KonichiValue Japan

Disclaimer: The information in this article represents my opinions and should not be construed as personalized or individualized investment advice and are subject to change.

You might not have heard of EIZO, but it's considered the gold standard in the professional monitor world.

If you work in digital design, healthcare, finance or the security industry, chances are that you or your company has paid multiple times the price of a regular monitor to get your hands on an EIZO screen.

With the demand for professional monitors increasing and a manufacturing renaissance in Japan, could EIZO be a great stock to invest in?

Overview

EIZO is the Japanese word for 'image' and is also the name of the most-respected high-end monitor manufacturer.

Since 1968, the brand has developed high-quality monitors and display solutions for use in gambling, finance, healthcare, the graphic industry, air-traffic control and shipping.

The company is one of the only monitor companies with a 100% in-house manufacturing and most of the manufacturing and quality control is performed in Japan.

An extremely agile company

EIZO has shown that it is capable to adapt to a quickly changing market. In fact, of all monitor manufacturers in Japan, once the world’s largest monitor producer, EIZO is the only one left standing.

In 2006, EIZO shifted part of its structure away from its most profitable area, Amusement (Pachinko, or Japanese gambling machines), to high-end office monitors (B&P) and healthcare. Amusement stood for over 50% of all revenue in 2006, but now stands for less than 15%. Yet, revenue has largely recovered and since 2012 EIZO’s revenue has increased by more than 50%.

This is indeed a good sign that the company's leadership is well-equipped to deal with changing markets and new challenges.

Table of Content

* Konichi-Value Score

* Profitability

* Opportunities & Risks

* Financial soundness

* Stock-price

* Dividends & Share buybacks

* Conclusion

0. Konichi-Value Score

🤩 = Amazing

🙂 = Good

😑 = Acceptable

😖= Bad

1. Profitability

According to the latest financial report (Q3 2022), operating margins are hit substantially in all segments by supply-chain shortages, especially when it comes to semiconductors, a necessary component for all of EIZO’s products.

However, due to EIZO having a 100% of its production in-house, the company has managed to stave off the supply-chain shocks better than its competitors. However, even though its margin is better than most competitors, a projected fall in operating profit margin from 13% to 9.3% still has a big impact on its upcoming profits.

Below is the revenue size for each of EIZO’s main segments [machine translated from Japanese]:

EIZO’s main segments are monitors for professional offices (BP) and Japanese Pachinko machines (Amusement) with around 41 of total revenue deriving from them. The company is quickly pivoting to more profitable markets, such as healthcare, air-traffic control and creative work, which is why the leadership is planning to increase its R&D spend:

Lastly, as EIZO hosts a 100% in-house manufacturing, it does have a heavy asset load on its balance sheet, which decreases its return on equity (ROE) and return on assets (ROA). However, the company has very high profit margins both historically and in the monitor industry:

As the manufacturing industry is increasingly emphasizing slack in supply chains and increased inhouse manufacturing, EIZO is already ahead and likely to be so for the foreseeable future.

Worrying Financials for First Half of Fiscal Year 2022

Worryingly, the company reported a 6.3% operating profit margin for F1 2022. According to EIZO, this is due to material procurement being done in USD, which has made it substantially more expensive than expected due to the sudden drop in the JPY. The reason this has had such a negative effect on EIZO’s profit margin is due to its main segment still being amusement, which solely has Japanese customers and hence payments in Japanese yen.

If EIZO’s profit margin continues to slump it might indicate that its shift from Japanese clients is not going well which will hurt its margins for a long time to come.

2. Opportunities & Risks

As previously mentioned, EIZO has managed to do an incredible pivot since 2006, shifting its main segment away from screens on amusement (pachinko machines) to high-end business screen, healthcare devices, air-traffic control shipping and other much more niche and specialized markets.

That EIZO has been able to break into these specialized markets successfully in such a short amount of time is impressive in itself, but that the company has managed to do this while reporting record operating margins of 13% in FY2021 (April 2021-March 2022) is astonishing.

This is a clear indication that EIZO have managed to create many moats from competitors in the otherwise extremely margin-thin industry of monitors (for example LG Display’s profit margin in 2021 was 0.86%).

The leadership at EIZO are also sure that they have created a strong enough moat to continue increase the company’s revenue and profit margins as supply-chain shortages subside (FY2023):

Risks

As stated earlier, supply-chain shocks and decrease in demand will have substantial effects on EIZO’s bottom line.

For FY2023 (April 2022-March 2023), EIZO is just predicting that the upcoming recession will have a 0.9% decrease in its revenue. However, the supply-chain shocks are predicted to affect the company’s operating income margin from 13.0% to 9.3%.

Looking at previous financial reports, the EIZO leadership has shown to be conservative with their estimation, so if anything, we can expect these numbers to be relatively pessimistic.

However, perhaps the biggest risk is EIZO’s massive pivot away from Amusement (Japanese Pachinko machines) described in the “Opportunities” section. The company has definitely shown that its capable of breaking into niche markets, but not without costs:

From F1 2021 to F1 2022, revenue from Amusement has gone down by 78.1% while the increase in other segments is only 10.9%, which has resulted in a revenue decrease of JPY 71.8 billion.

EIZO has still delivered a positive net income growth rate of 6.6% annually for the past 5 years, but if all sectors except Amusement don’t grow faster, it might turn negative.

On top of that, the report also shows a decrease in profit margins to 6.3% from 13% same period last year. As explained in the previous section, this is due to the unforeseen strength in the USD, but as EIZO is a net-exporter, a weak yen should benefit the company. If the profit margin continues to stay in single digits, it is a worrying sign that EIZO is not able to pivot from its local and shrinking Amusement segment to global, more profitable clients fast enough.

3. Financial soundness

As with most Japanese companies in manufacturing, EIZO has a great financial soundness. With a debt-to-equity ratio of almost zero, the company is almost debt free and with a quick ratio of 1.83, the company can pay off any short-term debt instantly.

4. Stock-price

EIZO’s Price-to-Earnings (P/E) ratio with the predicted earnings for FY2022 is around 15x.

