The Hennessy Japan Fund (Trades, Portfolio) has revealed its portfolio for the first quarter of the year. Major trades include additions to the fund's holdings in Murata Manufacturing Co. Ltd. (TSE:6981, Financial), Mercari Inc. (TSE:4385, Financial), Takeda Pharmaceutical Co. Ltd. (TSE:4502, Financial), Terumo Corp. (TSE:4543, Financial) and Z Holdings Corp. (TSE:4689, Financial).
Managed by Masakazu Takeda and Yu Shimizu, the fund, which is part of California-based Hennessy Advisors, invests in a concentrated number of high-quality Japanese companies. The portfolio managers search for value opportunities among companies that have good management, strong cash flow generation and above-average earnings growth.
Portfolio overview
At the end of the quarter, the portfolio contained 27 stocks with no new holdings. It was valued at $864 million and has seen a turnover rate of 6%. Top holdings at the end of the quarter were Nidec Corp. (TSE:6594), Keyence Corp. (TSE:6861), SoftBank Group Corp. (TSE:9984), Sony Group Corp. (TSE:6758) and Daikin Industries Ltd. (TSE:6367).
By weight, the top three sectors represented are industrials (29.43), consumer cyclical (22.12%) and technology (15.20%).
Murata Manufacturing
Newcomer to the portfolio in the fourth quarter, Murata Manufacturing (TSE:6981, Financial) was boosted by 170.6% with the purchase of an additional 182,200 shares. During the quarter, the shares traded at an average price of 9,066.21 yen ($82.85) per share. Overall, the purchase had a 2.02% impact on the portfolio and GuruFocus estimates the total gain of the holding at 10.98%.
Murata Manufacturing produces passive components for electronic devices. Passive components are necessary for all electronic circuits, used to enable wireless communication, store electricity and handle electric flow, remove electromagnetic noise from circuits and so on. Thus, passive components are imperative for electronic circuits. For instance, one high-end smartphone contains more than 800 passive components. Murata Manufacturing is the global top passive components supplier.
On April 12, the stock was trading at 9,127 yen per share with a market cap of 5.83 trillion yen. According to the GF Value Line, the shares are significantly overvalued.
GuruFocus gives the company a financial strength rating of 8 out of 10, a profitability rank of 7 out of 10 and a valuation rank of 2 out of 10. There are currently three severe warning signs issued for declining margins and assets growing faster than revenue. The strong profitability rank for the company is propped up by net margin and gross margin percentages that outdo at least 87% of competitors.
Mercari
The fund's Mercari (TSE:4385, Financial) also saw an addition of 44.4% with the purchase of 222,400 shares. Share prices declined to 4,705.16 yen per share since the holding was first established in the fourth quarter of 2020. GuruFocus estimates the total gain of the holding at 5.28% and the purchase had a 1.24% impact on the portfolio.
Mercari operates in the e-commerce market. It offers an online platform for people to buy and sell a wide range of items, including fashion, electronics and handmade items.
As of April 12, the stock was trading at 5,150 yen per share with a market cap of 826.56 billion yen. There is not enough data for the GF Value Line to be displayed, but the stock has seen share prices rise through the end of 2020.
GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rank of 1 out of 10. There are currently no severe warning signs issued for the company. The company's cash-to-debt ratio of 2.57 ranks it higher than 76.68% of competitors thanks to steady debt levels.
Takeda Pharmaceutical
Takeda Pharmaceutical (TSE:4502, Financial) has seen an addition after two reductions were made in 2020. The fund boosted its position by 31.07% with the purchase of 233,400 shares. The shares traded at an average price of 3701.98 yen per share during the quarter. Overall, the purchase had a 0.95% impact on the portfolio and GuruFocus estimates the total loss of the holding at 2.88%.
Takeda Pharmaceutical is Japan's largest pharmaceutical company, with revenue of 3.3 trillion yen in 2019. The company's five core therapeutic areas are oncology, gastroenterology, neuroscience, rare diseases and plasma-derived therapies, which account for more than 70% of revenue. Its geographic footprint is well diversified, with 50% derived from the U.S., 20% from Japan and 20% from Europe and Canada.
The stock was trading at 3754 yen per share with a market cap of 5.91 trillion yen on April 12. According to the GF Value Line, the shares are trading at a fair value rating.
GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rank of 6 out of 10 and a valuation rank of 8 out of 10. There are currently two severe warning signs issued for declining revenue per share and an Altman Z-Score of 1.03 placing the company in the distress column. Revenue saw a large jump in 2020 for the company, but net income fell off compared to the previous year.
Terumo
Another holding to see an increase during the quarter was the fund's position in Terumo (TSE:4543, Financial). The purchase of 108,700 shares grew the holding by 11.21% and the shares traded at an average price of 4176.62 yen per share during the quarter. The purchase had a 0.49% impact on the portfolio and GuruFocus estimates the fund's total gain on the holding at 61.70%.
Terumo manufactures and sells medical products and equipment. The company has three main businesses: blood management, cardiac and vascular and general hospital. The cardiac and vascular business generates the largest proportion of revenue and sells cardiac and endovascular interventional therapies, cardiovascular surgical systems, neurovascular products and vascular graft products. The general hospital business includes diabetes management, consumer health care, drug and device technologies and general hospital products. The blood management business sells blood components, therapeutic apheresis and cellular technologies. Terumo generates the majority of its revenue in Asia, with Japan contributing the largest proportion of Asian revenue.
On April 12, the stock was trading at 3949 yen per share with a market cap of 3.02 trillion yen. The shares are trading at a modestly overvalued rating according to the GF Value Line.
GuruFocus gives the company a financial strength rating of 7 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 3 out of 10. There are currently no severe warning signs issued for the company. The company has seen cash flows fall off slightly in the last few years, but they are more than adequate to support dividend payouts.
Z Holdings
The purchase of an additional 668,200 shares to add 18.33% to the fund's Z Holdings (TSE:4689, Financial) position rounds out the top five trades. During the quarter, the shares purchased traded at an average price of 642.31 yen per share. GuruFocus estimates the total loss of the holding at 20.52% and the purchase had a 0.48% impact on the portfolio overall.
Z Holdings' portal site, Yahoo Japan, was one of the first Internet services in Japan, and it has maintained its market-leading position in terms of monthly active user numbers and page views. In addition, the company offers a variety of internet services, including e-commerce, online travel and online video. In October 2013, the company began a new e-commerce strategy of waiving store tenant fees and sales royalty fees on its Yahoo Shopping service to compete with Rakuten and Amazon Japan. The company acquired Zozo in 2019 and integrated Line in 2021.
As of April 12, the stock was trading at 542.20 yen per share with a market cap of 2.60 trillion yen. According to the GF Value Line, the shares are trading at a fair value rating.
GuruFocus gives the company a financial strength rating of 3 out of 10, a profitability rank of 9 out of 10 and a valuation rank of 8 out of 10. There are currently five severe warning signs issued, including declining margins and poor financial strength. The company's return on invested capital has decreased since 2014, hurting overall value.
Disclosure: Author owns no stocks mentioned.
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