Active Investing in Japan

In response to an article I published yesterday, “Goldman forecasts recovery in Japanese stocks from mid-2009″, which was carried on Seeking Alpha, a reader asked for some “big cap” stocks trading at/near book value, among other things. Following is a quick list of select stocks with ADRs.

Trading below book value

FUJI FILM (4901) (FUJI) — 0.89x book; 1.04% dividend yield; at the bottom of its 52-wk trading range
Nissan (7201) (NSANY) — 0.95x; 4.9%; at bottom of 52wk range
Wacoal (3591) (WACLY) — 0.97x; 2.0%; near bottom of 52wk range
NTT (9432) (NTT) — 0.95x; 1.7%; near top of 52wk range
ORIX (8591) (IX) — 0.92x; 2.0%; at bottom of 52wk range

Stocks trading “near” book value

Mitsubishi UFJ (8306) (MTU) — 1.12x book; 1.7% dividend yield
TDK (6762) (TDK) — 1.12x; 2.1%
Kyocera (6971) (KYO) — 1.17x; 1.3%
Sony (6758) (SNE) — 1.21x; 0.6%
Hitachi (6501) (HIT) — 1.23x; 0.75%
Matsushita (6752) (MC) — 1.24x; 1.6%
Toyota (7203) (TM) — 1.27x; 2.9%

*Above stock information applicable to ordinary shares and based on Aug. 27, 2008 market close in Japan. Source: Yahoo! Finance Japan.

FD: No position in any stocks mentioned.

In a report issued today and covered by Reuters (see below for clip and link to Japanese original), Goldman Sachs says it sees a possible full recovery for Japanese stocks from mid-2009. On one hand, GS warns that a further slowdown in the global economy represents further downside risk for Japanese stocks given the nation’s high reliance on exports. On the other hand, corporate profits are seen recovering from late 2009 with fiscal year 2010 profits back to positive y-o-y growth. For FY March ‘09, GS now forecasts profits to fall 12.0%, compared to 10.2% previously. For FY ‘10, GS sees profits up 6.0%, but that’s less than the 12.5% it previously estimated.

GS is not alone in its earlier assessments of Japan, noting the nation’s comparatively better ability to cope with high oil prices; however, the fact remains that Japan still imports a significant volume of oil to support its energy producing needs. In addition, GS has previously cited the attractive valuation of Japanese stocks, with some 60% or so trading below book value and dividend yields of 1.9% exceeding the 10-year JGB of 1.5%. Although it’s true that Japanese stocks have outperformed in recent months, it’s also true that Japanese stocks are down around 25% across the board since a year ago. Stocks are down even more compared to recent years’ highs, which never touched 20,000, in the case of the N225.

So, while the perception of attractive value exists in Japan, the reality of realizing or unlocking this value remains elusive.

clipped from jp.reuters.com 日本株、本格的な上昇は09年中盤以降の可能性＝ＧＳ証券

Not a bad way to start the week, but the 1.7% N225 (stock average; futures +1.6%) rally to 12,878 (and 12,870) fell short of the 12,920 N225 futures close Friday in Chicago. Both equities and futures met resistance at 12,950 and trading activity (volume and turnover) for the broader TOPIX was anemic. As expected, JP financial press cites investors’ concerns over the U.S. economy and thus a lot of money on the sidelines waiting to see how the latest economic data reads. See below for headline clip and link to brief market wrap in Japanese.

clipped from biz.yahoo.co.jp 出来高、売買代金が連日で今年最低、日経平均は高値もみ合いに２１２円高＝東京株式・２５日後場

Below are some additional thoughts on the latest MUFG-UB offer (these comments were originally posted in response to an article published by Reuters; edited for style/formatting).

UB’s (UB: 0.00 N/A) Special Committee is very opportunistic and knows what it is doing. It has effectively taken its minority stake hostage vis a vis its board representation and a long-standing one at that for the Chief of the Committee. At the end of the day, there is absolutely no “reputation risk” as MUFG (MTU: 5.32 +2.50%) fears. Why? Nobody on Wall Street cares!

So, is MUFG overpaying? Of course it is. Is it a good deal — yes, great for UBOC in this market. Will MUFG pay up even further as some Tokyo analysts suggest? Probably not. If so, it is even more concerning why there is such urgency on the part of MUFG. Meantime MUFG shareholders suffer and shareholder value is sacrificed over the desire to expand overseas (note it’s great to seek overseas expansion, but it has to be done at the right cost).

