Thanks for sharing. We have a lot of overlap in our Japanese Value portfolios... The only material position I own that I don't see on your list in 1879 Shinnihon, a condo developer with its own construction arm. 25 years of positive EBIT, 10-year sales CAGR of 7%, ¥75b cash vs. ¥66b market cap (i.e. negative EV), 0.6x P/B, 5.4x P/E. They could easily increase their dividend pay-out ratio to 100% (from ~15% today) given their rock-solid balance sheet -- that would be a 19% dividend yield...
Great update, thank you. I've owned Japanese net nets for 12+ years now after buying after the Fukushima event. It's great to see the regulatory nudge and potential catalyst. I'm curious, you mentioned that you borrowed in JPY in your IB account. Is that a U.S. account? If so, how did you go about borrowing in JPY and how much leverage is allowed with IB? Thanks again
It is a U.S. Interactive Brokers account. When you purchase any foreign stock on Interactive Brokers the default is to fund the purchase on margin using local currency. ~60% of my Portfolio is Japanese stocks, so that's all funded with borrowed JPY. I could of course convert my U.S. Dollars to JPY then make the purchase, but I prefer to do it using borrowed JPY as it's closer to currency neutral that way (JPY liablity / JPY asset). The JPY borrowing cost is currently just 0.75% marginal rate with how much I'm borrowing.
Most of these net net small JP names require 100% margin, so you can only 'borrow' JPY up to your account value. I have U.S. long/short positions as well which have very little margin requirements.
Thanks very much for sharing the list. Lots of interesting companies. One question: with regards to Kinki Sharyo and Lonseal, have the parent companies said anything about acquiring these companies? I realise it would make a lot of sense but that doesn’t mean it will happen. It’s Japan after all. Also, I wrote up CEL Corporation on my Substack: I see you own that one too. I have a large position in that one.
Parent companies have not said anything about this, but it would be counter-intuitive to talk about it beforehand. This is a trend that's been going on for a while now, well before the recent pushes by the Tokyo Stock exchange to close the P/B gaps.
There has been a lot of parent companies buying out their listed subs over the years. There are still quite a few listed subsidiaries, but its been in decline for a few years now. Kinki Sharyo has already bought out one listed subsidiary (a much larger one to boot). They could choose to ignore the Tokyo Stock Exchange guidelines, but I don't think that's likely. While the rules don't have much teeth, non-compliance companies will be publicly listed and arguably shamed via social pressure (which is a bigger deal in Japan).
Had Kinki Sharyo/Lonseal's parent company communicated any intention to buyout their subs, they wouldn't be trading at 0.3-0.4x tbv. They'd already be closer to 1x.
Thank you for these posts - I also have several companies you mentioned in my list and have a bullish view on Japan stocks for the long term.
A quick question, as would love to get your take on this..How do you see the latest BoJ policy affecting the Japanese stocks? You see this having a major impact?
Macro will always have an impact on stocks, but given that my JP portfolio is financed with JPY margin loans on the surface it's currency neutral (JP liability + JP assets). This changes a bit depending on the company and where they derive their business (domestic vs intl). Generally speaking, I prefer a weaker yen as it helps the exporters I own and likely pushes domestic investors into equities.
Specifically about current loosening of YCC to allow long rates to go up a bit, it'll benefit banks mostly.
No one knows what the BoJ will do next, but mitigating currency with matching JPY liability/assets is the prudent way to go long Japan IMO.
This investment was truly a great success in a short period of time. Very very good judgement and timing. Congrats.
I am inexperienced. Please allow me one question. How can you finance the complete investment on margin to get currency neutral? Is it because IB is considering your whole portfolio with the non-Japanese holdings as equity for the JPY-margin?
Correct on IB providing margin on my non-jpy holdings. It's never truely currency neutral though despite having JPY asset and JPY liability as the companies that are reliant on exports will get hurt if JPY strengthens, but it's neutralish.
Thanks for sharing. We have a lot of overlap in our Japanese Value portfolios... The only material position I own that I don't see on your list in 1879 Shinnihon, a condo developer with its own construction arm. 25 years of positive EBIT, 10-year sales CAGR of 7%, ¥75b cash vs. ¥66b market cap (i.e. negative EV), 0.6x P/B, 5.4x P/E. They could easily increase their dividend pay-out ratio to 100% (from ~15% today) given their rock-solid balance sheet -- that would be a 19% dividend yield...
