Analyzing Bargain Stocks

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