大和冷機工æ¥æ ªå¼ä¼šç¤¾
I’ll be the first to admit that I’m generally not a net-net person. But I came across this little Japanese small cap that may be quite interesting to the net-net investors. I’m generally quite comfortable with Japanese language, as long as it doesn’t involve anything more complicated than “sake” and “sushi.” All prices were from May 14, 2012.
So here we go.
Daiwa Industries Ltd. 大和冷機工æ¥æ ªå¼ä¼šç¤¾
Investment thesis: a profitable high-return business selling below its net cash.
Stock prices
· Main listing: 6459: Tokyo: ¥388 (its five-year low was around ¥215 in October 2008)
· ADR (pink sheet): DAWIF, $5.14 (note that the ADR price was already more than one month old), with 52-week range between $4.50 and $5.32
Cash per share: ¥634 (~$7.9)
Net cash (= cash – total liabilities) per share: ¥480 (~$6)
Business
Daiwa Industries Ltd. is a small company in Japan. You can find their website at http://www.drk.co.jp/index.html. Sorry it’s in Japanese. If you use Google Translate, it helps a little, but not much. For instance, you won’t be able to read their business reports that come in PDF format.
Below is a brief description of their business on BusinessWeek.com:
“Daiwa Industries Ltd. engages in the manufacture, sale and lease of kitchen equipment, apparatus and parts in Japan. The company provides refrigerators, refrigerated showcases, sandwich tables, refrigerated cold tables, cold table with refrigerated boat sinks, ice cubes and crushed ice machines, stack-on icemakers, cooler jugs, and chip ice-cooled ice machines. It also offers wine cellars, open showcases, showcases for the pastry facing and ozone deodorization equipment; loading and unloading milk cool boxes with roller shelves; temperature shipping containers; and vending machines and cold-enabled products, as well as various parts for use in the construction of thermal equipment. In addition, the company is involved in planning, designing and constructing kitchen stores. Daiwa Industries Ltd. was founded in 1958 and is headquartered in Tokyo, Japan.”
Well, that doesn’t sound like an exciting business, just as what you’d expect from a lot of net-nets. A couple of issues immediately spring to mind. One, it’s probably at best a stagnant industry. Two, it’s probably more geared toward selling big-ticket items to business customers, so maybe it’s quite cyclical. Three, the fact that it doesn’t have an English website means that it’s probably a pure play on the domestic Japanese market, so currency fluctuation may be a headache, in addition to getting company information.
Clicking around their website, it seems that the company highlights innovation, especially on energy efficiency and noise reduction (two out of three points on this page). That’s encouraging.
Financials
In terms of business performance, BusinessWeek has its financials for the last four years (actually three years since you only see blanks for 2011), which you can easily have them converted in USD. You can also find brief annual reports on the company’s IR section of their website (look for PDFs with “å ±å‘Šæ›¸” in their titles; however, if it says “ä¸é–“å ±å‘Šæ›¸” it means semi-annual reports). Flipping back and forth between BusinessWeek and the company’s reports, I managed to get the following financials from 2002 to 2011 (all numbers in millions and share count has stayed at 51.717 million):
A couple of things are apparent. First, the company has been consistently profitable (its 10-year average operating income per share is ¥103) with no loss in any given year, even though the revenue has been stagnant. Second, operating margin has held up remarkably well, especially given the great recession we’ve just experienced (any end in sight?), as the chart below shows.
In fact, if you look at the company’s pretax return on tangible asset (total asset – cash and long-term investment) in the chart below, it’s actually kind of impressive, nothing like Warren Buffett’s soggy cigar butt.
Third, the company’s cash pile has been growing significantly, especially since 2008, so now it boasts cash and cash equivalent of ¥634 a share and has no debt.
Also, the company looks at least as good as its peers, according to Reuters (see chart below). It boasts higher profitability, higher return on assets, a stronger balance sheet and very subpar growth.
Chart 3: peer comparison
Some Potential Risks and Unanswered Questions
Some questions I have not been able to answer. For example, if you look at the charts on margin and return on tangible assets above, something very positive happened in 2006: Both its margin and ROTA went up sharply and have stayed relatively high ever since. What happened? Is it sustainable? Also, what does the management intend to do with their growing cash pile? BusinessWeek numbers indicate pretty low capex requirement (averaging ¥600 million [or ¥11.6 per share] per year between 2008 and 2010), so cash hoarding is not really necessary. Are they planning for some big acquisitions? Lastly, will the company be bought out?
Then, there are some practical headaches for U.S. investors. The good news is that you can buy the ADR on pink sheet (DAWIF, Financial), and the bad news is the extremely low trading volume: One trade (often a few hundred shares) a month seems the norm (the last trade occurred on April 5 for 2000 shares). Currency is another issue. Is the Japanese yen overvalued? If so, what to do? You could hedge your currency exposure, but that’s an additional cost. You could take a preemptive haircut to the cash hoard. And what’s an appropriate haircut?
