Hennessy Japan Small Cap Fund (Trades, Portfolio) has unveiled its portfolio for the third quarter of fiscal 2021, which ended on July 31. The main transactions include a new takeover of Kyoei Steel Ltd. (EST: 5440, financial), Cyberdyne Inc.’s sale of the fund (EST: 7779, Financial), a reduction in its Kawada Technologies Inc. (IS: 3443, financial) and additions to the Nihon Unisys Ltd. (IS: 8056, financial) and Siix Corp. (IS: 7613, financial).
Hennessy Japan Small Cap Fund (Trades, Portfolio) invests in stocks that its portfolio managers consider to be good companies with exceptional management and which trade at an attractive price. The selection of individual securities is based on rigorous on-site research and focuses on factors such as market growth potential, quality of management, quality of earnings and strength of the balance sheet. The Fund seeks arbitrage opportunities between a company’s fundamental value and its market price. The portfolio selects only the best ideas from managers and has a concentrated number of positions.
At the end of the quarter, the fund’s portfolio contained 62 holdings, with three new holdings. It was valued at $ 99 million and experienced an 11% turnover rate. Major holdings include Takeei Corp. (IS: 2151, Financial), SBS Holdings Inc. (EST: 2384, Financial), Mirait Holdings Corp. (EST: 1417, Financial), EF-ON Inc. (IS: 9514, Financial) and Musashi Seimitsu Industry Co. Ltd. (EST: 7220, Financial).
The main sectors represented are industry (39.10%), technology (23.41%) and cyclical consumption (13.82%).
The fund created a new stake in Kyoei Steel (EST: 5440, financial) with the purchase of 80,000 shares. The shares traded at an average price of 1,449.14 yen ($ 13.05) per share during the quarter. The purchase had an impact of 1.05% on the entire portfolio and GuruFocus estimates the total loss of the stake at 4.34%.
Kyoei Steel is involved in the steel and materials recycling business. Its main activities include the manufacture, processing and sale of billets and steel products. It also collects, transports and processes general, industrial and medical waste. The company’s products include concrete steel bars, flat bars, I-beams and equal-angle bars.
On October 1, the stock was trading at 1,386 yen per share with a market capitalization of 60.23 billion yen. According to the GF Value Line, the stock is trading at a slightly undervalued quote.
GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 7 out of 10, and a review rank of 10 out of 10. There are currently two serious warning signs for a declining gross margin and a declining operating margin. . As per the warning sign, the company’s operating margin of 4.43% ranks worse than the industry’s 59.86% and its net margin is also low at 2.88%.
The fund managers sold the stake in Cyberdyne (EST: 7779, Financial) after two years of possession. The remaining 138,100 shares were sold during the quarter at an average price of 522.14. GuruFocus estimates that the fund lost 18.5% on equity and that the sale had a -0.80% impact on the portfolio.
Cyberdyne is a Japan-based company dedicated to the research and development of medical wellness equipment and systems. It offers equipment and systems for rehabilitation assistance, assistance with bodily functions for the elderly and disabled, rescue assistance on disaster sites, entertainment and assistance with heavy work in factories. Its products include Hybrid Assistive Limb (HAL), Table Interface and Cleaning Robots. In addition, it also offers medical service and non-medical service, which includes HAL therapy as part of medical service and Hal fit and Robo care service as part of non-medical service.
As of October 1, the stock was trading at 437 yen per share with a market cap of 94.01 billion yen. The GF value line shows that stocks are trading at a significantly undervalued rating.
GuruFocus gives the company a financial strength score of 7 out of 10 and a profitability rank of 2 out of 10. There is currently a serious warning sign that assets are growing faster than income. The company’s return on invested capital was offset by the weighted average cost of capital, indicating difficulties in capital efficiency.
Kawada Technologies was reduced by 55.75% in the fund’s portfolio with the sale of 18,900 shares. The shares traded at an average price of 3,801.92 during the quarter, bringing the fund to an estimated total loss of 35.85%. The reduction had an impact of -0.76% on the portfolio.
Kawada Technologies is a construction company. The company designs, manufactures and installs structural steel. It also manufactures the general and system architecture, manages the group companies active in civil engineering and develops software related to construction.
The stock was trading at 3,875 yen per share with a market cap of 22.83 billion yen on October 1. It is considerably undervalued according to the GF Value Line.
GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rank of 6 out of 10. There is currently a serious warning sign that assets are growing faster than income. The company’s cash flow took a hard hit in 2020 before rebounding slightly this year.
The Nihon Unisys Fund (IS: 8056, Financial) rose 52.61% after several years of steady cuts. The managers bought an additional 24,000 shares at an average price of 3,318.46. Overall, the purchase had a 0.73% impact on the portfolio and GuruFocus estimates the total stake gain at 60.46%.
Nihon Unisys is an information technology company that provides management solutions for entities in industries ranging from financial services, manufacturing and distribution to energy and government. Nihon’s largest business line, System Services, includes contracted software development, systems related services and consulting. The software segment provides software under license agreements and the hardware segment sells or leases hardware. The Support Services segment provides support for software, maintenance services for hardware and installation.
On October 1, the stock was trading at 2,915 yen per share with a market cap of 292.65 billion yen. The share is rated slightly undervalued by the GF Value Line.
GuruFocus gives the company a financial strength rating of 8 out of 10, a profitability rating of 6 out of 10 and a valuation rating of 4 out of 10. There are currently no serious warning signs for the company. A medium warning sign is being issued for slowing growth in income per share and the company’s net income has also stabilized after a few years of slow growth.
The fund’s top five transactions were completed with a boost to its Siix (IS: 7613, financial). The transaction increased the position by 74.83% with the purchase of 55,000 shares. The shares were purchased during the quarter at an average price of 1,495.94. GuruFocus estimates the total stake gain at 11.71% and the purchase had a 0.71% impact on the entire portfolio.
Siix is an electronic components company that creates parts and devices. The company has five lines of business, four of which are categorized by region, rather than product type. The electronics business segment sells electronic circuits, liquid crystal displays, household appliances, audio devices, automotive equipment and industrial equipment. The Others business segment sells a variety of miscellaneous devices such as motorcycle components and wire harnesses. The most important business segment of the company is its electronics segment (Asia); however, by country, it generates the vast majority of its income in Japan.
As of October 1, the stock was trading at 1,204 yen per share with a market capitalization of 56.9 billion yen. According to the GF Value Line, the stock is trading at a slightly undervalued quote.
GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rank of 6 out of 10. There are currently three serious warning signs for declining gross margin, declining operating margin and revenue per share down. The company’s cash-to-debt ratio of 0.39 places the company below 80.48% of the hardware industry after several years of growing debt.