Japan’s financial condition supports company growth in times of a difficult macro environment


Fund Commentary
21 Sep 2017


In August, the Japanese market was shaken again by geopolitical problems. Poor dialogue between North Korea and the United States continued, creating a sense of insecurity for people in Japan.

Throughout the month, North Korea continued launching missiles and testing a hydrogen bomb, followed by an acceleration of UN sanctions against the country. One missile flew over Japan, indicating that North Korea’s nuclear programme is more advanced and dangerous than ever. The news affected Japanese markets negatively.

Moreover, President Trump’s ability to enforce fiscal stimulus measures is questioned by investors, further capping the market’s upside. Even though profits of Japanese companies were better than expected in the first quarter, the market’s reaction was very quiet.

Maruwa Unyu Kikan (9090) provides third-party logistic services. The Company conducts normal temperature logistics, low-temperature food distribution, pharmaceutical and medical logistics. Additionally, Maruwa also provides logistics consulting and warehouse services. In recent years, the Company received orders from Amazon Japan which it thus far rejected due to general labour shortages in Japan. However, Amazon Japan eventually asked to work together with Maruwa in an equal partnership. Maruwa will from now on increase the number of their couriers through various measures and reduce the average age of their drivers, which is currently 37 (and below the industry average of 48 years), further down to 32 years by the year 2020. As of 31st August, the Company traded at a P/E of 24x, a PBR of 4.0x, and a ROE of 18.2%.

The team continues to look for emerging growth companies and IPOs in the domestic market. The number of IPOs in Japan peaked in 2015 with a total of 98, declining slightly to 86 in 2016 and accounting for 41 in the first half of 2017. Although the number of IPOs is so far lower than in the previous year, there are still a number of potential growth companies in the market.

The Investment Adviser sees Japan’s healthy financial condition among the G7 countries as a support for company growth in times of a difficult macro environment. The strong leadership of Prime Minister Abe also assists companies to expand domestically and internationally. The team will maintain the current portfolio for the time being. The Investment Adviser will further continue to carefully watch the development of tensions between the United States and North Korea as well as UN sanctions, which may in the future be coordinated with Russia and China.

The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 12/09/17 and are based on internal research and modelling.