AVI Japan Opportunity’s results for 2023 show it continuing to pull ahead of its benchmark. For the 12 month period ended 31 December 2023, AVI Japan Opportunity generated an NAV total return of 15.8% and a share price total return of 14.8%, both well ahead of the 6.9% return on the MSCI Japan Small Cap Index.
Revenue earnings per share were up too, from 1.69p to 1.76p, and the dividend has been increased from 1.55p to 1.70p.
The chairman observes that 2023 was the year that unabated progress on corporate governance reform [which the trust was set up to exploit] drew global attention. He highlights the move by the Tokyo Stock Exchange to require companies to disclose capital efficiency improvement plans, particularly by those trading below 1x book value. More recently, the Tokyo Stock Exchange announced that it would add further pressure by calling on 1,000 plus companies that have parent-subsidiary relationships or that have listed or equity affiliates to increase disclosure around their rationale for having listed subsidiaries and their efforts to ensure their independence. Just after the end of the year in January, the TSE then released the names of 1,115 companies that disclosed information regarding actions to implement policies conscious of cost of capital and share price, shaming the 2,160 that did not.
The only real negative was the ongoing weakness in the Japanese yen [if and when this changes, UK-based investors could suddenly see significant gains on their Japanese exposure]. To illustrate the impact of the weak currency, since its inception, AVI Japan Opportunity has delivered returns of +40.5% versus +16.2% for the benchmark. In JPY terms, since inception, returns are significantly higher, at +73.7% vs +43.6% for the benchmark.
[These numbers clearly illustrate the success of AVI Japan Opportunities’ approach. The encouraging thing is just how much more there is for the trust to achieve. Even after this success, almost half of the total market cap of the companies in the portfolio is represented by cash sitting on these companies’ balance sheets, much of which is idle.]
The manager, AVI, has continued constructively engaging with portfolio companies to unlock value. Detailed letters or presentations sent to nine portfolio companies over the year. Three portfolio companies were the subject of public engagement, including NC Holdings, where three of our shareholder resolutions were successfully adopted.
Extracts from the manager’s report
The report has detailed information on most of the portfolio. Here we reproduce just the information provided on the top three contributors to returns.
TSI
TSI Holdings (“TSI”), one of the largest listed apparel companies in Japan, was the leading contributor in 2023, with its 68% share price increase adding 335bps to performance. TSI entered the portfolio in July 2022, and has generated a return on investment of 44%.
TSI’s strong performance can be partly attributed to the TSE’s initiative to pressure companies to address poor capital efficiency. As a follow-up to the 2022 TSE market classification review, in March 2023, the TSE requested listed companies to raise awareness around their corporate value, particularly if their shares were trading at a price-to-book ratio (“PBR”) below 1.0x. TSI holds a large amount of non-core business assets such as cash and deposits, investment securities and rental real estate, and remarkably, its PBR remains at c. 0.5x.
We believe the business side of TSI has also attracted investor interest. TSI, along with other Japanese apparel companies, faced challenges stemming from the impacts of COVID-19. Nevertheless, consumer sentiment recovered strongly in 2023, with the economy further stimulated by inbound demand from surrounding Asian countries acting as a tailwind.
In addition to the supportive macroeconomic trends, TSI is implementing operational changes to improve its efficiency. Specifically, TSI focused on revitalising its historically strong but currently underperforming brands, such as nano universe, through a rebranding initiative and reform that involved strengthening senior frontline members. Consequently, nano universe, whose performance had been on a downward trend over the past few years, began to exhibit signs of recovery in 2023. Furthermore, the company has been working towards delivering higher margins, targeting 4.3% operating margins by 2025 compared to the current lowly 0.9%.
In terms of engagement, we have deepened our constructive dialogue on operational improvement and capital policy. As highlighted earlier, TSI remains significantly undervalued, with a PBR of 0.5x, and we believe there is still substantial upside to be unlocked through our supportive engagement efforts.
Konishi
Konishi, a company engaged in manufacturing of adhesives and civil engineering, achieved a share price return of +65% over the period, adding 320bps to performance. Following intense private engagement with Konishi’s senior management, the company released a mid-term plan in May 2023, pledging to either invest or return to shareholders all cash generated over the next three years. The plan also outlined a three-year EBITDA growth target of +35% (of which +19% growth is forecast to be achieved in the first year).
This marked the first time Konishi had disclosed a capital allocation plan and its first commitment to buying back shares. A few weeks after the mid-term plan, Konishi announced an 8.5% share buyback which sent the share price +10% higher, and has been increasing further since. Aside from greater market recognition following the mid-term plan, earnings growth has buoyed the share price. Profits grew +71% over the six-month period to 30 September 2023 (Konishi’s interim), driven by price increases coupled with softening raw material prices.
Despite the +65% share price growth, Konishi’s EV/EBIT multiple increased only modestly from 4.0x to 5.4x. While Konishi have shown discipline in their capital allocation for the next three years, they have not addressed the current large cash pile, which, including listed securities, accounts for 47% of Konishi’s market cap. We will continue to engage with the company on improving capital allocation, amongst other operational measures, and foresee a bright future for the company and its share price.
Jade Group
JADE GROUP (formerly LOCONDO) (“JADE”), an apparel ecommerce company, achieved a near doubling of its share price, up +96% and adding 179bps to performance. Full-year profits in February 2023 came in above forecasts (¥991m vs. ¥900m), but it was the company’s +33% sales and +76% profit growth forecast for the year ending February 2024 that propelled the share price. By the 9-month mark at the end of December, operating profits had grown +99.9%.
JADE had been heavily investing in logistics infrastructure, leading to ballooning fixed costs weighing on profits and resulting in unutilised warehouse capacity. Last year it won the right to manage the Reebok brand in Japan through a joint venture with Itochu. Having already made the warehouse capacity investments, the company benefited from the power of operating leverage, with Reebok’s incremental sales flowing straight to the bottom line. This year’s profit guidance is in line with the mid-term plan, and management estimate that with further accretive acquisitions, they can grow profits by another 34% next year.
Alongside these results, JADE announced a 3.6% share buyback, which was well received. CEO Yusuke Tanaka’s insightful 14-page shareholder letter detailed the company’s history, what management have learned and management’s growth strategy. He made a compelling argument as to why JADE justifies a ¥30bn-50bn market cap, much higher than the current ¥23bn market cap. While it will require flawless execution of the plan to achieve the higher end of that range, we do not think it is entirely unrealistic.
Across AVI funds, we are JADE’s largest shareholder, owning just under 10% of the shares, and have maintained regular engagement with the company. We are optimistic about the company’s growth prospects, which we don’t think are being fully reflected in its 13x EV/EBIT multiple.
After the year end in February 2024, JADE announced the acquisition of Magaseek, which will see Gross Merchandise Value (“GMV”) double and, although not yet confirmed by the Company, double its profits over the coming years. At the time of writing, JADE’s share price is up +29% after the year end.
AJOT : Another great year for AVI Japan Opportunities