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Cash on Sale!

Japanese Companies Trading below Book Value
Many Japanese companies trade at significant discounts to book value. This should in theory present opportunities for value investors with patience who don't rely on margin. The investment approach is very easy to apply in theory but much harder in practice. The two challenges are the following. Establishing a correct book value and having the conviction to wait for years in many cases to see your investment thesis turn out profitable.

Establishing a correct book value
Book value can be rather hard to have a firm opinion on when the assets in question are of a illiquid or fixed nature and you can't estimate how market prices have developed. Examples are inventory which may or may not be worthless. Out of fashion clothes or outdated electronics equipment may not equal book value while commodity inventory like gasoline for a refiner most likely is not too far off. In Japan one should especially be weary of the book value of land and property as these may be tremendously overstated.

Conviction
Be sure you established the book value correctly and secondly avoid companies that have the potential to produce significant losses that eat up your margin of safety.

Ryoyo Electro (semiconductor trader)
I believe I have found the perfect candidate in the shape of Ryoyo Electro listed in Japan under 8068 and in US under RYOYF:PNK (in practice I think you can only trade the 8068). I believe it is because it is so clear what the book value is and it is so far above the current market cap.

Key numbers (all in million JPY):
Market cap: 21420
Total liabilities: 13108
Total assets: 76054
Of which cash, bonds and receivables: 21828+12026+24705 = 58559
This means that if we value the remaining assets at 0 then the book value is equal to 58559 - 13108 = 45451 or twice the market cap. The current dividend yield is 3.84% and it has a P/E of 22.

Conclusion
I want to stress that this is by no means a great company and it approximately earns the equivalent of the 10Y JGB yield on its equity but if anyone wants to buy 10Y JGBs they should also be interested in this. It is after all trading at 1/3 of book value and 1/2 of a conservative book value. 

If you are technically inclined (which I am not) then now may also be a good time to enter the Japanese market as it tightly follows USD/JPY which in turn follows the interest rate spread between 10Y USD and 10 JPY yield and all three are currently breaking out on the upside.

In the long run once investors gain appetite for equity investing this stock should easily double and in the meantime 3.5% is an attractive dividend. Remember to hedge your JPY exposure!

S Foods
On a side note I also like S Foods Inc (2292), which I came across on my search. S Foods is primarily a meat processing company. It is not as cheap on a book value evaluation (0.62) but it is growing income and revenue and has a P/E of 7 and dividend yield of 3.5%. These are to me attractive ratios growing revenue and income in a declining markets says something about the quality of the management.


Disclosure: Long: Ryoyo Electro and considering to go long S Foods