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Turn Japanese demographics into solid gains:
90%+ upside from this world-class growth stock!
by James Passin
It can hit you out of the blue, with a searing pain in your bladder. It can develop slowly, worsening day after day, without any warning sensation at all. It can materialize in a boiling large intestine waiting to explode unexpectedly when a dirty joke wracks you with laughter.
If you’re lucky, incontinence will never afflict you at all. But loss of control is often an unfortunate side effect of the aging process. Why do I bring up this depressing condition? Because I think there’s money in it.
Consider this: 15% of men and 25% of women over 60 suffer from incontinence.
Big numbers = big market
And nowhere does incontinence represent a more explosive growth market than in Japan. With a rapidly aging population and a huge disposable income, Japan is about to launch the biggest adult diaper-buying binge in history. To cash in on this consumer growth trend, I recommend that you immediately purchase Uni-Charm (8113-Tokyo Stock Exchange) under ¥5400 (US$48) with a one-year target of ¥10,000 (US$87).
Tale of two Tokyos
Japan is falling apart at the seams. Banks are laden with bad debts...The government can’t do anything right...Entrenched managers are looting their own companies...The lowest rates in recorded human history have failed to improve the economy...The recent rise of the yen will choke off Japanese exports, while rapidly rising long-term rates will squash any remaining faint hope of a recovery...
This G–tterd”mmerung scenario is the common wisdom. At key turning points in the market, the common wisdom is always wrong.
There’s another way to view recent market events: the rise in long-term rates and strength in the yen are clear signals of an imminent economic recovery in Japan. If rising rates and a rising currency were in fact catastrophic for Japan, then the Nikkei would have collapsed below 10,000. Instead, the Nikkei has held 13,000 like a rock. Taipan believes that the catastrophic terminal shakeout so feared by mainstream investors has already occurred.
A geisha in every pot
The popular superbearish view of Japan overlooks the obvious: Merger and acquisition activity is booming...U.S. investment banks are buying Japanese brokerages and insurance companies...The list of share buyback announcements keeps growing...Weak banks are being nationalized...
The most significant indicator I know of the health of the Japanese economy is the Ginza district indicator. Ginza is one of Tokyo’s notorious entertainment district, a Sodom and Gomorrah of karaoke bars, private sushi restaurants, and strip clubs -- a seminal destination for entertaining clients and cutting deals. Contacts in Japan tell me that Ginza has been packed with business in recent months -- a sign that a broad economic recovery may be brewing.
 The key to a sustained recovery in Japan is consumer confidence. The man on the street is terrified of losing his job. Ironically, low consumer confidence hurts the economy, hurting consumer confidence. This negative loop manifests itself in falling prices ("deflation") and rising personal savings. Since interest rates are ludicrously low (close to zero), Japanese households feel compelled to pile up huge cash hoards to earn a comfortable gross return on savings.
Since interest rates are starting to surge in Japan, consumers are feeling richer. Returns on savings are improving. At the same time, more marginal banks and debt-heavy conglomerates will be forced into bankruptcy, clearing the economy of residual debt overhang from the 1980s. The combination of rising consumer confidence and a "clearing of the slate" for banks would trigger a breathtaking resurgence in economic activity. The high savings rate reflects a huge pool of untapped consumer buying power -- exactly what Japan needs to kickstart its economy.
As a contrarian value investor, I like to get in when everyone has been flushed out. At current depressed levels, Japanese stocks have little downside risk and tremendous upside. Japan has the most developed social infrastructure in the world, with a highly educated workforce, almost religious work ethic, and cutting-edge technology. The stock market will rebound long before a broad economic recovery is evident. As a pure play on domestic consumption, Uni-Charm is an excellent vehicle for riding the Japanese renaissance.
Lucky charm
Uni-Charm is the 5th largest diaper producer in Asia. The company has been around since 1961, building up a dominant market position in Japan in diapers and feminine hygiene products. Currently, Uni-Charm controls 51% of the baby diaper market, 35% of the sanitary napkin market, 74% of the tampon market, and 30% of the adult diaper market.
