Japan - improving governance, emerging brands

Nicholas Price, Portfolio Manager, Fidelity Japan Trust PLC
11 October 2018

Growth in neighbouring countries benefiting economy

One of the key developments we have seen on-the-ground in Japan over recent times has been a change in corporate mind-sets and a greater focus on creating value for minority shareholders. This has been brought about by an integrated set of policies designed to encourage greater capital efficiency and return on equity from Japanese companies.

The Stewardship Code, Corporate Governance Code and return on equity (ROE)-aware benchmarks have left traditionally conservative managements with no place to hide. There is now seemingly a concerted commitment to change and it is notable that Japanese companies are delivering record levels of cash to shareholders.

10 years ago, only a dozen Japanese firms released integrated reports explaining their plans to increase long-term corporate value. That figure jumped to 341 last year, according to data from KPMG Japan. Only 45% of companies listed on the first section of the Tokyo Stock Exchange appointed outside directors in 2008. That has since grown to 99.7%.

Clearly, taken together this is all very good news for investors in Japan as over time we should expect increasing return on equity to be reflected in higher share prices for those companies, particularly as valuations remain very attractive relative to other major developed equity markets.

The gateway to Asia

The focus on governance and more value accretive use of balance sheets is slowly becoming more widely recognised, but what is perhaps less well appreciated is the extent to which Japan is benefitting from the growth in neighbouring economies across emerging Asia.

Indeed, we have seen Japanese companies with strong brands nationally expand across the rest of the region. The rise in inbound tourism, which has grown by around 15%-20% in recent times, means that Asian - and particularly Chinese - visitors to Japan are increasingly aware of the best local brands, so when these companies go looking for new business in Asia they enjoy immediate recognition from consumers.

This backdrop is creating some interesting investment opportunities among selected companies. For example, Ryohin Keikaku, operator of the ‘no brand quality goods’ label Muji, is a company I have covered for over 20 years and it has subsequently expanded domestically and overseas. It did not do so well when it first went to the UK, but has since moved into Hong Kong, Singapore and China, accelerating its growth with the help of good merchandising. It’s been a key holding in the portfolio and a solid performer for me.

Elsewhere, Yamaha, the maker of musical instruments, is a good example of a company that is expanding and growing its presence into the Chinese market. It has a strong brand image and its management is raising margins by 1% a year. The Chinese market for musical instruments is still quite a lot smaller than that of the US and Yamaha’s large market share gives it a strong platform for growing along with the market. It is well-positioned to benefit as China’s middle class grows and the demand for luxury goods increases.

I also own Makita, which is one of the largest power tool manufacturers in the world. As lithium ion battery technology improves, the company has continuous opportunities to keep on adding value and achieving steady increases in its pricing. It is currently expanding into the gardening market and working on offering more environmentally-friendly tools with greater battery capacity, a move that could increase Makita’s market penetration by 50-60% over the medium-term.

Overlooked smaller companies

While these stocks are relatively large and well-known names, I also maintain significant exposure to smaller and medium-sized companies. The abovementioned focus on shareholder returns is often most pronounced among such companies as management incentives tend to be directly aligned with those of minority shareholders. Moreover, with almost half of the companies in the small and mid-cap space not covered by sell-side analysts, there remains a significant opportunity to identify overlooked potential through bottom-up company research.


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