Warren Buffett sees something in Japan’s sogo shosha conglomerates, and says he’ll throw out the idea of co-investment deals while visiting his holdings in Japan.
Warren Buffett’s desire to sample more Japanese-equity flavor continues to boost the Tokyo market. The Topix closed 0.8% higher on Wednesday, matching Tuesday’s 0.8% bump, after Buffett indicated he intends to increase his holdings in Japan, and specifically its storied sogo shosha, or trading houses.
This story first appeared on TheStreet.com’s subscription service Real Money. Click here to see the original.
Buffett via his Berkshire Hathaway holding company owns a decent chunk of each of the five biggest Japanese sogo shosha: Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo. Berkshire first revealed holdings of at least 5% in an August 2020 filing, indicating it had spent US$6 billion on the stakes, then increased its holdings to 6.6% of all five in November 2022, and now announces it holds 7.4% of each.
“We’re very proud of that,” Buffett says in an interview with the Nikkei business daily. He will be meeting with those five trading houses this week “to really have a discussion around their businesses and emphasize our support.”
True to form for value-driven Buffett, the trading houses are very “real” businesses that are sprawling and complex but serve very essential purposes. With their roots in commodities and goods trading, they have expanded to become investment holding companies, too, much like Berkshire Hathaway in fact.
Buffet went on to indicate that Berkshire would be open to co-op investment with or alongside the trading houses. “We would love if any of the five would come to us ever and say, ‘We’re thinking of doing something very big’ or ‘We’re about to buy something and we would like a partner,’ or whatever,” Buffett said.
Although the trading houses are currently the extent of Berkshire’s holdings on the Tokyo market, Buffett says additional investments in Japan are “always a matter of consideration.” The five trading houses are his current focus but “there are always a few I’m thinking about.” This is his first trip to Japan since August 2011.
The trading houses are a kind of conglomerate specific to Japan, dating to the mid-1800s and Japan’s period of reopening to the world as the reign of the isolationist Tokugawa shogunate ended. The earliest trading houses were zaibatsu family-run conglomerates, with the trading house operating in-house to supply goods, transport and finance to the group’s various businesses. After World War II, another cluster of trading companies formed in the Kansai region to deal in commodities such as textiles or steel.
The trading houses played a major role in the overseas expansion of “Japan Inc.” in the 1980s, helping source goods and provide financing for companies that weren’t all that experienced internationally because of Japan’s 200+ years of closure to the outside world. As Japanese companies became more comfortable with their own overseas operations, the trading houses boosted their business in insurance, transportation, property development and project management — very much lines of business that Buffett likes.
The global scope of the conglomerates and the similarities with his own holding company are not lost on Buffett. “We feel that these five companies are a cross-section of not only Japan but of the world,” he says. “They really are so much similar to Berkshire. They own a lot of different things.”
However, the trading houses are perpetually lowballed in valuation, trading under 10x forward earnings, some would say for a reason. They are so diversified that they are hard to categorize, and critics contend their very nature is an oddity of Japanese history that no longer serves a purpose. Growth has been hard to come by for these giants, while their core operations are open to disruption to trade such as we’ve seen in the wake of the pandemic and due to the war in Ukraine.
Marubeni and Sumitomo in particular took write-downs to their operations in Russia during the tax year that ran through March. Profits when they come out are expected to drop for all five trading houses due to Russian disruption and pandemic effects.
On the plus side for a value investor like Buffett, the trading houses have been engaging in share buybacks, increasing the value of existing shares. And they pay very solid dividends indeed, as high as 5.01% for Sumitomo.
The share prices of the trading houses have all blossomed since Buffett bought into them. Part of that is the effect of other investors following Buffett’s lead. In the past year, both Marubeni and Mitsui are up by more than 30%, while Mitsubishi has advanced 15.6%.
They’ve all basked in Buffett light in the past two days. Itochu is up 4.8%, Marubeni is up 7.7%, Mitsubishi is up 4.4%, Mitsui is up 5.1% and Sumitomo is up 6.0%.
Buffett also discussed the sell-down of Berkshire’s stake in Taiwan Semiconductor Manufacturing Corp., the world’s largest chip foundry. Berkshire bought more than US$4 billion in TSMC stock between July and September 2022. But it ditched 85% of that holding in quick order, an unusual move for Buffett, who typically likes to retain core holdings for years if not decades. By the end of 2022, however, Berkshire held only US$617 million in TSMC stock.
Buffett said geopolitical tensions are a “consideration” in the divestment. He believes that TSMC is well-managed but that Berkshire has better places to deploy its capital.
One reason investors have been particularly excited about what Buffett has to say in Japan is that Berkshire Hathaway is marketing another offering of yen-denominated bonds. It’s expected to price those this week.
Berkshire did the same thing three years ago before buying the stakes in the trading houses. One underwriter told the Nikkei that these new bonds will be used to roll over existing debt. But savvy Buffett doesn’t like to tip his hand before he plays it. Watch for any indication that the money is going toward other companies in Japan, which would be sure to get a stock-price boost from the Buffett seal of approval.