Investing in Japan's Circular Economy

It's not just recycling, it's *Japanese* recycling

Dear Reader,

As I’ve perused the Japanese stock market an interesting theme keeps popping up: the Circular Economy.

The Circular Economy is basically recycling, but cooler (Japanese)

The Circular Economy is a set of long-term principles, often backed by legislation or government incentives, toward a less wasteful and pollutant society.

The term technically predates modern legislation, but Japan was an early adopter — as is consistent with the Japanese concept of mottainai (avoiding waste) — with major legislation in 2000 kickstarting the national transition. Further legislation in support of the Circular Economy was passed in both 2022 and 2023. The Ministry of Economy, Trade, and Industry (METI) launched the ¥2 trillion Green Innovation Fund to support circular economic projects in 2023.

It might be easy to brush off the phrase on one or two stray encounters in annual reports; but as I’ve researched a few intersecting sectors, I'm under the impression that this is a deeply-ingrained trend within Japanese society. The Circular Economy has popular support in Japan, as illustrated by nearly-universal participation in household recycling programs.

With a broader government initiative toward total carbon neutrality by 2050 already in place, companies that are well-positioned for the circular economy could enjoy business tailwinds for decades to come. The risk is that inflation and high capex requirements lead to a slowdown or backtrack in regulatory support.

Literally rolling up Japanese trash

An irony of Japan’s circular economy is that a society with a shrinking population + increased recycling efficiency could develop a *lack* of trash — at least for the traditionally small-scale waste management operators of Japan.

Tre Holdings ($9247), formed as the result of a merger of equals, is energized by management who see the opportunity to triple their revenue in the long-term with an aggressive roll-up strategy.

They not only recycle, but repurpose/manufacture/resell over 90% of the input volume! They are running a leveraged strategy, which is particularly aggressive for Japan. The numbers are compelling if management can be trusted to execute properly. The stock trades at around 6x forward earnings estimates, but might not necessarily pass through many Japanese stock screens due to its leveraged balance sheet.

Building + Operating / Maintaining the Plants

Takuma Co ($6013) not only engineers, provisions, and constructs water treatment, solid waste treatment, and biomass energy facilities, but also secures long-term contracts to operate and maintain them. With its backlog exploding higher in recent years, a 3% dividend and a robust buyback authorization in place it could be a bargain at ~13x forward earnings. I am trying to learn more about the risks here — I suspect that fixed cost maintenance contracts could see margin risk from wage inflation. I am interested in Takuma over rivals due to their superior balance sheet, backlog, and focus on long-term service contracts (though the latter may be a double-edged sword).

Concrete / limestone

Taiheiyo Cement ($5233) is a crucial player in the Circular Economy as initiatives have encouraged higher rates of recycling cement as well as stricter environmental standards for cement plants. Taiheiyo also owns substantial operations along the U.S. West Coast, comprising a bulk of the company’s income. Trading at ~7x consensus forward earnings, I may write more about this hidden gem in the future. I currently own shares.

Copper/battery metals

Sumitomo Metal Mining ($5713) is the second oldest-listed stock on the Tokyo Stock Exchange! Their focus is on copper, smelting, gold, nickel, and lithium iron phosphate battery technology (which has taken off like a storm in terms of Chinese EV adoption). They own a 30% stake in the Cote gold mine, one of the best projects in recent years. They also are involved in a joint venture in America’s largest existing copper mine, Morenci. Trading at 7.6x FY2026 consensus earnings, I own shares as I view this as a way to invest in copper with the ballast of the gold mining and smelting businesses. My primary concern is that China has been competing hard on smelting.