Bottom line, this is a so-called “safe” deal for a Japanese mega-bank. Union Bank’s SC knows this and is milking it. The offer in no way signals a bottom for banks’ woes. It also does not necessarily signal a forthcoming buying spree by foreign banks of their overseas subsidiaries. However, it would make sense for opportunistic HFs and other traders to buy shares and hold-out for more! See: MUFG Now Really Overpaying for Union Bank, Oh Well (Shikataganai).

$58 a share — no! $63 a share — no! $73 a share — oh, sure, might as well, especially in this market. Hats off to Mr. Farman and company for helping the little guys at Union Bank (UB: 0.00 N/A) get paid. Still scratching your head about what Mitsubishi UFJ (MTU: 5.32 +2.50%) is thinking? Keep scratching. For more background see both the FT clip below and last week’s “Mitsubishi UFJ Overpaying for UnionBanCal.” As stated then, this is a “safe” acquisition, but one that is even more dubious in terms of shareholder value. Shikataganai (MUFG shareholders just sigh and shrug their shoulders … accept the fact that this is the cost of doing (more) business in the U.S. even in today’s market climate).

FD: No position in any companies mentioned. Gladly with regards to MTU and unfortunately in the case of UB.

clipped from us.ft.com MUFG clinches US bank with higher offer The deal, which values UNBC at 2.3 times book value, is considered relatively expensive by analysts. However, MUFG has a track record managing UNBC and knows the San Francisco bank well, making the acquisition a relatively safe bet, according to one analyst. “The Special Committee of independent directors is very pleased to have negotiated a transaction with BTMU that we believe is highly attractive and in the best interests of the minority shareholders,” Richard Farman, chairman of the special committee, said.

This is not a bad deal, at all, for existing (non-MUFG) UnionBanCal (UB: 0.00 N/A) shareholders: a decent premium pushing the stock to a new 52wk high, amidst ongoing market woes, and not to mention UB’s last quote of $65+, which is above the $63 bid by Mitsubishi UFJ Financial Group (MTU: 5.32 +2.50%). Now, as for MUFG shareholders, you have to scratch your head and wonder if the remaining stake really could not have been acquired at a cheaper price — UB traded as low as $35 a month ago! Furthermore, MUFG seems to have implied it is willing to pay even higher to complete the deal, thus the >$63 trading.

If anything, this is a safe acquisition for MUFG, but not necessarily one to add much shareholder value, if any, at least over the next few years. What it does allow for, however, is further acquisitions. What’s next? How about neighbor Santa Clara-based SVB Financial Group (SIVB: 46.77 +1.23%)? With a $1.9B market cap, it is not insignificant, and it has equally as attractive margins. Unfortunately again for MUFG shareholders, SIVB is not far off 52wk and all-time levels and there would certainly have to be some premium beyond that considering the heavy institutional ownership.
*See the FT clip below. FD: No stakes in any companies mentioned. continue reading…

Shares of Credit Saison (8253) jumped 11%, while Orix (IX: 40.66 +2.55%) (8591) rose a muted 3%, on the report of merger talks. (See Reuters clip below). HOWEVER, shares of both have fallen sharply over the past year (there’s even more red over the past two years) compelling one to wonder why an alliance wasn’t formed earlier. Ultimately, Orix shareholders will be rewarded (no details yet if cash/stock merger), but a portion of existing owners of Saison will take a hit (which begs the question of whether Mizuho (MFG: 4.27 +1.43%) (8411) will sell its stake). Orix is a great company, but there’s seemingly no rush to get in given broader market pressures.

clipped from www.reuters.com Japan’s Orix, Credit Saison in merger talks TOKYO (Reuters) – Orix Corp, Japan’s largest leasing company, and credit card firm Credit Saison are in merger talks, financial sources said on Tuesday, in a further sign of consolidation in the country’s hard-pressed consumer lending sector. Combining the two would create a finance group with $106 billion in assets as Japan’s financial sector battles tighter regulations in consumer lending and the global credit crunch, even as a slowing economy has hurt Orix’s core lease business.

Mixed signals, as always, from Japan. Activist investors are making some ground, most notably in Steel Partners v. Aderans (8170). Still, the climate for M&A and shareholder value unlocking investors is not made any easier by more expansive cross-shareholdings. A more concerted effort is needed by METI, FSA, TSE and the business lobbies. (See Reuters 7/29: Activist investors face long haul in Japan).

clipped from customers.reuters.com