A rare P/BV of 1

Japanese companies, like the rest of its competitors around the world, are struggling with recessionary pressures. The effects of recession has hit sales(local and export) and increased the difficulty in raising funds. Some that are not level footed face the possibility of bankruptcies. In fact according to BBCNews, company bankruptcies in Japan jumped 24.7% in December from a year earlier. For the 2008 year, it rose 11%, the most in 8 years. With regards to operating loss, the latest forecast figures are also grim. Toyota, the world's second largest automaker is expected to lose USD1.7B this coming March, its first loss in 71 years due to slowing demand and a strong yen(yen soared 25% in 2008). Similarly, Sony is also expected to face an operating loss in the coming March of USD1.1B, its first loss in 14 years. Without doubt, such companies are all too ready to axe their workforce.

Would we be seeing opportunity here to buy cheap beaten up "blue chip" Japanese companies? In fact, according to IHT, refer here, the Nikkei which is nearing its 26 years low, and with a rare P/BV(or NTA) ratio of 1 now (October low of 0.87 when the index hits 6,995) indicates that investors are valuing companies at less than what they could theoretically be liquidated for. It added that even during Japan's decade of economic stagnation, deflation and banking troubles, the price-to-book ratio never fell below 1.

However, some will advise you to keep your money first. Sourcing from Bloomberg here, Analyst John Mihaljevic, writing on the Web site Seeking Alpha, looked at corporate Japan’s evolution since the 1990s, and it’s not pretty. “We approached our study of Japanese stocks with the hypothesis that we should be able to find some compelling investments given the cheap valuations of a large subset of Japanese public companies,” wrote Mihaljevic, managing editor of the Manual of Ideas in New York. “So far, however, we have remained unimpressed.” Five specific issues are explored: a lack of business focus, murky corporate governance, little regard for returns on investment, the high cost of production, and clubby boardrooms.

Despite the above, will you forego this golden opportunity to make money in the long run since the average Japanese stocks are at firesale prices? Actually I am not sure. I did try to do a search using the Bloomberg machines to compare the Nikkei's P/BV with the Bursa or HangSeng in general. Apparently, no such average can be calculated from its database. However, there is such information based on individual stocks. To feel how a 1X P/BV is like, look at AirAsia now. Also, for comparison based on Kenanga Research's latest sector coverage, the P/BV of Property is 0.8X, Plantation 1.7X and Oil & Gas 1.9X . So is P/BV of 1 cheap then? I think the Nikkei's P/BV of 1 is cheap but too generalised as we must also look deeper into the individual stocks themselves. In addition, I believe other valuation ratios (p/e, eps growth, roe etc) must also be used to justify our conviction to buy.

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* Happy Ponggal to you! Hope you have the sweetest start for the year and your low is bearable while your high is exceptional!

* Citi which expects a technical recession in 1Q09 for Malaysia, downgrades on Malaysian banks but still a hold AMMB. It also says Singapore property is in a Bear Trap and advises to sell into strength.

* YahooNews: Yahoo names tech veteran Carol Bartz as new CEO.

* US Trade deficit hits 5 year low in November due to fall in oil prices and slower domestic demand.

* Bloomberg: ABN Ambro: China, HK stocks may be the first to bottom amidst slump.

* RTTNews: China's foreign exchange reserves reaches USD1.95T on 31st December. For the year, it was up USD417.8B. However, the 4th quarter increase has slowed down compared with the previous 3 quarters.

Business, politics and Gaijin investors

Japan is the third-largest economy in the world in purchasing power parity terms and the second-largest at market exchange rates. It also boasts one of the world's largest markets, with a population of just under 130m. GDP growth is forecast to average 1.4% a year in 2008-12. Japanese economy has been overshadowed by the economic success from the emerging of China, India and Middle East countries. On the overall, the Japanese market remains the most closed market in the industrialised world and faces criticisms in terms of corporate governance especially from its ever demanding foreign shareholders. The country seems to be making headway although at a slow pace. Below is a warning statement raised by the Head of Tokyo Stock Exchange regarding the country's challenges ahead if Japan's companies and policies makers remain non committal about corporate governance and the high economic cost of practicing protectionism and fending off foreigners. My comments are in RED.

Business Standard: Japan will be forced to sell its assets cheaply to emerging economies such as China and India unless Japanese corporations raise their capital efficiency and enterprise value, the head of the Tokyo Stock Exchange warned on Thursday. Atsushi Saito said it was his "personal fear" that within 20 years the world's second largest economy would have to tap overseas investors to finance its debt — now at 170 per cent of gross domestic product — by selling property and other national assets at rock-bottom prices. "We will face a disastrous situation. Our grandsons and great-grandsons will carry very huge, tragic debt, thanks to their grandparents . . . (and will) have to rush to China, India, the Middle East (and say) ‘please help us'," he told the Financial Times.

