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Clayton Young
Clayton Young
Articles (12)  | Author's Website |

Constructing Virtual Reality: Silicon Valley's Appeal in Japan’s Fukui Computer Holdings

The specialty CAD developer sails into virtual, augmented reality software

September 14, 2017 | About:

Technology in construction

According to McKinsey & Co., the construction industry is among the least digitized, only ahead of agriculture. Concepts like internet of things (IoT) and business process automation might as well be a foreign language, but there is good reason for this. The construction industry is project-based and project contents often vary greatly - the same construction company can build an office building, automotive dealership and an NBA stadium all at the same time. The nature of the industry requires companies to be flexible, but flexibility does not always mix well with digitization.

The concept of building three different projects simultaneously is actually a personal anecdote. I once had the opportunity to work as a construction manager for a NBA stadium renovation project in 2015. With exactly zero days of experience in the industry, I learned a few things rather quickly:

  1. Superintendents walking the construction site with an internet-enabled iPad for viewing PDF files of construction drawings was considered high-tech.

  2. Disagreements in the field were typically taken back to the field office and settled by flipping through pages of drawings printed on enormous paper.

  3. Superintendents and construction managers have the magical ability to point at thin air, describe structures and discuss how to build things in detail - all from memory.

Keep in mind, the general contractor for this project was a sizeable subsidiary of a Fortune 500 company.

Overview of Fukui Computer Holdings

You might say I am a dreamer, but Fukui Computer Holdings Inc. (TSE:9790) works on reconstructing this tech-starved reality, mostly through specialized construction 3-D comper-aided design (CAD) software development. To be sure, Fukui is not a Silicon Valley tech startup. In fact, it is not even a startup. The company has been around since 1979 and maintains a market-leading position in specialized surveying, architectural and public works CAD software in Japan (exclusive of general purpose CAD software).

Fukui’s latest focus is in the hot area of augmented reality and virtual reality (VR). Unlike the video gaming augmented reality and VR applications that catch the headlines, augmented reality and VR applications in a hardly digitized construction industry appear to provide a more measurable value proposition. At least in theory, the value proposition would come in the form of time saving, error reduction and automation in the construction industry.

Fukui moves into augmented reality and VR

With a declining population and historically stagnant productivity improvements, the Japanese construction industry is forced to improve - and it is. For example, industrial equipment giant Komatsu (TSE:6301) recently started focusing on “Smart Construction,” where IoT tools are used to automate construction (e.g., surveying), resulting in a reduction of labor hours.

Of course, Fukui is nowhere near the level or scale of Komatsu, but the company is curiously positioned as a software developer with longstanding success in a construction industry starving for technology and productivity improvements. In the most recent Yuho (Japanese 10-K equivalent), Fukui mentioned the need for a new core product beyond surveying, architectural and public work CAD software. The new core product is 3dcata.com, a 3-D catalog for all things related to residential construction. This includes toilets, tiles, flooring, appliances, etc. Essentially, the platform creates a virtual environment to visualize what your future home would look like - and you get to try out all sorts of different materials instead of visiting a model home and flipping through a book with little carpet cutouts.

Financials and valuation

As you might imagine, Fukui’s business performance is more or less in line with Japan’s construction industry - which saw a decline from 1992 through 2009, then a steady improvement thereafter. Here is how Fukui’s revenue and operating income compares:

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The scalable nature of Fukui’s software business is starting to show its strength as the company steadily grows revenues. This is best reflected in Joel Greenblatt (Trades, Portfolio)’s ROIC formula, which measures returns against operating business needs:

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To be sure, Fukui’s continuously improving business performance has been recognized by the market in recent years:

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In June, Fukui shares reached an all-time high at 4,210 yen ($38.09) per share. Since then, share prices have cooled down to sub-4,000 yen levels.

On Sept. 4, Fukui sent out a letter announcing an extraordinary shareholder meeting, which was called for by the largest shareholder, Asset Management Co. (42.42% stake). Asset Management is basically calling this meeting to dismiss the current CEO, Masaru Fukino. This news sent Fukui shares tumbling down to today’s 2,700 yen level. My best guess is short-term traders are probably sending share prices up and down, especially since Asset Management and building material manufacturer Lixil (TSE:5938) own a combined 70% of Fukui.

On a historical basis, 2,700 yen per share for Fukui is still quite high. The company trades at 17 times EV/EBIT too. The stock is not cheap by any common measure, but it certainly holds characteristics of a company that would continue its top-line growth with even further improvements in business performance thanks to its asset-light, highly scalable business model.

Over the past decade, Fukui’s gross margins have held steady at around 80% while operating expenses also held steady around 5 billion yen per year. Break-even revenue for Fukui is about 6.5 billion yen per year.

  • 6.5 billion yen revenue * 80% gross margin = 5.2 billion yen gross profit
  • 5.2 billion yen gross profit - 5 billion yen operating expense = basically breakeven

On a trailing 12-month basis, Fukui brought in a little over 10 billion yen in revenues. This delivered a healthy 3.2 billion yen of operating income. As a thought exercise, a 20% increase in revenues would result in close to 45% increase in operating income. It goes without saying this would easily skew the EV/EBIT metric.

Fukui also holds a net cash position of 4.9 billion yen. With a 30% payout ratio, shareholders ought to demand a higher payout, especially given Fukui’s low fixed-cost, highly scalable nature. To give you an idea, our 20% increase in revenue thought exercise would give us a 12 times EV/EBIT, assuming EV is constant. Fukui management is guiding 10,100 million yen in revenues for fiscal 2018, but they also guided for 9,000 million yen for fiscal 2017 and delivered 9,970 million. While I would not invest in Fukui with the assumption revenues would increase 20% in the next year, I also would not consider it the second coming if Fukui actually delivers it.

Disclosure: I do not own any stocks mentioned in this article.

About the author:

Clayton Young
I grew up in Japan and completed an MBA in the U.S., but learned more from reading Howard Marks. I apply an American value investing approach to Japanese companies that are often inscrutable to outsiders who lack fluency in the unique cultural context.

Visit Clayton Young's Website


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