Warren Buffett, Chairman and Chief Executive Officer of Berkshire Hathaway, photographed during a 2011 visit to Japan.
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Japanese stocks have been falling since the end of last year, up about 15% Since November, the weak yen and inbound tourism help reactivate the economy. But Warren Buffett added a spark in April when he visited Japan to announce Berkshire Hathaway Increased its investment in Japanese business houses to 7.4%. Foreign investors followed suit, buying $7.83 billion in Japanese stocks in the five days of trading through April 14.
Buffett said the five – Itochu Corp, Marubeni Corp, Mitsubishi Corp, Mitsui and Sumitomo Corp – are on par with Berkshire. They have diversified portfolios focusing on long-term investing and value and cash flow.
“I just thought these were great companies. They were companies that I generally understood what they did,” Buffett told CNBC’s Squawk Box during his April visit to Japan. “Berkshire to some extent. Similar to, because they have so many different interests.” “And they were selling at a price that I thought was a ridiculous price, especially compared to the interest rates prevailing at the time.”
But many observers and Berkshire investors may still have questions for Buffett about his big bet on Japan’s economy as he descends on Omaha, Nebraska, for Berkshire Hathaway’s annual shareholders meeting this weekend. . For an investor who, in addition to looking for stocks trading at a discount to intrinsic value, is always looking for companies with durable economic “moats” in their industries and markets, what makes these Japanese companies so attractive?
Here are some answers.
Samurai has its roots in Buffett’s Japanese stocks
The five trading companies in which Berkshire has invested are the largest of Japan’s so-called sogo-shosha, or general trading companies. Their traditional role is to import energy, minerals and food into Japan, a mountainous archipelago with mostly natural resources, and export finished products.
As a result of Japan’s unusual history, sogo-shosha holds a special place in the country’s business world. During the Samurai era, the Tokugawa Shogun dynasty closed Japan off from the rest of the world for more than 200 years. After it opened for trade in the 19th century, its new leadership feared colonization by Western powers and began a rapid program of modernization. As industrialization began to fundamentally reshape the feudal economy, zaibatsu financial factions centered on trading houses, some of which had roots in the 17th century, took on major business roles and amassed enormous influence over national policy. The Empire of Japan soon caught up with the Western powers and became embroiled in lengthy military conflicts.
Restructuring after World War II through the recession of the 1990s
Under the Allied occupation of Japan after World War II, zaibatsu were disbanded or reorganized and replaced by keiretsu, which are groups of companies with cross-shareholding relationships and centered on a bank. He helped rebuild the country after the devastation of war, again amassing massive wealth and influence. Trading companies played an important role in the keiretsu system by taking advantage of their overseas connections to help Japanese manufacturers expand their business overseas. But after the long Japanese recession that began in the early 1990s, keiretsu began to lose influence, while business houses saw their role diminish.
“They used to be the quarterbacks of their groups (especially for zaibatsus, which were largely linked to the group’s main bank), mainly by financing Japanese companies overseas,” says Seijiro Takeshita, a professor of management and information science at the university. Helped in expanding our business.” Shizuoka. Takeshita said, “However, such a need has diminished significantly, as producers are now able to negotiate on their own. Therefore, sogo-shōsha has diversified into various sectors, especially into energy and natural resources. “
business revenue beyond trade
Berkshire’s largest investments are utility operations, rail, financial and insurance, and energy companies, but Buffett has also invested in companies ranging from truck stops (Pilot Flying J) to fast-food chains (Dairy Queen), industrial and manufacturing companies (e.g., Lubrizol and Have bought everything till now. Precision Castparts), and BYD, one of China’s leading EV developers.
Today, Japan’s trading companies derive most of their revenues from non-trading activities. In moving from import-export to business management, he has developed interests in everything from logistics and real estate to frozen foods and aerospace; New investments include electric vehicles and renewable energy. Their affiliated brands are fairly ubiquitous in Japan, but what they don’t have in common with some other notable Berkshire stock holdings are powerful global consumer products like Apple or Coca-Cola.
Still, their economic clout makes them an underrated player. According to the Japan Foreign Trade Council (JFTC), a shosha industry group representing 40 companies and 20 unions, shosha and their allies represent a large industrial group of 5,900 companies and 460,000 workers in more than 200 cities around the world. These complex global operations make it relatively difficult for investors to understand their businesses, but they are also an advantage.
Kazuhiro Nogi | AFP | getty images
“By joining interrelated businesses across a wide range of areas from upstream to downstream, Shosha gains a bird’s-eye view of the entire business process and facilitates customers by providing functions such as finance, information and logistics where necessary. ,” said Ryosuke Kawai, general manager of the research group at JFTC. “They are able to create new businesses with greater added value.”
