* PM Abe puts focus on ROE, a tailwind for some internet
* Foreign investors eye nimble, founder-led firms
By Ayai Tomisawa
TOKYO, April 15 Some Japanese Internet companies
are getting a boost from foreign investors as Prime Minister
Shinzo Abe pushes for an elusive strength his country's firms
are not known for - high returns.
Overseas long-term investors were already hunting for stocks
with growth potential, good governance and higher returns on
equity before Abe took office in December 2012. But it's been a
hard slog for many as the world's third-biggest economy stumbled
through 15 years of deflation and sporadic growth.
It came as no surprise then when Abe's prescription to
repair the economy with massive monetary and fiscal stimulus
sent the Tokyo market on a tear.
And now, stocks such as MonotaRo Co, M3 Inc
, Kakaku.com Inc, GMO Payment Gateway Inc
, and Start Today Co are getting a new tailwind
as "Abenomics" puts the spotlight on greater return on equity.
"These are entrepreneurial companies with founders in there,
first-generation founders in many cases," said Roger D. Edgley,
a portfolio manager at Wasatch Advisors, which is based in Salt
Lake City. This can mean they are nimbler than more established,
and bureaucratic, Japanese companies, he said.
This agility eliminates a major obstacle, especially when
firms make big investments such as M&A or overseas expansion.
"Some of these companies are change-makers," said Edgley,
who owns stock in all five of the companies and manages more
than $2 billion in the firm's international growth strategy.
In January the Japan Exchange Group, the owner of the Tokyo
Stock Exchange, launched the JPX-Nikkei 400 Index, which focuses
on stocks with higher ROE. After a slow start, the index is
attracting attention after Japan's Government Pension Investment
Fund, the world's largest pension fund, adopted the JPX-400 as a
benchmark for some of its passive stock investments.
Japanese companies traditionally have not focused on
maximising shareholder value, instead prioritising stability and
long-term business relationships cemented by interlocking webs
of cross-shareholdings. A lack of outside corporate directors
has meant little pressure for management to keep shareholders
Overall, Japan's listed firms returned just $9.10 for every
$100 of shareholder equity in the financial year ended in March,
far below the 15.10 percent ROE at U.S. companies and 12.60
percent at Asian companies excluding Japan, Nomura Securities
In contrast, MonotaRo, which operates an online shopping
site selling industrial tools to smaller Japanese manufacturers,
boasts an ROE of 31.4 percent. Its foreign ownership has risen
to 78.3 percent from 67.0 percent over the past two years. That
compares to a Japanese average of just 28 percent.
While the Nikkei benchmark jumped 57 percent in 2013 thanks
to Abenomics, these entrepreneurial companies soared as much as
225 percent. The internet stocks have pulled back with the
broader market this year but they still may look expensive.
Nonetheless, some overseas investors predict even bigger
returns over the coming decade.
"Long-term foreign investors would not buy shares of
companies with low ROE even if their price/earnings ratios were
cheap," said Shingo Ide, chief financial researcher at NLI
Some of the companies that have strongly outperformed the
market were created by entrepreneurs around the burst of the
dot.com bubble in 2000.
These smaller internet companies are not household names,
but occupying a niche could be an advantage.
Foreign investors have complained that big-name Japanese
companies tend to hold on to less profitable businesses and sit
on mountains of cash rather than investing for growth or
distributing money to investors.
Among bellwether exporters, for example, Sony Corp
runs such businesses as TV, finance and gaming, while Toyota
Motor Corp has a financing business and a house
building business. Frustratingly for investors, Sony's ROE was
just 4.9 percent, and Toyota's 8.5 percent for their fiscal
years ending in March last year.
Japanese internet firms are also spared from the woes that
hurt even the country's most profitable companies - shrinking
demand due to rapid aging of population.
The country's e-commerce market is still small compared with
other countries, leaving a lot of room for companies like
MonotaRo to expand their business in Japan.
Last year, Japanese people spent $46.8 billion on
e-commerce, according to Euromonitor. That compares with $207.6
billion Americans spent, while Chinese people spent $98.53
billion and British spent $53.0 billion. Per capita, that puts
Japan at roughly half the spending of the U.S. and well behind
Kabir Goyal, equity analyst at Wasatch Advisors who was in
Japan last month with the fund's portfolio manager Edgley, said
his fund has invested in Japan for more than 10 years.
"We've been meeting with more high quality small caps that
are led by entrepreneurial founders," he said. "This is aided by
the rapid acceleration of e-commerce in Japan, which is opening
up opportunities for new business models."
(Edited by William Mallard & Shri Navaratnam)