3 min read 26 Jul 23
Japan is the world’s third largest economy1, yet the Japanese stock market has remained largely overlooked by global investors until recent months. The country’s corporate sector is undergoing a structural shift in mindset that was put in motion a decade ago, when former Prime Minister Abe started to bring about a change in the role that companies play in Japan’s economy. The implementation of a stewardship code in 2014 and a corporate governance code in 2015, for example, helped pave the way for Japanese companies to accept corporate governance and become more shareholder-friendly. This has opened the doors for investors to benefit from the release of the vast latent potential embedded in Japan’s equity market. This positive change is one of the reasons the asset class has recently been gaining attention from overseas investors.
At M&G, we have talked about our concept of “value-added shareholdership” extensively in the past. Here we want to use some specific examples to showcase how our brand of active investment can add to a positive investment outcome. Our investment program is built on decades of continued research and relationship-building with company management. This places us in the position to add value as a partner to our investee companies, pursuing a common goal of creating and releasing value.
Sanrio is a Japanese entertainment company that focuses on the kawaii – or ‘cute’ – segment of Japanese popular culture. Among its brands, Sanrio owns the intellectual property (IP) of Hello Kitty, along with dozens of other character IP assets such as Mr. Men.
M&G has been invested in, and engaged with, Sanrio for around three years. We saw a company that had spent decades skilfully building an IP portfolio of tremendous value, but that was underachieving its potential. With this in mind, we invested significant time communicating with Sanrio’s new management team, helping us to better understand the company’s strengths and weaknesses.
Dr Ryohei Yanagi, who is now the Deputy President of M&G Japan and has been our exclusive consultant on engagement in Japan, has been involved, ensuring that our long-term oriented intentions and recommendations have been appropriately communicated.
In what has become a highly constructive, two-way dialogue between M&G and Sanrio, the company has been extremely open to our ideas and suggestions, and acted on many of them. We are particularly proud that brainstorming sessions with the company regarding its China strategy were followed by significant action. In the last 3 years, Sanrio’s China business has evolved meaningfully. Not long after former Disney China executive Joy Wei was hired to spearhead growth, Sanrio announced a significant deal with Chinese e-ecommerce giant Alibaba which has been a positive factor for the company’s share price2.
Three years on, Sanrio is a transformed company. The company remains focused on its original mission of “delivering smiles” to the world, but now in the context of a robust commercial strategy that ensures sustainable growth and profitability. This type of transformation is not easy and the company deserves credit for what has been an intense period of change. M&G has worked hard to be a strong partner for the company during this effort. The market cap of this company has grown fourfold in the past three years as the market has come to appreciate the earnings potential of the vast IP the company owns. With the new management time so intently focused on sustainable growth, we believe there is more progress to come.
Across Japan’s corporate landscape, significant opportunity for self-help may be found in balance sheets and income statements alike. Nikon Corporation is a case in point. M&G invested in Nikon in December 2020.
At the time, the market seemed solely focused on the fact that Nikon’s world-renowned camera franchise was under significant competitive pressure. Virtually no value was being ascribed to the company’s lithography franchise, one of the world’s largest, and certainly no value was being ascribed to the company’s significant net cash balance. Most importantly for M&G, the market was seemingly ignoring the pedigree and skillset of the new President Toshikazu Umatate and new CFO Muneaki Tokunari.
Whilst the market was skeptical about the company’s strategy to restore camera profitability and to develop new business areas, we believed the new management team and their carefully constructed plan deserved the benefit of the doubt.
As shareholders, we set about trying to help the company achieve it’s goals, particularly in the new business areas. Leveraging M&G’s global network, we introduced several ideas to the company in an attempt to serve and add-value to its new growth agenda. One of these was Oxford Nanopore Technologies, a pioneer in the next generation genetic sequencing space. This introduction led to a technology collaboration, which we hope will yield interesting long term results.
M&G has also been supportive of a more effective use of balance sheet capital. In the past three years, the company has undertaken significant share-buybacks, increased dividends and engaged in strategically interesting M&A.
In hindsight, it turns out that the credit we extended to the management team was warranted. The profitability of the camera business has improved significantly, new business areas continue to show promise and ongoing improvements in governance and transparency have led to significant repair in the market’s assessment of the companies prospects. Improvement in both income statement and balance sheet metrics has led to significant share price appreciation since we invested. We continue to see further progress ahead.
As with Sanrio, M&G has worked hard to be helpful where we can for Nikon. We have approached our shareholding in the spirit of partnership. This has led to a constructive two-way dialogue and ability to brainstorm different ideas as we seek to constantly improve our understanding of the business and the threats and opportunities it faces.
Reaching a level of involvement with Japanese companies that could help drive change and add value through shareholder ownership does not happen overnight. Investors need knowledge and experience, both corporate and cultural. To add value as a shareholder, it is crucial to understand the business and industry in question extremely well and to have a network of relationships that can be leveraged to the benefit of the company in question.
For us, engagement is not merely about “oversight.” Mostly, it is about “service.” Our long-term investment program is designed to position ourselves as the “shareholder of choice”, something we hope to achieve through helping companies, where we can, to become better versions of themselves. We feel we are not only well positioned to identify companies that are at the beginning of the self-improvement journey, but are also able to partner with them along the way, adding value to our investee companies and investors alike. Corporate Japan is awash with such opportunities, and we fully intend to harness this new lease of life in corporate Japan for the benefit of our investors.
1 The World Bank, “GDP (Current US$)”, (data.worldbank.org), as at 21 March 2023.
2 BBC, “Hello Kitty firm strikes China deal after viral hit”, (bbc.co.uk), 30 June 2022.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.