Japan Research Pack
A Summary of Select Global Markets Research
Tuesday 31 January 2017 KEY FORECAST CHANGES
RATING TARGET PRICE CUR YEAR EPS NEXT YEAR EPS SECURITY / SECTOR TICKER CURR CURR OLD NEW OLD NEW U/D% OLD NEW OLD NEW
TARGET PRICE CHANGES Canon Marketing 8060 JP Buy - JPY 2,828 2,979 +53.3 JPY 148.1 159.6 157.3 161.2 Japan Daiwa Securities Group 8601 JP Neutral - JPY 680.0 830.0 +13.2 JPY 46.4 62.0 50.1 60.7
Kinden 1944 JP Buy - JPY 1,645 1,704 +16.5 JPY 110.6 - 117.5 -
Kyocera 6971 JP Neutral - JPY 5,000 5,700 -4.6 JPY 207.2 223.5 214.0 250.8
Mabuchi Motor 6592 JP Neutral - JPY 5,800 6,000 -0.7 JPY 210.7 223.9 270.3 288.1
Murata Manufacturing 6981 JP Buy - JPY 17,500 18,000 +16.2 JPY 731.5 738.0 861.9 913.2
Sekisui Chemical 4204 JP Neutral - JPY 1,600 1,800 -4.9 JPY 122.5 122.2 126.4 138.3
TDK 6762 JP Buy - JPY 9,200 10,300 +25.0 JPY 475.7 487.6 559.8 647.8 Tokai Tokyo Financial 8616 JP Neutral - JPY 510 610 -3.6 JPY 33.2 37.4 34.4 35.1 Holdings NGK Spark Plug 5334 JP Buy - JPY 3,000 3,100 +23.0 JPY 154.7 189.9 207.9 213.6
Sankyu 9065 JP Buy - JPY 850 900 +28.9 JPY 57.8 - 59.8 -
Nihon M&A Center 2127 JP Buy - JPY 4,300 4,100 +14.7 JPY 92.4 78.8 107.0 99.2
East Japan Railway 9020 JP Buy - JPY 12,000 13,000 +23.4 JPY 696.7 - 732.9 -
Oriental Land 4661 JP Neutral - JPY 6,900 6,700 +4.8 JPY 242.8 232.6 247.4 235.3
Central Japan Railway 9022 JP Neutral - JPY 19,200 20,000 +6.3 JPY 1,884.7 1,899.4 1,923.8 1,893.8
NEC 6701 JP Neutral - JPY 310 295 -6.6 JPY 25.0 7.7 27.7 19.2
Acom 8572 JP Buy - JPY 680 600 +26.6 JPY 45.4 3.3 49.8 -
Misumi Group 9962 JP Buy - JPY 2,250 2,400 +17.6 JPY 71.3 69.6 80.5 85.6
West Japan Railway 9021 JP Buy - JPY 8,500 9,100 +24.7 JPY 537.2 - 569.2 -
ESTIMATE CHANGES
Hulic 3003 JP Neutral - JPY 1,060 - +3.7 JPY 53.9 57.7 61.5 62.3 Sumitomo Dainippon 4506 JP Neutral - JPY 1,950 - -0.2 JPY 59.6 86.2 70.0 72.5 Pharma Nisshin Seifun Group 2002 JP Buy - JPY 2,000 - +14.9 JPY 70.9 69.6 75.3 73.9
MonotaRO 3064 JP Neutral - JPY 3,200 - +9.9 JPY 62.4 61.3 81.0 78.3 *U/D % = Potential Up/Downside % Highlights for Today
Japan electronic parts - Earnings update summary Manabu Akizuki - NSC We expect sales, profits to turn to growth in 17/3 Q4, forecast OP growth of 25% for 18/3 Japan electronic parts: earnings update - Equipment for smartphones and IoT Manabu Akizuki - NSC Raising assumptions for OLED iPhone in 18/3 NGK Spark Plug (5334 JP) (Buy) 17/3 Q3 results (TP JPY 3,000→JPY 3,100, PRICE as of 1/30/2017 JPY 2,521) Manabu Akizuki - NSC We raise forecasts on steady earnings improvement for ceramic packages Production Complete: 2017-01-30 22:01 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. Nomura | Japan Research Pack 31 January 2017
Canon Marketing Japan (8060 JP) (Buy) 16/12 results (TP JPY 2,828→JPY 2,979, PRICE as of 1/30/2017 JPY 1,943) Tetsuya Wadaki - NSC Preparing for move into new era NEC (6701 JP) (Neutral) Q3 results: full-year guidance sharply lowered (TP JPY 310→JPY 295, PRICE as of 1/30/2017 JPY 316) Masaya Yamasaki, CFA - NSC All segments but enterprise fall short of plan First Look - Koei Tecmo Holdings (3635 JP) (Buy) - 17/3 Q3 results: some titles underperform (TP JPY 2,400, PRICE as of 1/30/2017 JPY 1,967) Junko Yamamura - NSC Oriental Land (4661 JP) (Neutral) Q3 results: slightly lower than our estimates (TP JPY 6,900→JPY 6,700, PRICE as of 1/30/2017 JPY 6,391) Junko Yamamura - NSC Visitor numbers likely to continue being affected by theme park events in near term Results at two elastomer companies, Sumitomo Chemical - JSR results not as bad as meets the eye Shigeki Okazaki - NSC / Kaori Iwasaki - NSC Zeon results show strong demand for large-screen TV film and battery materials Steel sector: impact of President Trump's executive orders - Pipelines will have to use steel made in US Yuji Matsumoto - NSC Construction of Mexican wall could boost demand for steel East Japan Railway (9020 JP) (Buy) Operating profits in line with our expectations (TP JPY 12,000→JPY 13,000, PRICE as of 1/30/2017 JPY 10,535) Masaharu Hirokane - NSC Deterioration on Hokuriku Shinkansen fading, sales of commuter passes strong West Japan Railway (9021 JP) (Buy) 18/3 outlook: record OP, higher shareholder returns (TP JPY 8,500→JPY 9,100, PRICE as of 1/30/2017 JPY 7,297) Masaharu Hirokane - NSC Q3 earnings in line with plan, company aims for further operating profit growth in 18/3 Central Japan Railway (9022 JP) (Neutral) Shinkansen solid, but high profit growth unlikely (TP JPY 19,200→JPY 20,000, PRICE as of 1/30/2017 JPY 18,820) Masaharu Hirokane - NSC Interest to start on maglev Shinkansen loans, rail car manufacturing subsidiary is a risk factor Misumi Group (9962 JP) (Buy) Forex-neutral overseas sales up 27% in Dec (TP JPY 2,250→JPY 2,400, PRICE as of 1/30/2017 JPY 2,040) Katsushi Saito - NSC High sales growth in China, Asia; we view as growth stock with prospects for 10% OP growth Acom (8572 JP) (Buy) Q3: revising our forecast, reaffirming Buy (TP JPY 680→JPY 600, PRICE as of 1/30/2017 JPY 474) Wataru Otsuka - NSC We think high interest repayment losses only temporary Nihon M&A Center (2127 JP) (Buy) Less share price upside, but we retain Buy rating (TP JPY 4,300→JPY 4,100, PRICE as of 1/30/2017 JPY 3,575) Naruhiko Sakamaki - NSC We lower our forecasts based on 17/3 Q3 results Sekisui Chemical (4204 JP) (Neutral) 17/3 Q3 results: forecasts raised on weak yen (TP JPY 1,600→JPY 1,800, PRICE as of 1/30/2017 JPY 1,892) Daisuke Fukushima - NSC Strengthening presence in built-for-sale housing MonotaRO (3064 JP) (Neutral) We lower our forecasts slightly, remain Neutral (TP JPY 3,200, PRICE as of 1/30/2017 JPY 2,913) Kosuke Narikiyo - NSC / Masafumi Shoda - NSC
2 Nomura | Japan Research Pack 31 January 2017
Automated logistics center likely to generate cost efficiencies in 17/12
Japanese Equity Research
Nisshin Seifun Group (2002 JP) (Buy) Steady rise in underlying profitability (TP JPY 2,000, PRICE as of 1/30/2017 JPY 1,741) Satoshi Fujiwara - NSC Prospect of double-digit profit growth in 18/3 on investment returns, EPA-E and bran recovery Japan REIT sector - Ichigo Hotel REIT raises guidance Tomohiro Araki - NSC No need for concern about hotel REITs missing guidance, depending on assumptions Mitsubishi Estate (8802 JP) (Buy) Quarterly data: weak condo releases (TP JPY 2,780.0, PRICE as of 1/30/2017 JPY 2,182.0) Daisuke Fukushima - NSC Slightly weak contract signings for condos to be posted as sales from 19/3 onwards Sankyu (9065 JP) (Buy) Solid Japanese infrastructure upgrade demand (TP JPY 850→JPY 900, PRICE as of 1/30/2017 JPY 698) Ryo Tazaki - NSC Improved margins at plant engineering/installation segment Japan REIT sector - Kenedix Office: credit rating raised to AA- Tomohiro Araki - NSC Poised to meet BOJ purchase criteria 10 months after last upgrade Sumitomo Dainippon Pharma (4506 JP) (Neutral) We revise forecasts, retain target price (TP JPY 1,950, PRICE as of 1/27/2017 JPY 1,954) Motoya Kohtani - NSC Acquisitions, in-licensing to make up for poorer prospects for pipeline drug Kinden (1944 JP) (Buy) 17/3 Q3 results: guidance raised (TP JPY 1,645→JPY 1,704, PRICE as of 1/30/2017 JPY 1,463) Kentaro Maekawa - NSC We retain profit forecasts despite lowering outlook for power distribution line engineering work Daiwa Securities Group (8601 JP) (Neutral) 17/3 Q3 results: fair showing at retail segment (TP JPY 680.0→JPY 830.0, PRICE as of 1/30/2017 JPY 732.9) Wataru Otsuka - NSC Announcement of second share buyback in 17/3 Hulic (3003 JP) (Neutral) 16/12 results (TP JPY 1,060, PRICE as of 1/27/2017 JPY 1,022) Daisuke Fukushima - NSC Looking for profits from real estate sales to generate one-third of real estate segment profits MTI [9438] - 17/9 Q1 results Yoshitaka Nagao - NSC Can management grow the healthcare business? Tokai Tokyo Financial Holdings (8616 JP) (Neutral) 17/3 Q3 results: earnings driven by trading income (TP JPY 510→JPY 610, PRICE as of 1/27/2017 JPY 633) Wataru Otsuka - NSC Large q-q improvement in profit levels in Q3 TDK (6762 JP) (Buy) Earnings update (TP JPY 9,200→JPY 10,300, PRICE as of 1/27/2017 JPY 8,240) Manabu Akizuki - NSC Portfolio rebuilding likely to start yielding results from 18/3 Mabuchi Motor (6592 JP) (Neutral) Earnings update (TP JPY 5,800→JPY 6,000, PRICE as of 1/27/2017 JPY 6,040) Manabu Akizuki - NSC Raising forecasts to factor in new forex outlook: we anticipate continued stable earnings improvement Murata Manufacturing (6981 JP) (Buy) Earnings update (TP JPY 17,500→JPY 18,000, PRICE as of 1/27/2017
3 Nomura | Japan Research Pack 31 January 2017 JPY 15,485) Manabu Akizuki - NSC 18/3: expecting recovery in RF module market share, improvement in MLCC conditions Kyocera (6971 JP) (Neutral) Earnings update (ADR:KYO US) (TP JPY 5,000→JPY 5,700, PRICE as of 1/27/2017 JPY 5,976) Manabu Akizuki - NSC We adjust forex assumptions, change forecasts, retain stance towards key businesses Pharmaceuticals industry - Results released by US companies through 27 Jan Motoya Kohtani - NSC Future threats: bb2121 CAR-T therapy, risankizumab Nuclear reactor court cases - Takahama, Genkai, and Ikata: rulings in 2017 H1? Shigeki Matsumoto - NSC We see risk of impact on other electric power stocks if even one company loses a case Proposed revisions to financial information disclosure system - Points from Council on Investments for the Future Yoshihiro Nomura - NSC Eliminating redundant disclosure in business reports and securities filings Japan major banks - Media report on assistance for Toshiba Ken Takamiya - NSC Report on Mizuho Bank lowering Toshiba's borrower classification Japan major banks: international financial regulations - Debate on finalization of Basel III Ken Takamiya - NSC SMFG announces estimate of floor adjustment impact Today's Japan results composite - Positive: Takara Bio; Negative: Yamato Holdings Japan Equity Research - NSC Japan steel sector (December import/export statistics) - Muted increase in December export prices Yuji Matsumoto - NSC / Takashi Nishizu - NSC We look for export prices to go up in Jan-Mar
Economic Research
Japan Economic Weekly - The feasibility of Premium Friday Takashi Miwa - NSC / Masaki Kuwahara - NSC / Yasuhiro Takahashi - NSC / Yoshiyuki Suimon - NSC / Kohei Okazaki - NSC / Kengo Tanahashi - NSC / Yusuke Miyairi - NSC Encouraging spending on activities as a way of reforming working practices
FX Research
JPY Intraday Comment - Investors judge Trump policy to be expansionary Yujiro Goto - NIplc
Rates Research
Japan Navigator No. 706 - Scenarios for BOJ tapering Naka Matsuzawa - NSC
4
Japan electronic parts
EQUITY: JAPAN ELECTRONIC PARTS
Earnings update summary Global Markets Research
We expect sales, profits to turn to growth in 17/3 30 January 2017
Q4, forecast OP growth of 25% for 18/3 Research analysts
Estimate revisions: we have revised our forex assumptions and outlook for individual businesses, and raise our forecasts Japan electronic parts End product output in Oct-Dec 2016 was slightly stronger than we had anticipated. Manabu Akizuki - NSC Corporate IT investment was buoyant globally, and we think China-related factors [email protected] (Lunar New Year coming earlier than usual and some production being brought +81 3 6703 1185 forward, as well as increased production of autos ahead of the end of tax breaks for auto purchases) may also have had an impact. For 17/3 H2, we see strong corporate IT investment as a key point for outlook revisions. We estimate sales and profits in the sector as a whole fell y-y in 17/3 Q3 owing to the stronger yen, but we expect sales and profits to grow in Q4 as the effects of this weakens. We have changed our forex assumptions for 17/3 Q4 (from USD/JPY of 103 to 114, from EUR/JPY of 114 to 120) and revised our outlook for individual businesses, and revised our earnings forecasts for 18/3 onward. The main changes to our outlook are: (1) we now think the HDD market has bottomed; and (2) we raise our shipment volume assumptions for iPhones featuring OLED displays (which we expect to account for 50- 60% of the new models sold in 2017 and the majority of all iPhones sold in 2018). For the 11 major companies under our coverage, we estimate aggregate sales and operating profits fell 3.1% y-y to ¥1,796.5bn and 2.2% to ¥202.6bn, respectively, in 17/3 Q3 and forecast declines of 2.9% to ¥6,934.0bn and 14.3% to ¥689.9bn for full year 17/3, while for 18/3 we forecast an 11.3% rise in sales to ¥7,718.3bn and a 25.1% rise in operating profits to ¥863.3bn. 2017 industry outlook: we forecast shift to IoT-based industrial structure In 2017, we expect a structural shift from an industry business model based on cloud and mobile services to one based on cloud and mobile plus IoT (see our 11 January 2017 Global Research report Japan electronic parts - 2017 investment perspective). Smart technology, which is a fusion of IoT and artificial intelligence (AI) for the purpose of providing services that match the needs of individual users, is not only a technology for smartphones and other electronic equipment, but also one that will facilitate the development of automated driving systems and new types of stores such as Amazon Go. In 2017, we expect to see an increase in capital investment in the networks and data centers needed to provide IoT-based services, and more widespread incorporation of data-collecting sensors to support the shift to smarter equipment. We think the HDD industry could find a second wind in a scenario in which the volume of data produced by digital equipment increases and capex ramps up for the equipment necessary for IoT services (eg, Edge Cloud or on-premise data centers). Stock selection: TDK, Nidec, and Murata Manufacturing are our core recommendations We recommend as our three core companies TDK [6762], Nidec [6594], and Murata Manufacturing [6981], which have been working to bolster their competitiveness in five growth areas involving smart equipment (sensors, radio components, processors, control mechanisms, and batteries). We also recommend Alps Electric [6770] from a product cycle perspective as we think components in which it excels, such as dual cameras using optical image stabilization (OIS) and haptic motors, are likely to be used in new high-end smartphone models. We continue to recommend NGK Spark Plug [5334], focusing on restructuring benefits at the ceramic packaging business and the possibility of tighter exhaust emission regulations in China leading to growth in shipments.
Production Complete: 2017-01-30 14:41 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 5
Japan electronic parts: earnings update
EQUITY: JAPAN ELECTRONIC PARTS
Equipment for smartphones and IoT Global Markets Research
Raising assumptions for OLED iPhone in 18/3 30 January 2017
Research analysts
Updating earnings forecasts for six related companies: increased outlook for HDDs and OLED iPhone Japan electronic parts We have updated our earnings forecasts for six companies with high sales weightings Manabu Akizuki - NSC of products for smartphones and IoT (excluding automotive). The main factor behind [email protected] our revisions is a change to our forex assumptions (USD/JPY from 103 to 114 and +81 3 6703 1185 EUR/JPY from 114 to 120), and we are also revising our forecasts for 18/3 onward for the individual businesses of each of these companies. The main changes to our outlook are: (1) we now think the HDD market has bottomed, and (2) we raise our shipment volume assumptions for iPhones featuring OLED displays (which we expect to account for 50-60% of the new models sold in 2017 and more than half of all iPhones sold in 2018). Our core recommendations are companies that have been working to bolster their competitiveness in five areas (sensors, communications, processors, control equipment, and batteries) where equipment is seeing a shift to smart technology. Of the six companies we look at in this report, we highlight efforts in these areas by TDK [6762] (Buy) and Murata Manufacturing [6981] (Buy). Outlook for the smartphone market in 2017: expect focus on OLED iPhone In the smartphone field, we think 2017 could see a new printed circuit board (PCB) used in the iPhone for the first time in the seven years since the iPhone 4 was released. The adoption of new boards known as substrate-like PCBs could offer more design leeway for board layouts, allowing for larger batteries in the same casing area, as well as for larger screens in proportion to the overall casing dimensions (bezel-less design). A bezel-less design would require putting the fingerprint sensor underneath the display and would require the development of new touch panels and Force Touch sensors. We think the higher technological complexity involved in this change could increase barriers to entry for the high-end smartphone market, which have been falling in the past few years. As this should also lead to increased use of smaller components and SiP modules, we expect further miniaturization of MLCCs and inductors in 2017 (which would mean improvement in the product mix). We expect network investment in the IoT market in 2017 In 2017, we expect a structural shift from an industry business model based on cloud and mobile services to one based on cloud and mobile plus IoT (see our 11 January 2017 Global Research report Japan electronic parts - 2017 investment perspective). Smart technology, which is a fusion of IoT and artificial intelligence (AI) for the purpose of providing services that match the needs of individual users, is not only a technology for smartphones and other electronic equipment, but also one that will facilitate the development of products for a wide range of industries, including for automated driving systems and new types of stores such as Amazon Go. In 2017, we expect first of all to see an increase in capital investment in the networks and data centers needed to provide IoT-based services, and more widespread incorporation of data-collecting sensors to support the shift to smarter equipment. We think the HDD industry (which has high technological barriers to entry and few major competitors) could find a second wind in a scenario in which the volume of data produced by digital equipment increases (eg, higher resolution and dual cameras in smartphones, a shift to smart technology in security cameras, and the spread of cloud- based digital video recorders) and capex ramps up for the equipment necessary for IoT services (eg, Edge Cloud or on-premise data centers).
Production Complete: 2017-01-30 11:05 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 6
NGK Spark Plug 5334.T 5334 JP
EQUITY: JAPAN AUTOS & AUTO PARTS
17/3 Q3 results Global Markets Research
We raise forecasts on steady earnings 30 January 2017 Rating improvement for ceramic packages Remains Buy
Investment stance: we raise target price to ¥3,100, reiterate Buy rating Target Price JPY 3,100 Sales and operating profits were better than we had previously expected in 17/3 Q3. Increased from 3,000 Sales at the mainstay automotive components segment remained strong, and the Closing price ceramic packages business saw restructuring benefits. NGK Spark Plug only began 30 January 2017 JPY 2,521 full-fledged restructuring of its ceramic packages business on 1 October 2016 but even so achieved cost savings in the Oct-Dec quarter. We have raised our earnings Potential upside +23% forecasts for 17/3 onwards on upward revisions to our estimates for earnings from
ceramic packages, and hike our target price to ¥3,100. We highlight the company’s strong position in the automotive spark plug market and prospects for growth in the Anchor themes sensor market as environmental regulations are tightened. We see considerable scope NGK Spark Plug has the top share of for dividend hikes over the medium term, and reiterate our Buy rating. the global market for spark plugs, and we see a widening gap in 17/3 results: ceramic package restructuring yields early results competitiveness between it and the NGK Spark Plug generated sales of ¥92.6bn (down 3.4% y-y) and operating profits of lower ranked producers. ¥12.9bn (down 27.5%) in 17/3 Q3 versus our estimates of ¥91.0bn and ¥11.0-12.0bn Consequently, we expect the respectively. company to further expand its market At the automotive components segment, sales remained firm, as in H1, and while costs share. Increasing eco-friendliness of rose q-q on an accounting basis, for example from inventory factors and sharp yen internal combustion engines should contribute to product mix depreciation, margins remained high. At the technical ceramics segment, operating improvement in the sensors losses at the ceramic packages business narrowed from ¥1.5bn in Q1 and ¥1.8bn in business. Q2 to ¥0.6bn in Q3. We attribute this to a decline in shipments of low-margin quartz- use products and higher shipments of more lucrative products for CMOS sensors and other applications, as well as fixed cost reductions. We had expected the benefits of Catalyst ceramic package restructuring moves to come to the fore from 18/3 but in the end they Potential catalysts include higher market share in spark plugs and came earlier. higher profitability in sensors on mix We have raised our forecasts on upward revisions to our estimates for ceramic improvement. Dividend hikes could packages. We expect the company to attain an earnings structure where it can break trigger a reappraisal of the even on ceramic packages at sales of ¥20bn, as does management. company’s value by capital markets.
