a look at Tokyo Electric Power (TEPCO), JP: 9501

“9501” says a lot

Unlike systems using letters to form ticker symbols for stocks employed in many Western markets, Japan has four-digit numbers that identify the stocks traded in that country.

The initial number indicates a company’s sector.  The 9000 companies are in the Service sector.

The second number is the firm’s subsector or industry.  The 9500 companies are Utilities.

The third and fourth numbers form a pair.  Firms are ranked in order of their importance in the industry (or at least their importance when the code numbers were initially given out), with “01” at the top.

So 9501 is the designator for the biggest and most important utility in Japan.  That’s TEPCO.

Foreign investors coming to Tokyo (other than those from Korea or Taiwan, which have similar number codes) might scratch their heads at Japanese ticker symbols.  But does a system where stocks can be designated “HOG” or “LUV” have a right to criticize?

As recently as the 1980s, the power of the “01” was immense.  Industry leading firms were magnets for the most talented university graduates.   The stock market invariably awarded the industry “01” the highest price-earnings multiple, regardless of relative growth rate or asset value, making it easier for these companies to raise equity capital if need be.

post-earthquake

I can’t imagine ever buying TEPCO again (I held tons of Japanese utility stocks in the late 1980sthat’s another story, though, having to do with a since changed electricity price setting mechanism).  So I haven’t done–and have no intention to do–the work I’d need to give an investment opinion.  What follows are observations rather than analysis:

1.  Japanese stocks are subject to maximum daily fluctuation limits, both up and down (don’t ask what the rules are).  The idea is that this gives panicky investors time to get their emotions under control so they don’t sell at crazy-low prices.  In my experience, however, wherever they’re in force the limits have the opposite effect.  There’s nothing like a day or two where your stock goes limit down with no trade–and all you can do is watch–to bring panic to never before experienced heights.  TEPCO had three such days in a row.  So the stock lost two-thirds of its value before anyone had a chance to get out.

2.  It’s not clear to me that TEPCO would be able to raise new capital from non-government sources if it operated in a market like the US.  But it doesn’t.  It’s possible that the Japanese government will pressure banks and insurance companies to provide funds.

3.  TEPCO is part of the industrial grouping (or keiretsu–another long story) led by the Mizuho Bank.  Group companies may feel a special obligation to lend support.

4.  There have been rumors that the Japanese government itself will make a large capital injection.  Since regulatory negligence seems to have been a contributing factor to the nuclear reactor disaster, this makes sense to me.  Certainly, the country has to replace the lost electric power somehow.

5.  The CEO of TEPCO has reportedly been hospitalized, suffering from a number of maladies.  It’s possible that Mr. Shimizu actually is sick.  But a company-announced hospital stay is also a ritual Japanese way for firms to sack unwanted executives.  The disappearance in January 2010 of Hirohisa Fujii as finance minister in the current administration after losing a power struggle to Ichiro Ozawa is a very recent example.

I think we’ll find that this “hospitalization” is the first step in a reorganization of TEPCO’s operations.  Interested investors should watch to see who’s appointed.

more on the Tokyo Electric Power nuclear plants in Fukushima

In my post on March 15th, I suggested that as the story of the failure of the Tokyo Electric Power (TEPCO) nuclear plants in Fukushima unfolds, there was a good chance we would find out that faulty construction or substandard maintenance, deliberately disguised from public view, would be revealed.  I didn’t expect, however, that it would happen so quickly.

Yesterday’s New York Times contains an article titled “Japan Extended Reactor’s Life, Despite Warnings.” It makes the following points:

1.  The #1 TEPCO reactor at Fukushima had reached the end of its useful life (it’s a GE plant that was installed in 1971), but was approved by government regulators last month for another ten years of operation.  This was done despite design deficiencies that have been corrected in later models and worries about the backup diesel power generators.

2.  Shortly after regulators granted the extension, TEPCO said it had failed to properly inspect the cooling systems at all of the six Fukushima reactors.

3.  At the same time as they were approving the extension, regulators were criticizing TEPCO’s failure to properly inspect or maintain all the reactors.

4.  In a 2003 scandal, it came out that TEPCO had falsified reactor safety inspection reports over a sixteen year period in order to avoid spending money on repairs.

5.  The article suggests, correctly, in my view, that the failure to enforce regulations stems in part from the Japanese practice of amakudari, meaning “descent from heaven.”  Jobs in the Japanese government bureaucracy offer very high prestige but relatively low pay.  Customarily, at the end of long careers, senior bureaucrats “descend” to high-paying positions in one of the companies whose industry they formerly regulated.  In the case of utilities, the best of such jobs wold be with TEPCO.

Since a job with TEPCO may well be your future “pension plan,” a regulator has got to be conflicted about how strictly to enforce the rules.  Also, it may be difficult to refuse the request of your former boss–who has retired to be come in effect a lobbyist for TEPCO–when he asks for a lenient interpretation of a regulation.

I’m sure this won’t be the last we’ll hear on this topic.