Japan: Finding the ‘picks and shovels’ in the electric vehicle boom

We own companies like Keyence, which makes sensors, laser markers and machine vision systems. Keyence has delivered strong capital growth for investors. The company generates stable free cash flow, and both sales and net profit per employee are among the highest in the industry.

There are a few key reasons for its superior profitability metrics and long-term steady returns. Firstly, Keyence’s production is fabless (meaning it does not own factory plants) and its resources are concentrated in two areas: research and development (R&D), and sales and marketing. Due to its low fixed cost structure, Keyence generates high return on invested capital and earnings are typically resilient during a downturn. We believe this also enhances its long-term competitiveness.

Secondly, Keyence’s direct sales model (as opposed to a distributor sales model), enables the company to benefit from a virtuous feedback loop with its clients. It has highly technical sales consultants that are able to innovate and design client-specific products. This translates into high (more than 80%) gross profit margins for the company.

We also own Murata Manufacturing, the world's largest multi-layer ceramic capacitor (MLCC) manufacturer with more than 50% global market share. MLCCs are core passive components in electronic circuits. The simple rule of thumb is that the increasing complexity of electronic devices means that more capacitors are required per device in order to reduce power loss. For example, according to our research, the number of MLCCs used in high-end 5G smartphones is estimated to be at least 30% higher than in an LTE or 3G phone.

Capacitors are also used in the automotive industry, which benefits from structural tailwinds in the growth of electric vehicles. Over the next five years, we believe the outlook for the automotive MLCC market should be quite favourable, as the number of capacitors in an electric vehicle can be 5-6x higher than in a combustion engine vehicle.

In our view, Murata is a well-run company albeit in a cyclical industry. The business is cash generative, balance sheet is strong, management is conservative and the company is well-regarded by its customers. We believe Murata should be a structural beneficiary of the component upgrade trend.

Other examples include Hoya and Lasertec, which should benefit from the increasing adoption of extreme ultraviolet (EUV) lithography in the semiconductor manufacturing process. Hoya has close to 100% market share for the mask blanks used for EUV and Lasertec has close to a monopoly in EUV mask inspection systems.

Hoya has a strong profit-centric culture and its track record has been consistently good. Hoya generates 40-50% operating profit margin (OPM) on its products, as there is virtually no competition. As semiconductor leaders Taiwan Semiconductor (TSMC) and Samsung start to migrate their chip production to more advanced and smaller nodes, we believe that average selling prices (ASPs) for Hoya’s EUV products should rise.

Lasertec is one of the largest semiconductor production equipment companies in Japan. The company is run by professional management and has a strong research & development (R&D) culture. As a result, it has been able to launch new products ahead of competitors. Return on equity (ROE) and operating margin is also among the top within the industry.

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.

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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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The information contained within this document is generic in nature and does not contain or constitute investment or investment product advice. The information has been obtained from sources that First Sentier Investors (“FSI”) believes to be reliable and accurate at the time of issue but no representation or warranty, expressed or implied, is made as to the fairness, accuracy, completeness or correctness of the information. Neither FSI, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from any use of this document. 

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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 First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.

In Hong Kong, this document is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this document is issued by First Sentier Investors (Singapore) whose company registration number is 196900420D. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

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First Sentier Investors (Hong Kong) Limited and First Sentier Investors (Singapore) are part of the investment management business of First Sentier Investors, which is ultimately owned by Mitsubishi UFJ Financial Group, Inc. (“MUFG”), a global financial group. First Sentier Investors includes a number of entities in different jurisdictions.

MUFG and its subsidiaries are not responsible for any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.

Important Information

The information contained within this document is generic in nature and does not contain or constitute investment or investment product advice. The information has been obtained from sources that First Sentier Investors (“FSI”) believes to be reliable and accurate at the time of issue but no representation or warranty, expressed or implied, is made as to the fairness, accuracy, completeness or correctness of the information. Neither FSI, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from any use of this document. 

This document has been prepared for general information purpose. It does not purport to be comprehensive or to render special advice. The views expressed herein are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an investment recommendation. No person should rely on the content and/or act on the basis of any matter contained in this document without obtaining specific professional advice. The information in this document may not be reproduced in whole or in part or circulated without the prior consent of FSI. This document shall only be used and/or received in accordance with the applicable laws in the relevant jurisdiction.

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 First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.

In Hong Kong, this document is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this document is issued by First Sentier Investors (Singapore) whose company registration number is 196900420D. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

First Sentier Investors and FSSA Investment Managers are business names of First Sentier Investors (Hong Kong) Limited. First Sentier Investors (registration number 53236800B) and FSSA Investment Managers (registration number 53314080C) are business divisions of First Sentier Investors (Singapore). The FSSA Investment Managers logo is a trademark of the MUFG (as defined below) or an affiliate thereof.

First Sentier Investors (Hong Kong) Limited and First Sentier Investors (Singapore) are part of the investment management business of First Sentier Investors, which is ultimately owned by Mitsubishi UFJ Financial Group, Inc. (“MUFG”), a global financial group. First Sentier Investors includes a number of entities in different jurisdictions.

MUFG and its subsidiaries are not responsible for any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.