Complete guide to Japan shareholder activism
Complete guide to Japan shareholder activism
Introduction to the sector, activist profiles and ongoing campaigns. Estimated reading time: 36 minutes
Disclaimer: Asian Century Stocks uses information sources believed to be reliable, but their accuracy cannot be guaranteed. The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. You are advised to discuss your investment options with your financial advisers. Consult your financial adviser to understand whether any investment is suitable for your specific needs. I may, from time to time, have positions in the securities covered in the articles on this website. This is not a recommendation to buy or sell stocks.
Summary
Japanese shareholder activism is booming. The number of activist shareholder proposals has increased exponentially over the past five years.
It’s easy to find Japanese companies that trade below fair value. But it’s more difficult to find management teams that care about their shareholders. Activists can help convince them to do the right thing.
I’m impressed by shareholder activists Oasis Management, ValueAct and Symphony Financial. It’s worth paying attention to their fund holdings.
Among the Japanese stocks currently targeted in activist campaigns, Seven & I, Sumitomo Osaka Cement, JAFCO, Sun Corp, and T. Hasegawa stand out, in my view.
1. Current backdrop
Minority shareholders have often been mistreated in Japan. Company management teams prioritise other stakeholders first, including employees and related parties. The strongest evidence of such mistreatment is the meagre return on equity that you often find for Japanese companies.
But we finally see the light at the end of the tunnel. Thanks to former prime minister Shinzo Abe’s post-2013 reforms, Japan is experiencing a boom in shareholder activism. Corporate governance in Japan is now improving, little by little.
Shareholder activism in Japan can be traced back to one man - Yoshiaki Murakami. In 1999 he set up activist investing firm MAC Consulting, which acquired shares in poorly managed Japanese companies and then pushed them to restructure. In 2000, Murakami launched Japan’s first hostile takeover bid for real estate and electronics firm Shoei. It created a massive controversy, and shareholders voted him down.
He became vilified in media but also gained support from many institutional investors who felt that corporate Japan needed reform. He eventually went to jail in 2007 for insider trading, vowing never to get involved with investments again.
Several foreign activist funds entered Japan in the mid-2000s. The Children’s Investment Fund got involved in several campaigns, including J-Power in 2008. Cerberus, Steel Partners and Third Point were also involved in activist campaigns, but most were unsuccessful. Jamie Allen at Hong Kong-based Asian Corporate Governance Association criticised these early campaigns:
“Earlier unsuccessful activists "didn't put time [in] to make friends and get supporters… They just launched their activist campaigns and people mistrusted them."
The real turnaround for the sector came in 2012. Shinzo Abe became prime minister for a second term and began to push for reform.
In 2013, Abe introduced an economic strategy targeting three separate areas (“arrows”): 1) monetary policy, 2) fiscal policy, and 3) structural reform.
The last of these arrows aimed to improve the performance of domestic Japanese companies. Besides a planned entry to TPP and deregulating several industries, he also introduced corporate governance reforms.
In 2014, the Tokyo Stock Exchange adopted a stewardship code that required fund managers to put clients' interests first when voting. One way to quantify the impact of the stewardship code is that the number of listed companies with poison pills has fallen dramatically:
Around the same time, proxy service ISS (Institutional Shareholder Services) announced that it would recommend voting against the management of any company with a return on equity below 5%.
In 2015, Tokyo Stock Exchange adopted a new corporate governance playbook. It was inspired by the UK’s corporate governance code, which is generally seen as shareholder-friendly. An essential part of the 2015 corporate governance code speaks about the board’s responsibility to improve capital allocation and not just let cash accumulate on the balance sheet - a recurring issue among Japanese companies.
Around the same time, Japan’s massive Government Pension Investment Fund (GPIF) started investing more aggressively in domestic equities. It started pushing investee companies to think more deeply about the cost of capital - about the opportunity cost of holding excess cash on the balance sheet.
Following Abe’s and the Tokyo Stock Exchange’s reforms, Japanese shareholder activism has become a significant industry - the third largest globally after the United States and Australia.
The number of shareholder proposals to Japanese companies as part of activist campaigns has gone up from about 10 in 2016 to 60 in 2020:
As you can tell from the above chart, roughly half of the proposals submitted are about improving capital allocation - increasing the return on capital and unlocking hidden values in the balance sheet. But improving capital allocation is only one of several categories of shareholder proposals. You can divide such shareholder proposals into five main categories:
Improve capital allocation through a share buyback or high dividends
Business strategy proposals, e.g. divestitures or M&A
Replacing a management team or a board director
Disclosure improvement
M&A activism, where an activist opposes a specific M&A deal
The most successful campaigns try to change a company’s overall business strategy or oppose a particular M&A transaction. Balance sheet proposals typically have low success rates:
M&A activism has become the new frontier for shareholder activism in recent years, with Japanese companies increasingly becoming “in play”. The number of hostile takeovers rose from just 1 in 2017 to 5-7 in the past few years:
A few of the more high-profile hostile takeover bids recently have included:
Nitori’s hostile takeover of Shimachu
Mitsui Fudosan’s acquisition of Tokyo Dome
Aslead Capital’s hostile bid for Fuji Kosan
Starwood Capital’s hostile takeover of Invesco Office REIT
The sector exposure is broad. Activists have targeted companies across sectors and the market cap spectrum. Roughly half of the targeted companies have been either industrials or consumer cyclicals:
There’s a big caveat regarding the sectors that can be targeted. The new Foreign Exchange and Foreign Trade Act (FEFTA) now requires foreign investors to undergo an examination by the authorities when they acquire a certain amount of shares in businesses that are sensitive in terms of Japan’s national security. That has made it more difficult for Singapore-based activist funds to engage in hostile takeovers in FEFTA category businesses.
