Japanese internet firms offer something new: high returns

Apr 17 2014, 12:13 IST
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SummarySome Japanese internet companies are getting a boost from foreign investors as Prime Minister Shinzo Abe

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 (ROE) 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, M3, Kakaku.com, GMO Payment Gateway and Start Today 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 happy.

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% ROE at US companies and 12.60% at Asian companies excluding Japan, Nomura Securities reckons.

In contrast, MonotaRo, which operates an online shopping site selling industrial tools to smaller Japanese manufacturers, boasts an ROE of 31.4%.

Its foreign ownership has risen to 78.3% from 67.0% over the past two years. That compares to a Japanese average of just 28%.

While the Nikkei benchmark

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