The Matthews Japan Fund (Trades, Portfolio) gained 10 new holdings in the final quarter of 2016. The top three new holdings are Sumitomo Mitsui Financial Group Inc. (TSE:8316, Financial), NGK Spark Plug Co. Ltd. (TSE:5334, Financial) and Dai-ichi Life Holdings Inc. (TSE:8750, Financial).
Established in December 1998, the Japan Fund seeks long-term capital appreciation by investing at least 80% of its assets in Japanese companies. The fund is currently managed by Kenichi Amaki and Taizo Ishida. The managers employ a fundamental, bottom-up approach to find companies with sustainable long-term growth prospects, strong business models and competent management that trade at a reasonable valuation.
After selling out of Sumitomo Mitsui Financial in first-quarter 2016, the firm established a new stake of 2,062,200 shares for an average price of 4,000.42 yen ($35.45) per share. The trade had an impact of 2.7% on the portfolio.
Sumitomo Mitsui Financial offers a diverse range of financial services, including commercial banking, leasing, securities, consumer finance and others. It has a market cap of 6.1 trillion yen; its shares were trading around 4,413 yen on Monday with a price-earnings (P/E) ratio of 7.9, a forward P/E ratio of 8.4, a price-book (P/B) ratio of 0.6 and a price-sales (P/S) ratio of 1.6.
The Peter Lynch chart below shows the stock is trading about evenly with its fair value.
GuruFocus ranked the company’s financial strength 6 of 10. The Piotroski F-Score of 5 suggests the company is in stable business condition. The cash-debt ratio of 2.1 indicates the company is able to cover outstanding debt for the quarter with cash on hand. In contrast, the interest coverage ratio of 2.4 falls beneath Benjamin Graham’s investment standard of at least five. An interest coverage ratio less than two indicates the company is burdened by debt.
Sumitomo Mitsui’s profitability and growth was ranked 7 of 10 by GuruFocus. It has an operating margin of 32.05% and a net margin of 20.2%. While its return on equity (ROE) outperforms 61% of competitors, its return on assets (ROA) underperforms 72% of other companies in the global banks industry. The company’s three-year revenue growth, EBITDA growth and EPS growth are outperforming 68%, 70% and 73% of competitors.
Some of the company’s other shareholders are the Hennessy Japan Fund (Trades, Portfolio) and the Causeway International Value (Trades, Portfolio) Fund.
After previously selling out of NGK Spark Plug in second-quarter 2015, the fund purchased 2,750,600 shares for an average price of 2,265.6 yen per share. The trade had an impact of 2.14% on the portfolio.
As the company’s name suggests, NGK Spark Plug manufactures and sells spark plugs and related products for internal combustion engines. It has a market cap of 553.6 billion yen; its shares were trading around 2,454 yen on Monday with a P/E ratio of 15.8, a P/B ratio of 1.6 and a P/S ratio of 1.4.
The Peter Lynch chart below shows the stock is trading slightly above its fair value.
GuruFocus ranked the company’s financial strength 7 of 10. The Piotroski F-Score of 5 and Altman Z-Score of 3.8 indicate NGK is in stable business and financial condition. Since the company’s return on invested capital (ROIC) outperforms its weighted average cost of capital (WACC), it is creating value as it grows. The cash-debt ratio of 1.02 and interest coverage ratio of 177.9 suggest the company is capable of covering its debt and interest expenses.
NGK’s profitability and growth was ranked 7 of 10 by GuruFocus. It has an operating margin of 15.8% and a net margin of 9.1%. Its ROE and ROA outperform 56% and 68% of other companies in the global auto parts industry. Similarly, its return on capital (ROC) outperforms 58% of competitors. In addition, the company’s three-year revenue growth, EBITDA growth and EPS growth are outperforming its competitors.
The Tweedy Browne (Trades, Portfolio) Global Value fund also holds a position in the company.
After selling out of Dai-ichi Life Holdings in second-quarter 2015, the Japan Fund bought 3,163,700 shares for an average price of 1,720.24 yen per share. The trade impacted the portfolio by 1.85%.
Dai-ichi is a life insurance company that sells life, health and annuity insurance to groups and individuals. It has a market cap of 2.4 trillion yen; its shares were trading around 2,100.5 yen on Monday with a P/E ratio of 16.6, a P/B ratio of 0.8 and a P/S ratio of 0.4.
The Peter Lynch chart below shows the stock is trading above its fair value.
GuruFocus ranked the company’s financial strength 6 of 10. The Piotroski F-Score of 2 indicates the company is in poor business condition. The ROIC underperforms the WACC, meaning the company is destroying value as it grows. The cash-debt ratio of 1.1 indicates the company is able to cover its debt with cash on hand. In addition, the interest coverage ratio of 12.4 meets Graham’s standard of at least five and is capable of covering interest expenses.
Dai-ichi’s profitability and growth was ranked 5 of 10 by GuruFocus. It has an operating margin of 5.8% and a net margin of 2.2%. The ROE and ROA underperform 69% and 78% of other companies in the global insurance-life industry. In contrast, its three-year revenue growth, EBITDA growth and EPS growth are outperforming 56%, 83% and 96% of competitors.
The Japan Fund is the only guru invested in the company.
Other new holdings established during the fourth quarter were Mitsui Fudosan Co. Ltd. (TSE:8801, Financial), Nitto Denko Corp. (TSE:6988, Financial), Ezaki Glico Co. Ltd. (TSE:2206), Kyushu Railway Co. (TSE:9142), Fuji Heavy Industries Inc. (TSE:7270), Septeni Holdings Co. Ltd. (TSE:4293) and PeptiDream Inc. (TSE:4587).
Disclosure: I do not own any stocks mentioned in the article.
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