March 5, 2024

Fund That Got In Before Buffett Now Likes Japan Drug Stores

(Bloomberg) — A fund manager who profited by buying Japanese trading companies years before Warren Buffett invested in them is now targeting a very domestic sector: drug store chains.

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Unlike the US where two drug store groups largely dominate the sector, in Japan the six or seven biggest chains barely make up half the market, according to Tsukasa Tokikuni, head of Orbis Investment Management’s Japan unit.

Tokikuni said there’s opportunity to profit from consolidation in the sector, and private equity funds have shown interest in those firms including Tsuruha Holdings Inc., which his company is invested in.

“Drug stores are generally considered to be an unexciting and saturated sector,” but it has several drivers of growth in the medium term including the ability to take away retail business from supermarkets, Tokikuni said in an interview.

Read: Japan’s Tsuruha Said to Draw Interest from Bain, Blackstone, KKR

Activist investor Oasis Management Co. said in June it may ask Tsuruha Holdings, Japan’s second-largest drug store chain in terms of market share, to seek consolidation in the industry going forward.

By setting up dispensing pharmacies on the sales floor, drug stores can increase revenue without having to secure more real estate, Tokikuni said. In addition, their high profit margins for drugs and cosmetics allow the stores to sell food and other products at low prices, taking sales away from supermarkets, he said.

Orbis SICAV Japan Equity Fund, which has outperformed 91% of its peers this year, has trimmed its investments in the trading companies and banks, while boosting drug store shares. The fund sold all of its stakes in Mitsubishi Corp. and Sumitomo Corp. by June, Tokikuni said. It also reduced holdings of lenders including Sumitomo Mitsui Financial Group Inc. and Sumitomo Mitsui Trust Holdings Inc. as the stocks jumped.

Tokikuni also likes mid-cap stocks because they’ve lagged bigger shares after the Tokyo Stock Exchange asked its listed companies to take steps to raise valuations. The bourse’s large-cap index has advanced 25% so far this year, while the mid-cap and small-cap indexes rose 21% and 20%, respectively.

The fund got into Japanese trading companies in 2013 and had the most invested in them from around 2017 to 2020. Billionaire Buffett’s Berkshire Hathaway Inc. said in August 2020 that it bought stakes in five trading firms including Mitsubishi and Sumitomo, and the firm ramped up investments in them this year.

–With assistance from Yasutaka Tamura.

(Adds chart and more comments from Tokikuni.)

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