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Sumi TRUST Monthly Commentary February 2014

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Sumi TRUST Monthly Commentary February 2014 SuMi TRUST Monthly Commentary February 2014 Key Points 1. Asian Economic Outlook (p1) The Asian economies are entering into a moderate growth phase after a period of rapid growth. China’s era of double digit growth has come to an end whilst Japan has finally come out of two decades of deflation. ASEAN nations still show potential for high growth, but are temporarily facing headwinds due to shifts in global money flows and the political turmoil in Thailand. Yet, there have been no changes to their advantages; namely a rich young labor force and an increase in income which will boost consumption. 2. Japanese companies’ Asian expansion (p.1) Over 15,500 Japanese companies have expanded their operations to Asia and total direct investment assets have exceeded JPY 24.9 trillion which is more than that invested in the US. This is the proof that there are many Japanese companies which see growth opportunities in Asia. 3. Our Focus: Rinnai (5947) (p.2-3) Rinnai, a gas cooker and hot-water heater manufacturer, is enjoying tailwinds both domestically and abroad. In Japan, the electricity fee hike has weakened demand for adopting all-electric houses. Hence, demand for gas cookers and hot-water heaters has increased. In developing countries, gasification policy is preferred to restrain oil consumption. In Indonesia, Rinnai already enjoys 60% share of the gas cooker market. 4. Japanese Equity Market in January (p.4) The Japanese equity market fell by 6% in January due to unexpectedly low employment data in the US, China’s slowdown and emerging market currency fluctuation. Cover 1. Asian Economic Outlook We feel that the dynamism in Asia has shifted as China has slowed from an express train to a local train in terms of growth. China’s focus is no longer on double-digit growth but on air pollution and income inequality. The IMF forecasts 7.5% growth in China this year, but the Chinese government is considering to cut its growth target from 7.5% to 7.0% and it is almost certain that their growth will slow gradually in the mid-term. We will keep an eye on China’s growth and on corporate strategy by foreign companies in China. Figure 1: Growth in China Table 1: Asian Economic Outlook 2013 2014 12.5 China 7.7 7.5 India 4.4 5.4 10 ASEAN Indonesia 5.3 5.5 Thailand 3.1 5.2 7.5 Malaysia 4.7 4.9 Philippines 6.8 6 Singapore 3.5 3.4 5 Japan 1.7 1.7 2000 2005 2010 2015 Asia Total 5.2 5.3 Source: Bloomberg Source: IMF Besides Japan, which has received favorable feedback from Abenomics, attention in Asia has shifted to ASEAN. Thailand aims to be the ‘Detroit of Asia’ and has built up an automobile industry through tax incentives. Indonesia has had robust economic growth under the political stability of President Yudhoyono and Jakarta, its capital city, is today full of automobiles. The Philippines took advantage of its English speaking labor force and has established call centers for global companies, some even from India! In these countries, the minimum wage has risen in recent years and consumers have enjoyed stronger purchasing power. Domestic consumption has therefore expanded and several shopping malls have been built in urban areas, with strong consumption being a distinctive feature of ASEAN. China, in the mid-term, is highly likely to avoid a collapse of the property bubble and we assume that Asia will maintain 5% growth. ASEAN, we believe, will maintain a high level of growth, despite fund flows out of the emerging markets to the US in the short term. Once global fund flows have stabilized and political stability has been reassured, ASEAN will show its full capacity growth. This view is widely shared among Japanese companies which have shown their commitment through the expansion of local subsidiaries. 