Nomura_Outlook for Japanese equities heading into 2019_watermark

vk.com/id446425943	9 November 2018
No ura | Japanese equities investment strategy (November 2018)

Fig. 34: Share price performance of environment-related companies between the awarding of the Aichi Expo and the expo itself

(End-Jun 97 = 0%)
80
60
40
20
0
-20
-40
-60
-80
97	98	99	00	01	02	03	04	05

Aichi chosen to	Aichi Expo officially	Aichi Expo	(CY)
host Expo 2005	registered	held

Note: Chart plots the TOPIX-relative performance (straight average basis) of the 14 listed companies that had a market capitalization of at least ¥10bn as of the end of June 1997 (the month in which Aichi was selected to host Expo 2005) and that Bloomberg categorizes as belonging to the industries of renewable energy, biofuels, environmental engineering & consulting services, waste & environmental service equipment & facilities, or waste management.

Source: Nomura, based on Bloomberg data

More attention likely to focus on life sciences-related companies as a result of Osaka Expo

Based on our findings as described above, we think that the hosting of the Osaka Expo will result in a greater focus on life science-related companies. We have taken up such themes previously in our longer-term themed reports, specifically New trends in healthcare x ICT in our 28 November 2017 Global Research Anchor Report: and Biotech 101 our 22 November 2016 Anchor Report. In the former, our focus was on: (1) telecare;

(2) AI; (3) medical treatment robots; and (4) service platforms. In our Biotech report we focused on Japanese biotech stocks that we believe have sufficient growth potential to bring about paradigm shifts in both medicine and society.

(Boqiong Wang)

31

vk.com/id446425943	9 November 2018
No ura | Japanese equities investment strategy (November 2018)

5-1 Analyst's perspective: restaurant industry initiatives aimed at tapping into demand from foreign tourists

The restaurant industry is seeing increased customer traffic along with the rise in the number of foreign tourists visiting Japan. The industry is working on a number of initiatives to tap into this demand, particularly as the number of foreign tourists visiting Japan should increase further heading towards the 2020 Olympic and Paralympic Games.

Taking steps to provide a greater variety of payment options

One area restaurant operators are working on is adding a greater variety of payment options. To date, we have seen a rise in the number of locations accepting the China UnionPay card to better serve visitors from China, and recently more restaurants are starting to accept Visa and MasterCard as well. We believe that the promotion of cashless transactions is also contributing to this trend.

Growing number of companies introducing ingredient traceability systems

A fair number of foreign tourists are vegetarians or vegans who do not eat animal products for religious, health, ethical or other reasons. It is also important for restaurants to be able to cope with customers with allergies to certain food ingredients. Restaurant operators are starting work on ways to help prevent customers from inadvertently consuming something that do not intend to, such as by offering menus in multiple languages and making lists of ingredients used in menu items available. A growing number of companies are also introducing ingredient traceability systems as a means to deal with food allergies, and this is creating business opportunities for companies such as Infomart, which operates an online marketplace for companies to conduct ingredientrelated transactions.

Public and private sectors actively working together in Okinawa

Okinawa is a good example of a case in which both the public and private sectors are actively working to tap into demand from foreign tourists. Okinawa is working to expand runway capacity at Naha airport and to expand capacity for receiving cruise ships in order to be able to take in more foreign tourists. Work is also being done to build, among other things, lodging facilities and shopping centers near the ports as distribution and lodging are currently bottlenecks for increasing foreign tourists. One such example is the joint development of the commercial portion of a multipurpose facility by San-A, which operates a wide variety of retail and restaurant facilities in Okinawa, and Parco. San-A has been strategically raising its hourly wages in view of future labor shortages. Okinawa's unemployment rate averaged 3.3% in Jul-Sep 2018, which is higher than the national average of 2.5%, but the rate is down 0.2ppt from a year earlier.

Tokyo Metropolitan Government ordinance against passive smoking generally well-received by listed restaurant operators

The Tokyo Metropolitan Government passed an ordinance against passive smoking, effectively banning indoor smoking in bars and restaurants that employ workers. While only a portion of the ordinance is currently in effect, the ordinance will go into full effect in April 2020. It is difficult to gauge what kind of an impact this will have on the restaurant industry, as, for example, the ordinance does not cover e-cigarettes, but it appears that many tourists from more economically developed countries are of the view that Japan should take stricter measures to ban smoking.

The Tokyo Metropolitan Government ordinance is stricter than the national rules, but the ordinance has been generally well-received by listed restaurant operators. The reason is that the Tokyo Metropolitan Government ordinance has less wiggle-room for loopholes than what the national government is proposing, with the result that listed restaurant operators, which have to strictly comply with the rules, do not feel they are being disadvantaged.

