Introduction
This is a post mortem on Hogy Medical, a Japanese stock
investment mentioned on this blog around mid 2012.
It was introduced to the audience around 1´700 Yen
(split adjusted). End of 2025 a consortium around the PE Firm Carlyle took the
company private at 6`700 Yen.
Thus, the investment generated a CAGR of roughly 10% (excl. Dividends) over the holding period.
Company Overview
Hogy Medical is a leading manufacturer of premium
quality medical products. Its mission is to improve Infection Management
(infection prevention) and efficiency in operating rooms. Sales are generated
exclusively within Japan.
The most important segment Hogy operates in are
surgical kits; carefully packaged collections of medical instruments and
supplies, organized for specific surgeries and delivered just in time.
The company also offers Mekkin Bags (Sterilization
Pouches). Sterilization pouches are used to package and protect medical
instruments. They ensure that instruments remain sterile until they are needed
for surgery or other medical interventions.
In addition, Hogy manufactures medical non-woven
fabric products at its Indonesian subsidiary P.T. HOGY Medical Indonesia. Those
are surgical gowns, drapes, FP masks and wound dressings that are essential for
maintaining sterility during medical procedures.
Lastly, the company offers OPERA MASTER. An IT system
that analyzes and provides information on the status of operating rooms, as
well as cost management to help improve operating room management. Together
with Hogy’s surgical kits the system enhances security and operating efficiency
of surgical procedures i as medical supplies needed for surgical intervention
are delivered according to surgery schedule, helping alleviate the inventory
burdens of medical institutions.
In short, the investment was in a quite unique, top
notch, mission critical company that had a leading position within Japan.
Starting Valuation
Lately, Japan has seen a major renaissance when it
comes to investor interest. Japan is in
vogue. The crowd is eager to invest. The indices taking out all-time highs on a
daily basis.
In 2012, when I started investing in and writing about
individual Japanese companies, the sentiment was completely different. From
peak to trough the indices lost almost 80% from the all -time high of 1989. Foreign
and Japanese investors would not touch Japanese stocks with a barge pole. Japan
was irrelevant. The future was in China.
The market was littered what I phrased J- Nets. Stocks
that traded below conservatively estimated liquidation value. Even high-quality
large cap stocks like Nintendo could have been bought below Net Current Asset
Value (NCAV). Nobody was interested. Nobody cared. I did.
Hogy Medical was not a J-Net Stock when mentioned in
2012. It traded roughly double its liquidation value (incl. Investments). Nevertheless,
it was still dirt cheap. Especially, when Hogy’s headquarter, a freehold in one
of Tokyo’s best districts, was taken into account.
From a qualitative angle Hogy was a mission critical
business with stable and satisfying margins. In addition, it had a proven long-
term track record with some sales growth and uninterrupted history of dividend
payments. Thus, I was willing to pay up
a little for Hogy compared to my other investments.
Quantitive Metrics in 2012
Stated P/E was around 13. But given the company carried
no interest-bearing debt on the balance sheet, and had a high cash balance, the
ratio was distorted to the upside. On an enterprise Value (EV) basis, which
adjusts for different financing, cash and investment holding of companies, Hogy
traded at multiple of 2,7 and 3,3 in relation to Ebitda and EBIT.
Since 1997 the company had not posted a loss year and
showed some sales growth. It generated significant and growing Operating Cash- Flow
(OCF). Free Cash- Flow (FCF)was depressed in 2012 due to capital expenditure
(CAPEX) in a new sterilization center.
In 2012 it had
a stated ROE of roughly 7% (in line with its average for the past 15 Years).
This was rather a better reading for a Japanese company during that time. If one
adjusted the stated numbers for conservative financing and accounting, return
metrics were significantly higher.
Why was the stock cheap?
Firstly, nobody cared and nobody watched. The
investment community was indifferent/ ignorant about what was happening on the
Japanese stock market.
