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Berkshire’s increase in holdings of Japan’s five largest trading companies is a victory carefully planned by Buffett?

  Berkshire is buying Asia again. Unlike BYD and TSMC before, Buffett’s latest move this time is to increase his holdings in Japan’s five major trading companies. Buffett’s initial purchase of the five major Japanese trading companies was at the end of August 2020. But Buffett’s attention to Japan can be traced back to 2008, when Berkshire’s metal processing company IMC Group acquired the unlisted Japanese company Tungalo (Tungalo, Iwaki City, Fukushima Prefecture). After the “3.11” Great East Japan Earthquake in 2011, Buffett also visited Tungaloy’s factory.
  In addition to buying Japanese stocks, Buffett’s actions on yen bonds have also attracted attention. In late November 2022, news that Berkshire was also considering issuing yen-denominated bonds circulated in the market again.
The share price performance of five major trading companies achieved “Davis double-click”

  In late November 2022, Berkshire’s wholly-owned subsidiaries will aggressively increase their positions in 5 stocks in the Japanese market, namely Itochu Corporation (Itochu Co.), Marubeni Corporation (Marubeni Corp.), Mitsubishi Corporation (Mitsubishi Corp. ), Mitsui & Co., and Sumitomo Corporation (SumitomoCo.), all of which increased their holdings by more than 1%. After the increase in holdings, the shareholding ratio of 5 stocks is at 6.21%-6.75%. The five companies have extensive trading operations and have been beneficiaries of the commodities boom over the past two years.
Attached Table 5 Stock price increase of major trading companies from the end of August 2020 to the present

Data source: Wind

  Berkshire’s first investments in these five Japanese companies were made in 2020. On August 31 of that year, Berkshire announced that through its subsidiaries, it had obtained 5% of the issued shares of the five largest trading companies in Japan, and stated that its investment in these five trading companies was the result of the past 12 months. buy. At the time, Berkshire also said in a statement that there was a possibility of increasing its stake to as much as 9.9%.
  According to Bloomberg estimates, the purchase cost of this investment was expected to exceed US$6 billion at the time. Accompanied by a round of stock price gains, it is expected to make about $4 billion in profits so far. Since Berkshire bought these five Japanese companies at the end of August 2020, the stock prices of these five companies have all risen sharply, with an increase of 70%-180%, and since the beginning of 2020, their stock prices have also increased by 50% -130%.
  Good performance is undoubtedly one of the important reasons for the surge in stock prices of these five companies.
  It is reported that Sumitomo Corporation has recently raised its full-year net profit forecast by nearly half to 550 billion yen (about 3.7 billion U.S. dollars); Expected; Mitsui & Co. had also expected net profit this fiscal year will hit a record high.
Figure 1 Comparison of the total revenue of the five largest trading companies in the same industry (currency: Japanese Yen)

Data source: Wind
Figure 2 Comparison of ROE among five major trading companies (currency: Japanese Yen)

Data source: Wind
Figure 3 Valuation analysis of the five major trading companies compared with peers (currency: Japanese yen)

Data source: Wind

  The sharp increase in performance is due to factors such as the recent tight supply, geopolitical conflicts, and demand rebound. Due to the rise in energy and commodity prices, the trading companies represented by these five companies have achieved high returns; It is also due to the sharp depreciation of the yen, which has also boosted its earnings to a certain extent. For example, the exchange rate of the yen against the dollar recently fell to a low in nearly 30 years.
  Some analysts said that this shows that Buffett is keenly aware that if commodities are about to enter a bull market, one of the better ways to invest is by investing in Japanese trading companies with a long history.
Issuing yen bonds to hedge against foreign exchange risk? Is it really good to borrow yen to buy stocks at low interest rates?

  Berkshire’s purchase of the five major trading companies in Japan is considered to be the first time that Berkshire has purchased a large number of stocks of listed companies in the Japanese market. According to the “Nihon Keizai Shimbun” report, in 2008, IMC Group, a metal processing company under Berkshire, acquired the unlisted Japanese company Tungalo (Tungalo, Iwaki City, Fukushima Prefecture). Buffett visited Tungaloy’s factory after the “3.11” Great East Japan Earthquake in 2011. At that time, Buffett said that “there are several large Japanese companies that have attracted my attention”, but he has not actually taken any action since then.
  It was not until 2020 that Buffett “started” with Japan’s five major trading companies. In this regard, Buffett said in a statement, “I am happy to be able to participate in the future of Japan and the five companies.” Regarding the five major Japanese trading companies selected as investment targets, he pointed out that “joint ventures are being established around the world” and expressed “looking forward to There will be opportunities to bring benefits to each other in the future.”
  At the same time, Buffett’s actions on yen bonds have also attracted attention. In late November 2022, news that Berkshire was also considering issuing yen-denominated bonds circulated in the market again. Berkshire has hired Bank of America Securities and Mizuho to arrange a potential offering of SEC-registered fixed-rate senior unsecured notes, according to a report from Mizuho.
  According to related reports, as early as 2019, Berkshire issued yen bonds for the first time, with a scale of 430 billion yen (about 3.89 billion U.S. dollars), which was one of the largest yen bond issuances by foreign companies at that time. In 2020, Berkshire issued another 195.5 billion yen (about 1.8 billion U.S. dollars) in bonds. In 2021, Berkshire sold bonds worth 160 billion yen (about 1.38 billion U.S. dollars).
  From the perspective of institutions, Berkshire’s wise move to invest and hedge exchange rate risks is likely to be carefully planned by Buffett, showing his extraordinary investment talent. Since the US dollar has appreciated more than 30% against the Japanese yen over the same period, the share price increases of these five trading companies in US dollar terms are actually much smaller. However, Berkshire hedged its foreign exchange risk by issuing yen bonds and fully benefited from fluctuations in the yen exchange rate. According to “Barron’s Weekly” estimates, if the gains from hedging are included, the current total value of this investment is 10.3 billion U.S. dollars, which is equivalent to an appreciation of about 65%, and the investment profit is about 4 billion U.S. dollars.

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