First Read: Japan Small & Mid-cap Sector "January-March small-cap earnin..."

Research evidence excerpt

First Read: Japan Small & Mid-cap Sector "January-March small-cap earnin..."

Valuation Method and Risk Statement

Small and mid-cap stocks generally have low free float ratios, and this can lead to high share

price volatility. Earnings are heavily dependent on the economic cycle. Most small and midcap

industries have an enterprise structure dependent on a few designated products and a single

business model, and have not diversified. This means that earnings will vary depending on

demand and the competitive environment for individual goods and services. Since the

management of small to medium-sized companies tends to depend on a limited number of

managers and personnel, there is also a risk that staff shortages may hamper growth.

Azbil (6845):

Earnings are affected by capex, construction investment, and industrial production. Economic

recession or capex declines could negatively affect company earnings. Of the company’s 13

domestic production facilities, four are in Kanagawa Prefecture and four are in Fukushima

Prefecture; if there were another disaster or if power were interrupted, earnings could be

negatively affected. Upside risks include capex and building investment rising, lower raw

materials costs, and early resolution of supply chain issues.Our price target is based on a DCF

model.

eGuarantee (8771):

There is a risk of lower revenues or higher costs at eGuarantee if a weakening economy

causes credit deterioration greater than anticipated, causes demand for fulfilment of credit

guarantee obligations to be greater than anticipated, or makes it difficult for the financial

institutions to which the company transfers credit risk to undertake risk. eGuarantee holds

comparatively low-risk credit risk through nine contracts with anonymous associations on its

own books.