However, with the company’s FY2021 earnings, its P/E is as low as 10.31x:

More incredibly is that the stock also trades at a Price-to-Book (P/B) ratio of 0.68. That means that theoretically, if EIZO sold off all its assets today, shareholders would get 42% more money than they paid for the stock.

Such a P/B is incredibly low for a company that has developed and holds technologies and patents used for specialized industries like healthcare or air-traffic control. Likely, the market is yet to price in that EIZO has pivoted from a more general monitor manufacturer to a successful specialized one.

However, with a predicted P/E of 15x and a net growth rate of 6.6% over the past 5 years, its valuation looks relatively high. As the stock-market is trending downwards, let’s require a low rate of return of 5%. This gives us a P/E of 15x as a fair valuation for EIZO, which is right where the stock is expected to be by the end of the year.

However, as the company is going through a seemingly successful pivot, its growth and profit rate should pick up soon, but for now, I conclude that EIZO is fairly valued with no margin of safety.

5. Dividend & Share buybacks

EIZO has an average dividend ratio of around 3%. It has moderately increased dividend for the past 5 year. However, as the company has a policy of pay out around 30% of its profits in dividend, it might go down if profit margins continue to be at the present 6.6% level.

EIZO recently announced a share-buyback plan that will purchase up to 3.52% of all shares issued. This is a big commitment for a Japanese company and indicates that the leadership believes that the company is healthy with good long-term prospects.

6. Conclusion

EIZO is an incredibly interesting monitor manufacturer. It is the only major monitor manufacturer left in Japan, a country that was once the biggest screen producer in the world. Thanks to an agile leadership, effective R&D investments and extreme quality control, the company has managed to pivot away from its local amusement segment (read: pachinko machines) to niche and more profitable industries with much bigger moats than general screens, such as air-traffic control, financials, shipping and healthcare.

On top of that, EIZO still has 100% of its manufacturing in-house, a practice that was often seen as negative when lean production and just-in-time logistics were the practices to strive for. However, with the recent pandemic resulting in companies realizing the importance of slack in supply chains and China being seen as a less reliable manufacturing hub; EIZO is positioned to take full advantage of this new environment.

Nonetheless, the drop in both revenue and profit growth in EIZO’s latest quarterly report indicate that its pivot from the Japanese amusement segment is not going fast enough, which if sustained, could be a sign of a long-term slowdown for EIZO’s growth.

Hopefully this is just a short-term anomaly in the otherwise successful pivot history of EIZO. Therefore, I would definitely strongly recommend that you wait for EIZO’s next quarterly report before making any major investments in its stock.

Ultimately, judging by the company’s historical performance and ability to pivot over the past couple of years, EIZO is not only one of the most intersting monitor companies in the world, but I believe this is a stock to buy and hold.

Rating: BUY

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As you probably have heard, the Japanese yen has fallen drastically this year. In fact, since the beginning of 2022, the Japanese Yen has lost 23% of its value to the US dollar.

The little talked-about effect the currency drop has had for Japanese investors is that US stocks have often been very lucrative despite their massive drops.

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The most popular stock index in the world, the S&P 500 has dropped 17.52% this year. This is the biggest drop since the financial crisis of 2008, and understandably, a lot of people have lost millions of dollars.

However, if you invested your hard-earned Japanese yen into the S&P 500 in January this year, you’ve actually gotten a return of 5.48%!

Why Japanese stocks are a bargain now

On the surface, it looks like the main stock-index in Japan, the Nikkei 225 (read more about it here), has fared much better than the S&P 500, with a drop of only 3.49% YTD.

However, in USD terms, it is down 26.49%…

So, does this mean that Japanese companies are in much worse shape than their US counterparts? No, in fact, the yen drop has likely made them more competitive!

You see, Japan is a significant export economy and has exports in excess of $700bn of goods annually, making it the fourth-largest export economy in the world. Pre-Covid, the country enjoyed a positive trade balance of $59.2bn, with total annual exports of $713bn exceeding imports of $653bn. Even though the pandemic and the following energy crisis have put Japan at a trade deficit, which means a big part of the economy suffer as a result, most major companies are net exporters.

Looking at the 10 largest companies in Japan, 6 are export oriented:

As such, a cheap yen makes exports much more profitable for these companies and their profits are likely to go up. Hence, even though their stocks have fallen this year, their profits are likely to be substantially higher.

As Japan is natural-resource poor, most raw material must be imported. As the yen is so weak, imports will be more expensive, but as Japanese exporters are high-end manufacturers and processors, the input material cost is mostly a small part of the total export value. Hence, a weak yen is net-positive for Japan Inc.

Of course, headwinds like a further dip in the yen or a global recession could make Japanese stocks drop further. However, looking at their fundamentals, there has never been more undervalued companies in Japan than right now.

As such, the only logical conclusion is that Japanese stocks look like the bargain of the century for Japanese and foreign investors alike.

Konichi-Value is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

Get full access to KonichiValue Japan at www.konichivalue.com/subscribe

Get full access to KonichiValue Japan at www.konichivalue.com/subscribe

Disclaimer: The information in this article represents my opinions and should not be construed as individualized investment advice and are subject to change.

Semiconductors have gone from obscurity to something on everyone’s mind in just a couple of months. Ever since the beginning of the Covid 19-pandemic, whole industries have stopped working because of a shortage in them, and companies like Taiwan Semiconductor Manufacturing Company (TSMC) and ASLM have seen their share prices rising to the skies due to their importance in the field.

However, one company we have not heard much about is Tokyo Electron (TEL). Virtually every semiconductor in the world passes through one of Tokyo Electron's systems. Despite this, the company is still not that well-known among investors.

TL;DR

* The semiconductor market size is expected to exceed about $1 trillion by 2030, more than doubling the level in 2020, providing a huge tailwind to Tokyo Electron.

* The Japanese Yen is currently very weak, which is making shares of Japanese companies more affordable, and making companies that export equipment like Tokyo Electron more competitive.

* Shares are trading at a very reasonable valuation, despite the company guiding for significant growth for its fiscal 2023 (April 1, 2022- March 31, 2023) with net sales expected to increase by ~17%.

