Hennessy Japan Fund’s Top 5 Trades of the 3rd Quarter

The


Hennessy Japan Fund
(Trades, Portfolio) has revealed its portfolio for the third quarter of fiscal 2021, which ended on July 31. Major trades include a new buy into Hitachi Ltd. (TSE:6501, Financial) and reductions in the fund’s Shimano Inc. (TSE:7309, Financial), Nidec Corp (TSE:6594, Financial), Daikin Industries Ltd. (TSE:6367, Financial) and Terumo Corp. (TSE:4543, Financial) holdings.

Managed by Masakazu Takeda and Yu Shimizu, the fund, which is part of California-based Hennessy Advisors, invests in a concentrated number of high-quality Japanese companies. The portfolio managers search for value opportunities among companies that have good management, strong cash flow generation and above-average earnings growth.

Portfolio overview

At the end of the quarter, the portfolio contained 28 stocks with the one new holding established in Hitachi. It was valued at $784 million and has seen a turnover rate of 5%. Top holdings include Sony Group Corp. (

TSE:6758, Financial), Keyence Corp. (TSE:6861, Financial), Recruit Holdings Co. Ltd. (TSE:6098, Financial), Nidec and Daikin Industries.

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The top three sectors represented are industrials (33.82%), consumer cyclical (20.39%) and healthcare (12.55%).

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Hitachi

The fund established a new position in Hitachi (

TSE:6501, Financial) during the quarter with the purchase of 659,100 shares. The shares traded at an average price of 6,032.98 yen ($54.09) per share during the quarter. Overall, the purchase had a 4.84% impact on the portfolio and GuruFocus estimates the total gain of the holding at 9.51%.

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Hitachi provides IT services across a range of business fields, including financial services. The company’s main products and services include system integration, consulting, cloud services, servers, storage, software, telecommunications and networks and ATMs.

On Sept. 30, the stock was trading at ¥6,607 per share with a market cap of ¥6.29 trillion. According to the GF Value Line, the stock is trading at a significantly overvalued rating.

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GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 6 out of 10 and a valuation rank of 2 out of 10. There is currently one severe warning sign issued for declining revenue per share. In line with the warning sign, the company has seen revenues decline over the last three years but net income hit a 10-year high as of March.

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Shimano

With share prices on the rise, the fund pulled back its Shimano (

TSE:7309, Financial) position. Fund managers sold 44,300 shares to cut the position by 23.32%. The shares traded at an average price of ¥25,843.30 per share during the quarter. GuruFocus estimates the total gain of the position at 85.70%, and the sale had a -1.19% impact on the portfolio overall.

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Shimano develops, manufactures and distributes bicycle components, fishing tackles and rowing equipment. The company also develops and distributes lifestyle gear products, such as apparel items, shoes, bags and related items. Approximately 80% of companywide sales come from its bicycle components segment. Shimano has operations in Japan, Asia, Europe, North America, Latin America and Oceania. The company was founded in 1921 and its headquarters are in Osaka, Japan.

As of Sept. 30, the stock was trading at ¥32,570 per share with a market cap of ¥3.02 trillion. The stock is significantly overvalued according to the GF Value Line.

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GuruFocus gives the company a financial strength rating of 10 out of 10, a profitability rank of 7 out of 10 and a valuation rank of 2 out of 10. There are currently no severe warning signs issued for the company. The company’s cash-debt ratio of 24,532.43 ranks the company better than 99.88% of the industry as cash levels have increased constantly over the last decade.

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Nidec

The fund also pulled back its long-standing Nidec (

TSE:6594, Financial) holding during the quarter. The sale of 72,300 shares cut the holding by 16.24%. During the quarter the shares traded at an average price of ¥12,589.60. The sale had a -0.98% impact on the portfolio and GuruFocus estimates the total gain of the holding at 97.83%.

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Nidec is a global leader of brushless DC motors. Nidec possesses the number-one market share in a wide variety of products, such as hard disk drive motors, optical disk drive motors, vibration motors on handsets, brushless motors for inverter air conditioners and brushless motors for electric power steering on automobiles. It continues to benefit from the growing demand for power-efficient motors, driven by strengthening environmental regulations.

The stock was trading at ¥12,515 per share with a market cap of ¥7.33 trillion on Sept. 30. The GF Value Line gives the stock a significantly overvalued rating.

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GuruFocus gives the company a financial strength rating of 6 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 1 out of 10. There is currently one severe warning sign issued for assets growing faster than revenue. The company’s strong profitability rank is propped up by operating and net margins that are above historical averages.

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Daikin Industries

Daikin Industries was cut back by 17.04% with the sale of 39,900 shares from the fund’s holding. The shares traded at an average price of ¥21,445.30 during the quarter, landing the company at a total estimated gain of 93.56%. Overall, the sale had a -0.94% impact on the portfolio.

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Daikin Industries is one of the world’s largest heating, ventilating and air conditioning, or HVAC, companies. North America, Japan, China and Europe are Daikin’s four biggest markets, accounting for 24.1%, 23.7%, 16.7% and 14.5% of fiscal 2018 revenue, respectively. Air conditioning accounted for around 90% of revenue and operating profit, while chemicals and others made up the balance.

On Sept. 30, the stock was trading at ¥24,360 per share with a market cap of ¥7.13 trillion. According to the GF Value Line, the stock is trading at a significantly overvalued rating.

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GuruFocus gives the company a financial strength rating of 7 out of 10, a profitability rank of 7 out of 10 and a valuation rank of 1 out of 10. There is one severe warning sign issued for a declining operating margin. The company’s operating and free cash flows have increased consistently over the last several and are more than sufficient to support dividend payouts.

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Terumo

Rounding out the firm’s top five trades was the first reduction to its Terumo (

TSE:4543, Financial) position this year. Managers cut the holding by 13.45% with the sale of 154,900 shares. The shares traded at an average price of ¥4,275.60 per share during the quarter. Overall, the sale had a -0.69% impact on the portfolio and GuruFocus estimates the total gain of the position at 92.21%.

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Terumo manufactures and sells medical products and equipment. The firm has three main businesses: blood management, cardiac and vascular and general hospital. The cardiac and vascular business generates the largest proportion of revenue and sells cardiac and endovascular interventional therapies, cardiovascular surgical systems, neurovascular products and vascular graft products. The general hospital business includes diabetes management, consumer healthcare, drug and device technologies and general hospital products. The blood management business sells blood components, therapeutic apheresis and cellular technologies. Terumo generates the majority of its revenue in Asia, with Japan contributing the largest proportion of Asian revenue.

As of Sept. 30, the stock was trading at ¥5,265 per share with a market cap of ¥3.98 trillion. The stock is trading at a modestly overvalued rating according to the GF Value Line.

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GuruFocus gives the company a financial strength rating of 7 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 2 out of 10. There is currently one severe warning sign issued for assets growing faster than revenue. The company’s return on invested capital has easily supported the weighted average cost of capital, indicating strong capital efficiency.

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