As a superhero in the investment world, every move of “stock god” Buffett is enough to cause a huge shock.

As the Japanese stock market continues to advance, Japan's top five trading companies have undoubtedly become one of Buffett's most successful investments in recent years.

From the first trading day of 2023 to April 8, 2024, over a period of more than a year, the stock prices of the five major Japanese trading companies rose across the board:$Mitsubishi (8058.JP)$increased by 146.7%,$Mitsui (8031.JP)$increased by 88.71%,$Marubeni (8002.JP)$increased by 73.63%,$Sumitomo (8053.JP)$increased by 69.26%,$ITOCHU (8001.JP)$Up 62.76% compared to the same period$Nikkei 225 (.N225.JP)$It rose 50.79%.

Looking back at Buffett's operations, as early as 2020, Berkshire took a stake in five major Japanese trading companies: Itochu, Marubeni, Mitsubishi, Mitsui & Co., and Sumitomo Corporation.

In August 2020, Berkshire first announced that it had passively held 5% of Japan's “Big Five Trading Companies”, then revealed in June 2023 that it had increased its shareholding ratio to more than 8.5%. In the latest shareholder letter, Buffett revealed that Berkshire holds about 9% of the shares in these five companies.

However, Berkshire promised each company that it would not buy more than 9.9% of the shares until approval was obtained from the five companies' boards of directors.

Buffett said the total investment cost for these five companies was 1.6 trillion yen, and their market value at the end of 2023 was 2.9 trillion yen. However, the yen has weakened in recent years, and Berkshire's unrealized dollar gain was 61% (about $8 billion).

Notably, regarding how long he will hold, 92-year-old Buffett stated in a shareholder letter that he will continue to hold shares in the five major trading companies for a long time, while he previously revealed that Berkshire plans to hold these investments for 10 to 20 years.

Amid the current round of rising Japanese stocks, Buffett's high-profile announcement that he had increased the shareholding ratio in Japan's top five trading companies became a landmark event, which not only led to a large inflow of foreign capital, but also stimulated many people's curiosity about Japanese trading companies.

So, what kind of magic do the five major trading companies have that make stock god Buffett love it? The following is the user's interpretation one by one.

What are the five major trading companies?

According to the CITIC Securities Wealth Management (Hong Kong) Research Report, a “trading company” is a form of trading company unique to Japan. It initially mainly engaged in trade and was based on existing business, then gradually extended its business to other industries. It has now expanded a wider range of business content and service functions, thus forming the diversified form of Japanese trading companies today.

The five largest trading companies in Japan are: Mitsubishi Corporation, Mitsui & Co., ITOCHU Corporation, Sumitomo Corporation, and Marubeni.

They are a long-standing, large-scale enterprise group that plays an important role in the Japanese economy. Each company operates in a highly diversified manner, trading in various products and materials, involving natural resources, energy, chemicals, metals, manufacturing, retail, real estate, and healthcare.

• Mitsubishi Corporation

Established in 1873, Mitsubishi Corporation initially focused on shipping. Later, it also invested in mining and ship maintenance services, and participated in mining in response to the rise of the Japanese coal mining industry, and successfully expanded its scale of operations. It was later split into independent companies, but they were linked to form the Mitsubishi Group, and its business expanded to include energy (oil, natural gas, nuclear energy), metals (iron ore, aluminum), automobiles, aircraft, chemicals, food, infrastructure, and military equipment research and development.

Mitsubishi Corporation has an advantage in resource and energy industries such as coal, liquefied natural gas, and copper, accounting for about 53%. The non-resources and energy industries also cover a wide range of industries, and Lawson Convenience Store is also its brand. Mitsubishi Corporation is currently actively investing in fields such as new energy and digital transformation.

Notably, compared to some of its peers, Mitsubishi Corporation is less resource-dependent, and about half of its profits by fiscal year 2025 will come from non-resource sectors. The medium-term return on net assets and return on total assets should significantly exceed its 10-year average. Mitsubishi Corporation's cash flow improvement is the best performer among its peers and is leading the industry in terms of shareholder returns.

• Mitsui & Co.