Disclosure: None
I’ll be the first to admit that I’m generally not a net-net person. But I came across this little Japanese small cap that may be quite interesting to the net-net investors. I’m generally quite comfortable with Japanese language, as long as it doesn’t involve anything more complicated than “sake” and “sushi.” All prices were from May 14, 2012.
So here we go.
Daiwa Industries Ltd. 大和冷機工æ¥æ ªå¼ä¼šç¤¾
Investment thesis: a profitable high-return business selling below its net cash.
Stock prices
· Main listing: 6459: Tokyo: ¥388 (its five-year low was around ¥215 in October 2008)
· ADR (pink sheet): DAWIF, $5.14 (note that the ADR price was already more than one month old), with 52-week range between $4.50 and $5.32
Cash per share: ¥634 (~$7.9)
Net cash (= cash – total liabilities) per share: ¥480 (~$6)
Business
Daiwa Industries Ltd. is a small company in Japan. You can find their website at http://www.drk.co.jp/index.html. Sorry it’s in Japanese. If you use Google Translate, it helps a little, but not much. For instance, you won’t be able to read their business reports that come in PDF format.
Below is a brief description of their business on BusinessWeek.com:
“Daiwa Industries Ltd. engages in the manufacture, sale and lease of kitchen equipment, apparatus and parts in Japan. The company provides refrigerators, refrigerated showcases, sandwich tables, refrigerated cold tables, cold table with refrigerated boat sinks, ice cubes and crushed ice machines, stack-on icemakers, cooler jugs, and chip ice-cooled ice machines. It also offers wine cellars, open showcases, showcases for the pastry facing and ozone deodorization equipment; loading and unloading milk cool boxes with roller shelves; temperature shipping containers; and vending machines and cold-enabled products, as well as various parts for use in the construction of thermal equipment. In addition, the company is involved in planning, designing and constructing kitchen stores. Daiwa Industries Ltd. was founded in 1958 and is headquartered in Tokyo, Japan.”
Well, that doesn’t sound like an exciting business, just as what you’d expect from a lot of net-nets. A couple of issues immediately spring to mind. One, it’s probably at best a stagnant industry. Two, it’s probably more geared toward selling big-ticket items to business customers, so maybe it’s quite cyclical. Three, the fact that it doesn’t have an English website means that it’s probably a pure play on the domestic Japanese market, so currency fluctuation may be a headache, in addition to getting company information.
Clicking around their website, it seems that the company highlights innovation, especially on energy efficiency and noise reduction (two out of three points on this page). That’s encouraging.
Financials
In terms of business performance, BusinessWeek has its financials for the last four years (actually three years since you only see blanks for 2011), which you can easily have them converted in USD. You can also find brief annual reports on the company’s IR section of their website (look for PDFs with “å ±å‘Šæ›¸” in their titles; however, if it says “ä¸é–“å ±å‘Šæ›¸” it means semi-annual reports). Flipping back and forth between BusinessWeek and the company’s reports, I managed to get the following financials from 2002 to 2011 (all numbers in millions and share count has stayed at 51.717 million):
A couple of things are apparent. First, the company has been consistently profitable (its 10-year average operating income per share is ¥103) with no loss in any given year, even though the revenue has been stagnant. Second, operating margin has held up remarkably well, especially given the great recession we’ve just experienced (any end in sight?), as the chart below shows.
In fact, if you look at the company’s pretax return on tangible asset (total asset – cash and long-term investment) in the chart below, it’s actually kind of impressive, nothing like Warren Buffett’s soggy cigar butt.
Third, the company’s cash pile has been growing significantly, especially since 2008, so now it boasts cash and cash equivalent of ¥634 a share and has no debt.
Also, the company looks at least as good as its peers, according to Reuters (see chart below). It boasts higher profitability, higher return on assets, a stronger balance sheet and very subpar growth.
Chart 3: peer comparison
Some Potential Risks and Unanswered Questions
Some questions I have not been able to answer. For example, if you look at the charts on margin and return on tangible assets above, something very positive happened in 2006: Both its margin and ROTA went up sharply and have stayed relatively high ever since. What happened? Is it sustainable? Also, what does the management intend to do with their growing cash pile? BusinessWeek numbers indicate pretty low capex requirement (averaging ¥600 million [or ¥11.6 per share] per year between 2008 and 2010), so cash hoarding is not really necessary. Are they planning for some big acquisitions? Lastly, will the company be bought out?
Then, there are some practical headaches for U.S. investors. The good news is that you can buy the ADR on pink sheet (DAWIF, Financial), and the bad news is the extremely low trading volume: One trade (often a few hundred shares) a month seems the norm (the last trade occurred on April 5 for 2000 shares). Currency is another issue. Is the Japanese yen overvalued? If so, what to do? You could hedge your currency exposure, but that’s an additional cost. You could take a preemptive haircut to the cash hoard. And what’s an appropriate haircut?
Disclosure: None
