Macquarie Marquee Ideas
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JAPAN Macquarie Marquee Ideas New Marquee List Up/Down Shifting to OECD LI Analyst Name Company Name Rec % William Daiwa House Industry OP 37.17 Event Montgomery William Hulic OP 72.08 . We adjust the Japan Marquee Ideas list to reflect the recent call by Peter Montgomery Mike Allen Towa Pharmaceutical OP 36.59 Eadon-Clarke, our Head of Global Strategy, that OECD LI is inflecting and Polina Diyachkina Nippon Steel OP 32.89 hence global cyclical stocks should outperform. Sumitomo Metal Damian Thong Mitsubishi Electric OP 26.98 . New additions (6): Nippon Steel (Outperform), Suzuki (Outperform), Towa Corporation Damian Thong Panasonic Corporation OP 56.73 Pharma (Outperform), MELCO (Outperform), Fanuc (Underperform) & Daiwa Kenjin Hotta Fanuc UP (16.43) House (Outperform). Maintain (3): Mitsubishi Corp (Outperform), Hulic Takuo Katayama Suzuki Motor OP 36.63 Polina Diyachkina Mitsubishi Corp OP 36.54 (Outperform), Panasonic (Outperform). Removals (5): Fast Retailing Source: Macquarie Research, June 2016 (Outperform), Takara Leben (Outperform), Cookpad (Outperform), Kakaku.com (Underperform) & Matsumotokiyoshi (Outperform). Impact . OECD LI turning: In Nov 2011 the OECD LI turned negative and fell for 15 months. In Mar-April 2016 it finally inflected positively. Peter Eadon-Clarke highlights that historically OECD LI troughs coincide with bottoms of the equities market and point to an early stage cyclical recovery where tech, materials and energy stocks tend to outperform in Japan. Steels upgrade: On materials, Polina Diyachkina has adjusted her commodity forecasts, highlighting that for the first time this year there are more upgrades than downgrades to her assumptions. She expects metals to beat bulks and precious metals for the remainder of the year, with zinc the top performer. She has upgraded Nippon Steel (5401) from Neutral->Outperform and JFE (5411) from Underperform->Neutral as steel names are now past their earnings trough and looks for sequential recovery over the coming two to three quarters. A stronger Yen is the biggest risk for Nippon Steel. As a result we include Nippon Steel in the Marquee list. Mitsubishi Corp remains on the list as well. Autos look interesting: As outlined in Peter’s Japan Strategy document he expects JP auto stocks to outperform. Tak Katayama recommends Suzuki in particular and hence we add to the Marquee list. Generics: Following the initiation by Mike Allen we add Towa Pharma. The company recently raised EBIT guidance, despite increases in guidance on capital expenditures and depreciation. We think the market’s obsession with these expense items is misguided. Towa earns above-average returns on its investments and struggles to meet the demand its products are generating . MELCO adding: Damian likes Mitsubishi Elec (MELCO) as a top pick in his coverage. He expects MELCO’s shares to outperform those of FA firms with high robot and MT exposure, building off recent price momentum. He sees MELCO as a leader in FA, air conditioners and power semiconductors. Daiwa House swap: Following the confirmation of an IPO for Takara Leben of its solar assets and strong mid-term plans we remove it and replace with Analyst(s) Daiwa House for domestic property expansion. Will still likes Takara Leben David Gibson, CFA and looks to FY3/18 for a residential JREIT IPO as a catalyst. +81 3 3512 7880 [email protected] . Out: We have removed Fast Retailing, Takara Leben (IPO catalyst has 15 June 2016 passed), Cookpad (management changes will take a while to work out), Macquarie Capital Securities (Japan) Matsumotokiyoshi and Kakaku (catalyst has passed). Limited Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. Macquarie Research Macquarie Marquee Ideas Analysis Fig 1 New Marquee List Upside/ Security Analyst Name Company Name Rec Price Price Target Downside % 1925 William Montgomery Daiwa House Industry Outperform 3062 4200 37.17 3003 William Montgomery Hulic Outperform 1046 1800 72.08 4553 Mike Allen Towa Pharmaceutical Outperform 5930 8100 36.59 5401 Polina Diyachkina Nippon Steel Sumitomo Metal Outperform 1956.5 2600 32.89 6503 Damian Thong Mitsubishi Electric Corporation Outperform 1260 1600 26.98 6752 Damian Thong Panasonic Corporation Outperform 906 1420 56.73 6954 Kenjin Hotta Fanuc Underperform 16155 13500 -16.43 7269 Takuo Katayama Suzuki Motor Outperform 2708 3700 36.63 8058 Polina Diyachkina Mitsubishi Corp Outperform 1831 2500 36.54 Source: FactSet, Macquarie Research, June 2016 Nippon Steel . We have upgraded Nippon Steel to Outperform as we believe the stock has exhausted negative catalysts, the earnings have bottomed, Asian steel is unlikely to get any worse from here and domestic demand should pick up in 2H vs a soft couple of years. The major risk is a stronger yen. We see Nippon Steel as a survivor in