Mitsui & Co., Ltd. was Japan's first trading company, founded by Mitsui Takatoshi in 1673. The Mitsui family then opened Japan's first private bank, Mitsui Bank, in 1876, and established Mitsui & Co., Ltd., which was the largest in Japan at the time. Mitsui & Co., Ltd. is currently involved in many industries, such as mineral and metal resources, energy, infrastructure, transportation, basic materials, functional materials, nutrition and agriculture, steel products, food, retail, health, IT & communications, and corporate development.

The company has certain advantages in resource and energy industries such as iron ore and liquefied natural gas. The company accounts for a large share of the resources and energy industry. Its resource assets are mainly concentrated in iron ore, including shares in BHP's iron ore assets in Western Australia. Efforts are being made to develop non-resource and energy industries such as healthcare. CITIC Securities Wealth Management (Hong Kong) expects that although the company has not set targets, non-resource revenue will gradually increase, and its share of sales will also increase.

Mitsui & Co. is the company with the highest leverage ratio in the resources sector. Among its peers, its level of return is medium. The return on net assets and return on total assets for 2023 and 2024 should easily exceed their 10-year average. As cash flow improved significantly, so did overall payments to investors.

• ITOCHU Corporation

ITOCHU Corporation started its business in the linen business in 1858. Currently, it is engaged in trade, import and export trade, tripartite trade, and domestic and foreign trade investments within Japan in various fields such as textiles, machinery, metals, energy, chemicals, food, household materials, housing, information and communication, and finance, etc., with a wide range of businesses. The share of the resource and energy industry is relatively small, about 45%. It has advantages in industries such as fiber, food, information, and finance. FamilyMart is its brand.

ITOCHU has a relatively large number of trade contacts with China, and has expanded overseas markets through the acquisition of shares in overseas companies and the establishment of joint ventures. ITOCHU Corporation acquired half of the share capital of Master Kong Drinks in 2005, then established a joint venture with Master Kong Convenience Foods and Calle B in China. Since then, ITOCHU has acquired some or all of the shares in companies such as Hangzhou Xinhuahai Trading, Kalahari Minerals PLC, Bu Feng International, Taipei Financial Tower, FamilyMart, and Big Motor, covering the fields of metals, food, and automobiles.

• Sumitomo Corporation

The predecessor of Sumitomo Corporation was Osaka Hokko Co., Ltd., which was established in 1919, and operated the real estate business. The company changed its name to Sumitomo Corporation in 1952. Currently, Sumitomo Corporation has 6 major industries, namely the metal industry (accounting for 11.1%), the transport aircraft construction machinery industry (accounting for 21.7%), the infrastructure industry (accounting for 14.6%), the digital media industry (accounting for 10.7%), the real estate industry (accounting for 17.6%), and the resource chemicals industry (accounting for 24.4%). Sumitomo Corporation has advantages mainly in industries such as real estate, media, leasing, and steel pipes. It mainly deals in non-ferrous metals in the resource industry.

Most of Sumitomo Corporation's revenue comes from outside of Japan. About 40% of the company's revenue comes from Japan; followed by the US, which accounts for more than 15%; other Asian countries (East Asia and Asia Pacific) account for nearly 20%; Europe, the Middle East, etc. account for more than 15%; and the rest comes from other countries in America, accounting for less than 10%.

• Marubeni

Marubeni was founded in the same year as ITOCHU, and it also started in the textile industry, and has a history of over 160 years. Marubeni's core companies include Mizuho Bank, Nissan, Nippon Steel Pipe, Sapporo Breweries, Hitachi, Marubeni, Canon, Nippon Seiko, the largest bearing manufacturer in Japan, and Kubota, the largest manufacturer of agricultural machinery. Marubeni Corporation has advantages in industries such as electricity and food (grain). The resources and energy industry accounts for 44%. Currently, we are committed to developing industries such as electric vehicle peripheral products and offshore wind power generation.

Compared to other companies, Marubeni's resource exposure is relatively balanced and does not rely too much on any one product type. The quality of resource assets is fair, and the risk of asset impairment has been reduced after depreciation over the past few years. Marubeni's business focuses on agricultural operations in North America (especially beef and grain) and aerospace leasing business.