What is Tokyo Electron and why is it so interesting?

Tokyo Electron (TEL) is mainly engaged in the manufacture and sale of electronic products for industrial uses. The Company operates in two segments:

* The Semiconductor Manufacturing Equipment segment is engaged in the provision of wafer probers and other semiconductor manufacturing equipment.

* The Flat Panel Display (FPD) Manufacturing Equipment segment consists of coater developer for flat panel display manufacturing, etching and ashing equipment.

* The Company is also engaged in the management of facilities, logistics, as well as insurance business (less than 5% of its revenue)

TEL has a history of significant growth, starting as a distributor of other companies' products, then becoming a manufacturer itself, and developing more advanced technology and products until it became one of the most important companies in the global semiconductor production equipment market.

The company today competes with the likes of Applied Materials (AMAT) and Lam Research (LRCX) in the global semiconductor production equipment market, but not as much with ASML (ASML), which specializes in Lithography.

TEL's strength lies in its broad equipment portfolio covering four sequential processes that are critical for semiconductor manufacturing: deposition, Coater/Developer, etch, and cleaning.

Its products in these areas rank either first or second in global market share. In fact, Tokyo Electron's Coater/Developer for EUV lithography has a 100% share of the worldwide market.

To summarize the company and its strength; virtually every semiconductor in the world passes through one of its systems.

Table of Content

* Konichi-Value Score

* Profitability

* Opportunities and Risks

* Financial soundness

* Stock-price

* Dividends & Share-buybacks

* Conclusion

0. Konichi-Value Score

🤩 = Amazing

🙂 = Good

😑 = Acceptable

😖= Bad

1. Profitability

Tokyo Electron Q1 FY 2023 Results

TEL's Q1 2023 (April 2022-June 2022) revenue was up 5% year over year, less than expected and mostly due to supply chain challenges. Despite this setback, TEL maintained its growth outlook for the year at above 17%!

As other companies in its industry have done, management lowered calendar 2022 wafer fab equipment growth expectations from 20% to a range of 5%-15%. It is likely that many of the orders are not fulfilled this year due to supply chain issues will move to calendar 2023. Hence, even though sales are lower than expected this year, the already laid orders will likely prop up the sales figures as soon as supply chain issues are fixed.

Financials

The quality of the business is reflected in its terrific profit margins and returns on capital. With operating profit margins that are getting close to 30% at its current growth rate of 17%, this is a particularly attractive business.

As expected in the semiconductor industry, there has been some historical volatility, but the company tends to remain profitable even during downturns. At least that has been the case since 2014, and as semiconductors go into more types of devices, the cyclicity appears to be moderating.

Looking at the Return on Equity (ROE), we can see why Tokyo Electron is a powerful investment compounding machine, as its ROE is extremely high. So, any retained earnings can be quickly compounded by the business.

Overall, TEL is extremely profitable with an operating margin getting close to 30% and a return on equity consistently above 20% in the past 4-years.

2. Opportunities & Risks

Opportunities

Market

The semiconductor market size is expected to exceed about $1 trillion by 2030, more than doubling the level in 2020, which was around $440 billion. This is a huge tailwind for semiconductor production equipment manufacturers, and TEL's role in the industry is becoming more critical than ever.

Based on calendar year 2021 sales, Tokyo Electron is a top 15 semiconductor production equipment manufacturer, in position 3 just behind ASML.

Currency tailwinds

The Japanese Yen has been dropping like a rock, making shares of Japanese companies more affordable, and making companies that export equipment like Tokyo Electron more competitive.

In fact, in the latest earnings projections, TEL has pegged 1 US dollar to 115 yen while the conversion rate now is much closer to 150 yen. Hence, we can expect revenues outside Japan to be much higher than projected.

On top of that, as over 50% of Tokyo Electron’s production value comes from Japan, its production costs have decreased substantially as inflation and salary increases are still low in Japan.

Guidance

The company is guiding for strong growth for FY 2023, expecting net sales to increase +17.3%, and operating income +19.5%. These are impressive growth rates and the reason that make Tokyo Electron so attractive right now.

The question is how long can it sustain this impressive growth, and what impact will the looming recession have? While the depth of the recession is still unknown, I do believe the current industry dynamics are very favorable and could help drive growth for a few more years.

Risks

As TEL operates in a very profitable segment of the market, there are many companies trying to outmaneuver them technologically, or with better business execution.

So far, TEL has proven itself very capable of keeping competitors at bay, but there is no guarantee this will continue indefinitely into the future. If competitors outperform TEL's technology, the company's attractive financial profile could quickly deteriorate, including its impressive growth and profitability.

However, looking at the company’s historical profit margins, which have so far increased substantially in the past 8 years, it is safe to say that TEL is likely increasing its competitive strength.

3. Financial Soundness

As is the case with many Japanese companies, it is operated in a very conservative manner, with no long-term debt and significant cash and short-term investments. I am therefore not worried at all about the liquidity available to the company.

In fact, increasing interest rates and costs of loans might be favorable for TEL as it can afford to fund its own investments, something that competitors cannot.

4. Stock-price

Shares became expensive after the Covid-19 pandemic, reaching an extremely high 5.6x Enterprise Value/Revenue multiple (EV/Revenue). Since then, shares have come back down to more reasonable levels, and right now are trading close to the 10-year average for this indicator.

Recently, there is significant fear regarding the semiconductor market, with some companies that have recently reported earnings being a little more cautious, which is resulting in lower valuations. This fear seems to be driven by an overall fear in tech and supply chain issues than anything connected to TEL.

The EV/EBITDA is also quite reasonable, currently at less than 10x, and at a wide discount to the ten-year average of 15x.

Price-to-Earnings Ratio

Regarding TEL’s Price/Earnings (P/E) ratio, it’s 14.36x when writing this analysis, which is definitely acceptable for a company with a historical growth rate of around 18%. Also, it is historically low thanks to rapidly increasing profits and a bearish sentiment on the Japanese stock-market.

