16 February 2017 Asia Pacific/Japan Equity Research Product Marketing Japan Earnings Product Manager EARNINGS Daisuke Takato 813 4550 9671 [email protected] Cyclicals lead the way in 3Q earnings; full- year guidance raised 9% Figure 1: Cyclicals raised NP guidance by 9% Total Cyclical Defensive Financials Sales -0.3% 0.3% -1.7% Surprise OP 1.1% 1.5% 0.6% NP 10.6% 10.4% 8.9% 14.3% Sales 0.5% 0.8% 0.0% Guidance 3.5% 6.0% 0.8% Change OP NP 4.3% 9.2% 1.1% 0.1% Source: Bloomberg, Credit Suisse ■ Cyclicals fare better: Automakers and trading companies led the way during the Oct–Dec quarter earnings period, as cyclicals raised their full- year net profit guidance 9%, compared with defensives, which more or less stayed put. We see this as reflective of the yen's weakness during 3Q and a stark contrast to 2Q, when cyclicals cut their guidance by −4% (the average USD/JPY level was ¥102 in 2Q versus ¥109 in 3Q). ■ Autos, materials, and banks lead gains: Third-quarter net profit was 10% higher than consensus overall, but operating profit and sales came in line with street forecasts. This disparity comes from two main reasons: (1) some of the NP gains were one-offs that came in below the OP line, such as JFE (5411) reporting inventory gains, and (2) trading companies benefited from recovering commodity prices, but are excluded from the sales and OP because of accounting differences. ■ What to watch for: The JPY/USD has stabilized at the current 110–115 rate, and we can expect further consensus and guidance upgrades as we round out the fiscal year-end. We also highlighted in our 2017 outlook report Japanese companies that have high operating leverage (compared with global peers) and are also highly leveraged to global growth. While there was little upside surprise at the sales level this quarter, we believe any incremental growth in revenue has the potential to boost profits. ■ Governance: Corporate governance is also likely to be in the spotlight with Toshiba's (6502) accounting woes and Mitsubishi Heavy (7011) embroiled in several lawsuits on global projects. We removed Toshiba from the Focus List and downgraded MHI to UNDERPERFORM this week. Meanwhile, buybacks continue to be strong (see page 5). DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 16 February 2017 Table of contents Guidance: Cyclicals far more optimistic 3 3Q earnings: Beat consensus forecasts 4 Buybacks strong 5 Guidance-related charts 6 Guidance: Revisions (%)..........................................................................................6 Guidance: Revisions (JPY mn) ................................................................................7 Guidance: Gap to consensus (%) ............................................................................8 Quarterly earnings-related charts 9 3Q: Earnings surprises (%) ......................................................................................9 3Q: Earnings surprises (JPY