Research analysts
Japan electronic parts
Manabu Akizuki - NSC
[email protected] +81 3 6703 1185
Cons 16/3 17/3E 18/3E 19/3E
Currency: JPY Actual Old New Co's Old New Old New
Sales (mn) 383,272 367,500 371,000 350,800 390,000 394,000 410,000 414,000 Ope profits (mn) 66,279 51,000 54,000 47,100 62,000 64,000 70,000 71,000 EPS 141.6 154.7 189.9 138.6 207.9 213.6 234.5 237.3 P/E (x) 17.8 16.3 13.3 N/A 12.1 11.8 10.8 10.6 EV/EBITDA (x) 6.5 7.7 7.3 N/A 6.3 6.1 5.5 5.4 P/B (x) 1.6 1.5 1.5 N/A 1.4 1.3 1.3 1.2 Dividend yield (%) 1.7 1.7 1.7 N/A 2.1 2.1 2.3 2.3 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 15:10 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 7
Canon Marketing Japan 8060.T 8060 JP
EQUITY: JAPAN PRECISION INSTRUMENTS & SPE
16/12 results Global Markets Research
Preparing for move into new era 30 January 2017 Rating Remains Buy
Investment stance: we reiterate Buy rating on steady moves to strengthen B2B Target Price JPY 2,979 presence Increased from 2,828 Canon Marketing Japan released 16/12 results on 30 January, posting sales of Closing price ¥629.3bn (down 2.6% y-y) and operating profits of ¥27.6bn (up 3.9%). The results 30 January 2017 JPY 1,943 briefing is scheduled for 10:00 JST on 31 January. Sales undershot guidance on weak demand for cameras and inkjet printers, but operating profits overshot it on improved Potential upside +53.3% margins, especially at the business solutions segment. Both we and management
expect sales and profits to rise in 17/12. Management’s efforts to reduce its exposure to previously lucrative imaging systems and nurture B2B operations such as production Anchor themes equipment and network cameras are gradually yielding results. Our view of the stock is We will need to keep a close eye on little changed and we reiterate our Buy rating. digital camera demand in 2017 once the impact of the Kumamoto No excessive expectations for inkjet printers and cameras earthquakes has faded, and on the Camera parts shortages following the Kumamoto earthquakes lasted until end-2016, market outlook for inkjet printers, prompting companies through the industry to refrain from advertising. This led to including moves to regain market generally lackluster conditions, with the result that even sales volumes of share. We look for recovery in interchangeable lens cameras at Canon Marketing Japan, which were not affected by demand for office equipment and the earthquakes, nevertheless fell 7% y-y in 16/12. Management is not expecting the higher printing volumes owing to market to recover in 17/12, and thinks that sales will peg level y-y. Inkjet printer sales improved earnings at Japanese volumes fell 13% in 16/12, but selling prices rose. Management expects inkjet printer exporters. Over the medium term, sales volumes to fall 4% in 17/12. our focus is on companies able to grow profits in fields such as Focus on nurturing B2B solutions and commercial printing. Management thinks that the main earnings drivers in 17/12 will be color laser printers,
for which it is projecting a 21% y-y rise in sales volumes, network cameras, for which it Catalyst is projecting a 40% rise in sales value, and production equipment, for which it is We expect the stock’s valuation projecting a 15% rise in sales value. It has been steadily shifting towards B2B. appeal to be recognized if sales growth and margin improvement get on track in surveillance camera and solutions operations on the back of a full-scale recovery in the office equipment market.
Research analysts
Japan precision instruments & SPE
Tetsuya Wadaki - NSC [email protected] Cons 16/12 17/12E 18/12E 19/12E +81 3 6703 1184 Currency: JPY Actual Old New Co's Old New Old New Sales (mn) 629,312 657,200 642,900 645,000 669,500 655,000 N/A 660,800 Ope profits (mn) 27,676 30,100 30,200 28,800 32,100 32,200 N/A 32,800
EPS 140.1 148.1 159.6 152.7 157.3 161.2 N/A 164.3 P/E (x) 13.9 13.1 12.2 N/A 12.4 12.1 N/A 11.8 EV/EBITDA (x) 3.4 2.9 2.9 N/A 2.6 2.6 N/A 2.3 P/B (x) 0.9 0.8 0.9 N/A 0.8 0.8 N/A 0.8 Dividend yield (%) 2.6 2.3 2.6 N/A 2.3 2.6 N/A 2.6 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 13:04 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 8
NEC 6701.T 6701 JP
EQUITY: JAPAN INDUSTRIAL ELECTRONICS
Q3 results: full-year guidance sharply lowered Global Markets Research
All segments but enterprise fall short of plan 30 January 2017 Rating Remains Neutral
Investment stance: still Neutral, with issues remaining on growth potential Target Price JPY 295 We take a negative view of the major downward revisions to 17/3 earnings guidance. Reduced from 310 Even after factoring in the positive impact of the addition of Japan Aviation Electronics Closing price Industry (6807) to consolidated accounts, the earnings undershoots of virtually all main 30 January 2017 JPY 316 businesses had tremendous impact. In addition to deterioration in the profitability of existing businesses, the earnings contributions of new business are substantially Potential downside -6.6% behind schedule. We see nothing wrong with NEC's strategic direction, focused on
safety, global carrier networks, and retail IT services as the three main businesses. However, we lower our earnings estimates and cut our target price as we think issues Anchor themes remain for achieving growth. That said, our rating is still Neutral as we expect recovery The shift to cloud computing is in 18/3, when many one-time factors will drop out. making steady progress, while opportunities are expanding in big Q3 (Oct-Dec) operating losses total ¥20.8bn, much worse than expected data and other new businesses. In Sales continued to decline, with the Q3 total down 8% y-y at ¥593.4bn. The operating the cloud computing era, we expect loss of ¥20.8bn is ¥29.0bn lower than plan and nearly ¥26bn lower than our forecast. companies that can provide both The undershoot versus plan is attributable to nearly all major segments, with the public hardware and services to compete segment falling ¥10bn short of plan, the telecom carrier segment coming up ¥9bn with specialty hardware makers. short, the system platform segment missing by ¥7bn, and the other segment falling Companies need to be able to ¥3bn short of plan. IT services orders in Japan declined 10% y-y in Q3, a tough result provide services for customers with even though some of the decline is due to recoil from a strong result the year before. global operations.
17/3 guidance sharply lowered NEC reduced its 17/3 earnings outlook substantially, lowering its operating profit Catalyst estimate to ¥30bn from ¥100bn. The ¥70bn downward revision breaks down as ¥5bn Questions remain over NEC's net from unprofitable projects (¥11bn gross), ¥6bn for restructuring expenses, ¥8bn in overseas business. The pace of growth in sales in software-defined one-time expenses such as reserves for contingent losses, ¥44bn in for existing networking (SDN), cloud computing, businesses, and ¥24bn for new businesses. These negatives were partially offset by big data, safety and other prioritized about ¥17bn improvement in other expenses. We lower our 17/3 operating profit areas will be closely watched. We forecast to ¥35bn, near guidance. In 18/3 we expect operating profits to improve ¥40bn think the share price could also be y-y on factors including a drop in one-time expenses, earnings improvement at influenced by movements in telecom businesses in the red, the addition of Japan Aviation Electronics to consolidated capex. accounts, and greater administrative efficiency.
Research analysts
Japan industrial electronics
Masaya Yamasaki, CFA - NSC [email protected] +81 3 6703 1190 Cons 16/3 17/3E 18/3E 19/3E
Currency: JPY Actual Old New Co's Old New Old New Sales (bn) 2,824.8 2,750.0 2,680.0 2,680.0 2,980.0 2,830.0 3,000.0 2,850.0 Ope profits (bn) 91.4 95.0 35.0 30.0 115.0 75.0 120.0 95.0 EPS 29.2 25.0 7.7 7.7 27.7 19.2 28.5 25.0 P/E (x) 10.8 12.6 41.1 N/A 11.4 16.4 11.1 12.6 EV/EBITDA (x) 7.1 7.7 13.2 N/A 6.8 8.4 6.4 7.0 P/B (x) 1.1 1.0 1.0 N/A 0.9 1.0 0.9 0.9 Dividend yield (%) 1.9 1.9 1.9 N/A 1.9 1.9 1.9 1.9 Source: Company data, Nomura estimates (See the bottom of page 2 for further notes to this table.)
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 20:43 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 9
Nomura | Koei Tecmo Holdings 30 January 2017
Koei Tecmo Holdings 3635.T 3635 JP
EQUITY: JAPAN GAMES & AMUSEMENT
17/3 Q3 results: some titles underperform Global Markets Research
First Look 30 January 2017 Rating Remains Buy
17/3 Q3 results: weaker-than-expected sales volumes of some titles, advance Target Price JPY 2,400 posting of development costs Remains Koei Tecmo Holdings generated operating profits of ¥0.75bn in 17/3 Q3 versus our Closing price full year forecast of ¥11.5bn, mainly because: (1) sales volumes of mid-sized titles 30 January 2017 JPY 1,967 such as Berserk and the Band of the Hawk and Samurai Warriors: Sanada Maru
were weaker than expected; and (2) the company booked development costs for Research analysts some console and mobile titles in Q3 even though they will now not be released until Q4 onwards. This latter factor reflects the company’s policy of recognizing costs as Japan games & amusement they arise, and should not be regarded as a negative. Lack of clarity about some aspects of results, for example how mobile games Junko Yamamura - NSC [email protected] have contributed to operating profits +81 3 6703 1176 We think some caution is warranted towards the undershoot in sales volumes for certain titles. While major titles have held up well, with global titles such as Attack on Titan, Hyrule Warriors, and Dragon Quest Heroes racking up sales of almost 1mn copies, performance of other titles looks to have been increasingly patchy, with small and mid-sized titles primarily aimed at the Japanese market failing to reach sales projections or subject to launch delays. Although we do not think that this will seriously affect Koei Tecmo’s competitiveness as it is a software developer with strong cost controls, we will nevertheless be looking at how it deploys its development resources. Management did not provide much detail in results, for example the contribution that mobile games, which we regard as a future growth driver, are making to operating profits at the entertainment segment. We intend to find this out in due course, and will also be focusing on the release of several mobile game titles and major console game titles in Q4.
Production Complete: 2017-01-30 16:06 UTC 1 See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 10
Oriental Land 4661.T 4661 JP
EQUITY: JAPAN GAMES & AMUSEMENT
Q3 results: slightly lower than our estimates Global Markets Research
Visitor numbers likely to continue being affected by 30 January 2017 Rating theme park events in near term Remains Neutral
Investment stance: we slightly lower our earnings estimates, maintain Neutral Target Price JPY 6,700 rating Reduced from 6,900 We have slightly lowered our earnings estimates for 17/3 onward following the release Closing price of Q3 results. We set a DCF-based target price of ¥6,700 and retain our Neutral rating. 30 January 2017 JPY 6,391 We retain our stance of waiting for full-fledged discussions on how the company plans to use its cash, including its growth strategy for 2020 onward and shareholder returns. Potential upside +4.8% A more fine-tuned marketing strategy required in near term
It looks as though the number of visitors fell 3.2% y-y in 17/3 Q3 (versus our estimate Anchor themes of visitor numbers being flat), while operating profits fell 2.9% to ¥38.84bn (¥43.5bn). Themes include (1) responding to The differences between our estimates and results were mainly due to (1) visitor senior citizens' growing purchasing numbers slightly undershooting our estimate and (2) the COGS burden (such as power, (2) tapping into growth in the maintenance, events, personnel costs) being higher than we had anticipated. Weak number of inbound visitors, and (3) visitor numbers mainly reflected it being the second year of Halloween events, but we expanding theme park capacity. think they were also negatively affected by unsuccessful marketing strategies such as
the introduction of fixed-date tickets. We think this factor could be specific to 17/3 as Catalyst the company does not plan to issue fixed-date tickets going forward. We have reflected Potential catalysts include 17/3 the increased COGS burden in our forecasts for 17/3 onward. earnings in excess of guidance, Visitor numbers in the theme park industry continue to be influenced by the success or improved shareholder returns, otherwise of events held at parks. The cycle for attracting visitors by holding events disclosure of specifics on use of the appears to be becoming shorter too. Although we continue to rate highly the company's long-term capex budget and its growth potential via large-scale development, as the number of annual visitors is over timetable, and higher ticket prices, for example on the weekend.
30mn and there is limited capacity, the company needs to continue coming up with a
succession of new ways for visitors to have fun and ensure satisfaction levels do not fall. It also needs to further improve its marketing strategy to that end. Consistently Research analysts
increasing value and having a fine-tuned marketing strategy are also strengths of the company. We will be focusing on this as a key evaluation point in the near term. Japan games & amusement Junko Yamamura - NSC [email protected] +81 3 6703 1176
Cons 16/3 17/3E 18/3E 19/3E Currency: JPY Actual Old New Co's Old New Old New Sales (mn) 465,353 483,535 477,968 479,900 482,600 477,800 494,700 489,900 Ope profits (mn) 107,357 114,700 109,800 109,110 116,400 110,500 119,600 113,500 EPS 221.3 242.8 232.6 231.8 247.4 235.3 255.3 242.3 P/E (x) 28.9 26.3 27.5 N/A 25.8 27.2 25.0 26.4 EV/EBITDA (x) 14.5 13.6 14.1 N/A 13.1 13.7 12.4 13.0 P/B (x) 3.4 3.2 3.2 N/A 2.9 2.9 2.6 2.7 Dividend yield (%) 0.5 0.5 0.5 N/A 0.6 0.6 0.6 0.6 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 16:25 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 11
Results at two elastomer companies, Sumitomo Chemical
EQUITY: JAPAN CHEMICALS & TEXTILES
JSR results not as bad as meets the eye Global Markets Research
Zeon results show strong demand for large-screen 30 January 2017
TV film and battery materials Research analysts
JSR [4185] (Neutral): elastomer business strong On 30 January, JSR [4185] (Neutral) announced 17/3 Q3 results at 15:00 JST and had Japan chemicals & textiles a conference call at 17:00. Operating profits improved to ¥8.7bn (¥4.3bn in the Shigeki Okazaki - NSC petrochemicals segment, which includes elastomers; ¥4.4bn in the fine chemicals and [email protected] other products segment, which includes semiconductor materials and display +81 3 6703 1170 materials) in Q3, from ¥6.7bn (¥1.8bn, ¥4.9bn) in Q2, but the result fell short of the Kaori Iwasaki - NSC Quick consensus forecast of ¥8.9bn and our forecast of ¥10.3bn. We think operating [email protected] profit growth was weak in the fine chemicals and other products segment owing to a +81 3 6703 1206 delay in shipments of semiconductor materials (sales rose 1% q-q) and display materials (-1%) amid strong demand related to semiconductors, and we see no need for excess concern. Elastomer sales volume rose 5% q-q in Japan and export volume rose 15%, and we think elastomer sales volume could benefit in Q4 from improvement in butadiene margins. We think sales trends in fine chemicals and other products warrant attention, but we think underlying earnings centered on elastomers are solid and our impression from results and the conference call is that they are not as bad as they look. Zeon [4205] (Neutral): specialty rubber remains unfavorable overseas, recovers in Japan On 30 January, Zeon [4205] (Neutral) announced 17/3 Q3 results at 12:30 JST, followed by a results briefing at 15:30. Q3 operating profits came to ¥8.4bn (+8.4% y- y), driven by specialty materials. Elastomer segment profits fell only 6% y-y, despite continued unfavorable demand for specialty rubber overseas and unfavorable price competition for chemicals, as the volume of high margin specialty rubber sales in Japan started rising in Q3 (up 4% y-y in Q1-3). The company said the contribution of recent improvement in butadiene margins to profit growth in Q4 would be minimal as (1) the selling price formula is delayed three months (negative for profits over the short term) and (2) the effect on profit growth from differences in inventory receipts and payments will be minimal with inventory levels lower than in the past. In the specialty materials business, battery material sales rose 51% y-y (+17% q-q), and the company said it expects demand to expand in 18/3. Q1-3 optical film sales volume rose 20% y-y (of which, small-to-medium sized FPD optical film sales fell 32% and TV optical film sales rose 18%). While the use of optical film in TVs appears to be increasing as TV screens become bigger, the sales volume of diagonally stretched film for small-to- medium sized screens appears to have fallen q-q in Q3. The company seems to be expecting the volume of optical film for small-to-medium screens to recover from 18/3 Q1 as it is employed in high-end smartphones scheduled for release in fall 2017 with no drop in the number of sheets per screen, even in OLEDs. The company made no change to its full-year operating profit guidance of ¥28bn, which seems cautious to us in view of the company's forex assumption (USD/JPY of 105 for the full year) and seasonality of specialty materials.
Production Complete: 2017-01-30 18:59 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 12
Steel sector: impact of President Trump’s executive orders
EQUITY: JAPAN STEEL, NONFERROUS METALS, WIRE & CABLE
Pipelines will have to use steel made in US Global Markets Research
Construction of Mexican wall could boost demand 30 January 2017 for steel Research analysts
Presidential memoranda relating to construction of two major pipelines On 24 January President Donald Trump signed executive orders to speed up Japan steel, nonferrous metals, wire construction of the Keystone XL Pipeline and to allow construction of the Dakota & cable Access Pipeline. Yuji Matsumoto - NSC Majority of steel for Keystone XL Pipeline has already been sourced [email protected] +81 3 6703 1220 President Obama had previously blocked the construction of the Keystone XL Pipeline, but President Trump’s executive order means that construction will now probably go ahead. We had seen business opportunities for Japanese steelmakers from this pipeline, which in total will be around 1,900km long (see our 22 November 2016 Nippon Steel & Sumitomo Metal (5401 JP) (Neutral) Forecasts revised: overcoming high input costs), but we now envision no major impact for now. Metal Bulletin reported on 26 January that TransCanada, which will be building the pipeline, had already sourced the steel needed to build it from companies such as Evraz (Russia) and Welspun Tubular (India). Both Evraz and Welspun have production bases in the US. Evraz issued a release on 6 November 2015 saying that it had already produced steel tube for around 880km of the Keystone XL Pipeline. Elsewhere, parts of the Dakota Access Pipeline have already been built, so this project is unlikely to create substantial fresh demand for steel tube either. Steel for the pipelines will have to be entirely produced in the US President Trump signed another executive order on 24 January mandating the use of US-produced steel in the construction of these pipelines. This refers to all aspects of production, from melting through to plating, and says that semi-finished products made in the US and transported overseas for downstream processing do not qualify as US- produced steel, nor do semi-finished products such as slabs produced overseas and then transported to the US for processing into final products. Accordingly, with the exception of specialty steel products that are not produced in the US, Japanese blast furnace steelmakers are unlikely to garner business opportunities that will provide any major boost to their earnings. (Text continues for comments related to construction of wall on Mexican border)
Production Complete: 2017-01-30 11:52 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 13
East Japan Railway 9020.T 9020 JP
EQUITY: JAPAN TRANSPORTATION
Operating profits in line with our expectations Global Markets Research
Deterioration on Hokuriku Shinkansen fading, sales 30 January 2017 Rating of commuter passes strong Remains Buy
Investment rating: still Buy, with results in line with our forecast Target Price JPY 13,000 We maintain our Buy rating in view of results. Q3 (Oct-Dec) operating profits declined Increased from 12,000 3% y-y to ¥138.0bn, on par with our ¥137.1bn forecast. Railway passenger revenues Closing price were strong in December, but profits were lower than we expected at the shopping 30 January 2017 JPY 10,535 centers & office buildings segment and the other segment. As long as the pace of growth in passenger railway revenues is maintained, we think the likelihood of Potential upside +23.4% operating profit growth in 18/3 is high, as personnel expenses are poised to decline on
a rise in the number of retirements. Our earnings forecasts are unchanged as the results are in line with our forecast. We increase our target price to ¥13,000, applying a Anchor themes P/E of about 18x (previously about 17x) to our 18/3 EPS forecast (previously 17/3 EPS We favor companies able to capture forecast). We continue to value JR East at a 20% premium to the market average growing tourism demand as Japan’s (based on Russell/Nomura Large Cap) of about 15x (previously about 14x based on population progressively ages, 17/3 estimates) in view of the company's stable earnings, the high visibility of longer- companies where strong cost controls make it more likely that sales term profit growth prospects, and unrealized gains on real estate assets. A similar growth will translate into profit target price can also be calculated from net asset value (NAV), by adding unrealized growth, and companies that have gains on the company’s real estate holdings and the Shinagawa redevelopment project real estate holdings with large to shareholders’ equity. unrealized gains.
