In his Are Japanese equities worth more dead than alive?, SocGen’s Dylan Grice conducted some research into the performance of sub-liquidation value stocks in Japan since the mid 1990s. Grice’s findings are compelling:
My Factset backtest suggests such stocks trading below liquidation value have averaged a monthly return of 1.5% since the mid 1990s, compared to -0.2% for the Topix. There is no such thing as a toxic asset, only a toxic price. It may well be that these companies have no future, that they shouldn’t be valued as going concerns and that they are worth more dead than alive. If so, they are already trading at a value lower than would be fetched in a fire sale. But what if the outlook isn’t so gloomy? If these assets aren’t actually complete duds, we could be looking at some real bargains…
In the same article, Grice identifies five Graham net net stocks in Japan with market capitalizations bigger than $1B:
He argues that such stocks may offer value beyond the net current asset value:
The following chart shows the debt to shareholders equity ratios for each of the stocks highlighted as a liquidation candidate above, rebased so that the last year’s number equals 100. It’s clear that these companies have been aggressively delivering in the last decade.
Despite the “Japan has weak shareholder rights” cover story, management seems to be doing the right thing:
But as it happens, most of these companies have also been buying back stock too. So per share book values have been rising steadily throughout the appalling macro climate these companies have found themselves in. Contrary to what I expected to find, these companies that are currently priced at levels making liquidation seem the most profitable option have in fact been steadily creating shareholder wealth.
This is really extraordinary. The currency is a risk that I can’t quantify, but it warrants further investigation.
It’s interesting that Amada should be mentioned.
I remember Peter Cundhill talking about them in a video that’s been posted by the Richard Ivey Business School – http://www.bengrahaminvesting.ca/Resources/Video_Presentations/Cundill.htm
That video is nearly five years old now, so I wouldn’t go holding my breath about value being recognised in Japan anytime soon!
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Another one: Nippon Game Card (stock code: 6261)
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the “weak shareholder rights” and corporate governance issues continue to be real issues in Japan. there is no path to control to force the companies to liquidate unlike the US or other jurisdictions so you are reliant on Japanese managements to do the right thing which is highly problematic.
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But in these 5 cases at least, management appears to do the right thing consistently, whatever the shareholder rights situation.
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I read the report – not totally clear how Grice calculated his liquidation value from it, as I recall.
There are actually a ton of NCAV stocks still trading below $1bn but mainly micro-cap names, on regional bourses, with super low liquidity.
Check out chofu seisakusho or shingakukai – shingakukai actually trades at a discount not just to NCAV but to cash and ST securities.
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