As stated in my last post, a full position in Takefuji Corp. (8564/JP or TAKAF/OTC) was purchased Monday at US$62.50 per share.
Takefuji is a Japanese-based consumer finance company that’s undeniably cheap. The shares currently trade at about 1.1 times book value, just over 16 times earnings and approximately three times sales. I’m not crazy about that price-sales ratio but the current ratio and quick ratio are each roughly 7. This is a hugely overcapitalized company that should return its surplus cash to shareholders either through special dividends or share repurchases. There’s no guarantee either will happen, but with Japan’s financial landscape changing I’m hopeful.
Takefuji could also use its cash to make acquisitions -- or it could be subject to itself being a takeover target. That’s not a prediction. I simply like the idea of holding stock in such a cheap, cash-rich company. I’m betting that something will happen to unlock the value over the course of the next 3 to 5 years.
Of course, there are reasons why Takefuji’s stock is cheap. (Regular readers know that everything I buy has problems.)
For starters, consumer lending companies in Japan have had their share prices held back due to uncertainty relating to legal issues regarding maximum interest rates that can be charged. In fact, two conflicting lending laws have existed for many years on this topic, leading to a “grey zone.” The judiciary and legislative governmental bodies have been working on this, with new legislation to eliminate the “grey zone” in 2007. Some investors worry that a recommendation will be made to radically reduce interest rate caps, which would hurt earnings. I take the view that eliminating the “grey zone” is a positive in and of itself, and that Takefuji’s rock-solid fundamentals can withstand any mandatory lowering of maximum rates.
Another factor holding down the stock prices of consumer lenders in Japan is the recent government action taken against Aiful Corp., the country’s largest consumer finance company. Japan's Financial Services Agency ordered the Aiful to suspend operations as punishment for illegal loan-collection tactics. Investors are concerned that the government is also investigating other consumer lenders, including Takefuji.
Lastly, the company suffered from a wiretapping scandal involving its former chairman a couple of years ago. A manager replaced him with stronger ties to the founding family -- which increased worries about corporate governance.
Despite these concerns, at the end of the day the fundamentals win out for me. I'm paying roughly 1.1 times book value for an overcapitalized consumer finance company generating a lot of cash. I'm patiently waiting for something good to happen -- in time.
UPDATE 8/7/2006: More Takefuji Corp. stock was purchased. The price paid was US$46.90 per share. That makes the average price $57.30.
UPDATE 6/5/2007: Even more Takefuji stock was purchased at the price of US$37.00 per share. The average price is now $49.18.
Even if they lower the interest rate caps, borrowing at 2% and lending in the high teens is still a pretty good business...
Posted by: Ian | April 21, 2006 at 03:33 PM
Ian,
Your comment reminds me of something I read about Takefuji when researching it. One money manager (who owns the stock) said he thinks of the company's business as "legalized loan sharking."
Posted by: John | April 22, 2006 at 02:36 PM
Do you know how much cash per share Takefuji has? I haven`t been able to get good info on the financials and I wonder where you get them.
This used to be Cundil`s biggest holding. Are there any other star fund managers who own it?
It is obviously a good business, made the owner the richest man in Japan. But will there be a backlash? If you read the Merchant of Venice, you know what I mean.
Posted by: midas-gold | May 23, 2006 at 09:58 PM
midas-gold,
Takefuji has a nice English language site at http://www.takefuji.co.jp/corp_e/
As of 3/31/06, the current assets per share is $98.50 (using $1.00 = 112 yen). The ratio of current assets to current liabilities is 6.3.
I often get information from Reuters. Either Reuters reports or 3rd party reports through Reuters. Some are free and others are $10 or more.
Last I checked, Takefuji was a major holding in virtually every Cundill fund. I think Francis Chou, another very successful investor based in Canada owns the company as well. Don't know anyone else offhand.
Regarding a backlash, you're right. There are headwinds blowing at the moment. But this is being held with the idea of it being a long term holding. Its balance sheet should be able to weather near-term struggles. Thanks for reading!
Posted by: John | May 25, 2006 at 11:37 PM
Thanks John!
I am very interested in Takefuji because I am based in Japan.
Just out of curiosity, how does this 6:1 ratio compare to other companies? I take it from your comment that banks or non-banks are usually much more leveraged.