Revenue decline shrinks on Hokuriku Shinkansen, strong passenger volumes
confirmed in Kanto region Catalyst Q3 (Oct-Dec) non-commuter pass revenues from Shinkansen (bullet train) lines rose Potential share price catalysts 2.7% y-y, improving from a 1.7% y-y decline in Q2 (Jul-Sep). 17/3 Q2 had fewer include: (1) stronger railway Sundays and holidays y-y and Q3 benefitted from a high number of Sundays and passenger numbers than holidays in December and strong passenger volumes at the year-end. Moreover, the management is projecting; (2) Hokuriku Shinkansen's revenue was down only ¥1bn y-y in Q3, a smaller decline than investor focus on real estate value; ¥2.5bn in Q2 and ¥2.0bn in Q1. Non-commuter pass revenues in the Kanto region rose and (3) evidence of curbs on costs, 0.2% y-y, down from 0.7% in Q2. However, commuter pass revenues were solid, up including traction costs and repair costs.
1.1% in Q3 following 0.7% growth in Q2. Improvement in the employment environment
appears to have been a factor. If the business environment remains supportive, growth in railway passenger revenues seems likely to continue in 18/3. Research analysts
Japan transportation
Masaharu Hirokane - NSC [email protected] +81 3 6703 1142
Cons 16/3 17/3E 18/3E 19/3E Currency: JPY Actual Old New Co's Old New Old New
Sales (bn) 2,867.2 2,877.3 2,877.3 2,878.0 2,907.3 2,907.3 2,937.8 2,937.8 Ope profits (bn) 487.8 464.8 464.8 450.0 486.8 486.8 503.6 503.6 EPS 625.8 696.7 696.7 684.2 732.9 732.9 760.5 760.5 P/E (x) 16.8 15.1 15.1 N/A 14.4 14.4 13.9 13.9 EV/EBITDA (x) 8.4 8.4 8.4 N/A 8.0 8.0 7.6 7.6 P/B (x) 1.7 1.5 1.5 N/A 1.4 1.4 1.3 1.3 Dividend yield (%) 1.2 1.3 1.3 N/A 1.4 1.4 1.4 1.4 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 16:14 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 14
West Japan Railway 9021.T 9021 JP
EQUITY: JAPAN TRANSPORTATION
18/3 outlook: record OP, higher shareholder returns Global Markets Research
Q3 earnings in line with plan, company aims for 30 January 2017 Rating further operating profit growth in 18/3 Remains Buy
Investment stance: still Buy; stock highly attractive in view of profit growth, Target Price JPY 9,100 greater shareholder returns Increased from 8,500 We maintain our Buy rating in view of results. Q3 (Oct-Dec) results were basically in Closing price line with our estimates. On the earnings call the company noted that (1) the DOE target 30 January 2017 JPY 7,297 is still 3% and (2) if capital exceeds plan in 17/3 or 18/3, it will consider how to use the balance. Given that the company's comments remain in line with those from the Q2 Potential upside +24.7% (Jul-Sep) results briefing, we expect 18/3 operating profits to reach a record high and
forecast DPS of ¥210 (DOE of about 4%). Our earnings estimates are unchanged. Also note that the company appears to be considering disposal costs for disused lines and Anchor themes extension of its early retirement program. However, even if related costs are incurred, As economic sentiment has we think they will be one-time extraordinary losses in 17/3. For this reason we do not deteriorated, railway revenue growth include any such losses in our forecasts. We increase our target price to ¥9,100. We has slowed and the condominium change the EPS base year of our target price to 18/3 from 17/3 and apply a P/E of sales environment has softened. We favor companies that can tap into about 16x (previously about 15x), and continue to value the shares at a slight premium company-specific revenue growth to the market average (Russell/Nomura Large Cap) of roughly 15x on 18/3 estimates drivers and/or that look undervalued (previously 14x on 17/3 estimates) in consideration of higher-than-average shareholder relative to metrics such as free cash returns. flow.
Revenue environment strong: revenue improving on both Hokuriku and Sanyo
Shinkansen lines Catalyst Q3 (Oct-Dec) operating profits rose 8% y-y to ¥59.4bn, on par with our ¥59.0bn Potential share price catalysts forecast. Shinkansen revenue improved to 1% growth in Q3 from 2% decline in Q2 include growth rates in ridership in (Jul-Sep) as the drop in passenger volume caused by the Kumamoto earthquakes monthly data or comments about subsided and the decline in Hokuriku Shinkansen revenue narrowed. Noncommuter shareholder returns at investor revenue in the Kinki region was strong too, showing 1% y-y growth on par with Q2. We briefings.
view the earnings progress—including expenses—of Q3 as in line with our forecast. If
the current conditions of the revenue environment continue, we think record-high Research analysts operating profits are likely in 18/3 thanks to a slight decline in personnel expenses and contributions from the acquired real estate company. Japan transportation
Masaharu Hirokane - NSC [email protected] +81 3 6703 1142
Cons 16/3 17/3E 18/3E 19/3E Currency: JPY Actual Old New Co's Old New Old New Sales (bn) 1,451.3 1,448.9 1,448.9 1,445.5 1,490.2 1,490.2 1,504.5 1,504.5 Ope profits (bn) 181.5 173.7 173.7 173.0 182.0 182.0 185.7 185.7 EPS 443.5 537.2 537.2 529.4 569.2 569.2 582.6 582.6 P/E (x) 16.5 13.6 13.6 N/A 12.8 12.8 12.5 12.5 EV/EBITDA (x) 7.2 7.4 7.4 N/A 6.9 6.9 6.7 6.7 P/B (x) 1.6 1.5 1.5 N/A 1.4 1.4 1.3 1.3 Dividend yield (%) 1.9 2.0 2.0 N/A 2.9 2.9 3.0 3.0 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 21:55 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 15
Central Japan Railway 9022.T 9022 JP
EQUITY: JAPAN TRANSPORTATION
Shinkansen solid, but high profit growth unlikely Global Markets Research
Interest to start on maglev Shinkansen loans, rail 30 January 2017 Rating car manufacturing subsidiary is a risk factor Remains Neutral
Investment rating: still Neutral; railway business solid, but stock has limited Target Price JPY 20,000 investment appeal Increased from 19,200 We maintain our Neutral rating. Q3 (Oct-Dec) operating profits beat our forecast. Closing price However, the average interest rate on ¥1trn in loans received under the government's 30 January 2017 JPY 18,820 Fiscal Investment and Loan Program (FILP) for the maglev Chuo Shinkansen is currently around 0.7%. The interest will likely depress recurring profits somewhat from Potential upside +6.3% 18/3 onward as construction of the new line gains momentum (under FILP, capital is
invested to earn income until it is used for the given project). Moreover, technical issues are impeding the manufacture of rail cars in the US, a project that has resulted Anchor themes in losses for the consolidated subsidiary that makes railcars. Management indicated As economic sentiment has that the subsidiary is in discussions with customers to pull out of the project. 17/3 deteriorated, railway revenue growth guidance includes reserves for rail car design changes, but further expenses could be has slowed and the condominium booked depending on negotiations. We adjust our forecasts slightly, mainly to reflect sales environment has softened. We favor companies that can tap into the interest on Chuo Shinkansen loans. Our 18/3 forecast calls for operating profits of company-specific revenue growth ¥611.8bn (+4% y-y) and recurring profits of ¥540.2bn (+1%) under a heavier load of drivers and/or that look undervalued interest expenses. We increase our target price slightly, to ¥20,000. We see fair value relative to metrics such as free cash at a P/E of 10-11x (previously 10x), as we continue to value the shares at a discount of flow. 30% to the market average (Russell/Nomura Large Cap) of 15x (previously 14x) based
on 18/3 earnings estimates. Catalyst Transportation segment: Shinkansen and cost management solid, but only Potential catalysts include expecting slight recurring profit growth in 18/3 shinkansen ridership data and news Q3 (Oct-Dec) operating profits totaled ¥180.1bn (+8% y-y), beating our ¥172.5bn about the maglev Chuo Shinkansen, forecast amid strong Shinkansen passenger volumes. We think the transportation which involves an extremely large segment is doing well, with growth in operating expenses (led by traction costs) held amount of investment over a long below plan. That said, we expect interest expenses of about ¥14bn to be incurred in period.
18/3 under an average interest rate of 0.7% on Chuo Shinkansen loans, which we
estimate will reach a cumulative total of about ¥2trn in 18/3 and ¥3trn in 19/3. While not Research analysts a major burden, the expenses will likely dampen growth in recurring profits. Japan transportation Masaharu Hirokane - NSC [email protected] +81 3 6703 1142
Cons 16/3 17/3E 18/3E 19/3E Currency: JPY Actual Old New Co's Old New Old New Sales (bn) 1,738.4 1,754.7 1,757.5 1,736.0 1,772.0 1,776.0 1,785.3 1,788.9 Ope profits (bn) 578.7 586.5 590.7 577.0 606.3 611.8 613.2 618.3 EPS 1,714.6 1,884.7 1,899.4 1,844.5 1,923.8 1,893.8 1,969.5 1,892.8 P/E (x) 11.0 10.0 9.9 N/A 9.8 9.9 9.6 9.9 EV/EBITDA (x) 6.5 6.4 6.4 N/A 6.4 6.3 6.5 6.5 P/B (x) 1.6 1.4 1.4 N/A 1.2 1.2 1.1 1.1 Dividend yield (%) 0.7 0.7 0.7 N/A 0.7 0.7 0.7 0.7 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 19:10 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 16
Misumi Group 9962.T 9962 JP
EQUITY: JAPAN MACHINERY
Forex-neutral overseas sales up 27% in Dec Global Markets Research
High sales growth in China, Asia; we view as 30 January 2017 Rating growth stock with prospects for 10% OP growth Remains Buy
Investment stance: Buy; we maintain view that Misumi is a growth stock with Target Price JPY 2,400 annual operating profit growth prospects of 10% Increased from 2,250 We raise our forecasts and reiterate our Buy rating. Q3 results were largely in line with Closing price our forecasts and guidance, and looked favorable. We think the stock is particularly 30 January 2017 JPY 2,040 attractive as a medium-term investment. We think the growth potential of the current business model is underscored by the 9% y-y growth in sales in Japan in Q1-3. The Potential upside +17.6% company has been growing overseas by transplanting its Japan model there. In
response to the spread of ICT-utilizing production technologies in the manufacturing sector, Misumi has been working to further increase ease of use for customers with Anchor themes new tools that leverage CAD. We think growth can be sustained over the medium term We see structural growth for factory as the business model evolves. We raise our target price to ¥2,400, based on our 18/3 automation (FA) in China and other EPS estimate (before goodwill amortization expenses) and a fair-value P/E ratio of 28x emerging markets as FA is a means (unchanged from before, 25x excluding net cash, which amounts to 9% of market cap). of reducing manpower requirements and increasing quality. While demand Sales (adjusted for forex) up 17% in December, including 27% growth overseas, is affected by short-term economic led by China, Asia cycles, we look to medium-term In Q3, sales rose 7% y-y and operating profits fell 1% to ¥7.4bn (11.4% of sales). cyclical growth. We think investment Operating profits declined mainly owing to a high comparison base stemming from low appeal is strong for companies with SG&A expenses (which were high in the subsequent quarter). We expect SG&A high sales and profit growth potential expenses to come to 31% of sales in 17/3, and because SG&A expenses are at the attributable to internal growth initiatives.
discretion of management, they can change drastically from quarter to quarter. We
think continuity of sales growth is the most important point to take into consideration when looking at Misumi's earnings. In Q3, sales rose 12% (excluding forex effects), Catalyst with rises of 9% in Japan and 16% overseas. In December, sales rose 17% (after Misumi's monthly sales, released adjusting for forex and calendar effects), with rises of 9% in Japan and 27% overseas, around the 20th of every month, tend the latter apparently driven by China and Asia. to hold up better than the macro environment. In December, sales We expect sales and operating profit CAGR of 10% and operating margin of 11% rose 8% y-y, and after adjusting for We raise our operating profit forecast for 18/3 and now forecast sales growth of 13% forex rates and business days, they and operating profit growth of 15%. The small increase in our forecast reflects yen rose 17% (+9% in Japan, +27% weakness and a small increase in our sales forecast for China/Asia, exceeding a small overseas). decrease in our sales forecast for the Americas. Our overall view on earnings is that
the company will continue to increase sales and operating profits about 10% a year Research analysts while maintaining an operating margin (before goodwill amortization costs) of 11%. Japan machinery
Katsushi Saito - NSC Cons 16/3 17/3E 18/3E 19/3E [email protected] +81 3 6703 1160 Currency: JPY Actual Old New Co's Old New Old New Sales (mn) 240,139 251,500 256,000 253,500 276,500 288,000 303,000 317,000 Ope profits (mn) 25,690 26,500 27,500 27,200 29,500 31,500 34,000 35,500 Adjusted EPS 66.3 71.3 69.6 N/A 80.5 85.6 89.6 93.2 Adjusted P/E (x) 30.8 28.6 29.3 N/A 25.4 23.8 22.8 21.9 EV/EBITDA (x) 15.9 15.1 14.7 N/A 13.7 13.1 12.6 12.1 P/B (x) 4.0 3.7 3.7 N/A 3.5 3.4 3.3 3.2 Dividend yield (%) 0.8 0.8 0.8 N/A 0.9 1.0 1.1 1.1 Source: Company data, Nomura estimates (See the bottom of page 2 for further notes to this table.)
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 21:34 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 17
Acom 8572.T 8572 JP
EQUITY: JAPAN INSURANCE & DIVERSIFIED FINANCIALS
Q3: revising our forecast, reaffirming Buy Global Markets Research
We think high interest repayment losses only 30 January 2017 Rating temporary Remains Buy
Investment stance: we reiterate Buy rating, solid growth in each business Target Price JPY 600 We revise our 17/3 forecasts in view of Apr-Dec 2016 (Q3 cumulative) results. As we Reduced from 680 have previously pointed out, the number of claims for repayment of overcharged Closing price interest has been declining, but the number of claims and the repayment per claim has 30 January 2017 JPY 474 been higher than we anticipated. We think this reflects changes to some TV commercials (on how to file claims) used by law firms and an increase in the number of Potential upside +26.6% claims that are not settled and lead to lawsuits. Given the statute of limitations for such
claims under the Civil Code, we think the number of claims and repayments per claim will remain high only temporarily. As sales have been trending higher than guidance, Anchor themes we think the likelihood is high that our forecasts, which are higher than guidance, will The loan book has been growing be attained. We maintain a bullish stance on the stock. We lower our target price to steadily, and we expect solid growth ¥600 in view of concerns (a rise in the risk premium) in the stock market over interest in the near term. The introduction of repayments. a negative interest rate policy could well stoke competition between bank (1) Assets outstanding in the consolidated loan & credit card segment were higher than lending and consumer finance guidance, (2) the guarantee segment performed in excess of guidance mainly owing to lending, but we think consumer its focus on regional banks, and (3) the overseas segment saw profits grow, despite the finance companies could see adverse effects of yen appreciation. The term-average fund procurement rate came to opportunities for growth in loan 1.27% in Q1-3, short of guidance for 1.46%. guarantee business. Our focus is on growth in the level of contributions Most claims for repayment of overcharged interest are made by lawyers and cannot be from overseas operations over the controlled by lenders. Some assumptions need to be made to project claims going medium term. forward (Figure 2). We factor in a higher repayment amount per claim in our latest forecast revisions. We lower our 17/3 forecasts. Our assumptions are based on our Catalyst main scenario that repayments per claim will rise until 18/3, but that the number of Catalysts we see include (1) claims will decline. For the reasons stated earlier, we make no change to our sales confirmation of improvements in forecast. We think the stock has been underperforming the market average of late growth potential and profitability from because the decline in interest repayment claims has slowed. We see downside risk to expansion at the guarantee and share price over the short term depending on the trend in monthly claims data. overseas financial segments; and (2) confirmation of the disappearance of claims for repayment of excessive
interest charges and a restoration of dividend payments.
Research analysts
Japan insurance & diversified
financials Wataru Otsuka - NSC Cons 16/3 17/3E 18/3E 19/3E [email protected] +81 3 6703 1128 Currency: JPY Actual Old New Co's Old New Old New Ope revenues (mn) 237,683 248,300 248,300 242,300 261,700 261,700 271,900 271,900 Ope profits (mn) 15,516 73,400 7,400 64,800 80,300 80,300 85,200 85,200 EPS 9.3 45.4 3.3 37.3 49.8 49.8 52.9 52.9 P/E (x) 50.9 10.4 145.6 N/A 9.5 9.5 9.0 9.0 P/B (x) 2.3 1.9 2.3 N/A 1.6 1.9 1.4 1.6 Dividend yield (%) 0.0 0.0 0.0 N/A 2.1 2.1 2.7 2.7 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 21:20 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 18
Nihon M&A Center 2127.T 2127 JP
EQUITY: JAPAN SERVICES
Less share price upside, but we retain Buy rating Global Markets Research
We lower our forecasts based on 17/3 Q3 results 30 January 2017 Rating Remains Buy
Investment stance: we reiterate our Buy rating Target Price JPY 4,100 We have lowered our earnings forecasts following the release of 17/3 Q3 results, and Reduced from 4,300 cut our target price from ¥4,300 to ¥4,100. Recent share price rises have reduced Closing price share price upside, but we reiterate our Buy rating as we expect ongoing growth in the 30 January 2017 JPY 3,575 market to find business successors and in view of the company’s longer-term growth potential. The main factor in our earnings forecast revisions is a cut to our projection for Potential upside +14.7% the number of deals closed in full-year 17/3. Although we expect a further q-q decline in
the number of deals closed in Q4 owing to the seasonality in the company’s earnings, we do not think the company has lost its growth potential and retain our Buy rating. Anchor themes Business succession M&A remains in Results overview high demand among SMEs. Attention Consolidated recurring profits rose 30% y-y to ¥7,695mn in 17/3 Q1-3. Although the is focusing on which M&A pace of profit growth slowed versus that in Q2, profits reached 96% of the company’s consultants can offer differentiated full-year projection, and growth was largely in line with guidance. The number of deals services amid upbeat business closed (number of companies basis) was 127 in Q3, down from 152 in Q2. We think conditions. this reflects the company being more engaged in order-taking activity than usual in Q3
in view of firm earnings in Q2. As of 30 January, the company had increased the Catalyst number of consultants by 36 versus end-March 2016 (including provisional hires), an Catalysts include (1) further acceleration versus the situation as of end-Q2 (increase of 22), which is reassuring in improvement in deal-closing regard to future business growth. efficiency, (2) utilization of newly Points to watch hired consultants, and (3) an We will be watching for whether the company can increase the number of deals closed increase in the number of deal per consultant in order to achieve greater earnings growth from the large number of referrals from partner financial institutions. consignments, and whether it can increase average revenue per contract by improving
its abilities in terms of making proposals to mid-tier companies. Research analysts
Japan banks
Naruhiko Sakamaki - NSC [email protected] +81 3 6703 1273
Cons 16/3 17/3E 18/3E 19/3E Currency: JPY Actual Old New Co's Old New Old New Sales (mn) 14,778 20,654 18,391 16,880 23,861 22,655 30,587 29,293 Ope profits (mn) 7,002 10,594 9,033 8,000 12,285 11,375 16,441 15,170 EPS 60.5 92.4 78.8 67.4 107.0 99.2 142.8 132.0 P/E (x) 59.1 38.7 45.4 N/A 33.4 36.0 25.0 27.1 EV/EBITDA (x) 39.2 26.1 30.6 N/A 22.2 24.0 16.3 17.7 P/B (x) 17.1 13.2 13.7 N/A 10.7 11.1 8.5 8.9 Dividend yield (%) 0.7 1.1 0.9 N/A 1.2 1.1 1.6 1.5 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 15:43 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 19
Sekisui Chemical 4204.T 4204 JP
EQUITY: JAPAN HOUSING & REAL ESTATE
17/3 Q3 results: forecasts raised on weak yen Global Markets Research
Strengthening presence in built-for-sale housing 30 January 2017 Rating Remains Neutral
Investment stance: raising our target price by 13% but retaining Neutral rating Target Price JPY 1,800 Sekisui Chemical released 17/3 Q1-3 results on 30 January and also raised its 17/3 Increased from 1,600 operating profit projection by ¥2.0bn and its recurring profit projection by ¥4.0bn, mainly Closing price to reflect yen depreciation, which has led to new profit projections for the high- 30 January 2017 JPY 1,892 performance plastics segment, where products such as automotive interlayers and electronic components have high overseas sales weightings. Having drawn up Potential downside -4.9% guidance at end-October 2016 on the assumption of USD/JPY of 101 in 17/3 H2
versus 105 in H1, it has now changed its USD/JPY assumptions to 109 for Q3 and 113 for Q4. With every ¥1 weakening versus the dollar boosting annual operating profits by Anchor themes around ¥0.5bn, we have revised our earnings forecasts for 18/3 onwards on the Housing demand has been assumption of USD/JPY of 114. Having previously valued stock in line with the recovering, but lacks vigor. Given the weighted average P/E for nine housing-related companies under our coverage, based consensus view that the housing on 17/3 forecasts, we have now rolled forward the base year for our target price market will contract over the longer term, it will be imperative for Sekisui calculation to 18/3, for which the sector average P/E is 13x. This yields a target price of Chemical to expand its footprint in ¥1,800. We retain our Neutral rating. Management intends to hold a briefing on 12 April non-housing operations. to discuss the new medium-term business plan that starts in 18/3.