In addition, substantial part of the float was owned
by the founder of the company. Although, the company paid a dividend, and had a
history of dividend increases, the pay- out ratio and the dividend increases
were small. There was no history of significant share repurchases.
By no means the company was outright hostile toward
their minority shareholders. It appeared rather indifferent. Astute capital
allocation certainly was not the company’s strong suit, as it kept piling up
cash on its balance sheet.
Furthermore, shareholder activism was non- existent.
They all had turned their back on Japan after the Great Financial Crisis of
2008/2009. [1]
Last, but not least, the market cap was smallish (low
liquidity) and the stock was not covered by any analyst.
The Ride
Stock price action during the holding period was quite
typical for a stock mentioned on the blog that multi-bagged during the holding
period. I call it the hockey stick, roundabout ride.
Shortly after I mentioned the stock on the blog, the
company dropped by roughly 10%. Reason: The company announced that Masao Hoki,
founder of Hogy Medical, had the intention to retire from business.
Given that Masao Hoki was already 91 that did not come
as a surprise, and not the reason for the sell off. The shocker (to me and the
market) was an accompanying news release. The management
intended to sweeten Masao Hoki's retirement with a 2 bln. yen bonus for “extraordinary
achievements”. Profit forecast was slashed by more than half and no guidance
was given anymore for FY 2012. Apparently, in addition to the aforementioned
reasons for the stock being cheap we got a veritable corporate governance issue
on top of it.
Luckily, I did not sell the holding. It took two weeks that my, and the markets,
emotions cooled down a little over this totally incomprehensible move by Hogy's
management. An announcement appeared that the founder politely declined the
offer by management.[2]
Welcome to investing in Japanese family-controlled businesses!
The stock swiftly recovered. And with the advent of Abenomics in late 2012
rallied to 3’400 Yen (roughly 110%) till April 2013 on no news (the Hockey
Stick).
The Stock quickly consolidated to 2’500 Yen the
following half a year, and did not take out the high for another two years. A break through the highs of 2013 initiated a rally,
accompanied by news about dividend increase, stock buybacks and a 2:1 stock
split until 3/2018 to 5000 Yen. The
rally abruptly stopped and reversed, and within half a year the stock crashed
by roughly 40% to below 3000 yen (the roundabout).
For something like a year, the stock showed wild
swings in the 3000 to 4000 Yen range. Followed by a narrower range between 3000
and 3500 Yen. The whole consolidation lasted for a gruesome 6 years.
In July 2024 the stock started to rally again. The
rally accelerated after Jamie Rosenwald, a well- known Japan activist, had been
appointed as independent director. [3]
After, the stock kept rallying, accompanied by rumors
that the company was taken private. Mid December 2025 the rumor was confirmed. Hogy
would be taken private for 6’700 Yen. A number that had been spoon fed to the
press shortly before the official announcement.
No premium was paid to the trading day preceding the
announcement.
Operational Performance During Holding Period
Operationally, the stock did not perform as expected
when the position was initiated.
Pretty much right from the beginning, Hogy’s Gross Margin
started compressing. Albeit from a high level (51%) in FY 2012, and only
slightly to 49% in FY 2016. But the picture was not getting any better. In Fy
2017 (that ended march 2018) Gross margins crashed to 39 %. Stated operating
margins held up until Fy 2016, but started plummeting from 24% in FY 2015 to
12% in FY 2023.
OCF was not growing, but neither was it under pressure.
But FCF generation, that used to be reliable and stable in the past, turned
highly volatile during the holding period, due to high (growth) CAPEX.
When initiating the position, I was highly optimistic
about the business. I was envisioning major tailwinds for Hogy, and the
Japanese medical sector in general, given the aging society.
But there were several factors I underestimated/
misinterpreted with Hogy Medical.