“It’s not just that the scope of trading is wide and diverse, but that trading companies also play an important role in the global economy,” says Chika Fukumoto, trading company analyst at JPMorgan Japan. But some recent tailwinds are fading. Amid growing concerns over a global economic slowdown, the ability of trading companies to maintain and improve capital efficiency will not necessarily come from higher commodity prices and a weaker yen, and to enhance shareholder returns, Fukumoto says, “their “Portfolio quality will increase and become the key determinant of long-term share value.”
Shosha: The Big Five
mitsubishi
Japan’s largest trading company Mitsubishi Corporation, established in 1954. The group’s founder, Yatarō Iwasaki, was born in 1835 into a poor farming family that had lost its samurai status, but quickly climbed the social ladder as Japan underwent rapid social change. Iwasaki found success in shipping, transporting troops and material for the new imperial government, and established the forerunner of Nippon Yusen (NYK Line), Japan’s first passenger ship. Today, Mitsubishi Corp. is one of the three core companies of the Mitsubishi Keiretsu, along with Mitsubishi UFJ Financial Group, Japan’s largest financial group, and Mitsubishi Heavy Industries, the country’s largest defense contractor.
Mitsubishi Corporation is quite distinctive from other shosha as it has businesses ranging from finance to raw materials and food; The new segments focus on digital transformation and next generation energy including offshore wind, solar, hydrogen and ammonia. It recently signed a $1.9 billion deal to supply rail, signals and communications equipment for a commuter railway project in Manila, part of its operations in 90 countries and territories through its 11 business groups. Mitsubishi is probably most familiar to everyday Japanese for its convenience store chain Lawson, named after Ohio dairy farmer James Lawson, which has approximately 19,000 outlets throughout Japan and East Asia.
Itochu
Another business house related to the opening of Japan is Itochu Corporation It began in 1858 when Chubei Itoh started selling clothes door to door. Textiles remains one of the company’s business groups today, along with machinery, metals and minerals, energy and chemicals, food, general merchandise and the specific sectors of real estate and finance. Itochu’s 8th company is designed to take advantage of synergy between its other sectors, especially consumer markets. Itochu is the majority holder in the FamilyMart convenience store chain, which has approximately 24,500 stores in Japan and overseas. Its other recent investments include the 160 MW Prairie Switch Wind project outside Houston, licensing and distribution rights for the LL Bean brand, and the supply of sustainable aviation fuel produced by Finland’s Neste OYJ to Japan Airlines and other carriers.
A customer exits a FamilyMart Co. convenience store in Tokyo, Japan, on Wednesday, July 8, 2020.
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Sumitomo
Sumitomo Corporation Its history traces back to Masatomo Sumitomo, a Buddhist monk who sold books and medicines in Kyoto in the 17th century. His family started a smelting business, formed close ties with the ruling shogun, and moved into trade and mining, opening the Beishi Copper Mine, which operated for 283 years. Founded in 1919 as Osaka North Harbor Co., Ltd., Sumitomo Sogo Shosha focused on natural resources in the post-war era, but after significant losses around 2014 it shifted its focus to infrastructure and automotive. It has invested in rail projects in the Philippines, German electric vertical take-off and landing aircraft (eVTOL) startup Volocopter and, with Marubeni, the transportation of hydrogen from Australia to Japan. It has approximately 900 group companies and 75,000 group employees.
mitsui
Sogo-Shosha, Japan’s third largest mitsui, part of the Mitsui Group and originally established in 1876. With 279 subsidiaries, its investments include an iron ore business in Australia, liquefied natural gas projects around the world and a truck leasing joint venture in the US with Penske Corporation. Like Mitsubishi, it has a convenience store business, supplying systems for merchandising and logistics to Seven & I Holdings Co., operator of the 7-Eleven chain. Its recent investments include Valesta Holdings, a Singaporean pharma startup focused on drug approval and marketing in developing countries, and Pittsburgh-based Optimus Technologies, which makes biodiesel fuel systems.
Marubeni
Like Itochu, Marubeni Corporation It also traces its roots to textile merchant Chubei Itoh; Its name first appeared in 1921 from the merger of two Itochu-related companies. Its business is similar to other Shoshas, including the transportation and industrial machinery group, but without the convenience store component. In recent projects, it has teamed up with US-based Lift Aircraft to stage the first pilot demonstration flight of an eVTOL in Japan, and a French startup to develop insect-based feed for fish such as seabream and yellowtail in Japan. Has partnered with and invested in Ynsect. American recycling company Syrba Solutions spent $50 million to extract rare metal compounds from discarded batteries.
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