´´ 10 Years Blogging: Japan Still Undervalued

Thursday, May 12, 2022

10 Years Blogging: Japan Still Undervalued

 

Ten years ago I started my little Journey into the Bloggosphere. To be honest, the experience of running the blog in the current form has been rather sobering. The main reason? Limited interest in general and little engagement of the audience in form of comments, links on social media, etc. Actually, the blog vindicated my deep- rooted antipathy towards social media!

Be it as it may! I still enjoy writing about my ideas and findings for myself. And for inexplicable reasons I still publish some every now and then on this blog.

In this post I will make the case that Japan was, and still is, a wet dream for any contrarian value investor, a truly endangered species. I would even argue that the Japanese market has never been more attractive at the time of writing.

Back in 2012 the entire Japanese stock market was on sale. Long established quality companies with big moats offering highly appreciated products could have been picked up at extremely favorable terms. Decent companies were trading at 1-2 times Net Current Asset Value (NCAV). Japanese net- nets were dividend paying surplus companies, often generating decent free cash flow. The whole spectrum and flavor of value could have been found for those investors venturing off the beaten track. The only problem? Nobody dared!

Almost everyone succumbed to buzzwords like: Japan the buck searching for a windshield; Japan the widow maker trade, Land of the rising sum, etc. Those labels would generate significant click rates and instant approval in the Fintwit community. Mainstream economists did not perform any better. They forecasted that Japan’s decline would mirror that of Argentina over the 20th century. And established financial media outlets like FT, Bloomberg, WSJ chanted the chorus of Japan’s imminent gloom and doom wholeheartedly, without even bothering (double) checking micro and macro factors.

Banks in Japan had been reducing staff for almost 20 years. International banks started to close its Japan branches in 2012 and relocate to Hong Kong or Singapore. Equity analysts within Japan more than halved from peak (1990) to trough (2012). Further draining the expertise that could uncover the value to be found on the Japanese Stock Exchange.

Basically, the whole situation in 2012 was a superficial diagnosis and knee jerk reaction by a bunch of ignorant morons that a developed country, the world’s third largest economy and stock market, had caught a terminal illness. It was a social proof loop, forming irrespectively of facts on micro/ macro level suggesting otherwise and/ or being well compensated, because it killed the very expertise that could do so.

It was even worse. The value investing community also succumbed to the doom narrative. I am only aware of a handful of prominent investors. like Jean- Marie Eveillard, pointing to the incredible opportunity in Japan. That was the background I picked the majority of investments in Japan.

In hindsight we all know what happened. Along came Shinzo Abe with his bold plan of Abenomics. The stock market literally exploded, annihilating those East Asian PM’s that were actively shorting Japan or neglecting it. Institutional investors got interested in Japan around 2015 after the stock market roughly doubled. The interest only lasted for little more than a year. From 2016, foreigners started selling once again and never reversed course. Prime example is ADIA, the Abu Dhabi Investment Authority, closing down its Japanese investment team. Reason? Looking for higher growth countries! Neglecting the fact that no positive correlation between GDP growth and stock market returns exist.

It is even more depressing. From the onset of foreigners selling Japan inc., profits, pay- outs, share buy backs, M&A and shareholder activism has kept its upward momentum. It appears that international investors got bored about something. I have not figured what it might be. Are profits and pay- outs worth less in Japan than in the rest of the world (ROW)?

Ten years ago, Japan and the United States started at similar valuation levels. Since valuations in Japan have gone down, while those in the ROW, especially U.S., expanded. And Japan had the best corporate efficiency improvement in G7 countries during that time span. Granted, a bunch of stocks within Japan had a stellar performance, like in the ROW. But stated price/earnings ratios in aggregate are lower than ten years ago, and over half of the companies still trade below tangible book. Those hard numbers even understate the true undervaluation in Japan, given high cash balances, cross shareholdings and the conservative nature of Japanese accounting.

For sure, also in Japan companies trading below book for a simple reason. The operating business does not cover the cost of capital. Many Japanese department stores fall in this bucket. Only surviving by selling real estate assets purchased decades ago. Although cheap I am not interested in such stocks. Personally, I am more interested in good companies trading around 2 times NCAV (Fukuda Denshi) and decent companies trading around NCAV or below (Nitto Kohki).

Even better, in Japan many of those companies are trading at negative enterprise value. A situation where the net cash holding is worth more than the market capitalization. Basically, it is like buying a used car where one figured out the asking price is covered by cash stashed in the glove box. A truly staggering situation and, like ten years ago, only available in Japan in a meaningful number.

