Analyzing Bargain Stocks

IJTT (‘company’) is engaged in manufacturing automobile parts – primarily for use in trucks and construction machinery. Isuzu Motors – a prominent commercial vehicle and diesel engine manufacturing company - owns 43.5% of the company’s stock, and generates 69% of its sales. Its sales are primarily generated in Japan (83% of 2020 sales – split further as 54% auto parts and 29% engine parts) with the balance from the rest of Asia (17% auto parts – primarily to China’s construction machinery market). Moreover, its tangible asset investment is split similarly - and includes operations in Indonesia and Thailand. FY20 sales were actually higher than expected because of rushed buying before Japan’s consumption tax hike kicked in. However, the coronavirus pandemic has significantly diminished sales for the company’s products – and suspended production. TTM sales (to September 2020) was 136.3b yen (FY20: 171.7b); ebitda was 6.4b yen (FY20: 13.9b yen) and net losses were 1.2b yen (FY20:...

Geostr (‘company’) manufactures construction materials used in a) the civil engineering segment using reinforced concrete; and b) the building construction segment using precast concrete. It primarily specializes in supplying tunnel structural materials for subways, waterworks, and sewerage. The industry is blighted by an aging workforce and a shortage of skilled labor. It also faces the unpleasant long-term prospect of a declining population and consequent reduced demand. Further, it is also exposed to rising raw material prices of cement, aggregates, steel, etc. Nippon Steel (third largest steel manufacturer in the world) owns 42.3% of the company – directly and via subsidiaries. It also generates about 50% of the company’s sales. The company primarily serves the public sector and therefore its prospects are tied to the Japanese government’s public investment plans, which has been relatively firm in the recent past – though some work has been suspended as a result of the corona...

Trinity Industrial (‘company’) is part of the Toyota Group and is engaged in manufacturing painting equipment (74% of 2020 sales), and automobile interior and exterior parts (26%). The segment profit split is 83% and 17% respectively. The Toyota Motor Corporation owns 40.71% of the company directly and through other subsidiaries. Further, 38% of 2020 sales were to Toyota. In addition to Japan (67% of sales), the company also sold to customers in China (18%), rest of Asia (8%), and others (7%). The company primarily sells to the automobile industry and hence, its fortunes are tied to automobile demand and the industry’s capital investment plans. It is also subject to raw material price rises in resin and steel, which are procured internationally. Recent demand in Japan was adversely impacted by the consumption tax hike – and the main markets of USA and China exhibited lower demand in the last year. Though the pandemic worsened this situation, the company’s sales fell only 6% in th...

Mori-Gumi (‘company’) is a small civil engineering and construction company – with minor operations in real estate sales/leasing, and manufacture and sales of crushed stones. Asahi Kasei Corporation owns 30.26% of the company. Its civil engineering and construction segments are roughly split 50:50 on a revenue basis. Its orders are also split roughly halfway between the government and private sectors. About 1/3 rd of its projects are categorized as “special mission”, and 2/3 rd are generated as a result of competitive bidding. Two customers accounted for 35% of its revenues. The travails of the Japanese construction industry include lower prospective demand due to an aging population; and a real shortage of skilled workers joining the industry. The coronavirus pandemic led to delays and suspensions of major contract work. Though reported sales in the last six months were higher over the previous period, construction orders were down 20%. The company reported TTM sales (to Sep...

Tobishima (‘company’) is engaged in civil engineering (57% of revenues), construction (37%), and real estate development (6%) work in Japan. It generates 25-35% of its orders via “special mission” contracts, and the balance via competitive tenders. The construction industry in Japan is currently experiencing declining demand and fierce competition after work for the Tokyo Olympics subsided. It faces a fairly poor demand outlook on account of Japan’s aging population, and a shortage of skilled workers. Orders to March 2020 were already down 25-30%. The coronavirus pandemic further dented orders and sales. The company reported TTM sales (to September 2020) of 129.4b yen (FY20: 134.9b), ebitda of 7.6b yen (FY20: 8.7b), and net profits of 4.3b yen (FY20: 5.1b). Earnings averaged 5.2b yen over the last five years. The company operates with net debt of 6.9b yen, which is easily covered by less than a year’s operating earnings. Receivables were fairly high at 55.2b yen, which indic...