A significant event that will take place in 2022 is the Tokyo Stock Exchange’s new listing structure. The last four categories: “First”, “Second”, “JASDAQ” and “Mothers” will turn into:
“Prime”: High market cap and liquidity and strong corporate governance
“Standard”: Market cap and liquidity above a certain level
“Growth”: For companies with business plans to achieve high growth
The companies previously listed on the “First” section will now have to qualify to become “Prime” market members.
The critical point here is that the Prime section will be exclusive to companies that meet specific corporate governance and investor disclosure requirements. Companies that want to become listed on the Prime section will, in many cases, have to divest their cross-holdings, introduce independent directors and start communicating with foreign investors. Hopefully, the new Prime section will provide incentives for Japanese companies to improve their corporate governance.
Whereas the activist campaigns of the MAC Consulting years targeted small caps, today, shareholder activists are increasingly going up the market cap scale. Foreign funds such as Elliott Management and Third Point have started targeting mega-caps such as SoftBank and Sony, often with great success.
During COVID-19, the pace of shareholder activism has slowed down. One activist explained that “it’s difficult to run an activist campaign over Zoom”. And so, we’re on a hiatus right now in terms of Japanese shareholder activism. But once Japan has recovered from the pandemic, the pace of Japanese shareholder activism is likely to pick up speed again.
2. Funds involved in Japanese activism
I will now go through the key funds involved in Japanese shareholder activism and the companies they have invested in.
The top shareholder activists in Japan are Oasis Capital and Strategic Capital, based on the number of proposals since 2013. But several smaller funds also engage with management teams privately, outside the public’s eye.
There are two main ways of identifying activist campaigns:
Shareholder disclosure under the Financial Instruments and Exchange Act of for beneficial shareholders that have acquired more than 5% of a company’s shares
Public shareholder proposals issued via news wires or activist websites
I have used both of these two methods to identify what Japanese activist campaigns are currently taking place today.
2.1. The “Murakami Matrix”
As mentioned earlier, Yoshiaki Murakami is a pioneer in Japanese shareholder activism. After going to jail for insider trading in 2007, he made a come-back in the mid-2010s. Today, he operates out of Singapore together with his daughter Aya. He uses a complex structure holding companies meant to disguise the accumulation of shares of companies he plans to target. Such holding companies include “Reno KK”, “City Index 11 KK”, “Yukihiro Nomura”, “Aya Nomura”, “S-Grant Co Ltd”, “Office Support KK”, “Minami Aoyama Fodusan”, and many others. To get a sense of what stocks Murakami owns today, I’ve added up the percentage holdings for each of his holding companies and added them up (all numbers in JPY billion):
As the above table shows, Murakami is currently a shareholder in the following companies:
A significant stake in construction company Daiho Corp, which is involved in the construction of heavy civil works such as dams and power plants, seaports, railways, etc. Daiho is also involved in the construction of commercial and residential property. Although the dividend payout ratio has risen, the balance sheet remains overcapitalised. And since 2019, cash flow from operations has deteriorated due to heavy capex and weak accounts receivables. The P/E is 11.1x and EV/EBIT 5.7x.
Central Glass is a building materials company, specifically regarding flat glass and chemical products. The stock trades at P/E 15.6x and EV/EBIT 16.7x, although with weak earnings during COVID-19. It trades at just 0.5x book. British activist Silchester is also involved in Central Glass.
Toyo Construction is yet another construction company trading at a discount to book. Murakami owns 6.4% of the company. Murakami likely sees value in Toyo’s accounts receivables that it could potentially monetise but, for some reason, has not.
Chugoku Marine Paints sells paint material for marine use, including containers and ships. The stock has gone nowhere for years and continues to trade at a discount to book, though with poor profitability. Following Murakami’s involvement, Chugoku Marine initiated a buyback for 7.7% of shares outstanding. Yet the stock has not responded.
Restar, where Murakami has helped the company in its recent M&A deals, including for Paltek. Restar continues to trade at a discount to book, 27.3x P/E and 14.6x. EV/EBIT. It also pays a dividend yield of 3.8%.
2.2. Oasis Management
Hong Kong-based Seth Fischer’s Oasis Management entered the Japanese shareholder activism industry with its June 2013 letter to Nintendo. Oasis urged Nintendo to make its games available on third-party devices in that letter. That campaign ended up victorious, with Nintendo two years later releasing the hit game “Pokemon Go” and several other smartphone games. Oasis has also been involved in the campaigns for Kyocera, Toshiba Plant, Katakura and Pasona to divest of their non-core holdings and return excess cash to shareholders. As well as the campaigns to prevent mergers between Alpine & Alps and Showa Shell & Idemitsu Kosan.
Generally speaking, Oasis are typically focused on operational improvements in its campaigns rather than just financial engineering. Seth Fischer was on the Beyond the Boardroom podcast in 2019 (link here). He was also interviewed by Bloomberg recently, discussing Sony Corporation (link here).
