"Japan is cheap, but " - Senior Fund Manager
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JOHCM Japan Fund / JOHCM
Japan Dividend Growth Fund
“Japan is cheap, but…”
Ruth Nash Scott McGlashan
Senior Fund Manager Senior Fund Manager
J O Hambro Capital Management – Annual UK Investor Day 2019 FOR PROFESSIONAL INVESTORS ONLY
Japan is cheap
Price-to-book ratios compared
4.25
3.75
3.25
2.75
2.25
1.75
1.25
0.75
Jan 95 Nov 96 Oct 98 Sep 00 Jul 02 Jun 04 May 06 Mar 08 Feb 10 Jan 12 Nov 13 Oct 15 Sep 17 Jul 19
MSCI Japan PBR MSCI World PBR
Source: Bloomberg.
2
…but the cheap companies are all low quality
Shinetsu Chemical
Operating profit margin (%)
30
• Has increased earnings per
share for nine consecutive
25 years
• Global number one in
semiconductor silicon, PVC and
20
advanced photomask blanks
• No debt
15 • 14x earnings
• 12% ROE
10 • 1.7x book value
5
Source: Bloomberg as at 31 March 2019.
4
Denso
Denso revenues (billion yen)
6,000
5,000
• Global leader in electrification,
4,000
automated driving and
connected cars
3,000 • No debt
• 11.6x earnings
2,000
• 0.9x book
• 3.2% yield
1,000
0
Source: Bloomberg as at 31 March 2019.
5
…there are no global leaders
Toyota Industries
Toyota Industries operating profits (billion yen)
160
140
120
100 • Global number one in forklift
trucks
80
60 • Global leader in car air-
conditioning compressors
40
20
• Trades at less than the value
of its shareholdings in other
0
Toyota Group companies
-20
-40
Materials handling equipment Textile machinery Automobile
Source: Bloomberg as at 31 March 2019.
7
Toyota Industries
Toyota Industries market cap (billion yen)
3,000
2,500
2,000
1,500
1,000
500
0
-500
-1,000
2007 Q1
2007 Q4
2008 Q1
2008 Q4
2009 Q1
2009 Q4
2010 Q1
2010 Q4
2011 Q1
2011 Q4
2012 Q1
2012 Q4
2013 Q1
2013 Q4
2014 Q1
2014 Q4
2015 Q1
2015 Q4
2016 Q1
2016 Q4
2017 Q1
2017 Q4
2018 Q1
2018 Q4
2019 Q1
Q2
Q3
Q2
Q3
Q2
Q3
Q2
Q3
Q2
Q3
Q2
Q3
Q2
Q3
Q2
Q3
Q2
Q3
Q2
Q3
Q2
Q3
Q2
Q3
Q2
Value of Toyota shareholding Value of Denso shareholding Value of Toyota Tsusho shareholding Market cap after adjusting for value of shareholdings
Source: Bloomberg as at 30 June 2019.
8
Minebea Mitsumi
Minebea Mitsumi EPS
175
125
• Global number one in
miniature bearings
75
• Global number one in rod end
25
bearings for aircraft
• Global number one in pivot
-25 assemblies for HDDs
• 11x earnings
-75
• 16% ROE
-125
-175
Mar 92 Mar 95 Mar 98 Mar 01 Mar 04 Mar 07 Mar 10 Mar 13 Mar 16 Mar 19
Source: Bloomberg as at 31 March 2019.
9
…there is no innovation
Corporate Japan leads the world
Derwent Top 100 Global Innovators 2018
45
40
35
30
Number of companies
25
20
15
10
5
0
Source: Derwent™ /Clarivate Analytics as at December 2018.
11Mitsubishi Chemical
• Started clinical trials for Muse Cell products using regenerative medicine to treat myocardial
infarction (heart attack) and cerebral infarction (stroke)
• Established a manufacturing facility for Muse Cell products
• Aiming for approval in FY2021
FY2017 FY2018 FY2019 FY2020 FY2021 FY2025
Clinical trials Application Approval Launch
Aiming to acquire approval as quickly
• Reduced exposure to commodity chemicals
as possible through parallel
development of applications for several
Cell Processing
Centre in the Life
indications in addition to myocardial
infarction and cerebral infarction
• 6.7x earnings
Innovation Centre Characteristics of Muse cells
Concentrating (Muse Tissues are
Proprietary technologies cells) into the infarction repaired and • 0.8x book
site through blood functions are
vessels recovered
Cell culture technique Intravenous
infusion of
Muse cells
• 5.6% dividend yield
Cryopreservation technology
• Parent earnings PE ratio is 2.6x
Signalling from
damaged tissue
Muse cells, discovered by the team led by Prof. Mari Dezawa of Tohoku Migration capability / spontaneous
University in 2010, are pluripotent stem cells that exist in the human body differentiation capability
Source: Mitsubishi Chemical “Aptsis 20” presentation to investors 4 December 2018. Valuation data as at 31 August 2019.