Pegasus Sewing (‘company’) is engaged in manufacturing industrial sewing machines for use in the apparel industry (80% of revenues); and die-casting parts for use in automobile safety belts (20% of revenues). The company specializes in ‘chain sewing’ machines used in garment factories for sewing jeans and other knit clothing – and is a leading operator in Japan. Its die-casting parts manufacturing facilities are located in the three major automobile parts production hubs – China, Vietnam, and Mexico – to service American and European automobile manufacturers. The company sells its products across the world in Japan (8% of sales), China (21%), Bangladesh (13%), Rest of Asia (32%), Americas (16%), Europe (7%), and others (3%). Its manufacturing facilities are spread as follows: Japan (46%), China (29%), Vietnam (12%), Americas (11%), and others (2%). The US-China trade dispute and resulting protectionist measures hit the apparel industry badly and capital investment from the garm...

Nippon Gear (‘company’) is a small operator that manufactures, sells, and maintains gears and jacks, valves and actuators, other acceleration/deceleration machines, etc. - for use in power plants, automobiles, industrial machinery, construction machinery, machine tools, railways, shipping, and water and sewage - among other industries. The company operates entirely in Japan and has a diversified customer base (including some exports to machine tool manufacturers in China). The business is largely dependent on the capital investment cycle and the frequency of inspections/maintenance of plant and machinery. It is also exposed to severe price competition and rising raw material costs of iron and copper. The coronavirus pandemic resulted in orders declining by 11% (though revenues were up 6% to September). The company reported TTM revenues (to September) of 7.8b yen (FY20: 7.6b), ebitda of 998m (FY20: 842m), and net profits of 504m (FY20: 396m). Earnings averaged 432m yen over the last fiv...

Yurtec is a contracting company primarily engaged in “equipment construction” – for electrical, communication, air conditioning, and other general equipment. This activity accounts for 98% of revenues. It is also engaged in miscellaneous businesses such as leasing of equipment, security services, and manufacture/sale of mineral water. Tohoku Electric Power (‘Tohoku’) owns 41.8% of the company – and contributes 42% of its revenues. Its equipment construction business includes: a) indoor wiring work, b) power distribution line construction, c) power transmission and information/communication work, and d) air conditioning pipe construction. Recent regulations requiring Tohoku to tender work to external companies has curtailed orders for the company and subject it to greater competition, and this may continue to adversely impact operations. (Sales have declined continuously since 2016 – see below.) In addition, it is subject to all the pains afflicting Japan’s construction industry...

Takamatsu Machinery engages in manufacturing: a) machine tools (88% of revenues), b) equipment related to liquid crystal substrates and semiconductors (8%), and c) automobile parts (4%). It generates 2/3 rd of its sales within Japan, 12% in China, 10% in North America, 10% in the rest of Asia, and the balance in Europe. The company primarily manufactures CNC lathes (computer-controlled NC lathes), which are used as ‘mother’ machines for making metal processing machines. They are primarily sold to the automobile industry, which makes up over 50% of sales – and therefore, the company’s fortunes are largely tied to the capital investment cycle of the automobile industry. Its semiconductor segment operates under a different demand cycle pertaining to that industry. And the auto parts business is marginally loss-making. The coronavirus pandemic has gutted capital investment, and the company’s machine tools orders fell a whopping 68% in the six months to September 2020. Though semiconductor...

Sanko (‘company’) is a small manufacturer of precision parts – primarily in the form of pressed and plastic composite processed products – for use in automobiles, housing equipment (electricity meters), office equipment (printers), digital appliances (cameras), and other electronic component-related and industrial equipment-related products. The company sells over 80% of its products within Japan and the balance throughout Asia and elsewhere. It has a manufacturing subsidiary in Thailand that constitutes 25% of its tangible assets - from which it imports molds, jigs, tools and other products. The overwhelming majority of its sales is for use in automobiles and hence, its fortunes are largely tied to the automobile industry. 30% of its sales are to two customers (Denso Corporation and Osaki Electric Co.). The company’s product offerings are subject to severe competition internationally – but orders prior to 2020 remained firm due to effective cost management. However. the coronavi...

