A Japanese net-net with an ADR listing (and English filings!)

I've mentioned in a previous post that I went through a list of 100 Japanese net-net stocks and scored them which resulted in 33 stocks that I want to research further.  For the most part I will be reviewing the stocks in batches of three or four stocks at a time.  This means there will be close to ten more posts about Japanese net-net's mixed throughout other posts in the future unless I see that no one's reading them.  If the posts about Japanese net-net's suddenly disappear it's not because I've lost interest, it's because you the readers have no interest.

One of the commonly asked questions I get when I post about Japanese stocks is how does someone go about purchasing them?  Some readers might not feel comfortable trading directly in Japan, so I did a search of all ADRs from Japan and tried to match the ADR names to my research further list, one company matched.  For readers that are interested I have included in this post information at the bottom about trading directly in Japan.

Tsutsumi Jewelry

Price: ¥2253 or $27.36 (4/5/2012)

US:TSSJF Doesn't trade often, call your broker before placing a trade, use a limit!

Tsutsumi Jewelry is Japan's largest importer of diamonds from India and runs a very developed stone trading network worldwide.  The company claims the volume of stones they move gives them a cost advantage over competitors.  Once the precious stones are imported Tsutsumi Jewelry manufactures jewelry and then sell it via their network of company owned retail stores or online.  The company operates 179 stores across Japan.  The blurb describing their stores says they're comfortable and hospitable making customers at ease to come and go as they please.  It sounds really nice but from the picture it just looks like a mall jewelry store, nothing fancy.

The company has a nice website where you can browse jewelry and order online.  The products looked nice, I have no idea if the prices were reasonable or not.  I also have no taste in jewelry and my wife wasn't interested in browsing the website so I have no real opinion on the quality of this stuff.

The real attraction of Tsutsumi Jewelry is that they're a consistently profitable company with substantial free cash flow selling for less than their liquidation value.  Here is a snapshot of their net-net value:

The company is currently selling for almost exactly the discounted net-net value.  This means if you purchased today and the stock merely rose to NCAV you'd have a 23% gain.  If you purchased and decided to sell when the stock reached an adjusted book valued (NCAV + PPE) you would lock in a 51% gain.

The company isn't losing money or bleeding cash, they actually have a decent net margin and return on equity meaning they should at least trade at book value.  Here are some other investment highlights:

-Five year EV/CF 3.75x
-Five year EV/FCF of 4.42x
-ROE ex-cash of 4.89%
-Net margin of 8.89%
-1.14% dividend yield
-A large portion of their market cap is in cash.

When I look at a net-net I want to have a margin of safety and cash flow that is supporting my margin of safety.  In the case of Tsutsumi Jewelry the company has both, a significant discount to liquidation value and stable cash flows for the past five years.  Capital expenditures have been steady and low, about 10% of CFO.  The rest of the cash goes towards dividends and to the bank.

Here's how Tsutsumi Jewelry compares with the other Japanese net-net's I've researched:

Researching further

For an investor looking to buy a Japanese net-net stock Tsutsumi Jewlery is really a perfect one to get started with.  The company offers an English version of their website here.

The company also offers quarterly financial statements in English published here.

Lastly MSN Money has great data on Japanese stocks, here is the page for Tsutsumi Jewelry.

Final thoughts

I think Tsutsumi Jewelry is a pretty high quality Japanese net-net.  For someone just starting out building a Japanese net-net portfolio this would be a perfect stock to add.  The company has a large English language website, and has English filings giving an investor an extra layer of comfort.  I haven't purchased any shares yet because I haven't finished my project of profiling my 33 selected net-nets.  Once I'm done if Tsutsumi stands out I might end up purchasing shares.  I think there are a lot worse stocks an investor could buy, Tsutsumi Jewlery seems like a pretty safe bet.

Trading Japanese stocks as an American

There are three brokers in the US that allow trading of Japanese stocks, I have them listed and the markets they trade on below.

ETrade - (Tokyo Exchange Only) Of the American brokers ETrade is the most at ¥3399 per trade.
Interactive Brokers - (Tokyo Exchange Only) The cheapest on a per trade basis.  Commission depends on the trade size, but it's usually only a few dollars.
Fidelity - (All Japanese exchanges, Tokyo, Osaka, JASDAQ, Nagoya) Trades cost ¥3000 per trade.

All three brokers charge a currency conversion fee based on the dollar amount you want to convert to Yen, pricing is on a sliding scale.

