Tag: Japan Market
With name recognition across the globe, a market cap above $130 billion, and a history of profitability, we understand how some readers may be surprised at our no-moat rating of the company. However, at the same time, we must observe the competitive landscape in which the company operates. Ito asserts that Sony does not have an economic moat as a large percentage of its products have very low switching costs, even though we identify economic moats in some parts of its business. In particular, we believe that consumer electronic products (25% of revenue) will be exposed to fierce competition with Asian manufacturers.
With many products in this part of the business being commoditized, and a replacement cycle of digital appliances being three to six years, it is generally difficult for consumer electronic companies to build up an economic moat that generates sustainable excess returns on capital.
At the same time, however, Ito positively evaluates Sony’s efforts in building an ecosystem within its PlayStation business. While PlayStation 4 accumulated shipments reached approximately 97 million units by the end of fiscal 2019, the number of PS Plus users exceeded 36 million. This not only gives Sony solid cash flows with which to improve the profitability of its gaming segment but also provides a hook for customers, leading them to again purchase a PlayStation console in the next generation.
Ito also notes strength in Sony’s sensor business that focuses on improving picture quality. As a result, Sony has increased its market share, owing to growing demand from handsets. This strength can be quantitatively illustrated in Sony’s dominance in the global market share for image sensors. Sony’s global market share in this space is estimated to be in excess of 50% with the second-largest player, Samsung, holding 18% of the global market share. Security and automotive (autonomous driving) fields are the next growth drivers for Sony’s image sensor business. A critical factor for both fields is high sensitivity under various difficult conditions, and so we believe Sony could leverage its strength to expand this business in the near term.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
• Medium-term growth could surprise the market to the upside if the integration of Sompo International continues smoothly.
• Sompo’s nursing-care business, while only a minor contributor to overall earnings at present, could provide a competitive advantage if it can be integrated with insurance products or if leveraging real-time data can allow it to generate new revenue sources.
Bears Say
• Sompo’s ambitious overseas expansion plans raise the risk of its overpaying for future mergers and acquisitions or acquiring targets that are difficult for it to manage.
• Because it is slightly smaller in domestic scale than Tokio Marine and MS&AD, this could be a cost disadvantage in the long term.
• Sompo’s historical connection to Nissan offers less advantage in developing future auto insurance products than competitors’ automaker ties, such as MS&AD’s connection to Toyota.
Company Profile
SOMPO Holdings, Inc. is a Japanese insurance holdings company. It is listed on the Nikkei 225. The firm is considered one of three top insurers in Japan. Sompo Holdings, Inc. provides property and casualty (P&C) insurance, life insurance, and nursing and health care services in Japan and internationally. It underwrites various P&C insurance products, including automobile and fire, as well as offers security, risk management, assistance, and warranty services; and life insurance products. The company also provides nursing care and healthcare services; and customer security, health, and wellbeing support services. In addition, it offers asset management services; home remodeling services; health support services comprising health guidance and health counseling, and employee assistance programs; and wellness communications services. The company was formerly known as Sompo Japan Nipponkoa Holdings, Inc. and changed its name to Sompo Holdings, Inc. in October 2016. Sompo Holdings, Inc. was founded in 2010 and is headquartered in Tokyo, Japan.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
• Biologic therapy Entyvio is one of the best drugs for treating IBD and will likely see improved sales once a subcutaneous injection is approved.
• Takeda’s pipeline has many interesting early-stage pipeline candidates, some with first-in-class or best-inclass potential, and we could see a boost in sentiment if early data readouts are positive, especially around its orexin program for narcolepsy.
Bears Say
• Takeda’s pipeline is mostly early stage, and success or failure of clinical trials will be critical in determining the market’s perception of the company.
• Takeda’s top-selling drug Entyvio has strong growth, but loss of exclusivity is expected to start in 2024 (for the U.S. and the EU).
• Other important drugs facing loss of exclusivity events within the next few years include Vyvanse, Dexilant, and Velcade.
Company profile
Takeda Pharmaceutical Company Limited engages in the research, development, manufacturing, and marketing of pharmaceutical products, over-the-counter medicines and quasi-drug consumer products, and other healthcare products. It offers pharmaceutical products in the areas of gastroenterology; oncology; neuroscience; and rare diseases, such as rare metabolic and hematology, and heredity angioedema, as well as plasma-derived therapies and vaccines.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Shimano has capitalized from a significant rise in demand for bicycles since the second half of last year, as its bicycle component business (which makes up about 80% of revenue) boasts the leading global share of medium/high-end gears. The rise in demand is attributed to more people partaking in cycling as a mode of transportation and as an outdoor activity that allows people to avoid close-contact in crowded spaces amid the pandemic. We expect sales to remain at similar, high levels for the second quarter, as retailers in Europe and North America (Shimano’s largest markets) as well as bicycle frame manufacturers look to restock their inventory to keep up with demand.
We currently assume record sales with a 17% year-on-year growth in fiscal 2021, but we continue to pay attention to: 1) any potential signs of whether some of the momentum starts to slow down in the second half compared with recent peak levels, as increased vaccinations might lead to other interests than activities that promote social distancing; and 2) further improvement in supply chain-related issues to keep up with high demand levels. The company has been able to improve capacity utilization to better meet increasing demand, compared with last year, by eliminating many of the bottlenecks related to production. Further, with construction of a new factory in Singapore, we expect this will increase total production capacity by about 10% next year. While fixed costs related to the construction will likely impact margins in the near term, we still think Shimano will realize operating margin expansion in 2021, to an all-time high of 23% from 21.9% in 2020.
