Strong balance sheet paying off for Japanese companies  

At FSSA, our investment approach focuses on identifying high-quality companies with strong management teams, dominant franchises and conservative financials. Additionally, we seek to invest in companies that have high return on invested capital (ROIC), strong and sustainable growth, and high earnings visibility.

In light of the ongoing market uncertainties, the FSSA Japan Equity strategy is invested in domestically-focused companies that have high visibility with regards to demand. This includes drugstores and discount retailers offering daily necessities, software and technology solutions providers operating a recurring revenue model, and online platforms in e-commerce and digital payments. We believe they should remain resilient in the event of a global recession.

We have also invested in leading consumer franchises, global medical equipment manufacturers, factory automation companies, and other technology leaders. Although they have high exposure to overseas markets, they are all high-quality companies with a dominant market share in niche industries and solid balance sheets.

Indeed, most of the companies in our Japan strategy have a net cash position on the balance sheet. In a world awash in high levels of debt, we believe these companies should offer a reasonable amount of downside protection. Our holdings also generate high ROIC, indicating that these companies have significant profits that can be reinvested into the business for long-term growth.

This can be seen in the Software-as-a-Service (SaaS) companies owned in the Japan strategy. They used their strong net cash balance sheets to take advantage of the “once in a lifetime” opportunity in 2020. Most of them invested massively into their businesses over the past year in order to increase their penetration into Japanese corporate clients. Rakus is a key example of this – although the company paused on its advertising spend in order to control costs during the pandemic, it continued to hire employees at its regular pace and its revenue growth remained strong, despite the macro environment. We believe there is still plenty of room to grow as the adoption of SaaS in Japan is still relatively low.

Other examples include companies like Japan Elevator Service and Shift, which took advantage of cash on their balance sheets to grow their businesses. Over the fiscal year ending March 2021, Japan Elevator Service made six acquisitions to expand its regional market share. It has identified another 20 companies with succession issues that it could potentially acquire in the future. We expect these new investments to improve its ROIC in the medium to long term.

Meanwhile, Shift added more than 700 engineers on a net basis in 2020, of which 100-200 came from acquisitions. So far, they have acquired 24 companies in total (five of the acquisitions were made in 2020) as they consolidated the market. Shift aims to disrupt the deeply-rooted practices of the domestic information technology (IT) services industry and become a full solutions provider for companies undergoing digital transformation projects. We believe that acquiring talent and technology is critical for the company to sustain its growth over the long term.

Source:  Company data retrieved from company annual reports or other such investor reports. Financial metrics and valuations are from FactSet and Bloomberg. As at end July 2021 or otherwise noted.

Note: Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same.  All securities mentioned herein may or may not form part of the holdings of FSSA Investment Managers’ portfolios at a certain point in time, and the holdings may change over time. 


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