Description

Let me introduce you to possibly the best managed Japanese company you’ve never heard of.  Its not sexy, just solid.  Not 2x EBIT like you sometimes find in Japan for horrible businesses with a pile of cash that’s never going anywhere.  But rather world class in everything it does, extremely well-managed with Japanese conservatism, a history of reinvesting in growth, and a quite reasonable valuation.

I found it in a screen about a year ago and simply read the annual report.  Just a fantastic document in my opinion.  You don’t see many like that (at least available in English) in smaller Japanese companies, or really any Japanese companies with the exception of a Toyota. 

I got the chance to spend an hour with the CEO in Tokyo before the world stopped.  He is bright, very genuine, and simply loves his business.

Products:

1. Shutters (34%)

   This was their first product when the company started in the 1950s and they are the dominant leader in Japan.  Don’t think window shutters.  Shutters in Japan means the rolldown things that are on any street-level shop.  In the US, we think of stores as standalone buildings.  In Japan there are a zillion little shops and restaurants and businesses that occupy small street level frontage.  Every one of them has a shutter.

    

   Shutters also means overhead doors for garages, loading docks, things like that.  It also might mean a large retractable partition in a factory setting, or a high-performance retractable door protecting a clean-room technology operation.

    

   Very importantly in today’s world, an e-commerce distribution center has a lot of overhead doors.

1. Doors (32%)

   90% or more of their door business is commercial.  Walk around your office (well you probably can’t now but just imagine what it used to look like!) and just notice how many doors there are.  Lots.  They also make automatic doors that you would find at the entrance to a commercial building.  This also includes what we in the US would call garage doors, where they are the leader.  Virtually all of their U.S. business is garage doors.

    

   

1. Other products include exciting things like building partitions, bathroom stalls, fire-proof partitions.

74% of the business is commercial, 26% residential.

After 40 years of acquisitions and organic growth I see a company that makes total sense.  These businesses are all relatively low-tech manufacturing and all sell to the same customers/distribution channels. 

And very importantly for today I can’t see a single thing in their product lineup which Amazon or Google would have the slightest interest in disrupting.

Even though this does not appear to be a consumer business, in Japan they are selling to every mom-and-pop little store.  There is evidence of a brand here.  My wife knew Sanwa instantly when I mentioned it and could even sing their corporate “Sanwa shuttaaaaa” jingle.  She has not lived in Japan since the early 1980s! 

https://www.youtube.com/watch?v=kjndOjkj4U4

Management

I find management to be exceptional, and not just relative to braindead Japan.  The Chairman is an old codger (80) named Toshitaka Takayama who ran the business for many years.  His son Yasushi Takayama (47) joined the company in 2006 and took over as President and COO in 2017.  The father joined the company in 1963 and became President in 2000.  Yasushi’s grandfather was also CEO.  The father owns about 1% of the company but it’s clearly a family running this business.  I don’t see how a non-controlling CEO can have his son succeed him.  That’s weird even in Japan.  But I’m glad he did.  Nepotism produced Ivan the Terrible but it also produced Peter the Great.

Their Shareholder Letter (Yasushi, the son) is the best I can recall reading in Japan, and I’d find this world class in any other country.  Very thoughtful discussion of both EVA and capital allocation.  They don’t write in the platitudes I am used to seeing in Japanese shareholder letters.  They are very specific about financial goals and don’t make excuses.  Goals are set high and are very specific.  When they don’t achieve them (though usually it seems they do) they explain clearly why. 

Most important is they talk about what matters to value creation:  1) They articulate a very clear growth strategy which the company has executed for 50 years; 2) Components of ROIC and EVA are monitored and analyzed; 3) Capital allocation – very clear statement of what they will do with cash flow.  Acquisitions is clearly the first priority which has served shareholders well over time.  I rarely say that about a Japanese company, and I look at and own a lot of them.  I rarely buy Japanese companies that acquire.  This one is different.

They say they started tracking EVA way back in 2001, though from 2009 to 2012 returns were lousy coming out of the GFC and all Japan’s own problems in that period.  What they call SVA (Sanwa Value Added) is not just mentioned but analyzed through their whole annual report.  Not coincidently perhaps, their return on capital has improved and they are setting a goal for further improvement and state very clearly how they will get there.

