Interview #123 : James Halse (Senjin Capital)
Japanese small cap activists [NO PAYWALL]
For this edition we have the pleasure of interviewing James Halse from Senjin Capital. Due to Senjin Capital being an activist fund we couldn’t talk about any individual companies that they’re currently involved with.
In this issue we discuss the following, plus much more...
- James background
- Why Japan?
- Companies the fund likes to invest in
- Approaching management
- Unlocking value for shareholders
- The macro environment
- Learning Japanese cultureDisclaimer: This interview is for informational and educational purposes only, and should not be seen as investment advice. Please do your own research before investing in any company mentioned.
Thanks James for taking time to do this interview. I’m excited to learn more about what you’re doing at Senjin.
Firstly, can briefly provide a background to yourself - how did you get involved in investing?
My father had a copy of Robert Kiyosaki’s “Rich Dad, Poor Dad”, which he suggested I read when I was about 18, which embedded the broad concept of investing.
I then met someone who became a lifelong friend when I was in my second year of law school. He suggested I read “One Up on Wall Street” by Peter Lynch.
From there I was hooked on researching and investing in stocks and spent a lot of time reading investing books, teaching myself financial theory, and reading company presentations and annual reports.
Why focus on Japan, what makes it such a compelling opportunity right now?
Japan has been a market with a tonne of cheap stocks for a long time, but they have generally been cheap for very good reasons.
The corporate governance reform has created a huge opportunity for activists to unlock the value formerly trapped inside many of these companies that have not focused on shareholder returns.
It is really only in the last 2-3 years that the change in the market has snowballed to the point that the path is now more clear for activists to achieve great outcomes in most of their investments.
Even though stocks have moved up in valuation, the odds of being successful in an engagement are now much better than they were historically.
What types of companies are you specifically targeting?
We look for companies with asset heavy balance sheets – cash, real estate, investment securities, and relatively stable core businesses – cash generative, not too cyclical, unlikely to be disrupted.
Preferably the company will have scope to consolidate the industry via deploying capital into roll-up M&A.
We want to buy the company for less than half the market value of those assets, ideally at around 30 cents on the dollar.
I noticed previously you have mentioned Hino Motors who sold an unused parcel of land for $500m that was carried on its books at $1m, that’s crazy - are you finding many situations like this?
Yes, while the Hino Motors case was particularly amazing, we have found companies that own, for example, a factory in central Tokyo, that is surrounded by apartment buildings.
The land is carried on books at historical cost, but is zoned for residential development – which would clearly be a much better use of the land these days than hosting a loss-making factory.
Once you identify a company that fits your criteria what’s the next step you take?
Do you start accumulating shares, or do you communicate with management first to see if they are open to your ideas?
Part of our due diligence process is multiple meetings with management to grow our understanding of their business, and to begin to build a relationship.
There is almost no management team in Japan that would be immediately receptive to activist ideas – if that were the case, they would already be implementing reform and there would be no need for us.
Once we have completed our DD, we may start accumulating shares. We will inform the management we are a shareholder, and begin meeting with them monthly to present them with our ideas for the company and to continue to grow our understanding of the business.
We do not make demands, just present how we think the company can best grow corporate value.
What ideas do you provide management with to unlock value for shareholders, is there perhaps a playbook you’ve created, or does it depend on the specific company and their situation?
It depends on the specific company, but there are of course common themes. Capital allocation is the most common issue, and the key reason most of these companies trade so far below the book value of their assets (and even further below the market value of their assets). It is also the easiest to improve.
We also engage on operational efficiency though. For example, a company may have made some acquisitions but never integrated any functions. They may have too many factories relative to the volume they need to supply.
Their working capital is often extremely bloated because the salespeople have freedom to offer credit terms but are only judged on the sales they produce, not the capital that goes into producing them, and the purchasing people only worry about cost, not how fast they have to pay.
Then also growth strategy. Is there an obvious opportunity to consolidate the industry? Should the company have a dedicated M&A team rather than passively waiting for deals to come its way?
Our name Senjin, is a homonym in Japanese, with multiple meanings depicted by different characters when in written form. It reflects how we work: pioneering a forward-looking approach, respecting what came before, carrying out deep research, and taking a long-term perspective.
From the macro perspective is there anything that worries you that could derail investing in Japan?
Such as the Japanese central bank moving interest rates higher, or the government pursuing inflationary stimulus packages, or even the slowing/aging demographic changes etc.
A rapid increase in interest rates would certainly depress valuations and take-private premiums, but that does not look very likely.
The demographics over time will hurt domestic-facing businesses, but is not really an issue for how we invest as our investment is more than covered by the hard assets on the balance sheet, with the earnings from the business generally the cream on top.
Do you hedge your currency exposure just in case the yen gets increasingly weak against the Australian dollar?
No, we do not hedge currently. That’s not to say we would never offer it – if investors requested us to.
We see the Yen as fundamentally undervalued at present. You only need to visit Japan and experience how cheap everything is relative to Australia, let alone the US, to get a good sense of that.
Japanese culture is very unique. When you meet and engage with management are you constantly learning the culture to help win their trust?
Has there been any cultural things that have surprised you in terms of how the Japanese do business?
I have been investing in Japan for a long time, and have been learning about the culture since I was about 11 years old, including going on a school trip to Japan when I was 14, where we did a homestay and attended the local high school for a couple of weeks.
I have read many books on Japanese business, history, company and founder biographies, and culture. With investing I have done hundreds of company meetings and calls over the years.
So, I have a reasonably good understanding of the business culture and am not surprised by too much.
That said, there are always new things to pick up. Thankfully my co-founder Tsubasa Umezaki is Japanese, and acts as a great cultural interpreter.
I’m assuming you visit Tokyo a lot, is there an excellent restaurant you can recommend to readers?
Yes I am in Tokyo quite frequently, and my co-founder is based there.
My recommendation would be not to follow any recommendations! You would be very unlucky to find a restaurant that is not great. The average quality there is amazing. Explore, be spontaneous, and enjoy.
That said, there is a great little Izakaya with a fantastic manager in Shinagawa that we often visit, but I couldn’t tell you the name!
Thanks James. Where can readers go to learn more about Senjin Capital?
If you’re specifically seeking deep value stocks in Japan we recommend the following newsletters…
Thanks for reading. @capitalemployed on X
Solid interview! The timing angle around corporate governance reform is underrated since it's not just about valuations anymore but actual propensity for managment to engage. The playbook around bloated working capital is spot-on too. I saw this exact issue at a mid-cap distributer in AU where credit terms were totally disconnected from working capital ROI and fixing that alone unlocked serious cashflow. The Hino Motors land example is wild tho, almost seems too good.