Japanese Basket

[writser]

Cool article, thanks for posting gaijin.

[Spekulatius]

Finally was able to get my grimy hands on a tiny position in Isamu Paint last night. Only took 5 weeks for the order to fill.

 

I don't know if this has been mentioned in this thread yet, but (IMO) one of the reasons why many of these tiny "J-nets" are so cheap is that they are horribly illiquid, partially due to trading in only 100 share blocks.

 

Bought a few hundred shares of 4624.T too. Looks like you can only get a fill when the mood in the market is a bit shoddy. I also gave back all my gains in 9142.T (GARP railroad stock) after they published a 5 year roadmap plan with more Capex even taking up debt. There was also an activist investor in it to no avail. I guess just scraping the bottom of the barrel avoids much downside. Lately, the Japanese stock market has been a bust for me. Isamu Paint (4624.T) is the only position I’m am holding right now.

[mjohn707]

Finally was able to get my grimy hands on a tiny position in Isamu Paint last night. Only took 5 weeks for the order to fill.

 

I don't know if this has been mentioned in this thread yet, but (IMO) one of the reasons why many of these tiny "J-nets" are so cheap is that they are horribly illiquid, partially due to trading in only 100 share blocks.

 

Bought a few hundred shares of 4624.T too. Looks like you can only get a fill when the mood in the market is a bit shoddy. I also gave back all my gains in 9142.T (GARP railroad stock) after they published a 5 year roadmap plan with more Capex even taking up debt. There was also an activist investor in it to no avail. I guess just scraping the bottom of the barrel avoids much downside. Lately, the Japanese stock market has been a bust for me. Isamu Paint (4624.T) is the only position I’m am holding right now.

 

I’m far from an expert here, but when you get a nice pop in one of these names, decent enough that it changes the calculus of your risk and reward, don’t be afraid to sell part of your position or even all of it, especially if you’re in a dead money situation or even if the value accretion is low.  These things aren’t compounders or whatever we’re calling them now, and unless there’s been some sort of sea change or you’re in a name that’s actually increasing in value, it doesn’t usually pay to hold out for the last 20%.

[writser]

We're in good company. Michael Burry:

 

“It is not hard in Japan to find simple extreme undervaluation -- low earnings multiple, or low free cash flow multiple. In many cases, the company might have significant cash or stock holdings that make up a lot of the stock price.”

 

“There is a lot of value in the small-cap space within technology and technology components. I’m a big believer in the continued growth of remote and virtual technologies. The global retracement in semiconductor, display, and related industries has hurt the shares of related smaller Japanese companies tremendously. I expect companies like Tazmo and Nippon Pillar Packing, another holding of mine, to rebound with a high beta to the sector as the inventory of tech components is finished off and growth resumes.”

 

Especially Nippon Pillar Packing looks like it could easily fit into a Japanese value basket. 0.6x book, dividend, decent ROE, boring business and a big pile of excess cash.

[Foreign Tuffett]

We're in good company. Michael Burry:

 

“It is not hard in Japan to find simple extreme undervaluation -- low earnings multiple, or low free cash flow multiple. In many cases, the company might have significant cash or stock holdings that make up a lot of the stock price.”

 

“There is a lot of value in the small-cap space within technology and technology components. I’m a big believer in the continued growth of remote and virtual technologies. The global retracement in semiconductor, display, and related industries has hurt the shares of related smaller Japanese companies tremendously. I expect companies like Tazmo and Nippon Pillar Packing, another holding of mine, to rebound with a high beta to the sector as the inventory of tech components is finished off and growth resumes.”

 

Especially Nippon Pillar Packing looks like it could easily fit into a Japanese value basket. 0.6x book, dividend, decent ROE, boring business and a big pile of excess cash.

 

Although cheap, Pillar Nipples looks like it is significantly exposed to the vagaries of the semiconductor cycle (Q1 FY 2020 earnings way down from Q1 FY 2019). I suppose it would be a good bet if one was bullish on semiconductors.

[writser]

Yeah, Q1 looks bad. On the other hand, their track record the past 10 years looks reasonably stable. Semiconductor / LCD makes up ~55% of their total sales. They even have some decent (English) investor presentations on their website: link.

[Spekulatius]

Yeah, Q1 looks bad. On the other hand, their track record the past 10 years looks reasonably stable. Semiconductor / LCD makes up ~55% of their total sales. They even have some decent (English) investor presentations on their website: link.

 

The semi downturn may last a while. on the business, I agree, it looks like quite high margin. And. decent ROE. I put this on my watchlist.

[NeverLoseMoney]

Bloomberg published a follow-up article in which Burry discloses all his Japanese holdings: https://www.bloomberg.com/news/articles/2019-09-05/burry-s-picks-of-undervalued-japanese-companies-rise-in-tokyo

 

His holdings are:

• Tazmo Co. (6266)
  
• Yotai Refractories (5357)
  
• Sansei Technologies (6357)
  
• Tosei Corp. (8923)
  
• Kanamoto (9678)
  
• Altech Corp. (4641)
  
• Nippon Pillar Packing (6490)
  
• Murakami Corp. (7292)
  

 

All these stocks are up nicely after he disclosed his stakes, which might be a reason why he decided to talk to the press about his Japanese holdings. A known Burry holding might hold up better in a big downturn as well.