mn)...........................................................................10 3Q: Earnings (YoY%).............................................................................................11 3Q: Earnings (YoY JPY mn) ..................................................................................12 Japan Earnings2 16 February 2017 Guidance: Cyclicals far more optimistic Cyclicals raised NP guidance 9% in the Oct–Dec (3Q) quarter, compared with a −4% cut in the Jul–Sep (2Q) quarter. The number of companies raising guidance outnumbered guidance cuts almost 4-to-1, with 2/3rd of them coming from cyclicals. For more details on company guidance revisions at the single-stock level, please see Figure 5 onward. Figure 2: Technology, autos and chemical sectors had the largest number of guidance increases Sales Operating Profit Net Profit No of Mkt Cap (JPY Sector cos tn) % chg ↑ ↓ % chg ↑ ↓ % chg ↑ ↓ Total 486 485,017 0.5% 80 27 3.5% 96 27 4.3% 104 24 Cyclical 205 208,812 0.8% 61 11 6.0% 65 15 9.2% 66 13 Electric Appliances 43 56,617 0.6% 18 5 3.8% 19 5 5.8% 18 5 Transportation Equipment 23 53,497 1.6% 11 0 7.6% 10 2 10.0% 11 2 Chemicals 43 31,656 1.2% 12 0 5.4% 14 1 7.2% 12 1 Machinery 31 22,174 0.4% 5 2 1.4% 6 1 3.5% 6 1 Wholesale Trade 22 18,784 -2.0% 0 1 1.6% 1 0 14.7% 5 0 Precision Instruments 7 6,374 -1.8% 0 2 -1.8% 1 2 0.0% 1 1 Iron & Steel 8 5,854 0.3% 3 1 -5.4% 2 3 10.1% 4 1 Rubber Products 2 647 0 0 0 0 0 0 Nonferrous Metals 8 3,994 1.8% 5 0 14.4% 5 1 -6.6% 5 1 Oil & Coal Products 4 2,735 1.2% 1 0 26.4% 1 0 29.4% 1 0 Textiles & Apparel 5 2,521 0.3% 1 0 1.2% 1 0 1.3% 1 0 Mining 2 1,813 6.8% 2 0 18.6% 2 0 106.4% 2 0 Pulp & Paper 4 1,086 0.0% 0 0 0.0% 0 0 0.0% 0 0 Marine Transportation 3 1,059 3.5% 3 0 18.9% 3 0 -2.1% 0 1 Defensive 209 197,827 0.0% 19 15 0.8% 30 12 1.1% 37 10 Information & Communication 25 50,926 0.0% 4 1 1.0% 6 1 0.9% 7 0 Pharmaceutical 24 26,234 0.9% 4 2 3.1% 4 1 3.4% 6 1 Foods 27 23,645 -0.1% 1 1 1.1% 4 1 2.3% 5 0 Services 21 22,571 -0.1% 0 2 -0.3% 0 1 -0.6% 0 2 Land Transportation 24 20,118 0.0% 3 3 0.0% 4 1 0.4% 4 1 Construction 20 9,866 0.3% 2 1 1.1% 6 0 -3.4% 6 1 Electric Power & Gas 13 8,279 0.1% 2 1 1.9% 2 2 3.5% 2 1 Other Products 9 7,224 0.1% 1 0 -4.4% 0 1 21.3% 2 0 Retail Trade 26 18,532 -0.1% 0 3 -0.4% 0 3 -0.4% 1 3 Glass & Ceramics Products 8 4,268 0.5% 1 0 3.4% 1 0 1.2% 1 0 Metal Products 6 2,869 -0.2% 1 1 1.5% 2 1 3.6% 2 1 Air Transportation 2 2,428 0.0% 0 0 0.0% 0 0 0.0% 0 0 Warehousing & Harbor Transport 3 690 0.0% 0 0 0.0% 0 0 0.0% 0 0 Fishery, Agriculture & Forestr 1 176 0.0% 0 0 18.2% 1 0 27.3% 1 0 Financials 72 78,379 0.1% 1 1 Banks 35 41,128 0.0% 0 1 Real Estate 12 10,807 -0.1% 0 1 0.9% 1 0 0.9% 1 0 Insurance 7 14,541 0.0% 0 0 Other Financing Business 11 6,774 0.0% 0 0 Securities & Commodity Futures 7 5,129 0 0 Source: Bloomberg, Credit Suisse Japan Earnings3 16 February 2017 3Q earnings: Beat consensus forecasts Profits in the Oct–Dec quarter surprised to the upside by 10% at the net