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Matthews Japan Fund's Biggest 4th-Quarter Buys

Earlier this week, the Matthews Japan Fund (Trades, Portfolio) released its portfolio update for the fourth quarter of 2019. The fund made several new buys during the quarter, most notably TDK Corp. (TSE:6762), Yamaha Motor Corp. Ltd. (TSE:7272) and Bandai Namco Holdings Inc. (TSE:7832). It also sold out of its positions in Z Holdings Corp. (TSE:4689), Persol Holdings Co. Ltd. (TSE:2181), Mercari Inc. (TSE:4385) and Misumi Group Inc. (TSE:9962).

The Japan Fund seeks long-term capital appreciation with the objective of having at least 80% of its funds invested in companies located in Japan. It looks for companies that it believes can maintain sustainable growth over a long period of time, basing its analysis on balance sheet information, employees and management, cash flow, products and marketing strategies. As of the end of the fourth quarter, the fund's equity portfolio is valued at $2.25 billion.


The fund's top holdings are Sony Corp. (TSE:6758) at 4.12%, Tolio Marine Holdings (TSE:8766) at 3.61% and Nippon Telegraph & Telephone Corp. (TSE:9432) at 3.58%. In terms of sector weighting, the fund is most heavily invested in technology, industrials and health care.


TDK Corp

The fund established a new position of 413,100 shares in TDK Corp., impacting the equity portfolio by 2.07%. Shares traded at an average price of 11,332 Japanese yen ($103.18) during the quarter.


TDK is a Japanese multinational electronics company that manufactures products such as electronic materials, recording and data-storage media, biosensors and smartphone batteries.

According to the Matthews Japan Fund fourth-quarter commentary, "The company's recent driver of earnings was the batteries business, where it commanded a leadership position in high-end smartphone batteries and continued to expand market share despite sluggish overall smartphone-unit growth. As the 5G era approaches, we believe TDK's economic moat of higher density per area, design and safety capabilities will increase its value proposition."

As of Feb. 5, TDK has a market cap of 1.5 trillion yen, a price-earnings ratio of 17.49, a cash-debt ratio of 0.68 and a three-year annual revenue growth rate of 6.2%. According to the Peter Lynch chart, the stock is trading near its fair value.


TDK's revenue and net income have increased over recent years as it has gained more market share from sales of its lithium batteries for smartphones and its sensors for robotics. Analysts estimate that revenue will continue to grow by 6% per year over the next several years.


Yamaha Motor

The fund established a new position of 1,947,300 shares in Yamaha Motor, impacting the equity portfolio by 1.74%. Shares were trading at an average price of 2,197 yen during the quarter.


Yamaha Motor is a Japanese company that manufactures motorcycles, boats, outboard motors and related products. It split off from its conglomerate parent company, Yamaha Corp. (TSE:7951), in 1955 and has since become one of the top reliable motorcycle brands based on data from Consumer Reports.

The Matthews Japan Fund (Trades, Portfolio) notes that, "Its stock price halved due to market-share losses and a sluggish macro environment in the motorcycle business, both in emerging markets and in Europe. While the timing of its turnaround remained uncertain, the company took action in each market and we concluded shares were undervalued given the company's overall ability to generate free cash flow."

As of Feb. 5, Yamaha Motor has a market cap of 709.84 billion yen, a price-earnings ratio of 8.14, a cash-debt ratio of 0.37 and a three-year annual revenue growth rate of 0.8%. According to the Peter Lynch chart, shares are trading below their fair value.


The company's revenue and net income have seen little fluctuation in recent years, attesting to its ability to navigate various market conditions. International diversity in its markets contributes largely to this, as only around 10% of Yamaha Motor's sales are in its home country of Japan. Other Asian countries account for 43% of sales, while North America accounts for 21%.


Bandai Namco Holdings

The fund also established a new position of 526,500 shares in Bandai Namco Holdings, impacting the equity portfolio by 1.43%. During the quarter, shares traded at an average price of ?6,680 yen.

Bandai Namco is a holding company that specializes in video games, arcades, anime, amusement parks and toys. It is perhaps most famous for its arcade games, which include Pac-Man and Tekken.

As of Feb. 5, Bandai Namco has a market cap of 1.41 trillion yen, a price-earnings ratio of 22.11, no debt and a three-year annual revenue growth rate of 8.4%. The company has seen fairly steady growth in both its revenue and share price ever since it went public.


The company is currently in the midst of a three-year global growth strategy, which began in April of 2018. It has been focusing on developing content tailored to specific regions in order to gain market share in more countries, especially China, which marks a departure from the Japan-centered development that it has focused on in the past. The turn to aggressive overseas growth is largely due to the entertainment company's market saturation in Japan, which faces population decline.

Disclosure: Author owns no shares in any of the stocks mentioned.

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This article first appeared on GuruFocus.