BEST SMALL CAP COMPANY
SHO-BOND Holdings
Japan’s construction sector doesn’t immediately spring to mind for the opportunities it offers. The island is after all very well-developed with longstanding infrastructure, while the damage done by the disastrous March 2012 earthquake and tsunami in northern Japan has largely been repaired. Added to this the government wants to begin reining in its cost base, not waste more sums of money on white elephant projects.
But SHO-BOND believes it has a niche. Instead of focusing on building new structures it has honed its capabilities on maintaining and repairing roads. It’s a sensible strategy, given that many of Japan’s highways, railways and other facilities are decades old.
“The government keeps cutting its budget for infrastructure in order to reduce its budget costs but SHO-BOND’s CEO has focused on road repair because this sort of work is expected to grow instead,” says the head of research for a foreign investment bank in Tokyo. “It’s proving to be a successful strategy and should benefit the company for some time to come.”
SHO-BOND’s results indicate it’s on to something. It reported 17.95% profit growth to ¥4.35 billion (US$44.37 million) based on revenue growth of 16.73% on its fiscal year results ending June 30. The research head notes that this is the highest level of operating profit for any company in the construction sector in Japan.
The company has also continued to increase its dividend payout to its investors. It currently stands at around 35% of profits, not a high level by international standards but not bad for the traditionally frugal standards of Japan, in which the average payout stands at 30%.
A Japanese head of equity research adds that SHO-BOND could also benefit if Tokyo is chosen as the location for the Olympics in 2020. A successful bid would inevitably require more spending on existing and new infrastructure, despite the government’s wishes to keep its costs down, and SHO-BOND could benefit as one of the country’s key roads-maintainers.
BEST MEDIUM CAP COMPANY
TOTO
“Take a look downwards when you’re next in the toilet and you’ll probably see the brand name ‘TOTO’,” suggests a Tokyo-based equity strategist at an international bank to Asiamoney.
TOTO is an abbreviation of the company’s full name, ‘Tōyō Tōki’ or Oriental Ceramics. Over the past several years it has become one of the largest global makers of “restroom products”, as it likes to coyly describe its bathroom fittings, supplying Japan, Asian countries, the US and Europe.
There will always be a need for toilets, and the growth of Asian cities, offices and shopping malls in particular necessitates that demand for its products is fairly constant. And TOTO, which has patented a toilet that can lift the lid as you arrive, warm your posterior and offer a bidet feature, ensures it offers the most advanced gimmicks around when it comes to assisting with necessary bodily functions.
Demand for its products helped it report a net income of ¥8.25 billion off of ¥113.5 billion in revenue, with its profit margin rising from 3% the previous year to 7.26%.
TOTO doesn’t just impress with its products, but also the way it treats its shareholders. In a country in which the rights and voices of minority shareholders are routinely ignored, Toto has taken decisions to benefit them. When announcing its results on July 31 it also surprised the market by saying it planned to buy-back up to 20 million shares for up to ¥10 billion between August 1 and December 20. Plus it retired 17.7 million of treasury shares on August.
It is also exploring plans to sell its Tokyo headquarters. This is often the sign of an ailing corporate desperate to raise capital but analysts say in Toto’s case it simply decided that owning the building trapped capital and was in no way a benefit to its business.
There are a few fears about TOTO’s future, principally its exposure to Chinese companies at a time of economic unease in the mainland. But it should continue prospering as long as humans want to answer the call of nature as comfortably as possible.
BEST LARGE CAP COMPANY
SoftBank Corp.
Back in the early 2000s SoftBank was effectively an internet incubator, building various online services to attract local consumers.
Under charismatic helmsman Masayoshi Son it worked to acquire interests in internet service companies, while Son kept interest in his company alive through advertising and marketing stunts. Then in March 2006 it bid successfully for the former Japan Telecom assets owned by UK mobile company Vodafone for US$15 billion. SoftBank used these loss-making assets to build itself into Japan’s third-largest, profitable telecom company.
It now seeks to replicate the strategy in the US. SoftBank successfully acquired Sprint Nextel for US$21.6 billion on June 25. The purchase of the country’s third-largest US carrier is a gamble – it loaded over US$20 billion of debt onto SoftBank’s balance sheet – and it represents a strategic challenge, given Sprint’s patchy network.
But it also offers SoftBank the opportunity to get exposure to the most active cellular market in the world. And as the company has demonstrated with its Japanese mobile assets, it is very good at building market share, as its net income of ¥238.3 billion in the three months ending in June – a year-on-year rise of 125.6% – could attest. Its network technology is similar to Sprint’s too, meaning there are plenty of equipment synergies to be had.
Sprint is a stronger company because of the acquisition too. SoftBank pumped US$5 billion into its balance sheet as part of the acquisition, which it used to buy Clearwire, another wireless carrier that owns 160 mega-hertz of airwaves in the most prime 100 markets of the US. This will prove indispensable in building Sprint’s network and increasing its speed.
Son has committed to having Sprint spend a further US$8 billion in capital expenditure this year, and then US$6 billion per year for the next four years. And the company is already offering unlimited data plans, which promises to attract internet-focused mobile users.
The acquisition of Sprint is a gamble, but it’s a gutsy move that could leave SoftBank as one of Japan’s biggest international success stories.
BEST EXECUTIVE
Masayoshi Son, chairman and CEO, SoftBank Corp.
Japan may possess the third-largest economy in the world, but it’s not large enough to contain the ambition of Masayoshi Son.
In a corporate culture that largely eschews risk-taking, dramatics and individualism, the founder of internet and telecom company SoftBank has long stood out for his risk-taking and theatrics. SoftBank possessed relatively little in the way of hardcore assets or revenue generation in the early to mid 2000s, yet Son convinced banks to extend him enough financing to acquire the Japanese assets of UK mobile telecom company Vodafone.
Critics at the time claimed Son had leveraged up his company too much in making the purchase, but he proved them wrong, turning it into a success.
Son’s US$21.6 billion acquisition bid for a 72% stake in Sprint Nextel marks a major step-up from this, but Son’s previous success offers a great deal of cause for hope. He was canny with his bid, ensuring the US’ third-largest US telecom carrier agreed to a US$600 million breakup fee if another company acquired it. That clause helped fend off a subsequent non-binding rival bid from satellite provider Dish for US$25.5 billion.
Again, some observers have the knives are out for Son, complaining that the purchase of Sprint is too costly and the synergies too small. Others point out he has done this before.
“With the Sprint acquisition Softbank’s profits will be comparable to [leading state-owned Japanese telecom company] DoCoMo’s,” notes an equity strategist. “Son was clever in introducing a breakup clause. That helped him outfox the rival interest from Dish.”
Son has his work cut out expanding in the US in the face of competition from market leaders Verizon Communications and AT&T. But he has plenty of experience stealing market share, and SoftBank’s technological similarities to Sprint should help.
Added to this Son has taken shares in Yahoo, Alibaba Group and Synga, all of which have been highly profitable. Expect further such investments in the years to come. Son may just prove to be one of the world’s most recognisable executives.