The Matthews Japan Fund (Trades, Portfolio) released its portfolio for the third quarter earlier this week.
Part of San Francisco-based investment firm Matthews Asia, the fund is managed by Taizo Ishida and Shuntaro Takeuchi. It invests in Japanese companies that have sustainable growth in order to generate long-term capital appreciation.
Keeping these criteria in mind, the fund entered seven new positions during the quarter, sold out of 10 holdings and added to or reduced a slew of other investments. Notable trades included the divestment of the Lasertec Corp. (TSE:6920, Financial), Nippon Telegraph & Telephone Corp. (TSE:9432, Financial) and Murata Manufacturing Co. Ltd. (TSE:6981, Financial) positions, a decrease in the Daikin Industries Ltd. (TSE:6367, Financial) holding and a boost to Nidec Corp. (TSE:6594, Financial).
Lasertec
With an impact of-4.81% on the equity portfolio, the fund sold its 708,500 remaining shares of Lasertec. The stock traded for an average price of 9,124.39 yen ($87.33) per share during the quarter.
GuruFocus estimates the fund gained 116.15% on the investment.
The company, which manufactures semiconductor-related equipment, laser microscopes and photomask inspection equipment, has a market cap of 806.19 billion yen; its shares closed at 8,940 yen on Tuesday with a price-earnings ratio of 74.55, a price-book ratio of 20.59 and a price-sales ratio of 18.95.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 1 out of 10 also supports this assessment.
Lasertec's financial strength and profitability were both rated 9 out of 10 by GuruFocus. In addition to comfortable interest coverage as a result of no long-term debt, the company's robust Altman Z-Score of 13.67 indicates it is in good standing despite assets building up at a faster rate than revenue is growing.
The company is also supported by an expanding operating margin, strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 6, which implies business conditions are stable. Driven by consistent earnings and revenue growth, Lasertec also has a predictability rank of four out of five stars. According to GuruFocus, companies with this rank return an average of 9.8% annually over a 10-year period.
No gurus currently hold the stock.
Nippon Telegraph & Telephone
Impacting the equity portfolio by -3.27%, Matthews dumped its 1.96 million remaining shares of Nippon Telegraph & Telephone. Shares traded for an average price of 2,465.96 yen each during the quarter.
GuruFocus data shows the fund lost an estimated 29.36% on the investment.
The telecommunications company headquartered in Tokyo has a market cap of 8.39 trillion yen; its shares closed at 2,259.5 yen on Tuesday with a price-earnings ratio of 11.53, a price-book ratio of 0.89 and a price-sales ratio of 0.71.
According to the Peter Lynch chart, the stock is undervalued. The GuruFocus valuation rank of 6 out of 10 supports this assessment since the price ratios are approaching multiyear lows.
GuruFocus rated Nippon's financial strength 5 out of 10. Although the company has issued approximately 684.3 billion yen in new long-term debt over the past three years, it is at a manageable level due to adequate interest coverage. The Altman Z-Score of 1.56, however, warns the company could be at risk of bankruptcy.
The company's profitability fared better, scoring an 8 out of 10 rating on the back of an expanding operating margin, returns that outperform over half of its industry peers and consistent earnings and revenue per share growth. Nippon also has a five-star predictability rank. GuruFocus says companies with this rank typically return 12.1% annually.
The T. Rowe Price Japan Fund (Trades, Portfolio) holds 0.03% of Nippon's outstanding shares.
Murata Manufacturing
The Japan Fund axed its 627,100 remaining shares of Murata Manufacturing, impacting the equity portfolio by -2.65. During the quarter, the stock traded for an average per-share price of 6,604.27 yen.
According to GuruFocus data, the fund gained 15.8% on the investment.
The company, which manufactures electronic components, has a market cap of 4.58 trillion yen; its shares closed at 7,319 yen on Tuesday with a price-earnings ratio of 26.05, a price-book ratio of 2.69 and a price-sales ratio of 3.04.
Based on the Peter Lynch chart, the stock appears to be overvalued. The GuruFocus valuation rank of 2 out of 10 also supports this assessment since the share price and price-sales ratio are approaching multiyear highs.
GuruFocus rated Murata's financial strength 8 out of 10. Although the company has issued approximately 220.4 billion yen in new long-term debt over the past three years, it is at a manageable level due to comfortable interest coverage. The robust Altman Z-Score of 7.57 also indicates the company is in good standing even though assets are building up at a faster rate than revenue is growing.