Shimano also witnessed a record top-line growth rate of 64% year on year, in the first quarter. Aside from strong retail sales of bicycles and related products in Europe and North America in the first quarter of this year, the comparable period a year ago was weak due to demand initially plummeting as lockdown measures meant many people stayed at home. Fishing tackle sales, which essentially makes up about the remaining 20% of companywide sales, also increased by 26% year on year in the first quarter from a warm winter in Japan as well as strong demand across its key overseas markets. As a result of increasing divisional sales across all business segments and improved capacity utilization, operating margin for the quarter also reached its quarterly peak at 25.8%, up from 16.5% in the same quarter previous year.
We note orders for its new high-end EP8 sport e-bike components series were favorable this quarter, implying an improvement from the previous year in fiscal 2020 when capacity constraints led to year-on-year declines in product sales. Further, and more importantly, this reaffirms our view that the company is able to adapt to evolving trends to remain competitive in newer areas within the cycling industry. According to management, e-bike components currently make up about 10% of Shimano’s total bicycle segment’s divisional sales and is expecting related sales to increase to record levels at about 40% higher than in 2019. As demand for its new high-end products, like the EP8 as well as the Deore MTB components, continue to grow, we expect favorable product mix will also contribute to improved margins in 2021.
Shimano Inc Company Profile
Shimano develops, manufactures, and distributes bicycle components, fishing tackle, and rowing equipment. The company also develops and distributes lifestyle gear products, such as apparel items, shoes, bags, and related items. Approximately 80% of companywide operating income comes from its bicycle components segment. It has operations in Japan, Asia, Europe, North America, Latin America, and Oceania. The company was founded in 1921 and its headquartered are in Osaka, Japan.
Source: Morningstar
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
We note that our revised expectation of margin expansion is still higher than management’s plan and we currently see upside potential in the low- to mid-teens percent. Throughout calendar 2020, the company’s share price grew significantly as a result of high growth expectations for HDS’ strain wave reduction gears, which serve as vital components for high precision machinery like industrial robots and semiconductor equipment. However, since reaching its peak of around JPY 9,200 at the end of 2020, HDS’ share price has fallen year to date, as the market’s excessively high growth expectations have been corrected.
The medium-term plan, ending in fiscal 2023, implies that operating margin will return to normalized levels in fiscal 2023–at 21.4%, from 2.3% in 2020. We believe the plan is conservative, but we also take this into account for our downward revision to our projection. Further, we consider the potential impact of pricing, as management commented that a domestic industrial robot manufacturer (HDS’ customer) hopes to eventually adopt a “two company” supplier policy for small-size reduction gears. At the moment, compared with other manufacturers’ gears, there is a significant pricing premium on HDS’ strain wave reduction gears due to hurdles by other companies in replicating the quality of HDS’ high-end gears. We note that this impact would not be immediate and that despite the likelihood of reduced pricing over the medium/long term, HDS’ wide moat remains intact, as the high-end strain wave gear market is not a “winner take all” market and will likely continue to have high barriers to entry.
Over the medium term, we assume margins will increase from 22% to 25.5% between fiscal 2022 and 2025, compared to 25% to 28% in our previous projection during the same year. Further, we maintain our fiscal 2021 operating margin of 18%, which is also higher than management guidance of 12.7% margin for the same year. We think this is possible, based on higher sales assumptions compared to guidance and after considering its high contribution margin of about 50%. We note that our assumption still implies operating margin of 5 percentage points lower compared to fiscal 2017 levels despite similar companywide revenue levels. We attribute this margin gap between 2017 and our 2021 projection to: 1) higher production-related costs, including increased expenses related to the operations of its new factories in Japan and North America as well as record D&A levels as a result of peak capital investments in 2018 and 2019; 2) increased R&D spending as part of its medium-term plan; and 3) near term rise in costs related to packaging and shipping.
For the current fiscal year, we assume 47% top-line year-on-year growth, which is higher than both guidance and our previous projection (40% and 37% year-on-year growth, respectively), as we expect stronger top-line recovery in Japan/Asia and Europe segments. We attribute this to order improvement in the fourth quarter, which exceeded our previous expectations, and likelihood of further increases in orders/sales throughout the fiscal year from industrial robot and collaborative robot, or cobot, manufacturers in these regions, as factory automation investments in the automobile industry pick up. Fourth-quarter consolidated orders in the Japan/Asia segment more than doubled year on year, and order growth in the Europe segment also turned positive in the fourth quarter with 12% year-on-year growth, after two consecutive declines from same periods of the previous year. We expect these factors will also contribute to margin expansion going forward.
The company’s fiscal 2020 year-end results, ending in March, were in line with our expectations, as companywide revenue remained flat year on year, while operating margin remained low at 2.3%–though this is an improvement from minus 0.5% in 2019. Margins have been impacted by high fixed costs from its newly constructed factories in Japan and North America, where HDS spent in excess of JPY 30 billion or 30% of sales collectively in 2018 and 2019. While the parent entity’s standalone operating margin improved by about 8 percentage points to 10.6%, from strong sales to Japanese industrial robot makers, other key group companies in North America and Europe realized declining operating income from lower sales for mainly non-industrial robot applications (such as for medical, amusement, and service robot industries).
Harmonic Drive Systems Inc Company Profile
Harmonic Drive Systems Inc., or HDS, manufactures and sells precision control equipment and components worldwide. It offers high-precision reduction gears (speed reducers) under the Harmonic Drive brand as well as other mechatronics products such as rotary actuators, linear actuators, and AC servo motors. The company also provides planetary-gear speed reducers under the Accu Drive and Harmonic Planetary brands. Its products are used in industrial robots, semiconductor manufacturing equipment, and other high precision equipment. HDS was founded in 1970 and is headquartered in Tokyo, Japan.
Source: Morningstar
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.