The Must Read PSA Weekly Research Round-up (week to 14 Dec)

REPORTS THIS WEEK: 5G Rollout and the Huawei debate / MACRO: Japan Tankan – predicting a further slowdown / BIG PICTURE INSIGHTS: We see Japan as a winner as China plays down Made in China 2025 / Japan’s FT^C to more closely monitor the growing issue of data concentration, particularly among foreign firms; beware Alphabet, Amazon, Facebook and Alibaba / COMPANY INSIGHTS: MonotaRO (3064 JT) reports another set of impressive monthly parent sales in Nov / Showa Denko (440 JT) continues to offer GARP / JDI (6740 JT) has a topsy-turvy week as good news follows bad / Sayonara to Pioneer (6773 JT) / Exciting mid-term plan from Yamaha Motors (7272 JT)

The Weekly Comment by Pelham Smithers

While the discussion over whether Alps (6770 JT) acquired Alpine (6816 JT) too cheaply may continue, now that the merger is going ahead, it is worthwhile reviewing the situation at the newly created organization Alps Alpine [AA] . While the merger won’t make much difference to the income statement and balance sheet beyond minorities, it enables the new company to now pursue a clear-cut automotive strategy, whereas before it had to hedge its bets. Once the dust settles, we should have a company with a market cap of ¥590bil, an enterprise value of ¥550bil and OP of ¥71.5bil in FY17 and around ¥68bil in FY18. This makes it one of the cheaper Apple (AAPL US) supply chain names in the Japanese stock market (EV/OP 7.8x) – though not the wow factor it once was. What is likely to be more attractive to investors in the short term is the forthcoming share buyback (¥40bil) plus the move to return 50% of total net income earned FY19~FY21 in dividends and share buybacks, which on current form would imply another ¥40bil in dividends / buybacks. As total cash dividends are currently around ¥5bil/yr, that is a sizable improvement. However, nice though that is, AA will still need to show that it can grow earnings from here for any benefits from this to be sustainable. In this regard it has a nice foundation because of where we are in (1) the Apple iPhone camera cycle and (2) cost-cutting on the problematic automotive module business.
As far as the iPhone situation is concerned, AA is considerably better off if sales of the 2018 / 19 era handsets are weak, assuming that this means the replacement demand cycle is pushed into FY19. This is because it only has a 2:2:1 inclusion rate for OIS VCM in the three 2018 / 19 iPhones versus 3:3:2 expected for the 2019 / 20 handsets. (Apple alternates between upgrading the front end and upgrading the AV side, so 2018 / 19 is a front-end upgrade with the move to 4×4 MIMO, while 2019 / 20 sees a camera / screen upgrade.) Consequently, what AA really wants from Apple is a so-so year this year but a significantly improved one next year (something Apple could probably achieve simply by sorting its launch program out).

Reports / Flash Notes Published This Week: Headlines at a Glance

1. 5G Rollout and the Huawei Debate

Company / Sector / Thematic Comments at a Glance

Technology: Consumer Electronics / Gaming / Precision / Components

1. Is Huawei Critical to 5G Rollout?
2. Sony (6758 JT) and Rhapsody Tie Up to Create Japanese Hi-Res Spotify / Impact of Epic’s Moving to Cross-Play
3. Goodbye Pioneer (6773 JT), It Has Been a Ride
4. Have Olympus’s (7733 JT) Problems Only Just Begun?
5. Hoshizaki (6465 JT) Under Scrutiny Again

Chemicals / Materials

6. Japan Display (6740 JT) Soars on Reports of Partnering Talks
7. Japan Display (6740 JT): The Uphill Battle Continues
8. Smartphone Supply Chain – a Flurry of Bad News: Read-across to TDK (6762 JT) and JDI (6740 JT)
9. Ohara (5218 JT) Clobbered After Weak Guidance
10. Delayed Reaction to Showa Denko’s (4004 JT) Announcement

Autos

11. China US Auto Import Tariff Cut
12. Nissan (7201 JT) Indicted for Under-reporting of Compensation
13. Yamaha Motor (7272 JT) Surges on Mid-term Plan

Auto Parts / Machinery

14. MonotaRO (3064 JT) Keeps Rolling

Internet / eCommerce

15. CyberAgent’s (4751 JT) AbemaTV Winning “Google Play Best of 2018”
16. Mixi’s (2121 JT) Monster Strike Led the Worldwide Revenue Charts for November
17. DeNA (2432 JT): Arena of Valor Fails to Impress

Enterprise Software

18. Google, Amazon, Facebook, Alibaba Beware: Japan’s FTC to Loom Large over Data Concentration
19. Heroz Inc (4382 JT) Shares Bounce Following Stock Split Announcement
20. Outsourcing Inc (2427 JT) Shares Closes In on its 52-Week Low

Macro / Miscellaneous / Strategy

21. 3Q GDP and the Threat to QE
22. Key Chinese Economic Data Disappoints
23. Japan Tankan – Predicting Further Slowdown
24. Japan a Winner as China Plays Down Made in China 2025

PSA in the Press

• Joel Scheiman is quoted in Dec 10 Bloomberg write-up ‘Japan Display Falls on Report of Iphone Screen Output Cut’

PSA Company Visits, Tours and Interviews

• Attended the earnings meeting for: Ohara Inc (5218 JT)
• Attended explanation meeting for: Showa Denko (4004 JT)
• Interviewed / Conference Call with: Minebea Mitsumi (6479 JT), U-Shin (6985 JT), IHI (7013 JT), Daikin (6367 JT)
• Visited: Ube Industries (4208 JT)

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