notes from the road - comgest

MARKETING COMMUNICATION1 FOR PROFESSIONAL INVESTORS ONLY

March 20, 2017

Notes From The RoadA Postcard From Comgest’s U.S. Investment Team

102020

March

JAPAN

Comgest’s Japan portfolio* outperformed the TOPIX index at just over 4% last year, close to our average alpha over the last ten years as under-researched quality companies continue to beat the value-destroying ‘Old Japan’ sectors with a heavy weighting in the index. Meanwhile, tensions over China-US trade, between Japan and Korea, and a sales tax (a/k/a the “consumption tax”) hike have weighed on investors’ minds.

China-US Trade

In our view, the detail at a company level always deserves more attention than macro-economic generalisations. Companies that address specific dynamics have been largely immune to macro considerations. Daikin, for example, has China as its largest profit geography, but reported around 13% organic EBITDA growth for the last quarter as their supply of industrial and high-end air conditioner technology is unaffected by broad Chinese economic trends due to its skew towards industrial and customized condominium applications.

Pigeon, another Japanese company, is the largest baby bottle seller in China with the country also being their largest profit constituent. The company continues to grow strongly through market share gain, penetration and the growing adoption of formula milk by Chinese mothers. Pigeon told us * Comgest’s representative account of the Japan Equities Composite. The representative account discussed has been managed in accordance with its respective Composite since the

Composite’s inception.

NOTES FROM THE ROAD:

JAPANA Postcard From: Comgest’s Japan Team

Six months into the new Imperial Era, Comgest’s Japan Team is taking stock:

Comgest’s Japan Team (left to right: Makoto Egami, Richard Kaye, Chantana Ward, Junzaburo Hyuga) visiting a Sushiro restaurant

March 2020

Notes From The RoadA Postcard From: Comgest’s Japan team


that their sales in China last quarter grew 7% versus the year prior (in local currency) and they are expecting 10% growth for the whole year.

Japan-Korea

Both ShinEtsu Chemical and Hoya were theoretically vulnerable to the tighter export inspections on high-tech goods bound for South Korea – but have not seen any changes in their business. Hoya’s pre-tax profit grew 15% versus the year before in their latest reported quarter, while ShinEtsu’s grew nearly 10% year-to-date, organically.

Our portfolio’s companies’ profit growth generally remains strong. While Daikin’s organic operating profit grew 12%, Hikari Tsushin’s is in the upper twentieth percentiles (excluding a stock sale), and Hamamatsu Photonics’ is at 4.9%. For Sysmex, organic sales are: Americas +6.1%, EMEA +11.6%, China +10.4%, Asia Pacific (ex China and Japan) +12.0%, and Japan +8.4%.

Consumption Tax

In contrast to the above global tensions, the consumption tax hike has weakened same-store sales across Japanese retail since its implementation in October. Last quarter GDP was reported as -6.3% (annualised), with the new tax as a major detractor, impacting the consumption element of GDP. Typhoon Hagibis (in October 2019), ongoing trade tensions and the current coronavirus virus outbreak have taken their toll. Most of our companies’ profits still grew last quarter, versus one year previously, showing again that the connection between GDP and profit – at least for our portfolio companies – can be tenuous.

Our companies’ stories are as follows. On January 31st, Kosé commented that the pace of decline had abated from November, but recovery might have to wait until March. In the meantime, the Japanese government has unveiled a JPY13tn (USD119bn) supplementary budget to mitigate the worst effects of the tax hike, with a focus on infrastructure in areas hit by recent natural disasters. It’s here that we’ve found opportunity since the government offered a tax hike waiver for non-cash transactions, which has stimulated providers of cashless transaction mechanisms.

LINE, recognised its ubiquitous LINE Pay solution, is subject to a buy-out offer by Yahoo Japan and Softbank, pending regulatory approval. Naver, South Korea’s ‘Google’ which has 42m users – of whom 25m use it as their default search – and drives 75% of search traffic, owns 73% of LINE and has agreed to the deal subject to the approval to share ownership with Yahoo Japan. As holders of Softbank, which is aiming to consolidate the Japanese domestic market for e-commerce and payment, we could benefit from this and from the company’s stake in another former long-term holding of ours, Zozo.

March 2020



Coronavirus

Since the news changes daily, it is difficult to comment on this topic. Japan’s problems with infected cruise ship passengers are well known, and on 27th February, the Prime Minister recommended that all schools to close for the two weeks prior to mid-March spring holidays.

