BY MITSUHIRO YUASA
In May, the Japanese market rose again, with small caps outperforming large caps. The market was supported by better than expected FY2016 bottom lines from Japanese corporates, and reasonable forecasts for the new fiscal year which began in April.
The bottom lines of a large number of the Topix companies rose about 12% in FY16 with most of those companies forecasting around 12% EPS growth in FY17 if the dollar trades at 110 yen. The Topix has not made significant gains over the last one and half years despite corporates making reasonable profits and expecting to generate further profits in the coming year as investors were reluctant to invest in equities due to geopolitical threats such as North Korea and the uncertainty regarding the global economy.
During the month, the Fund held a broad range of stocks. Seria (2782) was added during the period and is now the Fund’s top holding. Seria’s profits are expected to rise 35% yoy in FY17 whilst the top line is expected to rise 22% yoy. The company operates 100yen ($1) chain stores nationwide, and operates franchise businesses. The key factor in the company’s growth is massive data analysis of individual customer point of sale data. They run calculations more than 100m times per day to gain insight into what kind of products are booming or attracting customers.
Another top holding is (6875) Megachips, a manufacturer of microchips and digital monitoring systems. The company’s products are used in video games and other electronics, and they are a major supplier of components for the Nintendo Switch console which has recently been released. In 2014 Megachips purchased the Sitime Corporation that designs and produces micro-electro-mechanical systems (MEMS) chips which are used in cell phones. Phone manufacturers use Sitime’s MEMS as surface acoustic waves (SAW) filters to manage various kinds of signals. Their products are also used in various automotive applications. Sitime’s sales are forecast to be $100m with profits of $5m to $10m in 2017. This top line may double and the bottom line may rise 4 to 8 times higher in 2019 in comparison to the FY18 $25m estimated bottom line. It currently trades at a P/E of 42x and PBR of 2.8x
The North Korean threat continues and the US withdrew from the Paris accord. Some countries are isolating themselves and we do not know whether it will be good or bad for the world economy. However, there are companies that can improve their productivity regardless of the business environment. The Investment Adviser has been focusing on companies that can improve their productivity in order to increase profits, or companies which can provide services or tools which can boost the productivity of others. Overall, Topix companies’ bottom lines in this fiscal year, which will end in March 2018, may increase around 10% yoy if the dollar remains at 110 yen. Unless there is an unforeseen event, Japanese companies can continue to increase profits. The greatest headache at the moment is the uncertainty of the global political situation such as the result of the UK general election, which may bring political turmoil in Europe. However, the Investment Adviser will continue to focus on the bottom lines of companies as usual and will maintain the current portfolio.
The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 09/06/17 and are based on internal research and modelling.