In 2013 I bought my first couple of Japanese net-nets and expanded the basket the basket with a few more positions in 2014. In this post I’ll list my current Japanese holdings.

There have been a few developments that have led me to buy a few more Japanese positions since the last update in 2014. I will first discuss these developments briefly.

Abe reforms

See: Japan’s Return-on-Equity Revolution. In 2014 the Japanese government has introduced return on equity targets for companies. Also, proxy advisor Institutional Shareholder Services now recommends voting against corporate managements that have not achieved a 5% average ROE over the last five years.

Many people will blow these developments off, because these ROE targets are still very modest compared to US or European standards. But I think these are steps in the right direction that were practically unthinkable just three or four years ago.

Increasing investor interest

Take for example this excerpt from the 2015 FRMO Corp. (run by Murray Stahl and Steven Bregman) annual meeting (bold text mine):

“In Japan, in the last couple of months, not the law, but the attitude of the government has changed about companies that sit on big piles of cash with necessarily very low returns on equity. The government is pressuring companies to manifest at least a 5%, and maybe an 8%, return on equity and doing something with the cash. So, there are actually net-nets there. We’re exploring that possibility. We’d like to create a fund to invest in the net-nets. To find the net-nets in Japan, you need to be conversant in the Japanese language, because they have no annual reports in English. Happily, we have two Japanese-speaking analysts, and we are actually in the process of compiling a list of companies. We’d love to raise a fund to invest in net- nets. There are other net-nets in the world, but the home of net-nets in the way we think of net-nets is a company with a lot of cash, minimal if any liabilities, and a business that’s actually profitable. That’s the place they’re at. Hopefully we can manage to do something there. And if anybody wants to invest with us, we’d love to talk to them.”

Large market inefficiencies

I posted about the takeover bid for one of my holdings (Hakuseisha) last month. The price offered was a 140% premium over the previous closing price. This was a significant development for me, not just because it was a nice gain for a company in my portfolio, but more because I believe it confirmed I am fishing in the right pond. Hakuseisha is one of these companies with a 1,000 share lot that requires a relatively large minimum investment. I believe this creates large discounts to intrinsic value.

Also, the trading in Hakuseisha in the days after the takeover offer showed that some investors were not very informed or sophisticated. There were daily price limits in place that capped the maximum gain per day of Hakuseisha. A few investors were not aware of this and sold their shares for as little as ¥415, ¥495 and ¥575 when the takeover offer was ¥800. A few days later the price had moved up to ¥798. Even though only 9 lots traded at these much lower prices, it does provide an indication that this odd corner of the market is not very efficient.

Relatively expensive US markets

Two or three years ago I think I had around 40% of my portfolio in US stocks. Today this is just below 30%. I’m not finding a lot of opportunities in the US. Recently I sold a fairly large position in Markel and reinvested a portion of the proceeds in Berkshire (which I sold a year ago, but now looks more attractive in an absolute sense and also relative to Markel) and two OTC listed stocks, the rest I invested in Japan.

Also the strengthening dollar vs the Euro has been a tailwind for my portfolio in 2014 and 2015, but that is not an achievement and will not continue year after year. I think I should be more selective about investing in the US at this point in time. In general you should tend to invest where the news is bad and it has not been bad in the US. There is more negative sentiment in Australia, Japan and some other Asian markets. I’m also finding more potential investments in these markets which is not surprising.

Current basket of Japanese stocks

Sorted by ticker (low to high). Holdings that have not been discussed before in earlier posts are printed in bold text.

Okayama Paper Industries (JP:3892), share price: ¥472 Market cap: ¥2.7bn Manufacture and sale of paper boards and decorative paper boards 0.47x NCAV (¥5.7bn including long-term investments), 0.33x BV Consistent revenue and profitability. Reasonable free cash flow. Small buybacks in fisc. 2012, 2013 and 2015. Dividend: 2.5%. Cash & investments cover total liabilities. 1,000 share lot

Isamu Paint (JP:4624), share price: ¥550 Market cap: ¥5.2bn Manufacture and sale of paints, as well as the purchase and sale of related products 0.57x NCAV (¥9.1bn), 0.41x BV Good free cash flow yield, low capex. Lots of cash and investments, almost no debt. Small buyback in 2013 and 2014. Dividend: 1.8%. 1,000 share lot

Natoco (JP:4627) , share price: ¥947 Market cap: ¥7.1bn Manufacture of resin coatings 0.77x NCAV (¥9.2bn), 0.45x BV Relatively large buyback in fisc. 2014. Around ¥6bn of PP&E and therefore substantial capex, but free cash flow positive. Steadily growing book value. Dividend: 2.5%. 100 share lot

, share price: ¥947 Daiken (JP:5900), share price: ¥626 Market cap: ¥3.7bn Manufacturing and sale of architectural hardware, exterior building materials and other exterior products 0.61x NCAV (¥6.1bn), 0.33x BV Solid free cash flow and growth in book value. No buybacks. Dividend: 2.2%. 100 share lot. Daiken used to have a 1,000 share lot, but it looks like they trade in 100 share lots since November 2015. That could make shares more attractive to small investors.

