Japanese Tech Stock Weekly Summary (May 4 - May 10, 2009)

by: IRG Ltd

The following is excerpted from IRG's weekly stock report:

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• Gourmet Navigator to focus on service expansion; announces results and guidance. The Company’s January-March results showed sales coming in at 5.54 billion yen (US$57.6 million) (up 29% year-on-year) and operating profit at 1.12 billion yen (US$11.6 million) (up 96%), beating street forecasts of 5.38 billion yen (US$11.6 million) and 1.07 billion yen (US$11.1 million) respectively, reflecting a shift to full membership and ARPU growth. ARPU increased to 36,829 yen (US$383) (+2% quarter-on-quarter, +16% year-on-year) and the ARPU of full members was 91,116 yen (US$948) (flat quarter-on-quarter, +6% year-on-year). The company also announced FY3/10 guidance with forecast sales of 23.5 billion yen (US$244.4 million) (+17% year-on-year) and operating profit of 4.5 billion yen (US$46.8 million) (+15% year-on-year). Gourmet Navigator's earnings model currently requires personnel expenses to increase in step with business growth, meaning that the operating margin is relatively flat. The company says it wants to introduce services that generate earnings (advertising, etc.,) that are more scaleable and aims to make them growth drivers by FY3/11.

Media, Entertainment and Gaming

• Guidance revised by Sega Sammy (OTCPK:SGAMY). Sega Sammy has revised up its FY3/09 forecasts on above-plan results in gaming machine, arcade equipment, and arcade facility segments with improvement in the gaming machine gross margin and the bottoming out of sales at existing arcade facilities. For FY3/09, operating profit is raised to 8.3 billion yen (US$86.3 million) from 2.5 billion yen (US$26 million) mainly to reflect improvement in the gaming machine gross margin, arcade equipment business cost controls, and the bottoming out of sales at existing arcade facilities. However, bottom line forecast is lowered to a 22.8 billion yen (US$237.1 million) loss from a 21.5 billion yen (US$223.6 million) loss because of additional extraordinary losses, including costs associated with store closures and the suspension of software development.

• Nintendo (OTCPK:NTDOY) announces guidance. Nintendo expects Wii software sales volume (including titles bundled with hardware) to rise 40 million units (+20% year-on-year) in FY3/10, vs. previous guidance for 8% growth excluding hardware bundles. Also, the Company announced that U.S./European DSi sales were strong; with DS (DSL and DSi) sales volume more than double the year-ago level in the U.S. and also up year-on-year in Europe. Nintendo also expects DS hardware sales volume to drop 4% year-on-year but it aims for positive year-on-year growth in hardware sales value as the DSi boosts hardware ASP.

• Capcom (OTCPK:CCOEF) announces conservative overall guidance. Capcom's FY3/10 guidance appears more conservative than consensus expectations, beginning with the forex assumptions of 95 year per U.S. dollar and 115 year per euro. The FY3/10 same-store arcade sales assumption of -7% year-on-year is low compared to sector peers; and guidance calls for 38% sales growth and 31% operating profit growth in 1H. Capcom sharply cut sales volume guidance for Bionic Commando, whose launch was postponed from last year to May 2009, to several hundred thousand copies from 1.5 million; and delays may be occurring in development of Dead Rising 2 and other titles.

• Namco Bandai Holdings (OTCPK:NCBDF) announces unsurprising results. The Company announced FY3/09 results, which were slightly short of guidance and held no major surprises with guidance for flat operating profit growth which was below consensus forecasts. FY3/09 results showed operating profit declined 33.1% year-on-year to 22.3 billion yen (US$231.9 million), slightly below the 24 billion yen (US$249.6 million) company target. Although overall results were weak, with sales and profit declines in all businesses, in particular a large profit decline in the game content business due to sales slumps in arcade machines and domestic game software and a profit decline in the video & music business due to weak sales of anime DVDs. For FY3/10 guidance, Namco Bandai anticipates roughly flat operating profit growth to 22.5 billion yen (US$234 million), well below the street consensus of 27.7 billion yen (US$288.1 million), which is largely attributable to the company's plan for aggressive upfront investment aimed at longer-term growth.

