Quick idea from Japan: Iwatsuka Confectionery (TYO:2221)

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

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