Fujimak Corp (JP:5965) , share price: ¥799 Market cap: ¥5.2bn Manufacture, sale, maintenance and repair of kitchen equipment 1.58x NCAV (¥3.3bn), 0.41x BV Good growth in book value. P/E: 7.5. Heavy capex in fisc. 2015. Dividend: 2.5%. 100 share lot.

, share price: ¥799 SNT Corp (JP:6319) , share price: ¥650 Market cap: ¥17.0bn Manufacturer of forged products. 1.04x NCAV (¥16.4bn), 0.59x BV Very cash rich company. Good free cash flow. No meaningful buybacks in the last few years. Dividend: 2.2%. 100 share lot.

, share price: ¥650 Kikusui Electronics Corp (JP:6912) , share price: ¥665 Market cap: ¥5.6bn Manufacture and sale of various electronic application equipment. 0.98x NCAV (¥5.7bn), 0.64x BV Consistent revenue and free cash flow. It has a US based subsidiary. Nice dividend of 3.3% and small share buybacks every year. 100 share lot.

, share price: ¥665 Car Mate (JP:7297) , share price: ¥659 Market cap: ¥5.0bn Manufacture and sale of automobile items mainly. 0.79x NCAV (¥6.3bn), 0.46x BV Very small position (reinvested dividends). Business is showing losses in the last couple of quarters. I would not buy this today considering the alternatives. Dividend: 3.0%. 100 share lot.

, share price: ¥659 Nansin (JP:7399) , share price: ¥403 Market cap: ¥3.1bn Manufacture and sale of casters and dollies. 0.89x NCAV (¥3.5bn), 0.36x BV Low capex, perhaps unsustainable given the much higher depreciation charges. Debt reduced from ¥3.3bn in 2011 to ¥0.5bn today. Perhaps greater potential for future dividend increases or buybacks? Dividend: 2.5%. 1,000 share lot.

, share price: ¥403 Eidai Kako (JP:7877), share price: ¥300 Market cap: ¥1.9bn Manufacture and sale of various synthetic resin molded products. 0.53x NCAV (¥3.6bn), 0.30x BV Pretty consistent performer in terms of revenue, profits and cash flow, but not great in any department. Main attraction is the massive discount to net current asset value and book value. Probably caused by the 1,000 share lot and the fact that this is a very small company (market cap around $15m USD). Dividend: 2.7%. 1,000 share lot.

King Co (JP:8118) , share price: ¥424 Market cap: ¥8.2bn The Apparel division is involved in the wholesale of ladies apparels, fashion goods, apparel accessories, promotion materials, the planning, sale, logistics and clerical work agency businesses, as well as the sale of apparel store promotion items. The Textile segment is involved in the wholesale of textile products, through its subsidiary. 0.88x NCAV (¥9.3bn), 0.42x BV Very small position (reinvested dividends), but perhaps deserving of a normal position in the basket. I’m not really a fan of investing in anything related to fashion though. Strong free cash flow, a good dividend and some share buybacks in recent years. Dividend: 3.5%. 100 share lot.

, share price: ¥424 Denkyosha (JP:8144), share price: ¥643 Market cap: ¥8.1bn Wholesale of electrical products and household products. 0.63x NCAV (¥9.3bn), 0.34x BV A lot of cash, investments and real estate here. Business did produce a small operating loss in fiscal 2015. Unfortunately no meaningful buybacks. Dividend: 3.1%. 1,000 share lot.

Uehara Sei Shoji (JP:8148) , share price: ¥549 Market cap: ¥9.3bn The operation of industrial energy-related and construction material-related businesses. 0.38x NCAV (¥24.4bn), 0.31x BV What can I say? I basically stole this one from the blog Deep Value Ideas. Besides the extreme discounts to NCAV and BV, the company is regularly repurchasing shares. That’s why the company now holds a massive number of shares (7.3 million) in treasury. Dividend: 1.6%. 1,000 share lot.

, share price: ¥549

Disclosure: long the whole damn list. Long Berkshire Hathaway. No position in Hakuseisha, Markel or FRMO Corp.