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Travel and tourism has been one of the hardest hit sectors during the COVID-19 pandemic. Prior to the pandemic, this sector accounted for a quarter of all new jobs created globally, and contributed 10.4% to global GDP in 2019. In 2020, 62 million people working across the travel and tourism sector lost their jobs, and many are still supported by government wage subsidies. Domestic visitor spending decreased by 45% and international visitor spending declined by 69%. As a result, the sector lost US$4.5 trillion, or 49% compared to 2019, and only accounted for 5.5% of global GDP last year.

With the help of rapid vaccine rollouts in several economies, we are beginning to see some light at the end of the tunnel. In the United States (US), more than half of all adults have now been fully vaccinated. States are easing restrictions; some are aiming to fully reopen in July. Although business trips are unlikely to match pre-pandemic levels until 2023 or 2024, demand for leisure travels rebounded strongly. About 1.9 million travellers passed through airport security checkpoints on May 27, 2021 – that is six times the volume on the same day a year earlier, and about three quarters of the 2019 level. US domestic air travel has also returned to 75% of pre-pandemic levels.

A similar trend has been observed in the restaurant industry. According to OpenTable, restaurant bookings in the US were almost back to normal in the last week of May. Data released by the Bureau of Economic Analysis shows consumer spending on services in April 2021 had reached US$10.1 trillion, surpassing the US$9.95 trillion in April 2019, and approaching the previous peak of US$10.3 trillion in Feb 2020.

The European Union is also gradually reopening, and is working on the plans to welcome fully vaccinated travellers from abroad, including Americans, as soon as this summer. Most people have been staying within their local areas for over a year, and cannot wait to take that long awaited trip.
A recent survey shows nearly 9 in 10 American travellers have plans to travel in the next six months.

Many names in our portfolios are set to capture the pent-up demand in the leisure and tourism industry, and we would like to highlight a few in this commentary.

Autogrill (AGL IM)

While we do not invest directly in airline operators, we own Autogrill, the largest food and beverage provider at airports and motorways. Autogrill operates in 142 airports around the world, and manages 548 service stations along motorways and in railway stations. North America accounts for over 50% of the company’s total revenue, and the faster vaccination progress in this region will help the business to recover as passengers resume domestic travels.

Melia Hotels International (MEL SQ)

Headquartered in Spain, Melia operates more than 367 hotels in 41 countries. It is the third largest hotel group in Europe. First quarter results were still weak, but the company has seen a ramp-up in bookings for several key markets. Bookings of its resort destinations from domestic tourists in Spain have shown favourable recovery. US customers’ bookings for the Caribbean, particularly Mexico, have reached 2019 levels. With many quality assets, Melia should be able to benefit from the return of leisure travellers this summer.

Samsonite International (1910 HK)

Founded in 1910, Samsonite is the world’s largest lifestyle bag and travel luggage company. It owns many brands including Samsonite, Tumi, and American Tourister, and the products are sold in over 100 countries. The US and China accounted for 46% of total sales in 2019, and domestic travels have begun to pick up in both countries. The worst should be behind and the company targets to break even in the second quarter and return to profit from the third quarter onwards.

Ariake Japan (2815 JP)

Based in Japan, Ariake is a leading producer of natural seasoning concentrates based on animal bones. It has over 3,000 products used in soup, bouillon, broth and sauce bases. Customers are all commercial users that include hotels, restaurants, and makers of instant noodles, frozen foods, and prepared meals. Convenience store and food manufacturer channels remained resilient last year. Ariake continues to launch new products and gain market share. Yet the restaurant and hotel channel, which takes about 30% to 40% of total revenue, was hit due to dining restrictions and ordered closures of operators by the government. The restaurant related business is expected to catch up, with easing restrictions.

Limoneira (LMNR US)

Based in Santa Paula, California, the 127-year-old company is a leading producer of lemons, avocados, and oranges, with lemon being the largest revenue contributor. In the US, more than half of lemon production goes to food services, so the company was inevitably hurt by COVID-19. However, starting from the first quarter of fiscal year 2021, demand for lemon has recovered and pricing is performing well in comparison to 2020. The company also expects strong results for avocado and oranges sales in fiscal year 2021.

