Last week, I sold one holding in the Japanese basket. I’ll post an update once I’ve decided what I want to do with the proceeds. There might be one or two other changes as well. Currently I’m leaning to buy one new position and to increase a couple of existing positions in the basket.
I’ve been hunting for new ideas in Japan, but most of the things that come up in screeners or elsewhere don’t look more attractive to me than what I already own. It probably makes sense to just top up some other positions instead of seeking replacements for every position I end up selling. In my search, I did stumble on one interesting situation that I wanted to share here.
Iwatsuka Confectionery
Iwatsuka Confectionery Co Ltd (TYO:2221) manufactures and sells rice snacks. The company has a ~¥30bn market cap, or about $270m USD. The financial statements show that most of the company’s value comes from its securities holdings. In fact, one security position of theirs has a value that is far greater than the company’s current market cap! The dividend income from this position far exceeds the operating income from Iwatsuka’s own confectionery business.
Iwatsuka Confectionery owns 4.9% of the outstanding shares of the Hong Kong listed company Want Want China Holdings Ltd (HKG:0151), which has a 81.7bn HKD market cap, or ¥1,156 billion. Iwatsuka’s stake in Want Want China is worth roughly ¥57bn at the current market price, almost twice its market cap. That’s not an accurate estimate of the value of this stake though, because the company would also occur capital gains taxes on a potential sale, at least that’s where I think the ¥13.5bn deferred tax liability on their balance sheet comes from.
Apparently Iwatsuka has held this position in Want Want China Holdings for more than three decades now. The chairman of Want Want China Holdings established a rice cracker business in Taiwan in 1981, after obtaining the expertise to produce them from Iwatsuka Confectionery. In return, Iwatsuka got a 5% stake in Want Want China. I think it is safe to say there are probably no immediate plans to sell or distribute the Want Want China stock to shareholders…
There are a couple of interesting names on the shareholder register though. Simplex Asset Management owns 5% of the outstanding shares and Gabelli Funds owns 2.2% in its Small Cap Growth Fund. I believe Simplex has been involved in some activist campaigns in Japan.
I don’t think there’s enough pressure from activist shareholders to get me interested at this point, but you could also argue that by the time they do become more vocal, the share price will be up. It does seem like a situation that could become interesting in the future and I do think it is a good candidate for those investors looking to build a basket of cheap Japanese stocks.
Disclosure: no position in Iwatsuka Confectionery or Want Want China Holdings
Iwatsuka mcap now ~29b JPY and Want Want ~98b HKD. Upside is getting bigger ..! On the flipside: a discount for Iwatsuka seems justified given tax issues, horrible capital allocation and lack of activists. Let’s say a ~20% discount is justified, that still means you are buying Want Want China at a sizable discount. However, Want Want China itself seems richly valued at 4x sales, 26x earnings and a 1% dividend yield. Compare that to Unilever: 2.5x sales, 22x earnings and a 3% yield. Now if they are still growing that valuation might be justifiable but the past six years revenue and earnings have mostly been flat.
I’m on the sidelines for now, but this is probably not be the worst idea ever.
Thanks. I agree with your thoughts about the discount and Want Want China’s valuation. It could be worthwhile to track the discount and see what it has typically been in the past. Perhaps there are opportunities to trade around the discount when it gets especially large. I haven’t done much stuff like that so far in my portfolio.
The only thing in my portfolio now that’s somewhat comparable is Beximco Pharma. I’ve followed AlphaVulture into that one a few years ago. The discount between the two listings has fluctuated substantially during that period and offered some good buying and selling opportunities.
Yep, I hold that too. I like it better as a) a GDR beats a Japanese holding company in terms of capital allocation, double taxation and overhead and b) at some point you could actually buy Beximco at a ~4x PE or something equally ridiculous. That’s no longer the case but it’s still cheap on most metrics. Of course, Want Want might actually be a better pick at a higher multiple ..
On a related note: I bought back a few shares of Fujimak. Shares have dropped considerably and results were very good the past 2 years.
I like it as well at this price. Not sure how sustainable earnings are (earnings were a lot lower for 2015 & 2016), but this year they seem to be doing well. Looks like they’ll be trading for less than 7x FY 2019 earnings and at less than 60% of the most recent book value. Lots of cash and securities on the balance sheet too. I’ll probably pick up some shares as well if I have some room in my Japanese basket.