Oasis current ongoing campaigns include the following stocks:
A campaign against the management team of paper & pulp manufacturer Hokuetsu. In October 2021, Oasis set up a website called A Better Hokuetsu. The proposal includes a view that Hokuetsu should reinvest its capital in biomass plants. They also think the company should reorient itself from its focus on the dying printing paper industry towards sanitary tissues and container-board used in packaging. Further, Hokuetsu’s 24.6% ownership of Daio Paper Corporation represents 50% of Hokuetsu’s market cap. Hokuetsu could quickly get rid of this holding and distribute the proceeds to shareholders.
The campaign against E&C company Hazama Ando was launched in May 2020 with the following press release. Oasis urged Hazama Ando’s management team to avoid investing excess cash into low-yielding real estate and instead use the cash to buy back shares. There are now signs of progress with recurring buybacks that have reduced the share count by 6.6% since 2019.
Oasis's campaign against power semiconductor company Sanken began in 2019 with the proposal A Better Sanken. Oasis sees value in the company’s 52% stake in Allegro Microsystems, which is currently worth 2.5x as much as Sanken itself. Further, Oasis believes that Sanken could improve its margins by exiting the unprofitable power system business. There has been some progress. Since Oasis initiated its campaign, Sanken started engaging with advisers to sell the power systems business and introduce a performance-linked compensation plan. However, the stake in Allegro Microsystems has still not been divested.
Since COVID-19 broke out, Oasis has avoided taking a cautious approach to new campaigns with very little information in the public sphere. But today, Oasis also shows up as a large-percentage shareholder in the following companies:
Sun Corp, which produces mobile data solutions to law enforcement authorities in Japan through its large stake in Israeli cyber security company Cellebrite, which is worth more than the entire market cap of Sun Corp.
Construction company Daibiru, which the UK’s Asset Value Investors are also involved in. The board used to be stacked with representative from controlling shareholder Mitsui OSK but that is no longer the case. The stock trades at P/E 8.9x and EV/EBIT 5.2x. It trades above book but its leased assets may be undervalued on the balance sheet.
Denki Kogyo, which sells telecom and RF equipment. It has a massive net cash pile of JPY 20 billion, equivalent to 70% of the market cap. Overall P/B of 0.62x, with a P/E of 25.1x and EV/EBIT of 8.6x.
Venture capital fund JAFCO, which sits on unrealised gains on parts of its portfolio. It has in recent years repurchased shares from the proceeds of its divestitures, causing the share count to drop almost 40% in the past five years. Today, JAFCO trades at 0.66x book.
Infocom, which provides IT services to companies and government agencies. In recent years, the company has been growing in the mid-teens and now trades at P/E 18.5x and EV/EBIT 7.9x.
2.3. Strategic Capital
Strategic Capital was set up a decade ago by former Murakami colleague Tsuyoshi Maruki. He’s a highly active shareholder activist with almost 300 shareholder proposals since the firm was set up, all available on the Strategic Capital website. Most of these campaigns target minor balance sheet improvements rather than any change in strategic focus.
In 2021, Strategic Capital sent out proposals to the following companies:
Industrial equipment maker Kyokuto Boeki Kaisha, where Strategic Capital criticised the company’s inefficient capital allocation and its practice of accumulating excess cash and securities on the balance sheet. Its P/E is 18.5x and EV/EBIT 13.7x.
Industrial materials company Arisawa, where the fund tried to get the company to divest its non-core securities holdings and increase the dividend payout ratio to 100%. The stock trades at P/E 9.8x and EV/EBIT 8.3x.
Sliding doors and shutter manufacturer Bunka Shutter, where Strategic Capital hopes that the company will increase its dividend payout ratio to 100%, selling cross-holdings, abolishing the company’s poison pill, disclosing the company’s WACC so that it can be used for future capital allocation decisions, including whether to keep its enormous cash pile. The company’s P/E is 9.0x and EV/EBIT 5.5x.
Tokyu Group-connected construction company Seikitokyu Kogyo, with suggestions that the company increase its dividend payout ratio to 100%. The stock trades at P/E 8.3x and 3.3x EV/EBIT.
Construction materials and equipment company Wakita, noting that it had 20% of its market cap in net cash. Strategic Capital thinks that a 100% dividend payout ratio would rectify the current situation. The stock trades at P/E 14.9x and EV/EBIT 4.4x.
Strategic Capital asked that contractor Asanuma exits the real estate leasing business due to its low return on capital. It also proposed selling real estate on the balance sheet and using the proceeds to fund a special dividend to shareholders and reduce cross-shareholdings. The P/E is currently 15.1x and EV/EBIT 10.6x.
Since Strategic Capital uses nominee shareholders for its investments, it’s difficult to tell whether the fund is still involved in any of the above campaigns.
2.4. Third Point
Dan Loeb’s Third Point has been an activist in Japan for almost a decade. In 2015 it launched a campaign against robotics manufacturer Fanuc, urging its management team to improve shareholder returns. It was a success, with management quickly responding that it would increase its dividend payout ratio to 80%.
He was also involved with consumer electronics giant Sony Corporation. Third Point initially argued that Sony should cut costs in Sony Pictures and list it as a separate entity. Later on, in 2019, it initiated a second campaign urging Sony to list its image sensor business separately. But now, it looks like Third Point has already sold out from most of its stake in Sony.
2.5. ValueAct
ValueAct made its first foray into Japan in 2018 with a position in Olympus. Since then, the company has ramped up its exposure, making Japan the firm’s second-biggest market after the US, with US$3.5 billion in stocks in the country. It then got involved with Nintendo in 2019, sending a letter to the management team, offering guidance on how to grow the business. ValueAct thought that more should be done with mobile and that Nintendo should be seen as a digital content business with valuable intellectual property.