[Foreign Tuffett]

Bloomberg published a follow-up article in which Burry discloses all his Japanese holdings: https://www.bloomberg.com/news/articles/2019-09-05/burry-s-picks-of-undervalued-japanese-companies-rise-in-tokyo

 

His holdings are:

• Tazmo Co. (6266)
  
• Yotai Refractories (5357)
  
• Sansei Technologies (6357)
  
• Tosei Corp. (8923)
  
• Kanamoto (9678)
  
• Altech Corp. (4641)
  
• Nippon Pillar Packing (6490)
  
• Murakami Corp. (7292)
  

 

All these stocks are up nicely after he disclosed his stakes, which might be a reason why he decided to talk to the press about his Japanese holdings. A known Burry holding might hold up better in a big downturn as well.

 

I built a Murakami model in March, but passed on buying it as I didn't think it was quite cheap enough relative to some of the other J-net opportunities out there.

 

Also, I prefer names with tiny tit market caps and Murakami, while definitely small, is much larger than some of the other J-nets out there. Burry is managing almost $350 million dollars, so his opportunity set is somewhat constrained, particularly since he's a traditional stock picker and not running some quant strategy where he owns tiny pieces of 100 different Japanese companies.

 

Murakami (7292) ~$280 million USD equivalent market cap

 

1782 - $37M

 

2055 - $45M

 

4624 - $57.4M

 

6964 - $34.7M

 

9885 - $60M

 

 

Any thoughts?

 

 

 

*** Edited to make it clear I'm soliciting feedback and not just pontificating

 

[matjone]

I own some of those.  Since I started investing in Japan I've hardly ever lost money but many times I haven't made much either.  The currency moved against me a little but the main problem is that these companies simply aren't run for the shareholders.  A lot of times even if the business is decent they'll sit on cash for years on end earning like 4% on equity.  Their business culture is very different.  I forgot where I read it but someone was describing how they bought out a sake brewer.  The guy's family had been doing it for like 500 years or something crazy and then he sold out.  Apparently that was a very unorthodox decision and he was going to be seen as a failure for abandoning the family business.  Price paid, returns on other prospective investments, etc. didn't figure into it.  It kind of reminds me of how people view farm land where i grew up.

 

One thing I think might be smart, if you think there's a decent chance there's some sort of mass awakening of all these zombie companies, is to look for the ones that hold a lot of securities.  That way you'd get a double re-rate.  But to me it's a big if if this even happens.  It would be interesting to hear from people who are over there what the feeling is.

[Foreign Tuffett]

I own some of those.  Since I started investing in Japan I've hardly ever lost money but many times I haven't made much either.  The currency moved against me a little but the main problem is that these companies simply aren't run for the shareholders.  A lot of times even if the business is decent they'll sit on cash for years on end earning like 4% on equity.  Their business culture is very different.  I forgot where I read it but someone was describing how they bought out a sake brewer.  The guy's family had been doing it for like 500 years or something crazy and then he sold out.  Apparently that was a very unorthodox decision and he was going to be seen as a failure for abandoning the family business.  Price paid, returns on other prospective investments, etc. didn't figure into it.  It kind of reminds me of how people view farm land where i grew up.

 

One thing I think might be smart, if you think there's a decent chance there's some sort of mass awakening of all these zombie companies, is to look for the ones that hold a lot of securities.  That way you'd get a double re-rate.  But to me it's a big if if this even happens.  It would be interesting to hear from people who are over there what the feeling is.

 

The sake anecdote is from an article I linked to back in April.

 

Yeah, I would probably characterize the attitude of the average Japanese management team towards outside shareholders as benign neglect. They aren't actively hostile like Sardar Biglari, Chinese reverse mergers, or some of the Ukrainian companies listed in Poland. It's just that they have other priorities (no layoffs, fortress balance sheet, maintaining the firm's independence, saving face)  that are more important to them than maximizing shareholder value.

[CorpRaider]

It is sort of like Teldar Paper before Gordon Gekko.

[writser]

A cool blog post about a peculiarity of the Japanese stock market:

http://undervaluedjapan.blogspot.com/2019/09/getting-by-on-yuutai.html

[Foreign Tuffett]

A cool blog post about a peculiarity of the Japanese stock market:

http://undervaluedjapan.blogspot.com/2019/09/getting-by-on-yuutai.html

 

Great, yet another example of Japanese management teams entrenching themselves in order to maintain the status quo.

 

[hillfronter83]

I recently read a few books about Japan that helps me understand Japanese company and business in general.

 

Japan's New Middle Class and Japan as Number One both written by Harvard east Asia scholar Ezra Vogel. Although both books are initially published decades ago, I think a lot still apply in today's Japanese business.

 

How to Ignite the Low Desire Society by Kenichi Ohmae which talked about challenges faced by Japanese society today.

[Janeo]

Bought these over the past couple of months.