profit level (1% for operating profit, which excludes financials and trading companies). More than 50 companies beat consensus by more than 10% at both the NP and OP level, outnumbering companies that fell short of consensus (by −10% or lower) at a ratio of about 2-to-1. Figure 3: 3Q surprises were mainly driven by autos, materials, and banks Sales Operating Profit Net Profit No of Mkt Cap Sector cos (JPY tn) YoY % Surprise # Beat # Miss YoY % Surprise # Beat # Miss YoY % Surprise # Beat # Miss Total 486 485,017 -4.9% -0.3% 4 5 6.8% 1.1% 51 27 23.8% 10.6% 52 17 Cyclical 205 208,812 -6.6% 0.3% 0 3 -6.4% 1.5% 36 16 25.7% 10.4% 37 12 Electric Appliances 43 56,617 -5.3% -0.3% 0 1 -20.0% -4.4% 12 6 -13.5% 4.4% 14 5 Transportation Equipment 23 53,497 -3.1% 2.1% 0 0 -21.8% 1.1% 5 2 -15.1% 15.2% 9 1 Chemicals 43 31,656 -4.0% -2.2% 0 1 2.4% 7.5% 7 2 124.1% 31.3% 8 1 Machinery 31 22,174 -1.8% 1.0% 0 0 -17.5% 0.3% 3 2 21.8% 69.0% 1 1 Wholesale Trade 22 18,784 -22.2% 3.6% 0 0 98.5% 0 0 178.1% 60.4% 1 0 Precision Instruments 7 6,374 -4.2% -3.0% 0 0 -7.1% 7.2% 2 2 -24.2% -28.8% 2 2 Iron & Steel 8 5,854 -4.0% -2.9% 0 0 -32.0% -2.9% 2 1 130.1% 27.2% 2 1 Rubber Products 2 647 -18.2% -25.1% 0 1 -10.2% 0 0 -169.9% 0 0 Nonferrous Metals 8 3,994 -1.6% 2.7% 0 0 41.1% 30.8% 3 0 23304.7% -399.2% 0 1 Oil & Coal Products 4 2,735 -4.2% 0 0 515.5% 0 0 241.6% 0 0 Textiles & Apparel 5 2,521 -4.8% -5.2% 0 0 -11.2% -4.2% 0 0 3.1% 0 0 Mining 2 1,813 -6.0% 0 0 6.7% 0 0 73.4% 0 0 Pulp & Paper 4 1,086 0.7% 0 0 1.3% 0 0 47.1% 0 0 Marine Transportation 3 1,059 -12.9% -1.1% 0 0 -121.4% 89.2% 2 1 121.9% 0 0 Defensive 209 197,827 -2.8% -1.7% 2 2 22.4% 0.6% 15 11 27.6% 8.9% 13 4 Information & Communication 25 50,926 0.0% -0.6% 0 0 14.0% 1.5% 6 2 16.7% -2.6% 1 1 Pharmaceutical 24 26,234 -3.6% 0.9% 1 0 -7.8% 15.4% 3 0 1.6% 25.9% 2 0 Foods 27 23,645 -5.1% -7.0% 0 1 0.6% -3.7% 1 2 99.6% 26.9% 4 0 Services 21 22,571 -9.3% 0.9% 0 0 519.1% -18.3% 1 3 14.0% -26.3% 1 2 Land Transportation 24 20,118 0.6% -0.2% 0 0 1.6% 2.9% 0 0 13.6% 0 0 Construction 20 9,866 0.7% -13.0% 0 1 23.9% 0 0 15.3% 0 0 Electric Power & Gas 13 8,279 -6.9% -5.2% 0 0 -36.3% 0 0 162.2% 0 0 Other Products 9 7,224 -5.0% -1.6% 1 0 5.9% -6.2% 0 1 64.2% 215.3% 1 0 Retail Trade 26 18,532 0.2% -1.9% 0 0 5.1% 0.0% 1 3 19.4% 18.5% 2 1 Glass & Ceramics Products 8 4,268 -1.1% -1.1% 0 0 12.4% 11.3% 2 0 66.6% 40.9% 1 0 Metal Products 6 2,869 -3.1% -7.2% 0 0 10.0% 19.5% 1 0 58.8% 53.4% 1 0 Air Transportation 2 2,428 -2.9% -1.0% 0 0 6.9% 7.3% 0 0 10.7% 0 0 Warehousing & Harbor Transport 3 690 1.7% 0 0 8.3% 0 0 11.2% 0 0 Fishery, Agriculture & Forestr 1 176 -0.5% 0 0 32.3% 0 0 79.8% 0 0 Financials 72 78,379 25.6% 14.3% 2 0 30.2% 0 0 14.5% 14.3% 2 1 Banks 35 41,128 8.6% 14.3% 2 1 Real Estate 12 10,807 25.6% 14.3% 2 0 30.2% 0 0 30.7% 0 0 Insurance 7 14,541 13.3% 0 0 Other Financing Business 11 6,774 25.6% 0 0 Securities & Commodity Futures 7 5,129 48.3% 0 0 Note: Number of beat/misses are ones that exceed ±10%.