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Jacob Wolinsky
Jacob Wolinsky
Articles  | Author's Website |

Christoph Hilfiker of LLB Asset Management on Sumitomo, Sony and Nippon Paper

Christoph Hilfiker, born 1970 in Basel/Switzerland, is serving as a senior fund manager with LLB Asset Management in Vaduz/Principality of Liechtenstein. He's responsible for the research and the equity management of the Pacific region. Prior to joining LLB Asset Management, he was responsible for the European equity management at Münchner Kapitalanlage AG/Munich. He's the author of articles in several magazines like fund research, The Smart-Investor and The European Value Investor. He studied business law in St. Gallen (HSG) and completed his education with a MBA at the European Business school (EBS). He earned his CFA qualification in 2006. From 1994 until 1998, he was serving as a captain in the Swiss Air Force.

On Mar 11, 2011, a massive earthquake hit Japan. The earthquake that hit Japan was far worse than the ones...

Investors panicked and Japanese stock market tanked.

Three myths about Japan:

It is impossible to make money in Japan/Japanese stocks are for trading not investing.

Bruce Berkowitz — Go to places that people are running away from or ignored.

Buy at the points of maximum Pessimism — John Templeton

Frequently, something out of the blue like this, an extraordinary event, really creates a buying opportunity. I have seen that happen in the United States, I have seen that happen around the world. I don't think Japan will be an exception. — Warren Buffett, Korea, 04/11

LLB has basically made money in the past 13 years in Japan.

In 2000, I was in Munich and a speaker made the bullish case to buy gold, everyone laughed.

Myth #2 Weak economy = weak stock market.

This is not true. There is no positive correlation between GDP growth and the real return from its stock market.

Over the long run, there is not a positive association between a country's real growth in per-capita GDP and the real returns from its stock market.

Looking at 83 countries over 110 years, there is no evidence that investing in growth economies produced superior returns.

Sources: "In Triumph of the Optimists," 2006, Dimson/Marsh/Staunton, London School of Economics.

Many companies have transformed themselves into supra-national entities whose fortunes are entirely independent of their domestic market; a significant number of Japanese equities are world leaders and lot of them are incredibly cheap.

Myth #3 Shareholders don’t count.

In the last two years, dividends in Japan rose more than in any other developed country.

Cross holdings in Japan have decreased in Japan over the years.

Net debt of Japan is 114% of GDP, 4x tax revenue, which is not nothing but not too scary.

94% of public debt is domestically held, which is a good thing.

If economic growth is picking up, the revenues may well rise faster than any increase in debt services.

Now Japan is a playground for value investors.

Japanese market is trading below book value.

FCF yield is almost 10%

Dividend yield is 2.6%

Japan has a higher FCF yield than EM, US, Europe, etc.

Analysis over the 60 years shows that FCF yield has predicted returns the best for Japanese market.

Earnings revision — over last two months market was revising lower and lower, we think now that earnings will be revised upwards.

We start with a quant. model of 5,000 stocks, 85 data points P/S, P/E, corporate actions.

Afterwards we want to determine intrinsic value.

Project profit margins slightly forward (too far forward is not predictable).

We ask does the company have a moat?

Is there free market industry?

Is the industry economically viable? If no we look at liquidation, if yes we look for firms with moats so we look for earnings power value. Earnings Power Value (EPV) = adjusted book value x ROIC/R, such as Sumitomo Corp. If economically viable but no moat we look for free market entry, reproduction cost; an example would be Sony.

Nippon Paper Group 3893 JT

We look at liquidation value since business is decline.

It is very simple business to understand.

We value the assets and liabilities.

Look at restoration costs of the Ishinomaki Mill.

We look at current ratio, quick, coverage.

No. 1 in the Japanese paper market, rivalry with Oji.

The market is not dead, but shrinking, low growth.

It is a simple business and we understand it.

Assets and liabilities can be valued with great precision (tangible); we do not consider licenses, brand values, distribution networks, advertising, subsidiaries.

Restoration costs of the Ishinomaki Mill (after Tohoku) are known.

Current Ratio (1.2), Quick Ratio (0.7), Coverage Ratio (2.8), debt to equity ratio (1.3) do not signal any threat or inefficiency problems.

Free cash flow yield is over 20%; P/B 0.4.

ROIC FY 3/11 is 6.5%, coc FY 3/11 is 3.6% (not a value trap, not a cash burning machine).

No capital dilution in the last 10 years.

We see the cost of capital is very low.

Company is trading at 55% below liquidation value.

Sony 6758 JT

People are running away from it.

Tohoku and data leak will cost Sony about JPY 18 billion. Since March however Sony market cap went down 800 million.

You will not believe it, but it's true, Sony earns the cost of capital (ROIC FY 3/11 6.3% (JPY 362.2 billion in valuation reserves treated as one off), coc FY 3/11 2.9%).

Free cash flow yield is over 22.9%, cash to equity over 35%, P/B 0.6, no capital dilution since 2005.

Current Ratio (0.98), Quick Ratio (0.42), Coverage Ratio (4.3), debt to equity ratio (1.9) do not signal any threat or inefficiency problems;

It does not have a moat or franchise.

We look at marketable securities, and investments.

Add LIFO reserves.

Treat R&D as capital investment and depreciate over five years.

Intangibles only look at distribution networks.

Company is trading at 57% below intrinsic value.

Sumitomo 8053 JY.

Sumitomo has a big franchise and is the most attractive value stock in our universe.

Sumitomo is one of the leading general traders.

Has strengths in fields of steel pipes and nonferrous metals (copper, gold).

Has a large property rental income (after the land revaluation act, the big land holdings in Tokyo are valued at book).

Very strong financial holding and steady management.

High entry barriers (very old contracts and business ties).

Current Ratio (1.5), Quick Ratio (0.9), Coverage Ratio (5.2), debt to equity ratio (1.8) do not signal any threat or inefficiency problems.

One of the leading channel traders.

Sumitomo has a sustainable franchise.

Has strength in steel pipes and non-ferrous metals.

Cost of capital is below 5%, ROC is over 15%.

EPV indicates that the company 70% undervalued, using DCF the company is even cheaper.

One of my biggest mistakes is selling Nintendo in March 2007 when it reached IV and the stock climbed another 70,000 yen. Now you can buy it for 16,000 yen.

Patience and being rational is very important for investing.

Q&A: How is cost of capital so low (even with Japan’s low interest rates)?

For us it is important that the company earns that cost of capital. The diff between cost of capital and ROC is the multiplier.

Do you look at future? To predict the future is very difficult, I do look at it though. But for me to see how strong the balance sheet is, is the most important thing.

Disclosure: None


About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website

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