The company's profitability scored a 7 out of 10 rating. While the operating margin is in decline, it still outperforms a majority of competitors. Murata is also supported by strong returns and a moderate Piotroski F-Score of 4. As a result of the manufacturer's revenue per share declining over the past 12 months, its one-star predictability rank is on watch. GuruFocus data shows companies with this rank typically see their stocks gain an average of 1.1% annually.
Of the gurus invested in Murata, the Causeway International Value (Trades, Portfolio) Fund has the largest stake with 0.22% of outstanding shares. The T. Rowe Price Japan Fund also owns the stock.
Daikin Industries
The fund curbed its holding of Daikin Industries by 56.14%, selling 195,200 shares. The trade had an impact of -2.27% on the equity portfolio. During the quarter, the stock traded for an average price of 19,244.7 yen per share.
GuruFocus estimates the fund has gained 67.89% on the investment since the first quarter of 2014.
The air conditioner manufacturer has a market cap of 5.84 trillion yen; its shares closed at 20,505 yen on Tuesday with a price-earnings ratio of 41.53, a price-book ratio of 4 and a price-sales ratio of 2.39, which GuruFocus notes are approaching multiyear highs.
The Peter Lynch chart and GuruFocus valuation rank of 1 out of 10 both suggest the stock is overvalued.
Daikin's financial strength and profitability were both rated 7 out of 10 by GuruFocus. Although the company has issued approximately 75.4 billion in new long-term debt over the past three years, it is at a manageable level due to sufficient interest coverage. The high Altman Z-Score of 4.35 also indicates it is in good standing.
The company is also supported by expanding margins and returns that outperform more than half of its industry peers. Daikin also has a moderate Piotroski F-Score of 4, but the three-star predictability rank is on watch due to a decline in revenue per share over the past year. According to GuruFocus data, companies with this rank return 8.2%, on average, annually.
With 0.08% of outstanding shares, the Hennessy Japan Fund (Trades, Portfolio) is the company's largest guru shareholder. The T. Rowe Price Japan Fund also holds the stock.
Nidec
Matthews boosted the Nidec position by 23.69%, or 417,000 shares. The trade impacted the equity portfolio by 2.83%. During the quarter, shares traded for an average price of 8,589.95 yen each.
GuruFocus says the fund has gained an estimated 57.39% on the investment so far.
The company, which manufactures electric motors, has a market cap of 6.23 trillion yen; its shares closed at 10,820 yen on Tuesday with a price-earnings ratio of 132.76, a price-book ratio of 6.55 and a price-sales ratio of 4.13.
According to the Peter Lynch chart, the stock is overvalued. The valuation rank of 1 out of 10 aligns with this assessment since the share price as well as the price-book and price-sales ratios are all nearing 10-year highs.
GuruFocus rated Nidec's financial strength 6 out of 10. Despite issuing approximately 136.3 billion yen in new long-term debt, it is at a manageable level as a result of adequate interest coverage. It also has a high Altman Z-Score of 5.02 even though assets are building up at a faster rate than revenue is growing. The weighted average cost of capital also surpasses the return on invested capital, suggesting value is being destroyed.
The company's profitability scored a 7 out of 10 rating. Although margins are in decline, Nidec's returns outperform over half of its competitors. It also has a moderate Piotroski F-Score of 6, but the one-star predictability rank is on watch due to a slowdown in revenue per share growth over the past year.
The Japan Fund is the company's largest guru shareholder with 0.09% of outstanding shares. Hennessy also owns the stock.
Additional trades and portfolio performance
The new positions the Japan Fund established during the quarter were Makita Corp. (TSE:6586), Sysmex Corp. (TSE:6869), Sumitomo Bakelite Co. Ltd. (TSE:4203), Chugai Pharmaceutical Co. Ltd. (TSE:4519), Capcom Co. Ltd. (TSE:9697), Marui Group Co. Ltd. (TSE:8252) and AI Inside Inc. (TSE:4488),
Matthews' $1.38 billion equity portfolio, which is composed of 45 stocks, is largely invested in the technology sector at 25.18%, followed by smaller holdings in the health care (24.04%) and industrials (15.45%) spaces.
According to its fact sheet, the fund returned 26.08% in 2019, outperforming the MSCI Japan Index's 20.07% return.
Disclosure: No positions.
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