Oak Capital targets undervalued SMEs for maximum returns

What is your view as to how Japan's finance sector and economy have been performing and their progress over the past 15 years? 

Starting in 2000, the stock market slowed down, and then in the year 2012 the stock market underwent major changes. This is when Abe administration was inaugurated, and when the President started to revive the Japanese economy through his so-called three arrows, or Abenomics policies. 

The difference here between 2000 and 2015 is the average price-to-earnings ratio was 50 times in 2000, and it’s 15 times this year. The price-to-book value ratio was 2.4 times in 2000, and it’s now 1.4 times.

Abenomics’ first arrow is towards monetary policy, then the second one targets flexible fiscal policy, and the third arrow is the growth strategy. At the moment, Prime Minister Abe is implementing the third arrow.

So the sales and profits of listed companies are expected to continue to rise for the fiscal year ending March 31 2015. The total amount of net profits by 3,500 listed companies was 21 trillion yen, which is about $170 billion, and the total sum of dividend distributions was 10 trillion yen, which is about $83.3 billion.

For the fiscal year in 2016, the revenues of these 3,500 listed companies is being forecast to grow more than 10%, and their equities to increase by 8-10%.

Large-size merger and acquisitions (M&A) deals initiated by Japanese companies overseas are accelerating. The yen’s depreciation has been boosting exports.

We believe that the Japanese economy will continue to do well this year. Tax revenue is to increase to 54 trillion yen, which is about $450 billion, the highest level in 21 years, and unemployment ratio is as slow as 3%.

The real GDP annual growth rate is 2.4% with corporate profits growing in double digits, with strong performances from mega banks. And among the 3,500 listed companies, fewer than 200, or 5%, are operating in the red.

The Nikkei Stock Average surpassed the 20,000 mark in June 2015, and it’s now aiming at 23,000, but hovering around 21,000 for the time being.

Following the June 29 Greece crisis, the Nikkei Stock Average ended up down 596 points, however the market bounced back the following day, underlining the robust performance of Japanese companies.

And going forward, the Nikkei Stock Average will enter a correction phase reflecting potential interest by the Federal Reserve from the United States.

For Japan there’s a risk that stocks may decline by 5-10%, but with the rally in the stock markets the Nikkei Stock Average will ultimately challenge 25,000-28,000 levels.

If there is a slide in the stock market, there will be additional rounds of monetary policy easing by the Bank of Japan.

As well as the economic effects of political measures ahead of the May 26 G7 Summit, we also need to pay attention to the economic effects of the political measures ahead of the Tokyo Olympics in 2020, and also whether or not the 1,500 trillion yen, which is about $12.5 trillion, in national wealth can be channeled towards risk money, whether or not more individuals can be encouraged to risk investing their money.

The turning point will be individual investor activity – this is the important key.

As corporate performance continues to improve, the amount of funds managed by investment firms will increase, and these conditions will continue to improve and real estate prices are also on an upward trend.

The growth strategy implemented by the government has been successful and it constitutes the first stage rocket booster.

On the other hand, the Japanese who got smarter after experiencing the previous burst of the economic bubble are likely to remain cautious when it comes to risky money investments.

So it still remains to be seen if the mostly dormant 1,500 trillion yen in financial assets can attract risk money, and with further monetary easing by the Bank of Japan, individual assets will gain in power, and the 1,500 trillion yen individual financial assets may very well start to move towards risk money.

The real turning point will likely come when the Nikkei Stock Average ventures into the 23,000-25,000 range. This is the real turning point, which I would say when the second rocket booster stage will be ignited.

These individual assets are currently dormant; they have not been moving. But once people start to actively work with their financial assets this will be a big turning point.

The new Abe administration has provided these rocket boosters to the Japanese economy, and Japanese companies have been just gliders for 20 years and now they have become jet engine companies.