(Ryozo Minagawa, Masaki Motomura)

32

vk.com/id446425943	9 November 2018
No ura | Japanese equities investment strategy (November 2018)

5-2. Analyst's perspective: 2019 consumption tax hike

Housing sector: tax hikes tend to be followed by large drop in housing market

When the consumption tax rate was hiked in April 1997 and April 2014, there was rush demand for housing, and built-to-order detached housing in particular, before the increases and a sharp contraction in the market thereafter, and it looks as though the government is mulling economic stimulus measures to reduce the impact of any fallback after the tax hike. Potential measures include lengthening or enhancing the current tax breaks on home loans that run out in December 2021, raising the maximum annual income ceiling for home purchase subsidies from ¥5.10mn at present to ¥7.75mn, and offering so-called housing eco-points in exchange for new-build housing and refurbishment products with good environmental credentials. The government has already decided to increase the tax-free allowance for gifts to fund housing purchases from ¥12mn for properties subject to the current 8% consumption tax rate to ¥30mn for properties subject to the 10% rate. While we have some expectations for measures to curb any post-tax hike fallback, tax breaks on housing have been around for some time, and we think any additional stimulus measures may have only a limited impact.

Here we take a look at new housing starts and, within that statistic, at the number of built-to-order houses before and after the tax hikes. In FY95, there were 1,480,000 housing starts (with 550,000 for built-to-order houses), and this rose 10% y-y to 1,630,000 (+16% to 640,000) in FY96 on rush demand ahead of the consumption tax hike, followed by a sharp decline of 18% to 1,340,000 (down 29% to 450,000) in FY97 after the tax increase. Similarly, there were 890,000 (320,000) in FY12, followed by a rise of 11% to 990,000 (+12% to 350,000) in FY13 and a fall of 11% to 880,000 (down 21% to 280,000) in FY14 after the tax hike.

Some participants in the housing industry do not expect such a big peak or trough when the next consumption tax hike comes, reflecting the view that the government may enhance housing tax breaks after the tax increase and that there had already been considerable rush demand ahead of the tax hike in April 2014. Moreover, the increase next time will be from 8% to 10%, which is smaller than previous hikes in both absolute and relative terms, and some think that the impact will be similarly smaller. Even so, the prevailing view is that there will be a degree of rush demand and a fallback, and we concur with this.

The number of households in Japan is approaching a peak, and we expect it to decline in due course. We see industry realignment, overseas expansion, and other moves as key issues for the housing sector. Specifically, we would point out Daiwa House Industry's nonhousing businesses and efforts by housing companies to tie up with general contractors, as well as overseas operations at Sekisui House and Sumitomo Forestry.

(Daisuke Fukushima)

Retail sector: consumers becoming more choosy about where they shop, we view this as an operational risk for the industry

The consumption tax hike planned for October 2019 is basically a negative factor for the retail industry, in our view. We think that as customers become more choosy about where they shop, market shares of different store operators may grow more fluid. Such an operating environment could be seen as one where differences in consumer loyalty lead to differences in earnings, and we think stock selection will become even more crucial than before.

At the time of the last consumption tax hike in April 2014, retailers commanding the strongest consumer loyalty made major gains in market share. High-profile companies making sharp gains in share included Fast Retailing among softline retailers and Nitori Holdings among hardline retailers (Figure 35). At the upcoming tax hike we basically expect dominant companies like these to once again gain market share.

Two notable differences this time are (1) some categories of goods will have a lower tax rate (8%, instead of 10%) applied, and (2) the Japanese government will subsidize

33

vk.com/id446425943	9 November 2018
No ura | Japanese equities investment strategy (November 2018)

refunds in the form of points awarded to consumers shopping at small and medium-sized retailers in return for the retailers introducing cashless payment methods. Many details of these plans remain to be decided, but we see a possibility of considerable confusion being caused by their rollout. We think operational risk posed by these plans deserves attention at operators of convenience stores and supermarkets, which have a high sales weighting in food, and at Marui Group, which derives a large share of profits from its credit card business.

(Hidehiko Aoki)

The last consumption tax hike had a major impact on big-box electronics retailers. The upcoming consumption tax hike also coincides with a period of television replacement demand, and we expect to see rush demand ahead of the tax hike and a sharp dropoff in demand afterward. That said, with the Tokyo Olympic Games set for July 2020, inbound demand could ameliorate to some extent the post-hike dropoff at Bic Camera, which is frequented by many tourists. While drugstores are likely to see rush demand for products such as cleaning agents, those drugstores that offer dispensing pharmacy services are likely to bounce back quickly from any drop in demand, as was the case the last time around.

(Kosuke Narikiyo)

Fig. 35: Same-store sales at major retail subsectors and companies before and after the 2014 consumption tax hike

Value-oriented retailers made strong market share gains		3M average	3M average after	Six-month
		prior to hike	hike	average
	Japan Department Stores Association member sales growth	10.4	-5.8	2.3
	Same-store sales growth at convenience stores (Japan Franchise	1.3	-1.4	-0.1
	Association)
	Same-store sales growth for members of Japan Chain Stores Association	3.6	-3.1	0.2
	Clothing and accessories specialty retailers (data compiled by Nomura	1.4	-4.3	-1.4
	retail team across industry companies)
	Same-store sales growth at Uniqlo Japan business	5.5	1.3	3.4
	Furniture (data compiled by Nomura retail team across industry	22.2	-9.1	6.5
	companies)
	Nitori Holdings	15.4	-0.3	7.6

Note: Same-store sales prior to and after the April 2014 consumption tax hike, y-y, %.

