Japan’s GDP is recovering swiftly from its Q2 COVID induced 8 % downdraft and its stock market has been one of the best performers, propelled by constant buying by the Bank of Japan.
Within this context, there are a number of interesting recovery plays in Japan and we have added today two companies belonging to the same group.
BUY MISTUBISHI MOTORS 7211 JP @ JPY 200
Mitsubishi Motors has been for years the lame duck of the Japanese Auto industry until it was incorporated in Carlos Ghosn’s grand alliance with Renault of France and Nissan in Japan.
The ousting of Carlos Ghosn in 2019 and the COVIOD in 2020 has left the company in limbo but the restructuring implemented before Ghosn’s departure are putting the company on a strong recovery path.
The automotive sector in Japan is the third-largest automotive producing industry in the world, with 78 factories in 22 prefectures and employing over 5.5 million people, it is a major pillar of the country’s economy.
Automotive manufacturing takes up 89% of the country’s manufacturing sector and auto parts suppliers have also grown a substantial part of Japan’s economy, spreading into other industries such as chemicals and rubber.
It is a highly innovative and technology-driven industry, with increased production of hybrid and electric vehicles being brought onto the domestic and global market and an increase of supply and demand on an international scale.
Domestic brands such as Toyota, Nissan, Honda, Suzuki and Mitsubishi dominate the Japanese automotive market, with foreign-manufactured cars seen more as status symbols due to the incredibly high maintenance cost of imported vehicles. The majority of car owners reside in rural areas of Japan, while its urban population heavily relies on public transport.
Like most industries, the Japanese automotive market has been affected by COVID-19. All Japanese automakers had to close production plants all around the world for safety measures. Japan sales declined sharply by 23% in June, with Toyota still being the best-forming brand, followed by Honda and Nissan.
However, the Japanese automakers vowed to protect jobs against the worldwide pandemic, setting up a special fund for those who have been laid off to find jobs and even produced face masks.
While the global pandemic has had a massive impact on the automotive industry in Japan, it’s clear to see where the sector is going in terms of developing renewable, green technologies to be incorporated into vehicles. Hydrogen in particular has been a clear strategic choice for Japan’s auto industry.
Demand for electric motorcycles is stronger now than ever before amid declining sales in Japan, so hopefully, these will be released on the Japanese automotive market soon enough and help spur growth in the sector.
Japan remains to be a leader in this space, and the UK-Japan Trade Deal will also benefit the Japanese automotive market in the long run.
On 11th September 2020, the UK-Japan trade deal was announced to come into effect at the beginning of 2021. It was called a ‘historic moment’ by the British government as it was the first major trade deal for the UK as an independent nation after the announcement of the UK leaving the EU.
The deal is expected to bring strong tariff reductions for both the UK and Japan, with reductions on UK pork and beef exports, low tariffs on food and drink, as well as reduced tariffs for Japan’s exporters.
Japan Auto Market recovered strongly since COVID, growing by 29.3% in October 2020 with 406.724 units sold, despite the country being hit by the third wave of COVID-19 cases.
Year to Date sales were 3.8 million (-14.6%). All brands in the leaderboard reported growth. Although Mitsubishi Motors had the lowest growth of all.
In 2019, Mitsubishi Motors produced 1.34 million vehicles of which 730 000 were produced outside Japan.
Mitsubishi’s strong markets, Indonesia and Malaysia were severely affected by COVID 19 but are now on the mend. Mitsubishi pulled out of the Usa where it was selling only 120’000 vehicles a year.
For decades, Mitsubishi has been at the forefront of creating emissions-reducing technologies, electric cars, and hybrid vehicles designed to preserve and sustain the global environment.
In recent years, with the production of Outlander PHEV, Mitsubishi has focused on Plug-in Hybrid Electric Vehicle technology—pushing the boundaries of what’s possible with hybrids.
Mitsubishi also has very strong brand recognition in Japan and the rest of then world.
Financially, Mitsubishi is expected to make losses in FY 2020 and 2021 but resume profitable operations in FY 2022. Fiscal Year ends in March in Japan.
Analysts are still cautious on the company but Morgan Stanley started upgrading the stock in November within price target of JPY 350.
It is our view that both Japan’s auto sector and Mitsubishi Motors have seen the worst and that this is fully discounted in the stock price.
A clear bottom has been made now and the company shares are trading at the lowest level in 30 years
Moreover, the unwinding of the partnership with Renault may actually open a new era for Mitsubishi Motors.
In November, Nissan was rumoured to considering selling its 34 % stake in Mitsubishi Motors to Mitsubishi Corp. Such a move would actually send both stocks higher.
We believe that the current levels offer an interesting opportunity for long term investors wanting to build a strategic stake in a Japanese recovery play.
BUY MITSUBISHI HEAVY INDUSTRIES 7011 JP @ JPY 2950
Mitsubishi Heavy Industries, Ltd. is a Japanese multinational engineering, electrical equipment and electronics company headquartered in Tokyo, Japan.
MHI is one of the core companies of the Mitsubishi Group and its automobile department is the predecessor of Mitsubishi Motors.
MHI’s products include aerospace and automotive components, air conditioners, elevators, forklift trucks, hydraulic equipment, machine tools, missiles, power generation equipment, printing machines, ships, aircraft, railway systems, and space launch vehicles.
It is Japan’s largest defense contractor.
As most heavy machinery companies, MHI was affected by COVID as it hampered both orders and delivery schedule. With the economic recovery in full play, the company is seeing all its industrial segments revving up at the same time.
its margins should gradually recover as the pandemic’s impact wanes. Boeing’s output and civil-aircraft engine aftermarket demand may take longer to recover until a Covid-19 vaccine becomes widely distributed, but steady profit from its thermal power aftermarket services and stable gas-turbine orders may help in the near term while its auto-related businesses may improve as carmakers continue to ramp up output.
Halting the SpaceJet program may help reduce near-term costs while the longer-term focus shifts toward carbon neutrality by 2050, which should help utilize development assets and capitalize on future demand.
Financially, the company will not experience a loss in 2020/ 2021 and profits will recover strongly in 2021
Analysts have gradually upgraded the stock with Morningstare quantitative analyst putting a target at 4300 JPY
Both Price to Book and Price to sales rations are at a decade low
Technically, the stock has now bottomed out and is trading at levels that have provided significant entry points in the past 30 years.
We see MHI as a prime beneficiary of post-COVID economic recovery and current levels as a unique entry point for long term investors.
DISCLAIMER Mechelany Advisors FZ-LLC or www.mechelanyadvisors.com, is not a registered investment advisor, nor a capital management firm or broker-dealer and does not purport to tell or suggest which securities customers should buy or sell for themselves. Mechelany Advisors FZ-LLC operates as a private advisory and research company where we provide consulting services to pension funds, investments funds and private clients. Our analyses and conclusions are ours and they only clarify and highlight the investment rationale behind our own investment decisions. The analysts and employees or affiliates of Company may - and usually do - hold positions in the stocks or industries discussed here. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. You understand and acknowledge that there is a very high degree of risk involved in trading securities. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns. The indicators, strategies, columns, articles and all other features of Company’s products are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented on Company’s website are for educational purposes only. Such examples are not solicitations of any order to buy or sell securities, commodities, investment products or engage into any kind of trading activities. Accordingly, you should not rely solely on the Information provided in making any investment decision. Rather, you should use the Information provided only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment. By navigating on our website or remaining on our subscription lists, you accept our terms and conditions and discharge us irrevocably form all responsibility.