It is encouraging to see countries and cities coming back to life following a year of restrictions and confinement. However, caution is warranted as it takes time for the economies to fully recover due to uncertainties with vaccine rollouts, new COVID-19 variants, labour shortages, and supply chain challenges. Our portfolio remains balanced across regions and sectors. Companies in our portfolios are in great financial positions, and continue to deliver strong results.

Recent US dollar weakness against the euro, like the rally earlier in 2021 and a May-December 2020 slide, may reflect differential growth in net lending to government by the Fed and ECB. Fed net lending has been rising faster recently, possibly contributing to an excess supply of dollars, but the ECB may move back into the lead in H2, suggesting support for the US currency.

Eurozone balance of payments figures, available through March, show a record net outflow of direct and portfolio capital in late 2020 / early 2021. The outflow swamped the current account surplus, resulting in a record “basic balance” deficit, which may have driven a Q1 decline in EUR / USD – see chart 1.

Chart 1

Basic balance positions of currency areas, according to monetary theory, are influenced by the relative pace of domestic credit expansion (DCE), defined as bank lending to government net of government deposits plus lending to the private sector. Central banks have been a key driver of DCE in recent quarters via their QE operations and changes in their government deposit liabilities.

Chart 2 shows stocks of net government lending by the Fed and ECB, together with their ratio. A rise in the ratio implies faster “liquidity creation” by the Fed than the ECB, which – other things being equal – would be expected to imply upward pressure on EUR / USD.

Chart 2

There have been three distinct phases since covid struck:

  • The Fed launched additional QE earlier and on a much larger scale than the ECB, resulting in a surge in the ratio in spring 2020. The dollar moved into excess supply, reflected in a sharp rise in EUR / USD into August, with a further move higher into year-end.
  • The Fed’s stock of net government lending went into reverse in mid-2020 as a slowdown in QE coincided with a Treasury build-up of cash in its general account at the central bank. PEPP buying, meanwhile, boosted growth of ECB net lending. The rise in relative euro supply resulted in an outflow of Eurozone capital in late 2020 / early 2021, with associated EUR / USD weakness in Q1.
  • The Fed / ECB net lending ratio rose again from January as the Treasury ran down its general account balance from more than $1.6 trn to below $800 bn currently, partly to finance $380 bn of stimulus payments over March-May. This has been reflected in a Q2 rebound in EUR / USD towards a December high of 1.23.

What next?

ECB purchases of government securities are currently running at about €110 bn per month versus Fed buying of Treasuries of $80 bn. The Treasury’s latest financing estimates assume a further fall in its balance at the Fed to $450 bn by end-July but a recovery to $750 bn by end-September. The suggestion, therefore, is that the ECB’s stock of net government lending will grow faster than the Fed’s between now and end-September.

Eurozone governments, moreover, could choose, like the Treasury, to reduce their current large cash balance with the ECB, giving an additional boost to net lending and euro supply – chart 3.

Chart 3

The Fed / ECB net lending ratio could rise further in June / July before turning down and the last three EUR / USD moves began only after a new trend had been established. H2 is looking more promising for the dollar but confirmation of a shift in relative liquidity creation is required.

Occasionally we are reminded that cybersecurity decisions have real-world impacts. In early 2021, news of a cyber attack at a water treatment plant in Florida was made public, in which one of the employees lost control of his mouse and watched as the hacker increased the level of sodium hydroxide 111 times from its intended level, making it dangerous to even touch the water. Luckily, the computer’s owner was proactive in rectifying the situation and escalating the case to the FBI. Even though many security checks were in place, making it unlikely that the contaminated water would reach the population, this case illustrates how ill equipped modern infrastructure is to deal with cybersecurity threats.