The company’s history has been of steady growth by acquisition within their core.  They have not made one acquisition outside of that core that I can see.  Every acquisition has either been to expand to a new geography or acquiring adjacencies or competitors.  And they are opportunistic.  In December 2009 they acquired a garage door competitor in the U.S. right at the bottom of the housing market.  In 2018 they moved into the UK for the first time – the currency was undervalued and the country was deeply out of favor.  This is not at all how Japanese companies typically acquire.  Or U.S. companies for that matter.

We have yet to see an acquisition in this downcycle, but they’re probably not the only company that is frustrated they haven’t gotten a swing in this wacky year when things were on sale for two weeks and the Fed banned distressed selling.  Go ask Warren.

They are also clearly very conservative, a trait in many Japanese companies.  But not stupid conservative as you often see there.  Not so conservative that they hold a big pile of cash, though they do hold a small pile.  But the way they report numbers.  And a conservative balance sheet.  This seems like the kind of management that one of these years is going to go the next step and totally rationalize the balance sheet.  If they did that, about 10% of the market cap kicks out to shareholders in some form (either a dividend or they invest the capital – I’d rather they do that.)  Maybe at some point we see the balance sheet rationalized by a significant acquisition which modestly levers the balance sheet.  I would welcome that given their track record.

Economics

The business is cyclical – 2/3 commercial construction.  2009-2010 were rough as one might expect.  From what I can see they took a small loss for two years, but that was probably a small profit if we added back modest writedowns of assets.  Three years later they were back to 2007 levels with higher profits.  Very importantly, they used 2009 to build onto their U.S. presence with a significant acquisition.

In this cycle the second quarter was rough but you could already see “green shoots” (US housing, internet commerce distribution centers, Japan never locked down and covid is not a big problem there like it is in Europe and the US).  When they reported their third quarter they raised guidance a lot and the stock is now back to about what I paid a year ago.  There was never anything wrong with that price in my view (didn’t know a pandemic was coming) though I like my adds earlier this year better.

How cyclical is this business is a very important question.  It would seem the business should follow commercial construction, housing in the US.  Cycles may be mitigated by their geographical diversification 50% Japan with the rest split between Europe and the U.S.  U.S. housing is a very nice diversifier for them in this cycle.

It is important to note that their European business grew in YE March 2019 and is picking up fast in the second half of 2020.  Nothing in Europe grows. In 2019 they grew both revenues (by about 8% organic plus another 5% from an acquisition) and margins.  Is this business as cyclical as we presume?  Warehouse/DC construction is a big part of their European business – Ecommerce is a big driver of that.

This company clearly has the balance sheet to weather a recession and management in the past has done very smart acquisitions in recessions to build the business.  I view this as a business I am going to own for a long time.

We recognize that management is focused on return on capital and in recent years have improved that significantly.  They are an EVA culture – with those improving ROIC is never “done”.  Also we recognize that this company has grown sensibly through reinvestment and dividends for over fifty years.

The company bought back shares at good prices in the second half of FY 2020 because they were not finding acquisition opportunities at prices they want to pay.

Where Sanwa really shines is when you think about it as a slow but steady over years compounder with a Japanese cost of capital but a mid teens ROIC. 

I own a number of Japanese companies that are much cheaper on “metrics” but this is my biggest position there by far because the others are far inferior on management and business quality.

I’m not going to go into valuation in depth here.  It’s cheap on normalized P/E if that’s your thing.  Given the return on capital and cost of capital in Japan there are other ways of looking at that.  I respect the “colleagues” on VIC I’ve gotten to know over nearly 20 years that you have your own ways of doing that as do I.  You can read the annual report too and I would encourage you to do so.  The new one in English just came out about two weeks ago.

I think it’s worth 1700 give or take.  Given their historical ability to allocate capital opportunistically I’d probably bet on the “give” rather than the “take”.  I got the sense management agrees with me on that number roughly (importantly unlike the managements of most cheap Japanese stocks they actually understand what that means.)

The views expressed are those of the author and do not necessarily represent the views of any other person. The information herein is obtained from public sources believed to be accurate, reliable and current as of the date of writing.  The author will not undertake to supplement, update or revise such information at a later date.  The author may hold a position in the securities discussed.

Catalyst

Cyclical improvement

Capital allocation