The Comsn Affair
Comsn is a nationwide nursing home operator that has given false information when applying for permits to open new facilities; it has also been receiving benefits illegally. In consequence, the central government has decided that it will not renew the operating licenses of over 80% of its nursing care centers when they expire in 2011, and it has been asked by authorities to return funds it received illegally.

Comsn is part of the Goodwill Group, which offers services in areas stretching from staffing to pet care. It is run by Masahiro Origuchi, who is both admired and disliked for employing aggressive business tactics not usually seen in Corporate Japan. He initially made his fame at 30 by opening the trend-setting disco Juliana in Tokyo. He eventually lost control, but a few years later started the Goodwill temp and recruiting company and made it into a big business.

On June 11, Goodwill decided to sell off all of its troubled subsidiaries in the nursing-care business, setting off a scramble to acquire the assets. Origuchi hoped to sell them to a single company, but with Comsn operating over 2,000 facilities and providing a wide variety of eldercare services, that does not appear to be the most likely outcome.

Among the names of suitors that have appeared in press reports are Nichii Gakkan, Watami, Tsukui Corp., Japan Care Services, Bennesse, Saint-Care Holding, and Welcia Kanto Co. coupled with Wisnet. In all, Goodwill has received proposals from over 30 companies. It expects to make a decision on asset sales by the end of July.

The Comsn scandal should be considered in light of Japanese attitudes toward eldercare. Traditionally, the aged have been taken care of by their families, particularly daughters and daughters-in-law, and nursing homes have had a small role. Moreover, much elderly care in Japan takes place in hospitals, which historically have had far more hospital beds per capita than the US. Thus the nursing home business has an uncomfortable place in Japanese society; even younger Japanese women who reject their traditional obligations toward parents may hesitate about putting them in a home. The Comsn scandal will do little to calm their anxieties.

Bull-Dog Growls at Steel Partners
Reuters, Nikkei Net (subscription), and FT all have round-ups about the approval of a poison pill by shareholders of Bull-Dog -- a maker of Worcester, tonkatsu, and other sauces -- seeking to thwart Steel Partners's effort to take over the company.

According to the FT, Bull-Dog wants to dilute Steel's stake from 10.5 per cent to about 3 per cent by issuing new stock to shareholders other than the fund. At the general shareholders meeting on Sunday, more than two-thirds of the vote was cast for management's plan, which would give shareholders other than Steel Partners three new shares for each existing one, while paying Steel Partners in cash.

Steel will be fighting the legitimacy of that outcome in court, and according to the AP, a Tokyo District Court may issue a ruling as early as this week. (Here's a useful Reuters analysis of courts' attitudes toward poison pills.) The forthcoming decision may have potential implications for hundreds of similar defenses, although some analysts caution that not all poison pill defenses are alike, and thus there won't be a general precedent from any one ruling.

In weighing the impact of the vote, the Asahi Shimbun notes that there has been a general rise in shareholder activism at board meetings, which stands in some contrast to the image of compliant Bull-Dog shareholders eager to throw their support behind management against foreign invaders, no matter the cost to shareowner value. With foreigners now accounting for 28% of shareholder stakes and stockholders increasingly willing to voice their dissent at meetings, there's a body of opinion that believes attitudes in Japan to M&A are slowly starting to change, whatever the outcome of the fight for Bull-Dog.

Japan's Auto Parts Makers Poised for Higher Stock Prices
These have been flush times for Japan's auto industry. Toyota (TM) is now the biggest auto company in the world, Japanese makers continue to gain share in the U.S., high oil prices are boosting the sale of Japan's energy-efficient cars, and, as the worldwide auto market continues to expand, the cheap yen aids profits. 2007 should be another banner year for Japan's auto industry.

But finding value among Japanese auto stocks is difficult. The big names like Toyota, Honda (HMC), and Nissan (NSANY) are widely followed and very likely fully priced. Goldman recently released new target prices for Honda and Nissan, but as Steven Towns has commented, there's no excitement, as actual prices are around (or, now, above) target prices.

Focus has thus begun to turn to the auto parts and manufacturing equipment industry. However, according to S&P Japan's classifications, there are some 122 publicly traded auto parts/equipment companies in Japan. There are big, well-known names like Denso (JP: 6902) (DNZOY), a Toyota keiretsu major parts manufacturer with over $30 billion in market cap (about the same as Ford and GM together). But many are small firms; some are microcaps. A majority of the companies have no analyst coverage.