Source: Nomura, based on disclosures by industry associations and companies

Restaurant sector: negative impact, particular concerns surround companies that display tax-inclusive prices

We see the consumption tax hike planned for October 2019 as a negative for the restaurant sector. This is because we think (1) the tax hike will cause deterioration in consumer sentiment, (2) the media will focus on the point that restaurant food is not included in the categories of goods to be covered by a lower tax rate, and (3) takeout food will be included in the categories of goods to be covered by a lower tax rate, a detail that could cause operational difficulties. At the time of the April 2014 consumption tax hike, the restaurant industry saw nearly a complete absence of rush demand and subsequent fallback, and subsequently no negative reaction in terms of consumption levels or share prices was evident. This time, however, restaurant operators will not be able to change pricing displays again and a lower tax rate will be applied to some product categories, so we think past experience will not be a useful reference. Regarding (1), some restaurant operators chose to switch their menu price labeling from tax inclusive to pretax basis at the time of the last tax hike. This had the effect on the surface of making prices look lower (the displayed price appeared lower because it no longer included tax), and helped consumers overcome the psychological shock of the tax hike. However, restaurants who have already implemented this technique cannot do so again. Regarding (2), the tax rate for restaurant food (10%) will only differ by 2ppt from the tax rate for takeout food (8%) and other food consumed at home, but we think repeated media coverage of the difference will give a negative impression and cause more

34

vk.com/id446425943	9 November 2018
No ura | Japanese equities investment strategy (November 2018)

consumers to view food consumed on-site in restaurants as overpriced. Regarding (3), we think the dual tax-rate structure could actually contribute to packaging waste and cause disputes between customers and restaurant staff or conflict among customers if some consumers angle to get the lower tax rate applied by requesting takeout and then proceeding to eat the purchased food on restaurant premises anyway.

In particular, we urge caution on companies that use tax-inclusive pricing. We think it will be no easy feat to absorb a 2ppt tax hike (by leaving tax-inclusive prices unchanged) amid operating conditions where personnel costs are expected to continue to rise. We think the upcoming tax hike will force restaurant operators to take a fresh look at their product and pricing strategies. For details on which method of price labeling is used by different restaurant operators, see Figure 1 in our 24 October 2018 Global Research report Japan restaurant monthly November 2018.

(Ryozo Minagawa)

Food sector: lower tax rate will be applied, with exceptions of alcoholic beverages and tobacco

With the exception of alcoholic beverages and tobacco, the food sector will be covered by the lower tax rate. In addition, the upcoming tax rate hike will allow the use of taxexclusive price labeling, as was the case at the time of the April 2014 price hike. We think any negative effect for the food sector on consumer sentiment and demand will be considerably lightened as a result.

At the time of the April 2014 consumption tax hike, the impact on sales of beer and beerlike beverages in terms of price sensitivity was low at just 0.2, and we think the impact on demand this time around will be around the same. We note that two of Japan's major beer brewers, Asahi Group Holdings and Kirin Holdings, have low operating leverage (ie, a low break-even ratio) on their domestic beer businesses, and so even if demand were to fall, the impact on earnings would be light. In contrast, Sapporo Holdings has high operating leverage and would therefore be likely to incur a heavier impact.

Price hikes above and beyond the consumption tax hike look likely to be implemented for tobacco products. We think Japan Tobacco can offset any drop in demand with hikes to unit prices.

(Satoshi Fujiwara)

35

vk.com/id446425943	9 November 2018
No ura | Japanese equities investment strategy (November 2018)

