the earthquake have resumed operations, and TEPCO has raised its forecasts of power supply capacity to a degree (although the threat remains of shortages during peak summer demand). This appears to have reduced the downside risk to share prices, and suggests that a large double-dip is unlikely in the near term, as long as the nuclear situation does not deteriorate sharply. We expect the BoJ to purchase stocks (via ETFs) as part of its quantitative easing policy during market dips.

The disruption of Japanese supply chains for industrial products in areas such as automobiles, electronic components, and high- functional materials is now having worldwide repercussions. However, we do not believe Japanese products will easily lose their reputation for performance and quality. We forecast that Japanese corporate earnings will again recover, led by the exporters, once supply chains have been restored. The earthquake will have a relatively major short-term impact on earnings, but we remain confident that exports will continue to drive a recovery as demand grows from China and other emerging nations, and the US economic recovery remains intact. We also expect the yen to weaken over the longer term, based on the variance in growth rates between the Japanese and other developed economies, and the interest rate gap. Such external macro factors should support earnings growth at Japanese exporters once production capacity has recovered.

We lowered our forecast of FY11 profit at the start of April to reflect the impact of the disaster, reducing TSE1 (excluding financials) RP growth from +12.2% before the earthquake to -12.0% after. We expect share prices to be weighed down until summer by the downside risk to earnings and the uncertain outlook.

By the same token, we forecast that the uncertainty over earnings will recede during the summer as supply chains are restored and the impact of power shortages on earnings can be more accurately gauged. As this happens, we anticipate that the stock market will start to price in a FY12 profit recovery. It may therefore be an effective strategy to move early before the market begins to price this in.

Identify profit recovery candidates by screening for FCF and ROIC

Too little information is available to forecast earnings accurately. One result of this has been a wider divergence in analysts' 12- month forecasts since the disaster.

Given this uncertainty over the profit outlook, we screen for free cash flow (FCF) and return on invested capital (ROIC). Many companies, led by the exporters, had improved FCF greatly before the earthquake, and the recovery in profit was starting to catch up with the improvement in FCF. Capital efficiency (in terms of ROIC) was also improving markedly. We see the greatest prospect of profit recovery among companies that both generate adequate FCF and have high ROIC. Many companies with high ROIC also tend to have healthy balance sheets.

Given that FY10 (FY3/11) reporting season has not yet begun fully, we screen for companies with high ROIC on an analyst OP forecast basis and high 4-quarter historical FCF. Many of the stocks identified through this screening are in export sectors such

as transportation equipments, chemicals, and electric appliances sectors.

Equity Research

Equity Research

Figure 1: Earnings forecast dispersion among analysts and share prices (TOPIX500 stocks)

200

175

150

125

100

75

50

25

1600 1400 1200 1000 800 600 (Month-end values) 400 Analysts' earnings forecast dispersion index (LHS,
1600
1400
1200
1000
800
600
(Month-end values)
400
Analysts' earnings forecast dispersion index (LHS, End-Dec., 2003=100)
TOPIX500 (RHS)
12/2003
04/2004
08/2004
12/2004
04/2005
08/2005
12/2005
04/2006
08/2006
12/2006
04/2007
08/2007
12/2007
04/2008
08/2008
12/2008
04/2009
08/2009
12/2009
04/2010
08/2010
12/2010
15/04/2011

Note1) Analysts’ earnings forecast dispersion is based on 12-month forward EPS data for companies covered by five or more analysts. 2) Earnings forecasts are based on I/B/E/S data. Source: Factset, Barclays Capital

co vered by five or more analysts . 2) Earnings forecasts are based on I/B/E/S data.

Figure 2: Free cash flow and ROIC trends (TOPIX500 excluding financials)

(%) 12 10 8 6 4 2 0 (Month-end values) -2 FCF/TA (%) ROIC (%) 12/2003
(%)
12
10
8
6
4
2
0
(Month-end values)
-2
FCF/TA (%)
ROIC (%)
12/2003
04/2004
08/2004
12/2004
04/2005
08/2005
12/2005
04/2006
08/2006
12/2006
04/2007
08/2007
12/2007
04/2008
08/2008
12/2008
04/2009
08/2009
12/2009
04/2010
08/2010
12/2010
03/2011

Note: ROIC is defined as OP/(Net assets + interest-bearing debt) Source: Factset, Barclays Capital

Note: ROIC is defined as OP/(Net assets + interest-bearing debt) Source: Factset, Barclays Capital
Equity Research

Equity Research

Figure 3: Stocks with the prospect of profit recovery in FY12: Stocks with high FCF and ROIC

Company Name

Code

Sector

FCF/Total assets(%)

ROIC(%)

Share-price

(4/15, JPY)

ITO EN,LTD.