On May 7, Colonial Pipeline announced that it became the victim of a ransomware cyber attack that forced the company to halt all pipeline operations for a full week, making it the largest successful cyberattack on an oil infrastructure target to date. As the largest refined oil pipeline system in the eastern United States (US), the consequences were felt immediately. An estimated 12,000 gas stations faced shortages, fuel prices rose to more than $3/gallon, and panic buying surged to levels not seen since the toilet paper mania at the onset of the pandemic last year. As is usually the case with ransomware attacks, management did not know exactly how severe the breach was or how long it would take to have the systems work again on their own. As such, the company went ahead and paid the full ransom of 75 bitcoins, worth roughly US$4.4 million, and its operations were able to resume several days later.

Ransomware and other forms of cyber attacks are much more frequent than one would expect. In its annual “State of Email Security” report, Mimecast Ltd. found that 61% of organizations surveyed had been impacted by ransomware in 2020, an increase of 20% over 2019. On average, these companies lost six working days of system downtime and for 37%, the downtime lasted a week or more. One of the worst parts is that more than half of the victims paid the ransom demand but only 66% of them were able to retrieve their data afterward. This means one third never saw their data again despite paying the ransom.

In past commentaries we discussed how email is the most frequent and vulnerable attack vector, even more so since work from home became the norm. Since the beginning of the pandemic, it has been found that employees are three times more likely to click on malicious emails than they had before, while the number of email threats rose 64% year over year. This implies that working from home is also leading to employees being less vigilant about potential threats. Meanwhile, companies have been slow to adapt. Cybersecurity training is provided by only one out of five companies, despite almost half of technology chiefs believing that their biggest weakness stems from their employees’ lack of cybersecurity knowledge. Furthermore, one in ten companies do not even have an email security system.

With this in mind, it is not difficult to understand why Global Alpha has maintained continuous exposure to the cybersecurity sector over the years. In the past, we owned names such as Sophos, Nice Systems, and we currently own Mimecast Ltd. (MIME US).

Business Overview

Mimecast is a cloud-based platform that offers email security solutions. They provide a range of services, including targeted threat protection, encryption, large file sending services, and data leak prevention. Peter Bauer is one of the co-founders of the firm and has been CEO since its inception in 2003. Insiders own about 7% of the shares outstanding.

Competitive Advantages

Given the sticky nature of the business, Mimecast enjoys very high retention rates. They also have the fastest search service-level agreement in the industry because their service architecture was designed for the cloud from the beginning.

Mimecast processes over 400 million emails every day, and has more than 300 billion emails under management. They are the only email security provider to guarantee 100% continuity on Office 365.

Growth Strategy

  • Cross sell opportunities as the average customer owns around 3.5 products (up from 3.2 in 2019)
  • New product launches (6 products at its IPO in 2015, currently 11)
  • Increased penetration in the enterprise business

We are always on the lookout for new investment opportunities with secular growth opportunities. Our ability to be highly selective and nimble in our portfolio holdings leaves us well positioned to add some exposure to the online security industry at attractive valuations.

A post in November presented a “monetarist” forecast that CPI inflation would rise to more than 3% by late 2021. This forecast appears on track.

The Bank of England’s central projection for Q4 2021 was 2.1% in November. This was lowered to 1.9% in February but raised to 2.5% in May.

A key element of the November forecast was a significant inflation boost from energy prices, reflecting a view that a strong global industrial recovery would push up oil and other commodity prices. This has played out: the CPI energy component rose by 7.5% in the year to April, contributing 0.5 percentage points (pp) to annual CPI inflation of 1.5%.

The energy effect explains the upward revision to the Bank of England’s forecast. The Bank now expects the contribution of energy prices to annual inflation to rise further to 0.75 pp by Q4 – similar to the view here, which assumes an additional 5% increase in the Ofgem price cap in October.

The forecast that CPI inflation will exceed 3% by year-end is driven by three additional factors:

  • The planned increase in VAT in the hospitality and tourism sectors from 5% to 12.5% in October, with a return to 20% scheduled for April 2022.
  • A pick-up in food price inflation, partly reflecting recent strength in global food commodity prices.
  • A rise in underlying core inflation (i.e. excluding the VAT effect as well as energy / food contributions) in lagged response to faster broad money growth.