Posted by: midas-gold | May 30, 2006 at 01:42 AM
Takefuji is one of the best picks in Japan, it is one of Graham's famous net-net situations.
What about other cheap Japanese stocks? Sankyo would be one (www.sankyo-fever.co.jp), unfortunately most information is Japanese only.
Another one is Sega Sammy Holdings. Share price 2600 Yen, cash + investments of ca. 860 Yen per share. Sega would be worth 900 Yen per share at a p/e of 16.5, that leaves Sammy valued at 840 Yen per share. Projected earnings were 60 bn. Yen for Sammy but had to be lowered to 46 bn Yen or 183 Yen per share. 840/183 = p/e 4.6
Sammy's earnings grew 23% annually since 2000.
Takefuji as asset based opportunity and Sega Sammy as earnings value opportunity are my tweo top picks. Considering that a Bic Mac costs 250 Yen in Japan the Yen is valued very cheap, too. I think the Yen and US$ both should strengthen against all other major currencies and that's why I'm out of European and emerging market stocks.
Posted by: Kojak | November 22, 2006 at 05:17 AM
Midas-gold, appreciate your information on Sega Sammy. It does look undervalued. I believe Promise (PMSEY) is an attractive ADR since takaf seems very illiquid. Promise is selling at -19% discount to BV. Upside outside of Japan is their HK business, which can be expanded into Southern China. Overall, the China opportunity isn't priced into many Jp stocks at this point in time: banks, entertainment etc
Posted by: Gunnar | December 16, 2006 at 05:02 AM
Permalink
thanks for a GREAT site
Gunnar
Posted by: Gunnar | December 16, 2006 at 05:03 AM
Looks like prospects are dire until credit card products and non-Japan markets become additive.
Posted by: Rogermunibond | December 17, 2006 at 05:56 PM
Following info was filed with Japanese regulators on Jan 15, 2007.
On dec 31, 2006, value investors Brandes Investment Partners have takes the following positions in Japanese consumer lenders (all up from 0%):
Takefuji 5.26%
Sanyo Shinpan 5.65%
Promise 5.28% (told u)
note that they didn't buy the lenders selling above NAV: acom, aiful, credit saison.
Posted by: Gunnar | January 16, 2007 at 06:58 PM
Jan. 19 (Bloomberg) -- The following stocks rose or fell in Japanese markets. Prices are as of the close. Stock symbols are in parentheses.
Consumer lenders: Sanyo Shinpan Finance Co. (8573 JT) and other consumer financing companies gained after Goldman Sachs analyst Takehito Yamanaka said in a reported dated yesterday that profits in the sector may have bottomed out in the current fiscal year. Sanyo Shinpan soared 370 yen, or 12 percent, to 3,390. Aiful Corp. (8515 JT) gained 170 yen, or 4.4 percent, to 4,020. Acom Co. (8572 JT) rose 230 yen, or 5.1 percent, to 4,750. Promise Co. (8574 JT) climbed 220 yen, or 5.2 percent, to 4,450.
Posted by: Gunnar | January 19, 2007 at 06:09 AM
Takefuji increased reserves for repayments of interest by a huge amount becasue of the actual amounts already repayed. That makes clear that those losses are for real. Takefuji was an overcapitalized company that was worth 6500 Yen per share after a possible 4000 Yen repayment to stockholders. According to the latest figures it's only worth 4500 Yen. The 4000 Yen have been repayd, but not to stockholders but to clients. So the interest cap debacle is costing shareholders 6000 Yen per share. I would have figured only half the damage and thought 7000 Yen could be fair value. I was wrong. Hoewever, it is a sure bet now that most of the consumer lending industry in Japan will go bankrupt and that Takefuji will be able to either substantially increase its market share or do some cherry picking so that credit losses will decline. After bailing out of 2/3 of my position bought at 4100 I will hold 1/3 and only rebuy if we go below 3500 which could already happen next week. Margin of safety is nearly nonexistent at these levels.
Posted by: Kojak | May 02, 2007 at 04:25 PM
Thanks or the information. Although a bit old, I'm still going to look into them....
Posted by: Hamed Elbarki | April 21, 2008 at 08:28 PM