It has been a little more than one year since the last update on my Japanese stocks. I have made a number of changes since then and will briefly discuss the current Japanese basket.
Currently there are nine companies in the basket. I no longer own the two companies I first invested in: I sold Riken Keiki (JP:7734) a while ago after it had a nice run and I found a few companies that looked cheaper. Earlier I sold Maruzen (JP:5982) for the same reasons.
These are the additions I made since the last update:
Isamu Paint (JP:4624)
My favorite net-net in Japan. Isamu Paint produces paints, thinners and other products for automobile repair use, industrial use and construction use. The market cap of the company is just ¥4.6bn (about $45m). Revenues and net income have grown steadily over the last five years and the company also produces free cash flow. The dividend is small at just 2.1%, but the company has bought back stock in fiscal 2013 and 2014 (¥85m and ¥127m respectively).
Isamu Paint is trading at 0.39x BV and a P/E of 6. It has ¥6.8bn in cash and long-term investments against just ¥4.2bn in liabilities. Even though the stock has moved up a bit from where I purchased, I still think this is probably the most attractive stock in the basket currently.
Okayama Paper Industries (JP:3892)
This manufacturer of paper boards is the only loser in the Japanese portfolio at the moment. Its capitalization is tiny at ¥2.3bn. Revenue has been in a downward trend in the last couple of years and profits have dropped as well. Still, at 0.30x book value and with ¥4.0bn in cash and investments on the balance sheet it is a true book value bargain.
In the previous update I already questioned whether buying book value bargains is the best strategy for investors in Japan. The stocks that have done the best for me so far have mainly been the ones that have increased their dividends or repurchased stock.
I’m still holding on to Okayama Paper Industries though. I give them some extra credit, because they did repurchase some stock in FY 2013 and 2012, which is pretty rare for a small cap Japanese company. In 2014 they did not repurchase. The company is still generating some free cash. The stock yields 3.2% and is paying at least a little bit while I wait to see if things improve.
Hakuseisha (JP:9736)
Another new position compared to the last update and another small cap at a market cap of ¥2.6bn. The company provides building security services and cleaning services. Hakuseisha is trading at 0.40x book value and at a discount to cash & investments minus all liabilities. Earnings have been stable and the P/E multiple is 9. The dividend is 3.1%, but unlike Isamu and Okayama Paper this company has not repurchased shares in recent years.
Global Food Creators (JP:7559)
Global Food Creators has performed great so far in 2014 and is up 26%. I don’t know why. The market cap now stands at ¥7.3bn, which is still just below 0.50x BV. The company is very cash-rich with ¥8.4bn in cash and investments against just ¥2.9bn in liabilities. It generates a good amount of free cash flow, but unfortunately there have been no repurchases and the dividend is also small at just 2.0%. The company is not cheap on an earnings basis as the P/E ratio is 16.
KG Intelligence (JP:2408)
Is trading at just below 8x earnings and has a ¥3.6bn market cap. The company publishes various information magazines for weddings, housing, recruitment and… fishing. This is a small position in the basket. This stock trades in 100 share lots which means that at the current share price of ¥503 you need just around €370 or $500 for a minimum purchase. This makes KG Intelligence a good vehicle for reinvesting dividends, provided you have a low cost broker like IB that doesn’t charge you much for Japanese trades.
KG Intelligence is trading right around net-cash value. Revenues and profits have been pretty stable and the stock yields 2.9%.
KSK Co (JP:9687)
KSK is active in software development and the design of hardware systems. Like KG Intelligence this is a small position in the portfolio that I originally established by reinvesting dividends. The stock has performed well this year and is up 23%. KSK is trading at 0.60x book value and has a lot of excess cash. They have bought back a small number of shares in FY 2012 and 2011. The dividend is 2%.
Others: Maezawa Kasei Industries (JP:7925), Alps Logistics (JP:9055), Sugimoto (JP:9932)
I’ll just lump these three together since they were already part of the portfolio last year and not much has changed since then. You can read a brief discussion about them here. As a group I think these three stocks are up around 10% since the last update, a reasonable performance but not spectacular by any means.
Conclusion
At nine positions the basket is more diversified than last year and I’m now less likely to get very lucky or unlucky results in terms of the performance of the basket as a whole. I think the portfolio will do well over time. At these valuations it seems hard to lose money on these stocks. Japan has all sorts of structural problems and poor corporate governance, but I feel that is more than priced in at this point. I heard James Grant in an interview recently and in the context of Russian stocks he said something like: an improvement from terrible to bad can have much greater upside than an improvement from good to great. I think the same is true for Japanese stocks.
Disclosure: long Isamu Paint, Okayama Paper Industries, Hakuseisha, Global Food Creators, KG Intelligence, KSK Co, Maezawa Kasei Industries, Alps Logistics and Sugimoto. No positions in Maruzen and Riken Keiki.
Some nice ideas. I just initiated a position in Fujimak (5965). 1x EV/EBIT, ROIC 25%. Did you look at that one too? Was featured, among some other interesting Japanese ideas (Car Mate, Murakami, Namura Shipbuilding), on a message board you frequent as well.