6. Basic data on Japanese equities

Fig. 36: Event calendar

			Japan		Overseas
	Nov	8	Machinery orders (Sep)	1	US: ISM manufacturing index (Oct)
		8	Economy Watchers Survey (Oct)	1	Scheduled rebalancing of Russell/Nomura Japan Equity Indexes
		14	First preliminary GDP data (2018 Q3)	2	US: employment statistics (Oct)
		22	All-Japan CPI (Oct)	5	Euro zone: finance ministers meeting
		30	Industrial production (Oct)	6	US: midterm elections
				7–8	US: FOMC meeting
				11–15	ASEAN summit, East Asia Summit (Singapore)
				13	Scheduled rebalancing of MSCI indexes
				14	US: CPI (Oct)
				15	US retail sales (Oct)
				29	G20 finance ministers meeting (Argentina)
				30	China: official PMI (Nov)
				30 Nov	G20 summit (Argentina)
				–1 Dec
				30 Nov	US-China summit meeting
				–1 Dec
				During Nov	Japan-Russia summit meeting (Singapore)
	Dec	3	Financial Statements Statistics of Corporations by Industry	3	US: ISM manufacturing index (Nov)
			(2018 Q3)
		10	Economy Watchers Survey (Nov)	6	OPEC meeting
		10	Second preliminary GDP data (2018 Q3)	7	US: employment statistics (Nov)
		10	End of extraordinary Diet session
		12	Machinery orders (Oct)	12	US: CPI (Nov)
		14	BOJ Tankan Summary (Dec)	13	Euro zone: ECB policy board meeting
		19–20	BOJ monetary policy meeting	13–14	EU summit meeting
		21	All-Japan CPI (Nov)	13	US: end of House of Representatives session
		28	Industrial production (Nov)	14	US: end of Senate session
		During Dec	FY18 second supplementary budget proposal,	14	US retail sales (Nov)
			FY19 budget proposal,	18–19	US: FOMC meeting (press conference by Fed chair, forecasts
			Cabinet decision on tax system reform proposals		for economy, prices, and interest rates)
				30	TPP11 to enter into force without the US
				31	China: official PMI (Dec)
				During Dec	China: Central Economic Working Conference (CEWC)
	Jan	11	Economy Watchers Survey (Dec)	1	US may increase tariffs on Chinese imports (from 10% to 25%)
	2019	16	Machinery orders (Nov)	3	US: ISM manufacturing index (Dec)
		18	All-Japan CPI (Dec)	4	US: employment statistics (Dec)
		31	Industrial production (Dec)	24	Euro zone: ECB policy board meeting
		22-23	BOJ monetary policy meeting	29–30	US: FOMC meeting
			(Outlook for the Economy and Prices)
		31	Industrial production (Dec)
		During Jan	Regular Diet session
	Feb	8	Economy Watchers Survey (Jan 2019)	1	US: ISM manufacturing index (Jan 2019)
		14	First preliminary GDP data (2018 Q4)	1	US: employment statistics (Jan 2019)
		18	Machinery orders (Dec 2018)
		22	All-Japan CPI (Jan 2019)
		28	Industrial production (Jan 2019)

Note: Scheduled events are subject to change. Bold type indicates particularly important events.

Source: Nomura, based on news reports and various other materials

36

vk.com/id446425943	9 November 2018
No ura | Japanese equities investment strategy (November 2018)

Fig. 37: TOPIX-basis actual and estimated EPS, BPS, and valuation indicators (bottom-up estimates)

		TOPIX	BPS	EPS		Estimated EPS		Forward P/E	P/B	Estimated
										dividend yield
			Prev FY	Prev FY	Current FY	Next FY	12-M forward	12-M forward		Next FY
(yy/m)		TOPIX	TOPIX	TOPIX	TOPIX	TOPIX	TOPIX	x	x	%
13/	3	1,035	818	37.9	47.6	69.4	69.4	14.9	1.3	1.9
	6	1,134	910	48.8	76.7	82.6	78.2	14.5	1.3	1.9
	9	1,194	909	48.8	77.3	83.9	80.6	14.8	1.3	1.8
	12	1,302	908	49.0	80.7	85.8	84.5	15.4	1.4	1.7
14/	3	1,203	904	48.7	81.8	86.6	86.6	13.9	1.3	1.9
	6	1,263	1,007	81.6	86.2	94.7	88.3	14.3	1.3	1.9
	9	1,326	1,005	81.4	85.5	96.3	90.9	14.6	1.3	1.8
	12	1,408	1,004	81.5	88.2	98.1	95.6	14.7	1.4	1.8
15/	3	1,543	1,005	81.6	87.5	100.0	100.0	15.4	1.5	1.7
	6	1,630	1,144	86.9	99.9	108.5	102.0	16.0	1.4	1.8
	9	1,411	1,140	86.4	100.5	108.6	104.6	13.5	1.2	2.0
	12	1,547	1,149	86.5	96.9	106.5	104.1	14.9	1.4	1.9
16/	3	1,347	1,149	86.4	89.7	102.6	102.6	13.1	1.2	2.1
	6	1,246	1,135	82.8	94.1	101.4	95.9	13.0	1.1	2.4
	9	1,323	1,136	83.9	93.8	101.1	97.4	13.6	1.2	2.2
	12	1,519	1,132	82.1	93.3	103.6	101.0	15.0	1.3	2.0
17/	3	1,513	1,133	81.9	95.8	106.3	106.3	14.2	1.3	2.0
	6	1,612	1,189	93.8	106.2	114.3	108.3	14.9	1.4	2.0
	9	1,675	1,198	97.5	109.6	117.7	113.7	14.7	1.4	2.0
	12	1,818	1,190	97.3	110.9	120.5	118.1	15.4	1.5	1.9
18/	3	1,716	1,188	97.2	118.2	121.7	121.7	14.1	1.4	2.0
	6	1,731	1,286	118.9	122.4	132.5	124.9	13.9	1.4	2.2
	9	1,817	1,285	118.9	123.8	133.1	128.4	14.2	1.4	2.1
	10	1,646	1,288	118.5	123.3	131.9	128.3	12.8	1.3	2.3
	11	1,640	1,288	118.5	123.0	131.4	128.6	12.8	1.3	2.3

Note: (1) Toyo Keizai estimates used where Nomura estimates are not available. (2) Data for TOPIX through October 2018 are month-end values rounded to nearest whole number. (3) Data for November 2018 calculated using 5 November share prices.