Looking at my motivated P/E matrix (here), we can see that the motivated P/E for TEL’s with a profit growth of 18% and a required rate of return of 15% is around 18-20x. Even if the profit growth is slashed by half due to present market conditions, we can motivate its present P/E of 14.36x if we lower our return expectations to 10%.

The Tokyo Electron stock is by no means cheap, but even with substantially lower growth rates, the stock is justifiably valued.

5. Dividend & Share-buybacks

The dividend yield is currently about 3.5%, higher than the 10-year average by a significant margin.

The company has a policy to pay ~50% of its earnings as dividends, so as profits are likely to fluctuate a lot in the coming quarters, the dividend will likely also change a lot. Hence, this is not a stock for people searching for a stable dividend increase YoY.

Over the past three years, Tokyo Electron has bought back 1.7% of its shares. This is not a massive share buyback program, but it shows that the company is willing to prop up its share price after reinvesting into its core business.

Overall, Tokyo Electron has a relatively low, but stable and reasonable dividend & share buyback policy. For a company with rapid growth, this is acceptable.

6. Conclusion

Tokyo Electron does not get the attention it deserves, despite being one of the most important semiconductor production equipment manufacturers in the industry, with cutting-edge technology that touches basically every chip produced around the world.

After reaching excessive levels in the midst of both the stock-market and tech-company bull-run in 2021, its valuation has come down considerably, and I now see shares as somewhat undervalued and presenting a decent entry point. I believe that at the very minimum, investors should add the company to their watch list and familiarize themselves more with it.

My Rating: BUY

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Link to the full analysis of Murata Manufacturing here.

Disclaimer: The information in this podcast represents my opinions and should not be construed as personalized or individualized investment advice, and are subject to change.

All the stars are aligned for Japan to once again reclaim the title as a manufacturing powerhouse: The country is the most politically stable country in Asia, Japanese salaries have stayed basically stagnant since 1992 and the Japanese yen has lost almost 40% in value to the US-dollar in less than a year. All this is happening while companies are fleeing the from the world’s largest manufacturer, China, due to political turmoil, Covid-lockdowns and rapidly increasing salaries.

One company that looks to truly benefit from this trend is Murata Manufacturing, one of the world leaders in electronic component manufacturing…

Konichi-Value is a listener-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

Get full access to KonichiValue Japan at www.konichivalue.com/subscribe

Disclaimer: The information in this article represents my opinions and should not be construed as individualized investment advice, and are subject to change.

All the stars are aligned for Japan to once again reclaim the title as a manufacturing powerhouse: The country is the most politically stable country in Asia, Japanese salaries have stayed basically stagnant since 1992 and the Japanese yen has lost almost 40% in value to the US-dollar in less than a year. All this is happening while companies are fleeing the from the world’s largest manufacturer, China, due to political turmoil, Covid-lockdowns and rapidly increasing salaries.

One company that looks to truly benefit from this trend is Murata Manufacturing, one of the world leaders in electronic component manufacturing:

Konichi-Value is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

Overview

Murata Manufacturing (6981 JP) manufactures and sells electronic components for electronic devices such as smartphones, PCs, and automobiles. The company’s main products are capacitors (see description in image below) and but it also provide components such as inductor coils and filters. Many of its products have global reach, and are crucial to most smartphones, especially the Apple iPhone, but also to cars, IoT products and wearables.

Murata is exceedingly reliant on global sales with overseas sales ratio exceeds 90%. As of the end of March 2022, the company is developing its business with a wide network of 29 domestic affiliates and 60 overseas companies.

By application, telecommunications accounts for 43% of sales and mobility accounted for 18.6%. In terms of sales by region, Greater China accounts for 54.8% (down from 58.4% in 2020), and it seems that the ratio is increasing because Apple owns a factory in China. Attention should also be paid to developments in China and Murata is very aware of its risks. In fact, they have cancelled some new factory build-outs in China in favor of focusing on its Japanese manufacturing arm.

Konichi-Value Score

🤩 = Amazing

🙂 = Good

😑 = Acceptable

😖= Bad

Table of Content

* Profitability

* Opportunities and Risks

* Financial soundness

* Stock-price

* Dividends & Share-buybacks

* Conclusion

1. Profitability

Review the financial results for the first quarter of the fiscal year ending March 31, 2023:

Net sales were 436.7 billion yen (-0.7% YoY) while operating income went down to 88.6 billion yen (-15.7% YoY). Income before income taxes reached 101.2 billion yen (-2.4% YoY). Net income per share was at 118 yen (-2.2% YoY).

In the overall electronics market, demand for parts has declined due to the impact of the lockdown in China and prolonged semiconductor & other specialized component shortages, resulting in a decline in production volume of smartphones, PCs, automobiles, and other products. Hence, the downturn for Murata can be seen more as a supply shortage than a demand shortage.

Sales of capacitors increased by 6.4% year-on-year due in part to an increase in sales of base stations and wearable terminals, as well as the impact of exchange rate fluctuations due to the depreciation of the yen. In the high-frequency and telecommunications segments, due to a decrease in the number of smartphones produced, there was a significant decrease of net sales by 15.5% year-on-year.

Orders received in the first quarter, with the exception of the Battery & Power supply division, were all below the prior-year quarter, a total decline of 14%. The leadership explains that the main reasons are the lockdown in China and the lower in demand for smartphones and PCs after its peak during 2020-2021.

Orders received in the first quarter, with the exception of the Battery & Power division, were all below the prior-year quarter, with a total decline of 14%. It seems to have been affected by the lockdown in China and the decline in demand for smartphones and PCs.

In summary, this fiscal year, the situation is expected to be severe, partly due to the rise in U.S. interest rates and of global economic slowdown.

Sales

Sales are on an upward trend. The impact of the increase in sales of mainstay capacitor products is large.

Operating Profit and Operating Margin

EPS (Net Income Per share)

Operating income and EPS are also on an upward trend. The operating margin is around 22%, which is a very high profit structure.

The weakened yen, which now approaches 150 yen to a US dollar, is also helping prop up the company’s bottom line as 65% of its production is done in Japan but more than 90% of sales are made overseas.