“In the previous update I already questioned whether buying book value bargains is the best strategy for investors in Japan. “. Interesting that you point that out. A similar point was discussed on that forum too. Somebody was arguing that it is preferable to buy cheap & good Japanese companies rather than buying the cheapest stuff based on assets only. I think he might have a point.
Anyway, now I have to get back to work: analyzing all these Japanese companies and choosing which ones to buy.
Yes, I like Fujimak and Car Mate looks very cheap too. I’m thinking about replacing one or two of the positions (Maezawa Kasei perhaps) with these two stocks.
The better approach might be to pick growing, low P/E and low price to free cash flow stocks instead of picking companies trading at the largest discounts to book value. Since there are so many companies that have been trading at huge discounts to BV for a long time, I think it might be better to try to pick stocks that you think will become a little more attractive to other investors for some reason. For example a company that has a little bit of debt and is paying down this debt each year, might decide to finally increase the dividend a little.
Good luck making your picks! It’s pretty tough to choose from such a large selection of seemingly cheap stocks in Japan.
Great job on the analysis. I’ve learnt a lot from ur website, and I will continue following ur updates. I am just wondering what platform you are using to access the multi-nation markets and why? Congrats on ur PNE pick btw.
Thanks eL!
I’m mainly using Interactive Brokers, because they have a large selection of markets and very low costs.
Thanks for the fast reply. I think Fischer tech (SGX) may interest you. PB around 0.5, price little below net current asset value, low P/E, good divident and last quarter result very good.
Thanks for this and all your other posts.
Same question I left on one of the Corner of Berkshire and Fairfax threads:
assuming you will have no better information in the future than ft. com, Bloomberg summaries, etc., and no better access to Japanese translations,
what are your target price for exiting a position?
When it achieves BV or some premium thereof? When it reaches industry or market PE, based on normalized or peak earnings/cash flow?
Thanks again.
Most of the Japanese stocks I’d probably sell at net current asset value (but including long-term investments). Perhaps I’ll hold on to one or two if they seem like better businesses and have shown solid growth in book value and are trading at low P/E and cash flow multiples.
That doesn’t mean I’ll keep all these positions until they hit at least NCAV though. There are dozens of stocks in Japan that look very cheap and that I would consider investing in. The relative attractiveness of all these stocks, including those I own, changes constantly. So it makes sense to think about replacing a good performer in the portfolio with a company that has lagged. That was also the reason for selling Maruzen and Riken Keiki. They don’t look expensive today, but as their prices ran up, other things in Japan just looked cheaper.
First time reader here, roughly by what % are these outperforming the Japanese index each year?
And also are they outperforming the dowjones?
I am curious if you are using ft.com as I am, and if so if you are counting the “long term investments” and “note receivable – long term” items in your NCAV calculations. I was doing so for a while, but after looking at some other companies I don’t think that these investments are necessarily non-operational assets. Using an example from one of your writeups, Merchant House has some long term investments that are actually investments in associates. Since part of those assets would be non current assets such as PPE I am thinking I should give it a hair cut or omit it entirely when making the NCAV calculation. I am thinking that the LT notes receivable can be lumped in with the current assets but maybe I am wrong on that one too.
What do you think?
Great work on this blog. I just discovered it a week ago and it is already in the favorites category in my feedly.
Thanks, nice to hear you’re enjoying the blog!
Yes, I also use FT.com, mainly for taking a first glance at companies. I think you’re right about placing a discount on long term investments / notes in many cases when calculating NCAV. Merchant House is a good example. I think that purely looking at this company on the basis of NCAV or liquidation value, it is not that cheap. It’s only trading at a small discount to NCAV, excluding the investments in associates. In this case you need to have some confidence in the earnings power of the associated Chinese companies to be able to invest, I think. In a distressed scenario the value of the associates could be much lower than the carrying value.
For my Japanese holdings I have included long term investments in the NCAV calculations. Perhaps it’s better to put a discount on them, since I don’t know what they consist of exactly. I do believe that it is more common for Japanese companies to hold long term bonds and other liquid investments as long term investments.
Oh yeah, another question – are you using the market cap number from ft and reuters, or calculating it yourself from the shares out? It seems to me that everyone is calculating the market cap without subtracting treasury shares.hey are including treasury shares in shares out when calculating the market cap.
I’m subtracting treasury shares. You are right: FT is not subtracting treasury shares. I verified this with my first few holdings when I looked at the Japanese statements. You can also check Google Finance, they do subtract the treasury shares when calculating the market cap.
Sorry to see you quit Riken Keiki, you introduced me to my first Japanese stock!
I’ll definitely go through your list when I have time.
Riken Keiki has done very well. I’m perhaps a little quick in selling Japanese holdings that have performed well. There are so many cheap Japanese companies and it’s tempting to switch to a seemingly cheaper stock.
I also recently bought Fujimak btw. Thanks for your posts about this company!
Thanks for this post. It is quite informative and illustrates the opportunity at Japan.
Isamu Paint definitely looks interesting. Share buybacks among Japanese companies are quite rare. Has the company mentioned anything about repurchasing shares in the future? A net net that is repurchasing shares is definitely attractive.