Taking these in turn, the forecast assumes that there will be 35% pass-through of the VAT rise to prices, implying a 0.2 pp boost to the monthly change in the CPI in October. The Bank and consensus, by contrast, appear to assume a negligible impact. This is surprising: firms face rising costs and the withdrawal of government support while economic reopening should ensure strong demand – why would they allow margins to take the full hit from the VAT hike?

Food prices have so far been weaker than assumed in the November forecast here, falling by 0.5% in the year to April. Producer output prices of food products, however, were up by 2.3% over the same period, the largest annual rise since 2018 – see chart 1.

Chart 1

The pick-up in producer output prices appears to have been driven by higher input costs of home-produced food. Imported food materials, by contrast, have cheapened, partly reflecting sterling appreciation. This is about to change: the FAO global food commodity price index rose by 17% in sterling terms in the year to April – chart 2.

Chart 2

The forecast here continues to assume that annual CPI food inflation will rise to 2.0% by December.

The final element of the forecast is an expected further rise in underlying core CPI inflation. Actual core inflation (i.e. excluding energy, food, alcohol and tobacco) was 1.3% in April but the assumption of 35% pass-through of the VAT cut in hospitality and tourism implies a significantly higher underlying rate, of 1.9%. The underlying rate has risen from a low of 1.2% in May 2020.

Research previously reported here found a consistent directional leading relationship between broad money growth and underlying core inflation, albeit with a variable lead time influenced particularly by exchange rate movements – chart 3. The surge in annual broad money growth, as measured by non-financial M4, from 3.6% at end-2019 to a likely peak of 16.1% in February suggests further upward pressure on the underlying core rate in 2021 -22 – the assumption here is that it will rise to 2.1% by December.

Chart 3

Chart 4 shows forecasts for headline, core and underlying core CPI Inflation through end-2021 based on the above assumptions. The headline rate finishes the year at 3.1% – slightly lower than in the November forecast because of the Budget decision to postpone full reversal of the VAT cut until 2022.

Chart 4

As most of you know, fundamental research informs Global Alpha’s stock selection, as it identifies equities with growing earnings that will meet or exceed our expectations. The pandemic challenged this philosophy in 2020, due to the volatile and unpredictable nature of corporate earnings. With low rates and subsidies, cashed-up investors looked elsewhere and flocked to non-earning companies, sending the Nasdaq 45.1% higher versus the S&P 500 at 18.4%.

A company with no earnings typically supports its stock price with material events that can de-risk future earnings. Investors gravitate to this approach as it can provide substantial short-term returns given the timelines around material events are well understood. Global Alpha tends to focus more on the entire capex cycle, smoothing out the volatility of a single event. For example, the technology and biotechnologies industries hold many event-driven companies. 

Hedge funds are a class of investors that commonly use event-driven strategies. According to the Hedge Fund Research (HFR) Database, the highest-returning hedge fund strategies in 2020 were event-driven funds, which gained 9.3% for the year. Macro hedge funds returned 5.2% for the year, while HFR’s own relative value index ended 2020 up 3.3%. The hedge fund industry’s total assets stand at $3.8 trillion, a 21% growth in one year. This occurred while the industry has had net outflows of -1.9% in 2020, according to Opalesque, a hedge fund publication.[1]

Interestingly, the Financial Industry Regulatory Authority (FINRA) reports that margin debt has jumped 51% since February 2020, to $823 billion in March 2021.[2] The $340 billion change is three times greater than any annual change in the last decade. It is therefore arguable that hedge funds, as well as many investors, are highly levered and exposed to event-driven companies.

Following the debacle of Archegos Capital Management, which faced massive margin calls from its prime brokers, Federal Reserve Governor Lael Brainard stated, “The Archegos event illustrates the limited visibility into hedge fund exposures and serves as a reminder that available measures of hedge fund leverage may not be capturing important risks.”

Where is all the new levered money (or at least part of it)?

