The pandemic continues to pose near-term risks as new variants of the virus and rising infection rates prompt governments to extend restrictions. However, vaccines and continued monetary and fiscal-policy stimulus bode well for global growth and will be supportive of Japanese equities. Several themes present themselves. Clean energy and environmental-efficiency are areas where Japan has some very competitive companies. Covid-19 has also accelerated trends in e-commerce and digitalisation. As profits recover, companies will prioritise those areas.
Above all, Japan continues to offer a wealth of under-researched mid- and small-cap growth companies, where we typically find better business models and returns on equity (a key gauge of profitability), and management has more incentives in terms of shareholder returns. Active managers like myself, based here in Japan, get the opportunity not only to invest in established global leaders but also to unearth less well-known companies, where lower levels of coverage by analysts can often yield great mispriced opportunities.
NOF: delivering drugs and profits
NOF (Tokyo: 4403) is a diversified chemicals company with strong positions in many niche markets, resulting in stable growth and high profitability. Its core businesses include surfactants (inputs for toiletries and cosmetics) and drug-delivery system (DDS) products, which ensure that a drug’s active ingredient is delivered and absorbed safely in the right part of the body.
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DDS is a crucial component in mRNA technology (a new form of cancer treatment and also the basis of the Pfizer and Moderna vaccines) and other new treatments, and growth in this field benefits NOF as the market leader. While the stock is often overlooked, this is slowly changing as we successfully engage with the company’s new president to improve the group’s environmental, social and governance and disclosure policies.
Mitsui High-tec: motor-core expert powers ahead
Mitsui High-tec (Tokyo: 6966) comprises almost 70% of the global motor-core market, an essential component of power-train motors in electric and hybrid vehicles. The company’s strength lies in its ultra-precision machining and die technology, which is used to create high-quality motor cores and machine tools. Mitsui High-tec is a dominant supplier and it aims to expand its motor-core production capacity sixfold through 2030, a clear sign of confidence in its order backlog. Yet with a market capitalisation of only £1bn and little coverage, this is a name with significant upside potential.
Coconala: an online freelancers’ market
Coconala (Tokyo: 4176) is a unique online freelancing platform that enables users to trade knowledge, skills and experience. We first invested in the company in 2019, when it was unlisted, recognising it as a beneficiary of the many structural changes occurring in Japan’s labour market; we were attracted by its high and sustainable growth rates as well as the high operating leverage of its business.
Coconala recently had a strong debut on the Tokyo Stock Exchange and the value of the our holding increased more than threefold. The success of this investment highlights the benefits of our research on the ground and efforts to find the most attractive opportunities in corporate Japan.
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