Compared to competition

Compared to competitors, especially Murata’s main peers General Packer (6267 JP) and Omron (6645 JP), its profit margins and Return on Equity are outstanding!

That Murata is losing some operating margin due to supply chain shocks will likely also affect its competitors. Hence, I am assured that Murata Manufacturing is likely the most investment-worthy of the big parts-manufacturers in Japan.

2. Opportunities and Risks

In the fiscal year of 2023 of Murata, ending March 31, 2023, the company forecasts an increase in sales and a decrease in profit. The assumed exchange rate is 120 yen to the dollar, and the exchange rate sensitivity is 11 billion yen per yen for U.S. dollars, net sales of 11 billion yen/year, and operating income of 6 billion yen/year.

Opportunities

As the rate now is 147 yen to the dollar, we’ll likely see much higher increase in both profits and costs. However, as has large manufacturing capacity in Japan, the rapid yen depreciation will likely have a positive short-term effects on its profits.

Long-term, an expansion of markets for telecommunications, automobiles, IoT products, etc. are a given. That Murata is able to uphold a profit margin higher than its peers shows that its products are hardly replacable and likely not at risk of disruption.

Murata is also investing rapidly in increasing its product lineup and improving productivity and combatting an aging workforce through smart-factory initiatives. Recently, the company has increased production capacity through M&A initiatives, mainly ETA Wireless. With Murata’s large cash reserves in a market where liquidity is drying up, I believe this is a great strategy for further growth.

Risks

As the latest financial report from Murata has shown, there are major business risks short-term. The largest risk is the deterioration of market conditions due to global economic stagnation and geopolitical risks. On top of that, with Murata’s high profit margins, there is always a risk of intensification of competition in the most profitable segments.

Also, one of Murata’s largest client’s, Apple, is shifting to focus on a more software based strategy and already decreasing its proudction of smartphones and PCs. This will hurt Murata’s bottom line both short-term and long-term, but the company will likely find other clients to make up for it.

Lastly, both Murata’s biggest outside market and production center, China, is seeing a deterioration of market conditions due to worsening economic and political conditions. Murata is well-equipped for this as the company is increasing production outside of China, especially in Japan, but it is a tough shift that will cause damages to its bottom line.

3. Financial soundness

Next, let's look at the financial situation. This is the situation as of the end of June 2022:

* Total assets: ¥2,850.2 billion

* Total liabilities: ¥522.7 billion

* Total net assets: ¥2,327.5 billion

* Equity ratio: 81.7%

* Interest-bearing debt: ¥111 billion

* Interest-bearing debt ratio: 4.8%

* Current ratio: 489%

* Cash and deposits: ¥348.9 billion

The financial situation is very good. The equity ratio, interest-bearing debt ratio, and current ratio all indicate a well-funded business, and any bankruptcy risk is low, even if interest rates go up substantially.

However, as Murata is in a very cash intensive industry, these numbers could quickly shift as interest rates goes up.

4. Stock-price

The stock price as of October 4, 2022 is 6,790 yen.

In the 6-month chart, it is gradually declining. In addition to concerns about an economic slowdown, Apple's plan to increase iPhone production was recently postponed, so the company, which is an affiliated company, also fell sharply.

However, in the 10-year chart, we can see that the stock has had a remarkable journey. This is a reflection on its outperformance to its peers when it comes to consistently growing both earnings and profit margins. Hence, when the economy stabilize again, we’ll likely see a continuing journey upwards.

Indicators

Market capitalization: ¥4,692.2 billionPrice/Earnings ratio (estimate): 13.65xPrice/Book ratio: 1.89x

With a market capitalization of ¥4,692.2 billion yen, Murata is definitely a large cap company is the same size as Japanese giants like JT (Japan Tobacco) and Canon.

From a P/E ratio perspective, the stock is slightly overvalued, especially considering the P/E is measured for the company’s record year of FY22.

From a P/B perspective, the stock also looks slightly overvalued. However, this is likely due to Murata valuing their intangible assets relatively modestly.

5. Dividends & Share-buybacks

Dividends have increased every fiscal year since 2017. With a dividend payout ratio of around 30% and a dividend yield of 2.12%, Murata gives out good dividend for a company still in its growth phase, while

Murata’s leadership has also included a large share buyback program from April 22, 2022. This program will buy up to 2.5% of all outstanding stocks which will likely have a positive push up on the stock. However, the does not seem to stop the drop in share-price as it has fallen more than 25% YTD.

The company does project higher dividend and share-buybacks in the future, but as profits look to decrease this year, this might be a bit too optimistic to hope for.

6. Conclusion

Judging Murata Manufacturing Co., Ltd. comprehensively, I think that it is an excellent company ready to take on the increasing manufacturing demand from Japan. Long-term, the future prospects, profitability, and financial situation are all good. It is a company that you want to consider purchasing at a low price in the long run.

However, in the short-run, the company does suffer from the same supply-chain shortages, increasing electricity prices and slump in demand as the rest of the industry. With a P/E of over 13 on the previous year’s record earnings, I still think the stock has some room to fall before it’s worth buying.

Therefore, this stock is definitely on my buying radar, but I’d wait until it falls a bit more before picking it up.

Rating: Strong Hold

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Nintendo recently released a much-anticipated trailer for its new Super Mario movie (click HERE to watch it).

I wrote a stock-analysis on Nintendo where I argued that the company has a massive potential to create a much needed new revenue stream:

Today, almost 90% of Nintendo’s revenue comes from its video games and consoles. This puts the company at risk of being too reliant on one revenue stream. On top of that, even though the video game industry is growing rapidly, it is a relatively niche part of the entertainment industry as a whole.

I believe that the leadership of Nintendo is aspiring to break out of the gaming industry…

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This analysis was originally posted in podcast format on June 13, 2022 (link here). Since then, Itochu has posted its Q2 results beating expectations slightly on revenue and sales. The stock is trading at ¥3,860 on October 7, 2022, compared to ¥3,751 on June 22, 2022, which is the basis-price for the analysis.

All recommendations in this analysis still stand today.