Since starting the blog corporate Japan has seen dramatic improvements at various levels. Think: Management, efficiency, pay- outs and corporate governance, to name just a few. Profitability of Japanese companies need not fear comparison with the ROW and has been on par with the U.S. Even better, the increased profitability and efficiency was achieved while simultaneously reducing the corporate debt level. In stark contrast to the U.S. there was and is no financial engineering in Japan!

In my opinion it is the strength of corporate Japan’s balance sheets in combination with incremental improvement in efficiency that will be a decisive factor for national and international investors to revaluate Japanese equities in the coming ten years. 

If this blog will be around another decade in the current form has to be seen, and not only depends on the author, but also its audience!

59 comments:

  1. Please continue! I love your blog!

    ReplyDelete
  2. We will see. At the moment motivation is running rather low.

    In ten years I have not been pitched one compelling investmentcase on a Japanese company that would go beyond:
    " Company xy is a cash flow positive, dividend paying Japanese net- net company on my watchlist. What do you think."

    C'mon, guys!

    ReplyDelete
  3. Another great post!

    I have found myself wondering if the current macro environment has turned these companies that have been hoarding cash into value traps (Nitto Kohki). As inflation increases this cash will slowly erode. Although I believe higher inflation in Japan may be the catalyst for better capital allocation and revaluation.

    The other obvious issue for international investors in Japan is with the countries debt so high they cannot raise rates and the yen appears could weaken significantly because of this.

    For Nitto Kohki I see these as the two major headwinds to my investment but believe the margin of safety is still so wide given time good things will still happen.

    Really interested if you have any thoughts on either of these?

    Keep up the good work O-tone! I have only recently stumbled across this blog and I am really enjoying it!

    Regards

    Ryan

    ReplyDelete
    Replies
    1. Valid points.

      But personally I am not too much into macro when it comes to investing.

      Delete
    2. I think that’s probably the right approach to have considering the complexity! Very easy to get caught up in short term noise.

      I hope you keep blogging! I have been scouring Japan recently and find the real issue for me researching companies is not being able to read Japanese! It is hard to build a thesis to pitch with any confidence even if the fundamentals look amazing.

      Delete
  4. Another great post!

    I have found myself wondering if the current macro environment has turned these companies that have been hoarding cash into value traps (Nitto Kohki). As inflation increases this cash will slowly erode. Although I believe higher inflation in Japan may be the catalyst for better capital allocation and revaluation.

    The other obvious issue for international investors in Japan is with the countries debt so high they cannot raise rates and the yen appears could weaken significantly because of this.

    For Nitto Kohki I see these as the two major headwinds to my investment but believe the margin of safety is still so wide given time good things will still happen.

    Really interested if you have any thoughts on either of these?

    Keep up the good work O-tone! I have only recently stumbled across this blog and I am really enjoying it!

    Regards

    Ryan

    ReplyDelete
  5. I really like your blog. I even read many of your posts/articles several times particularly on value investing, and company's analysis. Please continue doing it.

    ReplyDelete
    Replies
    1. Thanks. I do too! I think I am the most avid reader of this blog (-;

      Delete
  6. good work , don´t give up

    ReplyDelete
  7. I think there are objective reasons why Japanese stocks are typically statistically cheap. They seem to have very little growth so you are more buying a bond than equity. Just taking a look at the company you mentioned, Nikko Kohki on Yahoo. It is cheap, trades at half book and a pe of about 12. But then again it has a 4% ROE and a 3.2% ROA. It like so many Japanese companies makes some industrial products that are probably not very differentiated from lots of other manufacturers. It is trading at about the same price as it was 20 years ago. Its earnings are probably not very different from what they were 20 years ago. It is net cash but insiders own close to half of the shares so they will spend the cash as they like. So you are taking the risk of equity and you are getting a bond like return -- unless someone in the future decides to pay more for the shares that you own, a strategy that hasn't worked over the last 20 years.

    ReplyDelete
    Replies
    1. Valid point.

      I would argue, and have been arguing, that standard value metrics should not been applied to Japan. And standard screening those stuff is not helpful. You have to dig a little deeper, scratching the surface. And, certainly u have to be patient, like I learned with Kawasumi laboratories, and prepared still being screwed with TOB 130% above previous close.

      Delete
    2. I think you err at another point.

      I am highly risk averse. Very likely too much though!

      With Nitto Kohki I buy a stock with cash like risk, and a potential for stock like returns. So, head = I win. Tail = I do not loose much.

      I am convinced that this is how value investors should think. But hi, likely I am only an old, white man!

