Existing growth opportunities in Japan despite natural disasters

In August, the domestic market (in terms of large caps) moved sideways, whilst small caps recovered. At the beginning of the month, the market declined sharply on the back of increased tensions between the US and China. At the same time, the dollar weakened, with investors continuing to react negatively to Trump’s behaviour.

Commentaire Mensuel
24 Sep 2018

In August, the domestic market (in terms of large caps) moved sideways, whilst small caps recovered. At the beginning of the month, the market declined sharply on the back of increased tensions between the US and China. At the same time, the dollar weakened, with investors continuing to react negatively to Trump’s behaviour.

During the month, disputes between the US and Turkey developed, which had a short term impact on the market. Overall, investors maintained their “wait and see stance” during the summer vacation. The market recovered towards the end of the month following a rebound of the US market, which was supported by Chairman Powell’s dovish comments on the country’s monetary policy and improved trade talks between the US and Mexico.

In August, the share price of LITALICO (6187), which provides employment support services for people with disabilities, surged, contributing 0.18% to the Fund’s return*. During the month, a scandal came to light involving Japanese government organisations padding out the number of employees with disabilities for several years, in an attempt to meet the requirement that people with disabilities should account for at least 2.5 percent of the workforce in any organisation with more than 50 employees.

CTS (4345), which was added to the portfolio at the end of 2017, provides IT and rental services mainly to construction companies, amongst others supplying wireless networking, temporary houses, office furniture and equipment. The Company also sells road signs, fences, surveying instruments, and software for construction purposes. Construction sites are normally difficult to access, which is why demand for CTS services, which concentrates on providing easy-access to such sites, is increasing. Further, creating a communication environment at construction sites, be it wired or wireless, is key, which is another service that CTS excels at. The Company currently trades at P/E 33.5x, PBR 5.1x and ROE 18.9%.

The market currently appears to be focussing on the LDP Presidential election on 20th September, which the Investment Adviser believes Prime Minister Abe will win for the third time. The team is expecting new bills to be submitted at the next extraordinary Diet starting in October, hoping that the new government may improve productivity levels in Japan by utilising current domestic assets as well as resources from outside of the Country. As a first step, the team expects the digitalisation of administrative government procedures to be further streamlined for businesses and individuals, enabling an online authentication of identity and eliminating the submission of any additional documents. Secondly, the Investment Adviser expects the government to offer new residency status to foreign workers who offer certain expertise and skills from April 2019 onwards, thereby tackling the shortage of workers across multiple industries.

Despite Japan having been hit hard by a severe typhoon and various earth quakes recently, the Investment Adviser still sees more room for growth. The team continue to closely monitor companies, which will benefit from the country’s growth. According to the team, companies’ bottom lines for the fiscal year, which were expected to be flat, compared to last year’s bottom lines, may be revised upwards towards year end. The team for now maintain the current portfolio.

The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 12/09/18 and are based on internal research and modelling.