[Anjani Trivedi] Japan’s Legendary Trading Houses Have a New History
The actions of the so-called sogo shosha, the groups that contributed to the success of post-war Japanese exports – such as Itochu Corp., Marubeni Corp. and Mitsubishi Corp. – have risen 36% over the past year, overtaking the race to a three-decade high by the broad Topix index. Trading companies’ free cash flow levels are higher than at their peak and their leverage is much lower.
Ask investors why stocks are recovering and they’ll likely quote commodity prices, as they always have. Previously, trading houses made almost 50 percent of their income from metals and energy assets and began to aggressively ramp up their investments just as the cycle was peaking.
Then that cycle turned. The sogo shosha were severely beaten and the prospects for a recovery looked dim. As of March 2016, the top five (including Mitsui & Co. and Sumitomo Corp.) recorded commodity-related depreciations of nearly 950 billion yen ($ 8.4 billion) over two quarters. , much more than what analysts had expected at the time. As they faced soaring debt to EBITDA, investors backed out of equities.
This led to a new chapter. Companies began to recalibrate themselves by ditching commodities and now own smaller chunks of mining and energy assets. Itochu, for example, has expanded its machinery, financial services and food segments. At Mitsubishi, consumer goods account for more than 50 percent of gross profit, and the company has seen a wave of acquisitions: in August, it announced plans to buy an 80 percent stake in a national company of precooked rice and lunch boxes. Later in the month, he revealed a partnership with Fast Retailing to launch the Uniqlo clothing chain in Vietnam next year.
Companies have generally taken a proprietary approach rather than a brokerage role. Sometimes they have been almost viewed as banks or private equity firms, or commodity traders who also have large interests in resources.
Through hundreds of subsidiaries, sogo shosha has entered every step of the supply chain, buying products, selling them and investing in businesses like food and textiles in Japan and around the world.
However, investors still view trading houses as primarily a commodity game. Goldman Sachs, restoring coverage to the sector after one year, said in a report last week that stocks are strongly correlated with resource prices, and cited the Bloomberg Commodity Index. This index measures a multitude of tradable assets, with a weight of nearly 11% for gold and 4.35% for live cattle futures, but it does not include coking coal and coking coal. iron ore, mainstays of trading companies, and obviously can not represent their retail businesses.
As Jefferies analyst Thanh Ha Pham points out, the dispersion of trading house interests makes it difficult to identify a single engine of growth.
So the Big Five and their brothers were valued based on their books, or as holding companies, or as asset managers with a discount on asset values, or just earnings.
But there’s a lag: Investors have acknowledged that sogo shosha has cleaned up their accounts, so they’re trading 8-50% above their five-year average price over tangible book value per share. Based on price-earnings, however, stocks are down 4-35% from their long-term averages, despite record earnings. They are also trading nearly 40 percent below the rest of the Topix 500, while their ROEs are 30 percent higher than their peers.
Of course, corporate earnings are often volatile and riddled with point elements, so the P / E gauge may not be perfect. And maybe companies are still burdened with the history of their investment decisions. But their activities have changed and the impact on value is ignored. Additionally, a major overhaul of Japanese taxation began in the year as investors looked elsewhere, which could encourage restructuring and possibly lower the conglomerate’s haircut.
As the Japanese market rebounds, it’s time to take a look at the new stories being told by the country’s most famous names.
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. – Ed.