ValueAct’s strategy is to invest in companies:
“with strong value propositions and global opportunities for growth that in many cases benefit from important long-term trends”
Partner Robert Hale has been the public face of the company’s Japanese campaigns and gave an excellent recent interview with Nikkei here.
ValueAct is currently involved in the following companies in Japan:
In 2020, ValueAct took a 7.3% stake in Japan Synthetic Rubber (JSR Corporation), which was recently increased to 9.3%. The company produces speciality chemicals for semiconductors and life sciences. Robert Hale has joined the board, and JSR subsequently sold its lower-margin rubber business. Today, the stock trades at a current-year P/E multiple of 20.1x. There’s a VIC write-up available on the stock here.
In 2021, ValueAct took a 4.4% stake in 7-Eleven owner Seven & I. The company was formed through a merger between convenience store operator Seven-Eleven, general merchandise store operator Ito-Yokado and a Denny’s Japan franchisee operation. ValueAct continues to take a collaborative, cautious approach with its campaigns. In Seven & I’s case, ValueAct wrote a presentation called Transforming Seven & I Holdings into Global Champion 7-Eleven. They think that Seven & I’s convenience stores are worth significantly more than the current valuation and that 7-Eleven has the potential to expand globally.
2.6. Elliott Management
Paul Singer’s Elliott Management got involved in Japanese activism by blocking Hitachi’s attempt to acquire Italian transit system builder Ansaldo in 2016. It also got involved in H.I.S.’s effort to acquire Unizo, which led to a bidding war and a handsome profit to Elliott.
But Elliott’s is most known for its campaign against SoftBank. Singer has publicly asked Masayoshi Son to address SoftBank’s massive discount to NAV. A few weeks after the campaign started, SoftBank announced a series of buybacks which became among the largest in Japanese corporate history. Elliott has significantly reduced its stake in SoftBank, and it’s unclear whether SoftBank is still a shareholder.
2.7. Simplex Asset Management
Hiromasa Mizushima’s Simplex has employed a strategy of buying stakes in listed subsidiaries and then orchestrating a buy-out by its parent. Most of Simplex’s positions are listed subsidiaries that trade at significant discounts to book.
Today, Simplex has significant double-digit stakes in the following companies:
Automation equipment maker Seibu Electric, which trades at P/E 11.5x despite steady growth and a substantial net cash pile that represents 47% of the market cap.
Commercial kitchen equipment maker Nakanishi Manufacturing, which trades at P/E 5.7x. It also had a cash pile of roughly 38% of the market cap.
Barbecue grill manufacturer Shinpo, which has an incredibly stable business trading at P/E 11.2x P/E with a net cash position equivalent to 34% of the market cap.
Heiwa Real Estate, a property business with an in-house REIT called Heiwa Real Estate REIT. It owns 3.2 million shares in Japan Exchange Group, and its biggest tenant happens to the Tokyo Stock Exchange. The stock trades at 0.85x book.
2.8. Asset Value Investors
UK investment manager Asset Value Investors (AVI) launched its first activist campaign in October 2017 with a 2% stake in TBS (formerly Tokyo Broadcasting Systems). Asset Value suggested that the company distribute its 40% stake in Tokyo Electron to shareholders through a special dividend. Unfortunately, the campaign failed, and the stock price has gone nowhere.
In 2018, Asset Value launched a specialised London-listed investment vehicle called AVI Japan Opportunities Trust (AJOT LN). The fund now has US$180 million invested across 26 activist campaigns. Founder Joe Bauernfreund was on the MoneyWeek podcast last year (link here) discussing why he thinks Japan is an excellent market for activism.
Recent AVI shareholder proposals include:
AVI became a shareholder in paint company SK Kaken in 2017. It gave the company suggestions on how to improve its operating and financial performance, including cancelling 90% of the company’s Treasury shares and a 10-for-1 stock split to reduce the minimum trading lot size. SK Kaken’s management team rejected both of these proposals. AVI countered with a letter to SK Kaken’s management team in May 2021, available here. There’s also an old VIC post on SK Kaken here.
AVI started an activist campaign against NS Solutions in May 2021 with this letter. AVI proposed a total dividend of JPY 87 and a share buyback to help the company meet the Tokyo Stock Exchange’s new 35% free float requirement and introduce a stock-based compensation scheme for directors. AVI is critical about NS Solution’s build-up of JPY 145 billion in surplus cash and securities, including its significant stake in Recruit Holdings.
AVI has been communicating with Tokyo Radiator for over four years. In a May 2021 proposal, AVI said that they saw conflicts of interests between itself and its controlling shareholder Marelli. Tokyo Radiator itself has cash of JPY 9.9 billion, which exceeds the company’s market cap. However - over half of that cash is deposited with parent Marelli. AVI wants to see a clearer demarcation line between Tokyo Radiator and its parent as well as the introduction of stock-based compensation for the company’s directors. These proposals have so far fallen on deaf ears.
AVI has been a shareholder in elevator giant Fujitec since 2018, sending letters to the management team and asking them to adopt a variety of measures to improve performance. Those suggestions fell on deaf ears. In 2020, AVI upped up its ante with a public campaign where it pointed out Fujitec’s flaws. One problem is capital being tied up in excess manufacturing capacity, a lack of economies of scale and a weak governance structure. Since then, the stock price has responded positively, almost doubling since the pandemic began.