Working to strengthen presence in built-for-sale housing, but outlook is unclear Catalyst Housing orders were weak, as at sector peers, in Q3. Order volumes fell 2% y-y, The medium-term business plan calls versus management’s projection of a 5% rise. While 17/3 earnings will be unaffected for 17/3 operating profits of ¥100bn as long as properties already ordered are built on schedule, the contraction in the order and ROE of at least 10%, but we book at the start of 18/3 will make for an increasingly uncertain outlook in 18/3. think this will be tricky to achieve. Management is looking for orders to grow 4% in Q4 as conditions pick up thanks to the Our focus is on rationalization at the equity market rally and the prospect of higher interest rates, and as it works to urban infrastructure & environmental strengthen sales of built-for-sale housing to first-time buyers, but it also recognizes that products segment and recovery in the market outlook is uncertain. We think it is better to take a slightly cautious stance housing demand, as well as potential towards housing. for expansion in growth businesses, including automotive interlayers and mobile phone components.
Research analysts
Japan housing & real estate
Daisuke Fukushima - NSC
[email protected] +81 3 6703 1150
Cons 16/3 17/3E 18/3E 19/3E
Currency: JPY Actual Old New Co's Old New Old New
Sales (bn) 1,096.3 1,064.0 1,067.0 1,067.0 1,100.0 1,105.0 1,120.0 1,145.0 Ope profits (bn) 89.8 94.0 96.0 96.0 99.0 102.0 102.0 107.0 EPS 115.1 122.5 122.2 123.4 126.4 138.3 130.6 144.6 P/E (x) 16.4 15.4 15.5 N/A 15.0 13.7 14.5 13.1 EV/EBITDA (x) 7.2 6.7 6.7 N/A 6.2 6.0 5.7 5.5 P/B (x) 1.8 1.6 1.6 N/A 1.5 1.5 1.4 1.4 Dividend yield (%) 1.6 1.7 1.7 N/A 1.8 1.8 1.9 1.9 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 14:33 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 20
MonotaRO 3064.T 3064 JP
EQUITY: JAPAN RETAILING
We lower our forecasts slightly, remain Neutral Global Markets Research
Automated logistics center likely to generate cost 30 January 2017 Rating efficiencies in 17/12 Remains Neutral
Investment stance: despite medium-term growth prospects we maintain Neutral Target Price JPY 3,200 rating on high valuations Remains For 17/12 we expect healthy new customer acquisitions, but look for a temporary Closing price slowdown in profit growth owing to a dent to private brand margins from yen weakness, 30 January 2017 JPY 2,913 startup costs at a new distribution center, and stepped up advertising. That said, we expect profit growth to gain momentum from 18/12 thanks to the deployment of robots Potential upside +9.9% at the new center. In the medium term, we expect sales to continue growing as the
company attracts new customers in restaurants and other nonmanufacturing sectors, and see ongoing growth via efficiency gains in logistics. We have lowered our medium- Anchor themes term forecasts slightly, but rolled forward the base year of our DCF model to 17/12, We expect the company to continue which leaves our target price unchanged. We retain our Neutral rating in view of high winning new customers by expanding valuations. inventories of manufacturing, construction, kitchen, and agricultural Q4 results: operating profits up 36% y-y on strong sales, boost from strong yen equipment supplies. The Operating profits rose 34% y-y in 16/12, within the guidance range. In Q4 alone, maintenance, repair and operations operating profits rose 36% y-y. The main factor behind profit growth was faster new (MRO) market is worth ¥5trn, and we customer acquisition thanks to stronger promotional activity, for example increased see no risk of fiercer competition for catalog distribution and TV advertising. Private brand products, which tend to result in the time being. MonotaRO’s regular product purchases, accounted for 22.8% of total Q4 sales, down from the prior- provision of its own private brands year period, although efforts to boost demand from existing customers appear to have goods and merchandise databases is had some results. In Q4 the operating margin improved 1.5ppt. Although the helping customers to manage their purchases and reduce costs.
advertising costs-to-sales ratio was higher, this was offset by an improvement in the
gross margin thanks to a boost to private brand merchandise from a stronger yen. Catalyst Investments in 17/12, working to improve SCM efficiency over medium term We see potential catalysts as (1) Management intends to focus on sales growth by increasing its range of products with stronger monthly sales as a result of short lead times and through more aggressive advertising. Our forecasts, which are moves to boost demand among based on our revised USD/JPY assumption (from 105 to 114), assume a deterioration existing customers, (2) an early move in margins on imported products from H2, and slightly high advertising costs to reflect into the black at the overseas stepped up advertising. The new logistics center in Ibaraki Prefecture is due to open at business, and (3) an improvement in the end of March. Although the company will likely incur one-time startup costs in H1, margins after the startup of the new in H2 we look for an improvement in cost efficiency as a result of better capacity Ibaraki center. utilization at the more productive new center. In the medium term, MonotaRO also
plans to focus on improving efficiency in the supply chain. It is seeking shorter routes Research analysts between overseas production bases and customers in order to further reduce lead times. The company needs to build a new IT system, and assuming this goes ahead Japan retailing we think it should result in further improvements in margins.
Kosuke Narikiyo - NSC [email protected] Cons 16/12 17/12E 18/12E 19/12E +81 3 6703 1259 Currency: JPY Actual Old New Co's Old New Old New Masafumi Shoda - NSC Sales (mn) 69,647 84,200 84,000 84,239 98,000 98,000 N/A 111,000 [email protected] Ope profits (mn) 9,493 11,500 11,000 11,596 14,500 14,000 N/A 17,000 +81 3 6703 1230
EPS 51.5 62.4 61.3 64.0 81.0 78.3 N/A 94.4 P/E (x) 56.6 46.7 47.5 N/A 36.0 37.2 N/A 30.9 EV/EBITDA (x) 35.7 29.1 29.9 N/A 23.2 23.6 N/A 19.4 P/B (x) 21.2 16.6 16.6 N/A 12.6 12.7 N/A 9.9 Dividend yield (%) 0.6 0.7 0.8 N/A 0.9 0.9 N/A 1.0 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 16:39 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 21
Nisshin Seifun Group 2002.T 2002 JP
EQUITY: JAPAN FOOD, BEVERAGES & TOBACCO
Steady rise in underlying profitability Global Markets Research
Prospect of double-digit profit growth in 18/3 on 30 January 2017 Rating investment returns, EPA-E and bran recovery Remains Buy
Investment stance: we reiterate Buy rating, forecast double-digit profit growth in Target Price JPY 2,000 18/3 as 17/3 negatives turn into positives Remains We have trimmed our 17/3 earnings forecasts to reflect the slow recovery in sales of Closing price EPA-E, but have only fine-tuned our earnings forecasts for 18/3 onwards. We expect 30 January 2017 JPY 1,741 bran prices to pick up from the start of 18/3, and think that EPA-E shipments will also recover during the middle of 18/3. We forecast operating profit growth of 10% y-y in Potential upside +14.9% 18/3 as 17/3 negatives turn into positives and prior investments generate cost savings.
We retain our target price and rating. We also look for management to reduce WACC via proactive shareholder returns such as share buybacks. Anchor themes Conditions within the flour milling 17/3 Q3 results: operating profits down y-y, but solid minus external factors industry are stable now that the focus Operating profits fell ¥0.2bn y-y to ¥8.1bn in Q3. Operating profits would have risen has shifted from sales to earnings. ¥0.7bn but for dents of ¥0.7bn from falling bran prices and ¥0.2bn from yen Potential for profit growth will likely appreciation. Frozen pasta sales bottomed out and dry pasta sales were solid too, and hinge on moves to shore up earnings profits benefited from rises in capacity utilization at the frozen food plant in Kobe and platforms in Japan, investment the dry pasta plant in Turkey. However, EPA-E shipments at Nisshin Pharma remained geared toward gaining cost weak. As well as writing down EPA-E inventories by several hundred million yen in Q3 competitiveness, or swifter overseas in response to demands for price cuts by US customer Amarin, Nisshin Pharma also expansion.
posted extraordinary impairment losses of ¥0.7bn on production facilities on the
prospect of tougher conditions going forward. While these losses are a negative, the Catalyst impairments will make earnings less volatile in future. Potential catalysts include a rebound 18/3: prospect of recoveries in bran prices and EPA-E shipments as well as in bran prices, higher shipments of investment returns EPA-E, better-than-expected We forecast operating profit growth of 10% y-y in 18/3. We think that higher capacity investment returns, and improved shareholder returns. utilization will ensure sustained cost savings at plants in Kobe and Turkey. While we expect bran prices to dent operating profits by ¥1.8bn in 17/3, we envision no such Research analysts impact in 18/3, with bran prices picking up from 18/3 Q1 thanks to yen depreciation and price rises for corn and soybeans. Elsewhere, the current priority for EPA-E is to work through shipments from third-party suppliers, but we think this will come to an end in Japan food 18/3, thereby leading to a recovery in shipments from Nisshin Pharma. Satoshi Fujiwara - NSC [email protected] +81 3 6703 1211
Cons 16/3 17/3E 18/3E 19/3E Currency: JPY Actual Old New Co's Old New Old New Sales (bn) 556.7 537.1 538.2 535.0 538.6 542.7 547.0 558.5 Ope profits (bn) 23.8 25.4 24.7 24.5 27.1 27.2 28.8 28.9 Adjusted EPS 62.1 70.9 69.6 N/A 75.3 73.9 81.2 80.0 Adjusted P/E (x) 28.0 24.5 25.0 N/A 23.1 23.6 21.4 21.8 EV/EBITDA (x) 11.6 10.7 10.9 N/A 10.2 10.2 9.8 9.8 P/B (x) 1.4 1.4 1.4 N/A 1.3 1.3 1.3 1.3 Dividend yield (%) 1.4 1.6 1.6 N/A 1.7 1.7 1.8 1.8 Source: Company data, Nomura estimates (See the bottom of page 2 for further notes to this table.)
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 16:36 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 22
Japan REIT sector
EQUITY: JAPAN REIT
Ichigo Hotel REIT raises guidance Global Markets Research
No need for concern about hotel REITs missing 30 January 2017 guidance, depending on assumptions Research analysts
Ichigo Hotel REIT hikes 17/7 estimates for operating revenues by 1.6%, DPU by 5.0% Japan REIT Ichigo Hotel REIT Investment [3463] announced upward revisions to its 17/7 Tomohiro Araki - NSC projections on 30 January. It hiked its operating revenue projection by 1.6% from [email protected] ¥1.64bn to ¥1.67bn and its DPU forecast by 5.0% from ¥2,838 to ¥2,981. It raised its +81 3 6703 1141 operating revenue guidance to reflect: (1) increased rents at Hotel Vista Premio Kyoto, Chisun Inn Osaka Hommachi, and Smile Hotel Tokyo Asagaya on tenant changes at restaurants and karaoke parlors located within the directly leased portion of the buildings; and (2) upward revisions for operating revenues for eight of the 12 hotels paying variable rent. It also lowered its estimates for operating costs by ¥7mn and for nonoperating costs by ¥2mn, and hiked its DPU forecast by 5.0%. Raising estimate for RevPAR growth on existing hotel basis from 4.0% to 5.0% Ichigo Hotel REIT Investment’s previous 17/7 guidance assumed average occupancy of 89.1% on a total portfolio basis and an average daily room rate (ADR) of ¥8,041. It has now revised these figures to 88.9% and ¥8,142 respectively. It also raised its estimate for RevPAR (revenues per available room, average occupancy × ADR) growth on an existing hotel basis from 4.0% y-y to 5.0%. Upward revisions for variable rents reflects increase in room and bed numbers, refurbishments The REIT increased its variable rent revenue projections for Nest Hotel Sapporo Ekimae, Nest Hotel Sapporo Odori, Nest Hotel Osaka Shinsaibashi, Smile Hotel Tokyo Asagaya, Smile Hotel Asakusa, Nest Hotel Matsuyama, and others (not disclosed). According to management, these revisions reflect greater-than-expected effects from an increase in room or bed numbers or rebounds following partial sales suspensions for refurbishments. On the other hand, it lowered its variable rent revenue estimates for Chisun Inn Osaka Hommachi and Valie Hotel Tenjin, to reflect fiercer competition for the former and a smaller-than-expected rebound from the Kumamoto earthquakes for the latter. Accuracy, achievability of projections even more important for hotel REITs Investors have been expressing unease about the earnings outlook for hotel REITs since Invincible Investment [8963] (Buy) cut its 16/12 estimates on 22 December 2016. That said, we note that some hotel REITs may raise rather than lower their guidance, as has been the case with Ichigo Hotel REIT Investment, depending on the assumptions lying behind their projections and subsequent performance at portfolio properties. In any event, we think the accuracy of earnings forecasts and their achievability are increasingly important factors for hotel REITs.
Production Complete: 2017-01-30 15:58 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 23
Mitsubishi Estate 8802.T 8802 JP
EQUITY: JAPAN HOUSING & REAL ESTATE
Quarterly data: weak condo releases Global Markets Research
Slightly weak contract signings for condos to be 30 January 2017 Rating posted as sales from 19/3 onwards Remains Buy
Investment stance: we reiterate Buy rating as mainstay office buildings are Target Price JPY 2,780.0 effectively fully occupied Remains Ahead of the release of 17/3 Q1–3 results on 6 February, Mitsubishi Estate has Closing price announced key monthly indicators for Q3 such as vacancy rates and rents for office 30 January 2017 JPY 2,182.0 buildings and releases, contract backlogs, and inventories for condominiums on its website. The vacancy rate at its mainstay buildings segment, which has the greatest Potential upside +27.4% bearing on its share price, improved from 2.93% in September to 2.68% in November,
but came in at 3.08% at end-December. This reflects secondary vacancies as tenants relocate to new properties that it has developed. However, we see only limited Anchor themes downside risk to these operations as a vacancy rate of around 3% is generally Mitsubishi Estate has started to considered to represent full occupancy and management expects the vacancy rate to conclude provisional tenancy come in at 3.5% at end-March 2017. It has also made steady progress in finding agreements for major buildings due tenants for properties such as the Otemachi Park Building, which it completed in for completion in 2018, which partly reflects the dearth of new office January 2017, and Marunouchi 3-2, which is scheduled for completion in fall 2018. buildings hitting the market in Tokyo's With the vacancy rate low, it has continued to negotiate rent hikes with tenants, and five central wards. We see prospects average monthly rents per tsubo (3.3m²) rose 3% y-y in December. We see no need to of sustained rises in rents. change our stance towards the office market or towards Mitsubishi Estate's buildings segment, and accordingly retain our earnings forecasts, target price, and Buy rating. Catalyst Slightly weak contract signings for condos to be posted as sales from 19/3 Our attention is on rent levels and onwards efforts to find tenants for office Mitsubishi Estate released only 719 condos (down 39% y-y) in Q3, making for a Q1–3 buildings. The company is due to total of 2,353 (down 13%). As of end-December 2016, it had signed contracts for only announce Apr-Dec 2016 results on 6 ¥13.2bn for condos scheduled to be posted as sales from 19/3 onwards and will February and plans to release a new therefore need to step up sales activities in future. Signed condo contracts totaled medium-term business plan this ¥373.4bn at end-December 2016, of which ¥211.8bn was for condos scheduled for spring. We will be focusing on capex posting as sales in 17/3, equivalent to 92% of management's sales projection (the reforms and shareholder returns policies.
same as our forecast) of ¥230.0bn. It also has some ¥148.4bn in signed contracts for
condos scheduled for posting as sales in 18/3, with developments such as Nishi Shinjuku Tower 60 (954 units) and Nakanoshima Tower in Osaka (894 units) already Research analysts
completely sold out. Japan housing & real estate
Daisuke Fukushima - NSC [email protected] +81 3 6703 1150
Cons 16/3 17/3E 18/3E 19/3E Currency: JPY Actual Old New Co's Old New Old New
Sales (bn) 1,009.4 1,129.0 1,129.0 1,129.0 1,080.0 1,080.0 1,090.0 1,090.0 Ope profits (bn) 166.2 180.0 180.0 180.0 186.0 186.0 190.0 190.0 EPS 60.1 64.9 64.9 64.9 67.0 67.0 68.5 68.5 P/E (x) 36.3 33.6 33.6 N/A 32.6 32.6 31.9 31.9 EV/EBITDA (x) 20.9 20.5 20.5 N/A 20.5 20.5 20.6 20.6 P/B (x) 2.0 2.0 2.0 N/A 1.9 1.9 1.8 1.8 Dividend yield (%) 0.7 0.8 0.8 N/A 0.9 0.9 0.9 0.9 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 15:41 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 24
Sankyu 9065.T 9065 JP
EQUITY: JAPAN PLANT ENGINEERING & SHIPBUILDING
Solid Japanese infrastructure upgrade demand Global Markets Research
Improved margins at plant engineering/installation 30 January 2017 Rating segment Remains Buy
Investment stance: we raise target price, reaffirm Buy rating Target Price JPY 900 Sankyu released 17/3 Q1–3 results on 30 January. We retain our earnings forecasts in Increased from 850 the light of results, and reiterate our Buy rating. We envision solid earnings, especially Closing price at the plant engineering/installation segment, as maintenance and upgrade demand 30 January 2017 JPY 698 increases for ageing steelmaking, chemical, and electric power infrastructure in Japan. Having rolled forward the base year of our target price calculation to 18/3, we obtain Potential upside +28.9% our target price of ¥900, up from ¥850 to date, using a target P/E of 15x, representing a
discount versus the capital goods sector average because of inferior liquidity. Anchor themes Improved margins in 17/3 Q1–3, especially at plant engineering/installation Many infrastructure-related facilities segment in Japan's steel, chemical, and Operating profits rose 21% y-y in 17/3 Q1–3. The core plant engineering/installation electric power industries were built segment's operating profits were up 32% y-y while its operating margin increased to during the country's period of rapid 8.4% from 7.2%. Margins look to have improved on additional projects arising as a economic growth and demand for result of the aging of infrastructure in Japan as well as scheduled maintenance of their maintenance and replacement chemical plants. Operating profits at the logistics segment rose 5%. Although work is growing as these facilities age. We volume declined at the on-site logistics business, margins are improving thanks to both also see plenty of demand for a rise in container handling volume and improved capacity utilization at a logistics energy-saving upgrades when center opened in 16/3. facilities are replaced.
Solid orders for Japanese infrastructure projects at plant engineering/installation segment Catalyst Orders at the plant engineering/installation segment rose 15% y-y in 17/3 Q1–3. In Potential catalysts include orders for addition to upgrade work on coke ovens, the company appears to have won a major upgrade work on coke ovens and an blast furnace upgrade order in Q3. The order backlog at the plant unexpectedly large increase in additional maintenance and engineering/installation segment is up 20% y-y at ¥64.1bn. We envision solid orders as rebuilding/upgrade projects for a result of upgrade demand for ageing steelmaking and electric power facilities in infrastructure in Japan. Japan. Management has raised its 17/3 operating profit projection from ¥24.5bn to ¥26.0bn, with the plant engineering/installation segment accounting for the majority of Research analysts the increase. Japan plant engineering & shipbuilding Ryo Tazaki - NSC [email protected] +81 3 6703 1117
Cons 16/3 17/3E 18/3E 19/3E
Currency: JPY Actual Old New Co's Old New Old New
Sales (mn) 489,441 502,000 502,000 500,000 510,000 510,000 521,000 521,000 Ope profits (mn) 24,317 26,600 26,600 26,000 27,400 27,400 28,600 28,600 EPS 42.9 57.8 57.8 57.8 59.8 59.8 62.5 62.5 P/E (x) 16.3 12.1 12.1 N/A 11.7 11.7 11.2 11.2 EV/EBITDA (x) 7.1 6.3 6.3 N/A 5.9 5.9 5.4 5.4 P/B (x) 1.5 1.3 1.3 N/A 1.2 1.2 1.1 1.1 Dividend yield (%) 1.6 1.7 1.7 N/A 1.7 1.7 1.7 1.7 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 15:39 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 25
Japan REIT sector
EQUITY: JAPAN REIT
Kenedix Office: credit rating raised to AA- Global Markets Research
Poised to meet BOJ purchase criteria 10 months 30 January 2017 after last upgrade Research analysts
Meeting BOJ REIT purchase criterion of AA- for first time since listing On 30 January Japan Credit Rating Agency (JCR) raised its long-term issuer credit Japan REIT rating for Kenedix Office Investment [8972] (Neutral) from A+ (outlook: positive) to AA- Tomohiro Araki - NSC (outlook: stable). This marks the first time that Kenedix Office Investment has gained [email protected] an AA- rating or higher since its listing in 2005. One of the BOJ’s criteria for purchasing +81 3 6703 1141 REITs is a credit rating of at least AA-. To qualify for the BOJ’s purchase program REITs must also in principle have been traded on an exchange for at least 200 days in a period of one year, and achieved annual trading value of at least ¥20bn. In 2016 Kenedix Office Investment was traded for 245 days with annual trading value of ¥210.6bn. The REIT’s lenders are likely to seek BOJ approval of debt issued by the REIT and loans to the REIT as eligible collateral, and if that approval is forthcoming, the REIT’s investment units would likely become targets for purchase by the BOJ. Latest upgrade comes around three years 10 months after A+ (stable) rating, and around 10 months after A+ (positive) rating Whether Japanese REITs meet the minimum AA- credit rating requirement for the BOJ’s REIT purchase program can sometimes be an important factor in their unit price performance. In that context ,the question sometimes arises of how long it might take for Japanese REITs with a credit rating below AA- to gain a rating of AA- or higher. Of course this is likely to be different in each case, but purely as an example we look back at Kenedix Office Investment’s credit rating history since 2013. Kenedix Office Investment’s long-term issuer rating (JCR; same below) was raised from A (outlook: positive) to A+ (outlook: stable) in March 2013. Its rating was left unchanged in the subsequent reviews in February 2014 and March 2015, but raised to A+ (outlook: positive) in March 2016. This was followed by the upgrade under the latest review in January 2017. From this we can see that it took around three years and 10 months for its rating to progress from A+ (stable) to AA- (stable), or around 10 months or so from when it received the A+ (positive) rating. As its rationale for the latest upgrade of Kenedix Office Investment, JCR cited qualitative improvements through diversification and reshuffling of the portfolio, as well as the REIT’s diverse property acquisition methods, its stable property management, and its conservative controls of LTV to keep it in the 40-45% range. Since 2016 there has been a notable difference between the unit price performance and valuations of REITs rated AA- or higher (and thus eligible for BOJ purchase) and those with ratings below that level. In order to correct that disparity, we think the BOJ could switch from individual REIT purchases to buying TSE REIT Index-linked ETFs, and this is likely to become an important point to watch from now on.