Over the past ten years, Marubeni's asset impairment losses have led to high profit volatility. Since FY2020, Marubeni's return growth has performed the best among its peers, and its ROE is also high. Impressive deleveraging measures meant a significant improvement in its balance sheet. Marubeni announced a new shareholder return policy in the third quarter of fiscal year 2023, targeting a total payment ratio of 30-35%.

Why is Buffett so popular?

Buffett said in a 2024 letter to shareholders that Berkshire continues to passively hold shares in Japan's five major trading companies for a long time, and that each company's business methods are highly diversified, which is somewhat similar to Berkshire's own business method. It says,

In some important ways, the five companies, ITOCHU Corporation, Marubeni, Mitsubishi, Mitsui, and Sumitomo, all follow shareholder-friendly policies, which are far better than US practice. Since we began buying Japanese stocks, all five companies have reduced the number of outstanding shares at attractive prices.

At the same time, the five companies' management demands for their own compensation are far less aggressive than those of American companies. It's also important to note that each of these five companies only uses about 1/3 of their earnings for dividends. The five companies retained huge sums of money both to establish many of their businesses and, to a lesser extent, to buy back shares. Like Berkshire, these five companies are reluctant to issue shares.

As can be seen from these descriptions, diversified business, high dividends, high free cash flow, and prudent issuance of new shares are important reasons why Buffett favors the five major trading companies.

In fact, Japan's five major trading companies are inextricably linked to each other, and are also integrated with each other in terms of business. They drive the development of various industries in Japan, are hidden chain owners in Japan, and all have very strong cash flow and trade logistics competitiveness.

Looking back at Buffett's investment path in Japan's top five trading companies, investing in the Japanese market was yet another Buffett textbook-style operation to copy high-quality assets.

Furthermore, market analysis suggests that the logic behind Buffett's huge increase in “Japan's Big Five Trading Companies” may also be to bet on rising energy and commodity prices.

If you take a close look at the financial reports of the five major trading companies, you can see that most of the revenue of these five companies comes from upstream resource sectors such as minerals and energy. Furthermore, over the past 30 years, these five trading companies have bought oil, natural gas and other resources from around the world in large numbers despite the downturn in Japan's economy.

However, Buffett first began betting on the five major trading companies at a time when the COVID-19 pandemic was ravaging oil and gas prices. Afterwards, with the impact of factors such as the Russian-Ukrainian conflict and gradual economic recovery, commodity prices repeatedly hit record highs. The stock prices of the five major trading companies soared, and Buffett also made a lot of money.

It can also be seen from CICC's research report. Take Mitsubishi Corporation as an example. In the past ten years, the company's stock price has outperformed more during the commodity boom, while losing in stages when commodities are weak.

The CBR commodity index rose 53.0% in March 2020-2024 (the highest point rose 83.0%). The company's stock price performance was impressive, with a cumulative increase of 470.3%, significantly outperforming the Nikkei Index.

Furthermore, in the past year, the Bank of Japan has been slow to raise interest rates, and the yen depreciated sharply, allowing these trading companies to fully enjoy the dividends brought by the policy. As an investment company, exchange rate fluctuations, especially the depreciation of the yen, are extremely beneficial to trading companies, because when trading companies return overseas investments to the Japanese market, they can obtain considerable profits.

Another thing worth mentioning about Buffett's investment in Japan's top five trading companies is its ultra-low financing costs.

According to Berkshire's 2022 earnings report, the total value of Japanese yen bonds currently issued by the company is 7.818 billion US dollars, and the weighted average interest rate is only 0.7%. In comparison, the interest costs of US dollar and Eurobonds are as high as 3.2% and 1%.

However, investors should be aware that from an investment perspective, even a powerful general trading company's investment is not without risk. As commodity buyers, trading companies are often viewed as traditional cyclical industries and have strong resource attributes. All Japanese trading companies, without exception, experienced a sharp drop in the international market.

Cow friends,

Are you optimistic about the next trends of the five major trading companies?

Which company might be in your pocket?

Welcome to leave your thoughts in the comments area~

Part of this article comes from CITIC Securities Wealth Management Hong Kong's “Follow Buffett's Investment Ideas to Understand Japan's Top Five Trading Companies”

Editor/Somer