Hedge funds bet Japan reforms have further to run at Sohn Tokyo

Tokyo, Oct 16 : The next phase of Japanese corporate reform took center stage at the Sohn Conference in Tokyo, as hedge fund managers highlighted investment opportunities ranging from a financial conglomerate's capital allocation strategy to an X-ray scattering firm's AI solutions.

At the inaugural Sohn Conference in Japan, which invited 14 funds to pitch their top investment ideas, more than half of the investors favored the theme of corporate reform.

Daisuke Nakayama, a portfolio manager at Hong Kong-headquartered Polymer Capital, picked Orix Corporation, a financial services firm, saying the change in management marks "a big turning point" for the company's transformation into a global investment firm.

"The new leadership has a greater focus on capital allocation and ROE," Nakayama said, adding the firm is now using overseas capital, including from Qatar Investment Authority, to bid for companies.

The number of activist campaigns in Japan hit a record last year, according to brokerage Jefferies, after years of pressure from regulators and the Tokyo Stock Exchange on companies to improve shareholder returns and invest in growth. 

BEYOND DIVIDENDS AND BUYBACKS

Fund managers said that the next chapter is not just about companies increasing dividends and buybacks but also about focusing on those deploying capital to expand businesses and drive long-term growth.

One example is Rigaku, an X-ray equipment supplier pivoting to semiconductor metrology, measuring and inspecting chips. 

New York-based Indus Capital Partners said it had invested in the company and had engaged with the firm to sell a stake to a US semiconductor firm to drive revenue. 

As semiconductor companies are going into vertical structures to scale, X-ray is needed to detect defects deeper in the 3D chips, said Byron Gill, managing partner at Indus.

Rigaku might be one of the few companies that "has the key to unlocking scale for the semiconductor industry in the middle of a super cycle", he added, forecasting a 100 per cent rise in its valuation by 2029.

REFORM THEME DOMINATES

The corporate reform theme still has a long way to run, market participants said. 

"Japan changes slowly, but once the change starts, it does not reverse," said Naohide Une, partner and CEO at Investment Lab, a former senior managing director at Japan Post Bank.

He picked Japanese chemical company Ube Corporation for its corporate reform efforts.

In a separate Q&A session, Seth Fischer, founder of activist Oasis Management, said his fund may substantially increase its stake in Japanese electric motor maker Nidec.

AI AS A BACK-OFFICE TAILWIND

AI was another key investment theme. 

Investment firms Ruane Cunniff and Japan Catalyst picked software companies Money Forward and OBIC Business Consultants, respectively. 

They argued that back-office software operators are AI winners rather than losers, as clients require accuracy.

And these businesses are helping Japan overcome labor tightness, they said.