Katsutaka Idogawa, the frail looking mayor of Futaba town in Fukushima, does not immediately strike one as a likely ally to Sotbank’s (9984) confident and charismatic Chairman Masayoshi Son. Yet his short testimony at Japan’s parliament during a questioning session on Noda’s post-Fukushima policies might give boost to the likes of Mr. Son who carry the private sector flag for Japan’s push into alternative energy while being another damning episode for those who support nuclear power. Mr. Idogawa talked about citizens whose “hair was falling off”, told tales of children who were falsely shepherded to polluted areas, and unleashed anger at those who argue limited radiation exposure was safe. His voice was trembling as he was accusing Prime Minister Noda’s government of hiding information and doing nothing.
FIT started from July 1
Ironically it was Noda’s predecessor, Naoto Kan, who passed Japan’s revolutionary alternative energy bill last August. That law started from July 1 this year giving generous incentives to investors who want to build alternative energy power plants. For example, for the next 20 years Japan guarantees a Feed-in-Tariff (FIT) of JPY 42 for electricity produced by solar power plants. Depending on construction costs an entrepreneur could earn 6% internal rate of return (IRR) at 100% equity. That is a very good yield for an almost risk-free investment. All one has to do is to secure land, build a solar power installment, connect to the grid, and present the bill to local electric company. They will have to buy the all generated power at designated prices for the next two decades.
The power of leverage
There are many examples around the world that show investors use leverage to boost returns from FIT schemes. This is where Mr. Son comes in. He knows how to use leverage as evidenced by Softbank which is a leveraged and highly profitable company. It boosts an ROE of 40% on 19% equity ratio. Compare that with its telecommunication rivals like NTT Docomo (9437) which has 73% equity and earns 9.36% ROE, or KDDI (9433) which achieved a 11.5% ROE with 51.47% equity ratio. An entrepreneur who built a business empire from scratch while making himself the richest man in Japan, Mr. Son obviously has the acumen to turn low risk- reasonable return investments into high powered businesses. Now with a clear alternative energy agenda he is making renewable energy a major pillar of his businesses.
His investors noticed. Softbank’s stock price soared 33% since March 24, the day Japanese financial daily Nikkei ran a breaking news story on FIT. Stock prices of its main telecommunications rivals lagged. NTT Docomo fell 1.6%, KDDI inched up by only 2.3%. Nikkei 225 Index was down by about 8% during the same period. According to local news reports brokers have been upgrading Softbank’s target price, pushing the stock higher.
A sure play?
The rest of the solar value chain has not been doing so well. Panel manufacturers are still suffering from overcapacity and low prices. World’s largest CIS module maker Showa Shell’s (5002) stock price fell 15%. Kyocera (6971), another module maker, is down 13.7%. Other leading panel makers like Panasonic (6952, down 12%), and Sharp (6953, down 36%) are suffering from problems in their other businesses. Tokuyama (4043), the largest Japanese producer of the raw material for silicon based panels, saw its stock price hitting a 30+ years’ low at JPY171. Makers of production equipment like Ulvac (6728) fell historical levels before jumping back on restructuring plans. Yamada Denki (9831, -31%) which pinned its next generation growth story to the spread of solar panels is struggling to convince investors it can deliver on this promise.
Demonstrations by angry citizens against the Government’s nuclear policy will continue as Japan is bringing online a second nuclear reactor in Oi power plant. Last week 170,000 protestors gathered in Tokyo’s Yoyogi Park under scorching temperatures. It is a testimony to the momentum behind the anti-nuclear movement. One, which likely to continue the pressure with vigor and help Softbank keep its cause on the spotlight. An alternative energy evangelist and active user of social media, @masason, Mr. Son’s twitter name, knows how to execute. He sure has the tailwind.
Disclaimer: This is a blog entry. All views expressed here are my own opinion. It is not an endorsement of any investment idea in any industry, index, country or stock.