Nippon Active Value Fund has published results for the 12 months ended 31 December 2024. The trust beat its benchmark by decent margin, returning 15.2% in NAV terms and 16.8% in share price terms versus 6.8% for the MSCI Japan Smaller Companies Index. There is a dividend of 3.25p for the year, up from 1.6p for 2023.

There is a continuation vote at this year’s AGM.

[This should sail through given the company’s track record and the promise of more to come as corporate governance standards continue to improve in Japan.]

It notes the impetus to reform that is being created by measures taken by the Japan Exchange Group (JPX). JPX has reclassified the Tokyo market into Prime and Standard divisions and companies not fulfilling their requirements will, over time, lose their Prime market listing, as well as their inclusion in TOPIX, the major market index. Nippon Active Value feels that this helps ensure that its proposals to investee companies are treated more seriously than might have been the case in earlier decades.

JPX has also stated that it will now adjust a company’s market capitalisation to remove strategic cross-shareholdings and that companies will need to have an adjusted market capitalisation in the top 97.0% of all listed shares to maintain their Prime market listing.

In addition, new regulations announced in February 2025 will require boards to provide a detailed justification of any proposed management buyout (MBO) process and price and to establish an external committee to ensure that minority shareholders have been fairly treated.

There were 18 MBOs in Japan in 2024, the third highest since 2001, and, according to CLSA, around 130 ‘activist events’. Japan is now the second largest market for activism after the US, and 4.5x the third largest (the UK), with major global private equity firms allocating a larger proportion of their activities to Japan.

Extract from the manager’s report

GAINS
Trancom is a logistics company specialising in optimising supply chain operations. The company offers logistics centre management and transport matching services. After multiple meetings with the founding family, in 2H 2024 Trancom announced a management buyout with Bain Capital, valued at approximately 100 billion yen. As a result, the shares increased 80.0%, contributing to 273bps of NAV performance. We agreed to tender our shares in the tender offer bid and will be looking to re-invest some of the proceeds into the go-private special purpose company (SPC).

Yamaichi Electronics is one of Japan’s leading manufacturers of burn-in IC sockets, selling a consumable product used in semiconductor testing. The company has benefited from increasing sales due to improvement in unit volume. The shares increased 48.0% over the period, adding 187bps to performance.

Miniaturisation leads to more pins (greater volume, more revenue) per integrated chip, creating barriers to entry as it becomes increasingly difficult to create the underlying mould for chip making. As integrated chips miniaturise, the test sockets become more prone to short-circuiting due to the proximity of the chips. In May 2024, the company announced strong earnings forecast, with operating profit more than doubling (up 150.0% YoY) FY23/24, driven by the recovery of test stocks for smartphone-related chips. We used market strength to sell down our entire position, which amounted to 6.9% of total shares outstanding, ex-treasury shares.

Hogy Medical is a leading manufacturer of medical products, focused on delivering premium surgical kits and non-woven fabric products. The share price increased 22.0%, contributing 184bps to performance. Foreign ownership of the company, including NAVF, exceeds 50%. We have engaged with company’s management, suggesting an improvement in capital allocation and increased alignment of interest through restricted stock unit compensation. Valuation of the company is at the high end for the portfolio at 8x Enterprise Value (EV) to its Earnings Before Interest, Taxes, Depreciation & Amortisation (EBITDA), but we are compensated by the low capital expenditure nature of the business.

Bunka Shutter is Japan’s second largest company in manufacturing of shutters after Sanwa Holdings. The company manufactures shutters used in households and warehouses. The share price increased 31.0%, contributing 178bps. We continue to engage with the company’s management, suggesting optimisation of the business portfolio, focusing on growth, profitability and return on invested capital (ROIC). We think that the company holds excessive amounts of cash and cross shareholdings, which dilutes any efforts to improve business performance with a low return on equity (ROE). The company valuation remains attractive to us, trading at sub 5x EV/EBITDA.

Murakami is a leading manufacturer of automotive rearview mirrors. The shares increased 40.0%, adding 175bps performance to the fund. It has 40.0% domestic market share, followed by Ichiko Industries’ 21.0% and Gentex’s 28.0%. Murakami serves the Japanese domestic original equipment manufacturers (OEMs), and historically, the company has followed their customers to overseas locations when they open up a new factory. Domestic mirrors have high barriers to entry due to aggressive demands (quality and price) by OEM and Tier 1 suppliers. Despite the 40.0% increase in the share price, Murakami’s valuation remains attractive at sub 2x EV /EBITDA.

DETRACTORS
Konishi produces and sells adhesives to domestic households, industrial and consumer markets. The company is also involved in construction and public infrastructure projects. The share price declined 10.0%, contributing to a negative 23bps drag to the fund. The company trades at sub 5x EV/EBITDA, while maintaining a mid-teens ROIC in a relatively stable business, with low capital expenditure. We own approximately 1.0% of the total shares outstanding, and will continue to revisit sizing, depending on the opportunity set within the fund.

Tsuruha Holdings is one of Japan’s largest drugstore chains, operating under the name Tsuruha Drug. The company owned over 2,500 locations across Japan as of 2024. In early February 2024, Aeon announced that it would acquire a 13.6% stake from Oasis for Y15,500 per share, 31.5% higher than the share price at the time of announcement. Aeon will acquire additional shares to make Tsuruha an equity method affiliate. We exited the position at a loss, as we were not confident of Aeon’s position as a major holder of Tsuruha.

Sekisui Jushi specialises in plastic and resin-based products used in road infrastructure and urban development. The company supplies products to government infrastructure projects. The share price declined 20.0%, as the market adjusted for the high valuation European Merger and Acquisition (M&A) deal announced earlier in the year. The position contributed a 114bps drag to the fund. The company trades at attractive valuations, trading at sub 4x EV/EBITDA. We will continue to closely monitor the company’s ROIC, which peaked at 25.0% in 2022.

Nippon Fine Chemical is a Japanese company specialising in fine chemicals, including cosmetic ingredients, pharmaceuticals, and industrial chemicals. The company is known for its high-purity chemicals, which plays a significant role in the cosmetics and healthcare industry. The share price reversed some of the previous year’s gains (up approx. 40.0%), declining 27.0% and contributing a 151bps decline to the fund. The company maintains a high teens EBITDA margin business, although revenue growth has slowed recently after strong consecutive growth since COVID-19. The company trades at attractive valuations, trading at sub 5x EV/EBITDA, while maintaining a mid-teens ROIC.

NAVF : Nippon Active Value delivers another year of outperformance