More on Hikari...always glad I made the decision to purchase Softbank vs Hikari some months ago, but will also be considering a purchase:
International : Asia/Pacific
A Japanese Highflier Plummets, and Investors Can't Reach the Exits
By Justin Lahart
Associate Editor
4/27/00 7:42 PM ET
For a fund manager, there is nothing quite so demoralizing as seeing a big position on your book blow up.
Whether it is Cendant, (CD:NYSE - news - boards) Rite Aid (RAD:NYSE - news - boards) or Lucent (LU:NYSE - news - boards), it all comes to the same thing. There will be the calls from clients and the meetings with your boss. There will be the long nights spent thinking about how the signs were there for you to see and of how you should have at least trimmed your position. And you'll do that thing you always do when disaster strikes, flipping back and forth between the before and the after: "Yesterday, I was up 13%, today I am down 4%..."
Yet, as awful as going through a blowup is, at least if you are a U.S. fund manager you can make the mote on your screen go away. You peel out the unwanted thing and plant what capital there is left in some better pasture. For many fund managers in Japan, who for four weeks have been unable to exit former highflier Hikari Tsushin, that is an enviable thing.
They Kill Bunnies, Don't They?
Even in last year's highflying Tokyo stock market, Hikari Tsushin shares stood out, rising in excess of 2,600% to close out 1999 at ¾207,000 ($1,953). Nor was the run over for the mobile-phone-seller-cum-Internet-incubator -- it would eventually top out at ¾241,000 on Feb. 15.
Then, disaster.
Rumors about the company, and a series of unfavorable business articles (one of which alleged that its president, Yasumitsu Shigeta, fed baby rabbits to his pet python) began to appear in March. By mid-month, Hikari shares had plunged to ¾88,500. Shigeta held a news conference where he denied rumors that the company was being investigated by regulators, that the company had cooked accounts to reach targets, and that his relationship with Internet giant Softbank, whose board he sat on, had soured. He also denied that he had died.
In addition, he said that sales and earnings were "proceeding smoothly" -- something that turned out not be true. On the evening of March 30, the company announced that it had posted an operating loss of ¾13 billion for the fiscal half-year ended Feb. 29, compared to expectations of a ¾6 billion profit.
"He broke faith with the people after announcing the loss," says Jim Bogin, portfolio manager of the Matthews Japan Fund. "He had always emphasized how profitable he was."
Bogin had owned Hikari, but cleared his position after the stock tripled to ¾43,000. As the stock more than quintupled from there, he felt pretty dumb. But selling Hikari turned out to be one of the smartest decisions he ever made.
There are daily price limits set on how far up or down Tokyo stocks can go. This is because -- according to the Tokyo Stock Exchange -- it is feared that distorted stock price formations might cause investors to make inappropriate investment judgements.
On March 31, Hikari fell by its daily limit of ¾5,000 to ¾73,800. Or rather, as the ask price for Hikari fell by its daily limit -- there were no takers. And it has fallen by its daily limit every day since then, with only sporadic buying. Last Monday was the only day in the past month when any actual trading got done. A pretty respectable 1.26 million shares changed hands before buying was exhausted, but even then many investors weren't able to exit their the stock.
"We have one account that has a little position that we're obviously trying to get out of at any price," says David Smith, a fund manager at Newport Pacific. Smith said he was able to sell about 40% of his Liberty Newport Japan Opportunities Fund's Hikari stake on Monday. He hopes to clear the stock entirely from his books before the fund is opened to Japanese investors in a few weeks.
Smith wishes that he could have cleared out of Hikari when it first announced the shortfall and that he could have taken what money he could and put it to work someplace else. Instead, that capital is dead in the water and will be until Hikari reaches whatever level it needs to reach to trade actively again. He's wishing for a change in the rules.
"Hopefully, the authorities are going to look and say, 'Maybe we can adjust this system,' " he says, reckoning that individual investors -- the ones who are supposed to be protected by the rules -- are the ones getting hurt the most. "Think of all the people on margin. They can't do anything about liquidating their positions."
Margin is the practice of borrowing from a broker to buy a certain stock. If a stock goes down too much, the broker worries about protecting its principal and puts out a margin call, which requires the borrower to put up additional cash. If the borrower doesn't have the cash to put up, it will typically liquidate the borrower's position. In Hikari's case, however, that's not possible, so brokers are liquidating investors' other positions. After seeing individual investors hemmed in like that, a review of the rules seems appropriate.
Nothing happens quickly in Japan, though, and until the rules change, investors putting money into Japanese mutual funds -- particularly funds that invest in growth areas -- need to know that there is some additional risk. While funds with investments in Hikari probably cannot be hurt much more -- it has fallen by 94% from its all-time high, making what were formerly large positions small -- there are plenty of other highflying stocks trading in Tokyo. One can easily imagine more Hikari Tsushins in the future and more funds caught with stock on their books that they can't get out of.
"In Japan, the whole cycle for this Internet stuff was a lot more compressed," says Bogin. "Some of these things went far further in a smaller amount of time than in the U.S."
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