2593

Foods

8.6

14.9

1,420

KURARAY CO.,LTD.

3405

Chemicals

16.9

12.9

1,039

ZEON CORPORATION

4205

Chemicals

15.0

17.4

698

Kao Corporation

4452

Chemicals

10.4

14.9

2,045

Nissan Chemical Industries,Ltd.

4021

Chemicals

9.4

15.0

815

TOAGOSEI CO.,LTD.

4045

Chemicals

8.8

16.0*

426

Hitachi Chemical Company,Ltd.

4217

Chemicals

8.7

13.9

1,529

UNI-CHARM CORPORATION

8113

Chemicals

8.6

11.9

3,080

NITTO DENKO CORPORATION

6988

Chemicals

7.7

18.4

4,280

HISAMITSU PHARMACEUTICAL CO.,INC.

4530

Pharmaceutical

14.5

19.4*

3,300

Shionogi & Co.,Ltd.

4507

Pharmaceutical

8.7

12.2

1,382

Mochida Pharmaceutical Co.,Ltd.

4534

Pharmaceutical

8.6

13.2

933

SANTEN PHARMACEUTICAL CO.,LTD.

4536

Pharmaceutical

7.6

18.8

3,080

Asahi Glass Company,Limited

5201

Glass & Ceramics Products

9.1

17.2*

1,009

NHK SPRING CO.,LTD.

5991

Metal Products

8.3

15.7

746

Nabtesco Corporation

6268

Machinery

13.2

17.7

2,012

SEGA SAMMY HOLDINGS INC.

6460

Machinery

10.3

20.2

1,425

SANKYO CO.,LTD.

6417

Machinery

9.1

13.1

4,015

DISCO CORPORATION

6146

Machinery

6.8

14.6

5,290

SMC CORPORATION

6273

Machinery

6.7

15.1

13,710

OSG CORPORATION

6136

Machinery

6.5

12.5

1,051

Dainippon Screen Mfg.Co.,Ltd.

7735

Electric Appliances

15.2

18.1

723

CANON INC.

7751

Electric Appliances

10.3

14.5*

3,670

IBIDEN CO.,LTD.

4062

Electric Appliances

9.3

11.8

2,527

Yamatake Corporation

6845

Electric Appliances

9.3

11.5

1,925

BROTHER INDUSTRIES,LTD.

6448

Electric Appliances

9.1

16.0

1,190

SYSMEX CORPORATION

6869

Electric Appliances

8.3

20.6

2,851

Mitsubishi Electric Corporation

6503

Electric Appliances

7.5

16.0

859

HORIBA,Ltd.

6856

Electric Appliances

6.9

12.4*

2,410

DAIHATSU MOTOR CO.,LTD.

7262

Transportation Equipment

10.9

15.0

1,146

SHIMANO INC.

7309

Transportation Equipment

10.4

19.1*

4,300

ISUZU MOTORS LIMITED

7202

Transportation Equipment

10.0

12.8

317

NISSIN KOGYO CO.,LTD.

7230

Transportation Equipment

9.9

12.4

1,304

Fuji Heavy Industries Ltd.

7270

Transportation Equipment

9.6

11.9

566

AISIN SEIKI CO.,LTD.

7259

Transportation Equipment

9.0

11.0

2,643

KEIHIN CORPORATION

7251

Transportation Equipment

9.0

15.3

1,513

TOKAI RIKA CO.,LTD.

6995

Transportation Equipment

8.2

12.7

1,322

TOYODA GOSEI CO.,LTD.

7282

Transportation Equipment

7.7

11.1

1,630

EXEDY Corporation

7278

Transportation Equipment

7.0

17.8

2,337

TOKYO SEIMITSU CO.,LTD.

7729

Precision Instruments

13.7

11.3

1,425

HOYA CORPORATION

7741

Precision Instruments

9.3

16.8

1,722

TERUMO CORPORATION

4543

Precision Instruments

8.0

19.1

4,335

ORACLE CORPORATION JAPAN

4716

Information & Communication

24.0

47.7

3,395

Yahoo Japan Corporation

4689

Information & Communication

19.5

43.8

28,040

ITOCHU Techno-Solutions Corporation

4739

Information & Communication

11.1

14.0

2,755

SOFTBANK CORP.

9984

Information & Communication

10.8

20.0

3,360

Trend Micro Incorporated

4704

Information & Communication

9.9

22.1*

2,144

CAPCOM CO.,LTD.

9697

Information & Communication

8.5

21.0

1,502

Sanrio Company,Ltd.

8136

Wholesale Trade

10.8

23.8

2,651

K'S HOLDINGS CORPORATION

8282

Retail Trade

16.8

19.9

2,305

SHIMAMURA Co.,Ltd.