According to PWC, the United States (US) equity and IPO capital markets in Q1 kicked off with yet another record, driven by the continued SPAC attack, with 389 IPOs raising $125 billion; 2020 raised $150 billion in total. A lot of this money is in newly issued, event driven, technology and biotechnology companies. The money is used to develop new products and services at an accelerated pace to catch up to their rich IPO valuations.  

These amounts materialize as capex and revenues to the subcontractors of technology or biotechnology companies, commonly known as the picks and shovel of an industry. Global Alpha is invested in these types of companies, which stand to benefit from the capital exuberance described above.

Additionally, our companies are profitable and diversified. They also are of lesser interest to event-driven hedge funds. These companies could be at a lesser risk of mass sell-off due to an Archegos Capital Management type liquidity crunch. Rich in pharmaceutical history, Europe holds many excellent contract research organizations that appear in our investment universe and have the biopharma industry as clients.

Evotec (EVT:GR)

Based in Hamburg, Germany, Evotec operates multiple scientifically driven contract research centers for the biopharma industry. The company has extensive scientific knowledge to assist in genetic and biochemical drug development programs.

With the large biopharma market growing at a compound annual growth rate (CAGR) of 13.5%, Evotec has been gaining market share with a 20% growth rate. The company recently launched a low cost biological drug production platform that is expected to grow revenues considerably in the mid-term. Evotec also signed an agreement with the Japanese giant Takeda for the development of RNAi drugs.

Oxford Biomedica (OXB:LN)

Global Alpha also owns Oxford BioMedica, a biopharmaceutical company engaged in the production of viral vectors, a key component of delivering a genetic drug.  Without vectors or other delivery systems, genetic material decays extremely quickly in the body. Oxford BioMedica offers a variety of vectors, including adenoviruses that are used in the present coronavirus vaccination program with AstraZeneca. However, it specializes in lentivirals, which have proven very efficient with biologics.

The FDA is predicting a wave of cell and gene therapies coming to market in the next few years, which is set to drive the overall end market to exceed $20 billion in the mid-term. The lentivirus vector market is expected to grow in excess of $1 billion by 2026, from $350-400 million today.

[1] https://www.opalesque.com/

[2] https://www.finra.org/

The forecast here remains that global industrial momentum, as measured by the manufacturing PMI new orders index, is at or close to a peak, with a multi-month decline in prospect.

The basis for the forecast is a fall in global six-month real narrow money growth from a peak in July 2020 – the rise into that peak is judged to correspond to the increase in PMI new orders to an 11-year high in April.

Available April monetary data indicate that real narrow money growth fell further last month, suggesting that the expected PMI decline will extend into late 2021 – see chart 1.

Chart 1

The presumption here is that PMI weakness will be modest, partly reflecting a view that the global stockbuilding cycle will remain in an upswing through H2. The cycle has averaged 3.5 years historically and bottomed in Q2 2020, suggesting a peak in Q1 2022 assuming an upswing of half-cycle length. Large declines in PMI new orders (i.e. to 50 or below) have usually occurred during cycle downswings.

Any PMI pull-back, however, could have significant market implications given consensus bullishness about global economic prospects.

Historically, a declining trend in global manufacturing PMI new orders has been associated with underperformance of cyclical equity market sectors and outperformance of quality stocks within sectors. The price relative of MSCI World cyclical sectors to defensive sectors peaked in mid-April, falling to a three-month low last week – chart 2.

Chart 2

The decline has been driven by a correction in tech – the MSCI cyclical sectors basket includes IT and communication services. The price relative of non-tech cyclical sectors to defensive sectors has moved sideways since March.

The MSCI World sector-neutral quality index, meanwhile, has recovered relative to the non-quality portion of MSCI World since March, following underperformance in late 2020 / early 2021 when cyclical sectors were outperforming strongly.

Equity market behaviour, therefore, appears to have started to discount a PMI roll-over, although confirmation is required – in particular, a breakdown in the price relative of MSCI World non-tech cyclical sectors to defensive sectors.

