While China’s world-beating stock market rally is generating headlines, some of the biggest Asia-focused hedge funds are looking further east for profits.
Hutchin Hill, Indus Capital Partners and Oasis Management (Hong Kong) are among firms touting winning trades among Japanese power producers, makers of foods and beverages and semiconductor parts.
A push by Prime Minister Shinzo Abe to improve corporate governance has made the market a favorite of hedge funds at the same time as fears that Chinese markets are entering bubble territory mount following gains of as much as 150 percent in the country’s two best-performing stock market indexes during the past year.
“A combination of sustained political resolve and focus on shareholder value is leading to real change across Japan,” said Ben Williams, Hong Kong-based head of Asia-Pacific financing sales at Bank of America-Merrill Lynch. “Global investors are increasingly viewing the country favorably and companies are somewhat further ahead than those in China in terms of genuine corporate reform.”
Hedge-fund managers who gathered at the annual Sohn Conference Hong Kong presented by the Karen Leung Foundation last week cited Japanese companies such as Kyocera Corp. and Coca-Cola West Co. as undervalued stocks poised to rally.
Management of Coca-Cola West has room to increase its per-share dividend to bring it in line with the local industry payout average of ¥60, said Ethan Devine, a New York-based partner of Indus Capital Partners. That would represent a 46 percent increase from last year’s payout based on Bloomberg-compiled data. The company paid a dividend of ¥41 for 2014.
“Any yield assumption you are using there, the stock is going to double,” he said. Indus oversees $6 billion of assets in Asia-focused and emerging markets stock funds.
Seth Fischer, chief investment officer of Oasis Management, said the share price of Kyocera could gain 90 percent.
Among the 13 managers who shared ideas at the conference, more presented Japan stock picks than investment ideas related to China.
As part of Abe’s reforms to help pull the world’s third-largest economy out of two decades of deflation, Japan brought in a new corporate governance code on June 1 that requires firms to appoint at least two independent directors, or explain noncompliance.
‘Process of change’
A stewardship code introduced last year enlists asset managers to help companies improve performance and shareholder returns. The government backed the creation of a stock index that rewards businesses that deploy funds well and set a minimum 8 percent ROE target for firms.
“We really are only at the beginning of the process of change,” said Rob Crawford, Singapore-based head of investment at Ichigo Asset Management. He likes IT Holdings Corp., a provider of network solutions and system integration, and Japan’s largest men’s suit retailer, Aoyama Trading Co. Both management teams have announced medium-term targets for ROE improvements.
Widespread cross-shareholdings to bolster business ties have been suppressing Japanese companies’ ROE. Oasis is asking Kyocera to unwind such shareholdings with mobile-services provider KDDI Corp. and to improve information disclosure, said Fischer.
Suzuki Motor Corp. may rally 50 percent, said Avinash Abraham, Asia head of Balyasny Asset Management, a Chicago-based hedge-fund firm that invests about $3 billion in the region. The carmaker recently took provisions, which Abraham said helped suppress its share price, before a planned buyback of 20 percent of its stock from Volkswagen AG to undo their cross-stakeholdings.
Analysts and investors have also underestimated earnings contributions from Suzuki’s fast-growing Indian dealership business, he added.
Share swaps to unwind cross-shareholdings could drive the stocks of such broadcasters as Nippon Television Holdings Inc. and Fuji Media Holdings Inc. as much as 50 percent higher over the next 18 months, said Aaron Nieman of Hutchin Hill Capital, a New York-based hedge-fund firm overseeing $4 billion of assets.
Hokkaido Electric Power Co. and Kansai Electric Power Co. are among power producers that could advance more than 60 percent, with tariff increases and the restart of nuclear reactors shut after the 2011 Great East Japan Earthquake helping them return to profitability, said Alp Ercil, founder of Asia Research & Capital Management.
Asia Research oversees just over $2 billion in funds focused on distressed assets.