BGFD Wives Part Two

Holdings 6-10 in the Baillie Giff Japan Trust

Dear reader

Continuing with the BGFD Top 10.

#6 GMO Internet 3.1% of NAV

It might grow boring if every one of BGFD’s top 10 are “record profits” but guess what? GMO Internet reported record operating profits. Yet net profits slipped slightly in FY2024 to 31/12/24. An exit from Thailand was said to be to blame. Bangkok has that money now and she’ll never let it go.

GMO is mainly a Japanese “GoDaddy” with nearly 15m customers, and providing various internet services for businesses, but also trading in FX, Securities and Crypto.

GoDaddy or GDDY is a P/E 27.4 vs GMO’s P/E of 23.7, but excluding exceptional costs that P/E would have been 13.6X. So Japan being half the cost of the US theme continues…

What is noticeable is the strength in its Internet Infrastructure and Crypto profits growth. Not surprising when you learn it holds an 83% market share on domain registrations, 60% share of hosting yet only holds 47k ecommerce sites and 160k payment gateway merchants.

GMO attributes this to the spread of cloud computing, paperless environments, data privacy and cashless payments.

It is buying back shares and bought back 4.4% of its shares in 2024. The nature of many of its products are services are recurring, with cross sale opportunities too. ARR is up 44.7% in 2024.

Sales and profits have consistently risen each year too.

#7 Cyberagent 2.9% of NAV

FY25 kicked off with 1Q25 to 31/12/24 with operating profits, yes, up 32% YoY and sales up 5.6% YoY

Cyberagent is Japan’s largest blog service, a TV subscription service (with Japan’s only 24-hour news channel and lots of Japanese programming), also Japan’s largest metaverse a place called Pigg, and a major dating service called Tapple.

So a “Substack”, “Roblox”, “Tinder" and “Netflix” all rolled into one!

But the entertainment doesn’t end there. It has an online gaming service, an internet advertising business (powered by AI since 2016) and a major producer of Anime.

It sees growth in FY25 and beyond.

Its Anime has traction in Japan but is growing fast as an export. It has 10 different series and launches three more in the coming months. It is leveraging this IP across different media - comics, events, games and merchandise.

#8 FANUC 2.9% of NAV

Eagle-eyed readers will spot this is a holding in RBTX and OB25 for 25 idea BOTG Robotics. Seems NVidia’s CEO agrees with the OB thesis that Japan is the Silicon Valley of the Robot Revolution, and the stocks are cheap.

Fanuc is a Japanese Robotics company then we find a £21.6bn market cap, generating £0.7bn net income and growing with a P/E of 30.5. Quite reasonable numbers and a 50 year track record of growth.

Europe’s woes are highlighted in the large contraction of sales in the past year. Automotive is highlighted as a weak area (-24%) as echoed by other Japanese holdings in BGFD and the BGSJC Fund. Despite this, profits are up through careful cost control. Interestingly extremely strong growth in China (28.5%) and particularly for new robots.

Its investment in R&D is around £0.25bn a year. It holds a (I think) incredible 12,475 patents worldwide(!) and 30% of its nearly 10,000 workforce are engineers. Its relentless focus on aspects like reducing start up times and improving power efficiency on robots continually drives further value to customers. Another focus is on “cobots” to seek ways to drive human productivity through a robot assistant particularly in areas which are dangerous, dirty, difficult or monotonous.

Its range of ROBOMACHINE spans a ROBOSHOT (Rapid Injection Moulding), ROBOCUT and ROBODRILLs are up 12.8% year on year. It also has an IoT proposition for maintenance management with sensors monitored by an AI.

Fanuc reports the Machine Tool show was attended by nearly 130,000 visitors so is back to pre Covid levels, and reports a strong order book going into 2025. Its Roboshot automated insert system impressed visitors with its advanced ability to mold EV parts.

#9 Calbee 2.7% of NAV

For those who like a nice packet of Crisps, Calbee needs little introduction. Although you probably didn’t know that “Seabrook” is really a Japanese company did you? (Just like Gary Linekar’s obsession are actually crisps from Pepsi in the USA). Or for those who enjoy a slurpy Pot Noodle the package itself (a plastic pot you will with boiling water with a peel off lid) is also a Calbee invention.

Calbee’s “mother” factory is based in Hiroshima, is brand new and a one of the world’s leaders on its environmental performance, energy efficiency (and recovery) with the highest level of automation and safety. Production of 19% of Japan’s potatoes Calbee is a major player in potato and convenience products.

In its latest results profits are up albeit slightly, and we see inflation feeding through both on the costs and sales in Japan. Calbee trades on 15X earnings.

#10 Nintendo 2.4% of NAV

Finally we come to the #2 Games Console producer…. by a whisker. If you watched the little video of consoles over time, you’ll know Nintendo has launched numerous generations of machine and its last - the Switch - is now in its 8th year and is growing long in the tooth.

Switch 2 is planned for release in April 2025. So we come to the first “Ouch” holding. At least in the short term. Look at the share price and investors are eager to own Nintendo. Why?

Over the past few years the Switch 1 OLED model was a bit of a stop gap with improved graphics, but hasn’t halted the decline in hardware sales. However 129m annual playing users is a lot of folks.

Lower hardware in 2024 combined with a hiatus on new games too; although 3 released in the past 6 months are selling in record volumes we are told, with several new titles planned in 2025 too.

Meanwhile Nintendo are opening theme parks in Orlando and in Japan, and promoting its IP into various forms of merchandising and commercialisation. Mario, Pokemon, Zelda, Donkey Kong are all highly recognisable brands.

Nintendo has doubled in share price in 2 years, and compared to Sony trades on double its valuation (49.6X P/E vs 23.6X). This reflects the high hopes for the new Switch 2, I suppose.

Conclusion

Consider the 5 from the prior article and the above 5 this accounts for nearly 40% of the fund.

If you consider the £14.75bn combined income in FY24, and compare that to the NAV excluding cash, then you arrive to 9.7X earnings or a ROCE of >10%.

If you instead use the market cap it’s 22.6X but falls to 18.5X if you strip cash. And that’s before you consider profits growth. For example Rakuten lost -£0.67bn in FY24 but that number includes a positive +£0.1bn net profit in 4Q24. Annualised that’s £0.4bn net profit, and that would drive a £1bn of net profit difference, at a steady run rate, let alone continuing profits growth in FY25.

So while this Investment Trust is deeply unloved, I would re-iterate the rationale from Part 1 of this article:

1. BGFD is on a 13% discount to NAV

2. Some holdings (incredibly) have a look through discount, and are holding large amounts of cash (the top 10 hold over £115bn of cash)

3. BGFD completed 10% buy backs in 1 year

4. There is lots of growth in the holdings, and reasons to think more in 2025.

5. The macro picture looks good in Japan

6. These are world class companies at a discount to equivalent US companies

7. The Yen is at a 40%+ discount to Sterling based on the Big Mac Index.

Tastier than a Seabrook Canadian Ham multipack, or a banana tossed by Mario.

Regards

The Oak Bloke

Disclaimers:

This is not advice - make your own investment decisions.

BGFD are generally blue chip holdings but risk exists everywhere. And as I always say Micro cap and Nano cap holdings might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip"