Asia Access Quarterly: Smart money pours into Japan & China

Japan

You would have recently read in the press of Omaha’s Wise Man, Warren Buffet, taking a $6 billion stake in the five largest Japanese trading houses. This was described as a contrarian bet[2]. Or is it? Is there a reason for smart money to be attracted to Japan at this particular moment? We believe there are several compelling reasons.

Corporate disposals are no longer taboo

Long-standing cultural resistance stood in the way of corporate disposals in Japan – disposing of non-core or under-performing assets was previously seen as somewhat ‘dishonourable’. However, Western private equity firms have largely changed Japanese shareholder sentiment and public opinion on this by delivering large buy-outs successively, from around 2017, demonstrating ways to for the large Japanese corporates to break free of conglomerate discount.

Covid-19 has accelerated this trend, with more Japanese companies than ever reviewing their business portfolios and applying strict management of ROIC in their analysis. Whereas historically, to many boardrooms, maintaining domestic employment across a very diverse portfolio of businesses was more important than enhancing shareholder value – this shift is driving disposal activity and subsequently, the rise of interest from overseas investors in Japanese or Japanese-owned assets.

Unwinding of cross shareholding

Another related Japanese phenomenon unshackling large Japanese corporates from the legacy activity, is the unwinding of cross-shareholding by banks and commercial partners, which once provided stabilities to the Japanese corporates. This allowed them to make bold investment decisions during the Japanese expansionist era, but acted as deterrent to inbound M&A activities.

In the past 9 years, Japanese cross-shareholding has decreased by 18%, implying that minority stakes in 16,000 related companies had been disposed during this time[3], resulting in M&A deal flows as well as ensuring that capital markets drivers are being driven rationally – without the irrational logic of historic / legacy relationships.

Publicly listed subsidiaries being acquired by the listed parent

There are proportionally 15x[4] more listed subsidiaries on the Japanese stock exchange than in the West, which has long attracted criticism around corporate governance. This phenomenon was perceived as handicapping Japanese groups – so many listed businesses with independent governance requirements meant much less ability to coordinate strategic decision-making at group level. This new trend of intra-group consolidation will allow Japanese corporates to improve their ROA as well as boosting their M&A firepower.

China

In China, we have also recently observed smart money being invested. As far back as twenty years ago, huge amounts of Western capital had been raised to take advantage of fast growth in the Chinese economy. The reality, however, was that governance issues and accounting opacity in the Chinese targets led to much of this capital being under-deployed, or resulted in a bitter experience for the Western investors. Today, with the emergence of global technology leaders from China, successful listings of Chinese companies on Hong Kong and overseas markets, and the implementation of increased regulatory transparency, the quality of Chinese investment opportunities has dramatically improved and ‘smart money’ operatives are quickly finding them.

The setting up of new ‘China funds’ is emerging across global fund managers, with BlackRock, JP Morgan Chase and Vanguard all indicating a shift of interest to the market[5]. London based mid-cap private equity funds are following Wall Street, with Investcorp launching two joint China Funds already, first with Everbright[6] and more recently with China Resources, the consumer conglomerate progressing in the past two years[7]. As another example, demonstrating confidence in the Chinese education / consumer market, Permira has signed an agreement to acquire English First China business for $1.5b in July[8].

Based on the above emerging trend, in both Japan and China, we believe there will be increasing chances for sponsor-backed corporates to find high-quality bolt-on opportunities in the region.

As you will see from the recent notable disposals by the Japanese and Chinese below, there have been many successful inbound deals by the Western strategic investors - including the deals reportedly soon to be in the market. Furthermore, increasing number of Asian sellers are turning to global auctions in addition to seeking bilateral transactions, as opposed to always preferring to do the deal domestically.

Major Japanese disposals 2020 YTD[9]

Date	Seller	Target	Buyer	Size (€m)
13/09/2020	SoftBank	ARM	NVIDIA	32,506
24/08/2020	Takeda Pharmaceutical	Takeda Consumer Healthcare	Blackstone	1,936
21/08/2020	(Private placement)	Nippon Paint	Wuthelam Holdings	1,285
18/08/2020	(Take private)	Nichii Gakkan	Bain Capital	1,062
01/05/2020	LIXIL	Permasteelisa	Atlas Holdings	N/A
28/04/2020	Hitachi	Hitachi Chemical	Showa Denko	8,141

Reported major Japanese disposals[10]

Parent	Reported disposal
Itochu	KwikFit
Toshiba	Toshiba TEC
Bridgestone	Firestone Building Products
Hitachi	Hitachi Metals
Japan Post	Toll Holdings
NEC	NEC Energy Solutions
Showa Denko	Showa Aluminium Can
H.I.S.	Huis Ten Bosch Resort
SoftBank	Sprint USA
Panasonic	Panasonic Automotive

Major Chinese disposals 2020 YTD[11]

Date	Seller	Target	Buyer	Size (€m)
31/08/2020	PAG Capital	YoungToys	MiraeN consortium	109
01/07/2020	Trina Solar	1 GW PV project	Matrix Renewables	623
26/03/2020	Wanda Sports Group	The Ironman Group	Advance Publications; Orkila Capital	666
06/03/2020	Beijing Kunlun Tech	Grindr	San Vicente Acquisition	562
24/02/2020	Haoxiangni Health Food	Hangzhou Haomusi Food	PepsiCo	678

Reported major Chinese disposals[12]

Parent	Reported disposal
China Tianying	Urbaser
Zhejiang Semir Garment	Sofiza
Alibaba Group Holding	ZTO Express
HNA Group	Ingram Micro
Amer Sports; ANTA Sports Products	Suunto Oyj,Precor
Bright Food Group	Miquel Alimentacio Group
China National Chemical Corporation	Syngenta International
Fosun International	Cainiao Network Technology
HNA Group	Hong Kong Airlines
CDIB Capital International Corp	World Fitness Services
Hony Capital	Genworth Financial
CITIC Capital Partners, Blue Sea Capital	DDS Lab