AVI Japan Opportunities Trust also has large percentage holdings in the following stocks:
DTS, which is an IT systems provider for the finance, government sectors and other private companies. It trades at P/E 15.4x and has a cash pile representing 33% of the market cap.
Wacom, which manufactures tablets for consumer and professional use. It trades at P/E 15.9x and has a cash pile representing 10.6% of the market cap.
Japanese fragrance & flavour specialist T. Hasegawa, a high-quality business trading at much lower multiples than its global peers IFF and Givaudan. Hasegawa currently trades at 13.8x current-year P/E and 10.6x EV/EBIT.
Electroplating chemicals specialist C.Uyemura, which trades at P/E 10.1x and has a cash pile equivalent to 26% of the market cap. Since AVI and Simplex got involved, the company has started to buy back shares - perhaps hoping for inclusion in TSE’s first section. There’s a 2018 VIC write-up on the stock available here.
Shin-Etsu Polymer is a processor of silicon and vinyl resin materials for semiconductors. It trades at a P/E of 11.9x and has a cash pile representing 54% of the market cap.
Pasona, whose 50.8% stake in Benefit One is worth JPY 210 billion, far more than Pasona’s market cap of JPY 97 billion. Oasis has been involved with Pasona since 2018 but has so far failed to convince Pasona’s CEO to improve the company’s capital allocation.
Web solutions provider and business incubator Digital Garage, which trades at P/E 7.5x and has a cash pile representing 34% of the market cap. Oasis also acquired shares in the company in the latter half of 2021.
2.9. Symphony Financial
Singapore-based Symphony Financial Partners was set up by David Baran and Kazuhiko Shibata in 2000. Baran and Shibata both come from investment banking backgrounds in senior management positions before setting up Symphony
Symphony’s modus operandi is to buy undervalued companies and convince management teams to undertake an MBO or buy back shares. The fund runs a very concentrated portfolio. Neither of their campaigns is public, making it difficult to guess their intentions. Even though they prefer to operate out of the public’s eye, Baran and Shibata did participate in the Capital Allocators podcast in 2021, with a link to the episode here.
The largest percentage holdings for Symphony Financial today are:
Zuiko, which produces machinery for sanitary napkin- and diaper production. The stock is inexpensive at just 9.9x P/E and 7.0x EV/EBIT.
Tokyo-based waste management company Kaname Kogyo, which trades at P/E 16.2x and EV/EBIT 9.1x. There may be a case that Kaname Kogyo benefits from a trend towards greater recycling though growth has historically been disappointing.
Japan Securities Finance, which provides loans against collateral to securities firms that are members of the Tokyo Stock Exchange. The company has grown nicely over the past ten years, though with a low return on equity. The stock trades at only 0.63x book.
Maruka Furusato, which was formed through the merger of construction machinery wholesaler Maruka and steel frame and pipe company Furusato. It’s unclear why the two companies merged. The stock has run up significantly and now trades at P/E 32.4x and EV/EBIT 24.2x.
Nagawa produces prefab construction for temporary use. It’s been a long-term holding for Symphony Financial and discussed extensively on the Capital Allocators podcast. Nagawa currently trades at P/E 54.7x and EV/EBIT 36.3x.
2.10. Dalton Investments
Dalton Investments entered into the Japanese activism scene by orchestrating an attempted takeover of Fujitec by Schindler in 2007. The transaction was ultimately aborted after Fujitec adopted a poison pill.
In 2019, Dalton launched a closed-end activist fund called Nippon Active Value Fund (NAVF LN). The IPO teaser outlined NAVF’s strategy: investing in companies with a significant amount of excess cash and pushing management teams to improve their capital allocation. The fund is run by Jamie Rosenwald and Japan head Shiro Hayashi. Jamie Rosenwald spoke to Asia Society in this recent YouTube video.
One of the first transactions was with Shinsei Bank, where Dalton pushed for a buyback and Jamie Rosenwald to become an independent director. Six weeks after the campaign started, Shinsei Bank announced a 10% share buyback, and it then followed up with yet another buyback. Another high-profile campaign was the 5% stake in Ebara Jistugyo, which almost doubled its dividend after Dalton’s involvement.
As of the latest Nippon Active Value Fund factsheet, the fund had significant exposure to other companies such as Intage, Mitsuboshi Belting and Bunka Shutter:
2.11. SPARX
Shubei Abe’s SPARX is discreet and cautious in terms of its activist campaigns. Abe became famous through his connection with George Soros in the 1980s. Author Ronald Chan featured Shuhei Abe in his book The Value Investors and interviewed him in this 2021 YouTube video. In 2017, SPARX made it to the top of the newspaper headlines with the campaign to get Morinaga Milk to merge with its parent Morinaga Corporation (VIC write-up available here). Unfortunately, Morinaga didn’t listen, and the two companies remain separately listed. SPARX then went on a four-year campaign to get disaster prevention specialist Teikoku Sen-I to improve its capital allocation, including the sale of its 2.6% stake in Hulic.
It’s unclear what campaigns SPARX are involved in at the moment, but its largest percentage holdings include:
Japan Data Science Consortium, which is a service company focused on machine learning. It’s a high-growth, unprofitable company and probably not an activist position.
Cosmetics company I-NE, which has grown fast and trades at P/E 20.0x and EV/EBIT 6.8x.