TL; DR

ITOCHU's financial condition and free cash flow is good, and its business performance is showing long-term growth. In addition, the company’s dividends are increasing yearly, and the dividend yield is approximately 3%.

On the other hand, ITOCHU is arguably the most popular trading company stock, so its stock price is high compared to its peers. I think this is justified as it has performed better than its peers historically. However, if the company’s growth cannot be maintained, the price premium may be corrected, and the stock price may fall.

All in all, I believe ITOCHU strong historical performance and current investments show that the stock still has room to grow long term. Hence, I believe this stock is the best stock among Japanese trading companies, and a buy on its current price!

What is ITOCHU, and why is it so Interesting?

ITOCHU is a trading company with the second largest revenue of all companies in Japan!

Simply put, Japanese trading companies are massive conglomerates that own companies from basically every major industry and connect them to hopefully create synergies.

In general, these trading companies have been valued less on the stock market than the sum of their parts because they’re seen as old relics with bloated balance sheets and slow-moving management.

However, in August 2020, Warren Buffett and his investment company Berkshire Hathaway bought roughly a 5% stake in all big Japanese trading companies, Itochu (8001 TYO), Marubeni (8002 TYO), Mitsubishi (8058 TYO), Mitsui & Co. (8031 TYO), and Sumitomo (8053 TYO), the world suddenly opened their eyes to this forgotten segment.

ITOCHU is steadily growing in business performance and has a dividend yield of about 3%, making it suitable for high-dividend stock investment.

On top of that, the company has consistently improved its bottom line with an average revenue growth of 11.9% and an earnings growth of 16.9% over the past 7 years. On top of that, it is still trading at a Price to Earnings ratio (P/E) of 8.2!

In this article, I want to answer these questions:

* How is ITOCHU's business performance and finance?

* Is ITOCHU’s stock price cheap or expensive?

My Six Investment Criteria

To find out if ITOCHU is a good investment, I have the following six criteria:

* Is the business growing?

* Is the profit margin high?

* Is the cash flow abundant?

* Is the finances sound?

* Is the stock price cheap?

* Does the company have good attitude towards its shareholders?

Konichi-Value Score

🤩 = Perfect

🙂 = Good

😑 = Acceptable

😖 = Bad

1. ITOCHU's Business performance over the long-term is good

The first criterion is if the business is growing.

The long-term results (Revenue and Profits for the year) of ITOCHU since 2013 are as follows (cited by Borsdata) *NOTE: ITOCHU has a broken financial year where Q4 in a year ends in March.

ITOCHU's revenue is spotty in 2013 and 2019 due to changes in accounting standards and the conversion of other companies into consolidated subsidiaries. Actual revenue has not changed abruptly.

Since it is difficult to see changes in business performance when looking at sales, it is better to look at continuous ordinary income.

ITOCHU's profits have continued to increase since 2013, and reached the highest profits in 2019 due to making FamilyMart a consolidated subsidiary.

Ordinary income increased slightly in the fiscal year ended March 2020, when the new corona problem began.

Compared to before the Lehman Shock in 2008, ITOCHU's ordinary income has more than doubled, and ITOCHU's business performance has grown over the long term.

ITOCHU's business performance is relatively stable because the ratio of resource-related businesses is lower than its competitors.

In general, trading companies have a large proportion of resource-related businesses such as crude oil and metals. As a result, the performance of trading companies is easily affected by resource prices, and during the 2015-2016 period when resource prices were sluggish, the performance of other companies in the same industry, such as Mitsubishi Corporation and Mitsui & Co., declined sharply.

However, ITOCHU’s energy segment only accounts for 10% of total revenue (compared to >20% for Mitsubishi and Mitsui & Co). Hence, ITOCHU's business performance is not as affected by resource prices, and it is a relatively stable stock compared to its peers.

2. ITOCHU’s Return On Equity is high at 17%

The second criterion is high profit margins. I believe that the rate of return is a measure of the strength of competitiveness, and the higher the rate of return, the better.

ITOCHU's rate of return is measured in ROE (return on equity) and ROA (return on total assets). Since 2008, they are as follows (cited by Borsdata):

ITOCHU's ordinary profit margin is in the single digit range, which is low. However, ITOCHU's sales have changed significantly due to changes in accounting policies, so it is difficult to refer to them.

On the other hand, looking at ITOCHU's ROE and ROA, they are 16.9% and 4.8%, respectively. For Japanese stocks, Average ROE is about 8% and ROA is about 4-5%.

In summary, ITOCHU's profit margin seems to be average or slightly higher than their peers.

3. ITOCHU's Cash Flow is Stable

The third criterion is the abundance of cash flow. Cash flow is a numerical value that indicates the inflow and outflow of cash, and is important as an index that reflects the actual state of the business.

* Free cash flow is the difference between operating cash flow and investment cash flow (absolute value).

Also, now when interest rates for loans are ticking up faster than they have for 40 years, having an abundance of cash can truly make or break your balance sheet.

The changes in Free Cash Flow (FCF) of ITOCHU are as follows (cited by Borsdata).

There are years when investment cash flow is high, and there are times when free cash flow is negative.

However, since the negative amount of free cash flow is supplemented by the positive amount of financial cash flow, there is no year in which cash and cash equivalents have decreased.

There is no concern about the cash at hand for ITOCHU, and we can see that it is a company with high business continuity.

4. ITOCHU's Finances are Sound

The fourth criterion is financial soundness.

Looking at the balance sheet, you can see the breakdown of assets and liabilities of a company. The balance sheet shows signs of the company that do not appear in data points like sales and profits.

Sales and profits are important, but I think balance sheet cleanliness is a better indicator of the company’s health.

The balance sheet of ITOCHU is as follows (cited by Borsdata):

On top of total equity outstripping current liabilities by a fair amount, ITOCHU's Net Debt in -54%!

This basically means that ITOCHU currently has 54% more cash than debt and they can pay off all their debt and still have more than half their cash left.

All in all, there is basically no risk that ITOCHU will have issues paying off their debt in the near future, even if interest rates on their loans increases substantially.