a tough steel industry able to benefit from the downturn through M&A. Our TP is based on 13x 3/17-3/19 earnings. Steel margins are under pressure following the rally in 1Q but the stock is already back to December 2015 levels while it is unlikely export margins will be as bad going forward. Hulic . Hulic’s share price has begun to outperform after a strong showing in 1H. Hulic’s primary earnings driver remains redevelopment of 120 legacy properties with key holdings in valuable retail/tourism driven locations such as Ginza, Yurakucho and Omotesando. By redeveloping, Hulic has quadrupled NOI in some instances by increasing rent and floor area ratio (FAR). An emerging driver is Hulic’s aggressive capital recycling and acquisition of an expanding portfolio of hotels and nursing homes which increases exposure to the themes of tourism and the aging population. Hulic has 41% upside to our RNAV. We believe the current share price only reflects the value of near- term visible EBITDA through 2016 and that the market is not yet fully pricing in the value of redevelopment of valuable properties in Nihonbashi, Ginza and Omotesando. We believe upside comes as more future projects are announced, and as acquired projects boost NOI. Mitsubishi . Reasons to buy the stock: 1) extremely low valuations, the stock is trading on 0.4x P/BV, low even assuming that there will be resource asset impairments due to declines in oil and metals prices; 2) solid non-resource portfolio, stable Y250bn net profit pa and cashflow Y300-350bn pa; 3) company focus on positive FCF, aggressive asset divestments (Y1trn over the past three years); 4) new president from April 2016 and a new mid-term plan to be announced in May 2016 with more focus on shareholder returns (we believe the company will embrace a stable dividend policy and will raise the dividend to offset the negative impact from a dividend cut in 2015 which management now admits was a mistake). Why now: 1) the company balance sheet is strong enough that it could afford large impairments at its FY3/16 result in May 2016, “clean the house” which will provide a fresh start for the new president; the larger the write-downs the better; 2) new president from April to focus on streamlining multiple portfolios within the company replicating his experience in the living essentials division (he has successfully sold non-core businesses in the living essentials division over the years he spent as group CEO); 3) we think the material names oversold on China concerns and that we are not seeing a hard landing in China, a relief rally to lift all boats, but we recommend this high-quality name which underperformed due to a dividend cut in 2015. 15 June 2016 2 Macquarie Research Macquarie Marquee Ideas Panasonic . We see Panasonic as a prime beneficiary of stronger Japan domestic demand for appliances, electrical fixtures and fittings and lighting products, ahead of the consumption tax hike and in tandem with intensified real estate development activity. Longer term, we see sustained growth in its Automotive business, including ADAS/car infotainment and lithium ion batteries. We expect it to indicate plans for sustained growth, including via M&A, at its investor meeting in late March. We forecast a sustained OP CAGR of 6%. In our view, the shares were particularly attractive by late- February, being at a 30-year low in terms of absolute EV and EV/EBITDA. Towa Pharma . Towa recently raised EBIT guidance, despite increases in guidance on capital expenditures and depreciation. We think the market’s obsession with these expense items is misguided. Towa earns above-average returns on its investments and struggles to meet the demand its products are generating. The company’s R&D expenses should be fully capitalized, while valuation gains and losses on long-term hedges should be ignored. After these adjustments, we think 3/17 implied guidance would have to be 30% higher. We continue to think the market is irrationally penalizing Towa for actions taken by management that add value to the firm. We think the stock is still severely under-valued. Based on a price/cash flow ratio of 7.9x EPS, which would still be a 30% discount to market leader Sawai, we set a target of 8,100. Suzuki . Expected continued growth of the Indian auto market combined with its dominant position within that market, Suzuki should enjoy robust earnings growth over the medium term. With a clear structural tailwind, Suzuki remains our top pick over the next 6-12 months. We employ a sum-of-parts valuation to derive our 12-month TP, valuing Maruti Suzuki and the Suzuki parent separately. For Maruti Suzuki, we utilize Indian auto analyst Amit Mishra’s TP and apply a 10% holding company discount. We use price-to-book valuation for the Suzuki-parent component, as it is in ‘rebuild’ mode, and to reflect the risks of rebuilding, we apply a 20% discount.