Cardboard Box Company Is Priced for Failure and Pays 3% Dividends

Top-line performance has deteriorated, but the operating business is alive and kicking at Chuoh Packing

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Aug 30, 2017
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Chuoh Packing (NGO:3952, Financial) makes corrugated cardboard boxes and bubble wrap, primarily for automotive parts and home appliances.

In a typical year, Toyota Motor (TSE:7203, Financial) accounts for about 20% of sales. Toyota owns 22.94% of Chuoh.

Perhaps I am on a Toyota binge, having covered Toyota affiliate Daihatsu Diesel (TSE:6023, Financial) recently. Chuoh’s story is not nearly as straightforward as Daihatsu Diesel. In fact, it’s been difficult to find useful information on the company, even through Japanese sources. That said, there are a few attractive aspects to Chuoh’s financials and business performance.

The story (from what I can gather)

Chuoh Packing started operations in 1957 in the Nagoya area (Japan’s third-largest metro) as a corrugated cardboard box manufacturer. After absorbing several related Japanese companies in 1989 and opening its second manufacturing plant in 1991, Chuoh became a public company listed on the Nagoya exchange (1993). Shortly thereafter, the company ventured outside of Japan to Hong Kong (1994) and then to Malaysia (1995). Today, apart from its Japan business, Chuoh manufactures in Hong Kong, Malaysia and China through subsidiaries (all noncontrolling interests).

To be clear, the China and Southeast Asia growth story didn’t quite work out for Chuoh. It reported increasing losses in its China segment for the past three fiscal years. Meanwhile, Japan revenues and profits increased. The company attributes its declining sales and worsening profitability in China to its customer base moving production facilities away from China. Additionally, environmental restrictions in China resulted in production caps and increased raw material prices, further pressuring margins.

The Japan story isn’t an easy one, either. The fortunate part is that cardboard boxes don’t travel well. Generally speaking, if the volume, weight and price mix of products being shipped don’t balance well, product margins are highly sensitive to freight cost. Though corrugated cardboard may be cheaper to produce outside of Japan, freight cost consumes a large portion of the margin, which means there is little room for profit. Thus, cardboard is generally produced and procured locally.

Here are historical containerboard (corrugated cardboard is made out of containerboard) production figures in Japan (thousands of tons):


Source: Japan Paper Association

In contrast, here are import figures for containerboard:


Source: Japan Paper Association

As you might imagine, corrugated cardboard is mostly a commodity. In Japan, big players mass produce, leverage buying power and gain cost advantages. Meanwhile, small players are forced to differentiate. Chuoh Packing is a small player. Hence, Chuoh is design-build and value-add focused:


Source: Chuoh Packing website (English)

Financial translation

First let’s look at revenues and gross margins:


Though revenues have steadily declined over the last 10 years, gross profits have more or less remained neutral.


Gross margins are still strong, but operating margins have seen better days.

In short, Chuoh has done all right despite increasing competitive pressures. Clearly, Toyota has remained a stable customer. It’s hard to dismiss Chuoh’s focus on design-build and value-add, too. Unfortunately, I don’t have any hard data that shows the two factors as the key reasons for Chuoh’s financial resilience. Regardless, Chuoh has maintained a healthy level of profitability. What’s more is the Greenblatt ROIC performance:


It’s important to note that the lowest figure on the y-axis in this graph is 15%, and Chuoh’s lowest Greenblatt ROIC was just shy of 20% over the past 10 years.

My interpretation of Chuoh’s financials and business performance is this: Chuoh has made some missteps in its China strategy. Overall, however, the company has weathered well in an increasingly competitive Japanese market. Perhaps the value-add strategy has not recovered revenue to previous levels, but the company still generates a healthy amount of operating income.

It’s important to factor in the share price at this point. With a negative enterprise value, Chuoh is priced for failure. The company holds no debt. More interestingly, its net cash position is at 77% of Market Cap. At the same time, dividend yield is just above 3%.

A slowdown in the automotive industry would surely affect Chuoh, and I’m willing to bet that Toyota affiliates (like Denso) are also Chuoh customers. In a normalized environment, though, being part of the Toyota group is a positive. Between the healthy operating income, more-than-healthy cash position, stable customer base and negative EV, investors are well protected. A meager valuation improvement to 0.8 times book would yield investors 35%. That said, the market can be a tough place and it may take some positive top and bottom line improvement for share prices to move meaningfully.

Disclosure: I do not own shares in any of the companies mentioned in this article.