The major ones
were:
· I underestimated how the weak Yen
increased input costs while Japanese medical device renumeration capped sales
prices of products
·
I underestimated the true amount of CAPEX
in plant expansion and modernization, and its impact on increasing depreciation
charges
·
I underestimated the markets
inability looking through (temporary) negative impact on EPS and FCF due to
aforementioned depreciation, although OCF remained stable
·
I underestimated how premium kits cannibalized
Hogy’s regular kits
The stock crash from mid-2018 to beginning 2020 was a
response to aforementioned factors. It was not only emotionally pretty painful,
but also ruined a CAGR that would have been more than satisfying.
Lets be honest. What saved my ass was picking a multidecade
low in the stock price, and an extremely low starting valuation (Margin of
Safety) when initiating the position.
Barbarians at the Gate
The first foreign investor who took a significant
stake in Hogy Medical was Godheart Partners. I had been aware of the fund, as
it was the only foreign fund that took significant positions in Japan following
the triple disaster of March 2011. (I am not aware of any other fund that had
not been active in Japan before took a significant wager on Japan between March
2011 and before the advent of Abenomics!)
I am not sure if Godheart partners engage with
management. But they certainly follow a contrarian approach to value investing.
If I remember correctly, they took on the investment right at the peak of
COVID. A time Hogy’s operations and stock price were seriously beaten down due
to postponement of surgeries in Japanese hospitals and a sharp overall market
correction. I contacted someone at the fund, and they told me that they saw Hogy
Medical profiting from Japan’s work style reform at hospitals.
What followed was quite an astounding reshuffling of
the shareholder structure on Hogy’s register.
In FY 2021 the founder’s son, who took over the role
as CEO after the founder retired, stepped down and sold almost its entire stake
back to the company (roughly 20%). At the same time GMO, a fund cofounded by
permabear Jeremy Grantham, had built a significant position. Shortly after,
Jamie Rosenwald, a well-known activist that had been investing in Japan for a
long time, and an associate fund (Nippon Active Value) were taking on a more
than significant stake.
What was strange is that the stock did not
significantly react to these major changes in the shareholder register.[4]
It kept being stuck in the 3000 to 3500 Yen range.
Apparently, the market was spooked by the company’s
dismal (stated) operating performance, with gross-, operating- and net margins
plummeting.
Only in 2024 the stock started moving again, after a
new management team took the helm at Hogy. Most notably was the new CFO Taisuke
Fujita who had extensive background in capital markets and investment
management, including roles at Amundi Japan, SPARX Asset Management, and Taiyo
Pacific Partners. Shortly after they presented a compelling and promising new
management plan.
At the same time Jamie Rosenwald launched a proxy
battle trying to gain a board seat at Hogy. He won the battle, and was
appointed as independent director.
The Battle Taking Hogy Privat
With Rosenwalds winning of the board seat the market
finally realized something was brewing at Hogy Medical, as Rosenwald had
frequently demanded for a review of strategic options, including a potential privatization
of the company.
Mid 2025 rumors emerged that U.S PE Firms were bidding
for the company. Hogy countered rumors frequently with press releases citing that
no decision regarding a privatization had been taken. But the stock rocketed
and rumors kept swirling. Apparently, the press was spoon fed about
negotiations from within the company’s board.
In December 2025, the Carlyle Group emerged as the
winning bidder to take the company private at 6’700 Yen. No premium was paid to
the previous closing price, as the stock had already rallied to the price finally
offered by Carlyle due to leaked information to the public.
Dalton Investments and associated (the largest
shareholders) and GMO agreed to tender their shares. They were given
preferential treatment over other minority shareholders. Namely, the right to reinvest
and maintain a significant stake in the, now-private, company.
The Outcome
Hogy Medical is the only mid/ long-term holding mentioned
on the blog in 2012 that did not earn its stock performance operational wise.
On all counts, may it be P/E, P/ OCF, P/ B, P/ NCAV, all the performance was based on multiple
expansion.
Most notably was the expansion of EV/ EBITDA, as it
takes into account conservative financing and excess depreciation. In 2012 EV/
Ebitda (excl. Investments) stood at roughly 3. The stock was taken private at a
multiple of 13 in 2025. The multiple expansion is, more or less, the performance
(excl. Dividends) of the stock during the holding period.