5. ITOCHU's Stock Price is at a slight Premium

The fifth criterion is the cheapness of the stock.

The stock price chart of ITOCHU is at 3,751 JPY when this article is released.

*Click here for the latest stock price of ITOCHU Corporation

In this section, I am using the following three as indicators to assess the cheapness of stock.

* P/E (Price Earnings Ratio)

* P/B (Price Book-Value Ratio)

P/E and P/B are important stock price indexes for understanding the fair value of a company, but they are just indicators and not answers. However, they do give a quantitative number on the stock’ cheapness.

ITOCHU's Price to Earnings Ratio (P/E) is at average 8, which is very cheap

First, looking at the transition of ITOCHU's P/E, it is as follows:

ITOCHU's P/E temporarily increased to 13,4 in Q4 2021, but has continued to decline since then.

It is said that the average value of P/E is about 15 on the Japanese stock market, so the current P/E of ITOCHU is generally cheap.

However, compared to ITOCHU's past P/E of around 8, 8.7 times is a little higher, but definitely low.

ITOCHU's Price to Book ratio (P/B) is about 1.3x, which is cheap for its growth.

Check the graph above to see ITOCHU’s historical P/B ratio.

A P/B at 1x is simply put the value of dissolving the company; the value of the company that remains if the business is liquidated is used as a floor of how low the stock could go.

A rule of thumb is that the stock price is low if P/B is less than 1x. However, stocks with good performances are almost always higher than 1x as a premium to their assets should be granted for their growth. Hence, a “fair” P/B may be 10x or more for high quality growth stocks.

As discussed above, ITOCHU has a higher-than-average growth in the trading company segment. Hence, a P/B of 1.3x compared to its good growth rate and profits is very cheap.

6. ITOCHU has a Relatively High Dividend Yield

The sixth criterion is if the company has a good attitude towards its shareholders.

The main way to assess this is to look at the companies’ dividends. There are pros and cons to dividends and some people prefer to promote reinvestments or stock buybacks in the company. However, stocks with dividends and have the advantage that the rate of decline in stock prices is relatively small when the market is hit by a shock. Also, dividends are historically much less likely to be removed than stock buybacks.

Let's take a closer look at ITOCHU's dividends:

ITOCHU's dividend yield is relatively high, but going down?

The changes in the dividend yield of ITOCHU are as follows (cited by Investing.com):

Dividend yields have fallen slightly due to stock prices rising since 2016. However, the dividend yield has been about 3% at average.

The average dividend yield of Japanese stocks is around 2%, so ITOCHU is a is not horrible, but it is definitely not a dividend stock.

ITOCHU is increasing dividends over the long term

The dividend yield of ITOCHU has gone down. However, this is due to the stock’s increase in value. The actual dividend amount have increased yearly (source: Borsdata):

The current dividend payout ratio is about 25%, and there is still plenty of room for dividend increases.* Dividend payout ratio: An index of what percentage of net income after tax was paid as dividends.

This shows that ITOCHU cares for its shareholders and that we can expect further dividend increases if its current business performance continues to be favorable.

Comparison of ITOCHU and its competitors

As competitors of ITOCHU, I compared the performance of Mitsubishi Corporation, Mitsui & Co., and Sumitomo Corporation with various investment indicators.

Due to the recent rally in natural resources, ITOCHU’s competitors have seen a higher increase in their stock prices. If you believe in a further increase in natural resources, they might be a better bet.

Trading company stocks are generally considered to be economically sensitive, so many companies are cheap in terms of Price to Book ratio (P/B).

On the other hand, ITOCHU's P/B is slightly higher than its competitors, giving a sense that its overpriced. However, ITOCHU has the highest Return on Equity and Return on Assets of all its peers, so the higher P/B is justified.

To summarize: ITOCHU outclasses its peers in long-term profitability, but Mitsubishi Corporation, Mitsui & Co., and Sumitomo Corporation are cheaper stocks.

Summary: Is ITOCHU a Stock Worth Buying?

ITOCHU's financial condition and free cash flow is good, and its business performance is showing long-term growth. In addition, the company’s dividends are increasing yearly, and the dividend yield is approximately 3%.

On the other hand, ITOCHU is arguably the most popular trading company stock, so its stock price is high compared to its peers. I think this is justified as the company has performed better than its peers historically. However, if the company’s growth cannot be maintained, the price premium may be corrected, and the stock price may fall.

All in all, I believe ITOCHU strong historical performance and current investments show that the stock still has room to grow long term. Hence, I believe this stock is the best stock among Japanese trading companies, and a buy at its current price!

Rating: BUY

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Disclaimer: The information in this article represents my opinions and should not be construed as personalized or individualized investment advice and are subject to change.

Previously, I wrote about the less known but recently more successful home-furnishing company Nitori (check out that article here). So, I thought it would only be fitting to take on the older brother of Japanese home furnishing, Muji!

Muji, or Mujirushi Ryohin (translates as “no-brand, quality goods”) as it is known in Japan, is perhaps the world’s most famous Japanese home-furnishing brand.

Muji began as a product brand of the supermarket chain The Seiyu, Ltd. in December 1980. The Mujirushi Ryōhin product range was developed to offer affordable quality products and were marketed using the slogan “Lower priced for a reason.”

Ever since its inception, Muji has carved out a distinctive design language, which is extended throughout its more than 7,000 products. Commentators have described Muji's design style as having mundanity, being "no-frills", being "minimalist", and "Bauhaus-style".

Muji product design, and brand identity, is based around the selection of materials, streamlined manufacturing processes, and minimal packaging. Muji products have a limited color range and are displayed on shelves with minimal packaging, displaying only functional product information and a price tag.

This has helped Muji differentiate itself and today the company’s products are often sold at a premium to competitors like IKEA and Nitori.

1. Profitability

This is a summary of financial results for the first quarter of the fiscal year ending August 31, 2022.

Net sales for the first quarter of the current fiscal year were ¥122.9 billion, up 6.9% year-on-year. Operating income decreased by 15.3% to ¥11.1 billion. Net income (EPS) per share was ¥29.8 million.The sales have reached an all-time high. According to Muji’s financial report, this is due to the increase in the number of stores in Japan and overseas.