Trading in Japan takes place between 8pm and 2am EST.  Even for illiquid stocks I have always had a fill, not right away but within a few hours.

I looked into both ETrade and Interactive Brokers and went with Fidelity as my broker.  Fidelity can trade in 13 or 14 markets, ETrade only in 6.  Interactive Brokers has access to a lot more markets but they penalize you with a no activity fee if you don't trade a certain amount of times per month.  I'll sometimes go months with no trades and didn't like the idea of paying for my inactivity.

Interested in trading in Japan in general?  I highly recommend Steven Town's book Investing in Japan that I reviewed here.

Disclosure: No position


  1. Enjoyed this post. I'm definitely going to consider adding this to my portfolio. I'll ask my Japanese friends whether they know about this company, would be interesting to hear how well known the brand is.

    1. LC,

      I'd be interested to hear what the on the ground perspective of Tsutsumi is over in Japan. If it's neutral or good then that's comforting. If they have a really bad reputation then we know why the shares are as cheap as they are.


  2. Keep these articles coming at least I promise to read them. :)

    (I'm currently researching the Danish Rella Holdings you mentioned in your earlier post. There is a lot information about the Nordic media market available and it seems that Rella is one of the top companies in the industry (60 % market share) and the price doesn't make ANY sense. I probably post something about it later when I get things little bit more organized.)

    Maybe I should order the recommended book to get little bit more comfortable with the Japanese market because it looks that there is lot playing ground there...

    1. I've found Japan to be the cheapest market worldwide right now. Just like there is always a bull market somewhere, there is always a market full of net-net's somewhere, that happens to be Japan right now.

      Rella is a good company, it's run up a bit since the post but there's a lot of value left there.


  3. Thanks for the information. Since I work for a Japanese company, we have lots of Japanese here in the office. I've been meaning to investigate more Japanese stocks as I can get input from my colleagues. I'll start with this one to see what kind of feedback they can provide.

  4. Sounds like an interesting company. I prefer japanese shares with english investor relation pages, as one can dig into the numbers a little.

    Regarding the ADR's. I am not very familiar with them. I reckon they are not tradeable in Japan, so I would be a little uncomfortable with them.

    A lot of japaneses stocks are also listed on german stock exchanges. Also mid-cap companies. I haven't seen a small cap yet. They are the actual japanese stocks (no foreign receipiants what so ever) and therefor can be traded in Japan. Also they can be bought and sold in odd lot sizes in germany, which I do not recommend. Most of them are rarely or thinly traded, but you have marketmakers and I bought illiquid stocks with "cheapest limit" and got the prices they offered on the internet. The bid/ask spread is quite high though.



  5. Nate,

    I have been reading your posts and enjoying them.

    A few things for you to chew on with 7937. Context is that funds I managed at one point were the largest foreign shareholder in the company. That said, I am out of date as I have not been involved for the last 4 years.

    1) They lease the vast majority of their stores. Don´t forget to bring the leases back onto the B/S.

    2) History of declining sales/ft2, ROE´s, etc. on a per store basis.

    3) Inventory is understated. Mostly gold & jewels which are stated at historic cost. I believe they use LIFO, so there is some hidden value in the inv.

    4) They manufacture their own jewelry and have had very low historic mfg utilization rates. Were the industry to rationalize/restructure, or jewelry sales to increase to 1980´s levels, gross margins would increase with rising utilization.

    5) Very sleepy management. Don´t expect a div hike or store rationalization exercise any time soon.

    The stores are okay in appearance, or at least were when I visited years ago. It is a middle-class jewelry retailer. Nothing overly alarming nor exciting re: capex read across.

    Good luck

  6. Don't forget that if the company meets the PFIC (passive foreign investment company) criteria any time during the year, you will have to pay taxes on it as a PFIC for the whole year. E.g. if it becomes a PFIC in Dec 2012, then it is a PFIC for the whole year, and any gains are taxed at ordinary rates (even if you sold in May). The PFIC asset test threshold is 50%, which it may cross, as currently:
    cash / assets = 36.2/77.4= 47%

    See more here:

    1. You've posted this twice now, not sure of your motivation.

      The problem us this tax advice would only apply to individual American investors. This blog is widely read worldwide, and not all readers are individuals.

      I would also say that the balance sheet has been very stable, a lot if these companies are, not growing or shrinking but stable. So if they have some ratio it seems like it would remain stable.

      As for myself I have no position in this stock as I put on the bottom of the post.