 

5971.T Kyowakogyosyo Co

7266.T IMASEN ELECTRIC

7614.T OM2 Network

 

 

Couldn't find an existing topic for HK stocks, but are there any interest in those as well? Bought the below recently too. Available for PM to avoid derailing this thread. :)

 

Computime (HK:0320)

Hung Hing Printing (0450:HK)

Qingling Motors (1122:HK)

Ming Fai (3828:HK)

[generalsandworkouts]

Thanks for sharing those ideas, Janeo. I currently hold NKK Switches (TYO:6943), Sanko Sangyo (TYO:7922), Yotai Refractories (TYO:5357), Katsuragawa Electric (TYO:6416) and Fujix Ltd (TYO:3600).

 

Some other names I've been looking at recently: Kaneso (Nagoya:5979), Geomatec (Sapporo:2137), Somar (TYO:8152) and Nankai Plywood (TYO:7887).

 

Out of the three you mentioned, Kyowakogyosyo is most attractive to me at first glance.

[Spekulatius]

^ Based on what are you guys buying these stocks and how are you finding those? Look for low price to book and excess cash? I scroll around the the Japan exchange website from time to time and find plenty of cheap looking stocks, but most of them are cigar buts in a sense that nothing much happens and the share price bounces around allow decent exits from time to time. There seem to be some transformational stories, but I haven’t been able to latch onto those before the crowds do? I only own a bit of 4624.T (Isamu Paint) now and poking around some others like 3001.T  (real estate Transformation, there is a VIC writeup if I remember correctly) etc. The money is really in transformational stories and I feel like I am at an information disadvantage here.

[Janeo]

Yea that's about it. Take a screener and look for low p/b, low enterprise value, multi years low etc then flip them if they go up. I find it hard to track those growth/turnaround/special situation plays so I stay away from them.

[mjohn707]

Anyone keeping an eye on things with this latest downturn?  Any low P/E names or anything like that?  I'll post below what lit up on my watchlist, some of this is going to be repeated names, but it's stuff that I thought looked cheap at the current prices:

 

2055

4624

5918

5921

6303

6496

6648

6943

7229

7399

7501

7628

7902

7937

8144

9885

[Stuart D]

Anyone keeping an eye on things with this latest downturn?  Any low P/E names or anything like that?  I'll post below what lit up on my watchlist, some of this is going to be repeated names, but it's stuff that I thought looked cheap at the current prices:

 

2055

4624

5918

5921

6303

6496

6648

6943

7229

7399

7501

7628

7902

7937

8144

9885

 

Thanks for posting.

 

7628 seems cheap.

Market cap = $19.1 billion (the number on google finance is $21b, but I think they are including treasury stock?)

 

Cash = $20b, total liabilities = $10b, net income ~ $3 to $4 b / year.

 

Obviously they'll get hit hard by a slow-down in the auto-market, but it looks like they are built to last.

 

Any thoughts on this one in particular?

[mjohn707]

Anyone keeping an eye on things with this latest downturn?  Any low P/E names or anything like that?  I'll post below what lit up on my watchlist, some of this is going to be repeated names, but it's stuff that I thought looked cheap at the current prices:

 

2055

4624

5918

5921

6303

6496

6648

6943

7229

7399

7501

7628

7902

7937

8144

9885

 

Thanks for posting.

 

7628 seems cheap.

Market cap = $19.1 billion (the number on google finance is $21b, but I think they are including treasury stock?)

 

Cash = $20b, total liabilities = $10b, net income ~ $3 to $4 b / year.

 

Obviously they'll get hit hard by a slow-down in the auto-market, but it looks like they are built to last.

 

Any thoughts on this one in particular?

 

It looks reasonably cheap on an earnings basis if you give them credit for the extra cash, which is hard to do entirely in Japan it seems like.  A bit cheaper than it's traded historically as well, maybe at 60% of book compared to a 5-year average of around 80%, but they're having a somewhat weaker year than FY2019.  Their earnings do seem to bounce around a bit though.  I think it's probably reasonable in a basket of similarly situated names, but not without risks considering what can happen to these names if they have a few really bad earnings years

[Spekulatius]

For those hunting for Japanese bargains - Kenkyoinvesting apparently has lowered his subscription fees and also added a free Tier. I signed up for the latter, a great resource. If I do more with Japanese stocks, I would probably pay for the kenkyo plus.

https://www.kenkyoinvesting.com/services/

[mjohn707]

4629 Daishin Chemical seems reasonable.  Shares trade for 45% of book, maybe 6x current earnings if the year finishes as strong as it's seeming, and around 8x average earnings over the long-term.  On a book basis, it's about a 20-25% discount over the 5-year average, but I think that the company might deserve a higher valuation based off of the reasonably consistent ROE numbers.  The company pays a modest dividend, but has not repurchased shares. 

[mjohn707]

7444-Harima-Kyowa also seems reasonable.  At 1410 yen, shares trade for around 42% of book and a P/E of around 6.5.  Historically, that's only about a 25% discount compared to the avg P/B, but the company's ROE and earnings history could I think justify a higher valuation.  The company has low debt, a sufficient current ratio, and pays something of a dividend

Harima-Kyowa_7444.xlsx