Sanko Techno (‘company’) manufactures and sells fastening materials (75-80% of sales) and functional materials (20-25%) – primarily used in the construction industry. Its sales are generated in Japan but it has subsidiaries in Thailand and Vietnam as well. The company’s fastening materials include post-construction anchors (its flagship product), drills and fasteners, and related earthquake-resistant supplements. Its functional materials include electro-hydraulic tools, fiberglass reinforced plastic (FRP) sheets, electronic printed circuit boards, and various measuring instruments (like breathalyzers). It also recently acquired a subsidiary importing plastic molding and packaging machines from Europe. The company’s fortunes are largely tied to the Japanese construction industry, which is off the peak of the Tokyo Olympics construction boom, and sluggish currently. The industry suffers from intractable problems of skilled labor shortage and also rising material costs. Further, its produ...

Fukuvi Chemical (‘company’) manufactures and sells housing materials (65-75% of revenues) and industrial materials (25-35%) – primarily made of general-purpose plastic resins. The company’s housing materials are used in exterior, interior, and flooring applications. The industrial materials are used in manufacturing home appliances, vehicle parts, precision products, furniture parts, etc. More than 90% of current sales are generated in Japan but the company has subsidiaries in the USA, Thailand, and Vietnam - which account for 12% of tangible assets. The company’s fortunes are tied to housing starts, and construction floor area in Japan – both of which have been declining for the last few years primarily due to Japan’s shrinking population; and exacerbated by other factors such as the consumption tax hike in 2019, stricter lending criteria, and the pandemic. It is also subject to labor shortages. The company reported TTM sales (to September 2020) of 37.5b yen (FY20: 41.3b), ebi...

Sata Construction (‘company’) is a small civil engineering and construction company operating solely in Japan. It generates about 1/3 rd of revenues from civil engineering work and 2/3 rd from construction orders. It also operates a small business selling asphalt. The company wins a majority of its orders by competitive bidding (over 60%) with the balance under “special mission” contracts. The revenue split between government orders and the private sector is about 55%/45%. Like other Japanese construction companies covered in this blog, the company is beset by a sluggish demand outlook - worsened by the consumption tax hike in 2019. It is also struggling with a shortage of skilled labor and rising material costs. It reported TTM sales of 35.4b yen (FY20: 36.5b), ebitda of 1.9b yen (FY20: 1.7b) and net profits of 1.2b yen (FY20: 1.1b). Free cash flows averaged 1.1b yen/year over the last five years. However, management forecasts earnings of only 750m yen/year to 2023. The bala...

Tokyo Energy (‘company’) designs, manufactures, and sells electric power equipment for the thermal, nuclear, hydro-electric, and solar power generation industries. It procures orders for construction as well as operations and maintenance of equipment. The company is 26.5% owned by Tokyo Electric Power Company (TEPCO). It generates 80% of its orders on “special mission” projects and the balance on competitive bidding. Its major customers are TEPCO, JERA (the largest power generation company in Japan), and Mitsubishi Electric – which accounted for 56% of 2020 sales. Practically all sales are currently in Japan but the company recently expanded into Thailand by investing in a subsidiary to exploit the growth of future energy demand from South East Asia. Recent orders fell 13% over the year as a result of reduced construction work for thermal and solar power industries – but nuclear power work has picked up. The industry is subject to full-throttled competition resulting in price war...

Toso (‘company’) manufactures and sells interior-decoration related products focused on windows - such as curtain rails (approximately 44% of sales), blinds (44%), and partitions among others (12%). These products are sold primarily through distributors mainly in the housing market. It also has a small operation in elderly care products such as canes and walking sticks. Its operations are primarily based in Japan (90% of tangible assets) but it has subsidiaries in Indonesia (7%) and Shanghai, China (3%) as well. The company’s fortunes are tied to the Japanese construction market, which is experiencing declining activity – initially due to the consumption tax hike in 2019 and then exacerbated by the coronavirus pandemic. In addition, it faces increasing logistics costs due to labour shortages. It is also exposed to rising input costs of steel, aluminium, and natural wood products – a lot of which is imported, and subject to currency exchange risks. It reported TTM sales (to Septem...