Production Complete: 2017-01-30 14:59 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 26
Sumitomo Dainippon Pharma
4506.T 4506 JP
EQUITY: JAPAN PHARMACEUTICALS
We revise forecasts, retain target price Global Markets Research
Acquisitions, in-licensing to make up for poorer 30 January 2017 Rating prospects for pipeline drug Remains Neutral
Investment stance: in-licensed products offsetting poorer outlook for pipeline Target Price JPY 1,950 drug, we retain Neutral rating Remains We have revised our forecasts and leave our target price at ¥1,950. We have cut our Closing price peak sales forecast for existing pipeline drug dasotraline, but this impact will probably 27 January 2017 JPY 1,954 be cancelled out by the completion of the acquisition of Tolero Pharmaceuticals, announced on 26 January, and the licensing in of three COPD treatments from Potential downside -0.2% Novartis. We retain our Neutral rating.
18/3 operating profits likely to fall on higher costs despite major contributions Anchor themes from in-licensed drugs The stock market has been focusing We have raised our forecasts for 17/3 to reflect bigger price hikes for Latuda and other on sales of earnings drivers and the products in the US than we previously envisioned. For 18/3, we have hiked our sales development of distinctive new forecast to factor in: (1) ongoing single-digit price hikes in the US; (2) the booking of drugs. Another major investment North American sales for the three in-licensed COPD treatments; and (3) sales theme is improvement of shareholder synergies with existing COPD drug Brovana. However, we have raised our operating return policies to raise asset profit forecast only slightly. Management projected a rise of around ¥7bn in promotional efficiency. costs from the in-licensing of drugs in North America at the start of the year. This refers
to the three COPD treatments. However, as the licensing was delayed, we think the Catalyst booking of these costs will be pushed back into 18/3. Factoring in the cost of the Tolero Potential share price catalysts acquisition too, we see an increase of over ¥10bn to SG&A costs in 18/3. Drug prices include: (1) success in the in North America are a risk factor. Sumitomo Dainippon Pharma normally hikes prices BRIGHTER trials for BB1608 or an in January but left them unchanged this year. Price increases may be smaller than we early end to the study (expected in had expected, depending on what the Trump administration does. 2017 or later); (2) achievement of the Lowering forecasts for dasotraline endpoint of a 10-20 point reduction in ADHD RS-IV score within four weeks We have cut our peak sales estimate for ADHD treatment dasotraline from ¥39.7bn to of administration in the Phase 3 trial ¥6.5bn. As noted in our 16 January 2017 Global Research First Look - Sumitomo of dasotraline; or (3) filing and Dainippon Pharma (4506 JP) (Neutral), the effect size for dasotraline was smaller than approval of SUN-101. for rival atomoxetine, offering no differentiation. With the Phase 3 study on adult ADHD patients failing to achieve its primary endpoint too, we think there are question marks Research analysts as to whether the drug will be approved at all. Japan pharmaceuticals & healthcare
Motoya Kohtani - NSC [email protected] +81 3 6703 1227
Cons 16/3 17/3E 18/3E 19/3E Currency: JPY Actual Old New Co's Old New Old New Sales (mn) 403,206 400,000 408,407 404,000 409,700 443,700 376,900 418,700 Ope profits (mn) 36,929 47,300 51,672 46,000 46,300 48,700 41,900 49,400 EPS 62.2 59.6 86.2 65.4 70.0 72.5 67.7 78.3 P/E (x) 31.4 32.8 22.7 N/A 27.9 27.0 28.9 25.0 EV/EBITDA (x) 12.5 10.0 10.5 N/A 9.4 10.5 9.5 9.8 P/B (x) 1.7 1.7 1.6 N/A 1.6 1.6 1.5 1.5 Dividend yield (%) 0.9 0.9 0.9 N/A 0.9 0.9 0.9 0.9 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 14:19 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 27
Kinden 1944.T 1944 JP
EQUITY: JAPAN CONSTRUCTION
17/3 Q3 results: guidance raised Global Markets Research
We retain profit forecasts despite lowering outlook 30 January 2017 Rating for power distribution line engineering work Remains Buy
Investment stance: we reiterate Buy rating, management raises profit guidance Target Price JPY 1,704 on improved margins Increased from 1,645 Kinden released 17/3 Q3 results after the close of trading on 30 January, posting solid Closing price operating profit growth of 10% y-y. It has raised its 17/3 full-year operating profit 30 January 2017 JPY 1,463 projection from ¥29.0bn to ¥33.0bn. We retain our forecast of ¥34.0bn. Management looks to have factored in the sustained improvement in margins, especially for electrical Potential upside +16.5% engineering work for non-power companies. We have trimmed our order and sales
outlook for power distribution line engineering work based on performance through Q3, but have also factored in improved margins, and have consequently left our profit Anchor themes forecasts unchanged. We have raised our target price because we have changed the We expect margins when orders are P/E we apply to our 18/3 EPS forecast from 14x to 14-15x to reflect the rise in the received from customers outside the benchmark P/E. electric power industry to improve. We also expect power distribution Solid parent orders from non-power companies, recovery in IT orders too line work for electric power Parent company orders rose 12% y-y in 17/3 Q3. Orders for power distribution line companies to remain firm. We expect engineering work fell 6%, but orders for mainstay work from non-power companies solar power-related orders to peak remained solid, rising 10%. Having fallen in 17/3 H1 on a capex clampdown at telecom out, but think the impact will be offset carriers, IT orders also rebounded, rising 25% on demand from mobile carriers. This by improvement in electrical work.
matches monthly orders disclosed by telecom engineering companies.
Improved margins on non-power company work at parent company, solid profits Catalyst at subsidiaries too, especially in Japan As a potential catalyst for stock price Parent sales and operating profits fell y-y in 17/3 Q3, but the gross margin improved gains we see orders for power from 16.3% in 16/3 Q3 to 17.6% in 17/3 Q3. Margins have continued to improve, distribution lining work running ahead primarily on non-power company work. Business conditions have remained tough at of company projections. We also highlight gross margins, and we overseas subsidiaries, except in Hawaii, but Japanese subsidiaries look to have driven expect benefits from margin profit growth. improvement in electrical engineering operations.
Research analysts
Japan construction
Kentaro Maekawa - NSC [email protected] +81 3 6703 1208
Cons 16/3 17/3E 18/3E 19/3E Currency: JPY Actual Old New Co's Old New Old New
Sales (mn) 475,345 480,000 473,000 460,000 496,000 489,000 506,000 504,000
Ope profits (mn) 33,450 34,000 34,000 33,000 36,000 36,000 37,000 37,000 EPS 109.1 110.6 110.6 106.0 117.5 117.5 122.1 122.1 P/E (x) 13.4 13.2 13.2 N/A 12.4 12.4 12.0 12.0 EV/EBITDA (x) 6.0 5.5 5.5 N/A 4.8 4.8 4.2 4.2 P/B (x) 0.8 0.8 0.8 N/A 0.8 0.8 0.7 0.7 Dividend yield (%) 1.6 1.8 1.8 N/A 1.9 1.9 2.0 2.0 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 13:50 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 28
Daiwa Securities Group 8601.T 8601 JP
EQUITY: JAPAN INSURANCE & DIVERSIFIED FINANCIALS
17/3 Q3 results: fair showing at retail segment Global Markets Research
Announcement of second share buyback in 17/3 30 January 2017 Rating Remains Neutral
Investment stance: we revise forecasts and target price, but remain Neutral Target Price JPY 830.0 In 17/3 Q1-3 both sales and profits came in lower y-y, owing in part to a sluggish H1, Increased from 680.0 but Q3 operating profits showed a q-q improvement on the back of a rise in the equity Closing price market following the US presidential election in November 2016 (sales up 5.6% and 30 January 2017 JPY 732.9 recurring profits up 6.5%). In Q3 recurring profits came in at 2.1x the prior-quarter level at the retail segment, but fell 1.7% q-q at the wholesale segment, 2.3% at the asset Potential upside +13.2% management segment, and 62% at the investments segment. The retail segment put in
a strong showing not only on equities but also on wrap account services and investment trust sales. At the wholesale segment's global markets business, recurring Anchor themes profits pegged more or less level q-q amid volatile market conditions. Global We think a strategy of raising the investment banking at the wholesale segment also maintained a high level of recurring fixed-cost coverage ratio through profits reflecting a larger number of deals. stable earnings, for example by strengthening the base of retail Along with its results release, management also announced a share buyback of up to operations in Japan and growth in ¥20bn, the same upper limit as the share buyback program announced in October asset management operations, is the 2016. This follows the company's announcement on 25 January that the previous share right approach for the longer term, repurchase had reached the expiration date without having been executed (citing a and we will be interested in how significant rise in its share price as the main reason). With a P/B multiple of around 1x plans progress.
based on our 17/3 BPS forecast, we think attention will be focused on the valuation
level at which the share repurchase will actually be able to go ahead. Catalyst In light of recent conditions, we have revised our forecasts to factor in the solid showing A rebound in top-line earnings via a at the retail and wholesale segments. As far as the target price is concerned, based on recovery in market turnover or sales an improvement in projected average ROE for 17/3-19/3, the risk-on stance of the value is a potential catalyst. We also equity markets and the upward revisions to our profit forecasts, we apply a P/B ratio of look to increased earnings stability and greater shareholder returns over around 1.1x (versus around 0.9x previously), yielding a target price of ¥830. We still the longer term via growth in stable think investors could take a more bullish stance on the stock if there is further progress sources of income, such as trust fees towards a stable earnings structure over the longer term and if that process provides for investment trusts. greater clarity regarding an increase in shareholder returns.
Research analysts
Japan insurance & diversified financials Wataru Otsuka - NSC [email protected] +81 3 6703 1128
Cons 16/3 17/3E 18/3E 19/3E Currency: JPY Actual Old New Co's Old New Old New Sales (mn) 653,711 534,400 553,100 N/A 546,700 555,500 556,200 557,900 Rec profits (mn) 165,148 116,900 137,200 N/A 126,200 138,700 134,300 140,200 EPS 68.3 46.4 62.0 N/A 50.1 60.7 53.3 61.4 P/E (x) 10.7 15.8 11.8 N/A 14.6 12.1 13.7 11.9 P/B (x) 1.0 1.0 1.0 N/A 0.9 0.9 0.9 0.9 Dividend yield (%) 4.0 2.6 3.4 N/A 2.7 3.3 2.9 3.4 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 12:54 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 29
Hulic 3003.T 3003 JP
EQUITY: JAPAN HOUSING & REAL ESTATE
16/12 results Global Markets Research
Looking for profits from real estate sales to 30 January 2017 Rating generate one-third of real estate segment profits Remains Neutral
Investment stance: we make only minor adjustments to our forecasts, retain our Target Price JPY 1,060 Neutral rating Remains On 30 January, Hulic announced 16/12 results. Operating profits came in at ¥53.4bn in Closing price 16/12, versus our forecast of ¥53.0bn (up 26%). For 17/12, guidance looks for a 11% y- 27 January 2017 JPY 1,022 y rise in recurring profits to ¥57.0bn, versus our previous forecast of ¥56.0bn (up 9%). We think the results announcement contained no major surprises. We fine-tuned our Potential upside +3.7% earnings forecasts in the light of results, but make no change to our target price and reiterate our Neutral rating. The company disclosed unrealized gains on rental real
estate of ¥253.6bn as at end-16/12, up 15%. Based on this figure and a corporation tax Anchor themes rate of 30%, NAV per share works out at ¥781, on which basis we do not think the We think demand for office buildings stock looks undervalued at its current level. could wane given prospects of the Actively acquiring properties in order to sell them on at a profit workforce contracting over the longer Operating profits at the real estate segment are broken down into two broad term as Japan's birth rate declines categories, rental income and sales income, and over the past few years property sales and society ages. Hulic is attempting have driven profit growth, with sales income as a percentage of operating profits at the to branch out into new business segment rising from 3% in 11/12 to 8% in 12/12, 12% in 13/12, 32% in 14/12, 29% in fields, including retail facilities in 15/12, and 34% in 16/12. We think the company has adopted a strategy of keeping its central Tokyo, hospitals, housing for sales income weighting at around 30-35%, and in 17/12 we look for sales income to the elderly, and tourist- and leisure- come in 3% higher y-y at ¥20bn, to give a weighting of 31%. Meanwhile, as at end- related real estate such as hotels in 16/12, the combined total of real estate for sale and real estate for sale in process was line with the government’s efforts to down 11% y-y at ¥95.7bn. Even selling off its entire ¥95.7bn in real estate holdings, it turn Japan into a major tourist destination.
would be difficult to generate sales income of ¥20bn, in our view, and thus in order to
reach this figure we think the company will need to aggressively acquire real estate for sale and then quickly add value before selling on. Although another possibility might be Catalyst to generate profits by selling off real estate held as long-term assets, this would also While generating profits from real have the effect of denting rental income from the fiscal year after the sale of such estate sales, the company also assets. We therefore think the company will continue to actively buy and sell real estate needs to acquire properties in order in 17/12. to maintain and increase its rental income. Another key focus is the pace of redevelopment of its existing buildings.
Research analysts
Japan housing & real estate
Daisuke Fukushima - NSC [email protected] +81 3 6703 1150 Cons 16/12 17/12E 18/12E 19/12E
Currency: JPY Actual Old New Co's Old New Old New Sales (mn) 215,780 240,000 240,000 N/A 270,000 270,000 N/A 284,700 Ope profits (mn) 53,377 58,000 59,000 60,000 67,000 67,000 N/A 70,000 EPS 53.0 53.9 57.7 57.7 61.5 62.3 N/A 64.5 P/E (x) 19.3 19.0 17.7 N/A 16.6 16.4 N/A 15.8 EV/EBITDA (x) 20.4 21.7 20.7 N/A 20.9 19.8 N/A 19.8 P/B (x) 2.0 1.9 1.9 N/A 1.7 1.7 N/A 1.6 Dividend yield (%) 1.7 1.7 1.8 N/A 1.8 1.9 N/A 2.0 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 11:54 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 30
MTI [9438]
EQUITY: JAPAN INTERNET
17/9 Q1 results Global Markets Research
Can management grow the healthcare business? 30 January 2017
Research analysts
Surprises in 17/9 Q1 results: focusing on growth at healthcare business MTI [9438] (Neutral) reported y-y declines in sales and gross profits but a rise in Japan internet & media operating profits for 17/9 Q1. While operating profits were far higher than we had Yoshitaka Nagao - NSC forecast, we find it hard to take a positive view of this as this was largely the result of [email protected] cuts in SG&A expenses. Looked at another way, ensuring operating profit growth via +81 3 6703 1175 sharp cuts to SG&A expenses and advertising spend in particular indicates that the earnings structure of the existing content business is reaching an inflection point. We think MTI needs to create a new profit growth driver. From this perspective we focus on the healthcare business, which management is targeting for growth as an area of investment. Specific examples include the Carada corporate packaged service, the sports management service, and expanding the electronic maternal and child health handbook service to local governments across Japan. We will be watching further developments closely. Fundamentals: sharp squeeze on advertising Operating profits of ¥1.15bn in 17/9 Q1 were much higher than our forecast of ¥0.72bn (Figures 1, 2). With sales of ¥7.64bn slightly short of our forecast of ¥7.95bn, outperformance in profits was largely due to SG&A expenses. Indeed, Q1 SG&A expenses of ¥5.21bn were nearly ¥0.6bn lower than our forecast of ¥5.80bn. The biggest discrepancy under the SG&A heading was for advertising expenses, which came in at ¥1.54bn versus our forecast of ¥2.27bn. This was due to a decline in the number of new paying subscriber additions at MTI as a result of declining smartphone handset sales volume in Japan. Implications for forecasts, investment stance While Q1 operating profits were stronger than we had expected, we have retained our full-year 17/9 forecasts, as we expect ongoing proactive investment in the healthcare services business, which management has targeted for investment. Although we may revisit our estimates for sales and SG&A expense items following the results briefing, we see limited impact on our earnings forecasts or target price from Q1 results themselves.
Production Complete: 2017-01-30 11:48 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 31
Tokai Tokyo Financial Holdings
8616.T 8616 JP
EQUITY: JAPAN INSURANCE & DIVERSIFIED FINANCIALS
17/3 Q3 results: earnings driven by trading income Global Markets Research
Large q-q improvement in profit levels in Q3 30 January 2017 Rating Remains Neutral
Investment stance: we revise our forecasts, but maintain Neutral rating Target Price JPY 610 Operating profits for 17/3 Q3 improved sharply q-q to ¥3.8bn, versus ¥0.7bn in Q2, Increased from 510 reflecting the rise in the equity markets following the US presidential election in Closing price November 2016. Trading income came in at ¥9.7bn, the highest level since 15/3 Q3. 27 January 2017 JPY 633 Most of the company’s trading income is based on customer orders, and trading of Japanese and overseas equities and sales of structured bonds were strong. As well as Potential downside -3.6% the external environment being in a risk-on phase, we think the strong performance
also reflected the marketing setup becoming established for the non-Japanese equity products of overseas equities and structured bonds. We have revised our forecasts, Anchor themes mainly for trading income, and raised our forecasts for operating profits, recurring While stock brokerage commissions profits, and profits attributable to parent company shareholders. Based on an remain an important source of improvement in projected average ROE for 17/3-19/3 (from 6.1% to 6.2%), the risk-on earnings, we are focusing on sector stance of the equity markets, and the upward revisions to our profit forecasts, we apply companies’ abilities to expand earnings without having to rely on a P/B of around 1.1x (versus around 0.9x previously), yielding a target price of ¥610. equity market turnover, such as via Tokai Tokyo Financial Holdings is focusing on joint ventures with regional banks. This foreign bond and investment trust is an advantage for Tokai Tokyo Financial Holdings not present at other securities businesses. companies. We urge a wait-and-see stance for now, while noting that improved
profitability, growth strategies, and effective use of capital, as targeted by management Catalyst in its medium-term business plan, might encourage us to once again take a bullish A near-term catalyst would be an stance towards the stock. upturn at the top line as a result of Main points in results growth in equity market turnover. Brokerage commissions rose 50.9% q-q in 17/3 Q3 and distribution commissions (for Medium-term catalysts include investment trusts, etc) rose 28.7%, although these were at the same level as in 17/3 growth in profits from JV securities companies, an increase in Q1. Meanwhile, trading income rose 22%, with a contribution from equity trading investment trust fees and other income (up 2-fold q-q). Earnings diversification is progressing steadily. stable revenues, and prospects of improved shareholder returns.
