Medical big data provider Medical Data Vision, musical instruments manufacturer Yamaha and end-of-life services provider Kamakura Shinsho are three Japanese growth companies that aren’t widely-held, according to Fidelity International’s Nicholas Price.
Price, who oversees the five FE Crown-rated Fidelity Japan Trust, said the Japanese market is not as well-covered by analysts as the UK or the European markets, which makes it appealing from a stockpicking point of view.
Japan benefits from a growing number of rich consumers and its proximity to China, which an increasing number of companies are taking advantage of.
However, the economy has struggled prompting prime minister Shinzo Abe to develop a package of reforms aimed at stimulating growth – dubbed ’Abenomics’.
Performance of index over 10yrs
Source: FE Analytics
“How to find growth companies in an environment of stagnant GDP and demographic challenges?,” asked Price.
“I would agree on the fact that, for example, the steel industry has probably not got a lot of growth but, when you look at the economy, the Japanese economy is about double the size of the UK and it’s got 120 million rich consumers,” Price said.
“So, if you are on the ground there you can find the Japanese equivalent of the British ASOS or Just Eat, which often will be rolling out their business models and can achieve great growth.”
The manager noted that his process benefits from being on the ground to meet management teams and identify strong business models, noting that the Japanese stock market has almost 4,000 listed companies, giving in a good number of options to choose from.
Yamaha
One of the names Price said is not so well-owned by investors is conglomerate Yamaha, that has improved its revenue significantly over the last years.
While the firm has a revenue streams deriving from a wide range of products and services, it is well-known as a manufacturer of musical instruments, which should benefit from a growing middle class in nearby China and other emerging markets.
“Yamaha has been growing steadily in the advanced countries and recently it has been expanding into Asia, particularly in China and India,” Price said.
“The interesting thing about the market in China is that, as GDP goes above $8,000, the consumption of musical instruments changes.
“Based on historical data, as Chinese consumers have more money, they buy the next stage of luxury: they firstly buy cars, they then focus more on education and therefore musical instruments trade up.”
Companies like Yamaha, he noted, are doing very well in China although their US market revenues are still double those of China.
However, the manager believes in the long-term Yamaha’s revenues in China will become similar to those in America, as happened with the auto market.
Performance of stock over 5yrs
Source: Google Finance
“Yamaha has good growth and good margins,” said Price. “They are very good on new product development, so they are rising their average asp [average selling price] whilst cutting their costs, which gives a margin improvement of one per cent to the operating margin each year.”
He noted Yamaha also benefits from a shareholder friendly management team and are utilising the excess cash on their balance sheet to buy back stock, which is improving their earnings per share.
“Yamaha’s shareholders are enjoying growth on the core business and they are also improving their earnings per share,” he added. “It’s not such a well-owned name by investors but it is quite innovative.”
Kamakura Shinsho
Another business that isn’t widely-researched or owned by investors but one which Price believes can achieve great growth is end-of-life services provider Kamakura Shinsho.
The Japanese firm went public in December 2015 and has a market cap of £200m.
“Kamakura Shinsho has very little analyst coverage and I don’t think institutional investors own it so Fidelity Japan Trust is one of the major shareholders in the company,” said Price.
“It’s the number one portal for funerals and gravestones in Japan: they’ve had around 25 per cent revenue growth in the most recent quarters.”
According to the Fidelity manager, Kamakura Shinsho’s growth is benefitting from two key factors.
Firstly, the growing number of deaths in Japan is leading people to increasingly search for funerals and gravestone information online.
“In the past, people in their 50s or 60s were not internet-savvy. However, that is changing today,” he explained. “Instead of using word of mouth, Japanese people are quite happy to go online and check these services.
“They use companies such as Kamakura Shinsho as the bridge to dealing with the local gravestone maker or funeral organiser.”
Whilst in Western countries such as the UK, the amount of money spent on funerals is not significant, Japanese people allocate a greater amount of money to end-of-life services.
“The Japanese market is quite a lucrative market for this company to penetrate,” he said.
Medical Data Vision
The final under-the-radar stock the manager favours is medical big data provider Medical Data Vision.
The £400m market cap company develops, produces, maintains, and sells medical information integration systems in Japan.
It provides its services to hospitals, pharmaceuticals, medical device manufacturers or research institutions.
“Medical Data Vision has a unique position with contacts in the major hospitals in Japan,” said Price. “They have that database and use their current patient database to increase efficiency of hospitals.
“And they want to use that in the future to link more with pharmaceutical companies that are looking to improving mechanical trial processes.”
According to the manager of Fidelity Japan Trust, Medical Data Vision has a unique position of having one of the best datasets in Japan, not being widely-covered by analysts and not well-owned by investors.
Performance of fund vs sector & benchmark under Price
Source: FE Analytics
Over the time Price has run the portfolio, Fidelity Japan Trust has delivered a 111.11 per cent total return compared with a gain of 82.04 per cent for the average IT Japan sector trust and a 69.75 per cent for the TSE TOPIX index.
The trust is trading at a 14.9 per cent discount to its NAV and it’s 14 per cent geared.
It has an ongoing charge of 1.31 per cent, data from the Association of Investment Companies (AIC) shows.