8227

Retail Trade

13.6

18.9*

7,230

LAWSON,INC.

2651

Retail Trade

9.0

27.3*

4,005

POINT INC.

2685

Retail Trade

8.2

43.2*

3,630

SUNDRUG CO.,LTD.

9989

Retail Trade

8.2

22.9

2,272

DeNA Co.,Ltd.

2432

Services

27.3

75.9

2,852

USS Co.,Ltd.

4732

Services

13.6

20.6

6,190

Note: 1) Analysis universe is TOPIX500 stocks excluding financials. 2) ROIC is based on OP estimates for FY2010 (forecast OP/(net assets + interest-bearing debt). ROIC values shown with * are based on actual OP. 3) Earnings forecasts are based on I/B/E/S analyst consensus data. Source: Factset, Barclays Capital

Equity Research

Equity Research

ANALYST(S) CERTIFICATION(S):

We, Fumiyuki Takahashi and Arisa Mori, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

Important Disclosures:

Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by investment banking activities.

This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA.

Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA. These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’s account.

For current important disclosures, including, where relevant, price target charts, regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barcap.com or call 1-212-526-1072.

On September 20, 2008, Barclays Capital acquired Lehman Brothers' North American investment banking, capital markets, and private investment management businesses. All ratings and price targets prior to this date relate to coverage under Lehman Brothers Inc.

Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise.

Barclays Capital offices involved in the production of equity research:

London Barclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London)

New York Barclays Capital Inc. (BCI, New York)

Tokyo Barclays Capital Japan Limited (BCJL, Tokyo)

São Paulo Banco Barclays S.A. (BBSA, São Paulo)

Hong Kong Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong)

Toronto Barclays Capital Canada Inc. (BCC, Toronto)

Johannesburg Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg)

This publication has been prepared by Barclays Capital, the investment banking division of Barclays Bank PLC, and/or one or more of its affiliates as provided below. It is provided to our clients for information purposes only, and Barclays Capital makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Barclays Capital will not treat unauthorized recipients of this report as its clients. Prices shown are indicative and Barclays Capital is not offering to buy or sell or soliciting offers to buy or sell any financial instrument.

Without limiting any of the foregoing and to the extent permitted by law, in no event shall Barclays Capital, nor any affiliate, nor any of their respective officers, directors, partners, or employees have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents.

Other than disclosures relating to Barclays Capital, the information contained in this publication has been obtained from sources that Barclays Capital believes to be reliable, but Barclays Capital does not represent or warrant that it is accurate or complete. The views in this publication

Equity Research

Equity Research

are those of Barclays Capital and are subject to change, and Barclays Capital has no obligation to update its opinions or the information in this publication.

The analyst recommendations in this publication reflect solely and exclusively those of the author(s), and such opinions were prepared independently of any other interests, including those of Barclays Capital and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Barclays Capital recommends that investors independently evaluate each issuer, security or instrument discussed herein and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results.

This communication is being made available in the UK and Europe primarily to persons who are investment professionals as that term is defined in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion Order) 2005. It is directed at, and therefore should only be relied upon by, persons who have professional experience in matters relating to investments. The investments to which it relates are available only to such persons and will be entered into only with such persons. Barclays Capital is authorized and regulated by the Financial Services Authority ('FSA') and member of the London Stock Exchange.

Barclays Capital Inc., U.S. registered broker/dealer and member of FINRA (www.finra.org), is distributing this material in the United States and, in connection therewith accepts responsibility for its contents. Any U.S. person wishing to effect a transaction in any security discussed herein should do so only by contacting a representative of Barclays Capital Inc. in the U.S. at 745 Seventh Avenue, New York, New York 10019.

Non-U.S. persons should contact and execute transactions through a Barclays Bank PLC branch or affiliate in their home jurisdiction unless local regulations permit otherwise.

This material is distributed in Canada by Barclays Capital Canada Inc., a registered investment dealer and member of IIROC (www.iiroc.ca).

Subject to the conditions of this publication as set out above, Absa Capital, the Investment Banking Division of Absa Bank Limited, an authorised financial services provider (Registration No.: 1986/004794/06), is distributing this material in South Africa. Absa Bank Limited is regulated by the South African Reserve Bank. This publication is not, nor is it intended to be, advice as defined and/or contemplated in the (South African) Financial Advisory and Intermediary Services Act, 37 of 2002, or any other financial, investment, trading, tax, legal, accounting, retirement, actuarial or other professional advice or service whatsoever. Any South African person or entity wishing to effect a transaction in any security discussed herein should do so only by contacting a representative of Absa Capital in South Africa, 15 Alice Lane, Sandton, Johannesburg, Gauteng 2196. Absa Capital is an affiliate of Barclays Capital.