A sign that this could be imminent is a recent sharp fall in the non-tech cyclical to defensive sectors relative in emerging markets – chart 3. A possible interpretation is that the decline reflects worsening Chinese economic prospects, with China likely to be a key driver of a global slowdown. Early Chinese monetary policy easing may be required to mitigate this drag and lay the foundation for a resumption of cyclical outperformance.

Chart 3

Chinese money trends continue to give a negative message for economic prospects. The PBoC could be moving towards easing policy despite a surge in producer price inflation.

Monthly changes in money and lending aggregates were notably weak in April. Six-month growth rates of narrow money, broad money and broad credit fell again, sustaining a downward trend since Q3 2020 – see chart 1.

Chart 1

Trends are weaker in real terms because of a recovery in six-month consumer price inflation. Six-month real narrow money growth is the lowest since February last year – chart 2.

Chart 2

The monetary slowdown was the basis for a forecast that the economy would lose momentum in H1 2021. Q1 GDP growth was below consensus and PMIs have moderated since late 2020. Further monetary weakness suggests that that the slowdown will extend through Q3, at least.

There is little reason to expect money / credit trends to revive. Average interest rates on bank loans have moved sideways since Q3 2020 – chart 3. The PBoC’s Q1 bankers’ survey reported a fall in loan approvals, consistent with a decline in the Cheung Kong Graduate School of Business corporate financing index – weaker readings imply less favourable credit conditions.

Chart 3

The expectation here was that the PBoC would reverse its H2 2020 policy tightening in response to softer economic data and an ongoing money / credit slowdown. The central bank, however, was concerned about housing market strength in early 2021 and withdrew liquidity to reverse a decline in money market rates into late January.

Many continue to expect the next PBoC move to be a tightening, a forecast seemingly supported by a recent surge in producer price inflation. The latter, however, has been driven by raw material costs, with little pass-through to date into producer prices of consumer goods – chart 4.

Chart 4

Core consumer price inflation has recovered from early year weakness but remains low – chart 5.

Chart 5

The weak April money / credit numbers could be the trigger for a PBoC rethink. Three-month SHIBOR has been allowed to drift slightly below its January low – chart 6. A further decline would support the view that a policy shift is under way.

Chart 6

On April 22 and 23, 2021, United States (US) President Joe Biden convened 40 world leaders for a virtual Leaders Summit on Climate, to rally the world in combatting the climate crisis.

Many countries announced ambitious new climate targets, ensuring that nations accounting for half of the world’s economy are now committed to the emission reductions needed globally to keep the goal of limiting global warming to 1.5 degrees Celsius within reach. For example:

  • The US submitted a new “nationally determined contribution” (NDC) under the Paris Agreement, setting an economy-wide emissions target of a 50-52% reduction below 2005 levels in 2030. 
    • Japan will cut emissions by 46-50% below 2013 levels by 2030, with strong efforts toward achieving a 50% reduction, a significant acceleration from its existing 26% reduction goal.
    • Canada will strengthen its NDC to a 40-45% reduction from 2005 levels by 2030, a significant increase over its previous target to reduce emissions 30% below 2005 levels by 2030.
    • The United Kingdom will embed in law a 78% greenhouse gas reduction below 1990 levels by 2035.
    • The European Union is putting into law a target of reducing net greenhouse gas emissions by at least 55% by 2030, and a net zero target by 2050.
    • China and Russia also reaffirmed commitments to reduce emissions, and agreed to cooperate with the US on climate change despite division on issues like trade and human rights.

During one of the sessions, Unleashing Climate Innovation, world leaders urged investment in mitigation and adaptation technologies, which include clean fuels such as hydrogen; renewables such as offshore wind and geothermal energy; energy storage; clean desalination; carbon capture; advanced mobility; sustainable urban design; and monitoring technologies to verify emissions and stop deforestation.

