[Why&Next] ‘Samurai7’ Breaking Out of Undervaluation... Lifting the Japanese Stock Market

Leading Companies in the Japanese Stock Market
Toyota, Subaru, Mitsubishi, etc.
Strong Performance and Future Growth Potential
Stock Market Surged Briefly
Different from the 1989 Bubble Economy
Nikkei Expected to Reach 55,000 by End of Next Year

The relentlessly surging Japanese stock market has been led by the seven major companies dubbed the ‘Samurai 7’ (S7) by Goldman Sachs. Just as the US stock rally was driven by the Nasdaq’s seven big tech giants known as the ‘Magnificent 7’ (M7), the term S7 refers to the seven companies that have lifted the Japanese stock market. The Nikkei 225 index, which has reached its highest level in 34 years since the bubble economy, is maintaining around the 40,000 mark.

The S7 consists of automobile manufacturers Toyota Motor Corporation, Subaru, Mitsubishi?one of the five major general trading companies?semiconductor equipment manufacturers Advantest, Tokyo Electron, Screen Holdings, and Disco. Since the outbreak of COVID-19 in 2020, none of these companies have recorded operating losses, and they share the common trait of having excellent future growth potential.

Toyota surpasses market cap of 540 trillion won... Mitsubishi quadruples after Warren Buffett’s investment

[Image source=Yonhap News]

Toyota, the world’s number one automobile seller, surpassed a market capitalization of 60 trillion yen (approximately 540 trillion won) on the 1st of this month. This came just three weeks after it became the first Japanese company to exceed 50 trillion yen on March 3rd. Toyota’s stock price surged 39% since the first trading day of this year (closing price on the 7th), reclaiming its position as Asia’s second-largest market cap company, overtaking Samsung Electronics for the first time in seven and a half years. Toyota is expected to post a record net profit of 4.9 trillion yen for the fiscal year 2023 (April 2023 to March 2024), an 80% increase from the previous year, marking the first time it has exceeded 4 trillion yen. Revenue is also projected to rise 17% to 43.5 trillion yen. As the pioneer of hybrid vehicles, Toyota is widely regarded as having greatly benefited from the global slowdown in electric vehicle demand. Subaru, in which Toyota holds a 20% stake, has also risen 21% so far this year. Seventy percent of Subaru’s total vehicle sales occur in the United States.

Mitsubishi is one of the companies in which Warren Buffett, the ‘master of value investing’ and chairman of Berkshire Hathaway, has invested. Buffett increased his stake from 5% in 2020 to nearly 9% recently. During this period, Mitsubishi’s stock price has risen about fourfold, with a 43% increase this year alone. The strengthening of shareholder return policies, supported by surplus cash flow from the weak yen and soaring resource prices, also played a significant role. Mitsubishi is expected to continue steady growth as it proactively secures essential resources for new industries. On the 4th, the Nikkei reported that Mitsubishi became the first Japanese company to partner with Canada’s Frontier Lithium to enter lithium development in North America.

Japanese semiconductor companies ride the AI rally

The rise of Japanese equipment companies riding the artificial intelligence (AI) rally led by US semiconductor giant Nvidia has been remarkable. Screen Holdings, the world leader in semiconductor cleaning equipment, saw its stock price surge 61% this year. Screen Holdings holds the largest market share globally in semiconductor cleaning equipment. Tokyo Electron, which rose 58% during the same period, surpassed Sony, Keyence, and NTT last month to become the third-largest Japanese company by market capitalization. Tokyo Electron announced plans to invest 1.5 trillion yen in research and development and 700 billion yen in capital expenditures over the next five years through 2029, anticipating growth in the semiconductor market.

Disco, which rose 52%, was added to the Nikkei 225 index on the 4th. Disco is a major global manufacturer of precision processing equipment and tools for silicon wafers used in semiconductor manufacturing processes. Its sales are projected to reach 368 billion yen in 2025, marking five consecutive years of growth. Similarly, Advantest, which rose 51%, is benefiting significantly from demand for memory chip testing equipment used in AI operations.

According to the Semiconductor Equipment Association of Japan (SEAJ), Japan’s semiconductor equipment sales are expected to reach a record high of 4.0348 trillion yen (approximately 36.347 trillion won) this year, a 27% increase from the previous year. This is the first time Japan’s semiconductor equipment sales have exceeded 4 trillion yen.

Among global country stock markets tracked by Morgan Stanley Capital International (MSCI), the Japanese stock market index ‘MSCI Japan Index (USD)’ rose 16.24% this year, ranking second after T?rkiye (18.99%).

S7 breaks the humiliation of the ‘Lost 30 Years’... from undervaluation to revaluation

The market views the current rally in the Japanese stock market centered on the S7 as a process of revaluation of stocks that had been undervalued for over 30 years.

In fact, excluding semiconductor-related stocks Advantest, Tokyo Electron, Screen Holdings, and Disco?which have surged significantly since last year’s ongoing AI boom?the average price-to-earnings ratio (PER) of Toyota Motor Corporation, Subaru, and Mitsubishi among the S7 is 11.08 times.

In contrast, the PER of the M7 excluding Nvidia?Apple, Alphabet, Meta, Tesla, Amazon, and Microsoft?is 35.72 times. Although the Nikkei index has surpassed 40,000 for the first time in 34 years, there remains a PER gap of more than three times.

Particularly, there is analysis that the S7 has sufficient room for further growth due to solid profit margins and growth drivers going forward. It is argued that this is distinctly different from the stock market during the bubble economy in 1989. Daiwa Securities forecasts that the Nikkei index will continue its upward trend for the next one to two years. The Japanese Monex Group predicts that the Nikkei index could rise to 55,000 by the end of next year, driven by the high profitability of Japanese private companies.

However, excluding external factors such as foreign buying driven by the weak yen, the spillover effect from the sluggish Chinese stock market, and the boom in the allied US stock market, it is pointed out that companies must continue to create promising future growth drivers to sustain the upward trend in the Japanese stock market. Goldman Sachs noted, “The scale of sales and profit margins of the S7 must expand further for their stock prices to rise as high as those of the M7.”