24 June 2018

As expected investors' focus has shifted back to more economically relevant matters like trade friction as the Japanese stocks treading very cautiously with key momentum growth names of last year in tech and automation segments being hit by more selling pressure. We continue to see good shorting opportunities here as foreign money which is generally moving out of Japan for now have been mainly parked in those names. This week we have left geopolitical and macro issues aside and zoomed in more to address some of our key themes that have featured prominently in our short selling strategies this year. 

Our continued concerns regarding tech and semiconductor cycles have led us to make some notable contrarian short sell calls in this segment this year, most of which are fortunately coming good. We think the slowdown in high-end computing led by the plunge in mining activity in crypto currencies, is now becoming better understood. This along with more saturated smart phone markets along with more patchy growth in Big Data spending are leading to an underwhelming market conditions which are in stark contrast to nosebleed growth rates of the past few quarters. 

Besides the recent memory spending push-outs which some link to Samsung's fast improvement in its 3D NAND production yields that are hurting spot prices, concerns about DRAM market is also starting to appear given the new capacities coming on line and end-demand sputtering. All in all, memory spending which looked the most promising segment in semiconductors is starting to show its cyclical nature and names like Advantest (6857) have featured high in our recommended shorts. 

Furthermore, we continue to see big downside potential in display capex which have led us to identify some purer plays in LCD and FPD manufacturing equipment which are also seeing share prices correcting. As we have argued, we think six years of fast growth in display production output, mainly led by the Chinese is drawing to a close as oversupply, especially in larger panels promise even more downward pricing pressure in the coming months. 

Sharp (6753) is one Japan name exposed which we added to our short sell list exactly a year ago on this weak panel pricing scenario currently unfolding. Despite its 40% share price correction thus far, Sharp still trades at 22x expected earnings, a rich level given where we are in the cycle and compared to say Taiwan’s AUO (2409) which trades closer to 14x. With the Korean panel giant, LG Display (034220) now reeling in losses, Sharp which is far smaller in scale looks like a sitting duck and would need all the help it can get from its parent Foxconn (2317). We suspect Sharp's share price could halve from here. 

One source of disappointment in terms of recent sector performance has been the Japanese financials which have yet to show a consistent pattern of out-performance as concerns about the prospects of trade war with the US and the coming consumption tax hike in April 2019 have left the market believing that BOJ's scope for tapering, and thus engineering a steeper yield curve looks limited for now. 

However, we think selling pressure on this segment will prove relatively light as foreign investors which remain the main sellers of Japanese stocks for now are generally underweight these names. Moreover, with input costs on the rise and wage pressure from labour shortages starting to rise, we still see long term rates in Japan moving higher.