Japan's debt is very high indeed. As a comparison, the country with the highest debt per GDP is Zimbabwe (190%) while the lowest is Luxemburg (2.6%) The other countries of interest are Singapore (95.3%), the US (36.8%), Malaysia (41%) and Hong Kong (12.8%) (refer here for the detailed list). The Japanese government borrowed vast sums of money and spent it in partly unsuccessful attempts to stimulate the Japanese economy during the 1990s "lost decade" (also discussed here previously).

Saito, a champion of good corporate governance as critical to raising the value of companies and boosting the national wealth, said those opposed to bringing Japanese corporate governance in line with the west's would "eventually dampen the future price of Japan". The Tokyo stock market has seen the benchmark Nikkei average plunge more than 20 per cent since July.

Corporate governance is a big subject. It was widely mentioned during the 1997 Asian Financial crisis and during the collapse of American companies like Enron and Worldcom in 2001. I believe the key to better corporate governance lies with the engagement of Shareholders with the Management and Board of the company to achieve the desired accountability. Management should strive to give a reasonable return to shareholders via egs a higher Return on Equity (ROE) and other financial ratios and pay particular attention to cost and expenses and its impact on environment. Management should always remember the shareholders are the rightful owners and it should always execute their work with the most prudential fiduciary duty. Further, Boards appointed should contain independent Directors who should have independent means to assist in their duty to monitor the accountability of Management on behalf of Shareholders.

About half of Japan's listed companies are trading below book value.

In another word, these companies are better off be broken into parts and be sold off rather continuing to be a going concern.

Saito's warning comes amid growing concern that poor corporate governance, which has led to the adoption of excessive takeover defence measures and stymied mergers and acquisition activity, is sapping the competitiveness of Japanese companies and the vitality of the economy. "At present Japan is alright, but it is like the Titanic just after (it hit the iceberg)," said Takaaki Wakasugi of the Michigan Ross School of Business, University of Michigan. "People are still singing and dancing but the Japanese economy is sinking."

Recent takeover bids by foreign parties were proven unsuccessful. It should be noted that despite Japan's success to fend off foreign control, foreigners are still very much attracted to Japan as they owned more than 25% of Japanese shares and accounted for more than 60% of trading in the stock exchange. Their high shareholdings have been proven useful to pressure policy makers and companies to push for sweeping reforms and greater shareholding democracy. According to an article in The Economist, foreigners want Japanese firms to take on independent directors, refrain from introducing poison-pill defences, unwind defensive cross-shareholdings and unload their cash by increasing dividends, among other things. More than 600 firms had adopted poison-pill defences by 2007, twice as many as in 2006. And cross-shareholdings increased in 2006 and 2007, having fallen for almost a decade.

The TSE is drawing up measures to improve the corporate governance of listed companies and guidelines for takeover defences to prevent them being used to entrench management. This week a group of ruling Liberal Democratic Party parliamentarians presented a report to Yasuo Fukuda, the prime minister, proposing reforms to the management of the public pension fund to improve returns.The Council for Fiscal and Economic Policy is calling for the break-up of Japan's Y149,000 billion ($1,380 billion) Government Pension Investment Fund into smaller units, to be managed by investment professionals competing with each other to raise returns from the average 2.9 per cent between 2002 to 2007 — when Canada's public pension fund returned a 9.1 per cent average.

The Council which was appointed by the prime minister also proposes 1) takeover of Japanese firms be made easier and reduction of corporate tax rate, currently at 40% and 2) TSE to establish new rules to discourage anti-takeover defences. These are good steps forward as Japan needs to get rid of the meddling of old bureaucrats who still remained as advisers to government affairs. Most of these advisers are reluctant to change and adopt a culture of "preserving stability and saving face" which does not promote transparency and questioning the authorities accountability. Only time will tell whether Japan will be able to work comfortably on these corporate governance guidelines proposed by the western world (including the Sarbanes-Oxley Act 2002) and whether it will promote long term value for the Japanese enterprises.

* The Sun: Dealers Association of Malaysia says petrol consumption in the country has dropped almost 30% following the 41% hike in prices early this month. However, it believes consumers will get over it and return to their old pattern of fuel usage.

* Thaksin Shinawatra blames the alignment of planets for his country's current economic and political woes.

* Reuters: US rate futures have been pricing in 2 quarter point Fed hikes by Oct, racing ahead of analysts expectation that the US interest rate to stay at 2% for the rest of the year and well into the next.

* UOBKayHian: Expects minimal direct economic losses from the torrential rains based on history of non significant impact on agriculture and economy. It fears summer drought rather than torrential rain. So far the direct economic losses from snow storm is estimated to be RMB150b and Sichuan major earthquake is RMB200b.