A Citi Research report published on February 20th highlights continued improvement in corporate profitability in Japan and the ramifications of the “third arrow” of Japanese PM’s Abe’s Abenomics plan to encourage corporations to focus on shareholder value. Citi analyst Kenji Abe also focuses on equities in four categories — Radical Restructurers, Global Growers, Only Ones and Shrinkers and Hikers — that are likely to benefit as Abenomics reforms and restructures the Japanese economy.

Strong 2013 corporate earnings

The Citi report points to strong corporate earnings in 2013 as evidence of improvement in the long-term cyclical malaise that has been dogging Japan for more than a decade. “Japan continues to enjoy stronger profit momentum than other regions, with just-completed Q3 results season once more surprising to the upside. In his February 10 report Japan Equity Strategist-October-December results: Earnings strong, unlike market, Kenji Abe noted that positive surprises outweighing negatives by a ratio of 2:1.” Citi Research predicts strong earnings growth for Japanese equities in 2014 and 2015.

Abenomics Japan EPS growth

Abenomics’ “third arrow” — unlocking shareholder value

The “third arrow” of Abenomics — unlocking shareholder value — has been oft discussed in the Japanese and international financial media over the last few months, and the Citi report suggests that corporate management is beginning to pay heed to the call. Furthermore, companies that are taking steps to improve investment return and unlock shareholder value are likely to see significant stock price appreciation as a reward for their efforts.

Abenomics

The Citi report divides Japanese equities expected to benefit from Abenomics and a renewed focus on shareholder value into four categories as described below.

Radical Restructurers — “Radical Restructurers include Hitachi, Ltd. (ADR) (OTCMKTS:HTHIY) (TYO:6501) (continuing with far-reaching structural reforms including offloading non-core business and group restructuring) and Nidec (key earnings driver is steadily shifting to automotive and general industrial motors from HDD motors).”

Global Growers — “Global Growers, on the other hand, include Nippon Paint CO., LTD. (TYO:4612) (OTCMKTS:NPCPF) (to take majority stakes in its Asia JVs with Wuthelam, working to transform itself into the No. 4 paint maker globally with sales of ¥500bn) and M3 (plans to launch Internet services for physicians in China, having done so in Europe and the US).”

Only Ones — “The Only Ones category includes Toray Industries Inc (TYO:3402) (OTCMKTS:TRYIY), which is managing to turn fibers into a high-growth business despite the area being considered as mature and commoditized.”

Shrinkers and Hikers — “Shrinkers and Hikers include LIXIL Group Corp (TYO:5938) (OTCMKTS:JSGRY) (has a clear focus on shareholders, has hiked DPS for the first time in 11 years), OMRON Corporation (TYO:6645) (OTCMKTS:OMRNY) (also focused on shareholders, aiming for a dividend payout of 25% or more), and Asahi Group Holdings Ltd (TYO:2502) (OTCMKTS:ASBRY) (taking an aggressive approach to shareholders’ return in 2013-2015, aims for a total payout of 50% or more via share buybacks and dividends.”