      I

      Delete
  8. I love your blog.

    I'm just not smart enough to comment.

    Sumitomo Mitsui-8316 just upped the dividend to JPY22 000. I am happy to have money in them as well as MUFJ-8306.

    ReplyDelete
    Replies
    1. MUFJ is a good choice! Nice dividend increase today. And sizeable share repurchase, too.

      Congrats.

      Delete
    2. Thank you. I haven't seen that yet.

      I also have AEON-8267 for owner discounts at the supermarkets. The banks and Aeon were held before and added to in March 2020.

      ORIX-8591 was added at same time.

      I have had COLOWIDE-7616 for a long time...paid around JPY543. I get JPY40 000 in coupons a year to use at its restaurants.

      I recently started on Pigeon-7956 and Takeda-4502.

      Im down 40% on HOGY-3593 but their 200 masks per year for holders were a blessing when NO masks were available during the worst of Covid.

      Thanks to you I was in and out of Fukuda Denshi. Its coming down again.

      When your mails arrive in my inbox, I get tingle of excitement, there is next to nothing available in English on investing here.

      I do wish you success and hope you can keep this going.

      Martyn.

      Delete
    3. I would add that I also regularly trade 1358 and on occasion 1360.

      Martyn.

      Delete
    4. Interesting. Thanks for sharing!

      Delete
  9. Please keep writing! Though I don't comment often I am always reading...

    ReplyDelete
    Replies
    1. No prob. Appreciate you like the content.

      Delete
  10. Thank you for sharing... always insightful posts!

    ReplyDelete
  11. Sincere apologies. I'm one of those silent readers. I really appreciate your blog and enjoy your views and writing! Please do continue

    ReplyDelete
  12. I can relate to that. Engagement is not through the roof on classic blogs I believe. But, if one does not want to maximize for engagement that is not a problem.

    I also like your blog, so keep at it.

    I also believe Japan might be a fruitful hunting ground for Contrarian value investors, but, I strongly believe you overestimate it (i used to too) :

    Buying a car with its price tag stashed as cash in it IS DIFFERENT from buying a few shares of a company with negative EV since you cannot command them to pay out the cash tomorrow.

    Most tweets/blogs that write sth like '... and the asset xyz for free' are not exactly right. You pay a price today for any asset/SOTP play, and this is certainly not free.

    Obviously, it/the attractiveness very much depends on Management's willingness to create value and /or catalysts.

    In conclusion, I think Japan mit be much more attractive for active investors funds than for you/me.

    Best, s4v

    ReplyDelete
    Replies
    1. You might be right and I am overestimating the situation.

      Having an activist fund on board certainly helps.

      Best

      Delete
  13. Please keep writing and sharing your thoughts! I have been a japan net net investor for the last 7 years and have used your site as inspiration, motivation, and comfort at times when I have gotten discouraged about investing in Japan.

    For those who may also feel discouraged at the prospects in Japan, I wouldn't. Over the last 7 years I have used a mechanical approach and held a basket of ben graham style net nets trading well below NCAV in Japan. I also invest 90% of my net worth in these net nets. My returns have been great, beating the SP500 by 3% per year annualized.

    I have heard it all from skeptics about my stocks...poor ROE, poor corporate governance, high crossholdings, never gonna unlock that cash as a minority shareholder...and on and on. The fact is that the results speak for themselves.

    ReplyDelete
    Replies
    1. Yeah. If the net- nets work out they do so nicely.

      But the time to pay- out is really tough. The hockystick pay- out. Watching paint dry for years and than in 2-3 months value gets realized. Or worse those round trip hockysticks, Where value gets realized partially over a long timeframe, just to give it up again in a few weeks and than going into the hockystick.

      Certainly a humbling experience. And I can see why most people rather want to avoid it.



      Delete
    2. For the subscribers using Ben Graham and others screeners, could you kindly share your findings and names that screen well. Thank you!

      Delete
    3. "The hockystick pay- out. Watching paint dry for years and than in 2-3 months value gets realized."

      I would say that is generally the characteristic of any actively managed portfolio and even the overall market. Returns are not smooth and are in fact concentrated in certain short time frames. There is a non-linearity to returns that people do not realize when they look at an "average annualized" time weighted return. Our brain is wired to think in linear terms and that we should have a "smooth" trend upward. In fact in my short experience, it is quite the opposite. I think patience and emotional temperament is the key.

      Delete
    4. Great comment! Totally agree!

      Are you able to stay put?

