Growth in Japan: So cheap it hurts

by admin on June 25, 2012

This article is about a near-net-net stock in Japan.


This is an interesting psychological test – note your initial reaction to the following question, and review it after reading to the end:

How interested would you be in investing in a linen manufacturing business in Japan, one of the most expensive countries in the world?

When I phrase the question like that, even I am starting to run away.

Now, let’s look at the stock in question in detail.

Teikoku Sen-i (帝国繊維, 3302, literally “Imperial Fiber”) is an old-school manufacturer based in Tokyo. It was originally a linen manufacturer, and it still makes a lot of linen products, but has diversified into disaster-prevention.

Teikoku Seni Segment sales Teikoku Seni Segment sales

Disaster prevention: Sells products to protect you from a biological or chemical attack, as well as from an earthquake. The biggest product is fire hoses.

Fiber: Sells high performance work clothes for the government and private businesses. The clothes are fire-resistant and tough.

Real estate: Renting out property and operating game centers (smoky buildings full of arcade games, air hockey, and machines where you can win a teddy bear – very popular entertainment in Japan). The real estate business also does insurance agency work.

Teikoku Seni Segment op margins Teikoku Seni Segment op margins

The company’s biggest customer is the government, accounting for 26% of sales in 2011, down from 39% in 2010.

Note that the demand for fire hoses is fairly stable, and customers are extremely unlikely (in Japan of all places) to change supplier, least of all for cost reasons, as there is a huge cost of failure. The demand for fire-resistant clothing is linked to economic activity, whereas that for disaster-prevention goods is linked to government programs and corporate spending plans, and is increasing in Japan.

Effect of the earthquake:

There was a one-off effect initially, but demand for disaster prevention products is now increasing again as companies get round to setting up business continuity plans (there was a delay in implementation at many companies due to the poor business environment last year), and as the government slowly but surely decides what to do about preparing for the next earthquake.

The company’s products played a big role in cooling down the Fukushima nuclear reactors during the crisis in 2011.


Largest owners are: an insurance co. (5.9%), a bank (4.8%), a trading co. (4.4%), and another insurance co. (3.7%).

Recently put in a poison pill.

Cash flow:

The company more or less balances its capex with depreciation, so there is no significant difference between net income and free cash flow.

Teikoku Seni Overall sales and margins Teikoku Seni Overall sales and margins

Before we look at the balance sheet, how much would you pay for a company that has grown EPS by about 160% since 2007 (32 to 85 yen/sh), has a large part of its business from the government, has customers who are prepared to pay more money to ensure quality (high cost of failure), and has an outlook of continued growth?

If this was in the US, you might say 15 times earnings.  Or, if you are more stingy (like me) you might say eight times earnings after adjusting for net current asset value.

So, what is the valuation of this stock according to the market?

Balance sheet:

Tenkoku Seni Balance sheet Tenkoku Seni Balance sheet

As you can see from the above, the stock is trading very close to its non-adjusted bankruptcy value, and 15% of its stress case bankruptcy value.  Note that the above does not include real estate, which I believe should be valued it on a DCF or earnings multiple basis.

If I own this business and I wanted to dispose of it as a fair price, I might propose something like this to the bidder:

Teikoku Seni Valuation by parts Teikoku Seni Valuation by parts

That is to say, this is the price I would put on the business before adjusting for the balance sheet. Since the stress-case bankruptcy value of the balance sheet is about 14 B yen, I would be looking to accept offers around 45 B yen or so.

Make no mistake – I am not saying that this company will trade as 3 times its current market price any time soon. The whole Japanese small-cap area is completely depressed.

Somewhat bizarrely, the fact that it has put in a poison pill, making it more difficult to take over the company, is a good thing, because you would not want to see the company taken out at a 20% premium when a few years of growth will almost certainly see the stock re-rated. (However, do not take that to mean that it is possible to take over the company. If the government had a clever idea to consolidate the industry it would “recommend” that two companies would get together, and shareholders would have little say.)

What I am saying, is that it is possible to find growth companies within Japan that have been left for dead but yet maintain an ample buffer of safety, as exemplified by Teikoku Sen-i, a growing company with a market cap only exceeding its stress-case bankruptcy value by about 1 year of free cash flow.


Disclosure: I am long this stock. Do your own research.

{ 8 comments… read them below or add one }

Feuerball September 20, 2012 at 11:44 am

Have you looked at at Tsurumi Manufacturing 6351.T, which is close to being a net net by my account and earns 70yen, at a 580Yen stock price. Tsurumi manufactures pumps that are sold allover the world and appear to have an excellent reputation. Decent dividend is paid out as well (16yen/share). This is a company that is growing and yet trades below liquidation value. Only in Japan….


admin September 25, 2012 at 2:32 pm

Thanks for visiting – welcome.

I am aware of that company. It is capital-spending sensitive. Particularly in relation to China, and particularly in relation to construction.

The slowdown in China will impact them. And their earnings have been improved by post-earthquake rebuilding which is now going away. And they have operating leverage. However, you have one factor in your favor – the imminent turning of the Tokyo property market, which has been oversupplied until now.

I look for low operating leverage, predictable earnings, and/ or competitive advantages in conjunction with ridiculous valuations. So this is not really on my radar.

However, it clearly is worth more than where it is trading – something like NCAV of 14B vs. 16B mkt cap with no losses even in ’08/’09. To get excited about this name you need to care about the construction cycle and also see through the current slowdown in it. If you are very familiar with the kind of pump they make and their position in that market, you might be strong enough to hold on, despite equally tasty bargains in less dicey situations. I prefer to sidestep.



Feuerball September 29, 2012 at 11:46 pm

Re Tsurumi, yes Tsurumi’s pumps are used in construction, but they are also used in infrastructure projects, mining. In the US Tsurumi is known for garden pond pumps. The markets are more stable then you would think, and the company weathered the 2008/2009 recession extremely well. What I like about them is their world wide presence and strong brand position, considering the moderate size of the firm. The stock is trading at a discount to net asset value, assigning no value to a quite profitable business.

In the same business line then Teikoku, have you looked at Sakura Rubber? This company is not that well run, but also sells fire equipment, is in the real estate business and sells as an enormous discount to asset value.


admin September 30, 2012 at 9:29 am

Thanks Feuerball – I will definitely look into these.

For Tsurumi, the infrastructure and mining part is a potential problem – clearly, there is too much capacity in some areas, particularly in iron ore, especially if China stops overbuilding. Infrastructure spending also tends to be lumpy.

Nonetheless, I will look into it on the basis that a. there could be a secular-demand component in there (e.g. replacement, service, etc.), and b. the mkt could be already discounting the bad stuff. The cheapness no longer seems amazing once you’ve gone through loads of net-net stocks, although it is pretty mind-blowing when I step back and think about it every so often.



o-tone October 3, 2012 at 12:59 am

That one is my favourite stock of your investment ideas.
Shame it hasn’t got a financial section in english. So unfortunately
not investable for me.

Lucky me that Japan’s investment universe is so rich these days.

Keep your patience and carry on with your good work.


admin October 21, 2012 at 5:26 pm

Hi o-tone,

I love your site. You must be very brave to be investing in Japanese small caps with no knowledge of Japanese!



O-tone October 22, 2012 at 7:13 pm

Hi jan.

Not investing only in small caps in Japan, but also in mid/ large caps. I sleep very soundly, as most of my holdings publish decent english financial statements.



Anon November 24, 2013 at 9:31 am

Stock has doubled since June (congrats!) – and the company continues to perform well. Still see upside here?


Leave a Comment

Previous post:

Next post: