The Matthews Japan Fund (Trades, Portfolio) disclosed last week its top five buys for the second quarter were Shionogi & Co. Ltd. (TSE:4507), Yahoo Japan Corp. (TSE:4689), Kyoritsu Maintenance Co. Ltd. (TSE:9616), SBI Holdings Inc. (TSE:8473) and Eisai Co. Ltd. (TSE:4523).
Overseen by lead manager Taizo Ishida and co-manager Shuntaro Takeuchi, the fund seeks long-term capital appreciation through investments in common and preferred stocks located in Japan. According to the fund's latest letter, the Japan Fund returned 13.76% during the first half of the year, outperforming the MSCI Japan Index's return of 7.97%.
The letter said strong stock selection among small and midsize companies drove benchmark outperformance during the first half of the year. According to the letter, Japanese equities posted solid gains despite swings in market sentiment due to ongoing trade friction between the U.S. and China.
As of quarter-end, the fund's $2.64 billion equity portfolio contains 53 stocks, of which seven represent new holdings. Approximately 26.18% of the equity portfolio is dedicated to the information technology sector, a sector that contributed to the fund's first-half performance: The letter said the fund's "focus on productivity" in software, information technology services and automation allowed it to "capture attractive returns" within the sector despite the cyclical downturn in semiconductors.
The fund purchased 725,000 shares of Shionogi, giving the position 1.59% weight in the equity portfolio. Shares averaged 6,349.15 yen ($59.59) during the quarter.
The Osaka-based company manufactures and distributes pharmaceuticals, diagnostic reagents and medical devices. GuruFocus ranks Shionogi's financial strength 9 out of 10 and profitability 8 out of 10 on several positive indicators, which include robust interest coverage, a solid Altman Z-score of 13.38 and profit margins that outperform over 94% of global competitors. Even though the company's three-year revenue growth rate of 5.50% underperforms 65.23% of global drug manufacturers, Shionogi's business predictability ranks three stars out of five on consistent revenue growth over the past 10 years.
The Vanguard Health Care Fund (Trades, Portfolio) also has a holding in Shionogi.
The fund purchased 13,680,100 shares of Yahoo Japan, giving the stake 1.52% equity portfolio weight. Shares averaged 300.42 yen during the quarter.
The fund's letter said Yahoo Japan announced in May a corporate structure change resulting in Altaba Inc. (NASDAQ:AABA) and Softbank Group Corp. (TSE:9984) selling out and Yahoo Japan coming under the umbrella of Softbank's global telecom businesses. The letter also said Yahoo Japan "can now focus on online ads and e-commerce, two bright spots of growth" in the country.
GuruFocus ranks Yahoo Japan's profitability 8 out of 10: Even though profit margins have declined over the past five years, a sign of declining profitability, the company's per-share revenue increased 22.40% per year on average during the past five years and 16.50% per year on average during the past 10 years. Additionally, Yahoo Japan's business predictability ranks a solid 2.5 stars out of five on consistent revenue growth.
The fund purchased 683,600 shares of Kyoritsu Maintenance, giving the holding 1.21% equity portfolio weight. Shares averaged 5,423.62 yen during the quarter.
The Tokyo-based company operates several travel and leisure business segments, including dormitories, hotels, contracted services, food services and construction. GuruFocus ranks Kyoritsu's profitability 7 out of 10: Operating margins have increased approximately 5% per year on average over the past five years despite underperforming 65.72% of global competitors. Additionally, Kyoritsu's business predictability ranks 3.5 stars out of five on consistent revenue and earnings growth over the past 10 years.
The fund purchased 1.265 million shares of SBI Holdings, giving the stake 1.19% weight in the equity portfolio. Shares averaged 2,507.60 yen during the quarter.
The fund's letter said that unlike competitors, which have a majority of assets under management held by clients aged between 60 and 70, SBI Holdings has a majority of assets under management held by clients aged between 30 and 40. According to the letter, assets under management held by younger clients is expected to grow "given that Japanese pensions are no longer sufficient to support retirement life."
GuruFocus ranks SBI Holdings' profitability 6 out of 10: Although the company has a return on equity that outperforms 62.89% of global competitors, SBI Holdings has a weak Piotroski F-score of 3 and revenues that declined 3.20% in the trailing 12 months despite increasing over 6.5% per year on average over the long term.
The fund purchased 458,900 shares of Eisai, giving the position 0.98% weight in the equity portfolio. Shares averaged 6,392.92 yen during the quarter.
The Tokyo-based drug manufacturer categorizes its pharmaceutical business by region, with Japan and the Americas generating the majority of the company's revenues. GuruFocus ranks Eisai's profitability 8 out of 10: Even though the company's three-year revenue growth rate of 5.50% underperforms 74.06% of global competitors, it has a strong Piotroski F-score of 8 and operating margins that have increased approximately 11.60% per year on average over the past five years.
Disclosure: No positions.
Read more here:
- Kahn Brothers' Top 6 Buys in the 2nd Quarter
- Matthews China Fund's Top 5 Buys of the 2nd Quarter
- David Nadel's Top 5 Buys of the 2nd Quarter
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This article first appeared on GuruFocus.
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