As a sign of the times, the Nikkei news reported on the 2nd of March that the “coronavirus rumours fueling a panicked purchase of toilet paper in Japan” had led to a discussion in the Parliament, which provoked a comment from Prime Minister Abe, “we don’t have to worry about supply from China. We have sufficient [toilet paper] inventory and manufacturing capability in Japan.”

That said, China’s infrastructure shutdown is a handicap. However, some companies such as Workman, have provisioned ample inventory, so the effect is hard to gauge.

Although our tourist-geared stocks initially reacted negatively, some have already rebounded. In response to the outbreak, we increased the cash weight of the portfolio, but it is too early to disavow our long-held belief in the structural theme of Japan as the aspiration of emerging markets due to the high demand for Japanese brands by Asian consumers.

Jeffries’ analysis of the peaking-out of SARs in 2003 reinforces the view that the situation may not worsen after spring.

Japan: following the opposite path

1) US-China relations, Brexit all imply deglobalisation and a return to protectionism.

Japan is following the opposite path. The EU-Japan and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) trade agreements of recent years have brought the ratio of Japanese goods free from tariff barriers to 51.6%, shows the government’s website.

Figure 2. Free Trade Agreement coverage ratio reaches over 50%

Source: Calculated by Ministry of Economy, Trade and Industry based on Ministry of Finance “Trade Statistics of Japan” (January 2018–December 2018; Fixed numbers; https://www.japan.go.jp/abenomics/opportunity/).

In force or signed

Under negotiation

51.6%34.6%

Trade value base, in force

or signed

Figure 1. 2003 SARs Cumulative infected patients & average temperature in Guangdong

Source: WHO, Jefferies.

3,000

4,000

2,000

5,000

0

1,000

6,000

7,000

8,000

18

20

22

24

10

12

14

16

26

28

30

Infected (China + HK Total, LHS)

Temperature (RHS)

16-N

ov-0

230

-Nov

-02

14-D

ec-0

228

-Dec

-02

11-J

an-0

325

-Jan

-03

8-Fe

b-0

322

-Feb

-03

8-M

ar-0

322

-Mar

-03

5-A

pr-0

319

-Apr

-03

3-M

ay-0

317

-May

-03

31-M

ay-0

314

-Jun

-03

March 2020



2) Likewise, other countries are restricting immigration or freedom of movement; but Japan is forging ahead again in the other direction. It has doubled its foreign worker count since 2012, and is steadily easing residence requirements for foreigners in a pragmatic response to its labor shortage.

3) Japan is also levering its greatest internal resource – women – and now has higher female participation in the workforce than for example the United States.

Figure 4. Women in the Japanese Workforce

Source: Cabinet Office, Government of Japan / * Ministry of Internal Affairs and Communications “Labour Force Survey” / ** Ministry of Health, Labour and Welfare “Basic Survey on Wage Structure” (https://www.japan.go.jp/abenomics/diversity/index.html).

2.9*

10%**

million

From 2012 to 2018, the number of women joining the workforce increased by about

Women in management positions in the private sector approaches

Figure 3. Immigration in Japan

Source: Government of Japan (https://www.japan.go.jp/diversity/workinginjapan/).

Increase in number (in millions) of workers from abroad

2012

0.682013

0.722014

0.792015

0.912016

1.082017

1.28

March 2020



Investing in “Changing Japan”

Japan is therefore changing – opening to trade, liberalizing immigrations and reforming labor. Comgest has found beneficiaries of these changes throughout the market. One ‘Changing Japan’ stock which we bought recently is Workman, a company that we first visited and began monitoring in 2003. With only one broker in Japan covering this stock there is a distinct lack of analyst coverage; however, this work uniform company has had some of the strongest growth in retail as it has expanded its apparel offerings to outdoor wear. Workman used just to focus on professional use work uniforms, eventually using vivid colors in place of conventional dark colors. Their diversification began in September 2014 as they shifted towards outdoor clothing and other new areas using their conventional technology and materials.

