The 2011 Tōhoku earthquake taught us that significant events can change consumer behaviour, going against Japan’s conservative society norms. The longer such catastrophes continue, the more structurally embedded the new behaviour becomes.
The Covid-19 pandemic was no exception. Firstly, it accelerated the long-anticipated digital transformation at Japanese corporates; secondly, it strengthened demand for goods and services that stretch consumers’ disposable income.
Below are examples of companies in the FSSA Japan Equity strategy that have benefitted from these changing behaviours. They characterise some of the attractive long-term investment opportunities we have found in Japan.
Growth trend 1: digital transformation
Despite Japan having one of the largest annual IT expenditures globally, the pace of digital adoption has been slow. However, the pandemic has forced companies to rethink their digital strategy. According to the Information-technology Promotion Agency, 40% of Japanese companies have now established a digital transformation (DX) project.
We believe this will benefit internet services and Software-as-a-Service (SaaS) companies. One example is M3, a web-based marketing platform connecting doctors with pharmaceutical companies. M3 saw orders for e-detailing surge 2.5 times in 1H2020, as doctors avoided in-person meetings with medical representatives. Given online marketing expenditure is only 1-2% of pharmaceutical companies’ marketing budgets, we believe the long-term growth potential for M3 is huge.
Rakus, which provides cloud-based services to small and medium-sized enterprises (SMEs), saw strong (40%+) year-on-year growth for its core expense management software. Rakus’ suite of software helps its key target market – SMEs and their employees – save significant labour and time costs. With low penetration due to limited IT literacy, we believe there should be a long runway of growth ahead.
Similarly, Bengo4.com, the largest provider of cloud-based contract software in Japan, has grown exponentially as companies adopt e-signatures in their business. Its CloudSign service has over 80% share of the Japan market, with sales up 2.6x year-on-year due to the work-from-home environment in 2020. The company estimates that less than 10% of Japanese businesses currently use e-signatures, indicating that growth could pick up significantly in the coming years.
Growth trend 2: deflationary spending
Amidst the backdrop of economic instability, demand for goods and services that stretch consumers’ real disposable income has strengthened. In Japan, “cheap” products used to be viewed with suspicion, but that perception has slowly changed as more middle-income customers visit stores like Gyomu Super and Workman.
Gyomu Super, a leading discount grocery franchise operated by Kobe Bussan, enjoyed 16% same-store sales growth in 2020, driven by stay-at-home demand and products sold cheaply in bulk. As a vertically integrated retailer, Kobe Bussan sells its private-label goods at a 30-50% discount compared to those at a traditional grocery store.
Similarly, Workman, a specialty retailer of private-label outdoors and athleisure clothing, recorded 18% sales growth in 2020, and its profit margins continue to widen. With its functional wear priced at a fraction of the big brands, demand has been so strong that its franchisees struggle to restock the shelves in a timely manner.
Customers have posted recipes made with Gyomu Super ingredients or outdoor styling with Workman clothes on their social media, leading to a cult following for these two brands. Given the performance of other discount retailers in Japan, we believe the discounting trend – particularly with Japan’s sluggish economy and muted wage growth – is here to stay.
Well positioned to reap the rewards
FSSA Investment Managers’ (FSSAIM) Japan Equity strategy is well positioned to take advantage of these long-term growth trends. At FSSAIM, we do not predict macro events, because our investment approach – as bottom-up stock selectors – seeks to identify companies that are in charge of their own destiny. While Japan consistently defies convention, we select only the companies that can thrive, regardless of the country’s economic challenges.
Learn more about FSSAIM Japan strategy –
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For Singapore investors: click here.
Source: Company data retrieved from company annual reports or other such investor reports. As at 23 February 2021.
 Source: https://www.ipa.go.jp/files/000082054.pdf (Japanese language)
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