The premium paid by the consortium was roughly 70% above
a conservatively estimated intrinsic Value (3900 Yen). A more liberal estimate
would value the stock at roughly 6’000 Yen. Thus, a premium of 10% was paid.
Premiums paid for Japanese medical device companies in
take private operations are quite high. When compared to other deals, and
especially the take private transaction of Topcon that had taken place shortly
before, the Hogy deal was at the lower end of the valuation range.
Conclusion
The price performance of the investment over the
holding period was ok, but not great. It did not outperform the Topix. It did
outperform most other medical device stocks from within Japan though.
For two long periods during the investment horizon, it
was no fun at all having the stock in the portfolio. Not so much because of the
severe stock price corrections and volatility, but rather by those being accompanied
by dismal operational performance over an extended period.
Still, I am proud of this investment. It showed that my
asset valuation was correct, as there was a severe disconnect between the price/
value the stock was trading when I initiated the position and the price/ value a
private bitter would be willing to pay for controlling the whole entity.
Most importantly, it showed that I have what Peter
Cundill called the most important personal trait when it comes to deep value
investing. Namely: Patience, patience and more patience.
Final Remarks
I was disappointed by Rosenwald and GMO getting
preferential treatment over other minority shareholders by owning a significant
stake in the now taken private entity. I think GMO acted opportunistically.
Rosenwald was more active in the deal.
I do not blame him for what he did. It would be naïve
to expect altruism from activist funds. Stock market investing is a cutthroat
business, and I hold it with Gordon Gekko. If I need a friend I will get a dog.
Still, I think Rosenwald did a disfavor to his long
build reputation in Japan. Management opposed the proxy that suggested the
nomination of Jamie Rosenwald as independent director, citing he was not truly
independent. Apparently, for the right reason.
In the future I will be wary when I see Jamie
Rosenwald, or any associates, turn up on any of my holding’s shareholder
register. I will certainly not buy into any Japanese company they have a
significant stake in.
The new management team at Hogy, formed after the
founder’s son had left the company, was promising. They presented a
comprehensive long- term management plan to return cash to the shareholders,
turn operations around and enter a new growth era at Hogy Medical. The selling
of the Headquarter shortly before the company was taken private serves as a
strong indication that management was walking its talk.
Although, without doubt, I made several mistakes in my
assumptions concerning Hogy’s operational performance over the medium term, I
am pretty sure the investment would have turned out a big winner over the long-
term.
Rosenwald and GMO apparently agree with me. Unfortunately,
I will never find out.
Source:
[1] I am only aware of one major activist boutique that did not abandon Japan. Namely: Symphony Financial Partners co-founded by David Baran (a very underrated activist by the way with an unique approach). Unfortunately, Hogy Medical was never on their radar.
[2] What the heck...He doesn't want his
bonus now? I couldn't get my head around this absolute shit show at all. So I
asked somone who was more familiar with Japanese business culture than I was
and he told me, that he found this news very interesting and very japanese.
Basically, he explained to me, Mr. Hoki expected this offer to him by
management, as a sign of respect. At the same token management expected Mr.Hoki
to decline the offer
[3] Interesting to note is
activist action built around 2020-2024 totally unnoticed/ ignored by the
public. Only after Rosenwald had won the board seat did the stock price react.
[4] As a side note: Japan Investing saw some interest on Fintwit in 2023 with Warren Buffett increasing its stake in Japanese trading houses and the stock indices finally printing new ATH after 35 Years of doldrum. Before Japanese stocks were neglected. Still, I am only aware of one person on fintwit pointing to the interesting shareholder composition at Hogy, and that was beginning of 2025. A few years after the reshuffling was unfolding. And, although Jamie Rosenwalds (failed) campaign at Fuji media had some steer on twitter, only one Japan observer on engish twitter commented on Rosenwald winning a proxy battle and board seat at Hogy Medical. Actually, the whole battle went unnoticed by Fintwit.
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