By Sophia Li, Portfolio Manager, FSSA Investment Managers
There is a viral meme making the rounds on social media that asks, “Who led the digital transformation of your company?” A red circle drawn around the answer “Covid-19”, rather than CEO or CTO, is intended to be a humorous response. While the meme is rather tongue-in-cheek, surveys conducted by consultants such as McKinsey have indeed noted the acceleration of digital disruption due to the pandemic.
In Japan, despite annual IT expenditures being among the highest globally, the pace of digital adoption there has been slow. But, with tailwinds brought about by Covid, companies are starting to pick up the digital pace. According to the Information-technology Promotion Agency, 40% of Japanese companies have now established a digital transformation (DX) project1.
We believe this will benefit internet services and Software-as-a-Service (SaaS) companies – many of which we own in the FSSA Japan Equity strategy. M3 is one such example. The company provides digital marketing services, connecting pharmaceutical companies to doctors on its web-based platform. More than 80% of Japanese doctors are active members, leading to a surge of e-detailing orders on M3’s website in 1H2020, as doctors avoided in-person meetings with medical representatives.
We expect this to continue post-Covid, as the industry increasingly embraces technology to deliver highly efficient yet low-cost marketing. Given online marketing expenditure is only 1-2% of pharmaceutical companies’ marketing budgets, we believe the long-term growth potential for M3 is huge.
Rakus, which provides cloud-based services to small and medium-sized enterprises (SMEs), also delivered strong growth for its core expense management software, Raku Raku Seisan. One of the benefits of cloud services, particularly as more people work from home, is that it is accessible anywhere and at any time. It also helps that Rakus’ software saves companies significant time and labour costs. With low penetration of cloud services in Japan, we believe there should be a long runway of growth for Rakus ahead.
We also own Bengo4.com, the largest provider of cloud-based contract software in Japan, which has grown exponentially as companies adopt e-signatures in their business. Its CloudSign service has over 80% share of the Japan market, with sales up 2.6x year-on-year due to the broad work-from-home environment across industries in 2020.
Covid-19 has served as the strongest push yet for corporate Japan to shift away from the deeply rooted hanko stamp culture. A hanko, to put into context, is a physical stamp used in place of a signature to process official documents. Amid the pandemic, many Japanese employees were still commuting into the office to “sign” documents, leading the government to announce that digital administrative procedures needed to improve.
We believe the government’s plans to accelerate digitalisation in Japan should support Bengo4.com’s future growth, with signs of change already happening: a group of small and medium-sized information technology (IT) companies recently held a “memorial service” for hanko seals that are no longer needed2.
The FSSA Japan Equity strategy is well positioned to take advantage of these accelerating growth trends. With our bottom-up investment approach, we seek to identify quality companies with a strong corporate culture and team of people, a superior franchise, dominant market share, strong pricing power, high recurring revenue and a cash-rich balance sheet. We believe M3, Rakus and Bengo4.com should exhibit lasting competitive advantages – and are prime examples of the kind of long-term investment opportunities we have found in Japan.
1 Source: https://www.ipa.go.jp/files/000082054.pdf (Japanese language)
Source: Company data retrieved from company annual reports or other such investor reports. As at 31 December 2020 or otherwise noted.
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Sophia Li, Portfolio Manager, joined FSSA Investment Managers as a graduate in 2009 and has developed an extensive coverage of companies in North Asia. She is the lead manager of the FSSA Japan Equity fund and FSSA Asia Pacific All Cap fund.
This article was adapted from 2021-03 FSSA Japan Equities Client Letter (part 1 of 4).