PEC’s Japan strategy：Grinding out minimal growth

Please refer to page 61 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. ASIA TOPIX, 2014 start to latest (in Yen) Note: High 1,691 10 August 2015 Source: FactSet, Macquarie Research, April 2016 TOPIX and MSCI AC Asia-ex (in US$, indexed to 100 as of start 2011) Source: FactSet, Macquarie Research, April 2016 Analyst(s) Peter Eadon-Clarke +81 3 3512 7850 peter.eadon-clarke@macquarie.com Nara Song +81 3 3512 7878 nara.song@macquarie.com 6 April 2016 Macquarie Capital Securities (Japan) Limited PEC’s Japan strategy Grinding out minimal growth Our TOPIX 12-month target is 1630 (previously 1670), 15.0 times earnings to March 2018 (109). Our TOPIX EPS forecasts have been cut four times over the last eight months, page 42, with FY3/16-18E YoY growth now 5.3%, 4.0% and 4.8%, respectively. Moderate earnings growth, reasonable valuations and policies supportive of asset inflation underpin our bullishness. Please see the 3 February 2016 The BOJ & Reflation winners. Sell-side consensus earnings forecasts are also being cut, Fig 1, with the latest FY3/18 TOPIX EPS forecast being 112.6. We run through our entire rated universe inside, pages 2-25. The Macquarie Marquee list is our best stock ideas driven bottom-up by our analysts: The Macquarie Marquee List for Japan Stock Code Analyst Rec CP (¥) TP (¥) To TP (%) Vol. index Cookpad 2193 David Gibson OP 1,630 2,850 74.8 High Kakaku.com 2371 David Gibson UP 2,024 1,600 -20.9 Medium Hulic 3003 Will Montgomery OP 1,041 1,800 72.9 Medium Matsumotokiyoshi 3088 Toby Williams OP 5,820 8,000 37.5 Medium Panasonic 6752 Damian Thong OP 908 1,420 56.4 Medium Mitsubishi Corp 8058 Polina Diyachkina OP 1,840 2,500 35.9 Medium Takara Leben 8897 Will Montgomery OP 667 1,000 49.9 High Fast Retailing 9983 Toby Williams OP 34,070 52,500 54.1 Low/Medium Note: Prices are as of 1 April 2016. Please note that Kakaku.com is an Underperform Source: FactSet, Macquarie Research, April 2016 We are revising our Japan macro forecasts, below. Weak domestic demand is one consequence of existing policies, especially the impact of the BOJ’s ‘attack’ on savers, from page 26. As we build deeper negative policy rates into our base case we need to reduce our 2016 consumption forecasts. We expect the BOJ to move its rate ‘paid’ on Tier Three current balances from -0.1% to -0.3% on 28 April 2016 and to -0.5% on 1 November 2016. One consequence is the rising probability of the government postponing the consumption tax rate increase scheduled for April 2017. We are building this into our base case. With the economy lacking momentum, we now expect a second 18-month postponement of the 10% consumption tax rate, leading to modestly higher 2017-18 growth forecasts. We have been forecasting a trend appreciation in the Yen, but the move has been stronger than expected. Company profitability currency sensitivity tables appear from page 26. Japanese real GDP growth and ¥/US$ forecasts (Macquarie) CY11 CY12 CY13 CY14 CY15 CY16E CY17E CY18E CY19E GDP (YoY, %) -0.5 1.7 1.6 -0.1 0.4 0.6 0.6 0.7 0.8 Previous 1.1 0.5 0.3 0.8 ¥/$ (at year end) 77.6 86.3 105.4 119.8 120.4 114 110 106 100 Previous 118 114 110 104 Note: Latest Consensus Economics real GDP growth forecast: 2016 +0.7%, 2017 +0.6% Source: Bloomberg, Macquarie Research, April 2016 1100120013001400150016001700Jan/14Jul/14Jan/15Jul/15Jan/16TOPIX 1st Section70809010011012013001/1107/1101/1207/1201/1307/1301/1407/1401/1507/1501/16MSCI AC Asia ex JPTOPIX(Jan'11=100) Macquarie Research PEC’s Japan strategy 6 April 2016 2 Our entire rated universe For the following six groupings of our analysts’ coverage: 1) Consumer (Toby Williams, Nathan Ramler, David Gibson) 2) Reflation/property (Will Montgomery, Heyang Ping) 3) Financials (Keisuke Moriyama, Leo Nakada) 4) Hardware tech (Damian Thong, George Chang) 5) Autos, Auto parts & Machinery (Takuo Katayama, George Chang, Kenjin Hotta) 6) Energy & Commodities (Polina Diyachkina) Whilst the analysts’ stock recommendations speak for themselves, we’ve added some light commentary. We begin with a few pointers. A) Growth has been scarce for 25 years in Japan When growth is scarce, the market usually pays up for what growth there is. The 13 January 2016 PEC’s Japan strategy: Stocks, themes & sectors looked at Japan’s best performing stocks over 30, 25, 20, 15, 10, 5 and 3 years, hunting for innovative business models and sustainable earnings growth. The simple average of the ROEs in the tables was 15%. The ROE metric appears prominently inside. B) Earnings revisions have been negative since the summer of 2015 Fig 1 TOPIX consensus EPS estimates Source: FactSet, Macquarie Research , April 2016 C) 6% trend TOPIX EPS growth is possible Typically the sell-side is optimistic looking for 10-12% YoY TOPIX EPS growth each year. We believe 6% on a trend basis is more realistic. This is anchored by global nominal GDP growth and th