Because of Buffett, even shareholders who don't care about the Japanese stock market at all should have heard the name “Japan's Big Five Trading Companies” a few times after 2020.

According to Berkshire's annual report released in February this year, by the end of last year, the “Omaha Stock Gods” had achieved a floating profit of 8 billion US dollars in these five Japanese stocks, with a return on investment of over 60%. Considering that the five companies have increased by 20% to 50% this year, it is conservatively estimated that Buffett's bet has now earned at least $10 billion.

Various indications suggest that, as a symbol of the “revaluation” of the Japanese stock market, these listed companies are further improving their profitability by adjusting their portfolios and giving back to “Buffett” as the commodity factors that previously drove the sharp rise in trading company stocks have come to an end.

2024 target ROE all “superior double”

At the beginning of this month, Mitsubishi Corporation, Itochu, Mitsui & Co., Sumitomo Corporation, and Marubeni all completed the publication of their annual reports (note: the fiscal year for Japanese listed companies ends at the end of March) and explained the next phase of operations to shareholders.

Undoubtedly, as the “Buffett Loves Stock” that the world is watching closely, these companies have also vowed to improve profitability and promise to return benefits to shareholders under the spotlight of the media.

According to statistics, for the 2024 fiscal year, ITOCHU has set a return on equity (ROE) target of 16%, while the annual ROE targets for Mitsubishi Corporation, Sumitomo Corporation, and Marubeni are 10.4%, 12%, and 15%, respectively. Mitsui & Co., Ltd. did not give an outlook, but CEO Kenichi Hori stated at the financial briefing that it will continue to increase ROE and corporate value. Mitsui's FY2023 ROE was 15.3%.

As a reference, the average ROE for Japan's Tokyo motherboard (Prime board) is 9.7%. However, given that the average ROE of the top 100 companies in the world by market capitalization can reach 40%, Japan's large trading companies are still far behind in terms of return on capital, but conversely, there is also a lot of room for improvement.

Another reason that is driving these companies to adjust their portfolios is stabilizing commodity prices. Without this support, the company needs to tap more potential at the management level in order to maintain profitability.

In fiscal year 2023, Mitsubishi Corp.'s net profit fell 18%, and Marubeni also fell 13%. Thanks to investments in retail, information technology, and the food industry, ITOCHU managed to maintain a profit growth rate of 0.2%.

Adjust the frequency of motion

Mitsubishi Corp.'s president, Katsu Nakanishi, also said last week that the company is replacing assets according to certain standards and exiting before the asset's life is over to avoid being trapped. Mitsubishi's asset sales revenue in fiscal year 2023 reached 760 billion yen, the highest in nearly 5 years.

Masaru Nakanishi also mentioned that the Australian coking coal mine will be one of the important factors supporting its profit in the 2024 fiscal year. The company is also considering investing in copper projects and launching a series of acquisitions in Western countries, taking advantage of the global energy transition trend.

Marubeni CEO Masumi Kakiki mentioned that profit growth in the 2024 fiscal year will benefit from investment in Chilean copper projects and growth in non-commodity businesses. The company hopes to do its best to increase profits in the non-commodity business, from about 300 billion yen to 400 billion yen.

ITOCHU, on the other hand, focused on the field of science and technology. In addition to existing IT technology and renewable energy projects, the company is also focusing on opportunities in consumption, digital transformation, and AIGC, and has prepared an investment budget of up to 1 trillion yen.

In addition to increasing the company's profitability, increasing ROE also involves allocating excess cash to shareholders. Counting Sumitomo Corporation, which was the last to join, these five companies will all adopt a system of gradually increasing dividends — dividends can only increase, or at least remain at the same level.

At the same time, in addition to Mitsubishi Corporation stating that “repurchase will be decided based on cash flow,” the other four companies have also announced stock repurchase plans.

As far as the next year's trends are concerned, these companies are still likely to “fall in the light of Buffett” (Berkshire just issued 260 billion yen in yen bonds at the end of April), but they still have to rely on their own performance to a greater extent.

Including this year, Berkshire has been “issuing Japanese yen bonds to buy Japanese stocks.” In a shareholder letter in February of this year, Buffett revealed that he already holds 9% of the shares in each of the five trading companies. Since shareholders have long promised not to buy more than 9.9% of the shares, there is already relatively limited room to increase their holdings in the future.

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