Mizuho Securities recently released a report on this industry. Among the major upgrades were Koito (JP: 7276), an automotive lighting manufacturer; Tokai Rika (JP: 6995); and Denso. Nihon Securities Journal recently recommended Nisshinbo (JP: 3105): while only 20% of sales are auto parts, they account for the bulk of operating profit, which grew 28% for the segment in the March 2007 year (according to a Reuters article dated May 23), Steel Partners has about a 5% stake).

Among much less well-known companies is H-One (JP: 5989), a new name as a result of a merger of two Honda group parts companies. Year-over-year sales and net profit comparisons (plus 211.9% and 167.3%, respectively) aren't useful because of the merger, but other measures seem to indicate that the combination resulted in some improved ratios (per share profit is up 64.4%, ROE improved from 7.6% to 14.7%). Trading at a (historical) P/E of 9, the company might be good value for small-cap investors who believe Honda will continue to grow in the world's marketplace (90% of H-One's sales come from Honda).

Previews from the Latest Kaisha Shikiho
The Kaisha Shikiho, issued quarterly by Toyo Keizai, is considered by some to be Japan's investment bible. This thick, paperback-size publication covers all of Japanese public companies, over 3,700 in number. It's like Value Line but has a much wider readership -- Toyo Keizai says Shikiho has a 70% share of Japan's investment periodicals market.

Indeed, you will often see the most recent version on the desks of both brokers and small investors. Wahei Takeda, perhaps Japan's largest individual shareholder, is said to read Shikiho as his main information source for investing. In the US, investors know the English-language edition as the Japan Company Handbook, which appears about a month after the Japanese edition (Toyo says the English version includes any subsequent earnings revisions).

Prior to the release of the summer issue on Friday, June 15, the publisher ran a number of "preview" articles for subscribers of its online magazine. While of course there's no guarantee that its comments and earnings forecasts will prove accurate, the mere fact that so many investors read them might be worth considering, especially for stocks with large individual ownership.

Here are selected comments from the Shikiho on three stocks that caught our eye:

McDonald's (2702, Parent MCD)
As in the US, McDonald's Japan is doing nicely. A revamped breakfast menu, new products like the MegaMac, and 24-hour outlets should push same-store sales up 8% for the fiscal year ending December. The company has embarked on an aggressive store-closing program, and eliminating losses from these operations will give a nice fillip to profits. The company is also remodeling its 200-store base to include "one-seaters" that will make its outlets more attractive to lone diners. Shikiho is raising its net income forecast for calendar 2007 to 6.2 billion yen, a big jump from the 1.5 billion earned in 2006.

Komori Corp. (6349)
The printing press equipment maker should benefit from better sales in China, and overall higher unit sales will benefit operating profit. The company's official recurring profit estimate, based on a conservative exchange rate, is flat. But Shikiho expects a 10% advance for recurring profit to 18.5 billion yen for the year ending March 2008, as well as a higher dividend.

Fanuc (6954, FANUF)
This leading factory automation and robotics maker should benefit from the recovery of capital investment in the auto industry. Numerical control units are expected to be a core strength. The company continues to benefit from its skills in producing servo motors, and it plans to reduce delivery times. Interest income should be helped by higher rates. Shikiho thinks the company's estimates of slight growth in revenue and flat operating profits are conservative. It forecasts an 8.7% rise in net income to 116 billion yen for the year ending March 2008.

Rule Revisions to Support Tokyo's Bid as Financial Center
In our May newsletter, we discussed Tokyo's move to reclaim its place as one of the world's great financial centers. Yesterday a government panel made recommendations for achieving that goal. Among the steps that may be taken:

(1) Creating an exchange that offers a wider range of products, including stocks, derivatives, and commodities;

(2) Lowering barriers to global financial transactions, trade, and tourism to stimulate economic growth. Such steps might include lifting securities regulations that prohibit sharing compliance executives between affiliates, which creates burdens for overseas companies.

(3) Establishing a more hospitable physical environment, along the lines of London's Canary Wharf, for Tokyo's financial center of Nihonbashi.

No doubt some moves will need to be made to compete with regional centers like Hong Kong, which is studying the creation of a commodities derivatives market.

UPDATE 6/25/07 Apparently some executives at foreign securities houses are less than impressed with the plan:

"(The plan) is typical of the old-fashioned way of thinking that focuses on
putting up buildings," said Masaaki Kanno, chief economist at JPMorgan
Securities Japan Co. The emphasis should be placed on "building invisible
infrastructure," such as reducing taxes on hedge funds, which are said to be
higher in Japan than in the U.S. and Europe, and adopting global accounting
standards, he added.