• Dentsu announces revised guidance. Dentsu revised FY3/09 guidance upward mainly due to a conservative gross margin assumption, with profitability at subsidiaries, in particular, not deteriorating as much as expected. FY3/09 operating profit guidance was increased to 43.2 billion yen (US$449.3 million) from 35.8 billion yen (US$372.3 million), reflecting above-plan parent sales, an above-plan gross margin, and additional SG&A expense reductions.


• Dwango revises up 1st half guidance, but Nico Nico Douga below expectations. Dwango raised FY9/09 H1 (October 2008-March 2009) guidance to sales of 13.2 billion yen (US$137.3 million) from 13.8 billion yen (US$143.5 million) and operating profit of 410 million yen (US$4.3 million) from a loss of 50 million yen (US$0.5 million) and left full-year guidance unchanged. This suggests that January-March sales totaled 6.24 billion yen (US$64.9 million) and the operating loss amounted to 90 million (US$0.9 million). In regards to Nico Nico Douga, although January-March portal sales of just over 700 million yen (US$7.3 million) sustained the growth trend of the last several quarters, this number was low in light of expansion of fee-based services (point services) and growth in ad space. However, in fee-based services, the other factor in the undershot, the launch of services was delayed, and given that full operations started in March, may accelerate momentum from April.

• NTT DoCoMo (DCM) to release Android Phone. It was reported through various industry blogs that DoCoMo will be releasing its first Android phone in Japan, HTC’s HT-03A running Android 1.5.


• Hirose Electric orders - stocking almost finished, orders flat Apr-May. Hirose's April orders were flat month-on-month and -37% year-on-year, with domestic sales +9% month-on-month and -41% year-on-year, and overseas sales -6% month-on-month and -35% year-on-year. Hirose expects May orders to be flat overall and assumes a small domestic decline due to frontloading before Golden Week and mild growth for overseas cellphone orders. Hirose envisages low growth (no strong increases) for 2H2009, a view shared by Murata. It appears as though electronic component restocking is complete and orders have returned to real demand levels.

• Hitachi (HIT) revises forecast. January-March earnings did not deteriorate as much as the company had expected, but EPS will be impaired by additional DTA write-downs. While Hitachi only fine-tuned its FY3/09 sales forecast, to 10 trillion yen (US$104 billion) from 10.02 trillion yen (US$104.2 billion), it lifted its operating profit forecast significantly, to 127 billion yen (US$1.3 billion) from 40 billion yen (US$416 million). However, it widened its net loss forecast to 788 billion yen (US$8.2 billion) from 700 billion (US$7.3 billion). Hitachi did not offer detailed background for its operating profit forecast increase, but cited the extreme conservatism of the old plan, with earnings not actually deteriorating that far and more rigorous project management and cost cuts in information & telecom systems and power & industrial systems. The net profit cut comes mainly on additional DTA write-downs. Hitachi had been budgeting 250 billion yen (US$2.6 billion) but has now decided to write down 390 billion yen (US$4.1 billion) on the assumption that grim business conditions will continue in FY3/10. DTA at the consolidated group for tax purposes will disappear, and end-FY3/09 DTA amount to around 330 billion yen (US$3.4 billion).

• NEC Corp. (OTC:NELTY) raises FY3/09 target sharply. NEC Corp. announced a large upward revision to FY3/09 operating profit guidance. It cut FY3/09 operating loss guidance to 6.0 billion yen (US$62.4 million) from 30.0 billion yen (US$312 million). The 24.0 billion yen (US$249.6 million) upward revision comprises higher forecasts for IT/network solutions (+14.0 billion yen or US$145.6 million), other businesses (+6.0 billion yen or US$62.4 million), and cost eliminations (+6.0 billion yen or US$62.4 million), and a lower forecast for only one business, devices (-2.0 billion yen or US$20.8 million). Cost containment was the main factor behind the upward revisions. The downward revision in devices was smaller than NEC Electronics' (NECEL's) downward revision, suggesting that NEC had factored in more risk at NECEL. The company increased net loss guidance by 7.0 billion yen (US$72.8 million) to losses of 297.0 billion yen (US$3.1 billion) from its initial figure of 290.0 billion yen (US$3 billion) on litigation costs (a non-operating item) and extraordinary losses including increased restructuring charges. In a conference call to discuss the revisions, management officially stated for the first time that it expects fixed cost reductions to exceed its prior forecast of 130-140 billion yen (US$1.4-1.5 billion).

