Performance

The Fund rose by 0.4% in sterling terms, slightly behind the broader sector, which was up by 0.6%. Smaller stocks performed somewhat better than larger stocks. The yen weakened again against sterling to ¥203.5/£1.

Positive contributors included Aichi Corp (6345), a subsidiary of Toyota Industries (6201), which rose by 7.2% as speculation regarding further cross-shareholding restructuring grows. Aichi Corp has an excellent balance sheet and should eventually be sold or fully consolidated. Another riser was Dai Nippon Printing (7912), which has underperformed since March 2024 but is seeing a margin improvement in its electronic businesses, where margins are 20%. Their ¥300bn buyback programme has seen ¥100bn completed, while they are also selling down ¥375bn of long-term securities. The shares rose by 12.7%. There was some excellent earnings visibility at Arealink (8914), a storage company which is in a very nascent stage in Japan compared to the USA. The young president is only 36 years old and met us recently in London. First-quarter sales and profit were both +20% YoY, capacity utilisation is high, and the land consolidation business performed well. The shares rose by 13% during the month.

Portfolio

The portfolio had very few changes in May, but we did add a new name, Nippon Road (1884), a paving company. This is another parent/child subsidiary, this time of Shimizu Corp (1803), which may get taken out at some stage. With the price down by 10% since Shimizu bid for 25% of the company at ¥2000 in 2022, there is a distinct possibility of them completing the purchase. Free cash flow is usually very good and shareholders’ equity has risen every year sequentially.  Net cash of ¥24bn and net receivables of ¥33bn leave a company on just ¥22bn of Enterprise Value and a 21% discount book value. We had a somewhat frustrating meeting with Hi-Lex Corp (7279), the control cable, door module auto parts company, where business should begin to bottom out, but in the longer term the shift to electric vehicles will be a negative. However, at 0.3x book, it is the cheapest stock in the portfolio. It also has cash and long-term securities of 1.5x its market cap. In no market outside Japan would this be possible. Our sense is that the company is beginning to worry about activists circling.

Market Snippets

The gap between the S&P and Japanese indices in USD terms has continued to widen. The yen has continued its steep fall despite somewhat more hawkish comments from the Bank of Japan and mildly weaker US data. The outlook for Japanese corporate earnings remains very conservative. Exporters have forecast the yen at ¥145/$1, but revision of earnings probably will not occur in early August at first-quarter reporting time. This may have to wait until the end of September. Whilst US long bonds have seen yields decline from 4.7% to 4.3%, in Japan, 10-year government bonds now yield over 1%. Recent AGM meetings have been encouraging for activists. Strategic Capital has made a significant breakthrough at Daidoh (3205) where three new board members proposed by Strategic Capital were elected.  Approval rates for many company presidents have fallen sharply. The corporate governance story has a long way to run, but as highlighted in earlier reports, this will likely lead to smaller stocks performing somewhat better as much of the good news is already priced into large mega-cap shares. We will be reporting soon on the first quarter results season.