Analysis: Investors seek to break through Japan Inc's 'value trap'

L1

20/04/2023 09:37

(Adds milestone on foreigners purchasing Japanese shares, share
milestone for Fujitec)
    By Ankur Banerjee
       SINGAPORE, April 20 (Reuters) - Corporate governance in
Japan has suddenly become a cause celebre, rousing the world's
third-largest stock market out of decades of lethargy and
drawing in hordes of foreign investors.
    Japan's stock market has long been seen by investors as a
'value trap' where companies focus on market share, hoard cash
and care little about shareholder returns. 
    While there has long been talk of change, 2023 has seen some
real evidence of a shift. One such example was when the board of
75-year old elevator maker Fujitec Co Ltd  6406.T  ousted its
chairman last month, handing a huge victory to activist
investors. 
    The Tokyo Stock Exchange (TSE) is forcing reform, too,
threatening companies with underperforming stocks to demonstrate
a better use of capital or face being delisted.
    What has prompted investors globally to sit up and take
notice is an endorsement from legendary billionaire investor
Warren Buffett. Buffett's firm Berkshire Hathaway Inc  BRKa.N 
increased its stake in Japan's five largest trading houses and
said he may invest more in the country.  
    "The worm has clearly turned in Japan," said Simon Edelsten,
manager of UK-based Artemis's global select strategy fund. "For
the Tokyo Stock Exchange to say that all companies that trade
below book are going to have to do something about it is a
massive change, a big step up." 
    The Nikkei Average  .N225 , whose top companies include
multinationals Fast Retailing  9983.T  and Sony Group  6758.T ,
has persistently been undervalued, trading at close to book
value, which is the value of a firm's assets.  
    A TSE analysis showed about half of the 1,800 companies on
the exchange's prime section were trading below their book value
in January, meaning the market is under-pricing the shares.
    Investors say the push for better corporate governance has
led companies to be more open to ideas to boost returns and
stock prices. Buybacks for shares in the fiscal year ending in
March hit a 16-year peak, according to calculations by Nikkei
newspaper. 
    "Instead of discussing whether there should be a buyback,
it’s a discussion of how big should the buyback be, often," said
Jamie Halse, who manages an A$490 million Japan-focused fund at
Platinum Asset Management  PTM.AX  in Sydney.
    "Instead of a discussion about whether they need a woman on
the board, it’s why don’t they have more women on the board," he
said. "It’s definitely progressed. It’s been accelerating over
the last five years and particularly for the last three."    
    Hisashi Arakawa, deputy head of Japanese equities for abrdn,
said the management teams are more aware of capital efficiency
and capital allocation. "We believe that they are increasingly
willing to hear to investor views like us."
    
    FLOCKING TO JAPAN
    Foreign investors have also noted the change. Foreign
investors purchased about 1.59 trillion yen ($11.82 billion)
worth of Japanese shares last week, their biggest buying since
at least 2018. The iShares MSCI Japan ETF  EWJ , is up 8% in
2023 and saw inflows of $346 million in the week of April 5, its
biggest weekly inflow in 18 months. 
    Artemis' Edelsten said he had been buying first-tier
Japanese banks since the summer of 2022 and in the last quarter
had built positions in two firms: printer Toppan Inc  7911.T 
and machine maker Toyota Industries  6201.T . 
    To be sure, not everyone is convinced. Steve Holt, head of
international equity sales at investment bank RW Baird, said his
clients were still wary of investing in Japan. 
    "Clients aren’t doing trips out there to discover huge value
stories because they tried that for decades, it has been cheap
for decades and cheap doesn't mean anything." 
    Still, those seeking to play undervalued stocks, i.e. the
value proposition, have been rewarded. The MSCI Japan Value
index  .dMIJP0000VPUS  is up 9% since August 2020 versus a 9%
drop for the MSCI Japan growth index  .dMIJP0000GPUS .     
    Seth Fischer, founder of Hong Kong-based Oasis Management
whose activism led Fujitec to replace incumbent directors with
ones nominated by the fund and then oust Fujitec's chairman,
says shareholder votes are no longer overwhelmingly in favor of
management, as was always the case in Japan. 
    Shares of the company has risen 17% since the board ousted
its chairman in March and hit all-time peak of 3,570 yen on
Wednesday. 
    "You have management that is put under pressure and pushed
and pulled towards improving value," said Fischer, who has
invested in Japan for 28 years.
     "I think the value trap that was Japan is no longer."

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Nikkei and Topix on the charge    https://tmsnrt.rs/3AbJJ2w
Japan price to book ratio    https://tmsnrt.rs/3GWGKih
Foreign flows into Japanese stocks & futures Foreign flows into
Japanese stocks & futures    https://tmsnrt.rs/40Muzfc
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 (Reporting by Ankur Banerjee, Tom Westbrook in Singapore, Naomi
Rovnick in London and Makiko Yamazaki in Tokyo;
Editing by Vidya Ranganathan and Kim Coghill)
 ((ankur.banerjee@thomsonreuters.com;; Mobile - +65 8121 3925;
Twitter: @AnkurBanerjee17;))