Source: Nomura, based on Toyo Keizai data

Fig. 38: Nikkei 225-basis actual and estimated EPS, BPS, and valuation indicators (market cap-weighted average, bottom-up estimates)

		Nikkei 225	BPS	EPS		Estimated EPS		Forward P/E	P/B	Estimated
										dividend yield
			Prev FY	Prev FY	Current FY	Next FY	12-M forward	12-M forward		Next FY
(yy/m)		¥	¥	¥	¥	¥	¥	x	x	%
13/	3	12,398	9,342	454.0	606.0	867.0	867.0	14.3	1.3	2.0
	6	13,677	10,459	617.0	967.0	1,018.0	980.0	14.0	1.3	2.0
	9	14,456	10,526	621.0	974.0	1,044.0	1,009.0	14.3	1.4	1.9
	12	16,291	10,838	639.0	1,045.0	1,099.0	1,085.0	15.0	1.5	1.8
14/	3	14,828	10,829	638.0	1,061.0	1,115.0	1,115.0	13.3	1.4	2.1
	6	15,162	11,916	1,026.0	1,082.0	1,189.0	1,109.0	13.7	1.3	2.1
	9	16,174	12,108	1,042.0	1,085.0	1,233.0	1,159.0	14.0	1.3	2.0
	12	17,451	12,350	1,063.0	1,143.0	1,276.0	1,243.0	14.0	1.4	2.0
15/	3	19,207	12,490	1,075.0	1,138.0	1,313.0	1,313.0	14.6	1.5	1.8
	6	20,236	14,182	1,115.0	1,296.0	1,412.0	1,325.0	15.3	1.4	1.9
	9	17,388	14,178	1,108.0	1,308.0	1,415.0	1,361.0	12.8	1.2	2.3
	12	19,034	14,174	1,108.0	1,253.0	1,381.0	1,349.0	14.1	1.3	2.1
16/	3	16,759	14,488	1,133.0	1,173.0	1,351.0	1,351.0	12.4	1.2	2.4
	6	15,576	14,299	1,073.0	1,231.0	1,327.0	1,255.0	12.4	1.1	2.6
	9	16,450	14,228	1,084.0	1,234.0	1,321.0	1,277.0	12.9	1.2	2.4
	12	19,114	14,301	1,092.0	1,237.0	1,389.0	1,351.0	14.2	1.3	2.1
17/	3	18,909	14,343	1,094.0	1,269.0	1,420.0	1,420.0	13.3	1.3	2.2
	6	20,033	15,136	1,245.0	1,420.0	1,530.0	1,447.0	13.8	1.3	2.3
	9	20,356	15,416	1,260.0	1,447.0	1,549.0	1,498.0	13.6	1.3	2.3
	12	22,765	15,863	1,296.0	1,514.0	1,635.0	1,604.0	14.2	1.4	2.1
18/	3	21,454	16,069	1,313.0	1,672.0	1,667.0	1,667.0	12.9	1.3	2.4
	6	22,305	17,783	1,722.0	1,725.0	1,883.0	1,765.0	12.6	1.3	2.5
	9	24,120	17,956	1,738.0	1,774.0	1,918.0	1,846.0	13.1	1.3	2.4
	10	21,920	17,898	1,732.8	1,769.4	1,902.5	1,847.0	11.9	1.2	2.6
	11	21,899	18,114	1,753.7	1,785.6	1,916.4	1,872.8	11.7	1.2	2.6

Note: (1) Toyo Keizai estimates used where Nomura estimates are not available. (2) Data for Nikkei 225 through October 2018 are month-end values rounded to nearest whole number. (3) Data for November 2018 calculated using 5 November share prices. (4) EPS, BPS, and DPS are market cap-weighted averages as previously.