2. Japanese companies’ Asian expansion Over 25,000 Japanese companies had expanded overseas at the end of 2012 of which 15,500, or more than half the total, had advanced to Asia. (Breakdown: 6,000 co’s to China, 1,800 to Thailand, 1,100 to Singapore, and 850 to Indonesia) From the manufacturing sector, transportation equipment (JPY 3.5 trillion), electric machinery (JPY 3 trillion) and chemicals/ pharmaceuticals (JPY 2.1 trillion) were the largest investors, whereas finance/ insurance (JPY 3.2 trillion) and wholesale/retail (JPY 2.9 trillion) were the most active amongst the non-manufacturing sectors. Without a doubt, investments to China have been the largest, whilst those for Singapore and Thailand were more than JPY 3 trillion. The total amount invested in Asia is almost JPY 25 trillion which exceeds that invested in the US. 1 (as of end 2012) Table2: Direct Investment Assets (JPY 100 million) and Number of Japanese Companies Expanding Overseas No. of Japanese Transportation Non- Finance Total MFG co’s equipment MFG and insurance expanding overseas Asia 249,399 157,648 35,191 91,750 32,425 15,582 China 80,463 58,986 14,667 21,477 6,575 6,091 Singapore 31,130 11,672 723 19,458 4,956 1,111 Thailand 30,247 24,221 7,731 6,026 3,539 1,853 Indonesia 15,906 10,438 4,289 5,468 3,277 862 India 13,040 8,203 3,983 4,837 2,479 581 Malaysia 11,491 8,529 582 2,963 1,956 829 Philippines 8,959 5,838 798 3,121 112 463 U.S.A. 247,332 103,106 18,535 144,226 55,924 3,376 Australia 52,952 13,764 884 39,189 3,839 478 Europe 218,290 117,877 24,623 100,412 31,836 3,786 U.K. 46,574 11,503 227 35,072 13,051 847 Netherlands 81,524 48,679 6,736 32,845 4,669 411 ASEAN 105,543 66,012 15,013 39,531 15,615 n.a. World 898,128 423,737 88,150 474,391 184,401 25,204 Note: “China” excludes Hong Kong and Taiwan. Source: BOJ, Toyo Keizai 3. Our Focus: Rinnai (5947) Rinnai (5947) is a gas-cooker and hot-water heater manufacturer and a rival of Bosch, AO Smith and Rheem. We focus on Rinnai because it is capturing market share in Asia. For example, Rinnai’s market share in Indonesia’s gas cooker market has already exceeded 60%. 1) Rinnai’s background Rinnai dates back to 1920 when it began to manufacture and sell gas-cookers through the improvement of Sweden’s Primus stove which was made famous by the Norweigian explorer, Roald Amundsen in his expedition to Antarctica. In Japan, Rinnai is a pioneer in this field. A tie-up with Germany’s Schwank in the 1950’s brought hot-selling products of gas infrared stoves and infrared grills. In Japan, Paloma and Noritz are key competitors, but Rinnai is the largest of them and holds 50% market share in gas-cookers and 40% in hot-water heaters. Photo1: The latest gas cooker Photo2: The slim hot-water heater Photo by Rinnai Photo by Rinnai 2 2) Rinnai’s heat technology Rinnai is well-known for its gas technology among gas suppliers and its products are known to be trouble- free and durable. Not only among domestic gas suppliers such as Tokyo Gas, but also foreign gas suppliers admit Rinnai’s superiority in its quality and safety. In emerging countries, there is a trend to restrain oil consumption whilst gasification is encouraged. Some countries have even outlawed the sale of inefficient hot-water heaters. 3) Rinnai in Asia China’s rapid growth brought new demand in gas cookers and gas hot-water heaters. Mid-range (i.e. JPY 70-100 thousand price range) hot-water heaters and JPY 20-30 thousand gas cookers were especially hot- sellers. Indonesia has adopted a gasification policy and as a result, Rinnai has enjoyed double digit sales growth in that country. Today, 60% of gas cookers sold are by Rinnai. In Vietnam, Rinnai has been acknowledged as a luxury brand after being certified as a high grade product for 12 consecutive years. We expect Rinnai’s sales to grow in Vietnam as income levels rise. Figure 2: Shanghai Rinnai Figure 3: Rinnai’s operating profits and share price (JPY: million) (JPY: million) (JPY) 16,000 14% 35,000 10,000 14,000 12% 30,000 8,000 12,000 10% 25,000 10,000 8% 20,000 6,000 8,000 6% 15,000 6,000 4,000 4% 4,000 10,000 2,000 2,000 2% 5,000 -- 0% 0 0 2004 2007 2010 2013 2004 2006 2008 2010 2012 2014 Sales(LH) operating profit ratio Operating Profit(LH) Share Price(RH) (NB) Operating profits for 2014 is based on Rinnai’s forecast 4) Sales outlook In Japan, margins are improving through increased demand for Rinnai’s more expensive models, replacement demand and home renovation needs. In developed countries, there is stronger demand for gas products than electricity goods due to environmental concerns. In this context, Rinnai’s tankless, highly efficient hot-water heater (photo 2) has been a boost to sales. In developing countries, gas-cookers are prevailing under the gasification policy and consumers have started to buy hot-water heaters in accordance with their rising living standards. We expect Rinnai’s sales to grow both in Japan and abroad and maintain our bullish view on its shares. 3 Sources : Bloomberg, SuMi TRUST 4. The Japanese equity market in January Table 3: Major Equity Market Performance (as of 31 Jan., JPY) The Japanese equity market fell by 6% in January.
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