Sun-wa Technos Co., Ltd.

Sun-wa Technos (‘company’) operates in the industrial electronics and mechatronics industry. It is affiliated with various manufacturers and trades in products used in automobiles, smartphones, semiconductors, and industrial machinery – among others.

The company sells in Japan (74% of sales), China and South East Asia (22%), and the West (4%). It reported product segment sales as follows: Electric (15% of sales), electronic (77%), and machinery (8%).

It appears to have a diversified customer and supplier base but is dependent on capital investment trends.

The company’s products were unfortunately at the forefront of the US-China trade conflict attracting tariffs. Further, the coronavirus pandemic has delayed capital investment plans and therefore, reduced demand for the company’s products.

It reported TTM sales (to September 2020) of 132.1b yen – down from a 2018 high of 146.8b yen. Similarly, ebitda and net profits were 2.1b yen and 1.4b yen – down from 2018 highs of 4.4b yen and 3.1b yen respectively. Average earnings and free cash flows were 1.9b and 1.1b yen/year respectively.

The balance sheet is strong with net cash of 6.6b yen – partly bolstered by a share capital raise of 2.7b yen in 2019 (at 1460 yen/share). The net current asset value (ncav) including securities at market, and investment property (capitalizing rental income at a conservative 5% yield) is 32.8b yen.

The stock sells for 15.3b (971 yen/share) at market – at less than half of liquidation value and 8x average earnings.

Investors should be careful to note that this is a trading company, not manufacturing – hence, there aren’t ‘bonus’ tangible assets (such as factories, machines, etc.) beyond net current assets. This requires an additional discount to ncav to pass our quantitative investment tests.

The current assets are primarily comprised of cash and receivables, though there are 10.7b yen of inventories, which are subject to special risks of technological obsolescence. Even deducting this, the stock sells at a 30% discount to liquid asset value.

Management indicates that demand for semiconductors, and capital investment for factory automation robots is rising. This, in addition to ambitious long-term sales targets, indicates forward momentum.

It’s difficult to predict earnings for a rapidly changing industry – but the company’s flexibility to adjust to demand, and diversified supplier and customer base should afford some stability – and therefore, we consider the stock price to offer enough of a discount to offer protection against untoward events.