In the past 20 years they were just keeping very quiet, now what you’re seeing is a big rebound; they were just like a bear during in the winter, they were hibernating. So the listed companies are now seeing double-digit growth.

This is the structure of Japanese corporations, so the big companies are directing to grow capital. Then there are subcontracting firms that produce the parts that are used by Toyota for example.

This is the general structure of Japanese companies. So you can have a mobile phone company that doesn’t produce the phone, but uses all the parts constructed by a Japanese firm.

These are the subcontracting firms. Small companies, many of which went public. But in 2009 they were all in the red. Companies were then moving back into the black. Same thing with Toyota.

But the subcontracting firms are still not profitable. They are only producing parts, they are not selling. This is the general structure. The products are only being supplied in Japan.

We will see the Japanese economy really start to move ahead full speed. This is how you reach the future stock prices, which I believe will be significantly higher.

Now, please allow me to briefly explain Oak Capital. We started in 2001 with investment activities. We were able to profit from the improvement in the stock market and now we have a market capitalization of $150 million.

Today in Japan you have premium fish at cut-rate prices. More Japanese companies like Oak Capital will be effectively investing in these companies.

So there are 3,525 listed companies, of which 1,438 firms are below 10 billion yen, $83.3 million. We are targeting this sector of the stock market.

The government is putting a lot of effort in the revitalizing the stock market. At Oak Capital, with our capital policies we helped the investors enter new business.

Today the conditions of the market have increased investment in the listed companies through the Tokyo Stock Exchange.

So we made a public announcement and new investors are attracted because they know Oak Capital launched the investment.

Plus we implemented this scheme for companies, so we were able to attract many more new investors. In fact, the average share price appreciation for our investments is about five times the average!

We were able to achieve that because we know of the 1,000 companies that have really reached rock bottom and have enormous potential.

While the economy is doing much better, they still are at rock bottom, so once we provide a little bit of support, you can see the immediate effects.

Oak Capital is actively involved in supporting and it has a very positive impact. In the second stage, these companies need to grow, so we give support for about one to two years. That is our method.

The average of the market gap is $290 million. In 2014 the average was $527 million. These are the companies we have invested in.

Oak Capital is investing in companies listed in the equity markets, and this year we started business investments in brands and also specific business project investments, including corporate acquisitions, and we moved these acquired companies under our own umbrella.

In terms of Japan-US relations, no two countries have done more to positively influence each other than Japan and the United States.

Going back to 1854 when Admiral Perry arrived, the US has greatly influenced Japan to think globally. Now this year, with the TPP (Trans-Pacific Partnership), Japan will open up to a free trade economy.

I wanted to highlight this. I cannot think of any other country that had this much growth like the United States. If I look at France or the UK it’s different.

Japan tried to imitate other countries but the US had an impact on the growth of Japan. This year is a really important year for Japan because of the ratification of the TPP and its impact on the economy, which of course Oak Capital will capitalize on as well.

At Oak Capital, specifically, you defined yourselves as being “the few and the proud” small team which is very adaptable to modern economic concerns of the day, but we’d like to know what makes you different. What are the competitive advantages of Oak Capital?

First of all, in 2009 there were other companies just like Oak Capital active in Japan. They all collapsed and today we are the only company active in this field.

There are still of course many brokers. If you focus on the listed investment companies, institutional investors have access to money they are only interested in investing in big-name companies, and they’re satisfied with 5% investment return.

So there the amount of funds they have does not reach the small companies, and since we have more competitors, it’s very difficult for other players to enter the market.

There could be foreign capital, like Deutsch Securities, so these companies are entering the market. But they don’t know the market. We only invest in 10 companies, but we make more investments compared to others.

Our aim is to double the number of companies on the emerging stock market. US funds have approached us several times to do some co-investments with Oak Capital.

But at this point in time we have no interest in setting up a dedicated fund for that. There are many rules for foreign companies to invest in this. They need the Stock Exchange’s permission and also the Ministry of Finance will check the applications.

