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📖 MoneyFitt Explains

🎓️ Actively Activist

📝 Focus

Actively Japanese

Japan’s Topix stock market index recently hit its highest point since August 1990, with a large amount of foreign buying helping it reach 33-year highs. There are numerous reasons for this. Among them is Warren Buffet raising his stakes in Japan’s top five general trading houses. Another could be the increased risk with equities in some other parts of the world. But most interestingly, it could also be from the increasing involvement of activist investors in Japan.

..... ▷ For many years, Japan’s stock market has been a ‘value trap’. This means that shares are trading at seemingly low prices compared to other markets and yet still somehow fail to deliver superior performance. For reference, Japan trades at a Book Value of 1.2x with a trailing Price/Earnings Ratio of 12x, while the US trades at 4x and 21x. Japanese companies also typically have higher cash levels than companies in other markets. This could be prudent cash management in uncertain times or simply an inefficient or “lazy” balance sheet, which can lead to lower returns and persistently lower valuations.

..... ▷ This is where activist investors🎓 can come in. Activist investors typically run specialised funds that buy minority stakes that are significant enough for them to have a voice to gather support from other shareholders and influence how the companies are run or even to replace management. Activist investors used to be controversial, but the CEO of the Tokyo Stock Exchange said in February 2022 that firms should be more open to their opinions and open a dialogue with them. This applies especially to Japan, as many publicly-listed firms may be stubborn in their strategic business directions.

..... ▷ An example is the parent company of the popular 7-Eleven ‘conbini’ (convenience store) chain. Activist investor ValueAct Capital spent several years building up a 4.4% stake in retail giant Seven & i Holdings in its effort to push for strategic changes in the conglomerate. ValueAct believes that Seven & i should focus on its profitable 7-Eleven stores, potentially spinning them off entirely to close the “conglomerate discount” and drop unprofitable assets like its department stores Sogo and Seibu.

..... ▷ Though management recently won a shareholder vote on ValueAct’s proposal to replace them, Seven & i is also closing roughly one in every four legacy Ito-Yokado general merchandise stores in Japan to improve its overall returns. This is a challenging decision in view of the history of the company. Founded in 1920 as Ito-Yokado, the company only changed its name following the 1990 acquisition of Southland, the American company that started the 7-Eleven chain (and which Ito-Yokado had been operating in Japan since 1974) to reflect its key business. It acquired Sogo and Seibu during the mid-2000s, but they suffered from the rise in online shopping and contributed to a decade of stagnant growth and feeble returns. Succumbing to ValueAct’s pressure, Seven & i announced plans to sell the department stores to US-based investment fund Fortress at the end of 2022.

..... ▷ Another famous activist investor looking to shake up Japanese corporate culture is Elliott Management, which owns a significant stake in Toshiba and is pushing it to unlock underlying value.

..... ▷ These activist investors' admittedly only occasional wins have given foreign investors hope that Japanese equities will no longer be a ‘value trap’ and can generate better returns in the coming years. On a macro level, corporate management better focused on returns and profitability with or without the direct hand of an activist investor is a good sign for both Japan’s stock market and "Japan Inc." as a whole.

Writer: Alexis Kong, NUS Business School, 2024