12…companies don’t change
Hitachi
Hitachi net income (billion yen)
600
Hitachi parent net income Hitachi subsidiaries net income
400
200
• Lumada IOT platform
generated 12% of revenues in
Q1
0
Billion yen
• 7.8x earnings
-200 • 1x book
• ROE 13.5%
-400
-600
-800
Jan 03 Jan 05 Jan 07 Jan 09 Jan 11 Jan 13 Jan 15 Jan 17 Jan 19
Source: Bloomberg as at 31 January 2019.
14Maeda Corp
Maeda Corp operating profits (billion yen)
40
35
30
• Leader in concessions market
25 – operates toll roads in Aichi
20
and Sendai Airport
15
• 6.5x earnings
10
• 0.7x book
5
• 10% ROE
0
• 2.4% yield
-5
-10
Source: Bloomberg as at 31 March 2019.
15…there is no way to release value
Shinmaywa
Shinmaywa net cash
• April 2018 - Reno declares
30 stake
• May 2018 Shinmaywa raises
20 2018 dividend from Y14 to Y23
and declares Y36 for 2019
10 • July 2018 Shinmaywa
announces 4.2% buyback
0
• January 2019 Shinmaywa
billion yen
raises 2019 dividend to Y37
-10
• January 2019 Shinmaywa
announces 28% buyback and
-20 raises 2019 dividend to Y45
• April 2019 Shinmaywa
-30
announces 2020 dividend of
Y90
Source: Bloomberg.
17Shinmaywa
Shinmaywa price-to-book multiple
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
Apr 18 Jun 18 Aug 18 Oct 18 Dec 18 Feb 19 Apr 19 Jun 19 Aug 19
Source: Bloomberg as at 30 August 2019.
18…it’s just a play on the global economy
Kyudenko
Kyudenko EPS
500
400
300
• 100% domestic business
200
• 8.2x earnings
100
• 1.3x book
0
• ROE 16%
-100 • Dividend yield 3%
-200
-300
-400
Jan 95 Jan 97 Jan 99 Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 Jan 11 Jan 13 Jan 15 Jan 17 Jan 19
Source: Bloomberg as at 31 January 2019.
20Daibiru
Daibiru market cap (billion yen)
250
Unrealised gains on property Market cap
200
• Osaka based real estate
150 • Osaka commercial property
prices bottomed in 2012
• 16x earnings
100
• 0.3x NAV
50
0
Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Mar 19
Source: Bloomberg as at 31 March 2019.
21Tokyotokeiba
Tokyotokeiba EPS
180
160
140 • Owns horse racing track near
Haneda airport
120
• Has a very profitable off-
100 course betting business
• Also has a very profitable
80
warehouse business
60 • 20x earnings
40 • EPS has grown by more than
6x in the past 7 years
20
0
Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18
Source: Bloomberg. Valuation data as at 31 January 2018.
22…low interest rates are killing the financial sector
IBJ Leasing
IBJ Leasing EPS and DPS
450 90
Dividend per share (RHS) EPS
400 80
350 70
• 7.4x earnings
300 60
• 0.7x book
250 50
• ROE 10%
200 40
• Dividend yield 3%
150 30 • 15 consecutive years of
dividend increases
100 20
50 10
0 0
Source: Bloomberg as at 31 January 2019.
24Tokio Marine & Fire
Tokio Marine & Fire revenues (billion yen)
6,000
5,000
• Japan’s largest insurer
4,000
• Grown its overseas business
through M&A
3,000
• 11.5x earnings
2,000 • 1x book
• Total shareholder return over
1,000 7%
0
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
Overseas revenues Domestic revenues Jan 19
Source: Bloomberg as at 31 January 2019.
25…the demographics are terrible
Tokyu Corp
Population along Tokyu railway lines (thousand)
5,300
5,250
5,200
• Grown EBITDA for the past 7
5,150 years
5,100
• Railway operator, real estate
company, hotel owner and
5,050 retailer
5,000 • Currently implementing a
major redevelopment project
4,950
in Shibuya area of Tokyo
4,900
4,850
4,800
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Tokyu Corp as at 31 December 2018.