• TDK (TDK) announces results in line with expectations with recovery matching sector average. TDK announced FY3/09 operating losses of 54.3 billion yen (US$564.7 million) and FY3/10 operating profit guidance of 13.5 billion yen (US$140.4 million). The FY3/09 shortfall stemmed from growing restructuring costs. Overall, there were signs that losses were shrinking in April, and TDK is acting steadily to remedy mounting problems.

• Minebea results announcement are below expectations and focus on new strategy. Minebea announced FY3/09 operating profits of 13.4 billion yen (US$139.4 million), well below street forecast and plan of 17.5 billion yen (US$181.2 million). The company is targeting FY3/10 operating profits of 10-14 billion yen (US$104-146 million). The machined components earnings structure means profits should recover with volume, and electronic devices/ components could turn profitable in 2H under the leadership of new president Yoshihisa Kainuma, who took the helm in April. Mr. Kainuma also unveiled a new business strategy - rather than working on each business individually, he aims to work on the firm as a whole to maximize its overall strength.

• Furukawa Electric announces surprise guidance for substantial profits. Furukawa Electric announced guidance for a shift to substantial profits which came as a surprise to the market. The company announced results for FY3/09 which was in line with revised guidance announced in April. Operating profit declined about 39 billion yen (US$405.6 million) year-on-year due to a sales decline (- 18.2 billion yen or US$189.3 million), a decline in nonferrous prices (8.0 billion yen or US$83.2 million), tax system revisions (5.2 billion yen or US$54.1 million), an increase in material costs (4.0 billion yen or US$41.6 million), valuation of inventories using the lower-of-cost-or-market method (3.2 billion yen or US$33.3 million), and yen strength (2.3 billion yen or US$23.9). EPS was down to 203 yen (US$2.1) from 333 yen (US$3.5), and shareholders' equity ratio to 16.9% from 22.9%. On the guidance front, FY3/10 operating profit guidance was above the consensus of around breakeven. Furukawa targets quarterly operating profit of −7 billion yen (US$72.8 million), 1 billion yen (US$10.4 million), 8.3 billion yen (US$86.3 million), and 7.7 billion yen (US$80.1 million), and anticipates substantial profit growth in Q3 in particular. It expects a -17.5 billion yen (US$181.2 million) impact from a sales decline and a -1.4 billion yen (US$14.6 million) impact from yen strength to be absorbed by lower expenses (+12 billion yen or US$125 million), lower material costs (+5.3 billion yen or US$55.1 million), and the impact of applying the lower-of-cost-or-market method (+1.8 billion yen or US$18.7 million).

• Horiba announces results above expectations with exhaust analyzer and chip orders bottoming. Horiba announced 1Q operating profits of 2.0 billion yen (US$20.8 million) (-3% yearon- year), well above street forecasts and initial 1H guidance of 1.0 billion yen (US$10.4 million). Sales were in line with expectations, but expenses fell 1.5 billion yen (US$15.6 million) year-on-year, more than expected. While 1H profit guidance was raised, Horiba left initial FY12/09 guidance unchanged. Orders in both automotive test systems (5.5 billion yen or US$57.2 million,-37% year-on-year) and semiconductors (1.6 billion yen or US$16.6 million, -40% year-on-year) fell short of guidance. Domestic motor exhaust gas analyzer orders may pick up again, including booking of orders originally scheduled for 1Q, and semiconductor orders may also recover, albeit lagging slightly behind SPE.

