May 31, 2019 / 4:27 AM / 3 months ago

Breakingviews - Hedge funds see honey in Japan’s value traps

An employee of a foreign exchange trading company works near national flags of the U.S. and Japan in Tokyo, Japan November 7, 2018. REUTERS/Toru Hanai

HONG KONG (Reuters Breakingviews) - Hedge funds see honey in Japan’s value traps. Companies from the Land of the Rising Sun dominated pitches at Hong Kong’s Sohn Conference on Thursday. They pointed to signs of unjustified panic in the country’s equities slump, creating opportunities to buy low. But even optimists highlighted the persistent cash hoarding and slack governance that have long scared investors away.

   Prime Minister Shinzo Abe’s promises of reform - efforts to push local firms to boost profitability, put their balance sheets to work, and be more responsive to shareholders - have tantalised foreign funds, including activists who took positions in troubled giants like Toshiba.

    But their interest has not been widely shared. Masahiko Yamaguchi of York Capital Management pointed out that foreign holdings of Japanese shares have steadily fallen in recent years to slightly over 5 trillion yen ($46 billion), a quarter of what they held in 2015. With lacklustre economic performance weighing, the Topix index has shed 20 percent since the beginning of 2018. On average, Japanese firms trade at 12 times forward earnings, near a historic low, and down from 18 times four years ago.

    That’s appealing to counterintuitive value investors. At the annual gathering, managers pitched unloved shares in companies like JR Kyushu, a staid railway company with an under-appreciated real estate business; beer-dispensing champion Hoshizaki, beat up by shareholders after a sales fraud scandal; and old-school refiners Idemitsu and JXTG Holdings.

    The presenters blamed much of the battering on poor communication and worse management. Aaron Stern of Fir Tree Partners pointed out that JR Kyushu, which makes most of its profit from property, barely describes its portfolio, and holds a large cash pile despite negative interest rates. Similar problems are visible at the refiners and Hoshizaki. Casio, meanwhile, was proposed by Interlink/Swiss Asia as a short play, thanks to complacent bosses who failed to keep up with developments in the watch industry.

   The prospect of quick double-digit gains dangled by the speakers may intrigue those with risk appetite. But plenty of investment officers have been deceived by false Japanese dawns. Arguing with market forces is as dangerous as ever.

Breakingviews

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