      I did on this blog with Ryoyo Electro and Kawasumi Laboratories. Not a pleasant experience!

      I am tested with Fukuda Denshi at the moment.

      Best

      Delete
    5. I have found that I am able to stay put and do nothing, though it can be emotionally hard to do. That is why I turn to reading and other activities to take my mind off of investing in the moment.

      I owned Kawasumi Labs as well. I would say that was a stock that worked out even more quickly than some of my other holdings.

      Delete
  14. Another anonymous reader who gets good value from your rumbling. Please keep publishing and sharing your findings and thoughts. Am sure it has been a hell of a learning curve. If anything, i say increase the frequency of your writing. Suggest you organize your write up as 1. The business 2. The financials 3. The conclusion. So cheers to the next 10 years. Thank you!

    ReplyDelete
    Replies
    1. Thanks.

      "Am sure it has been a hell of a learning curve. "

      Certainly true!

      Delete
  15. I will subscribe and also share it. Always appreciate Japan commentary

    ReplyDelete
  16. Thank you sir for sharing over the years. Your blog did a good job of piquing my interest in Japanese companies.

    Though I feel like Japan has much more to offer than just net net/NCAV investing. Japan is truly a land full of treasures. The following are themes I found absolutely fascinating to research:

    1. Manufacturers of industrial consumables. e.g. JCU Corp, OSG Corp, NS Tool.

    2. Companies with razor/blade business models. e.g. TKC Corp, Shinpo Co, Shinoken Group,

    3. Subscription business. e.g. Weathernews, Japan Best Rescue System, IFIS Japan

    4. Other recurring revenue nature business. Such as Arata Corp, Nippon Care Supply, Nishio Rent, Nagaileben, Kanamoto...etc

    Japan provides an environment that is capable to build an anti fragile, robust, countercyclical portfolio that has little correlation with my home market. Best of all they have attractive valuation. Say if I want to do the same in US market with similar concepts it would be so expensive.

    So please keep up! You are not alone, there are plenty more passionate investors in Japan market.

    ReplyDelete
    Replies
    1. That is a nice list. Thanks you for sharing!

      I know I am not alone with my enthusiasm and pain investing in Japan. But it certainly felt like the last decade.

      I think comments like yours are adding value to the blog I can't offer. That was the main point me apparently "whining" (-;

      Delete
  17. Feel free to reach out to AVI on any of their holdings in AJOT (AVI Japan Opportunites Trust). There are a number of net cash ideas, they know the stocks well and are happy to chat about then.

    ReplyDelete
    Replies
    1. Yes I know Thanks.

      Had a nice chat with one of their analysts about a common position.

      Delete
  18. I really really enjoy your blog. I got interested in Japanese companies mostly because of your writings.....

    ReplyDelete
  19. +1 reader here. Just 1 small Japanese position - Nintendo. And looking for others. I got interested in Murakami and Kanamoto some time ago but not went through with them.

    ReplyDelete
    Replies
    1. I mentioned Nintendo on this blog in 2013. It was a Graham net-net. Nobody cared.

      https://undervaluedjapan.blogspot.com/2013/01/the-sleeping-giant-nintendo-jp7974.html

      Delete
    2. Correction. Just skimmed the old post. It was not a net-net. But almost.

      Delete
    3. 2013 was a perfect timing! +400% price growth + dividends since then.

      Delete
  20. Keep it up 💪

    ReplyDelete
  21. Keep up the good work

    ReplyDelete
  22. Very nice post, I'm interested and invested mostly in Japan for the same reasons. The valuations for a lot of high quality companies are simply absurdly low compared to the rest of the world. Thus we face significantly less risk. So imo the downside is extremely limited (as often times you get way above average dividends, compared to snp), given enough patience.

    Personally I like Honda, Yamaha motor, Shinoken and Casio. Currently japanese exporters are also favourable due to the weak yen.

    ReplyDelete
  23. I first bought into Japan in the market panic in spring 2020. There were high quality, profitable companies like Hirano Tecseed 6265, trading at fractions of tangible book value.

    All the shares I bought into are up over 50%. I sold out 6265, for example, at 3 times the buy price in yen. But there's the rub: the yen's down 15% against the pound since early 2020.

    I currently have about a third of my overall portfolio in Japan, the rest is in Europe, UK and Canada. There are still notable bargains in Japan; but I always look for potential catalysts, which rules out many of the more tranquil net-nets.

    I love your blog, which I've only stumbled across recently. And will certainly post any new purchases here.

    Thanks.

    ReplyDelete
  24. Keep Up the good Work

    ReplyDelete