27Tokyu Corp
Shibuya in around 2027 Average rent by district (yen per tsubo)
Shibuya Hikarie SHIBUYA STREAM 24,000
Opening: April 2012 Opening: September 2018
23,000
22,000
21,000
Shibuya Scramble Square
East building 20,000
Opening: November 2019
19,000
18,000
Shibuya Scramble Square Shibuya Station 17,000
West building Sakuragaoka Exit Block
Opening: FY2027 (Plan) Completion: FY2023
(Plan)
Shibuya FUKURAS Tokyo 5 central wards Shibuya
Completion: October 2019 (Plan)
Source: Tokyu Corp as at 31 March 2019.
28…corporate governance hasn’t really improved
Mitsubishi Estate
Mitsubishi Estate price relative (indexed to 100 at 1 May 19)
120
115 • 14/5/19 Mitsubishi announces
results
• It abandons its poison pill
110
• It raises its dividend
• It announces its first ever
105 share buyback (4.7% of
outstanding)
100
95
May 19 May 19 Jun 19 Jun 19 Jul 19 Aug 19 Aug 19
Source: Bloomberg as at 31 August 2019.
30…there are no growth industries
31Tourism
Kyoritsu Maintenance operating profits (billion yen)
16
14
• In 2012, 8.3m tourists visited
Japan
12
• In 2018, 31.1m tourists visited
10 Japan
• Kyoritsu Maintenance operates
8
the nationwide Dormy Inn
6
hotel chain
• It also operates student and
4 corporate dormitories
2 • 16x earnings
0
Source: Bloomberg as at 31 January 2019. Valuation data as at 31 January 2019.
32Keisei Rail
Keisei Rail market cap (billion yen)
1,200
Value of Oriental Land stake Market cap
1,000
• 100% domestic business
800 • Narita Airport line accounts for
32% of railway revenues
600
• Also has hotel, real estate and
retail businesses
400
• Trades at a discount to the
value of its stake in Oriental
Land
200
0
Source: Bloomberg.
33…Japan is bankrupt…
…or is it?
Japan’s public sector balance sheet (trillion yen) Japan’s National balance sheet (trillion yen)
12,000 3,000
10,000 2,500
8,000 2,000
6,000 1,500
4,000 1,000
2,000 500
0 0
Assets Liabilities Assets Liabilities
Source: Cabinet Office of Japan as at 31 December 2017.
35Asia’s Norway
Japan’s overseas income
200
150
100
50
$ billion
0
-50
-100
-150
Investment income Trade balance
Source: OECD Economic Outlook May 2019.
36Appendix
JOHCM Japan Fund
Ten year performance to 31 August 2019
Percentage growth, Share Class A – in GBP Recent history relative (%)
80
1 3 6 12 3 5 10 Since
JOHCM Japan Fund TOPIX TR (12pm Adjusted) Month Months Months Months Years Years Years Inception
60
Fund -1.86 6.65 7.08 -6.46 20.62 46.97 102.38 166.47
Benchmark -1.50 5.81 8.42 -0.80 27.19 75.16 127.79 175.71
40
25.26
24.37
24.02
21.88
AUM / Rankings
22.82
19.73
16.91
17.06
15.69
12.38
11.16
11.02
10.78
20
9.61
6.87
6.63
% return
3.76
2.69
2.49
Fund Size Lipper Ranking
3.71
1.54
0 2nd quartile since inception
-0.29
(3rd quartile over ten years)*
-1.68
-5.42
GBP 252.2m
-9.02
Ranking 23/73 since inception
-12.59
-13.82
-20
-17.34 (ranked 66/114 over ten years)*
-40 Awards
SI (p.a)
YTD 2019
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Q2 2019
JOHCM Japan Fund – 5 year discrete performance (%)
1 year to 31 August 2019 1 year to 31 August 2018 1 year to 31 August 2017 1 year to 31 August 2016 1 year to 31 August 2015
-6.46 6.50 21.07 13.00 7.82
Past performance is not necessarily a guide to future performance
Source: JOHCM/Tokyo Stock Exchange. NAV of share class A in GBP, net income reinvested, net of fees, as at 31 August 2019. All performance is
shown against the TOPIX TR (12pm Adjusted). Performance of other share classes may vary and is available upon request. *Source: Lipper
Hindsight, IA Japan and Lipper Global Equity is Japan domiciled in either the UK, offshore Ireland, or offshore Luxembourg. Sector Rankings to 31
August 2019. ©2007 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. 38
Morningstar Overall Ratings and Morningstar Analyst Ratings are as at 31 August 2019.JOHCM Japan Dividend Growth Fund
Performance since inception to 31 August 2019
Percentage growth, Share Class A – in GBP Recent history relative (%)
35
1 3 6 12 3 Since
24.06
23.29
Month Months Months Months Years Inception
25
Fund -2.50 4.04 6.35 -4.53 12.74 54.26
14.89
13.14
13.11
11.91
11.25
11.42
Benchmark -1.30 6.55 10.30 1.55 27.98 83.97
9.70
15
8.68
8.33
6.89
5.30
4.49
% return
5
AUM / Rankings
-5
Fund Size Lipper Ranking**
-7.19
-15 4th quartile since inception
GBP 30.4m
-13.91
Ranking 131/142 since inception
-25
2014* 2015 2016 2017 2018 YTD 2019 Q2 2019 SI (p.a.)