–1.0

15.3

45%

50%

40%

35%

20%

25%

30%

55%

60%

10%

5%

0%

–5%

–10%

15%

Jan-

18

Feb-

18

Mar

-18

Apr

-18

Mai

-18

Jun-

18

Jul-1

8

Aug

-18

Sep-

18

Oct

-18

Nov

-18

Dec

-18

Jan-

19

Jan-

20

Feb-

19

Mar

-19

Apr

-19

Mai

-19

Jun-

19

Jul-1

9

Aug

-19

Sep-

19

Oct

-19

Nov

-19

Dec

-19

Change in existing store sales per customer:

1,7

0.2 0.41.8

6.6

2.4

5.1

2.3

4.7

4.32.6

3.2 3.3

2.9

5.6

3.7 4.1 4.2

4.66.0 6.7

–1.9 –1.9

1.2 3.1

12.5

7.13.4

10.8

16.1

6.9

28.1

3.2

20.1

32.7

14.0

11.9

14.117.5

31.6

35.8

16.3

54.7

16.1

23.8

24.1

28.7

21.1

3.25.1 10.6

6.83.0

8.9

8.9

4.4

21.8

4.3

17.5

26.8

11.1

7.310.5

13.8

27.9

28.5

12.1

34.2

11.5

18.7

18.6

21.4

13.5

Double-digit increase in branch sales for 15 consecutive months

We strengthened our Ambassador Marketing tactics. Brands like Field Core, Find Out and Aegis were strong

regardless of the season.

Q4 existing store sales +5.0%








The very hot summer drove sales of work clothes with built-in fans.

Spring and summer collections sold well but the long rainy season in July

was a brake on sales.

Monthly sales growth y/y (+35.8% in June; +16.3% in July 2019)

# of customers Average selling price (ASP)

Figure 5. Workman’s Monthly Sales Growth (y/y) and Number of Customers

Source: Workman

Comgest’s Japan Team visiting a Workman store

March 2020



Since September 2018, the company has promoted ‘Workman Plus’ stores, with brands likes ‘FieldCore’ for the outdoors, ‘Aegis’ for fishing and biking, and ‘FindOut’ for sports. In addition, the company has been transforming less profitable Workman stores, in areas such as road-side stores, to Workman Plus. According to the company, this renovation tends to increase the sales by 1.5x.

Sushiro is another recent portfolio addition, which is benefiting from the consolidation of sushi chains, more efficient operations and a focus on returns, while not compromising quality.

The company’s stores are highly competitive and their format takes little time to recoup investment. The company has an edge in terms of the competitiveness of its stores and the speed of their opening. Their competitive strength comes from in-store preparation, supply procurement, and IT systems:

Figure 8. Suchiro restaurant conveyor belt system

“O shaped” layout of a typical conveyor belt sushi shop

“E shaped” layout of Sushiro (200 seats per store on average)

Sushi Chef

Sushi Chef

Source: Sushiro

Figure 6. Workman’s Brand Diversification

Source: Workman

Figure 7. A fan-cooling jacket from Workman

Source: Comgest

March 2020



– There is no central kitchen, and main ingredients, such as tuna, sea beam and yellowtail, are prepared by cutting from a block of fish or by processing on the premises. Preparing ingredients this way increases the work load of its restaurants, but by serving freshly cut and filleted fish, the company differentiates itself from competitors in terms of quality and freshness.

– The company invests highly in procuring the best, high quality ingredients, such as fresh fish. More-over, they have direct trading relationships and price negotiating power due to the company’s large scale procurement.

– Management highlighted that one key reason for Sushiro’s success is its strategy of ‘paying up’ on higher quality fish, which is paying off in terms of greater numbers of repeat customers. Separate and distinct from its own advertising efforts, a number of TV shows have also highlighted Sushiro. Strong brand rec-ognition supports its pricing power!

Another ‘Changing Japan’ stock we recently bought after a long period of monitoring is Kobe Bussan, a ‘Costco’ type discount supermarket whose same-store sales history speaks for itself (see Figure 9). Just as Workman is challenging apparel, Kobe Bussan is taking share in the inefficient and fragmented supermarket industry and offering exclusive import products (Figure 10). In addition, the company’s ready-to-eat ‘Chisona’ space which has driven customer traffic.

Figure 9. Same-store sales at Gyomu Super (directly controlled area) and food supermarket average

Source: Mizuho Securities Equity Research

Supermarket average Gyomu Super (directly controlled)

9%

11%

7%

5%

–1%

–3%

13 2014 2015 2016 2017 2018 2019

–5%

1%

3%

13%

15%

SSSG

Jan

Feb Mar

Ap

rM

ay Jun

Jul

Aug Sep Oct

No

vD

ec Jan

Feb Mar

Ap

rM

ay Jun

Jul

Aug Sep Oct

No

vD

ec Jan

Feb Mar

Ap

rM

ay Jun

Jul

Aug Sep Oct

No

vD

ec Jan

Feb Mar

Ap

rM

ay Jun

Jul

Aug Sep Oct

No

vD

ec Jan

Feb Mar

Ap

rM

ay Jun

Jul

Aug Sep Oct

Jan

Feb Mar

Ap

rM

ay Jun

Jul

Aug Sep Oct

No

vD

ec

No

vD

ec

Thank you sale

15th Anniversary

700th store celebration sale

Best domestic factory sale

Strong yen reimbursement

sale Weak yen reimburse-ment sale 777 store

celebration sale

Spring thank-you

sale

Special prices for some PB products

Gyomu Super X Kobe Bussan festival

Gyomu Super X Kobe Bussan:

