By Richard Kaye
Japan has a wealth of undiscovered excellent companies. At Comgest, our unconstrained global fund retains a 30% or so weight in Japanese equities, not out of any conviction about the overall economy or policy direction of Japan, but rather to reflect the opportunity in individual stock ideas.
Many Japan growth stories are predicated on a rationalisation of inefficient domestic industries.
Gulliver, Japan’s largest user car dealer and the world’s number two, is rationalising the fragmented user car market by introducing nationwide supply, standardised pricing, customer-tailored category marketing, and comprehensive guarantee packages. Gulliver has a plan roughly to double its store network, while shifting its focus from wholesale to retail; this is working, and its recent quarters have delivered operating profit growth well in excess of 50%.
Hoshizaki is a doing a similar activity in commercial kitchen equipment. Both the kitchen equipment industry and the restaurant market are highly balkanised, and Hoshizaki is the only supplier with a nationwide network for coordinated systematic marketing and maintenance. Hoshizaki, in defiance of lackluster domestic growth data, has posted consistently high single-digit growth over several years.
Hikari Tsushin is becoming a universal supplier of telecom and office equipment to Japanese SMEs, again an unbelievably fragmented and under-marketed industry. Hikari’s customer lists are a unique asset which no competitor has even been able to approach. Hikari has delivered nearly 15% net profit growth over the last five years, and we see that trend as sustainable.
Sugi Holdings is becoming the Boots or Walgreens of Japan, as a rationaliser in the pharmacy market. Japanese pharmacies are typically mom-and-pops, and a great number of them will soon need a successor to pursue the business. Sugi has stepped into this market as a uniform provider with nationwide procurement power and brand. Nihon M&A Center is a slightly similarly positioned company, as the principal adviser to success-less SMEs in Japan, especially in the pharmacy industry.
Even outside the domestic sphere, Japan has a wealth of global technology leaders with hard to replicate technology and exposure to growth industries. The most attractive of these are typically not household names like Sony or Toyota, but rather champions in a specific field.
Sysmex, one of Comgest’s largest holdings and performance attributors, is the world leader in hematology equipment thanks to its versatility and breadth of possible tests, with diagnostic medical needs driving its growth in all geographies.
Hamamatsu Photonics is the near-unique supplier globally, since all rivals gave up trying to emulate Hamamatsu’s quality, of the optical components used in CT scans, PET scans, dental X-ray machinery, robot positioning sensors and laser dicing of semiconductor wafers.
Murata, which makes some 10% of the iPhone, has for decades outpaced technology rivals in several electronic component areas thanks to its close design relationship with Apple, its integration of several different applications and its unfailing quality and production advantage.
Putting it all in context, Japan’s recent economic history has facilitated the emergence of companies with global franchises or barriers to entry around hard to replicate businesses, many of which are positioned to benefit from structural changes which will sustain long-term growth.
In a dirigiste, high corporate tax, economy it has always been the iconoclasts who led innovation and built ingenious business models as testimony to free enterprise triumphing over bureaucratic diktat. Thus it was that Toyota, the upstart manufacturer shunned by the big lenders, eclipsed ‘Japan Production Works’ whose Japanese name is Nissan, Sony outpaced Hitachi, and SoftBank became a larger company than DoCoMo. The companies mentioned earlier are the new innovators who have pioneered in ultra-competitive markets and won.
Research in relatively unknown companies has yielded important relative performance for our portfolio in recent years.
Richard Kaye is portfolio manager of the Comgest Growth Japan fund
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