A country that had seemingly fallen off investors' radar in the past couple of decades or so is making a bit of a return, and this article explains why that is.

A country winning a degree of new love these days after a long period on the sidelines is Japan. There are a number of reasons for this revival of interest, as the article below goes on to show. We hope readers find this interesting. The commentary is from Richard Kaye, co-lead manager Comgest Growth Japan Fund JPY Acc Comgest, based in Paris, which is an international asset management firm operating in a number of regions and countries, including Japan.

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Japan has undergone widespread regulatory and societal changes in recent years which have been brought about by Prime Minister Abe’s policies to reinvigorate the economy as well as by an acute labour shortage and an ageing population.

One beneficiary of the regulatory portion of these changes has been Ain Holdings, a market leader in the pharmacy dispensing business, which has been a Comgest Growth Japan holding for three years. The government has eased regulations on ownership of pharmacy stores which is dominated by 60,000-plus one-man and small-chain pharmacies. Ain has taken advantage of this move and has embarked on a nationwide store acquisition programme, building up around 1,000 stores to date. Japan has an effectively universal health insurance system and with pensioners being subsidized for their medicines pharmaceutical demand is strong. At the same time, the government is desperate to rein in costs so it regularly cuts medicine prices and the incentives and subsidies which it offers to pharmacies. This creates a need for a cost-effective nationwide chain which can accommodate this environment, and Ain is best-placed to fill that role.

Another beneficiary of regulatory change has been the labour placement industry. Japan has introduced new regulations which have allowed foreign students to apply for a working visa giving them the option to work 16 hours a week. The number of students working in Tokyo alone, mainly from Vietnam, China and Myanmar, has increased by more than 200 per cent since the Abe government was elected. Persol Holdings, one of the largest temporary employment agencies in Japan and a Comgest stock selection for two years, has enjoyed double digit growth in the last four years partly as a consequence of this change.

Comgest met the Persol management team just two weeks ago and it explained that the current pace of job growth would lead to a six million workers shortfall by 2030, and it is lobbying for further deregulation both of immigration and of temporary labour laws which will permit Japan to address this problem.

Besides regulatory change, social change has created many opportunities for consolidators in different parts of the economy to reap profits from new gaps in the market. Over 30 per cent of the Japanese population will be over 65 by 2030, and over 600,000 companies founded during Japan’s postwar recovery are now led by men near to or past retirement age and without successors, and in need of buyers to ensure their survival. Into that opportunity steps Nihon M&A Center, a Comgest holding for over four years, which is Japan’s largest M&A consultancy for small and medium enterprises. Its profits have risen by more than 20 per cent annually over the last ten years as it has expanded its base of consultees. In a meeting just last month with the company’s chairman, Mr Wakebayashi, he reconfirmed the size of the target market which the company is well placed to address, which highlighted the company’s growth potential.

Classic case
A further classic example of a beneficiary of social change is Hikari Tsushin, a Comgest holding for nine years, which has become the dominant player in a market which nobody else wants to serve, IT and hardware services for very small companies. Other providers focused away from this market but this company seized the opportunity. Hikari Tsushin has spent two decades building a nationwide sales network which has proved its skill at cross-selling. Although still barely covered by analysts, Hikari Tsushin’s market capitalisation has trebled over a decade; and the company continues to perform, for example growing operating profit by 51 per cent last quarter versus one year previously.

Another example is Obic, a supplier of efficiency software for payroll and accounting management, again to smaller companies. Comgest has held these shares for over 10 years. Obic reported its latest quarter just recently, and delivered 17 per cent operating profit growth versus one year previously, its ninth successive quarter of teens profit growth, buoyed by small companies’ need to change the way they work as they run out of labour.

Comgest just met with Obic, and this normally conservative company expressed confidence in the continued growth of its target market. Like Oracle, it is deploying the cloud to speed up installations and improve its management of software upgrades. Unlike Oracle, its revenue has not been affected by the drop-out of up-front contract revenue with the shift to the cloud. 
 

The author
Richard Kaye is co-lead manager with Chantana Ward on the €1.52 billion ($1.73 billion) Comgest Growth Japan Fund JPY Acc. The fund has generated a cumulative 5-year return of 103.5 per cent to 30 April 2019 versus 52.2 per cent for the Topix – Net Return index.

Important information:
Investing involves risk including possible loss of principal. Past performance is not a reliable guide to future performance.
This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The views expressed in this document are valid at the time of publication only, do not constitute independent investment research and should not be interpreted as investment advice. Investing involves risk including possible loss of principal. All opinions and estimates are current opinions only and are subject to change.
Comgest Growth Japan Fund is a UCITS compliant sub-fund of Comgest Growth plc, an open-ended umbrella-type investment company with variable capital and segregated liability between sub-funds incorporated in Ireland and authorised by the Central Bank of Ireland and managed by Comgest Asset Management International Ltd.
Before making any investment decision, investors must read the latest prospectus and Key Investor Information Document (“KIID”). The Prospectus, the KIID, the latest annual and interim reports and any country specific addendums can be obtained free of charge at our offices or on our website www.comgest.com.
Comgest Asset Management International Limited is an investment firm regulated by the Central Bank of Ireland and registered as an Investment Adviser with the US Securities Exchange Commission. Its registered office is at 46 St Stephen's Green, Dublin 2, Ireland.