When it comes to private equity you can buy on the market that we are investing in; it is all done through private equity, so we subscribed to private equity financing.

You have to submit the names of the people who are investing to the Ministry of Finance, and for foreign capital companies this is very difficult.

That’s one of the reasons you do not see active involvement of foreign capital investment firms in Japan. In the case of Oak Capital we can typically get the permission in two weeks.

You have to even show your bank books, but not in the case of Oak Capital. There are many technical hurdles for overseas investors.

So Oak Capital can be that bridge between the international companies?

Yes, that’s correct. If we can guarantee that, we can work as a guarantor. So we have like an average investment return of 60%.

These growth numbers are quite impressive. The next step it would seem is to communicate this to the international community. How do you do that? How do you attract more partners and investors to Oak Capital?

We are working with people who know the business, and when we founded the company in 2001, this New York reporter came and called me the Warren Buffet of Japan, because we were in the fishing net business originally.

So we changed it into an investment company. We have some people, but not many people knock on our door to learn more about our business.

We are working with people from Israel, and they’re very quick to respond. They’re based in New York, and they want to provide funds for us to work with, but we do not have many partners.

In the year 2020, as the stock market continues to improve, these 1,000 companies with small capital will grow very rapidly, and for companies to grow it takes two years to double the size, but in case of emerging economies in two weeks’ time they can double their performance.

We made an announcement today, about our performance for April, May and June of 2015. Actual results of that period compared to the same three-month period last year, we increased eight times, in one year.

We made this announcement today. Last year we invested 8 billion yen; it’s a very small amount. The capital gain is 3 billion yen. It means that the profits, capital gain per employee, is like 100 million yen.

Operating profits per employee is also 100 million.

At the G20, the key agenda is for how countries can promote and invest in SMEs. Considering you’re an expert in this field, what advice would you give to these world leaders?

On a daily basis, I never say it openly, but the top people of the Tokyo Stock Exchange, Mr. Akira Kiyota, knows what they should do. But he believes that the top blue-chip companies are important for the Japanese economy.

If the companies are on the bottom they do not improve their performance, the economy overall does not improve. Small parts are produced by small companies.

Many parts of Apple’s iPhone are produced by Japanese companies, so it also explains why you do not see many venture companies in Japan. They do not try to pull up these companies, to help them.

So those big companies that do not make that effort will not survive. It’s the same as in life, parents who do not look after their children will not have a happy family.

Japanese companies in that respect have not been very good parents to their children.

What’s the new brand of Japan that should be projected to the world?

I think the role of the internet is largely ignored. You have this generation, people who were born after 1980, these people will influence the trends in the market. It’s the people who go to Starbucks.

They want to be in a company that has a cozy environment and the same in the US and in Europe. If you go to Starbucks, you can just sit there and do your work for two hours.

There’s a bookstore in Japan, and if you browse the books it’s ok. But before they would come with a hammer and they would hit you.

It’s really the spread of the internet that has allowed young people to buy products for comfort and to work in an environment that is comfortable.

If you go in with a black limousine to a fancy hotel the doorman will come to open the door, but if you arrive in a taxi they will not. So young people don’t like fancy hotels.

Other places make people feel at ease, they feel comfortable. They like iPhones. Companies that understand this consumer shift, those companies will grow.

Especially talking about branding, you were speaking about huge brands in the US, such as Starbucks, Apple, and all these brands have been growing with their country. They are the brands that represent America. Do you believe this is something Japan also needs to develop? Do you believe that Oak Capital could be a brand for Japan?

In one generation it will probably be difficult to achieve that. But there’s a good probability that we can become a brand because I think we’re on the right track.

The investors will give their approval. I’m talking about young individual investors who use the internet to make investments. That’s one of the reasons.

1,500 trillion yen in individual assets, so these will flow into stock investments. This is the mission at the beginning. At that time, Oak Capital has great potential to become a major brand in Japan.