Source: Nomura, based on Toyo Keizai data

37

vk.com/id446425943	9 November 2018
No ura | Japanese equities investment strategy (November 2018)

Fig. 39: Nikkei 225-basis actual and estimated EPS, BPS, and valuation indicators (Nikkei 225 weighting basis, bottom-up estimates)

		Nikkei 225	BPS	EPS		Estimated EPS		Forward P/E	P/B	Estimated
										div idend yield
			Prev FY	Prev FY	Current FY	Next FY	12-M forward	12-M forward		Next FY
(yy/m)		¥	¥	¥	¥	¥	¥	x	x	%
13/	3	12,398	7,547	393.0	514.0	720.0	720.0	17.2	1.6	1.7
	6	13,677	8,416	515.0	774.0	855.0	794.0	17.2	1.6	1.7
	9	14,456	8,352	514.0	750.0	836.0	793.0	18.2	1.7	1.6
	12	16,291	8,344	519.0	745.0	842.0	818.0	19.9	2.0	1.4
14/	3	14,828	8,343	518.0	736.0	865.0	865.0	17.1	1.8	1.6
	6	15,162	9,460	732.0	853.0	957.0	879.0	17.3	1.6	1.7
	9	16,174	9,454	732.0	845.0	980.0	913.0	17.7	1.7	1.6
	12	17,451	9,449	732.0	856.0	988.0	955.0	18.3	1.9	1.5
15/	3	19,207	9,458	733.0	862.0	1,018.0	1,018.0	18.9	2.0	1.4
	6	20,236	10,761	868.0	1,017.0	1,126.0	1,044.0	19.4	1.9	1.6
	9	17,388	10,728	866.0	1,022.0	1,121.0	1,072.0	16.2	1.6	1.8
	12	19,034	10,730	867.0	990.0	1,081.0	1,058.0	18.0	1.8	1.7
16/	3	16,759	10,744	868.0	908.0	1,033.0	1,033.0	16.2	1.6	1.9
	6	15,576	10,530	840.0	972.0	1,047.0	991.0	15.7	1.5	2.1
	9	16,450	10,413	841.0	962.0	1,037.0	1,000.0	16.5	1.6	2.0
	12	19,114	10,423	845.0	948.0	1,071.0	1,041.0	18.4	1.8	1.7
17/	3	18,909	10,414	848.0	998.0	1,115.0	1,115.0	17.0	1.8	1.8
	6	20,033	10,992	1,048.0	1,120.0	1,232.0	1,148.0	17.5	1.8	1.8
	9	20,356	10,953	1,054.0	1,139.0	1,276.0	1,207.0	16.9	1.9	1.8
	12	22,765	10,941	1,043.0	1,157.0	1,313.0	1,274.0	17.9	2.1	1.7
18/	3	21,454	10,952	1,044.0	1,279.0	1,342.0	1,342.0	16.0	2.0	1.8
	6	22,305	11,992	1,264.0	1,341.0	1,541.0	1,391.0	16.0	1.9	1.9
	9	24,120	11,996	1,264.0	1,361.0	1,555.0	1,458.0	16.6	2.0	1.8
	10	21,920	11,987	1,263.1	1,362.1	1,522.8	1,456.0	15.1	1.8	2.0
	11	21,899	11,987	1,263.1	1,358.8	1,515.0	1,462.9	15.0	1.8	2.0

Note: (1) Toyo Keizai estimates used where Nomura estimates are not available. (2) Data for Nikkei 225 through October 2018 are month-end values rounded to nearest whole number.

(3) Data for November 2018 calculated using 5 November share prices. (4) EPS, BPS, and DPS are averages weighted on the basis of each stock’s weighting in the Nikkei 225. Source: Nomura, based on Toyo Keizai data

38

vk.com/id446425943	9 November 2018
No ura | Japanese equities investment strategy (November 2018)

Fig. 40: Recurring profit growth estimates by Russell/Nomura sector (bottom-up estimates)

	No. of cos	FY15	FY16	FY17	FY18E		FY19E
					Old	New	Old	New
		%	%	%	%	%	%	%
Industrial groups	334	-0.6	1.4	15.3	9.9	8.2	9.0	9.2
Russell/Nomura Large Cap
Russell/Nomura Large Cap (ex financials)	303	1.5	3.6	17.5	11.3	9.4	9.9	10.1
Manufacturing	181	-1.9	0.2	21.6	12.3	10.2	8.5	8.0
Basic materials	41	-7.4	12.1	43.6	13.8	12.2	3.8	3.8
Processing	84	-4.2	-3.1	19.6	13.4	10.9	9.9	9.3
Nonmanufacturing	153	0.6	2.5	9.7	7.4	6.2	9.6	10.5
Nonmanufacturing (ex financials)	122	7.1	8.4	12.2	9.8	8.2	11.9	13.3
Sectors	31	21.6	16.1	34.2	13.9	13.3	4.4	4.0
Chemicals
Steel, nonferrous metals	10	-54.6	-5.5	93.4	13.6	8.4	1.6	3.0
Machinery	26	-6.6	-17.9	29.3	15.1	14.3	9.2	8.6
Autos	20	4.7	-11.6	12.9	5.6	2.3	10.1	10.5
Electrical machinery, precision equipment	38	-19.7	27.8	26.1	24.1	21.6	9.8	8.1
Pharmaceuticals, healthcare	24	39.2	-5.4	5.9	7.0	6.0	11.2	9.7
Food products	19	-0.5	8.3	4.8	1.7	0.1	7.4	6.6
Household goods	13	3.3	5.8	20.8	14.5	13.9	10.5	9.7
Trading companies	7	-62.2	233.4	31.2	18.2	19.0	1.5	1.5
Retailing	18	13.4	-1.4	12.4	12.1	10.6	10.4	9.3
Services	14	-5.6	-9.6	10.9	-4.8	-4.1	12.4	12.3
Software	9	-11.4	21.1	44.2	26.1	25.7	22.5	22.6
Media	5	10.4	-1.0	9.6	-15.7	-14.0	9.5	9.3
Telecommunications	9	5.6	-1.4	1.4	25.9	22.0	24.8	30.3
Construction, engineering	6	92.4	30.5	9.8	-2.6	-2.6	4.6	4.6
Housing, real estate	19	11.3	22.4	9.9	3.2	-0.8	7.0	6.9
Transportation	24	13.3	-5.2	9.0	4.6	3.4	6.2	5.8
Utilities	11	146.7	-36.2	10.2	-10.5	-13.4	15.8	22.1
Financials	31	-8.6	-8.1	4.4	1.8	1.6	3.8	3.7

