Description

Note: this stock is not cheap based on what happened last year, but there's a decent chance it is very cheap now looking out 3-5 years. 

Sanki Service (6044 JP): a Growing Air-Conditioning Maintenance Company

              Sanki Service (ticker: 6044 JP), based in the Japanese city of Himeji (population: 500,000), is an entrepreneurial company founded in 1977 by Mr. Yoshikane Nakajima.  The company IPO’d in 2015, but Mr. Nakajima remains the major shareholder and President to this day.  Sanki Service has two main business segments: “air-conditioning equipment maintenance” and “total maintenance.”

The air-conditioning equipment maintenance segment is Sanki Service’s original business: acting as a third-party air-conditioning equipment maintenance company for customers of Sanyo Electric, the OEM manufacturing subsidiary of the Panasonic Group.[1]  Sanki Service’s role here is straightforward.  Buyers of Panasonic air-conditioning equipment typically receive a long-term maintenance contract.  When these air-conditioning equipment owners need to maintain or replace their hardware, especially chillers, Panasonic will dispatch (and compensate) a dedicated maintenance company like Sanki Service to do the actual work. [2]

Today there are about 50 authorized Panasonic air-conditioning maintenance companies in Japan, each with their own exclusive territory, and Sanki Service is the largest player with a market share of over 20%.[3]  In recent years the unit growth of large, commercial-use air-conditioners has been muted.  Yet Sanki’s maintenance segment has prospered because A) the Panasonic brand has maintained the highest nationwide market share (about 35%), B) smaller maintenance competitors to Sanki Service have disappeared over time, and C) Sanki has enjoyed tailwinds from the regular consignment sales of Panasonic replacement equipment and installation work.  This segment has been a lucrative cash-cow for Sanki Service: from 2014 to 2017 segment revenues increased 37% (thanks to a spate of replacements), segment profit margins averaged 10%, segment return on assets averaged 33%, and capex was almost zero.   We think this segment should remain profitable going forward, but with limited growth potential.

And that is why Sanki Service launched their second business segment, total maintenance, back in the year 2000.  The total maintenance segment is also focused on commercial air-conditioning maintenance, but with two twists.  First, Sanki Service employees do not do the actual maintenance work.   Rather, Sanki Service operates a 24/7 call center that accepts incoming “help” calls from clients then dispatches other third-party companies to perform the maintenance work on short-notice.  Second, Sanki Service is not bound to serving Panasonic clients in specific territories – they can work for anyone, anywhere, anytime. 

So far, Sanki Service’s total maintenance offering has appealed to large Japanese chain stores or restaurants which, for reasons including manpower shortages, increasingly must rely on third-party maintenance companies for urgent repairs.  For example, in late 2016 Sanki Service became the air-conditioning maintenance company for all 20,000 7-Eleven outlets in Japan – a major coup.  7-Eleven is widely recognized as the biggest and best convenience store chain in Asia, if not the world.  If things go smoothly, this maintenance coverage could extend to overseas 7-Eleven outlets, including mainland China, where Sanki Service already has a 24/7 call center.

So far, the total maintenance segment has recorded lower segment profit margins and returns on assets than the air-conditioning equipment maintenance segment, but management believes those figures should improve as more chains like 7-Eleven sign up. [4]  In management’s view, the blue-sky total revenue opportunity for this segment could be as large as JPY 3 trillion (USD 28 billion) versus the JPY 6 billion (USD 55 million) of revenue that this segment recorded for Sanki Service in the last fiscal year.[5]  Sanki Service’s total maintenance business adds a lot of value to clients, so we are inclined to believe that management can continue to grow this segment’s revenues at a double digit percentage rate for years to come.[6]

According to management, our visit to their headquarters in September 2017 was the first they had ever hosted for a foreigner. 

It was this visit to Himeji that convinced us that Sanki Service not only has a unique business model, but also a unique respect for shareholders.  Why?  First, according to the Shikiho Online database, Sanki Service has by far the highest return on equity (25%) of the 21 public companies within the building maintenance (ビルメンテナンス) sector.[7]  Next, Sanki Service has uncommonly high insider stock ownership for a Japanese public company: almost 70% of employees are shareholders via the employee stock ownership program, and a majority of the board of directors are also shareholders.[8]  One of those board members, executive director Kitakoshi Tatsuo – who owns shares nearing JPY 100 million in value, a small fortune in Japan – even rose out of his seat and knelt on his knees next to a coffee table to flip the pages of an investor presentation for us while he explained the company to us in great detail.[9]

Granted, we’re industry outsiders, so our optimism for Sanki Service could ultimately be a mistake for many reasons, including those we haven’t thought of yet.  But if the total maintenance segment continues to expand, the current share price could potentially represent a single-digit EV multiple of future EBIT. 

Catalyst

Continued growth of revenu, profit, and dividends.