Questions from a reader VI

by admin on May 19, 2013

1. The question is basically how come Japanese companies with loads of cash have some borrowings? Is it a favor to their banks?

A: If you look at Western companies with loads of cash then they will sometimes have a little bit of borrowings too. The reason is that a company will have many subsidiaries and they might have a preference for holding cash at the parent level or in one subsidiary while not caring very much about small short-term debt which the bank will charge them very little for anyway. I agree that when you consolidate you see a picture that looks odd – you would imagine that you could just net it out and save a bit on borrowing. There may also be a bit of doing favors for their mates at banks who they play golf with, but I am not worried about this.


2. What will companies do with all their excess cash balances?

A: The government wants them to invest it, shareholders want them to pay it out, but the management wants to sit on it as a large tub of soothing balm for their mental scars from the 1990s, and/ or spend (i.e. waste) it on acquisitions, with South East Asia being the default choice now that China is not buying Japanese stuff. Things change slowly in Japan, and shareholder-friendly moves will occur at a glacial speed.


3. Property values – whether to incorporate them and how to do it

A: Yes – incorporate them. If your process starts with a defensive analysis (e.g. break-up value), as does mine, then you can throw in the property value as part of the baseline worth of the company. However, remember that in reality if you sell a building in a going concern, you release capital but create an ongoing lease liability, so if you are modeling the P&L to any degree of precision, you will need a handle on that. I don’t need precision, but I will chuck in a discount to the potential FCF in my rough-and-ready approach. I assign zero value for crap buildings (e.g. warehouses), or just give them a discounted land-only value, and discount premium property less. I am not fully on top of the move to IFRS, but it may actually result in worse disclosure in things like land and buildings.

How to do it: there is no Zillow in Japan that I am aware of, but this is probably the easiest thing for you to use:

Also, as a general thing, remember that a property in Japan will need to be destroyed and rebuilt after perhaps 50 years due to earthquakes. For your interest, if you are a resident (not necessarily a national) – like me – then you can buy distressed properties at auction:


4. “Treasury shares not yet retired – I subtract these from shares issued”

I agree. Unless you have reason to believe management will sell them or give them out for “performance”.


5. Psychological change due to Abenomics?

Depends who you speak to. Ferrari dealers = V. happy

Nomura sales people = V. happy

Workers at Toyota = Happy

Ordinary salarymen = Don’t care/ Not happy

Processors of raw materials = V. unhappy

Consider that the media has been going full blast warning over inflation and speculating over Abenomics, and actual inflation is starting (e.g. taxi fares just went up in Tokyo), but the fear of it is definitely not apparent.

We have an entire lost generation with all their hopes, dreams, etc. based on experience of falling prices, a weak economy, and people becoming increasingly zombified. Six months is just not long enough.

For most people, even if they could break out of their zombie mind-frame, what exactly would they do anyway?

I will answer questions about analogies with China elsewhere.


6. Olympics in Japan? The only sport I know is tennis. And technically I should add swimming, as I have just come back from a swim, but it is hardly a good spectator sport. I am probably the least qualified literate person to comment on this – I just have no idea. Wake me up when Usain is on.

{ 1 comment… read it below or add one }

Frank May 21, 2013 at 8:36 pm

Hi Jan,
Thanks for the post. Great info and insights thanks for sharing. On a side note on the property lifespan, I was surprise to hear that the properties need to be destroyed after maybe 50 years – perhaps you are talking about certain wood-structures and such? I do know that most buildings and structures depreciates in say 45 years or less so perhaps the 50-year lifespan is pretty close to the reality.
Also regarding psychological change due to Abenomics, my guess is that if inflation does happen (which seems like is the case with JPY stocks, real estate and other imported stuff), then the Japanese people will start moving assets out of cash/JGB and into risky assets like real estate and stocks because they are incentivised to make this move as money in the bank will lose purchasing power overtime. I don’t think there is a lot of incentive for them to invest in the past when you do get good returns on your bank deposits versus almost everything else.


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