That stocks are cheap in Japan is no secret. Part of the reason is probably that it’s hard to get exited about a stock market that has been going down for decades. Even though 2013 was a pretty decent year for the Nikkei 225 the index is currently trading at the same level as in 1986. But the bigger issue is that corporate governance is a major problem in Japan, and it’s also the reason why I have never been too enthusiastic about jumping on the Japan bandwagon. As someone mentioned on Twitter this week:
If something is undervalued for good reason, then it isn’t undervalued.
— Hardcore Value (@HardcoreValue) 7 augustus 2014
This is certainly true to some extent in Japan. It’s not a coincidence that a majority of Japanese companies have a very large cash balance: it’s the result of a country wide culture of poor capital allocation. So buying cash at a discount with a small operating business attached never sounded very attractive to me. You should expect that the company continues to sit on the cash balance for years or even decades while earning shareholders almost nothing in the mean time. I expect that eventually corporate capital allocation will improve in Japan, but that could be an event that happens outside my investment horizon.
Luckily not every company in Japan is a stagnant business with poor returns on equity, and some are just too cheap to ignore. I will let the table below do the talking:
As is visible both companies managed to generate good returns on equity the past 5 years despite the drag of a medium/large cash balance. I expect that these companies will be able to grow intrinsic value meaningfully in the years to come, and hopefully that will be reflected in the stock price and/or higher dividends. Fujimak has a good history of growing it’s dividend while it has also been investing a lot of money in capex the past years. Normally I would be a bit worried when I see a lot capex, but in the case of a Japanese company I actually think it’s a pretty good sign: almost anything is better than idle cash…
Since both companies are located in Japan and I don’t speak a word Japanese my analysis of both companies is superficial at best and purely based on the financial statements of the past 5 years. It is totally possible I’m missing something important. That’s why I initiated two small positions, and I might add a couple of other names in the future to create a small basket of similar priced Japanese stocks to diversify my risk.
- Bovine Bear blog on Fujimak
- Translated Fujimak AR
- CoBF threads on Fujimak & Nansin
Author is long Fujimak and Nansin
Thanks for the analysis. How did you translate the AR? I use google translate and http://www.onlinedoctranslator.com — both are far from perfect
The AR linked above (didn’t upload that one myself) has also been translated with Google Translate. It’s not perfect, but you get something that is understandable.
Nice! What broker do you use? And what’s the comission? Also, do you know of the rate regarding witholding tax on dividends?
ps. I use IB
Cheap as chips these stocks. Do you have any idea how I can circumvent the page limit on google translate when translating large pdfs? That would help a great deal when looking at cheap japanese stocks. I just dont feel complete without fully reading an annual report before investing.
Use EDINET to download the AR in XBRL format and you get a zip file with a dozen html-pages that you can open in Google Chrome to translate it automatically.
Other option is to use a tool to split a pdf file in multiple pdf files, for example: http://www.splitpdf.com/
Thank you for sharing this information about Fujimak.
Did anyone notice that there are two quarters in a row of heavy losses. There appears to be a problem with the pension funds.
I am not sure if this will change much about the overall fundamentals at Fujimak.
Today, I received a dividend payment of 30 yen per share, which is more than previously announced (http://www.reuters.com/finance/stocks/5965.T/key-developments/article/3198815).
Does anyone know, why the dividend has been raised in the annual shareholder meeting?
I haven’t received a dividend yet, and I have a 20 yen per share dividend accrual. Payment date is tomorrow I think, so we’ll see if they did indeed raise the dividend.