Japan corporate earnings trends observed from the latest results

Japan’s corporate earnings season certainly proved eventful, however, surprises were skewed to the downside as we had anticipated. Momentum in share buybacks remained healthy enough but what was notable this season was that the weak yen could not quite mask over the falling overseas sales volumes like it had in the past few quarters. The general trend showed continued weakness in tech components while machinery and factory automation firms proved the hardest hit by anemic sales to China where capital outlays have remained subdued. 

On the other hand, sales of semiconductor production tools to Chinese chip makers has shown strong double-digit gains as China’s hoarding of equipment continued. Indeed, revenues from the region had surged to close to half of total for most top tool makers by last quarter. Clearly, fears of more stricter export restrictions have led to a notable front-loading of orders in China which we think look unsustainable. With TSMC also signalling that its capex programs from next few years will likely be less intense, we see potentially more negative surprises ahead. 

Earnings growth among Japan’s car makers, auto parts and related component suppliers are also looking to be peaking as supply of auto chips seem to have fully normalised and US dealership inventories are nearing historical averages. Indeed, a warning by TSMC a few weeks back that the auto chip segment has entered a period of inventory correction was not an encouraging forward indicator. With Chinese EV giants reportedly significantly raising their local content of parts and component, we also see dangers of Japanese suppliers being pushed out of China’s EV manufacturing supply chain. 

We think Japan car makers themselves will be facing a much more challenging next term, especially as forex gains will likely become more muted and US sales slow down considerably. With sub-prime US auto loans that are in arears in September posting its highest levels ever, we think financing units of Japan’s bigger car companies could also be facing heavy headwinds.  Moreover, given that all Japanese car makers are playing catch-up to boost their EV model offerings, there is much to be concerned about regarding their medium term market share prospects. 

Other more positive trends we observed during the earnings season was food companies mostly posting stronger earnings from their past price hikes and lower input costs. Japan’s inbound tourist plays have also shown strong earnings momentum which is unlikely to be disrupted anytime soon, at least as long as the weak yen makes Japan a cheap destination for overseas tourists. This is especially the case as Chinese holidaymakers are also starting to finally return which should significantly expand related sales over the next 18 months.