Heisei era‘s last festival

TV special aired (17 Feb)

Gyomu Super X Kobe Bussan: Reiwea‘s �rst

festival

Pre tax-hike sale

March 2020



Governance improvement continuing

Japanese companies’ renewed focus on the shareholder – and returns – is unchanged, thus leading to an increasingly favourable environment for quality growth investing.

As Japan returns to growth and Japanese investors demand returns in their own market, we believe even more that growth and quality investing will work in Japan.

Figure 10. Kobe Bussan – Imported products, store interior

Source: Mizuho Securities Equity Research

Figure 11. Kobe Bussan - Ready-to-eat ‘Chisona’ space

Source : Comgest

Figure 12. Japan - Number of share buybacks

Source: Bloomberg, Credit Suisse research

1,000

1,200

800

600

400

200

1,400

0

1,600

1,800

2,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

Share buybacks, % of market cap, 12 month rolling sum(# of buybacks, excluding duplicates in a single month)

2019

2018

2017

2016

2015

2014

2013

2005 2007 2009 2011 2013 2015 2017 2019

Source: Bloomberg, Refinitif, Credit Suisse research

March 2020



FOR PROFESSIONAL INVESTORS ONLY

MAIN RISKS

Investing involves risk including possible loss of principal.

The value of all investments and the income derived therefrom can decrease as well as increase.

Changes in exchange rates can negatively impact both the value of your investment and the level of income received.

Because the portfolio invests in a single country, its performance could be more volatile than the performance of more geographical-ly-diversified portfolios.

A portfolio invested in a limited number of securities may entail higher risks than portfolios which hold a very broad spread of investments.

IMPORTANT INFORMATION

This document has been prepared for professional/qualified investors only and may only be used by these investors.

Not investment advice

This material is for information purposes only and it does not constitute investment advice. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. It is incomplete without the oral briefing provided by Comgest representatives. Opinions expressed herein are subject to change without notice.

Not an investment recommendation

Included in this postcard are references to specific companies, each of which Comgest’s investment professionals met during recent trip(s) to Japan. No discussion with respect to specific companies should be considered a recommendation to purchase or sell any particular security/ investment. The companies discussed do not necessarily represent past, current or future portfolio investments. It should not be assumed that any of the companies discussed were or will be profitable, or that recommendations or decisions made in the future will be profitable.

Comgest does not provide tax or legal advice to its clients and all investors are strongly urged to consult their own tax or legal advisors concerning any potential investment.

Not Investment research

The information contained in this communication is not ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with MIFID II. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.

Performance Disclaimer

Past performance is not a reliable indicator of future results.

Forward-looking statements

This postcard includes projections or other forward-looking statements regarding future events, targets, intentions or expectations. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking statements. There is no guarantee that projected returns or risk assumptions will be realized or that an investment strategy will be successful. No representation, warranty or undertaking is made as to the reasonableness of the assumptions made herein or that all assumptions made herein have been stated. Information provided subject to change without notice

Certain information contained herein has been obtained from third party sources and such information has not been independently verified by Comgest. No representation, warranty, or undertaking, expressed or implied, is given to the accuracy or completeness of such information by Comgest or any other person. Comgest has not necessarily made any attempt to verify all such information and Comgest does not guarantee the accuracy of any such information. None of the companies discussed in this postcard should be viewed as an investment recommendation and are provided for illustrative purposes only. All opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice.

Restrictions on use of information

This material and the information herein may not be reproduced (in whole or in part), republished, distributed, transmitted, dis-played or otherwise exploited in any manner by third parties without Comgest’s prior written consent.

Limitation of Liability

Certain information contained in this presentation has been obtained from sources believed to be reliable, but accuracy cannot be guaranteed. No liability is accepted by Comgest in relation to the accuracy or completeness of the information.