Pet insurance company Anicom, which trades at P/E 22.4x and only 1.9x book. Many consider pet insurance to be a growth industry.
Yamaichi Electronics, which produces basic semiconductor chip components. The stock trades at low multiples of P/E 7.0x and EV/EBIT 4.6x, but its earnings are volatile.
Staffing services company Nisso Corp, which tradest at P/E 15.7x and EV/EBIT 8.9x.
2.12. Hibiki Path Advisors
Singapore-based Hibiki Path Advisors was founded by former Dalton associate Yuya Shimizu in 2015. The company publishes its shareholder proposals on its website under the “Message” section. In 2020, Shimizu organised a campaign to get Japanese golf course operator Accordia Golf Trust to improve its unfair privatisation offer, which Shimizu summarised with the following YouTube presentation. But the campaign went nowhere, and Accordia Golf Trust was eventually acquired at a low price. As detailed in this press release, Hibiki also opposed the merger between pharmacy operators Matusomotokiyoshi and Cocockara.
Hibiki Path Advisors have recently published the following two shareholder proposals:
A February 2022 proposal to food distributor company Nishimoto to improve its IR function and start issuing sponsored research reports on platforms such as Shared Research. The stock trades at P/E 8.0x and EV/EBIT 4.0x.
A January 2022 proposal to online supermarket operator Oisix to improve its disclosure to investors, especially relating to a recent problem with the move to a new distribution centre and to institute a new share buyback.
Neither of these two stocks shows up in Hibiki’s latest filings. I suspect they accumulated a significant amount of shares during the first quarter of 2022.
Other significant Hibiki holdings include IG Port, Japan Pure Chemical, Aoyama Zaisan Networks, Sodick, Daihatsu Diesel Manufacturing and Ihara Science Corp. But Hibiki has not gone public as to why and how they’re hoping for value to be realised in any of these companies.
2.13. Silchester
British investment firm Silchester International has kept a low profile but has a significant presence in Japanese shareholder activism with over JPY 700 billion invested. They tend to take a quiet, collaborative approach. Silchester is most known for its long campaign to get building materials company Sangetsu to remunerate shareholders with its excess cash. It took many years, but in 2013, Sangetsu finally took steps by buying back shares and cancelling them. Silchester also had a public spat with the Bank of Kyoto over its shareholder returns plan in 2020 that Silchester felt did not address underlying issues. The Bank of Kyoto campaign has not led to a satisfactory outcome.
A few of Silchester’s current campaigns include:
Sumitomo Osaka Cement, of which Silchester owns 10.4%. The company has cement plants and produces aggregates for use in concrete in Japan, where it has a 20% market share. The company also has a growing materials business. The stock has fallen quite a bit since its peak in 2018. Today, the stock trades at 0.6x book, a trailing P/E of 10.8x and a trailing EV/EBIT of 13.1x. After Silchester took its position, Sumitomo Osaka Cement initiated its first-ever share buyback.
Prescription drug and cosmetics products wholesaler Medipal, in which Silchester owns 6.1%. Medipal owns 50.1% of Paltac and 22.5% of JCR Pharma and other equity holdings. The entire equity portfolio is worth JPY 410 billion on top of Medipal treasury shares, equivalent to 14.1% of shares outstanding. Medipal’s market cap is JPY 426 billion though the company does seem to have preference shares outstanding as well. Excluding the above balance sheet values, the stock trades at only 12.3x P/E.
Shiga Bank is a regional bank operating in the Shiga prefecture. Like many other Japanese regional banks, Shiga Bank trades at a low price to book of around 0.23x. Like the Bank of Kyoto, the bank has significant unrealised gains in its securities portfolio, though I believe that these are already counted as part of the book value. Its largest holdings are in Nidec and Murata. The stock currently trades at P/E 6.0x.
2.14. Effissimo Capital Management
Singapore-based Effissimo was founded in 2006 by Takashi Kousaka and Yoichiro Imai - two former colleagues of Yoshiaki Murakami. Effisimo has a concentrated portfolio of 25 stocks, in which Effissimo takes significant positions to affect operational change. Effissimo has avoided the spotlight for most of its existence instead of trying to open a private dialogue with management teams of its investee companies. Their biggest campaign has been to get Toshiba to replace its CEO and board members. They also had public proposals to get insurance company Dai-ichi Life and shipping company Kawasaki Kisen to restructure. They were able to get an Effissimo representative to become an outside director of Kawasaki Kisen.
The fund currently has large percentage holdings in:
Shipping company Kawasaki Kisen, which trades at 0.73x book. It’s benefitted from the recent global bull market in shipping stocks.
Auto manufacturer and Nissan associate Nissan Shatai. The company is currently unprofitable, and the stock trades at 0.46x book.
Power semiconductor maker Sanken Electric. The stock trades at P/E 26.0x and EV/EBIT 9.6x, but the real value lies in the company’s 52% stake in Allegro Microsystems.
Office equipment maker Ricoh. The stock trades at P/E 17.9x and EV/EBIT 15.1x. Some of the changes undertaken by Ricoh since Effissimo’s investment includes a higher dividend payout, equity-based comp, divesting non-core assets and a cost-saving program. There’s a VIC write-up on the stock here.
Consumer electronics conglomerate Toshiba, which has several businesses, including NAND memory, batteries, smart city meters, rail cars as well as nuclear power plant construction through subsidiary Westinghouse. Effissimo managed to get Yoichiro Imai on the board, and governance is seemingly improving after a series of accounting scandals. Today, Toshiba trades at P/E 13.9x and EV/EBIT 13.1x.
