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Oct 2006
LONG ONLY JAPANESE EQUITIES
Takefuji experienced another weak month of
performance.
The shares fell by 22% in October in response to
news that the new laws introduced to reduce the
maximum interest rates charged by consumer finance
companies, such as Takefuji, proposed a lower rate
than previously indicated and that Takefuji and other
consumer finance companies were required to make
higher than anticipated provisions against the 'excess
interest' on existing higher rate loans, causing interim
losses and a fall in book value. We had thought that
proposed changes would be less draconian as
politicians would recognize that consumers' demand
for such loans was as much a basis for growth in the
industry as the promotional effort by the companies
to advance their business. Also, restricting interest
rates and the size of loans by statute not only
withdraws credit but may encourage borrowers to
seek the funds elsewhere from far less reputable
sources, thereby negating the moral purpose of the
change in legislation in the first place. Despite such
obvious woes and our misjudgement of the political
agenda, we remain attracted by the value of the
shares for a number of reasons. First, the company is
currently valued at a discount to book value of
almost 30%. Next, it has ample capital, with loans
backed 60% by equity, to cope with the increased
provisions that should accompany the contraction of
its existing business. Also, with the announcement of
its interim results the company maintained its
dividend, currently 5.4%, (we thought it might be
cut), a sign, we think, of the true capital strength of
the company in such torrid times. Finally, despite the
industry inheriting, though its past practices, a
certain distasteful notoriety, Takefuji, for good or for
ill, operates one of the most widespread and
recognised consumer franchises in Japan. Still the
proposed changes will doubtless impact both the
extent and likely profitably of its future business but
we think future cash flow returns should remain
better than most other businesses in Japan even if
they may be lower than they once were.
Another poor performer was Aderans which fell 11%
after disappointing interim results. The company
makes bespoke wigs for both men and women.
Originally men formed the largest customer base as
loss of hair in Japan had a social stigma which
Aderans cleverly exploited. However such concerns
are less today than before so the company has relied
increasingly on the thinning pate of older women to
grow its business. New customers almost always
become repeat customers, for obvious reasons, giving
the company a particularly durable business dynamic.
However, growth is dependant on new customers
that have been difficult to attract because of
competition in the women's market, where their
virtual monopoly has fallen to an 80% market share,
and the difficulty of persuading men of the necessity
of wearing wigs in the modern age. Offsetting this,
the company's overseas business that concentrates
on hair transplant and hair care clinics has moved
into profits. While the company addresses the
problems in the women's market it has at least
committed to return 100% of free cash flow to
shareholders in dividends and/or share buybacks,
making the shares on a dividend yield of 2.0% and an
enterprise value to sales ratio of just 1x good value
with little potential downside risk in our judgement.
On a brighter note Meiko Network announced results
in line with expectations but increased its dividend by
20%, the 8th consecutive year of increase, a 40%
annualised rate over that period. The shares
responded with a 12% monthly increase. Also,
Astellas, following on from the significant changes to
its capital allocation policy last month, rose a further
11% in October.
Michael Lindsell
Nov 2006
15 Nov 2006 LTL 000-041-1
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