Part 3: Unique business models - "Only in Japan"

Throughout this six-part series, we aim to address some of the most common investor concerns about Japan equities and highlight the opportunities for sustainable growth in this market.

Despite the perception that there is little or no growth in Japan, our core portfolio holdings in the FSSA Japan Equity Fund have been able to adapt and grow despite economic headwinds, and have delivered sustainable earnings growth and attractive shareholder returns.

In chapter three, we look at unique business models – found “only in Japan” 

Tourists who have visited Japan would most likely agree that it is a country like no other. Those who have yet to be introduced to this unique country may find aspects of its inimitable culture and customs unfamiliar, perhaps even inscrutable. From an investment perspective, this same unfamiliarity with the Japan market – with dissimilar investment opportunities compared to other equity markets – could present investors with considerable challenges.

We believe that a deep knowledge of the local market and an understanding of the cultural and societal aspects of Japan are critical in the research and analysis of Japanese companies – especially if there are no direct Western parallels to draw a comparison. As a team, we spend most of our time visiting companies and carrying out research trips to the countries where we have made investments (though we have temporarily moved to “virtual meetings” due to Covid-19). We have found that the Japan market contains businesses that are uniquely Japanese.

For example, M3 is a global leader in online medical-related services. The company launched its pharmaceutical marketing services (information on drugs emailed to doctors) around 20 years ago and has since expanded its business areas to include contract research, job placements and medical records software. There is no Western company equivalent that provides similar services to M3.

One of the main reasons for M3’s success is its huge following among doctors (around four million subscribers globally), which puts the company in a position to transform the sales process of pharmaceutical and medical products.

While Japanese drug companies spend the majority of their annual marketing budgets on sales representatives and related commissions, just 2% is allocated to online marketing. On the other hand, doctors spend twice as much time collecting materials on the internet (using informational sources like M3) compared to the time they spend talking to pharma reps. We believe this represents a huge market potential for M3.

Doctors benefit from having reliable and trusted information at their fingertips, which saves time that could be better utilised elsewhere (for example, by seeing more patients). Drug companies benefit by using “pay-for-performance” services to promote products directly to doctors on M3’s medical platform, which reduces the costs of hiring traditional medical representatives.

M3 has no direct equivalent that investors could compare to, which makes it a challenge to understand the market and long-term growth opportunity. Only after meeting with management multiple times (and with different team members, to gain fresh perspectives) did we start to grasp the enormity of its potential, which eventually resulted in a purchase of the company’s shares.

Katitas, which buys old homes or auctioned-off houses, remodels them and then sells them on to new or first-time buyers at a reasonable price (usually at a 50% discount to new properties), is also unique to Japan. In the past, houses in Japan were not built to last for more than 30 years – they were constructed quickly and cheaply to serve a growing population after the Second World War. As a result, many have fallen in value over time, while those left vacant are often neglected or abandoned by their owners.

There are currently more than 8.4 million vacant properties (“akiya”) around Japan – one out of every seven properties – and this has been rising steadily over the past five decades. Katitas, which means “adding value” in Japanese, has created an entirely new market from this previously untouched segment, with a clear value proposition that not only provides quality and affordable homes, but also contributes to the revitalisation and redevelopment of local regions in Japan.

Established for more than 20 years, Katitas has accumulated years of experience in buying the right properties at a low price and renovating at a reasonable cost. As such, we believe Katitas is well positioned in a niche market – and there are no sizeable competitors in this space. Though the company is still relatively small with a market cap of just USD1.9 billion, we would expect it to grow considerably larger in the years to come.

Look out for chapter four of this six part series, as we continue to dispel some of the most common myths and misconceptions.