2.15. RMB Capital
Chicago-based RMB Capital’s Japan Opportunities Fund has been managed by Masakazu Hosomizu since 2013. The first public campaign was against Internet ad specialist Opt Holdings to sell its stake in Dentsu and cancel its Treasury shares. That campaign was a success.
RMB Capital’s current ongoing campaigns include:
Convincing music software company Faith to pay out a special dividend. The battle continues to this day, with the fund retaining a 10.7% stake in Faith. The company is unprofitable yet trades with a negative enterprise value due to its large cash pile.
RMB Capital’s current most high-profile campaign is its attempt to get troubled retailer Sanyo Shokai to replace its entire board or sell the company to a third party. RMB Capital has an 8.3% stake in Sanyo Shokai. Its enterprise value is also negative and has a P/B of 0.26x.
Looking at the fund’s largest positions, they do not seem like a typical activist fund but more like a conventional mutual fund. The RMB Japan Fund’s 4Q21 factsheet can be found here.
2.16. Aslead Capital
Aslead Capital is a Singapore activist investor run by former Fidelity analyst Hiroki Asano. In 2020, Aslead teamed up with the Nintendo family’s Yamauchi-No10 family office to help the management of Just Systems to fund an MBO to counter a hostile bid. The MBO was eventually withdrawn, and the hostile bid succeeded.
The only ongoing campaign that I was able to identify was in oil distributor Fuji Kosan. In April 2021, Aslead Capital made a hostile bid for the 85% of Fuji Kosan it didn’t already own. The acquisition was terminated, and the stock has dropped from past levels. Aslead remains a significant shareholder though it has reduced its position marginally. The EV/Sales is just 0.09x, so with its historical average operating margin of 1%, you’re looking at a normalised EV/EBIT multiple of 9x.
2.17. Taiyo Pacific
US investor Wilbur Ross set up Taiyo Pacific, and the chief investment officer is currently Michael King. Their campaigns tend to be quiet and collaborative. For example, in the case of Lixil, they teamed up with other hedge funds to call an EGM to replace the CEO. Taiyo Pacific was also involved in the take-private transaction of Roland in 2014, and it remains a 16% shareholder.
Last month, the Nintendo family’s Yamauchi 10 Family Office bought a majority stake in Taiyo Pacific and will be actively involved in cooperating with investee companies to create value. So we should probably expect a more significant presence in Japanese shareholder activism in the coming years.
Taiyo Pacific’s current positions also appear to be long-term holdings. For example, Taiyo Pacific has owned consumer electronics company Maxell for over five years and vacuum pump manufacturer Ulvac for over ten years.
2.18. AIM&R
Geneva-based Albert Saporta’s AIM&R (Alternative Investment Management & Research is perhaps best known for its so-far failed campaign against South Africa’s Naspers. But in Japan, Saporta is better known for its attempt to get Pasona to monetise its valuable stake in Benefit One. The campaign has gone nowhere so far. It’s unclear whether AIM&R still owns Pasona since their stake was always held under nominee accounts.
2.19. Argyle Street
Argyle Street is a Hong Kong-based hedge fund focusing on special situations across Asia. It was co-founded by veteran investor V-Nee Yeh of Value Partners-fame and who was profiled in Ronald Chan’s book The Value Investors. In Japan, Argyle Street is known for its campaign arguing that Toshiba should divest itself of non-core businesses and initiate a share buyback. Toshiba took the advice of Argyle Street and the other activist investors by selling non-core businesses and a JPY 700 billion share buyback. Another campaign that Argyle Street has been involved in is the appeal for insurance company Dai-ichi Life to sell its stock portfolio and use the proceeds to buy back stocks. Their appeal seems to have been ignored.
It’s unclear whether Argyle Street is still involved in any Japanese activist campaigns. The stocks owned by “Argyle Street Management Ltd” are listed in either Hong Kong, Australia, the UK or Singapore.
3. Five personal favourites
I’ve tried to identify a few stocks that fit the following criteria:
A business with a strong competitive advantage
Enjoying secular growth tailwinds
Inexpensive in terms of both P/E and EV/EBIT, assuming that ongoing activist campaigns are successful.
Reasonably liquid
3.1. Seven & I (3382 JP)
Seven & I (3382 JP — US$41 billion) was formed as a merger between Seven-Eleven Japan, Ito-Yokado and Denny’s Japan. Its most transformative acquisition occurred in 2005 when it acquired the ultimate 7-Eleven franchisor, Dallas-based “7-Eleven Inc”. Today, Seven & I oversee 70,000 separate 7-Eleven stores throughout the world. Domestically, its primary competitors include FamilyMart and Lawson.
In a February 2022 presentation, ValueAct recommended that Seven & I’s management team streamline the company. Almost 100% of profits come from the 7-Eleven convenience store franchise. The other assets, including general merchandise store Ito-Yokado and troubled department stores Sogo and Seibu, are barely breaking even. The company has started to listen to Value Act’s recommendations. Seven & I just announced that they planned on divesting the company for more than JPY 200 billion (US$1.7 billion).
Altogether, ValueAct believed that its measures could increase earnings per share to JPY 748 by 2026, putting the stock on a P/E ratio of 7.4x. Such an EPS would require buybacks, a margin expansion and organic growth. The assumptions appear somewhat aggressive, but they’re not implausible if Seven & I’s management takes all of ValueAct’s recommendations to heart.