Took a very small tracker position shortly after your comment. Definitely belongs in the basket. Ran up a bit already too. Thanks!
Thanks for sharing, will take a look!
Great update, thank you. I've owned Japanese net nets for 12+ years now after buying after the Fukushima event. It's great to see the regulatory nudge and potential catalyst. I'm curious, you mentioned that you borrowed in JPY in your IB account. Is that a U.S. account? If so, how did you go about borrowing in JPY and how much leverage is allowed with IB? Thanks again
It is a U.S. Interactive Brokers account. When you purchase any foreign stock on Interactive Brokers the default is to fund the purchase on margin using local currency. ~60% of my Portfolio is Japanese stocks, so that's all funded with borrowed JPY. I could of course convert my U.S. Dollars to JPY then make the purchase, but I prefer to do it using borrowed JPY as it's closer to currency neutral that way (JPY liablity / JPY asset). The JPY borrowing cost is currently just 0.75% marginal rate with how much I'm borrowing.
Most of these net net small JP names require 100% margin, so you can only 'borrow' JPY up to your account value. I have U.S. long/short positions as well which have very little margin requirements.
Thank you
Thanks very much for sharing the list. Lots of interesting companies. One question: with regards to Kinki Sharyo and Lonseal, have the parent companies said anything about acquiring these companies? I realise it would make a lot of sense but that doesn’t mean it will happen. It’s Japan after all. Also, I wrote up CEL Corporation on my Substack: I see you own that one too. I have a large position in that one.
Parent companies have not said anything about this, but it would be counter-intuitive to talk about it beforehand. This is a trend that's been going on for a while now, well before the recent pushes by the Tokyo Stock exchange to close the P/B gaps.
https://www.omm.com/resources/alerts-and-publications/alerts/japan-client-alert-nov-2020/
https://www.lexology.com/library/detail.aspx?g=4b328058-7979-40d0-b062-c07f1e300456
https://www.japantimes.co.jp/news/2020/10/01/business/corporate-business/docomo-parent-child-listings/
There has been a lot of parent companies buying out their listed subs over the years. There are still quite a few listed subsidiaries, but its been in decline for a few years now. Kinki Sharyo has already bought out one listed subsidiary (a much larger one to boot). They could choose to ignore the Tokyo Stock Exchange guidelines, but I don't think that's likely. While the rules don't have much teeth, non-compliance companies will be publicly listed and arguably shamed via social pressure (which is a bigger deal in Japan).
Had Kinki Sharyo/Lonseal's parent company communicated any intention to buyout their subs, they wouldn't be trading at 0.3-0.4x tbv. They'd already be closer to 1x.
Thank you for these posts - I also have several companies you mentioned in my list and have a bullish view on Japan stocks for the long term.
A quick question, as would love to get your take on this..How do you see the latest BoJ policy affecting the Japanese stocks? You see this having a major impact?
Thanks, Sam
Hi Sam -
Macro will always have an impact on stocks, but given that my JP portfolio is financed with JPY margin loans on the surface it's currency neutral (JP liability + JP assets). This changes a bit depending on the company and where they derive their business (domestic vs intl). Generally speaking, I prefer a weaker yen as it helps the exporters I own and likely pushes domestic investors into equities.
Specifically about current loosening of YCC to allow long rates to go up a bit, it'll benefit banks mostly.
No one knows what the BoJ will do next, but mitigating currency with matching JPY liability/assets is the prudent way to go long Japan IMO.
Thank you so much for these posts.
This investment was truly a great success in a short period of time. Very very good judgement and timing. Congrats.
I am inexperienced. Please allow me one question. How can you finance the complete investment on margin to get currency neutral? Is it because IB is considering your whole portfolio with the non-Japanese holdings as equity for the JPY-margin?
Correct on IB providing margin on my non-jpy holdings. It's never truely currency neutral though despite having JPY asset and JPY liability as the companies that are reliant on exports will get hurt if JPY strengthens, but it's neutralish.