 |
 |
 |
 |
 |
 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Sep 2007 LONG ONLY JAPANESE EQUITIES This month we have been taking advantage of the general weakness in smaller companies. Small company indices have been notably poor performers, with the TSE second section index falling 31% from its peak in January 2006 and the Mothers Index, representing even smaller companies, falling 71% from its peak in December 2005.These performances compare to a fall of 7% peak to trough of the TOPIX index. Much of this divergent performance was justifiable. At the peak the main constituents of the smaller indices sold at ridiculously inflated valuations. However the subsequent fall has included some decent businesses and thrown up material valuation opportunities, albeit in tiny companies in which it takes time accumulating anything like a significant position. We now have five companies in the strategy with a market capitalisation of less than ¥50bn (£200m, U$400m) that now collectively represent just under 10% of net assets. During the last two months we have made material additions to these positions, taking advantage of share price weakness. We added to positions in Medikit, Morningstar Japan and the Osaka Securities Exchange. Meiko Network’s price has been reassuringly resilient and we await even lower prices to pick up more Shinwa Art Auction. We continued to be encouraged by Nintendo’s line-up of new software releases for the Nintendo Wii this autumn and winter. Not only are there iconic titles such as ‘Super Smash Bros Brawl’ and ‘Super Mario Galaxy’ that should appeal to long standing Nintendo fans but also ‘Wii Fit’, which has received ecstatic reviews, designed to appeal to new casual gamers. There is also a deeper line up of third party titles than we can remember for any Nintendo console. This all bodes well for year end sales.On a disappointing note, Takefuji’s price fell 27% over the month and the weighting in the strategy shrunk from approximately 7% to 5.5% despite us adding materially to the overall position. To remind you, Takefuji is a consumer lending company and its allure to us is the fat margin that exists between the lending rate (soon to average 16.5%) and the funding rate, say 2.5%. Of the 14% difference the company has to account for provisions, operating costs and taxes. In the past as much as 5% has been left for the company and its shareholders as retained profit, despite many changes in interest rates and the operating and cost environment. As a business it requires specialist skills, experience and scale to manage its complexities. Takefuji has all three and will in the future benefit from a higher market share and stiffer barriers to entry as a result of the proposed lowering of maximum interest rates and the recent demise of smaller participants such as Credia, that filed for corporate rehabilitation last month. Clearly the mandated fall in maximum interest rates provides for a testing time in the short term but in the end the industry will be dominated by fewer, stronger businesses. Takefuji’s other strength is its ample capital, even if the reserve provisioning related to excess interest payments from last year depleted it from an even more abundant level. Today, 35% of net loans are backed by equity. Debt funding is predominantly long-term, 96% at the end of last fiscal year. We are frustrated that we have committed capital to the business at higher prices but we did not anticipate such an acute loss of investor confidence in the industry. Also, we recognise now - and perhaps wrongly failed to appreciate before - that while the company is transitioning to a lower maximum interest rate and while the full extent of claims of overpaid interest remain uncertain, the company is vulnerable to accusations of its (and the industry’s) demise, however misinformed or tenuous. We take solace from our belief in the compelling economics of the business, the tangible 8% dividend yield and such actions as Takefuji’s recent announcement of a plan to buy back over 2% of its equity at prevailing prices. At least such tangible signs of financial strength led to a sharp recovery in the price in the last few days. Ito En, the company that owns the best green tea brand in Japan, ‘Oi Ocha’, and a long-standing holding in our strategy, issued bonus preference shares last month. The company justified this unconventional action in two ways. First it claims that a significant body of their domestic individual shareholders want more income. Knowing the need for income on the part of Japanese savers in general, we do not doubt that, but at the same time we think the yield pick-up of 0.4% to 2.1% is not enough to make much difference. Second, and we suspect the real motivation for the issue is to broaden its financing options. The new preference shares have no voting rights, a higher dividend at a 25% premium to the ordinary and convertibility to the ordinary only in the event of a change of control. We expect that the company needs to raise additional finance for its expansion plans over the next five years, and will seek to issue more preferred shares for that purpose. Our first choice would have been to issue conventional debt or alternatively fixed cost preferred shares. As it is, the new preferred shares are quasi common equity in all but name. We think a possible other reason behind the issue is to make it more difficult for potential acquirers to buy the company as, in the event of a change of control, new preference shares would dilute the ordinary. Whatever the intention, the effect has been to depress the combined market capitalisation of the company by more than 15% from its peak. At the same time the free cash flow yield on the preferred shares, given their claim to a higher dividend flow and because of the fall in their share price since issue, is now 40% higher than the ordinary. We have begun to buy the preferred to the exclusion of the ordinary. Michael Lindsell Sep 2007 15 Oct 2007 LTL 000-052-9 |
This document is intended for use by professional advisers, UK FSA authorised persons or those who meet the FSA intermediate investor classification. It is not intended for use by private individuals.
Opinions expressed whether in general or both on the performance of individual securities or funds and in a wider economic context represents the view of the fund manager at the time of preparation and may be subject to change without notice. It should not be interpreted as giving investment advice or an investment recommendation. This document is produced solely for information purposes only and may not be copied or distributed without expressed permission. Past performance is not a guide or guarantee to future performance. Investments are subject to risks and their value and income from them may go up as well as down. Investors may not get back the amount they originally invested. Issued by Lindsell Train Limited Authorised and regulated by the Financial Services Authority |
| 2008 | |||
| Jan | I Forgot More Than You'll Ever Know | Japan Eq | |
| Feb | Cash Hoarders & Debt Dependants | Japan Eq | |
| 2007 | |||
| Jan | Japan Eq | ||
| Feb | What's up in 2007 | Japan Eq | |
| Mar | Japan Eq | ||
| Apr | Japan Eq | ||
| May | Various thoughts on Japan | Japan Eq | |
| Jun | Idea Updates | Japan Eq | |
| Jul | The Bids | Japan Eq | |
| Aug | Japan Eq | ||
| Sep | Japan Eq | ||
| Oct | Japan Eq | ||
| Nov | On the Failure... | Japan Eq | |
| Nov | Is Japan a 'Buy'? | Japan Eq | |
| Dec | Japan Eq | ||
|
|||||||||||||||||