JAHJ currently has 80,000 shares in TSE, representing about 3.52% shareholding interest in TSE. As JAHJ

is an associated company, the Company has no direct control over the shares in TSE.

GETTING rid of peripheral assets is in conventional wisdom a good move for companies seeking to streamline their business and obtain funds for expansion. For Japan Land, this means selling its financial services business to focus on real estate in Japan.

 

Japan Land owns 15.64 per cent of Japan Asia Holdings (JAH), a Hong Kong-based investment holding firm engaged in acquiring companies, and then increasing the value of its investments by methods such as financial restructuring and consolidation.

 

JAH, in turn, owns 44.27 per cent of Japan Asia Holdings (Japan) or JAHJ which is heading for a public listing.

 

Japan Land chairman Tetsuo Yamashi says in the company's latest annual report that upon JAHJ's listing, Japan Land will sell part or all of its direct JAHJ shareholding of just under 8 per cent. The money would be used to fund expansion.

 

And in the logical flow of events, Japan Land would subsequently sell its stake in JAH as well.

 

But it might be wiser for Japan Land to reconsider the strategy, given the upcoming listing of the Tokyo Stock Exchange (TSE), the second largest bourse after NYSE Euronext.

 

Why? There is more to JAH than meets the eye - as it has a valuable stake in the TSE of 3-5 per cent. This could make it one of the largest stakeholders in the exchange, alongside Mitsubishi UFJ and SMBC Friend Securities, according to a source close to Japan Land.

 

Based on the average price-earnings ratio of 23 times on Japan's Topix index, the TSE may have a market value of about US$3.8 billion. If TSE goes ahead with the listing, Japan Land stands to benefit whether or not JAH decides to sell its stake in TSE.

 

Furthermore, it still makes financial sense to keep JAH and JAHJ. Although the bulk of the group's revenue for the latest year, which ended on March 31, was derived from its 68 per cent subsidiary Katsumi Housing Corporation (KHC), a customised property developer, JAH and JAHJ remained cash cows, with a combined net profit of $7.4 million.

 

Japan Land was previously WizOffice.com, a technology and office services outfit. When the dotcom business fizzled out after its listing here, WizOffice acquired a stake in Japan Asia Securities Group (JASG), which it renamed JAH. Japan Land would have morphed into a financial services firm through a reverse takeover of JASG if the deal had not been twice scuttled. In a drastic switch of corporate focus, Japan Land announced its intention to focus on the real estate sector in Japan in 2004.

 

This shift in focus proved successful when Japan Land acquired a stake in Katsumi in March 2005. This became the mainstay business of the group. For the latest financial year, the group's revenue came to $175.8 million, of which Katsumi contributed $113.5 million from the sale of 550 homes.

 

Last year, the prolonged decline in Japan's real estate market appeared to have ended and land prices finally emerged from a slump, rising for the first time in 14 years on the back of economic recovery. Recent data shows Japan's economy outperforming both the United States and the euro zone for the second straight quarter on robust capital spending between January and March.

 

With the Japanese property market picking up, it seems like a good time for Japan Land to expand its property business. Certainly true, but the group should also bear in mind the downside risks of the sector, which is vulnerable to economic cycles. Having its financial services business to fall back on may not be a bad idea.

 

JAH's strategic interest in TSE warrants a relook at the group's divestment policy. Japan Land may consider holding on to its stake in JAH and its subsidiaries for the time being, while it looks at other funding options for its property expansion, lest it misses out on whatever gains might come its way with the listing of the TSE.