In Japan, foreign exchange research reports are prepared and distributed by Barclays Bank PLC Tokyo Branch. Other research reports are distributed to institutional investors in Japan by Barclays Capital Japan Limited. Barclays Capital Japan Limited is a joint-stock company incorporated in Japan with registered office of 6-10-1 Roppongi, Minato-ku, Tokyo 106-6131, Japan. It is a subsidiary of Barclays Bank PLC and a registered financial instruments firm regulated by the Financial Services Agency of Japan. Registered Number: Kanto Zaimukyokucho (kinsho) No. 143.

Barclays Bank PLC, Hong Kong Branch is distributing this material in Hong Kong as an authorised institution regulated by the Hong Kong Monetary Authority. Registered Office: 41/F, Cheung Kong Center, 2 Queen's Road Central, Hong Kong.

Barclays Bank PLC Frankfurt Branch distributes this material in Germany under the supervision of Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin).

This material is distributed in Malaysia by Barclays Capital Markets Malaysia Sdn Bhd.

This material is distributed in Brazil by Banco Barclays S.A.

Barclays Bank PLC in the Dubai International Financial Centre (Registered No. 0060) is regulated by the Dubai Financial Services Authority (DFSA). Barclays Bank PLC-DIFC Branch, may only undertake the financial services activities that fall within the scope of its existing DFSA licence.

Barclays Bank PLC in the UAE is regulated by the Central Bank of the UAE and is licensed to conduct business activities as a branch of a commercial bank incorporated outside the UAE in Dubai (Licence No.: 13/1844/2008, Registered Office: Building No. 6, Burj Dubai Business Hub, Sheikh Zayed Road, Dubai City) and Abu Dhabi (Licence No.: 13/952/2008, Registered Office: Al Jazira Towers, Hamdan Street, PO Box 2734, Abu Dhabi).

Barclays Bank PLC in the Qatar Financial Centre (Registered No. 00018) is authorised by the Qatar Financial Centre Regulatory Authority (QFCRA). Barclays Bank PLC-QFC Branch may only undertake the regulated activities that fall within the scope of its existing QFCRA licence. Principal place of business in Qatar: Qatar Financial Centre, Office 1002, 10th Floor, QFC Tower, Diplomatic Area, West Bay, PO Box 15891, Doha, Qatar.

This material is distributed in Dubai, the UAE and Qatar by Barclays Bank PLC. Related financial products or services are only available to Professional Clients as defined by the DFSA, and Business Customers as defined by the QFCRA.

This material is distributed in Saudi Arabia by Barclays Saudi Arabia ('BSA'). It is not the intention of the Publication to be used or deemed as recommendation, option or advice for any action (s) that may take place in future. Barclays Saudi Arabia is a Closed Joint Stock Company, (CMA License No. 09141-37). Registered office Al Faisaliah Tower | Level 18 | Riyadh 11311 | Kingdom of Saudi Arabia. Authorised and regulated by the Capital Market Authority, Commercial Registration Number: 1010283024.

Equity Research

Equity Research

This material is distributed in Russia by Barclays Capital, affiliated company of Barclays Bank PLC, registered and regulated in Russia by the FSFM. Broker License #177-11850-100000; Dealer License #177-11855-010000. Registered address in Russia: 125047 Moscow, 1st Tverskaya-Yamskaya str. 21.

This material is distributed in India by Barclays Bank PLC, India Branch.

This material is distributed in Singapore by the Singapore branch of Barclays Bank PLC, a bank licensed in Singapore by the Monetary Authority of Singapore. For matters in connection with this report, recipients in Singapore may contact the Singapore branch of Barclays Bank PLC, whose registered address is One Raffles Quay Level 28, South Tower, Singapore 048583.

Barclays Bank PLC, Australia Branch (ARBN 062 449 585, AFSL 246617) is distributing this material in Australia. It is directed at 'wholesale clients' as defined by Australian Corporations Act 2001.

IRS Circular 230 Prepared Materials Disclaimer: Barclays Capital and its affiliates do not provide tax advice and nothing contained herein should be construed to be tax advice. Please be advised that any discussion of U.S. tax matters contained herein (including any attachments) (i) is not intended or written to be used, and cannot be used, by you for the purpose of avoiding U.S. tax-related penalties; and (ii) was written to support the promotion or marketing of the transactions or other matters addressed herein. Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor.

Barclays Capital is not responsible for, and makes no warranties whatsoever as to, the content of any third-party web site accessed via a hyperlink in this publication and such information is not incorporated by reference.

© Copyright Barclays Bank PLC (2011). All rights reserved. No part of this publication may be reproduced in any manner without the prior written permission of Barclays Capital or any of its affiliates. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14 5HP. Additional information regarding this publication will be furnished upon request.