A recent Nikkei article highlighted some of the incredible hidden value present in Japan. Companies included in the TOPIX index hold nearly $600 billion of investment properties at fair market value, that are carried on the books at around $320 billion due to historical cost accounting.
When you hear that half of the 2,000 companies in the TOPIX trade below book value, remember that the value of those book assets is heavily understated.
Another almost 2,000 listed companies are NOT included in the TOPIX, but many of these, in our experience, have also accumulated large unrealised gains on their property portfolios.
Further, something the Nikkei’s article does not address is that the “fair market value” is often itself understated, not accounting for the specific circumstances of individual assets. Additionally, it does not take into account assets classed as “operating”, but which can often be discerned from a company’s “Major Facilities” disclosure in its Securities Report. With a little digging, we can ascribe a value to these assets.
In the latter case, consider the example of one of our target companies, which owns land in Tokyo that houses an under-utilised factory. The book value of this land is only $4m as it was acquired so long ago. Our investigations revealed that the land is zoned for residential development, and at prevailing price/sqm values in that area, would be worth more like $35m to a developer. This is extremely interesting, as the company’s entire market capitalisation is only around $70m, and it also has cash and securities amounting to ~$60m, as well as other valuable real estate, including its Head Office, worth another ~$70m.
In an even more extreme example, most of us have seen Hino Motors trucks driving around on Australian streets. Hino is a Toyota-affiliate, and like the rest of the group, in line with the corporate governance reform, has increased its focus on capital efficiency. In September last year, Hino sold an unused parcel of land for ~$500m that was carried on its books at only $1m!
Real estate is also a key source of value in the Fuji Soft case study (discussed in the next section) and in the case of Sapporo Holdings (of brewery fame). Sapporo is especially interesting as, in the 2010s, the company specifically chose to reclassify its investment properties to operating assets, and thus no longer has to disclose “Fair Market Value”. In that case, the activist involved has published a presentation citing a valuation it has obtained of Sapporo’s assets that points to a ~$6.7bn price tag, when as recently as 2020, Sapporo’s market enterprise value was as little as $3.6bn. The brewery and brands, you got for free.
Investors who previously ignored real estate values, as they believed they would never see that value realised, are increasingly waking up to the fact that activists are scouring the market for these opportunities. But, with almost 4,000 companies, many with assets deeply hidden, this opportunity can persist for some time.
