The Matthews Japan Fund (Trades, Portfolio) released its portfolio for the fourth quarter of 2021 earlier this week.
Part of San Francisco-based investment firm Matthews Asia, the fund is managed by Taizo Ishida and Shuntaro Takeuchi. It invests in Japanese companies that have sustainable growth in order to generate long-term capital appreciation.
Based on these criteria, the fund established five new positions during the three months ended Dec. 31, sold out of eight stocks and boosted or trimmed a number of other existing holdings. The most notable trades for the quarter were new positions in Seven & I Holdings Co. Ltd. (TSE:3382, Financial), Koito Manufacturing Co. Ltd. (TSE:7276, Financial) and Raksul Inc. (TSE:4384, Financial) as well as the divestment of the Nitori Holdings Co. Ltd. (TSE:9843, Financial) and Nidec Corp. (TSE:6594, Financial) holdings.
Seven & I
The Japan Fund invested in 531,200 shares of Seven & I Holdings (TSE:3382, Financial), allocating 1.51% of the equity portfolio to the holding. The stock traded for an average price of 4,879.76 yen ($42.27) per share during the quarter.
The retail company, which operates 7-Eleven convenience stores, general merchandise stores and specialty stores, has a market cap of 5.08 trillion yen; its shares closed at 5,750 yen on Tuesday with a price-earnings ratio of 22.76, a price-book ratio of 1.75 and a price-sales ratio of 0.65.
The GF Value Line, which takes historical ratios, past performance and future earnings projections into consideration, suggests the stock is modestly overvalued currently.
Seven & I’s financial strength was rated 5 out of 10 by GuruFocus. Although the company has issued new long-term debt over the past three years, it is manageable as a result of a comfortable level of interest coverage. The Altman Z-Score of 1.88 indicates it is under some pressure, however, since revenue per share has declined in recent years. The return on invested capital slightly overshadows the weighted average cost of capital, meaning value is being created as the company grows.
The company’s profitability scored a 6 out of 10 rating, driven by operating margin expansion. Its returns on equity, assets and capital underperform around half of its competitors. Seven & I also has a moderate Piotroski F-Score of 5 out of 9, indicating conditions are typical for a stable company, and a predictability rank of two out of five stars. According to GuruFocus, companies with this rank return an average of 6% annually over a 10-year period.
Matthews has the largest position in Seven & I with 0.06% of its outstanding shares. The Third Avenue Value Fund (Trades, Portfolio) and the iShares MSCI ACWI ex. U.S. Exchange-Traded Fund also own the stock.
Koito Manufacturing
The fund picked up 429,200 shares of Koito Manufacturing (TSE:7276, Financial), dedicating 1.47% of the equity portfolio to the position. During the quarter, shares traded for an average price of 6,591.13 yen each.
The company, which manufactures headlights, taillights and fog lights for cars, has a market cap of 933.88 billion yen; its shares closed at 5,810 yen on Tuesday with a price-earnings ratio of 21.62, a price-book ratio of 1.65 and a price-sales ratio of 1.23.
According to the GF Value Line, the stock is fairly valued currently.
GuruFocus rated Koito Manufacturing’s financial strength 8 out of 10 on the back of a comfortable level of interest coverage and a high Altman Z-Score of 5.26 that indicates it is in good standing even though revenue per share has declined in recent years. The ROIC also eclipses the WACC, so value is being created.
The company’s profitability also fared well with a 7 out of 10 rating. Although margins are declining, its returns outperform over half of its industry peers. Koito also has a high Piotroski F-Score of 8, suggesting operations are healthy, and a one-star predictability rank. GuruFocus says companies with this rank return 1.1% annually.
Matthews Japan has the largest holding in the stock with 0.27% of its outstanding shares. The iShares MSCI ACWI ex. U.S. ETF also has a position in Koito Manufacturing.
Raksul
Matthews entered a 378,600-share investment in Raksul (TSE:4384, Financial), giving it 1.21% space in the equity portfolio. During the quarter, the stock traded for an average per-share price of 6,062.5 yen.
The company, which provides printing and transportation services, has a market cap of 101.78 billion yen; its shares closed at 3,525 yen on Tuesday with a forward price-earnings ratio of 769.23, a price-book ratio of 12.73 and a price-sales ratio of 3.45.
