1 stock: 100% cash, 150% real estate, ~10x earnings... and still cheap

The price you pay always matters. It’s one of investing’s oldest rules, and also one of the easiest to forget when markets get carried away. It’s also the one piece of advice James Halse, CFA of Senjin Capital would give to new investors.

And in Japan, mispriced assets aren’t just hiding right in front of you, they’re hiding in extraordinary abundance. Imagine buying a company where the cash on the balance sheet alone covers the entire market capitalisation, real estate adds another 150% on top, and a profitable manufacturing business is thrown in for free.

These kinds of situations don’t exist in most markets. In Japan, they still do and corporate governance reform is turning what were once dismissed as value traps into genuine opportunities for those willing to pull the trigger.

James Halse CFA, is Co-Founder, CEO and CIO of a deep-value shareholder activist fund focused exclusively on Japan. A former senior portfolio manager at Platinum Asset Management – where he oversaw roughly $1 billion across Japan strategies and a global fund – Halse has spent more than a decade finding exactly these kinds of mispricings.

In this week’s Q&A, he shares his latest investment, a watchlist idea gaining activist attention, and why the valuation gap between the US and Japan deserves a much closer look.

What’s your most recent investment and why?

Our most recent large investment is Iwabuchi Corp. (5983-JP).

We follow a deep-value shareholder activist strategy, focused on the Japanese market.

The strategy benefits from the changes in Japan from the corporate governance reform, and still very cheap valuations of companies with very lazy balance sheets in many parts of the market.

Iwabuchi Corp has a nicely profitable, stable manufacturing business that could be much more profitable if management optimise the very underutilised factory footprint and integrate past acquisitions.

But the business itself is only about 1/3 of the company's value.

When we started buying the stock, the market cap was 100% covered by the net cash balance. The company also had an estimated 150% of its market cap in real estate at market value, but held on balance sheet at historic cost from many years ago. Another 20% of the market cap was in equity securities. The stock was trading on 10x the NPAT of the manufacturing business.

These are the kinds of opportunities you don't see outside of Japan (and maybe Korea).

We have been engaging constructively with the company's management around reform of their capital and operating policies, and the discussions have been progressing well. In the meantime, the stock has roughly doubled, but still trades on only 0.7x its tangible book value (and much less if you value the real estate at market value).

 

Which investment did you add to your watchlist this week?

Mitsubishi Logistics (9301-JP). 

It is not one for us right now, but is a potentially interesting "shadow activist" idea, where our investors could benefit from another activist doing the heavy lifting.

It holds real estate it rents out worth close to the market capitalisation, has a huge pile of equity holdings in other public companies worth 40% of the market cap, and also has a sizeable logistics business where it owns warehouses and other facilities. It also owns Kobe Seaworld.

Private equity firms have been very acquisitive in this area in Japan and elsewhere due to the ability to sell & lease back owned real estate, plus grow via the execution of bolt-on M&A.

It has an activist we know well on the register, and it is their number 1 / number 2 position in two of their funds where the holdings are publicly disclosed.

The company is buying back stock and selling down its equity holdings. The activist will push them to keep doing this, and perhaps also rein in their large capex plans.

What is the most recent investment you have trimmed or sold and what drove this decision?

None recently. Our approach tends to be buy substantial positions and hold until we exit, rather than rebalancing between positions frequently.

What’s your favourite chart or data point from this week?

The US market is becoming a lot more capital intensive with the datacentre / GPU spending money-go-round.

Typically, greater capital intensity is correlated with lower valuations (less free cash-flow for every dollar of earnings and lower returns on invested capital). 

Historically, the US has had lower capital intensity than Europe and Japan, but that is reversing dramatically.

Given that situation, will the US continue to trade at premium valuations?

What was your weekly high?

I met one of our investors for the first time. He had reviewed our materials, asked sensible questions, and made a substantial commitment to our fund on the spot.

And, on the same day my 5yo daughter drew a card for me and wrote (in her broken spelling) "Daddy I love you so so much".

Both are great highs, but for very different reasons!

What was your weekly low?

It's always the unavoidable business admin!

Research is fun, speaking to investors is fun, writing about ideas is fun, thinking about business strategy is fun. Admin is not fun. 

What first drew you to markets and what continues to keep you inspired today?

I was first drawn to the Japanese markets by the insanely cheap valuations.

I stayed because I discovered Japan's corporate governance reform and shareholder activism which meant "value traps" could become gold mines.

What’s one piece of advice you’d give to new investors?

The price you pay always matters. Investors forgot that in 2021, and may be forgetting that now in some parts of the markets.

How do you unwind when you’re not thinking about the market?

I have a 7yo and 5yo, so there is not a lot of "unwinding", even away from the markets. That said, taking the kids fishing can be quite fun (and rewarding!).

From our recent trip up to Port Stephens:

I do like to go to a concert every month or two, when a band I like is in town.

This year I have seen Linkin Park, Pendulum, Anthrax & Alien Weaponry, and (on the Japan theme) Babymetal. 

Rapid fire! 🔥

Favourite investing book?

One Up on Wall Street (Peter Lynch), or Hedge Fund Activism in Japan (Buchanan, Chai, Deakin)

Favourite investing or finance/markets-related podcast?

I don't really do the podcasts anymore, but probably the normal ones - business breakdowns, invest like the best etc.

The first thing you read each morning?

X / LinkedIn.

Favourite restaurant?

A little Izakaya (Japanese "pub") in Shinagawa, Tokyo.

Something people are surprised to learn about you?

I rode an elephant into my wedding. My wife and I were married in a Mughal palace in Rajasthan. It was a great experience with four days of events and all our friends and family there.