• Toshiba (OTCPK:TOSBF) to raise US$5 billion. Toshiba said it would raise US$5 billion after a second quarter of losses tore deeper into its battered capital, but forecast a return to profit this year as it slashes costs and aims to shrink losses in the chip market. Japan's biggest chipmaker is shifting its focus to its relatively stable power business and other promising areas such as lithium ion batteries while shrinking investments in its loss-making semiconductor business to improve earnings. Toshiba forecast a return to an operating profit this financial year as it pushes ahead with a previously announced US$3 billion cost-cutting plan and expects its chip business to remain in the red this year. Toshiba had been widely expected to raise capital to counter the impact of a big loss in the last financial year as it already faces 1.8 trillion yen (US$18.7 billion) in interest-bearing debt. Toshiba said it would raise as much as 493 billion yen (US$5 billion) in capital, including new shares worth up to 313.1 billion yen (US$3.3 billion) and will raise the rest through an issue of subordinated bonds.

• Panasonic (PC) and Sumitomo Chemical (OTC:SOMMF) to produce large-screen OLED TVs in 2010. The Nikkei reported that Panasonic and Sumitomo Chemical will team up to produce a 40-inch or larger organic EL (OLED) TVs. The companies plan to start production in 2010 and aim to have a 10,000 yen/inch TV that consumes 40W by 2015, which is expected to be 3mm thick and at least 20x brighter than plasma TVs. Panasonic and Sumitomo Chemical have yet to make an announcement although it is fairly well known that the two companies have a cooperative relationship. Panasonic has already announced that it will invest in OLED production lines at its IPSα Himeji plant, where operations are scheduled to start in summer 2010, but has not revealed specific plans. Sumitomo Chemical is dominant in high-polymer technologies.

• NGK (OTCPK:NGKIF) Insulators reports big NAS battery order. NGK Insulators received a large order for NAS batteries from EDF (OTC:EDFEY), France's largest electric power firm. The order is reportedly for batteries with an output of 150MW, worth 30-40 billion yen (US$31-42 million), which is large compared with NGK's current annual NAS battery sales of 17 billion yen (US$176.8 million). The Nikkei said EDF Energies Nouvelles, a natural energy subsidiary of EDF, will mainly use the batteries in a photovoltaic system, and NGK will deliver them over a five-year period starting from 2010. NGK guidance at the 1H3/09 results announcement calls for NAS battery sales of 17 billion yen (US$176.8 million) in FY3/09, 22 billion yen (US$228.8 million) in FY3/10 and 30 billion yen (US$312 million) in FY3/11, but it is now possible the business will grow sharply from FY3/11.

• NEC Electronics revises guidance downwards. NEC Electronics lowered its FY3/09 sales estimate to 546 billion yen (US$5.7 billion) from 555 billion yen (US$5.8 million), its operating profit estimate to a 68.5 billion yen (US$712.3 million) loss from a 55 billion yen (US$572 million) loss, and its net profit estimate to an 83 billion yen (US$863.1 million) loss from a 65 billion yen (US$676 million) loss. The fields where sales fell short (semiconductors for consumer-use electronics, auto, industrial-use applications) and the size of the shortfalls were expected by the Street but operating profit and net profit estimates are worse than forecasts. While details were not disclosed, at the operating profit line it is likely that the sales shortfall and production adjustments and inventory valuation losses were significant factors behind the revision. At the net profit line, tax system reforms led to the reversal of deferred tax liabilities, with positive effect, but reserves for settlement of litigation contributed to the large downward revision.


• Nippon Telegraph (NYSE:NTT) operating profit seen at 1.1 trillion yen (US$11.4 billion). Nippon Telegraph and Telephone Corp is expected to report a group operating profit of roughly 1.1 trillion yen (US$11.4 billion) for fiscal 2008, down16 percent from the year before and nearly in line with an earlier outlook. With Toyota Motor Corp. slipping into the red, the telecommunications giant is now set to reclaim the No. 1 spot among listed companies in terms of operating profit after a six-year hiatus. The drop in operating profit stems from a boost the firm enjoyed in fiscal 2007 on 317.6 billion yen (US$3.3 billion) gain from returning a portion of pension assets to the government. Nikkei said excluding special factors, operating profit was mostly flat and this was largely due to a 3 percent uptick in operating profit at cellular phone service unit NTT DoCoMo Inc. Despite cell phone sales slumping more than 20 percent in unit terms, DoCoMo enjoyed an increase in operating profit because of reduced commission fees paid to sales agents, the paper said.