Based on the GF Value Line, the stock appears to be a possible value trap. As a result, potential investors should do thorough research before making a decision.
Raksul’s financial strength was rated 5 out of 10 by GuruFocus. The high Altman Z-Scoree of 6.99 indicates the company is in good standing even though its debt-related ratios are underperforming versus the industry and its own history.
The company’s profitability did not fare as well, scoring a 4 out of 10 rating on the back of negative margins and returns that underperform a majority of competitors. Raksul is also supported by a moderate Piotroski F-Score of 6.
The Japan Fund is currently the only guru invested in the stock with 1.31% of its outstanding shares.
Nitori Holdings
The Japan Fund dumped its 130,600-share holding in Nitori Holdings (TSE:9843, Financial), impacting the equity portfolio by -1.54%. The stock traded for an average price of 19,713.1 yen per share during the quarter.
According to GuruFocus, the fund gained 32.85% on the investment over its lifetime.
Operating a chain of furniture stores, the retailer has a market cap of1.82 trillion yen; its shares closed at 16,120 yen on Tuesday with a price-earnings ratio of 19.97, a price-book ratio of 2.57 and a price-sales ratio of 2.32.
The GF Value Lune suggests the stock is modestly undervalued currently.
GuruFocus rated Nitori’s financial strength 8 out of 10, driven by a comfortable level of interest coverage and a high Altman Z-Score of 6.75. Although assets are building up at a faster rate than revenue is growing, value creation is occurring since the ROIC exceeds the WACC.
The company’s profitability scored a 9 out of 10 rating on the back of operating margin expansion, strong returns that top a majority of industry peers and a high Piotroski F-Score of 7. Despite recording consistent earnings and revenue growth, the five-star predictability rank is on watch. GuruFocus data shows companies with this rank return, on average, 12.1% annually.
The Hennessy Japan Fund (Trades, Portfolio) has the largest position in Nitori with 0.11% of its outstanding shares. The iShares MSCI ACWI ex. U.S. ETF also holds the stock.
Nidec
The fund exited its 209,400-share holding of Nidec (TSE:6594, Financial), which had an impact of -1.38% on the equity portfolio. Shares traded for an average price of 12,882.1 yen each during the quarter.
GuruFocus estimates the fund gained 67.07% on the long-held investment.
The company, which manufactures electric motors for electric appliances, hard-disk drives and automobiles, has a market cap of 5.86 trillion yen; its shares closed at 10,030 yen on Tuesday with a price-earnings ratio of 41.72, a price-book ratio of 5.11 and a price-sales ratio of 3.31.
According to the GF Value Line, the stock is currently fairly valued.
Nidec’s financial strength was rated 6 out of 10 by GuruFocus. Despite issuing new long-term debt over the past several years, it is at a manageable level as a result of adequate interest coverage. It also has a high Altman Z-Score of 4.71 even though assets are building up at a faster rate than revenue is growing. The ROIC also surpasses the WACC, suggesting value is being created.
The company’s profitability scored an 8 out of 10 rating. Although the operating margin is in decline, Nidec’s returns outperform over half of its competitors. It also has a high Piotroski F-Score of 9. Steady earnings and revenue growth contributed to a 2.5-star predictability rank. Companies with this rank return an annual average of 7.3% based on GuruFocus data.
Hennessy is the company’s largest guru shareholder with 0.06% of its outstanding shares. The iShares ETF also has a position in Nidec.
Additional trades and portfolio performance
During the quarter, the Japan Fund also curbed its Recruit Holdings Co. Ltd. (TSE:6098, Financial) and SMS Co. Ltd. (TSE:2175, Financial) positions, sold out of Pan Pacific International Holdings Corp. (TSE:7532, Financial) and Hikari Tsushin Inc. (TSE:9435, Financial) and boosted its bet on Persol Holdings Co. Ltd. (TSE:2181, Financial).
Matthews’ $1.54 billion equity portfolio, which is composed of 52 stocks, is largely invested in the technology sector, followed by smaller holdings in the health care and industrials spaces.
The fund returned -1.92% in 2021, underperforming the MSCI Japan Index’s 2.04% return.