At Global Alpha, sustainability is one of our five major investment themes. The energy transition towards a low-carbon society provides long-term growth opportunities. We look for niche market leaders who will benefit from this secular growth trend. A few current holdings include:

  • Clean Energy Fuels (CLNE US), based in the US, designs, builds and operates natural gas filling stations for vehicle fleets. It has 550+ stations in North America. Its primary fuel is Renewable Natural Gas (RNG), the only fuel available for heavy-duty vehicles that can have carbon-negative emissions (RNG avoids more emissions than it generates).
  • Ormat Technologies (ORA US), based in the US, is a leading renewable energy provider globally with a 932 megawatt portfolio. Its business expands from geothermal to recovered energy and energy storage.
  • Hexagon Composites (HEX NO), based in Norway, is a global market leader in a carbon fiber gas containment system used in the transportation industry. It operates in Norway, Germany and the US. Hexagon’s products are mostly used for clean alternatives, such as RNG, hydrogen, and propane.

We also invest in companies related to electric vehicles (EV) and waste management but this week, we would like to profile one of our new holdings, Iwatani Corporation (8088 JP), which is the largest distributor of hydrogen, LPG, and helium in Japan.

Business Overview

Founded in 1930, Iwatani is a leading distributor of gases for industrial and household use in Japan. It has several business areas. The industrial gases segment includes hydrogen, oxygen, nitrogen, helium, semi-conductor material gas and medical gas. The energy segment distributes a wide range of gases such as LPG, LNG, kerosene, and gasoline. The company also manufacturers machinery and environmental-friendly materials, such as biomass fuels, eco PET resin and EV-related battery materials.

Iwatani is the only fully-integrated supplier of hydrogen in Japan, with a nation-wide network, including manufacturing, transportation, storage, supply, and security.

Target Market

Iwatani has a steadily growing product portfolio led by LPG, but the new growth driver is hydrogen.

Japan was the first country to adopt a « Basic Hydrogen Strategy » as early as in 2017. Japan aims to increase the number of fuel cell vehicles (FCVs) to 40,000 units by 2020, to 200,000 units by 2025 and to 800,000 units by 2030. It also aims to increase the number of hydrogen stations to 160 by 2020, to 320 by 2025, and to 900 by 2030.[1]

The Japanese hydrogen market is expected to grow 56-fold to JPY 408.5 billion by 2030, according to the market research company Fuji Keizai.

Competitive Advantages

  • Top market shares in Japan
    • #1 in hydrogen sales volume with 70% market share
    • #1 hydrogen stations network with 33% market share
    • #1 in helium sales with 50% Japan market share, and 8% global market share
    • #1 in LPG sales in the retail market with 4.1% market share
    • #1 in LPG sales in the wholesale market with 13.1% market share
    • #1 in the portable gas cooking stoves market with 80% market share
    • #1 in the cassette gas canisters with 60% market share
  • Close relationship with government as the industry leader
    • High entry barriers: a highly regulated industry because safety is of the utmost importance when handling industry gases.

Growth Strategy

  • Distribution: expand distribution network for hydrogen and LPG
  • Consolidation : 
  • To acquire smaller LPG competitors
  • To acquire companies into its organized Marui Gas network


Management

Akiji Makino has been Iwatani’s Chairman and CEO since 2012. He joined the company in 2000 and has rich industry experience. Insiders own about 16%, including the Iwatani Naoji Foundation.


ESG

Iwatani has been an industry leader in energy transition. Its sustainability report is very comprehensive. Iwatani’s major offices are ISO14001 certified. The company is focused on eco-friendly products and promotes eco-efficient use of energy. At its workplace, Iwatani promotes diversity, employee development, and provides support for child care and nursing care.

Regarding corporate governance, Iwatani has met all the requirements of the Tokyo Stock Exchange. However, at Global Alpha, we apply more stringent requirements in line with western standards. For example, we encouraged the company to have at least one-third of board directors be independent, with a separate board chair and CEO, and at least one female board director.


Risks

  • Delay in the rollout of FCV commercialization ad FC technology development
  • Decline in LPG price
  • Low industrial production

[1] https://www.meti.go.jp/english/press/2017/pdf/1226_003a.pdf