JOHCM Japan Dividend Growth Fund TOPIX 100 TR Index (12pm adjusted)
JOHCM Japan Dividend Growth Fund – Discrete performance (%)
1 year to 31 August 2019 1 year to 31 August 2018 1 year to 31 August 2017 1 year to 31 August 2016
-4.53 2.51 15.21 16.03
Past performance is not necessarily a guide to future performance
Source: JOHCM/Tokyo Stock Exchange. NAV of share class A in GBP, net income reinvested, net of fees, as at 31 August 2019 . All performance is
shown against the TOPIX 100 TR Index (12pm adjusted). 5 year performance history does not exist. Performance of other share classes may vary
and are available upon request. *Performance from inception date: 31 March 2014 to 31 December 2014. **Source: Lipper Hindsight, IA Japan,
and Lipper Global Equity Japan domiciled in the UK, offshore Ireland, or offshore Luxembourg. Sector rankings to 31 August 2019 . ©2007
Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not
be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible
for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar Overall Ratings 39
and Morningstar Analyst Ratings are as at 31 August 2019 .DISCLAIMER THIS DOCUMENT IS FOR PROFESSIONAL INVESTORS ONLY. J O Hambro Capital Management Limited . Registered in England No:2176004. Authorised & regulated by the UK Financial Conduct Authority. Registered office: Level 3, 1 St James’s Market, London SW1Y 4AH, United Kingdom. The registered mark J O Hambro® is owned by Barnham Broom Holdings Limited and is used under licence. JOHCM® is a registered trademark of J O Hambro Capital Management Limited. The information in this document does not constitute, or form part of, any offer to sell or issue, or any solicitation of an offer to purchase or subscribe for the proposed Funds described in this document; nor shall this document, or any part of it, or the fact of its distribution form the basis of, or be relied on, in connection with any contract. Recipients of this document who intend to subscribe to any of the proposed Funds are reminded that any such purchase may only be made solely on the basis of the information contained in the final prospectus, which may be different from the information contained in this document. No reliance may be placed for any purpose whatsoever on the information contained in this document or on the completeness, accuracy or fairness thereof. No representation or warranty, express or implied, is made or given by or on behalf of the Firm or its partners or any other person as to the accuracy, completeness or fairness of the information or opinions contained in this document, and no responsibility or liability is accepted for any such information or opinions (but so that nothing in this paragraph shall exclude liability for any representation or warranty made fraudulently). The distribution of this document in certain jurisdictions may be restricted by law; therefore, persons into whose possession this document comes should inform themselves about and observe any such restrictions. Any such distribution could result in a violation of the law of such jurisdictions. The information contained in this presentation has been verified by the firm. It is possible that, from time to time, the fund manager may choose to vary self imposed guidelines contained in this presentation in which case some statements may no longer remain valid. We recommend that prospective investors request confirmation of such changes prior to investment. Notwithstanding, all investment restrictions contained in specific fund documentation such as prospectuses, supplements or placement memoranda or addenda thereto may be relied upon. Investments fluctuate in value and may fall as well as rise and that investors may not get back the value of their original investment. Past performance is not necessarily a guide to future performance. Investors should note that there may be no recognised market for investments selected by the Investment Manager and it may, therefore, be difficult to deal in the investments or to obtain reliable information about their value or the extent of the risks to which they are exposed. 8780 40
DISCLAIMER (cont’d) The Investment Manager may undertake investments on behalf of the Fund in countries other than the investors’ own domicile. Investors should also note that changes in rates of exchange may cause the value of investments to go up or down. Sources for all data: JOHCM (unless otherwise stated). Copyright © 2007-2019 Morningstar UK Limited All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers;(2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. FE Crown Rating. Ratings do not constitute investment advice offered by FE and should not be used as the sole basis for making any investment decision. All rights reserved. © 2019 FE. The information contained herein including any expression of opinion is for information purposes only and is given on the understanding that it is not a recommendation. Information on how JOHCM handles personal data which it receives can be found in the JOHCM Privacy Statement on its website: www.johcm.com 8780 41
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