A Big Announcement


I expect Japan’s yield curve to continue to strengthen
as the economy improves and when the BOJ
, at some point, backs away from the negative interest rate policy. We have added to the names in our Japanese Bank holdings which includes Mitsubishi UFJ in the Fat Prophets Global Contrarian Fund, after the sector was one of the worst performing. I expect a significant recovery in the Japan’s banks over the coming year, particularly if we are right on our view that the yield curve will continue to steepen.

The wild card for Japan’s economy is the labour market, and with record low unemployment and an economic recovery, I believe wage growth is inevitable. I wrote last week about the key concerns of Corporate Japan, and at the top of the list was insecurity over being able to attract enough workers.

Mitsubishi UFJ

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In China the CSI 300 closed 0.47% higher at 3,670 and in Australia the ASX 200 closed 0.08% higher at 5,728. Data from the casino floors in Macau last week suggested that daily gaming revenue jumped 76% against the previous seven days. This helped lift casino stocks but analysts expect a slowdown in the second half of 2017. The overall recovery in the gaming revenues has been quicker than the markets expected, but the Macau casino stocks are still well down from the record highs of 2014.

I see further upside, particularly as Macau grows and attracts a broader mass market clientele. We hold MGM China, Wynn Macau and Sands China in the Fat Prophets Global Contrarian Fund, as well as in our Asian and Global Managed Account portfolios.

Wynn Macau

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The return of Retro

The rise of high-tech seems to have most people looking for smaller, thinner, more powerful consumer electronics these days. But, nostalgia is a powerful feeling as well and some companies are looking backwards to tap into that feeling and bring back retro products. We note that these sales are supplementing sales of new-generation products in most cases, but are ‘cannibalising’ sales of some other products caught in the middle ground.

Last week Sony, one of the biggest players in the music business, announced it will begin producing vinyl records again for the first time in almost three decades. Sony is looking to tap into a resurgence in vinyl sales in recent years, although sales growth was tepid in the United States in 2016. In the case of vinyl, the sales will supplement the primary areas of growth such as streaming and music subscriptions, but are adding to the pressure on already falling physical CD sales. The growth seems to be at both extremes, either retro or new cutting-edge offerings.

In Japan, sales of vinyls have surged roughly eight-fold from 105,000 units in 2010 to almost 800,000 units in 2016 according to a CNBC report, citing statistics from the Recording Industry of Japan. Over that same period, the CNBC report said sales of CDs have fallen approximately 25%. Many Japanese are known for their love of collecting and it is easy to see how the sales of vinyls could tap into that passion.

We note that although Sony ceased producing vinyls in the late 1980s, the Japanese technology and media conglomerate has churned out some pretty sweet turntables in recent years to target audiophiles and collectors.

The Sony PSHX500 is a hybrid machine that plays vinyl, but can also convert them into high-resolution digital files that can be added to your collection on your phone for when one is on the go. Amazon currently lists it as retailing for approximately $398.

The Sony PSHX500:

This is a modern record player from Amazon

Source: Amazon

In the United States, the Recording Industry Association of America (RIAA) numbers show vinyl sales have surged more than four times from $88.9 million in 2010 to roughly $430 million in 2016. However, 2016 was a relatively slow year for growth in vinyl sales in the United States, expanding only 4% from 2015. It is notable though, that vinyl sales accounted for roughly 26% of physical sales, marking the highest share since 1985. This is a combination of the growth in vinyl sales and the fall in CDs, with the latter losing out to streaming and subscription sales.

Retail music sales enjoyed a strong year in 2016 in the US, climbing 11.4% to $7.7 billion, while wholesale revenues increased 9.3% to $5.3 billion.

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Image credit / Source: RIAA

Globally, consulting firm Deloitte’s is estimating global sales of vinyls and accessories to hit $1 billion this year.

Sony’s new vinyl factory will be only the second factory to produce vinyl’s in Japan and initially, the records produced will primarily be from older Japanese catalogue songs to targeting Japanese customers, according to the Nikkei Asian Review.

Sony’s Music segment saw sales increase 4.6% to ¥647.7 billion (US$5.8 billion) in FY16, despite a currency headwind. In constant currencies sales increased 11% driven by higher media, platform and recorded music sales. One of the best-selling music titles was Beyoncé’s Lemonade.

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Segment operating income slipped ¥10.7 billion, or 12% to ¥75.8 billion, with this primarily due to the year ago period benefitting from an exceptional ¥18.1 billion gain from one of the company’s equity stakes. The Sony Music business has been a steady contributor to the group over the years with Sony growing it organically and via acquisitions.

Sony’s Japan-listed shares are trading at multi-year highs as the company’s turnaround efforts over the past four years are bearing fruit. The big losses in problematic areas such as the television segment have been stemmed and areas such as the gaming division and semiconductors (Sony is a leader in image sensors) are thriving.

Guidance for group operating profit this year is strong at ¥500 billion. If this is achieved it would the highest level for operating profit in two decades and investors are buying into the renaissance of one of Japan’s most storied electronics brands. A major impairment charge taken against the Pictures (movies & TV shows etc.) business last year should clear the decks for that segment and see it return to profit growth this year. Sony is held in the Fat Prophets Global Contrarian Fund and the Asian and Global Opportunities Managed Account Portfolios.

Disclosure: The Fat Prophets Contrarian Fund declares a holding in Mitsubishi UFJ, MGM China, Wynn Macau, Sands China and Sony.

Carpe Diem!

CEO | Fat Prophets