3.2. Sumitomo Osaka Cement (5232 JP)
Sumitomo Osaka Cement (5232 JP — US$1.1 billion) is a cement manufacturer that’s part of the Sumitomo keiretsu. It’s the second-largest cement company in Japan after Taiheiyo Cement. Roughly 90% of revenues are from cement or related products such as aggregates. The rest of the revenues come from sales of advanced materials and optoelectronics. The exposure is 100% domestic.
Japan’s cement industry suffered after the real estate bubble of the 1980s. But since the 2010s, demand has stabilised. The industry has also consolidated to a point where pricing has become more rational.
Ever since UK activist investor Silchester took a stake in the company, it has been buying back shares aggressively, including 1 million shares in 2022. There’s plenty of value on the balance sheet. Due to Sumitomo-related cross-holdings, Sumitomo Osaka Cement has securities on the balance sheet, including Treasury shares worth US$449 million, representing 42% of the market cap.
While cement demand has been weak during COVID and profitability has been further hit by rising coal prices, normalised net margins are probably around 6%. Assuming JPY 250 billion in revenues and further share buybacks, we can expect EPS of around JPY 400, giving the stock a P/E of 8.5x vs historical levels of around 14x.
3.3. JAFCO (8595 JP)
JAFCO (8595 JP — US$1.3 billion) is Japan’s leading venture capital firm. It manages funds for third parties (64% of the total) and has its own investments as well. It’s made 4,098 investments since its founding in 1982, mostly in private tech companies. Most of the companies currently in the portfolio have names that I’ve frankly never heard of, including Wacul and i3 Systems.
What’s particularly interesting about JAFCO is that it’s a buyback machine. The total share count has dropped over 30% in the past five years. Lazard has been pushing hard for JAFCO to sell its stake in Nomura Research Institute for a long time, and the sell-down in NRI has been taking place gradually. Oasis sent another shareholder proposal to JAFCO in 2021, but it’s unclear what the contents of this proposal were.
JAFCO currently trades at a P/B of 0.66x. But from my understanding, this net asset value does not include the 2% management fees it gets from its JPY 452 billion of committed capital (JPY 9 million per year) plus additional potential performance fees. That income stream alone could probably justify the current market cap of JPY 155 billion.
For those interested in the story, look at Shared Research’s recent initiation report here.
3.4. Sun Corp
Sun Corp (6736 JP — US$406 million) produces mobile data solutions for cyber security. The key value in Sun Corp is its 52% ownership in US-listed Israeli digital intelligence platform Cellebrite, worth roughly US$621 million. Sun Corp also has net cash on its balance sheet, and I believe it’s somewhere around US$227 million if this recent Sun Corp VIC write-up is correct. The value of Sun Corp’s Cellebrite stake and its net cash position are together worth US$848 million on my numbers - almost twice as much as Sun Corp’s own market cap. And that’s before even counting the value of the Japanese business (pachinko equipment).
Cellebrite itself grows at 20% per year and trades at just 3.5x sales - a valuation multiple that’s far below its global cyber security peer group. And given that Oasis has completely replaced the board and the management team, it seems likely that corporate governance is now shareholder-friendly. Oasis has not sold a single share yet, suggesting they think the stock is still undervalued.
3.5. T. Hasegawa (4958 JP)
T. Hasegawa (4958 JP — US$884 million) is Japan’s leading fragrance & flavour specialist. It’s a peer to IFF and Givaudan - two firms that trade at significantly higher multiples. Hasegawa is an incredibly high-quality company. A few years ago, it became the only company globally able to manufacture natural vanillin without (expensive) vanilla beans. This speaks to Hasegawa’s R&D capabilities.
While top-line growth has been somewhat disappointing, there is room for optimism. First, Hasegawa acquired Mission Flavors & Fragrances in late 2020 for roughly 13x normalised earnings and 35%+ operating margins - an incredible deal. Second, Hasegawa has been buying back shares gradually, which has contributed to EPS growing 10% per year. Finally, AVI acquired shares in Hasegawa in 2021 and now owns 1.6%. I don’t know if AVI has submitted a shareholder proposal to Hasegawa’s management team. Still, I would imagine that AVI will push Hasegawa to reform, including selling its non-core holdings.
Hasegawa currently trades at 13.8x current-year P/E and 10.6x EV/EBIT. But as noted above, there could be additional levers to pull, including synergies from the 2020 acquisition of Mission and sales of non-core assets. Hasegawa’s listed securities investments on its balance sheet are also worth roughly 18% of the market cap.
4. Conclusion
It’s easy to identify Japanese stocks that trade far below global peer group multiples. But it’s more challenging to find those management teams willing to do something about the undervaluation.
Shareholder activist campaigns can help provide the catalyst to unlock value. However, they differ in skill and tactfulness. I’m most impressed by Oasis Management’s and ValueAct’s thoughtful shareholder proposals. Symphony Financial are also worth paying attention to, in my view.
Among the Japanese stocks currently being targeted in activist campaigns, Seven & I, Sumitomo Osaka Cement, JAFCO, Sun Corp, and T. Hasegawa stand out. But I’m curious to hear where you see value as well.
Brilliant write-up Michael! Exactly what I needed.
Tks a lot for the report Michael, great job!
Regarding Murakami portfolio, do you know if it FUJI OIL 2607 or 5017 ?