While the diaper and hygiene markets are highly competitive, Uni-Charm’s high-quality, absorbent products have attracted a loyal customer base. Uni-Charm’s non-woven cloth material provides extra comfort. By consistently beating the competition with innovative products like thin panty liners and self-adhesive napkins, Uni-Charm has built up robust brand equity.
Uni-Charm is a 100% vertically integrated manufacturer. Costs can be tightly controlled, giving the company tremendous pricing power. The result has been steadily rising profit margins despite the fiercely competitive nature of the business. In FY97, gross profit margin was almost 42%! This kind of profitability is obscene for a diaper manufacturer -- a sign of Uni-Charm’s manufacturing efficiency.
While the birth rate has been declining and the tampon market is saturated, adult diapers represent an emerging growth opportunity for Uni-Charm. Japan’s baby boomer population is rapidly aging. By 2020, the ratio of senior citizens (65+) to the general population will balloon from 15% to 25.5% (a huge 60% increase).
One out of every four women and one out of every six men over 65 suffer from some kind of incontinence. Since there is some tangible consumer resistance among adults to wearing diapers, the aging of the general population will in itself raise consumer acceptance, expanding market penetration. And since no adult (with the exception of some Baltimore panhandlers) wants to smell bad, the high end of the adult diaper market will grow rapidly to the low end -- fueling the explosive growth of Uni-Charm’s top and bottom lines.
Betting on Asia
Uni-Charm has a strong market position in Southeast Asia and China. Uni-Charm exports to China, Taiwan, Korea, Malaysia, and Indonesia. While total export sales are small relative to total sales, exports represent tremendous potential for growth. The Asian crisis has temporarily hurt the buying power of consumers, but Southeast Asia will eventually make a comeback. I expect a broad economic recovery in Southeast Asia to be a powerful driver of Uni-Charm’s exports over the next five years.
 Regardless of the government-enforced "one birth policy" in China, the absolute number of babies in China is huge. As Chinese GDP/capita grows, consumers will feel richer -- and begin buying diapers for their babies. If China returns to its fast historical growth rate, sales of diapers and feminine hygiene products will take off.
Best run company in Japan
Uni-Charm has almost doubled pre-tax profit margins over the last six years to 11.6%. This is a significant achievement in the face of Japan’s weak economy. Uni-Charm has a rock-solid balance sheet, with almost zero long-term debt and ¥24 billion (US$210 million) in cash. At 11%, Uni-Charm’s Return on Equity (ROE) is high by both Japanese and international standards.
In my view, Uni-Charm is one of the best run companies in Japan. To create shareholder value, Uni-Charm implemented a 1.9 million share buyback plan. The share buyback plan should put a technical floor under the stock -- and more generally is a testimony to the financial resiliency of the company. The market cap of ¥390 billion (US$3 billion) is cheap relative to annual sales of ¥216 billion (US$1.9 billion).
The financial strengths of Uni-Charm have been reflected in a steadily rising share price. Uni-Charm has doubled in price since 1995. While I usually play severely beaten-down stocks, it makes sense to play rising stocks that have bucked the bearish trend in Japan. Since the stock is still cheap in terms of sales or EBIDTA, there’s still tremendous upside. If a surprise recovery in Japan actually materializes, there’s no upside limit to this stock.
Buy Uni-Charm now!
Based on the low price/sales ratio, favorable demographic trends, and projected broader market recovery, Uni-Charm (8113-Tokyo Stock Exchange) is a Buy under ¥5400 (US$48) with a twelve-month target of ¥10,000 (US$87).
Uni-Charm trades in minimum lots of 100 shares. That means the minimum investment in the stock is around US$4730. However, the stock is very liquid: you should have no problem buying or selling shares. Free stock quotes on the Tokyo Stock Exchange are available on the Internet: www.nni.nikkei.jp/servlet/Stock?CODE=8113.
To avoid paying an egregious mark-up, I strongly recommend buying the Uni-Charm through Peter Schiff at Euro Pacific Capital, 330 Washington Blvd., Suite 511, Marina Del Ray, CA 90292, tel. 800-727-7922 or tel. 310-448-8000, fax 410-448-8000. Peter can buy Uni-Charm in blocks smaller than 100 shares, but at the cost of reduced liquidity.
For more information on Uni-Charm, I recommend checking out the company’s website: www.unicharm.co.jp/index1-e.html.
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