Value Investing In Japan
Japan is the one region of the world where you can still find a large number of deep-value investments, making the country a haven for value investors like Masa Takeda of Tokyo-based Sparx Asset Management.
The Hennessy Japan Fund that Takeda has long co-managed has earned a net annualized 8.4% since 2003, vs. 4.4% for the Russell/Nomura Total Market Index.
In the Jan 31 issue of Value Investor Insight, Masa Takeda describes the situations he finds most attractive and why his strategy has beaten peers in difficult markets. Below is a brief summary of his comments.
Value Investing In Japan – Masa Takeda: GARP
Mr Takeda begins the interview by explaining that he is, “firmly in the growth-at-a-reasonable-price camp.” He’s looking for companies that are trading at attractive prices, with sustainable competitive advantages and run by smart management, similar to the qualities Warren Buffett looks for when he’s buying equities for Berkshire Hathaway’s portfolio.
At the core of Mr Takeda’s strategy is his desire only to invest in inherently safe and sound businesses. He defines these as companies that can prosper over very long time horizons, through adverse conditions, so a strong balance sheet is essential. Moreover, the firm tends to gravitate towards firms with durable competitive advantages such as strong consumer brand franchises, scale and low costs, which typically earn above-average returns on equity and have above-average sustainable earnings growth potential. And finally, Mr Takeda needs to see an exceptional management team in place which is focused on, “allocating capital with a good understanding of cost of capital.” An excellent example of the kind of businesses Mr Takeda is looking for is Shimano:
“It controls 70-80% global market share in high-end gear and braking systems for bicycles. It has strong relationships with the top racers in the sport, who provide regular feedback that consistently leads to new product technology, which helps strengthen the company’s consumer brand image. It has a time-tested business model, consistently earning high margins and returns on equity and capital for decades…Management also has proven to be good at capital allocation, even aggressively buying back stock at the right times in a way that few companies do in Japan.”
Unfortunately, such high-quality companies are rare finds and Mr Takeda, and his team may only have 50 stocks that meet their criteria for quality at any given time. As a result, the funds Mr Takeda manages are relatively concentrated with only 10 to 15 names in the most-concentrated portfolios, and 20 to 25 names in the Hennessy Japan Fund.
Value Investing In Japan: Ideas
Based on the above methodology, there are three Japanese companies that, according to the interview with Value Investor Insight, meet Mr Takeda’s criteria for investment right now.
Firstly, there’s SoftBank. Mr Takeda is quick to point out that this isn’t a traditional investment for his firm. This is less of a bet on the business itself and more of a bet on the CEO Mr. Son:
“I think he is one of the best CEOs – if not the best CEO – of all time in Japan. He started this business in 1981 and opportunistically built it from scratch into a company with a ¥6.3 trillion market cap. He’s 58 and shows every sign that he wants to continue growing Softbank globally for many years to come.”
Mr Takeda believes that SoftBank’s intrinsic value is somewhere in the region of ¥10 trillion to ¥12 trillion on a sum-of-the-parts basis, assuming no value for most of the group’s venture capital holdings — that’s compared to a current market value of ¥6.3 trillion.
The second idea from Mr Takeda is running shoe company Asics. Like Shimano above, Asics make high-quality products that are loved by its customers. The company has increased earnings over the past ten years at around 10% a year, and this trend is expected to continue.
Based on Mr Takeda’s DCF analysis, assuming a discount rate of 10%, he estimates an intrinsic value at around ¥3,100 per share, roughly 45% above the current price.
The third and final idea is Unicharm, a global manufacturer of branded consumer products primarily for the baby care, feminine care, personal care, pet care and household cleaning markets. Unicharm is the dominant force in the emerging market diaper market. It’s the biggest seller of disposable baby diapers in Japan, with a 35% share, in India with a 30% share, a 60% market share in Indonesia and Thailand, and a 10% share of the Chinese market. On a P/E basis, Unicharm looks expensive but Mr Takeda and his team believe that Unicharm can compound cash flow at 10% per year over the next ten years, and at 5% annually from there. Based on this forecast, using a DCF with a 10% discount rate they estimate intrinsic value is around ¥3,000 per share.
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