Research analysts
Japan insurance & diversified financials Wataru Otsuka - NSC [email protected] +81 3 6703 1128
Cons 16/3 17/3E 18/3E 19/3E Currency: JPY Actual Old New Co's Old New Old New Sales (mn) 67,584 62,000 63,000 N/A 63,700 64,000 65,300 64,700 Rec profits (mn) 15,297 10,700 12,300 N/A 12,400 12,600 13,700 13,400 EPS 46.9 33.2 37.4 N/A 34.4 35.1 37.8 37.4 P/E (x) 13.5 19.0 16.9 N/A 18.4 18.0 16.8 16.9 P/B (x) 1.1 1.1 1.1 N/A 1.1 1.1 1.0 1.0 Dividend yield (%) 4.4 3.2 3.2 N/A 3.3 3.3 3.6 3.6 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 11:26 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 32
TDK 6762.T 6762 JP
EQUITY: JAPAN ELECTRONIC PARTS
Earnings update Global Markets Research
Portfolio rebuilding likely to start yielding results 30 January 2017 Rating from 18/3 Remains Buy
Investment stance: we reiterate Buy rating, think that portfolio rebuilding Target Price JPY 10,300 benefits will start to kick in gradually Increased from 9,200 We have raised our forecasts for TDK and hiked our DCF-based target price to Closing price ¥10,300. Our revisions reflect: (1) changes to our forex assumptions (USD/JPY from 27 January 2017 JPY 8,240 103 to 114, EUR/JPY from 114 to 120, factoring 60% of the theoretical impact into our forecasts as a boost of ¥9.0bn); and (2) higher earnings forecasts for HDD heads from Potential upside +25% 17/3 onward, as we think the HDD market has bottomed. TDK has been aggressively
reorganizing its business portfolio to prepare for the IoT era. In 18/3, we expect the company’s efforts in magnetic sensors, automotive power electronics, next-generation Anchor themes electronic parts, and next-generation HDD heads to begin to bear fruit. We maintain Electronic parts companies are our Buy rating on TDK as one of our core picks. retooling their business portfolios as they prepare for the IoT era. We Earnings outlook for HDD heads raised on prospect of improved product mix expect the gap to widen between We have raised our earnings forecasts for HDD heads on the prospect of product mix companies that have reallocated improvements. Spare production capacity for HDD components (heads and media) business resources to areas where disappeared in 2016 because of demand for higher-capacity HDDs for nearline data they are needed by leveraging center storage, gaming PCs, and network-attached storage. HDD producers look to competitive advantages, and have adopted a strategy of keeping capacity utilization for components high by companies that have not.
switching from low-capacity to high-capacity components. We think that earnings from
HDD heads at TDK will also benefit from product mix improvements. We have also Catalyst factored costs from the October 2016 integration of the suspension subsidiary (¥3-4bn The establishment of a favorable including purchase price allocation (PPA)) into our 17/3 earnings forecasts. reputation in the power electronics TDK is looking to establish a high-frequency component JV with Qualcomm in 17/3 Q4 and sensor businesses would be a and to complete the acquisition of InvenSense in 18/3 Q2. Spinning off high-frequency potential catalyst. Valuations could also benefit from sales of next- components will dent operating profits by just over ¥20bn. The impact of consolidating generation products such as sensors InvenSense will depend on the amortization of intangible fixed assets. We assume that and heat-assisted HDD heads that it will be profit neutral minus one-time accounting costs in year one and make a positive are based on thin-film technology contribution from year two onwards. We estimate that TDK generated sales of around and tunnel magneto resistance ¥315bn and operating profits of around ¥28bn in 17/3 Q3. We note considerable (TMR). margin of error in these forecasts because of substantial forex volatility.
Research analysts
Japan electronic parts
Manabu Akizuki - NSC [email protected] +81 3 6703 1185
Cons 16/3 17/3E 18/3E 19/3E
Currency: JPY Actual Old New Co's Old New Old New
Sales (bn) 1,152.3 1,166.0 1,181.0 1,140.0 1,216.0 1,288.0 1,273.0 1,350.0
Ope profits (bn) 93.4 84.0 85.0 76.0 98.0 113.0 114.0 130.0 EPS 514.2 475.7 487.6 412.2 559.8 647.8 651.7 745.3 P/E (x) 16.0 17.3 16.9 N/A 14.7 12.7 12.6 11.1 EV/EBITDA (x) 6.2 6.5 6.5 N/A 5.5 5.1 4.7 4.3 P/B (x) 1.5 1.6 1.6 N/A 1.5 1.5 1.4 1.3 Dividend yield (%) 1.5 1.6 1.6 N/A 1.9 1.9 2.2 2.2 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 10:34 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 33
Mabuchi Motor 6592.T 6592 JP
EQUITY: JAPAN ELECTRONIC PARTS
Earnings update Global Markets Research
Raising forecasts to factor in new forex outlook: we 30 January 2017 Rating anticipate continued stable earnings improvement Remains Neutral
Investment stance: maintaining our Neutral rating; raising forecasts on new Target Price JPY 6,000 forex assumptions Increased from 5,800 We revise up our earnings forecasts to factor in revised forex assumptions (now Closing price USD/JPY of 114, previously 103) and raise our target price to ¥6,000. We think 27 January 2017 JPY 6,040 Mabuchi Motor will continue to increase its R&D spending at a moderate rate to secure future growth potential. While high growth in profits looks unlikely, we think earnings Potential downside -0.7% will continue to show stable improvement. On the basis of our DCF analysis we do not
find the stock undervalued, and we maintain our Neutral rating. Anchor themes Earnings outlook: no major change in overall view despite expectation for rise in Electronic parts companies are SG&A and material costs retooling their business portfolios as Here we outline the basis for our segment forecasts for 17/12 and beyond. First, in the they prepare for the IoT era. We automotive products segment we forecast a contribution to sales growth from power expect the gap to widen between window motors and electric parking brake (EPB) motors. In 17/12, production of power companies that have reallocated window motors at a new plant in Mexico will get under way in earnest, and we forecast business resources to areas where a rise in the company's share of sales to US automakers. We anticipate an increase in they are needed by leveraging shipments of EPB on greater takeup of the product. We forecast that well-established competitive advantages, and categories of motors, such as for door mirrors and air conditioner damper actuators, companies that have not.
will see slowing growth in shipments on a slowdown in automobile output in China.
Second, in the consumer & industrial products segment, we forecast a continued Catalyst decline in shipments of motors from 17/12, primarily on lower demand for inkjet printer We think a higher market share applications. However, we think Mabuchi Motor will continue to maintain a high level of following the increased takeup of shipments of motors for power tools and white goods, and as a result we think the risk automotive brushed motors would be of this segment weighing on sales and profits is low. a positive for Mabuchi Motor. Conversely, if brushless motors, In addition to our outlook for the company's segments, we see as factors likely to which offer superior control, were to impact earnings in 17/12 and beyond (1) fluctuations in SG&A expenses, including replace brushed motors in R&D costs, and (2) fluctuations in materials costs and in CNY rates (much of Mabuchi automotive applications, we see risk Motor's production takes place in China). Our revised forecasts assume slightly higher that the company's growth levels of SG&A expenses (including R&D) and material costs (reflecting market prices) opportunities might decline.
than previously (total difference of around ¥1.0bn).
Research analysts
Japan electronic parts
Manabu Akizuki - NSC [email protected] +81 3 6703 1185
Cons 15/12 16/12E 17/12E 18/12E
Currency: JPY Actual Old New Co's Old New Old New
Sales (mn) 143,143 137,000 140,000 135,000 141,000 149,000 148,000 157,000
Ope profits (mn) 22,961 23,000 24,000 21,800 24,500 26,200 26,700 28,400 EPS 267.0 210.7 223.9 197.1 270.3 288.1 298.5 316.6 P/E (x) 22.6 28.7 27.0 N/A 22.3 21.0 20.2 19.1 EV/EBITDA (x) 10.2 10.2 9.9 N/A 9.4 8.8 8.3 7.8 P/B (x) 1.8 1.8 1.8 N/A 1.7 1.7 1.6 1.6 Dividend yield (%) 1.8 1.5 1.5 N/A 1.8 1.9 2.0 2.1 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 10:13 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 34
Murata Manufacturing 6981.T 6981 JP
EQUITY: JAPAN ELECTRONIC PARTS
Earnings update Global Markets Research
18/3: expecting recovery in RF module market 30 January 2017 Rating share, improvement in MLCC conditions Remains Buy
Reiterate Buy; updating forex assumptions, no change to medium-term outlook Target Price JPY 18,000 We raise our forecasts for Murata Manufacturing as we revise our USD/JPY Increased from 17,500 assumption from 103 to 114, and update our earnings forecasts for each of the Closing price company's business segments. We raise our target price from ¥17,500 to ¥18,000. 27 January 2017 JPY 15,485 Over the medium term, we expect the company to increase its share of the market for radio frequency (RF) transceiver modules (including PAMid and front-end modules with Potential upside +16.2% integrated low-noise amplifiers) for major smartphone manufacturers. We like what the
company has been doing to establish a strong position in RF technologies, which should be a growth area during the IoT era. We reiterate our Buy rating on Murata Anchor themes Manufacturing, which we consider a core pick. Electronic parts companies are retooling their business portfolios as 18/3: expecting recovery in RF module market share, bottoming in MLCCs they prepare for the IoT era. We Murata Manufacturing's earnings have slumped somewhat in 17/3 on a temporary drop expect the gap to widen between in its share of the market for RF modules for smartphones in North America, and not companies that have reallocated much growth in electrostatic capacitance values for multilayer ceramic capacitors business resources to areas where (MLCCs) used in smartphones after the large increases in 16/3. We expect earnings to they are needed by leveraging recover in 18/3, as we expect the company to regain some of its market share for RF competitive advantages, and modules, and also expect increased sales of MLCCs for automotive applications and a companies that have not.
shift to more compact high-capacitance MLCCs for smartphone applications. We have
updated our forecasts to (1) revise our forex assumptions (we assume a roughly ¥20bn Catalyst boost to earnings, or roughly 60% of the theoretical boost, as we also factor in higher Potential catalysts include market costs accompanying yen depreciation and earnings improvement) and (2) add its share gains in the RF front-end battery business acquisition to our earnings forecasts. We assume that the battery market, growth of antenna solutions business will contribute sales of around ¥125bn and operating losses of ¥5bn in 18/3, business as wireless signals become and we assume that the business will begin contributing to earnings from 20/3 as a more diverse, and topline growth that result of increased sales for industrial applications. beats the market consensus.
For next-generation broadband communications such as 5G and WiGig Research analysts communications, upstream analog front-end circuitry (antennas, switches, LNAs, diversity modules) will be key to technological development. We believe there are many areas which will need to make technological strides and areas where Japan electronic parts opportunities are likely to expand (such as for various kinds of RF modules), and we Manabu Akizuki - NSC expect Murata to be proactive about upfront investment, including for development. [email protected] +81 3 6703 1185 We assume that Oct-Dec sales were around ¥310bn and operating profits were ¥60-
62bn. We caution that there may be significant margin of error in our forecasts as it is difficult to forecast the near-term earnings impact from forex fluctuations.
Cons 16/3 17/3E 18/3E 19/3E Currency: JPY Actual Old New Co's Old New Old New Sales (bn) 1,210.8 1,154.0 1,160.0 1,115.0 1,240.0 1,408.0 1,296.0 1,483.0 Ope profits (bn) 275.4 210.0 214.0 200.0 245.0 260.0 283.0 298.0 EPS 962.6 731.5 738.0 733.6 861.9 913.2 992.9 1,043.6 P/E (x) 16.1 21.2 21.0 N/A 18.0 17.0 15.6 14.8 EV/EBITDA (x) 8.4 10.1 10.0 N/A 8.8 8.4 7.9 7.4 P/B (x) 2.7 2.5 2.5 N/A 2.3 2.3 2.1 2.0 Dividend yield (%) 1.4 1.5 1.5 N/A 1.7 1.7 1.9 1.9 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 09:57 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 35
Kyocera 6971.T 6971 JP ADR:KYO US
EQUITY: JAPAN ELECTRONIC PARTS
Earnings update Global Markets Research
We adjust forex assumptions, change forecasts, 30 January 2017 Rating retain stance towards key businesses Remains Neutral
Investment stance: we remain Neutral, only revise our view to reflect new forex Target Price JPY 5,700 assumptions Increased from 5,000 We have raised our earnings forecasts to reflect new forex assumptions (USD/JPY Closing price from 103 to 114, EUR/JPY from 114 to 120) and hiked our target price to ¥5,700. We 27 January 2017 JPY 5,976 retain our Neutral rating as our broad view of the stock remains unchanged. Kyocera has integrated several subsidiaries over the past year. It will be interesting to see Potential downside -4.6% whether this process boosts earnings at businesses such as electronic devices and
semiconductor components. Elsewhere though, we think that earnings will remain weak at the solar panel operation owing to poor demand prospects and at the Anchor themes telecommunications equipment segment because of Kyocera’s low status within the Electronic parts companies are industry and a lack of earnings stability, and think that further restructuring may be retooling their business portfolios as required. they prepare for the IoT era. We expect the gap to widen between Outlook for key operations: improved momentum for semiconductors and fine companies that have reallocated ceramics, risks for solar business resources to areas where Our outlook for key businesses is as follows. We expect earnings from semiconductor they are needed by leveraging components to improve as conditions for ceramic packages bottom out. Recovering competitive advantages, and and rising demand for ceramic packages for CMOS image sensors and automotive companies that have not.
LEDs is good news for Kyocera, which has a high market share in these fields. The
applied ceramic products segment is also benefiting from improved demand Catalyst momentum for multiple components for use in SPE, and for automotive camera Potential catalysts include sharp modules. We think that semiconductor components and applied ceramic products will improvements in margins on drive earnings from 18/3 onwards. electronic devices and Kyocera is looking to strike a balance between domestic and export demand for solar semiconductor components, which Kyocera has been restructuring. panels. It thinks that the Japanese market, which accounts for the majority of Solar panels are at risk of a structural shipments, will bottom out in due course, and is looking to increase exports to the US. decline in margins if Kyocera fails to However, President Trump made negative statements about renewable energy during generate growth in shipments to the the campaign trail, and Kyocera may have to adjust this strategy depending on what US. actions the new administration takes. We remain cautious about earnings from solar
panels, partly because of these policy risks. Research analysts We think that Kyocera generated sales of around ¥356bn and operating profits of ¥28- 30bn in 17/3 Q3. The demand climate has been favorable, and we also envision Japan electronic parts restructuring benefits for telecommunications equipment segment and solar panels. Manabu Akizuki - NSC [email protected] +81 3 6703 1185
Cons 16/3 17/3E 18/3E 19/3E Currency: JPY Actual Old New Co's Old New Old New Sales (bn) 1,479.6 1,382.0 1,400.0 1,520.0 1,397.0 1,450.0 1,390.0 1,443.0 Ope profits (bn) 92.7 83.0 86.0 110.0 85.0 97.0 88.0 101.0 EPS 297.2 207.2 223.5 231.5 214.0 250.8 222.2 259.0 P/E (x) 20.1 28.8 26.7 N/A 27.9 23.8 26.9 23.1 EV/EBITDA (x) 12.6 12.5 12.3 N/A 12.0 11.0 11.4 10.2 P/B (x) 1.0 1.0 1.0 N/A 1.0 0.9 0.9 0.9 Dividend yield (%) 1.7 1.7 1.7 N/A 1.7 1.7 1.7 1.7 Source: Company data, Nomura estimates
Key company data: See next page for company data and detailed price/index chart. Production Complete: 2017-01-30 09:39 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 36
Pharmaceuticals industry
EQUITY: JAPAN PHARMACEUTICALS
Results released by US companies through 27 Jan Global Markets Research
Future threats: bb2121 CAR-T therapy, 30 January 2017 risankizumab Research analysts
Celgene, AbbVie 16/12 Q4 results US pharmaceuticals majors Celgene and AbbVie announced 16/12 Q4 results on 26 Japan pharmaceuticals & healthcare and 27 January respectively. Motoya Kohtani - NSC Celgene has one of the strongest pipelines in the industry in the blood cancer [email protected] domain, with clinical trials underway of 11 compounds for multiple myeloma, seven +81 3 6703 1227 for lymphoma & leukemia, and nine for myeloid disease. This puts it in competition with Takeda Pharmaceutical [4502], Astellas Pharma [4503], and Daiichi Sankyo [4568] in the development of new blood cancer treatments. We see bb2121, co-developed by Celgene and Bluebird Bio, as a threat to Japanese companies. In the Phase 1 clinical study of bb2121, the results of which were published at end-November 2016, all six patients with relapsed/refractory multiple myeloma receiving the highest doses showed an objective response. None of the six had detectable multiple myeloma cells in their bone marrow on day 14 or beyond. While the launch of the drug is still a long way off, this is a potential threat to the therapies being developed by other companies. We also highlight the APACT Phase 3 study of Abraxane being undertaken by Celgene. APACT is studying an Abraxane/gemcitabine combination therapy in subjects with surgically removed pancreatic cancer. The results are due out by end-2017. Although the APACT study does not encompass Japan, Otsuka Holdings [4578] subsidiary Taiho Pharmaceutical is carrying out a Phase 1 trial in Japan (JapicCTI-163179). We think a successful outcome of the APACT study could boost peak Abraxane sales at Otsuka Holdings. During AbbVie’s earnings call, analysts focused their questions on the US pricing strategy for Humira and the launch schedule for biosimilars. AbbVie said that it would only implement single-digit price rises once a year, and noted that it hiked prices by only high single digits in 16/12 too. President Donald Trump has criticized the pharmaceutical industry since being elected, and it looks as though US companies are taking a cautious line about pricing strategies. We think Japanese companies may need to fall in line too. Earnings growth at Sumitomo Dainippon Pharma [4506] has been boosted in particular by price hikes for Latuda, but growth potential from 18/3 could well slow. AbbVie also said it expected Humira biosimilars to launch in many regions outside the US in Oct-Dec 2018. It emphasized that its US patents are valid until 2022. We think biosimilars will be launched in Japan from end-2018 too, but it will likely take some time for them to penetrate the market. In terms of AbbVie’s pipeline, our focus is on IL-23 antibody risankizumab (BI- 655066). This is potentially more convenient than existing TNF-alpha antibodies, as it can be administered once every three months. It is currently in Phase 3 trials for plaque psoriasis, with results due for release this year. Phase 2 trials for Crohn’s disease and ulcerative colitis are also planned.
Production Complete: 2017-01-30 08:59 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 37
Nuclear reactor court cases
EQUITY: JAPAN UTILITIES
Takahama, Genkai, and Ikata: rulings in 2017 H1? Global Markets Research
We see risk of impact on other electric power 30 January 2017 stocks if even one company loses a case Research analysts
Timing and outcome of verdicts still difficult to predict We think 2017 H1 could bring verdicts for several cases involving injunctions on Japan utilities & oil operations at nuclear power plants. It remains difficult to predict how each court will Shigeki Matsumoto - NSC rule, and we see the potential for adverse impact on the share prices of electric power [email protected] companies that depend highly on nuclear power if even one company loses its case, as +81 3 6703 1137 this could raise concerns in the market over legal risks. Kansai Electric Power's Takahama units 3 and 4: restart with no delay if Osaka High Court lifts injunction The Osaka High Court's hearings on Kansai Electric Power's [9503] Takahama units 3 and 4* concluded on 26 December 2016. No timing has been set for the verdict, but we would expect notice from the court roughly one week before a verdict is handed down. If the injunction is lifted, we believe the company would be able to restart its first reactor within 3-4 weeks**. If the injunction is not lifted, however, we think the company could have no choice but to resort to formal litigation at the district court level, which could take considerable time even if it eventually wins its case. Kyushu Electric Power's Genkai units 3 and 4: risk of further court cases even if this injunction is lifted Hearings at the Saga District Court on Kyushu Electric Power's [9508] Genkai units 3 and 4 concluded on 16 January. The plaintiff expects a verdict by March. Even if this injunction is lifted, a restart of Genkai units 3 and 4 would require not only the reactor modification approval obtained on 18 January, but also approval of the construction work plan, approval of changes to the operational safety program, a pre-service inspection, and approval from Saga Prefecture and other local communities. Sendai units 1 and 2 took roughly 11 and 13 months, respectively, between approval of reactor modification and restart. In the event that the court lifts the injunction, we would expect the plaintiff to appeal to the High Court. The Asahi Shimbun on 28 January reported that a citizen group other than the abovementioned plaintiff applied to the Saga District Court on 27 January for an injunction on Genkai units 3 and 4. Shikoku Electric Power's Ikata unit 3: even if Matsuyama District Court lifts injunction, cases at other district courts will continue Hearings at the Matsuyama District Court on Shikoku Electric Power's [9507] Ikata unit 3 (currently in operation***) concluded on 2 November 2016, and the deadline for additional written claims was 20 January 2017. Oita Godo Shimbun on 27 January reported that the Matsuyama District Court could hand down a verdict by the end of March. In the case at the Hiroshima District Court, the plaintiff made additional claims on 17 January, and Shikoku Electric Power is expected to submit its counterargument by 20 February. A scheduling conference is slated for 3 February. The Oita District Court began hearings on 26 January and has further hearings scheduled for 16 March and 11 May, with no date set for the end of proceedings. The 11 January Denki Shimbun reported that residents of Yamaguchi Prefecture are preparing to file for an injunction at the Yamaguchi District Court.