Domestic business

Muji has been increasing its expansion even during the Covid-19 pandemic. Due to new store openings, net sales increased by 2.1% compared to the same period last year, but operating income decreased by 31%.This is due to the fact that sales of clothing and miscellaneous goods have declined significantly from the plan.

Overseas business

Both operating revenue and operating income grew by around 15%. Last year's overseas business struggled mainly in Europe due to the impact of Covid-19, and hence the numbers that had to be beaten in Q1 were relatively low.

In China, which accounts for the majority of Muji’s overseas business, 13 additional stores were opened from the end of the previous fiscal year, but as with Japan, Muji is struggling with sales of clothing and miscellaneous goods, and total sales were therefore flat.

2. Opportunities and Risks

Opportunities

Muji is one of the most recognized Japanese brands, and it’s mostly due to their successful overseas expansion. In September 2021, the company managed to open its 1000th store and it’s spending massively on new stores abroad. As the Japanese market is saturated and overseas tourism is likely not coming back to pre-pandemic levels any time soon, Muji has an up compared to other Japanese home-furnishing companies as they can easily leverage their brand in growing markets, especially mainland China and Southeast Asia.

As homeownership and the demand for high-quality Japanese furniture has shown exponential growth in these markets, Muji is the perfect brand to ride on this wave without much marketing effort. Muji’s leadership has also shown that expanding to east Asia has generated much higher profits than Europe and the US.

Risks

China is Muji’s fastest growing market, which brings two problems: The first one was highlighted with the use of Xinjiang cotton sourcing which the company downplayed as an issue earlier this year, whilst some other Western brands were more forthcoming in criticizing Chinese authorities. This could have an adverse effect in some markets.

The second issue is the company's growing reliance on China, as longer term it will probably become its biggest market. 'MUJI' may be seen as onside with the Chinese authorities currently, but geopolitical tensions can flare up and consumer behavior can be affected dramatically (although these cases tend to be temporary). China brings commercial opportunity but also fairly large risks, something that other regions do not come saddled with. In this context we would prefer to see the company make more efforts to grow in countries such as Indonesia (only 6 stores) and Vietnam (no stores currently) where there may be different challenges but not a growing risk profile.

However, the main risk I see is imitation in Muji’s products. Barriers to entry for minimalist 'MUJI'-like products are low, as seen by products by Uniqlo (OTCPK: FRCOY), Daiso Industries (private) and China's Miniso (MNSO). The company must continually innovate and compete versus discount stores.

3. Financial soundness

Next, let's look at Muji’s financial situation. First, the breakdown of assets.

Total assets were 391.5 billion yen, of which liabilities were 172.9 billion yen. The capital adequacy ratio is 55.1%.

Net assets (BPS - Basis Points) per share are ¥820.3. As the graph shows, in the last three years, there has been no significant change in BPS.

Considering how exposed Muji has been to the effects of Covid-19, this is impressive to say the least.

To summarize, a Capital Adequacy Ratio of over 50% is strong enough to not worry any investor of default risks. On top of that, that Muji has been able to hold a stable net asset ratio over the pandemic while expanding is very impressive.

4. Stock-price

The stock price is 1,268 yen as of July 8th, 2022.

The stock has been on a continuous downtrend from 2,480 yen on July 8th, 2021. That is a 49% drop since its peak despite record sales!

However, Muji has been very highly valued for a long time with an average Price-to-Earnings ratio (P/E) of 20 over the past 10 years. Its P/E ratio has come down to 13.52.

As China is the company’s biggest market, I am worried that we will see a big loss of revenue in the coming quarters which will increase its P/E substantially. Therefore, even though I believe Muji is undervalued at its current P/E-ratio, I think there is a big risk it will go up soon.

5. Dividend

The dividend yield for Muji is OK, but considering the company is in a growth phase, I believe it is definitely more than good.

6. Conclusion

At the current share price, I do not want to buy shares of Muji (Ryohin Keikaku).

The reasons are as follows:

* Results

Looking at the current situation, it is difficult to predict the future where profits will grow significantly. In particular, clothing sales are struggling not only in Japan but also in other countries, and although the number of stores has increased, sales and profits have not increased as expected.

If Muji can follow in the footsteps of Nitori, I can see it growing substantially in South-east Asia and Europe, but as of now, this is just hopeful thinking.

* Financial status

Muji’s earnings growth has not increased steadily over the past three years.

It seems that the Covid-pandemic has affected this, but it is still not a good sign.

* Stock price index

If you look at the stock price from the P/E perspective, it looks like the stock is cheap historically, and if you look at it from the P/B ratio, the stock is expensive.

In addition, the credit multiple is at a high level, and there is a possibility that there will be a lot of selling when the stock price rises. However, since the dividend is stable and the stock has brand power, I still believe that the stock is cheap long-term.

I've said a lot of negative things so far, but I think it has the potential to become a retailer with a global presence, like Fast Retailing (Uniqlo/GU) and Nitori HD. If its growth rate picks up, I would definitely justify its current P/E of around 16x due to the enormous potential the company has abroad.

MUJI's strength lies in its wide range of hit products (food, sweets, cosmetics, stationery, interior goods) and global brand recognition. If the company can continue to release hit products in the future, it will lead to further increases in corporate value.

However, I would not buy the stock currently…

Rating: HOLD

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To read the full analysis with all the graphs, tables and data, click here.

Hamakyorex Co., Ltd. <9037.T> is an independent logistics bulk contractor, in Japan referred to as a 3rd Party Logistics (3PL) company. Over the years, it has manage to achieve steady growth and revenue, all while improving its efficiency with robotics and other automation focused initiatives. Still, the company’s Price-to-Earnings ratio has been hovering around 8-9 for the past 10 years!

Is Hamakyorex a diamond in the rough, or are there some dirty secrets hidden beneth the facade? Let’s find out in this week’s Konichi-Value stock analysis.

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Link to the full article can be found here

All major Japanese REITs can be found here. For me, the most interesting REITs are:

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