Japan is one of the few places globally where the majority of companies conclude their fiscal years on March 31st as opposed to calendar year-end. With earnings season now commencing in Japan, Tokyo-based Yuki Management & Research (Yuki) sees much of the negative economic effects from Covid-19 impacting FY2019 earnings and that moving into FY2020, remaining impacts will be at least partially offset by a harvesting period from sizable capex investments made in FY2019.
Thus far, Yuki cites that FY2019 consensus earnings in Japan have deteriorated as a result of the crisis from -6.8% (relative to 2018 earnings) to -11.4% for 1200 of the 3800 listed companies with coverage from more than one sell-side analyst. Looking ahead to fiscal FY2020, consensus estimates for this set of companies is earnings growth of 10.3% over FY2019, while the 157 companies within Yuki’s growth equity universe see earnings growth of 38.8%.
Japan has dealt with the Covid-19 crisis by having companies not shutter, for the most part, including restaurants which have shifted to build take-out services. Rather than pursuing a broad economic shutdown, Japan’s approach has been to remain open and aggressively throw resources at virus clusters, while informing citizens to further heighten hygiene standards, maintain consideration of others and adjust personal spacing. To its credit, Japan’s nationalized healthcare system has thus far not been over-taxed by the Covid-19 crisis.
The Yuki team has been monitoring the manufacturing operations of Japanese companies in China and notes that some, including Nippon Paint, which derives 40% of its revenue from China, are back in revenue growth mode. While the team does not foresee a V-shaped recovery of production in China, as it did after the post-Lehman GFC, when auto sales in the U.S. rose sharply, the overall effects of the re-start presently underway will be beneficial and the team is increasing exposure to selected Japanese manufacturers at this stage.
