“Where is my chicken?” and the $5k asymmetric pyjama play

by admin on September 2, 2012

Are you an obsessive investor?

I don’t mean somebody who watches every show on CNBC, or who is glued to the ticker. Rather, an obsessive investor is the kind of person who will ruminate on operating margins or asymmetry while in the bath tub.

Without even realizing it, instead of trying to remember whether I have any cumin left to make a curry, my supermarket experience is like that of the child in the Bruce Willis film where he can telepathically crack an alien code so well that the CIA gets involved… except that in my case, of course, it is computing the average cost per kilo of chicken adjusted for the risk of not using the whole pack of drumsticks by the time the option expires, and I’m pretty sure that the CIA is not involved. Or, I find that I am gathering data on what might be a long-lasting brand. Then back to reality… cumin… can’t remember, buy it just in case.

Do you do this?

When I see lots of women wearing kimono in the street during the summer festival season (I refer to these, collectively with yukata and karate/judo/aikido suits, as “pyjamas”), I start wondering whether they are made in China, and how much they are prepared to pay for them.

Buying an aikido suit, I recently discovered, can easily be as reasonable as the stock of a social networking website.

These lines of thought recently led me to two stocks that are interesting. Not bargain basement, but I’m pretty sure they will be around in 50 years’ time. This, by the way, is something you should look out for – the cockroach factor is worth something on top of your ordinary valuation.

The companies are 京都きもの友禅 (Kyoto Kimono no Yuzen) and 六甲バター(Rokko Butter, aka QBB House).

The interesting thing about the kimono company is that they sell extraordinarily expensive pyjamas, and sales are doing rather well, all things considered. Despite the ageing of the population and all related noise, they have been able to increase sales over the past 10 years.

Kimono prices in Japan Kimono prices in Japan

I cannot exactly explain why women are willing to pay so much money for these items, but there is a clear tendency.

Based on my statistically-insignificant interview sample, there is a very strong preference for buying the real deal as opposed to made-in-China material, although it does depend on age group and on income level.

I would be happier if they got more of their sales from rentals, because that is a better business, but at least, due to the made-in-Japan preference, it is unlikely that purchase prices will crash any time soon.

The demand for kimono is bipolarized.

If a woman does (almost) anything in Japan worth a photograph, such as: graduate from university, go to a temple for a special event, get married, etc., then there is a good chance that they will need to wear a kimono. There are also special kimonos for special occasions, but I will never be able to understand that level of detail. However, the key thing to know is that the occasions on which a woman will need to buy a kimono are basically sub-23 years old (coming of age, graduation, and a few other things like that). And we all know what is happening to the young population – it is falling. Badly. Kimono do not really wear out – you could keep wearing the same one for life. Scary.

Kimono company orders by segment Kimono company orders by segment

However, the bipolar part comes in because there is replacement demand from old women. Old rich women, that is. The thinking is along the same lines as buying an expensive watch to compensate for living a long stressful life of hard work and no fun (common in Japan), although in the case of women it might be compensating for putting up with a man who is never in the house or gets in the way when he is there (I’m a bit out of my depth here, but you know what I mean). And we all know where the money is (i.e. who owns all those JGBs that will have to get inflated away one day)…you got it – old men, and importantly for our present purposes, women.

You can see in the above chart that orders for kimonos from young women (orange bars) are shrinking with the decline of the population of 20-year old women (peak demand age for kimono), shown in triangles. However, this is being more than made up for by orders from old women. The good news is that demand for rental kimonos is growing (dark orange), and in general there is increasing interest in wearing kimonos in Japan (data not published). While there have in recent years been cheap kimono on sale in Japan in supermarkets and in Uniqlo, old women who experienced the bubble in Japan are less afraid to spend money, and are less likely to accept the fake version.

The management has been careful with costs, changing the strategy from shops in stations to those in office buildings and purchasing smarter. It seems that customers are ridiculously loyal – mothers get their daughters to also buy from the company. They used to get 60% of their sales from long-sleeved kimono (2002), which are for young women to wear for particular occasions. However, they are growing in normal kimono, and currently they are about 45% long-sleeved, 43% normal, and the balance is rental and jewelry-like products. It seems that a large part of this mix-shift has basically been through selling normal kimono to their previously existing long-sleeved captive audience.

Kimono company sales and net income Kimono company sales and net income

FY01 – FY06: Sales: blue columns; Net inc: red line; Essentially operating income: blue line

Kimono company sales and net income 2 Kimono company sales and net income 2

FY08 – FY12E: Sales: orange columns; Essentially operating income: blue line

FY 13 EPS is forecast to be 66% ahead of FY 08, and the yield is over 4%. And they have been repurchasing shares. The company is not cheap relative to my normal tests (i.e. how much below aggressive liquidation value). You pay 14.5B yen for a company with 14B yen in current assets, 8B yen in total liabilities, making about 1.9B yen in net income, and its DD&A is greater than capex.

Reading the 2002 management’s discussion and analysis was interesting – the pessimistic mood was very similar to that in the 2012 version. My view is that in ten years’ time they will have slightly higher overall sales with the current mix shift accelerated and the rental business much larger than it is now.

Kimono company growth Kimono company growth

I’m not going to go into the company in great detail, because the core of the investment thesis is exactly as I just said above. However, I will say that the downside case is that you get basically a utility-like company with a market that will shrink over the very very long term, and seen from that point of view, a 4% yield is not bad. The ironic thing is that electrical utilities in Japan have performed like sky-divers and in many cases are not paying out anything. The upside is that you get a spending recovery at some point and you do something like 2x if it is similar to the last recovery, but much more if the JGB-inflation mania scenario becomes reality. Make no mistake – the market is going to shrink for Kyoto Kimono. I am willing to pay up, however, for good old-school management that can navigate smoothly despite rocky seas, and to have a customer base so loyal that it spans generations.

Will discuss QBB house next time.

Disclosure: I have a small, basically tiny, position in Kyoto Kimono. I was planning on buying more but it got more expensive. I am waiting like a crocodile underneath a suspension bridge.

{ 3 comments… read them below or add one }

Feuerball October 1, 2012 at 5:14 am

Cool find, this company appears to have a nice moat. What I don’t like about Kyoto Kimono is that this company is that I don’t see them expanding beyond Japan ever (since their product is very much a unique japanese thing).
I would love to find companies that have a moat or brand recognition for a unique japanese product, which can be sold in other countries. Something like Kikkoman comes to my mind, or Japanese Sake manufacturer. The idea would be to buy something with huge brand recognition, that does not trade at the premium , valuation most luxury producers in other markets do, but which has an avenue to international expansion.

Reply

admin October 21, 2012 at 5:33 pm

Feuerball,

You should look at Yakult Honsya – or rather, you should have done that a year ago. It’s difficult to find that kind of company with a screaming undervaluation – most Japanese companies that are well-known overseas are either a. crap (a la Sony/ Panasonic/ Toshiba/ etc.), or b. not crap but overly covered, and hence offer little alpha (e.g. Shimano, Fanuc, etc.)

Another one is Sotsu – they were my second-biggest holding after the earthquake, but have unfortunately become more expensive.

It’s difficult – Japanese companies have a tendency to make expensive overseas acquisitions, which also can be a problem.

JP

Reply

o-tone October 22, 2012 at 7:20 pm

@feuerball

Shiseido comes into my mind. The only real luxury brand in Japan, which is well recognized in the rest of the world.
My sister is going crazy for their products.

It’s trading at a premium though.

greetings

Reply

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