Note: (1) As of 5 November 2018. (2) Old estimates as of 27 August 2018.

Source: Nomura estimates

Fig. 41: Valuations by Russell/Nomura sector (bottom-up estimates)

	Consolidated P/E			Consolidated P/B	Div idend yield	Consolidated ROE
	FY18E	FY19E	FY20E	FY18E	FY18E	FY17	FY18E	FY19E
	x	x	x	x	%	%	%	%
Industrial groups
Russell/Nomura Large Cap	13.0	12.4	11.6	1.26	2.32	10.3	9.9	9.8
Russell/Nomura Large Cap (ex financials)	13.5	12.8	12.0	1.41	2.25	11.2	10.7	10.6
Manufacturing	13.3	13.2	12.1	1.49	2.32	11.9	11.6	10.9
Basic materials	10.2	10.2	9.6	0.98	2.76	9.7	10.0	9.4
Processing	11.6	11.7	10.7	1.38	2.44	12.8	12.3	11.4
Nonmanufacturing	12.8	11.5	10.9	1.06	2.33	9.0	8.5	8.9
Nonmanufacturing (ex financials)	14.0	12.3	11.7	1.30	2.13	10.2	9.6	10.2
Sectors
Chemicals	10.5	10.3	9.8	1.11	2.63	11.0	11.0	10.4
Steel, nonferrous metals	9.1	9.6	9.0	0.69	3.23	6.8	7.8	7.0
Machinery	15.8	14.5	13.5	1.57	2.13	9.9	10.3	10.5
Autos	9.6	8.7	8.0	1.04	3.45	13.4	11.2	11.5
Electrical machinery, precision equipment	12.4	14.3	13.0	1.75	1.77	13.3	14.9	11.7
Pharmaceuticals, healthcare	27.4	26.3	24.2	2.57	1.66	9.6	9.5	9.5
Food products	18.9	17.8	16.4	2.01	2.53	13.0	10.8	11.0
Household goods	25.5	23.2	21.0	3.64	1.33	14.1	14.9	15.1
Trading companies	7.0	7.0	6.7	0.85	4.15	12.0	12.7	11.7
Retailing	28.5	25.5	22.2	2.45	1.24	8.7	8.9	9.3
Services	24.9	21.4	20.1	1.18	1.78	5.2	4.8	5.4
Software	24.4	20.1	17.7	3.36	2.15	12.0	14.3	16.0
Media	18.7	17.6	16.4	1.15	1.65	7.7	6.3	6.4
Telecommunications	11.4	8.5	8.4	1.31	2.38	14.5	11.8	14.6
Construction, engineering	9.1	8.7	8.5	1.19	2.68	16.8	13.6	13.0
Housing, real estate	13.0	12.2	11.8	1.29	2.38	11.1	10.2	10.2
Transportation	14.2	13.4	12.4	1.32	1.36	9.6	9.6	9.5
Utilities	11.6	9.7	9.1	0.74	2.30	8.2	6.5	7.4
Financials	9.9	9.6	9.0	0.65	2.98	7.2	6.7	6.6

Note: Share prices and earnings forecasts are as of 5 November 2018.