Production Complete: 2017-01-30 08:39 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 38
Proposed revisions to financial information disclosure system
JAPAN MARKET ANALYSIS (ACCOUNTING & TAX POLICY)
Points from Council on Investments for the Future Global Markets Research
Eliminating redundant disclosure in business 30 January 2017 reports and securities filings Research analysts
Discussion on earnings reports centered on quarterly reporting timing and on earnings forecasts Japan market analysis (accounting & Proposed revisions to the system for disclosure of financial information are one of the tax policy) main agenda items for the Council on Investments for the Future, which was Yoshihiro Nomura - NSC established by the Economic Revitalization Headquarters on 9 September 2016. [email protected] According to the Office of the Prime Minister's website, the Prime Minister stated at the +81 3 6703 1279 Council's fourth meeting on 27 January 2017 that the Council will review the way corporations disclose information, including in quarterly reporting, in order to provide efficient and effective disclosure of the information investors truly require. In this report, we look at the proposed revisions to the financial information disclosure system, based on the materials from the fourth meeting of the Council on Investments for the Future disclosed on the Office of the Prime Minister's website. First we highlight the information in section 7-2 of the materials, regarding discussion thus far and the direction of future discussion. We think the content of this section is likely to be included in the Japan Revitalization Strategy 2017 (unofficial name), which is expected to be drawn up in mid-2017. The materials state that the Council is to consider specific ways to unify disclosure items in the interest of integrated disclosure, and that it will organize and streamline the disclosure items to be included in quarterly reports. "Integrated disclosure" here refers to eliminating redundancy in disclosure content between the business reports required under the Companies Act and the securities filings required under the Financial Instruments and Exchange Act, and we expect discussion of this issue move forward mainly at the Ministry of Justice and the Financial Services Agency. Section 3 of the materials, prepared by the head of the committee to promote thorough structural reforms (set up under the Council on Investments for the Future), presents examples of disclosure from the EU and the US, and notes the overlap in disclosure items between business reports and securities filings. We expect discussions from here to include consideration of unifying the publication timing of these two reports. For quarterly reporting as well, section 3 of the materials suggests that redundancy in disclosure items may be eliminated between the quarterly earnings reports required by the Financial Instruments and Exchange Act and the earnings reports (kessan tanshin) required by stock exchanges. We think unification of the publication timing of these two reports may also be on the table as a potential solution. Section 3 of the materials also proposes a review of the disclosure of earnings forecasts included in earnings reports. We think the way companies disclose guidance could also come up for debate. We intend to continue to keep a close watch on the direction of discussion for each of these issues.
Production Complete: 2017-01-30 08:08 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 39
Japan major banks
EQUITY: JAPAN BANKS
Media report on assistance for Toshiba Global Markets Research
Report on Mizuho Bank lowering Toshiba’s 30 January 2017 borrower classification Research analysts
Overview On 28 January, the Nikkei morning edition reported on the risk-management dilemma Japan banks faced by the group of lenders providing broad-based support to Toshiba [6502]. We Ken Takamiya - NSC have not been able to confirm the accuracy of this report, but assuming it is correct we [email protected] would only expect a minor impact on the major banks' corporate value. Nevertheless, +81 3 6703 1140 we expect investors in the banks to want an explanation of why such support makes economic sense. Outline of Nikkei report The Nikkei report contains the following three main points. (1) Mizuho Bank, one of Toshiba's main lenders, on 27 January announced that it was lowering its borrower risk assessment classification on Toshiba by one rank, from the status of normal loans to the status of loans in need of attention. Other lenders are reportedly considering doing the same. (2) If the borrower status is lowered by one more rank, then Toshiba would be classified as a high-risk borrower and have difficulty securing new loans, and banks would need very large reserves in order to be able to lend to Toshiba. At present, however, lending to Toshiba has not been affected. (3) Other lenders, including Sumitomo Mitsui Banking, Sumitomo Mitsui Trust Bank, and the Bank of Tokyo- Mitsubishi UFJ have at present not changed their borrower classification for Toshiba and are expected to review their response after disclosure on Toshiba's losses and the details of its rehabilitation plan. Our assessment We have not confirmed the accuracy of this report. Assuming the report is correct, our views are as follows. We view this news as having only minor implications for corporate value at the major banks. Even if we assume that the main lenders raise their loan-loss reserves for Toshiba, we estimate that the impact would be, roughly speaking, only at the lower end of several tens of billion yen. Compared with the current shareholder value (market cap) of the megabanks of roughly ¥5-10trn, we thus think the impact (if we assume that Mizuho Bank were to further downgrade Toshiba to the borrower status of other loans in need of attention) would be slight. Furthermore, the major banks have built buffers into their 17/3 earnings guidance, including for credit costs, equity gains/losses, and forex assumptions, and we thus think this matter is unlikely to cause major shortfalls to guidance. We think that further provision of assistance to Toshiba by the main lenders could make some sense from the viewpoint of recovering their loan principal. Nevertheless, we think that they need to: (1) avoid providing support without carefully examining the situation, such as by carrying out thorough internal debates over whether financial support for Toshiba makes economic sense; and (2) if they decide to provide such support, within the limits of what they are able to disclose, seek to gain the understanding of internal and external stakeholders such as shareholders as to how this support makes economic sense.
Production Complete: 2017-01-30 07:07 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 40
Japan major banks: international financial regulations
EQUITY: JAPAN BANKS
Debate on finalization of Basel III Global Markets Research
SMFG announces estimate of floor adjustment 30 January 2017 impact Research analysts
Investment implications The timing of the finalization of Basel III by the Basel Committee on Banking Japan banks Supervision (BCBS) remains unclear. If the timing of the finalization is delayed, that Ken Takamiya - NSC would in our view also defer the timing of a positive catalyst for bank stocks in the form [email protected] of the elimination of uncertainties regarding capital regulations. All the same, we +81 3 6703 1140 continue to take a bullish investment view on the major Japanese banks, which we think remain significantly undervalued at P/B ratios of around 0.7x (based on end-16/3 BPS). BCBS release and Reuters report On 3 January, the BCBS announced that a meeting of the Group of Central Bank Governors and Heads of Supervision (GHOS) that had been due to approve the final version of Basel III has been postponed while saying that the GHOS is "expected to complete the work in the near future." On this issue, Reuters reported on 3 January that (1) the GHOS is now due to meet again on 1-2 March, (2) European regulators are "worrying that higher capital demands would curb bank lending – the prime source of funding for companies in the region," and (3) "the floor rule had been softened to win over the Europeans" with Basel members having agreed "on a lengthy phase-in whereby the capital floor would start in 2020 at 55% of the amount that would be required if a bank had used the standard approach set out by regulators for totting up risks." According to the report it "would then rise by 5ppt to a maximum of 75% by 2025." We have not confirmed the accuracy of this report. Our view on the regulatory debate With regard to finalizing Basel III, discussions are still needed on floor adjustment and other items. Given that there appear to be significant differences in opinion between the US and others that have already completed the introduction of floor adjustments in domestic regulations and the European side, where some countries and banks still have vulnerabilities, we think it remains unclear at this stage if the different countries will be able to agree on the finalization of Basel III in the near future. SMFG's announcement regarding the regulatory impact Sumitomo Mitsui Financial Group (SMFG) [8316] (Buy) on 27 January released its "Overview of 3Q, FY3/2017 performance" in which it says that "a meeting of the GHOS to finalize Basel III reforms, originally planned for early January, was postponed," going on to add that there is no change in its view that its "risk-weighted assets inflation caused by the new regulations has potential to be higher than the mid-20% range." As far as we are aware, SMFG is the first Japanese bank to disclose a specific figure for the expected impact of the finalization of Basel III in published materials or elsewhere. Considering that dispelling uncertainties over capital regulations would in our view likely afford greater leeway on capital policies and raise expectations in the stock market, we think the timing of SMFG’s announcement could disappoint some investors who have been hoping to see a change in its capital policy.
Production Complete: 2017-01-30 01:37 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 41
Nomura | Today’s Japan results composite 30 January 2017
Today’s Japan results composite
JAPAN STRATEGY
Positive: Takara Bio; Negative: Yamato Holdings Global Markets Research
30 January 2017 Quick Note
30 Jan (Mon) Today's result update
Japan Equity Research - NSC Below we list analysts’ first impressions of results and estimate revisions announced [email protected] . on 30 January.
Positive: 4204, 4974, 5703, 5911, 6676 Negative: 9064 Neutral: 1973, 2002, 2127, 3003, 4205, 6305, 6465, 6737, 6754, 6794, 6806, 6923, 8572, 8601, 9020, 9021, 9022, 9065, 9508, 9962
Results NEC Networks & System Integration [1973] (Kentaro Maekawa) (Neutral; ¥2,180, 27 January close) No results briefing scheduled Neutral • Operating profits down 44% y-y in Oct-Dec on lower sales in social infrastructure business and sharp increase in SG&A expenses • Full-year 17/3 operating profit guidance lowered sharply from ¥13.5bn to ¥10.0bn, below our forecast of ¥12.0bn • At the same time, Oct-Dec orders were up 3% y-y, up in corporate, carrier, and social infrastructure businesses and showing signs of bottoming [Back to Top]
Nisshin Seifun Group [2002] (Satoshi Fujiwara) (Buy; ¥1,741, 30 January close) No results briefing scheduled Neutral • Q3 operating profits of ¥8.1bn, down ¥0.2bn y-y; but up a firm ¥0.7bn y-y on adjusted basis after factoring out impact of forex and bran prices • Q3 results confirmed a bottoming in sales of frozen pasta and abatement in the sales decline at Nisshin Pharma • Bran prices likely to rise in Q4 off a Q3 bottom on recovery in grain prices and on yen weakness [Back to Top]
Nihon M&A Center [2127] (Naruhiko Sakamaki) (Buy; ¥3,575, 30 January close) Results briefing scheduled for 1 February Neutral • Recurring profits reached 96% of full-year guidance • While the number of deals closed slowed somewhat from Q3, Q1-Q3 cumulative deals closed reached a record-high 406 • Number of consultants (including informal signings) as of 30 January increased 36 from end-Mar 2016 [Back to Top]
Hulic [3003] (Daisuke Fukushima) (Neutral; ¥1,022, 27 January close) Results briefing scheduled for 1 February Neutral Production Complete: 2017-01-30 13:25 UTC 1 See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 42
Japan steel sector (December import/export statistics)
EQUITY: JAPAN STEEL, NONFERROUS METALS, WIRE & CABLE
Muted increase in December export prices Global Markets Research
We look for export prices to go up in Jan-Mar 30 January 2017
Research analysts
Summary: Oct-Dec export prices highly likely to have fallen slightly short of our forecast Japan steel, nonferrous metals, wire The Japan Iron and Steel Federation published December 2016 statistics for steel & cable imports and exports at 15:00 JST on 30 January. December export prices of key Yuji Matsumoto - NSC products rose less than we expected and Oct-Dec export prices of blast furnace [email protected] steelmakers look like they may have risen only about $10/t q-q, versus our forecast for +81 3 6703 1220 them to rise $20/t (see our 27 December 2016 Global Research flash Japan steel Takashi Nishizu - NSC sector (November import/export statistics)-Real upside in export prices likely from [email protected] December). Export prices are likely to be slightly short of our expectation, but owing to +81 3 6703 1272 forex translation gains and other weak yen effects, we think recurring profits at blast furnace steelmakers in Oct-Dec will be in line with our forecasts. Given the tendency for export prices to lag Chinese steel prices, we expect export prices to rise sharply in January and beyond. The price of hard coking coal fell to around $170/t, far short of the Jan-Mar contract price of Japan's blast furnace steelmakers of $285/t. We think this puts Japanese blast furnace steelmakers at a disadvantage in terms of costs. Scrap prices in Europe and North America have started falling, and we think the risk of falling Asian steel prices, a leading indicator of Japanese export prices, warrants caution. We expect the export spread to improve in around Feb-Apr, but we think it could deteriorate again thereafter. Exports: export prices only rise slightly m-m Overall steel export volume fell 5% y-y in December (Figure 1). Volume fell 3% for ordinary and specialty steel, the first decline in six months. Specialty steel export volume rose 13%, with demand still brisk, mainly in Asia, but ordinary steel export volume fell 7%. It was the lowest December volume of ordinary steel exports in five years. While export volume may have been held down by strong demand in Japan, we think the appreciation of export prices was too small if that was the case. Dollar- denominated prices of hot-rolled coil and cold-rolled coil exports both rose $9/t (2%) m- m, those of galvanized sheet and steel plate rose $4/t (1%) and $19/t (4%) (Figures 3 and 4). We think the spread for hot-rolled coil, taking carryover into consideration, deteriorated in December from November on a dollar basis, but was largely unchanged on a yen basis owing to yen weakening (Figures 5 and 6). Imports: imports of specialty and ordinary steel down y-y for first time in five months December ordinary and specialty steel import volume fell 7% y-y to the lowest level in five months (Figure 2). Hot-rolled coil import prices rose ¥1,100/t (about 2%) m-m. Import prices tend to increase with a lag to prices in Japan, but prices in December only rose marginally.
Production Complete: 2017-01-30 18:57 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. 43
Japan Economic Weekly
MACRO ECONOMY
The feasibility of Premium Friday Global Markets Research
Encouraging spending on activities as a way of 30 January 2017 reforming working practices Research analysts
Premium Friday = Black Friday + the reform of working practices METI, the Japan Business Federation, and various retailing and service trade Japan Economics associations have agreed to implement "Premium Friday," starting on Friday, 24 Takashi Miwa - NSC February 2017. The idea is that workers should be allowed to finish work early on the [email protected] last Friday of each month so that they can enjoy the rest of the day. The main point to +81 3 6703 1280 note about the scheme is that it is intended not just as a Japanese version of Black Masaki Kuwahara - NSC Friday but also as a means of reducing long working hours in line with the [email protected] government's reforms of working practices. +81 3 6703 1295 Many Japanese would like to reduce their working hours and increase their Yasuhiro Takahashi - NSC leisure time [email protected] Normally, attempts by authorities to regulate working hours run the risk of upsetting the +81 3 6703 1255 work-life balance of individual workers. In the case of Japan, however, many workers Yoshiyuki Suimon - NSC feel they do not have enough leisure time and would like to reduce their working hours. [email protected] Ideally, many would also like to shift the focus of their lives from work to other aspects. +81 3 6703 1297 The Premium Friday scheme, which will allow such workers to finish work early once a Kohei Okazaki - NSC month and spend their time more enjoyably, should therefore to be welcomed. [email protected] +81 3 6703 3880 Spending on activities such as resting and relaxing or pursuing hobbies looks likely to increase Kengo Tanahashi - NSC Allowing workers to finish work early is likely to lead to an increase in the time spent on [email protected] +81 3 6703 1284 activities such as resting or relaxing and pursuing hobbies. As one of the main reasons given for taking paid leave is "travel, leisure activities, and visiting one's home town," Yusuke Miyairi - NSC such activities are also likely to increase. Also, some retailers and service providers [email protected] +81 3 6703 1289 have begun to market activity-related service plans for Premium Friday. Since FY11, spending on activity-related items such as "eating out," "TV license fees," "package holidays," "hairdressing," and "entrance fees and online gaming fees" has come to account for a growing share of total household expenditure. Premium Friday seems likely to reinforce this trend. Cooperation from the private sector and a willingness to pay for hours not worked will likely be key to the scheme's success As the concept of Premium Friday attempts to both stimulate consumption and reform working practices, we think it has considerable potential. However, the success of the scheme should depend on how it is implemented. For one thing, companies will have to be willing to pay for hours that are no longer worked. In our view, as a loss of income would have a negative impact on consumption, it is important that companies continue to pay their workers their normal wages or allowances even when they encourage them to finish work early. For another, the cooperation of the private sector will be needed to ensure that as many companies as possible sign up to the scheme. Although many companies are eager to reduce long working hours and encourage their workers to take their paid annual leave, the government also needs to play its part.
Japanese version published on January 27, 2017
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JPY Intraday Comment
FOREIGN EXCHANGE
Investors judge Trump policy to be Global Markets Research
expansionary 30 January 2017 Visit Themes and Trades website for strategic cross asset ideas.
Investors judge Trump policy to be expansionary
Long-term inflation expectations among Japanese bond investors remain Research analysts subdued, according to the Nikkei Quick (Figure 1). Although short-term inflation expectations recovered further, 10yr inflation expectations declined to +0.82% in January Global FX Strategy from +0.87% the previous month. This is the lowest in three months. Inflation is expected Yujiro Goto - NIplc to recover in the short term, thanks to the recent JPY weakness and the stabilisation in [email protected] oil prices, but long-term inflation expectations remain cautious. Inflation expectations in +44 20 7103 2936 Japan remain more backward-looking, and further acceleration in actual inflation will be necessary to improve inflation expectations more broadly (see “JPY: Stars align for the BOJ?”, 22 December 2016). Wage negotiations are likely to remain disappointing for the BOJ, and we expect the Bank to keep its dovish stance tomorrow (see “JPY: Governor Kuroda to remain dovish”, 26 January 2017). In contrast to subdued inflation expectations in Japan, Japanese bond investors continue to judge the Trump policy implications to be expansionary (Figure 2, see “Investors see limited upside room for JGB yields”, 28 November 2016). 78% of investors expect inflation to accelerate under the Trump policy, largely unchanged from the survey in November (77%). A majority of investors expect growth, employment and wages to accelerate as a result of President Trump’s policy. More investors (49%) now expect monetary policy to become more hawkish, while only 38% expected the Trump policy to have a hawkish impact on monetary policy as of November. The survey also asked about the upper limit of USD/JPY the Trump administration would allow, and the average response was 121.95. The latest Nikkei opinion poll survey showed that a majority (53%) expects the relationship between the US and Japan to worsen. 42% said Japan should try to form a bilateral trade agreement with the US, as President Trump has confirmed the US’s withdrawal from the TPP. There is still uncertainty about FX and trade policies under the new administration. Japanese investors remain constructive on the Trump administration’s economic policy on average. Japanese investors have been quiet recently, but their foreign portfolio investment is likely to recover in our view (see “Summary of Japanese investment in December”, 20 January 2017).
Fig. 1: Inflation expectations based on survey of bond Fig. 2: Japan bond investors’ views on the implications of investors Trump policy
(%) Accelerate/expansion/hawkish No change 3.0 Decelerate/contraction/dovish 90% 84% 2.5 80% 78%
2.0 70% 1.61 58% 60% 55% 54% 1.5 49% 50% 1.0 40% 40% 40% 0.82 0.77 0.62 0.5 30% 0.36 20% 0.0 -0.01 10% -0.5 0% 1 year average -1.0 2 year average 10 year average -1.5 2005 2007 2009 2011 2013 2015 2017 Source: Nomura, Nikkei-Quick Source: Nomura, Nikkei-Quick
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Japan Navigator No. 706
RATES
Scenarios for BOJ tapering Global Markets Research
This is a direct translation of the original Japanese report issued on 27 January 2017 and 30 January 2017 reflects data as of that date. Visit Themes and Trades website for strategic cross asset ideas.
1. Near-term outlook and strategy
Research analysts
Scenarios for BOJ tapering There are a number of movers next week (30 Jan- 3 Feb). The BOJ policy board will Japan Rates Strategy meet, 2yr and 10yr JGB auctions will be held, and industrial production data will be released. The BOJ will announce the February schedule for its JGB purchase operations. Naka Matsuzawa - NSC In the US, the FOMC will meet and January jobs data will be released. [email protected] +81 3 6703 3864 We view the BOJ’s decision to skip purchase operations, targeting short and intermediate bonds and increasing its purchase of long-term JGBs) as reflecting its intention to move towards QQE tapering, while maintaining its commitment to supporting supply and demand. We expect the BOJ to abolish quantitative targets at its April meeting, but believe it will continue to adjust its purchase operations in such a way as to keep 10yr rates below 0.10%. This makes it likely that super-long JGBs will drive market movements, in our view. US monetary policy poses the biggest risk to this scenario, either upside or downside. If the likelihood of a June Fed hike diminishes, as well as a March hike, USD could weaken to make the BOJ wary of abolishing its QE targets. Conversely, if the Fed raises rates in March, JGB yields could rise sharply, reflecting momentum in the UST market. In this scenario, we believe the BOJ may have to raise the upper end of its target 10yr JGB yields, in addition to pushing back abolishing QE targets. A scenario of no March Fed hike and its hawkish message should be the most ideal for the BOJ, in our opinion. We believe next week’s FOMC meeting is likely to have few implications on this particular point. Instead, investors should look the January jobs data in the US and Chair Yellen’s congressional testimony (mid-February) to determine positioning. The BOJ is unlikely to make any decision whether or not to abolish QE targets before seeing the outcome of the March FOMC meeting and the G20 meeting (in which policymakers will hear opinions about Japan’s monetary and currency policies). In other words, the BOJ is unlikely to begin laying the foundations for abolishing QE targets in January-March – we will focus on whether it will change its inflation forecast, which is already well above the private sector consensus next week. Supply and demand in the short and intermediate part of the JGB curve has not eased materially even after the BOJ’s decision not to absorb these bonds in its operations for the week of 23-27 Jan. This makes it likely that policymakers will continue to reduce their purchases, particularly because issuance is set to decrease from April. The BOJ adjusted its JGB purchase operations in such a way as to reduce the monthly absorption of short and intermediate bonds by JPY0.82trn and increase long-term JGB purchases by JPY0.24trn from December (Figure 1). Assuming that the Bank will continue with the same monthly purchases, it would absorb about JPY64trn on a net basis in 2017, which should be considered tapering. We would be surprised to see the absorption of short and intermediate operations reverting to original levels and/or an increase in its purchases of super-long JGBs in February, as yields are substantially lower and the yield curve flatter compared with
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Nomura | Japan Research Pack 31 January 2017
Appendix A-1
Analyst Certification Each research analyst identified herein certifies that all of the views expressed in this report by such analyst accurately reflect his or her personal views about the subject securities and issuers. In addition, each research analyst identified in this report hereby certifies that no part of his or her compensation was, is, or will be, directly or indirectly related to the specific recommendations or views that he or she has expressed in this research report, nor is it tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Important Disclosures
The lists of issuers that are affiliates or subsidiaries of Nomura Holdings Inc., the parent company of Nomura Securities Co., Ltd., issuers that have officers who concurrently serve as officers of Nomura Securities Co., Ltd., issuers in which the Nomura Group holds 1% or more of any class of common equity securities and issuers for which Nomura Securities Co., Ltd. has lead managed a public offering of equity or equity linked securities in the past 12 months are available at http://www.nomuraholdings.com/report/. Please contact the Research Product Management Dept. of Nomura Securities Co., Ltd. for additional information.