March 2020


Representative account information

The representative accounts discussed is managed in accordance with their respective Composite since the Composite’s inception. The representative account is the open-ended investment vehicle with the longest track record within the Composite. The perfor-mance results discussed reflect the performance achieved by the representative account. Accordingly, the performance results may be similar to the respective composite results, but the figures are not identical and are not being presented as such. The results are not indicative of the future performance of the representative account or other accounts and/or products described herein. Account perfor¬mance will vary based upon the inception date of the account, restrictions on the account, and other factors, and may not equal the performance of the representative account presented herein.

To receive a GIPS compliant presentation for the composite discussed contact [email protected].

Index

TOPIX Index Value and the TOPIX Marks are subject to the proprietary rights owned by the Tokyo Stock Exchange, Inc. and the Tokyo Stock Exchange, Inc. owns all rights and know-how relating to the TOPIX such as calculation, publication and use of the TOPIX Index Value and relating to the TOPIX Marks. No Product is in any way sponsored, endorsed or promoted by the Tokyo Stock Exchange, Inc.

Trademark disclaimer

Product names, company names and logos mentioned herein are trademarks or registered trademarks of their respective owners.

Legal entity disclosure

Comgest S.A is a portfolio management company regulated by the Autorité des Marchés Financiers and whose registered office is at 17, square Edouard VII, 75009 Paris.

Comgest Asset Management International Limited is an investment firm regulated by the Central Bank of Ireland and registered as an Investment Adviser with the U.S. Securities Exchange Commission. Its registered office is at 46 St. Stephen’s Green, Dublin 2, Ireland.

Comgest’s investment professionals are employed either by Comgest S.A., Comgest Asset Management International Limited, Comgest Far East Limited, Comgest Asset Management Japan Ltd. and Comgest Singapore Pte. Ltd.

Comgest Far East Limited is regulated by the Hong Kong Securities and Futures Commission. Comgest Asset Management Japan Ltd. is regulated by the Financial Service Agency of Japan (registered with Kanto Local Finance Bureau (No. Kinsho 1696)). Comgest Singapore Pte Ltd, is a Licensed Fund Management Company & Exempt Financial Advisor (for Institutional and Accredited Investors) regulated by the Monetary Authority of Singapore.

FOR HONG KONG ONLY:

This advertisement has not been reviewed by the Securities and Futures Commission of Hong Kong.

FOR SINGAPORE ONLY:

This advertisement has not been reviewed by the Monetary Authority of Singapore.

FOR AUSTRALIA ONLY :

Comgest Far East Limited is regulated by the Securities and Futures Commission under Hong Kong laws, which differ from Australian laws. Comgest Far East Limited is exempt from the requirement to hold an Australian financial services licence under the Australian Corporations Act in respect of the financial services that it provides. This material is directed at “wholesale clients” only and is not intended for, or to be relied upon by, “retail investors” (as defined in the Australian Corporations Act).

Comgest Singapore Pte. Ltd. is regulated by the Monetary Authority of Singapore under Singaporean laws, which differ from Austra-lian laws. Comgest Singapore Pte. Ltd. is exempt from the requirement to hold an Australian financial services licence under the Australian Corporations Act in respect of the financial services that it provides. This material is directed at “wholesale clients” only and is not intended for, or to be relied upon by, “retail investors” (as defined in the Australian Corporations Act).

March 2020



March 2020



COMGEST S.A.17 square Edouard VII, 75009 Paris FranceTel: (+33) 1 44 94 19 [email protected]

COMGEST FAR EAST LIMITEDLevel 10, 28 Hennessy RoadHong KongTel: (+852) 3972 [email protected]

COMGEST ASSET MANAGEMENT INTERNATIONAL LIMITEDUK Representative OfficePark House, 116 Park Street,London, W1K 6SS United KingdomTel: (+44) 20 3871 [email protected]

Dublin Office46 St. Stephen’s Green, Dublin 2 IrelandTel: (+353) 1 631 [email protected]

COMGEST ASSET MANAGEMENT JAPAN LTD.1-8-2 Marunouchi, Chiyoda-kuTokio 100-0005 JapanTel: (+81) 3 4588 [email protected]

COMGEST SINGAPORE PTE. LTD.8 Temasek Boulevard, #20-01A Suntec Tower ThreeSingapore 038988Tel: (+65) 6672 [email protected]

COMGEST DEUTSCHLAND GMBHSky OfficeKennedydamm 24 40476 Düsseldorf GermanyTel: (+49) 211 44 03 87 [email protected]

COMGEST US LLC101 Arch Street, 8th floorBoston, MA 02110 USATel: (+1) 857 304 [email protected]

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www.comgest.com

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