Japan Idea Radar #1
6 ideas on my watchlist...
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Trying something new today…
The goal of this newsletter is to help improve the understanding of Japanese businesses for non-Japanese people, and my priority will always be the quality of content. I enjoy providing the details and nuance that might otherwise be difficult to understand as a ‘gaijin’.
One thing I’ve been thinking about, however, is given there are some 4000 stocks in Japan, how I could increase the velocity of idea generation for my supportive readers. So as a beta, I’m going to share a couple of watchlist stuff with a short note on why I found it potentially interesting. My list is long (some potentially expired) and I for sure will not have time to go through all of it in my lifetime so the hope is that someone can end up finding something interesting for themselves!
Please note it’s watchlist stuff so I don’t own any as of the date of publication. This may change at any point in the future.
It’ll cover companies of all sizes and ‘styles'. I prefer shitcos growth but I’m also happy to bet on more shitcos value. For these typically I’m looking for a decent business and put more focus on the probability of the company willing to unlock that value.
This might turn into a series but idk, experimental at this stage and I’d love to hear your feedback! here we go:
1. Hamamatsu Photonics (6965)
Mcap: ¥608.3b
P/E: 22
EV/EBITDA: 10.8
Daye at East Asia Stocks provided coverage on this name and I found it very interesting. The company is a leading producer of optical sensors, light sources and other related systems that use light as the main input/output. It’s got attractive end markets like semiconductors, healthcare, and automation. The products play a critical role and are difficult to replace. Hamamatsu themselves have strong credibility within the value chain.
Stock also seems to trade at a discount to similar bizes at home and abroad which often get valued at much higher multiples. This is the typical Hidden “Made in Japan” Champion with global recognition. The real test is if the management which, took over the founder in 2018 after his passing, can really drive home the growth initiatives its been going after.
They’ve also recently announced some buybacks which is a positive and I appreciate their conscious capital allocation decisions here.
A potential risk/opportunity is their European acquisition of NKT, which has been loss-making but seems to offer a highly complementary product portfolio to Hamamatsu. I guess you’ll need to do more digging on if this ends up being a success or not. (and otherwise may just simply be highly dilutive to the group).
2. Nippon Tungsten (6998)
Mcap: ¥5.9b
P/E: 10.6
EV/EBITDA: 4.6
This is pretty much a net-net. (P/B = 0.5). Even just adding net cash and marketable securities (and before any receivables and other bits and pieces) They have 65% of their market cap in cash. As far as I can tell, there is some cross-shareholding but they don’t add to a majority stake (combined with what the company owns).
They sell tungsten materials, components and products to other potentially interesting end markets. This includes relay connectors used in EVs and metals used for medical catheters. Nippon Tungsten is the #2 player in the world for NT Die Cutters which are used to produce sanitary products.
The biz is also quite interesting bc they are the global leader for ceramic components for HDD used for Data Centers which can be a multi-year tailwind.
The profitability is…. not great, but with the products diversified across end markets with long-term tailwinds, I don’t think they’re a business that’ll go away any time soon. - and hey maybe their growing bizes might have better margins??
Importantly they’ve been increasing their dividend payout ratio in the last 3 years which is a positive flag for them actually willing to return cash to shareholders. Although it feels like they could do more here.
3. Hochiki (6745)
Mcap: ¥55.6b
P/E: 9.8
EV/EBITDA: 5.2
This business is 100+ years old…Manufactures fire alarms and fire extinguishing systems. This is stuff like sprinkler systems and water cannons. It has the top share in Japan for large-scale systems and 3rd position for small/medium systems. Fun fact: they’re the inventor of the water canons for extinguishing systems and has 80% market share in Japan. So seems like a pretty defensive business. Their P/B is just at 1!
What initially made me interested is that they’re focused on gradually increasing their ‘stock-type’ recurring revenues which is mainly maintenance and renewal demand.
The more remarkable point though is that its Overseas business seems to be doing quite well and they have the ambition to be a globally recognized supplier. This is still roughly 20% of their business but has grown at a 22% 3-year CAGR. I’m not sure how much of this will interfere with their willingness to increase stock-type sales but usually, when a Japanese company succeeds in expanding abroad it gets awarded a higher multiple which I also think is an interesting angle. It’s also worth considering that revenue could accelerate from its current single-digit growth cadence if their global expansion succeeds.
Another thing I like is they’re proactively giving ROIC as a KPI (although it’s not high, their long-term target is ‘above 10%’)
Sohgo Security Services (2331) took a strategic stake some years ago and owns 15%. So the wild card is if they try to buy them out - though this seems unlikely…
*I noticed that they bundle maintenance revenues and system renewal and call it ‘recurring’ so I’d check that.