Online availability of research and conflict-of-interest disclosures
Nomura Group research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested from Nomura Securities International, Inc., or Instinet, LLC on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for help.
The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA rules, may not be associated persons of NSI or ILLC, and may not be subject to FINRA Rule 2241 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
Nomura Global Financial Products Inc. ("NGFP") Nomura Derivative Products Inc. ("NDPI") and Nomura International plc. ("NIplc") are registered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, and NIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report.
ADDITIONAL DISCLOSURES REQUIRED IN THE U.S. Principal Trading: Nomura Securities International, Inc and its affiliates will usually trade as principal in the fixed income securities (or in related derivatives) that are the subject of this research report. Analyst Interactions with other Nomura Securities International, Inc. Personnel: The fixed income research analysts of Nomura Securities International, Inc and its affiliates regularly interact with sales and trading desk personnel in connection with obtaining liquidity and pricing information for their respective coverage universe.
Distribution of ratings (Nomura Group) The distribution of all ratings published by Nomura Group Global Equity Research is as follows:
50% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 39% of companies with this rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the EEA) with this rating were supplied material services** by the Nomura Group.
42% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 52% of companies with this rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the EEA) with this rating were supplied material services by the Nomura Group
8% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 7% of companies with this rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the EEA) with this rating were supplied material services by the Nomura Group.
As at 31 December 2016. *The Nomura Group as defined in the Disclaimer section at the end of this report. ** As defined by the EU Market Abuse Regulation
Definition of Nomura Group's equity research rating system and sectors The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock, subject to limited management discretion. An analyst's target price is an assessment of the current intrinsic fair value of the stock based on an
47 Nomura | Japan Research Pack 31 January 2017 appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated target price, defined as (target price - current price)/current price.
STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap.
SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as 'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.
Target Price A Target Price, if discussed, indicates the analyst's forecast for the share price with a 12-month time horizon, reflecting in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.
Valuation methodology - Fixed Income
Nomura's Fixed Income Strategists express views on the price of securities and financial markets by providing trade recommendations. These can be relative value recommendations, directional trade recommendations, asset allocation recommendations, or a mixture of all three. The analysis which is embedded in a trade recommendation would include, but not be limited to: • Fundamental analysis regarding whether a security's price deviates from its underlying macro- or micro-economic fundamentals. • Quantitative analysis of price variations. • Technical factors such as regulatory changes, changes to risk appetite in the market, unexpected rating actions, primary market activity and supply/ demand considerations. The timeframe for a trade recommendation is variable. Tactical ideas have a short timeframe, typically less than three months. Strategic trade ideas have a longer timeframe of typically more than three months.
For the purposes of the EU Market Abuse Regulation, the distribution of ratings published by Nomura Global Fixed Income Research is as follows:
58% have been assigned a Buy (or equivalent) rating; 82% of issuers with this rating were supplied material services* by the Nomura Group**.
0% have been assigned a Neutral (or equivalent) rating.
42% have been assigned a Sell (or equivalent) rating; 70% of issuers with this rating were supplied material services by the Nomura Group.
As at 3 January 2017. *As defined by the EU Market Abuse Regulation **The Nomura Group as defined in the Disclaimer section at the end of this report
Disclaimers This publication contains material that has been prepared by the Nomura Group entity identified on page 1 and, if applicable, with the contributions of one or more Nomura Group entities whose employees and their respective affiliations are specified on page 1 or identified elsewhere in the publication. The term "Nomura Group" used herein refers to Nomura Holdings, Inc. and its affiliates and subsidiaries including: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New York, US; Instinet, LLC ('ILLC'); Nomura International (Hong Kong) Ltd. ('NIHK'), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. ('NFIK'), Korea (Information on Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd. ('NSL'), Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore); Nomura Australia Ltd. ('NAL'), Australia (ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia ('PTNI'), Indonesia; Nomura Securities
48 Nomura | Japan Research Pack 31 January 2017
Malaysia Sdn. Bhd. ('NSM'), Malaysia; NIHK, Taipei Branch ('NITB'), Taiwan; Nomura Financial Advisory and Securities (India) Private Limited ('NFASL'), Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; Tel: +91 22 4037 4037, Fax: +91 22 4037 4111; CIN No: U74140MH2007PTC169116, SEBI Registration No. for Stock Broking activities : BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034, MCX: INE261299034; SEBI Registration No. for Merchant Banking : INM000011419; SEBI Registration No. for Research: INH000001014 and NIplc, Madrid Branch ('NIplc, Madrid'). 'CNS Thailand' next to an analyst's name on the front page of a research report indicates that the analyst is employed by Capital Nomura Securities Public Company Limited ('CNS') to provide research assistance services to NSL under an agreement between CNS and NSL. 'NSFSPL' next to an employee's name on the front page of a research report indicates that the individual is employed by Nomura Structured Finance Services Private Limited to provide assistance to certain Nomura entities under inter-company agreements. The "BDO-NS" (which stands for "BDO Nomura Securities, Inc.") placed next to an analyst's name on the front page of a research report indicates that the analyst is employed by BDO Unibank Inc. ("BDO Unibank") who has been seconded to BDO-NS, to provide research assistance services to NSL under an agreement between BDO Unibank, NSL and BDO-NS. BDO-NS is a Philippines securities dealer, which is a joint venture between BDO Unibank and the Nomura Group.
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The Nomura Group, and/or its officers, directors and employees, may, to the extent permitted by applicable law and/or regulation, deal as principal, agent, or otherwise, or have long or short positions in, or buy or sell, the securities, commodities or instruments, or options or other derivative instruments based thereon, of issuers or securities mentioned herein. The Nomura Group companies may also act as market maker or liquidity provider (within the meaning of applicable regulations in the UK) in the financial instruments of the issuer. Where the activity of market maker is carried out in accordance with the definition given to it by specific laws and regulations of the US or other jurisdictions, this will be separately disclosed within the specific issuer disclosures. This document may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor's. 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49 Nomura | Japan Research Pack 31 January 2017
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Explanation on Ratings by Unregistered Rating Agencies From the perspective of obtaining fairness and transparency in the market, registration system for credit rating agencies has been introduced based on amended Financial Instruments and Exchange Act. In accordance with this, those financial instruments business operators utilizing ratings assigned by unregistered rating agencies ("Unregistered Ratings") upon soliciting clients are obligated to notify their clients that these ratings are Unregistered Ratings and to provide them with such other information necessary as the significance of registration.
○Significance of Registration Those credit rating agencies which have been registered under the system will be supervised by the Financial Services Agency (FSA) and will be subject to certain restrictions. Such restrictions include the following; duty of candor and good faith; obligation to maintain compliance system to prevent conflict of interest and to maintain fairness in the credit rating process; prohibited from assigning ratings on those securities which they are holders of; and obligation to prepare and disclose rating policies and other necessary documents and to make publicly available the explanation materials and other necessary documents. They will also be obligated to report to FSA upon its request, to accept on-site investigations, to receive business improvement order and will be under other forms of supervision by FSA. Unregistered rating agencies will not be subject to these restrictions and supervision by FSA.
○Rating Agencies Standard & Poor's -Name of the rating agency group and registration number Name of the rating agency group: S&P Global Ratings (S&P) Name of the registered credit rating agency within the group and its registration number: Standard & Poor's Ratings Japan K.K. (Financial Services Agency Commissioner 5) -The way of obtaining summary information on the policies and methods used for assigning credit ratings Please refer to the Japanese website of Standard & Poor's Ratings Japan K.K. at (http://www.standardandpoors.co.jp). Access「無登録格付け情 報」 (http://www.standardandpoors.co.jp/unregistered) under 「ライブラリ・規制関連」of the page. -Assumptions, Significance and Limitation of Credit Ratings Credit ratings assigned by Standard & Poor's are statements of opinion on the future credit quality of issuers or particular debts as of the date they are expressed, but such ratings are not indexes which show the probability of the default by issuers or on particular debts and do not constitute a guarantee creditworthiness. Credit ratings are not a recommendation to purchase, sell or hold any securities, or a statement of
50 Nomura | Japan Research Pack 31 January 2017 market liquidity or prices in the secondary market of any issues. Credit ratings may change depending on various factors, including issuers' performance, changes in external environment, performance of underlying assets, creditworthiness of counterparties and others. Standard & Poor's conducts rating analysis based on information from the reliable sources and it provides credit ratings only if such information is sufficient in quality and quantity to enable it to reach decisions credit ratings could be provided. However, Standard & Poor's does not perform an audit, due diligence or independent verification of any information provided by the issuer or any third party and it does not guarantee its accuracy, completeness or timeliness of the available information for credit ratings and the results gained from such information. Moreover it needs to be noted that there may be a potential risk resulting from the limitation of the historical data available for use depending on the rating. This information is based on information Nomura has received from sources it believes to be reliable as of May 18, 2016, but it does not guarantee accuracy or completeness of the information. For details, please refer to its website above.
Moody's -Name of the rating agency group and registration number Name of the rating agency group: Moody's Investors Service Inc. (Moody's) Name of the registered credit rating agency within the group and registration number: Moody's Japan K.K. (Financial Services Agency Commissioner 2) -The way of obtaining summary information on the policies and method used for assigning credit ratings Please refer to the Japanese website of Moody's Japan K.K. at (https://www.moodys.com/pages/default_ja.aspx). Click 「信用格付事業」and access to 「無登録格付説明関連」in「無登録業者の格付の利用」. -Assumptions, Significance and Limitation of Credit Ratings Credit ratings are Moody's Investors Service, Inc.'s ("MIS") current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. MIS defines credit risk as the risk that an entity may not meet its contractual, financial obligations as they come due and any estimated financial loss in the event of default. Credit ratings do not address any other risk, including but not limited to: liquidity risk, market value risk, or price volatility. Credit ratings do not constitute investment or financial advice, and credit ratings are not recommendations to purchase, sell, or hold particular securities. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such rating or other opinion or information is given or made by MIS in any form or manner whatsoever. Based on the information received from issuers or from public sources, the credit risks of the issuers or obligations are assessed. MIS adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MIS considers to be reliable. However, MIS is not an auditor and cannot in every instance independently verify or validate information received in the rating process. This information is based on information Nomura has received from sources it believes to be reliable as of May 18, 2016, but it does not guarantee accuracy or completeness of the information. For details, please refer to its website above.
Fitch -Name of the rating agency group and registration number Name of the rating agency group: Fitch Ratings (Fitch) Name of the registered credit rating agency within the group and registration number: Fitch Ratings Japan Limited. (Financial Services Agency Commissioner 7) -The way of obtaining summary information on the policies and method used for assigning credit ratings Please refer to the Japanese website of Fitch Ratings Japan Limited at (https://www.fitchratings.co.jp/web/) and access 「格付方針等の概要」in the section「規制関連」. -Assumptions, Significance and Limitation of Credit Ratings Ratings assigned by Fitch are opinions based on established criteria and methodologies. Ratings are not facts, and therefore cannot be described as being "accurate" or "inaccurate". Credit ratings do not directly address any risk other than credit risk. Credit ratings do not comment on the adequacy of market price or market liquidity for rated instruments. Ratings are relative measures of risk; as a result, the assignment of ratings in the same category to entities and obligations may not fully reflect small differences in the degrees of risk. Credit ratings, as opinions on relative ranking of vulnerability to default, do not imply or convey a specific statistical probability of default. In issuing and maintaining its ratings, Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The assignment of a rating to any issuer or any security should not be viewed as a guarantee of the accuracy, completeness, or timeliness of the information relied on in connection with the rating or the results obtained from the use of such information. If any such information should turn out to contain misrepresentations or to be otherwise misleading, the rating associated with that information may not be appropriate. Despite any verification of current facts, ratings can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. Please refer to "Definitions of Ratings and Other Forms of Opinion" on Fitch's Japanese website for the explanation covering the details of the assumptions, significance and limitation of credit ratings. This information is based on information Nomura has received from sources it believes to be reliable as of May 18, 2016, but it does not guarantee accuracy or completeness of the information. For details, please refer to its website above.
------Disclaimers required in Japan Credit ratings in the text that are marked with an asterisk (*) are issued by a rating agency not registered under Japan's Financial Instruments and Exchange Act ("Unregistered Ratings"). For details on Unregistered Ratings, please contact the Research Product Management Dept. of Nomura Securities Co., Ltd. Investors in the financial products offered by Nomura Securities may incur fees and commissions specific to those products (for example, transactions involving Japanese equities are subject to a sales commission of up to 1.404% on a tax-inclusive basis of the transaction amount or a commission of ¥2,808 for transactions of ¥200,000 or less, while transactions involving investment trusts are subject to various fees, such as commissions at the time of purchase and asset management fees (trust fees), specific to each investment trust). In addition, all products carry the risk of losses owing to price fluctuations or other factors. Fees and risks vary by product. Please thoroughly read the written materials provided, such as documents delivered before making a contract, listed securities documents, or prospectuses. ------
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Transactions involving Japanese equities (including Japanese REITs, Japanese ETFs, and Japanese ETNs) are subject to a sales commission of up to 1.404% of the transaction amount (or a commission of ¥2,808 for transactions of ¥200,000 or less). When Japanese equities are purchased via OTC transactions (including offerings), only the purchase price shall be paid, with no sales commission charged. However, Nomura Securities may charge a separate fee for OTC transactions, as agreed with the customer. Japanese equities carry the risk of losses owing to price fluctuations. Japanese REITs carry the risk of losses owing to fluctuations in price and/or earnings of underlying real estate. Japanese ETFs carry the risk of losses owing to fluctuations in the underlying indexes or other benchmarks. Transactions involving foreign equities are subject to a domestic sales commission of up to 1.026% of the transaction amount (which equals the local transaction amount plus local fees and taxes in the case of a purchase or the local transaction amount minus local fees and taxes in the case of a sale) (for transaction amounts of ¥750,000 and below, maximum domestic sales commission is ¥7,668). Local fees and taxes in foreign financial instruments markets vary by country/territory. When foreign equities are purchased via OTC transactions (including offerings), only the purchase price shall be paid, with no sales commission charged. However, Nomura Securities may charge a separate fee for OTC transactions, as agreed with the customer. Foreign equities carry the risk of losses owing to factors such as price fluctuations and foreign exchange rate fluctuations. Margin transactions are subject to a sales commission of up to 1.404% of the transaction amount (or a commission of ¥2,808 for transactions of ¥200,000 or less), as well as management fees and rights handling fees. In addition, long margin transactions are subject to interest on the purchase amount, while short margin transactions are subject to fees for the lending of the shares borrowed. A margin equal to at least 30% of the transaction amount and at least ¥300,000 is required. With margin transactions, an amount up to roughly 3.3x the margin may be traded. Margin transactions therefore carry the risk of losses in excess of the margin owing to share price fluctuations. For details, please thoroughly read the written materials provided, such as listed securities documents or documents delivered before making a contract. Transactions involving convertible bonds are subject to a sales commission of up to 1.08% of the transaction amount (or a commission of ¥4,320 if this would be less than ¥4,320). When convertible bonds are purchased via OTC transactions (including offerings), only the purchase price shall be paid, with no sales commission charged. However, Nomura Securities may charge a separate fee for OTC transactions, as agreed with the customer. Convertible bonds carry the risk of losses owing to factors such as interest rate fluctuations and price fluctuations in the underlying stock. In addition, convertible bonds denominated in foreign currencies also carry the risk of losses owing to factors such as foreign exchange rate fluctuations. When bonds are purchased via public offerings, secondary distributions, or other OTC transactions with Nomura Securities, only the purchase price shall be paid, with no sales commission charged. Bonds carry the risk of losses, as prices fluctuate in line with changes in market interest rates. Bond prices may also fall below the invested principal as a result of such factors as changes in the management and financial circumstances of the issuer, or changes in third-party valuations of the bond in question. In addition, foreign currency-denominated bonds also carry the risk of losses owing to factors such as foreign exchange rate fluctuations. When Japanese government bonds (JGBs) for individual investors are purchased via public offerings, only the purchase price shall be paid, with no sales commission charged. As a rule, JGBs for individual investors may not be sold in the first 12 months after issuance. When JGBs for individual investors are sold before maturity, an amount calculated via the following formula will be subtracted from the par value of the bond plus accrued interest: (1) for 10-year variable rate bonds, an amount equal to the two preceding coupon payments (before tax) x 0.79685 will be used, (2) for 5-year and 3-year fixed rate bonds, an amount equal to the two preceding coupon payments (before tax) x 0.79685 will be used. When inflation-indexed JGBs are purchased via public offerings, secondary distributions (uridashi deals), or other OTC transactions with Nomura Securities, only the purchase price shall be paid, with no sales commission charged. Inflation-indexed JGBs carry the risk of losses, as prices fluctuate in line with changes in market interest rates and fluctuations in the nationwide consumer price index.The notional principal of inflation- indexed JGBs changes in line with the rate of change in nationwide CPI inflation from the time of its issuance. The amount of the coupon payment is calculated by multiplying the coupon rate by the notional principal at the time of payment. The maturity value is the amount of the notional principal when the issue becomes due. For JI17 and subsequent issues, the maturity value shall not undercut the face amount. Purchases of investment trusts (and sales of some investment trusts) are subject to a purchase or sales fee of up to 5.4% of the transaction amount. Also, a direct cost that may be incurred when selling investment trusts is a fee of up to 2.0% of the unit price at the time of redemption. Indirect costs that may be incurred during the course of holding investment trusts include, for domestic investment trusts, an asset management fee (trust fee) of up to 5.4% (annualized basis) of the net assets in trust, as well as fees based on investment performance. Other indirect costs may also be incurred. For foreign investment trusts, indirect fees may be incurred during the course of holding such as investment company compensation. Investment trusts invest mainly in securities such as Japanese and foreign equities and bonds, whose prices fluctuate. Investment trust unit prices fluctuate owing to price fluctuations in the underlying assets and to foreign exchange rate fluctuations. As such, investment trusts carry the risk of losses. Fees and risks vary by investment trust. Maximum applicable fees are subject to change; please thoroughly read the written materials provided, such as prospectuses or documents delivered before making a contract. In interest rate swap transactions and USD/JPY basis swap transactions ("interest rate swap transactions, etc."), only the agreed transaction payments shall be made on the settlement dates. Some interest rate swap transactions, etc. may require pledging of margin collateral. In some of these cases, transaction payments may exceed the amount of collateral. There shall be no advance notification of required collateral value or collateral ratios as they vary depending on the transaction. Interest rate swap transactions, etc. carry the risk of losses owing to fluctuations in market prices in the interest rate, currency and other markets, as well as reference indices. Losses incurred as such may exceed the value of margin collateral, in which case margin calls may be triggered. In the event that both parties agree to enter a replacement (or termination) transaction, the interest rates received (paid) under the new arrangement may differ from those in the original arrangement, even if terms other than the interest rates are identical to those in the original transaction. Risks vary by transaction. Please thoroughly read the written materials provided, such as documents delivered before making a contract and disclosure statements. In OTC transactions of credit default swaps (CDS), no sales commission will be charged. When entering into CDS transactions, the protection buyer will be required to pledge or entrust an agreed amount of margin collateral. In some of these cases, the transaction payments may exceed the amount of margin collateral. There shall be no advance notification of required collateral value or collateral ratios as they vary depending on the financial position of the protection buyer. CDS transactions carry the risk of losses owing to changes in the credit position of some or all of the referenced entities, and/or fluctuations of the interest rate market. The amount the protection buyer receives in the event that the CDS is triggered by a credit event may undercut the total amount of premiums that he/she has paid in the course of the transaction. Similarly, the amount the protection seller pays in the event of a credit event may exceed the total amount of premiums that he/she has received in the transaction. All other conditions being equal, the amount of premiums that the protection buyer pays and that received by the protection seller shall differ. In principle, CDS transactions will be limited to financial instruments business operators and qualified institutional investors. No account fee will be charged for marketable securities or monies deposited. Transfers of equities to another securities company via the Japan Securities Depository Center are subject to a transfer fee of up to ¥10,800 per issue transferred depending on volume.
Nomura Securities Co., Ltd. Financial instruments firm registered with the Kanto Local Finance Bureau (registration No. 142) Member associations: Japan Securities Dealers Association; Japan Investment Advisers Association; The Financial Futures Association of
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Japan; and Type II Financial Instruments Firms Association. The Nomura Group manages conflicts with respect to the production of research through its compliance policies and procedures (including, but not limited to, Conflicts of Interest, Chinese Wall and Confidentiality policies) as well as through the maintenance of Chinese walls and employee training. Additional information regarding the methodologies or models used in the production of any investment recommendations contained within this document is available upon request by contacting the Research Analysts listed on the front page. Disclosures information is available upon request and disclosure information is available at the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx Copyright © 2017 Nomura Securities International, Inc. All rights reserved.
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