Source: Nomura estimates

39

vk.com/id446425943	9 November 2018
No ura | Japanese equities investment strategy (November 2018)

Fig. 42: Global comparison of MSCI valuation indices

		Div idend	P/E (f)		P/B	P/CF (f)		ROE (f)		Rev ision
		yield
			CY18	CY19		CY18	CY19	CY18	CY19		Sep-18
		%	x	x	x	x	x	%	%	%
Industrialized countries		2.50	15.28	13.99	2.28	10.55	9.54	12.40	12.92	-4.14	-0.18
Industrialized countries, ex Japan (KOKUSAI)		2.51	15.62	14.23	2.46	10.85	9.79	13.12	13.80	-4.05	0.23
	North America	1.98	16.56	15.06	3.09	12.02	10.72	18.71	19.94	0.25	2.84
	Canada	3.15	13.87	12.46	1.70	8.91	8.06	12.22	13.09	-3.40	1.52
	US	1.92	16.73	15.23	3.23	12.23	10.90	19.04	20.28	0.61	2.97
	Asia/Pacific	3.00	12.85	12.24	1.31	8.58	8.03	8.78	8.57	-6.03	-3.24
	Australia	4.78	14.50	13.91	1.89	10.24	9.76	12.41	12.09	-7.84	-3.51
	Hong Kong	3.73	13.75	12.41	1.09	11.36	10.52	9.28	9.71	-10.52	-5.50
	Japan	2.31	12.37	11.86	1.27	7.78	7.28	7.85	7.42	-4.74	-2.77
	New Zealand	2.58	23.55	21.39	2.80	16.19	14.89	10.82	11.31	-4.63	-4.43
	Singapore	4.92	12.17	11.28	1.18	9.52	8.46	9.82	10.08	-6.55	-2.85
	Europe	3.78	13.63	12.41	1.72	8.46	7.77	9.84	10.25	-9.71	-2.78
	Austria	3.32	9.70	9.04	1.26	5.71	5.40	11.79	11.75	-2.96	1.51
	Belgium	4.63	15.79	14.39	1.80	10.08	9.46	11.22	12.63	-15.26	-1.21
	Denmark	2.61	17.36	16.23	3.55	13.51	12.53	36.86	34.39	-6.75	-2.63
	Finland	4.27	17.00	15.06	2.27	14.76	12.99	9.12	11.74	-7.14	2.54
	France	3.32	14.02	12.81	1.61	8.81	8.06	9.96	10.35	-3.96	-0.32
	Germany	3.21	12.76	11.44	1.56	7.59	7.07	10.77	11.41	-17.20	-8.74
	Ireland	2.11	14.20	13.36	1.55	9.86	8.99	9.92	9.20	-12.13	-5.70
	Italy	4.39	10.25	9.01	1.07	4.95	4.65	8.30	8.88	-4.31	-0.92
	Netherlands	3.21	15.03	13.89	2.05	10.64	9.93	12.40	12.87	-6.00	3.02
	Norway	4.33	14.40	12.27	2.01	6.55	6.00	13.84	15.45	-13.53	-1.72
	Portugal	5.05	15.87	14.09	1.91	6.09	5.55	8.02	9.78	-7.74	-1.67
	Spain	4.53	11.54	10.57	1.21	4.46	4.26	8.90	9.24	-7.45	-7.30
	Sweden	4.13	15.32	14.08	2.03	11.50	10.46	12.02	12.60	-4.37	-0.20
	Switzerland	3.16	16.87	15.19	2.49	12.77	11.06	14.06	15.25	-11.64	-2.42
	UK	4.57	12.62	11.66	1.66	8.29	7.62	9.91	10.15	-11.82	-2.13
	Middle East
	Israel	1.43	11.20	10.33	1.50	9.08	7.02	17.73	13.60	-24.78	-3.15
Emerging economies		3.05	11.13	10.07	1.47	7.05	6.07	12.87	12.82	-7.72	-3.33
	Latin America	3.05	13.65	11.38	1.98	7.79	6.84	14.04	15.00
	Brazil	3.25	13.07	10.66	2.07	7.82	6.75	15.13	16.71	-6.06	0.15
	EM Asia	2.81	11.32	10.28	1.43	7.05	5.98	13.15	13.08	-8.42	-3.51
	China	2.61	11.12	9.62	1.48	7.35	6.26	12.92	12.90	-10.00	-5.63
	Korea	2.53	7.68	7.45	0.88	4.01	3.85	19.82	16.39	-11.94	-1.31
	India	1.43	18.66	15.54	2.90	12.27	10.40	14.25	15.88	-3.19	3.01
	Indonesia	2.75	15.12	13.56	2.55	10.74	2.55	17.63	17.86	-4.40	-2.32
	EM Europe, Middle East	4.94	7.24	7.03	1.13	4.78	4.49	12.18	12.08
	Russia	6.05	5.35	5.37	0.95	3.93	3.70	12.17	12.08	11.47	23.35
	South Africa	3.42	13.25	11.39	2.02	11.67	10.20	15.62	16.37	-9.10	-15.03

Note: As of end-October 2018. Universe is stocks in the MSCI standard indices. With the exception of revision data, forecasts are Bloomberg consensus (12-month forward basis). Forecast data on calendar year basis. Data are aggregated forecasts for January through December and do not contain actual results. The revision column shows revisions based on 12-month forward I/B/E/S EPS forecasts from the past four weeks: (number of analysts making upward revisions minus number of analysts making downward revisions) divided by total number of analysts.

Source: Nomura, based on MSCI, Bloomberg, ThomsonReuters, and I/B/E/S data

40