Description

Condiments can be a fantastic product category.  They’re disproportionately important to a meals flavor profile, very-low-cost-per-serving, frequently served inside their trade dress, and can have very strong brand loyalty (ex. Sriracha or Heinz tattoos).  These factors can give dominant condiments pricing power.

Soy sauce has been around for a couple thousand years as one of the world’s oldest condiments.  It’s been brewed with the same ingredients for 500 years (soybeans, water, salt). 

The late Park Seung-bok led Sempio Foods Company (“Sempio”) for ~40 years (until 2016) and created a dominant soy sauce brand by continuously “widening the moat.”  It seems he emphasized brand building, market share, and product quality over maximizing profits.  I’ve seen his (translated) quote that “a company is not a money making organization, but a society where people live together.”  This resulted in Sempio obtaining ~60%+ value share in Korean soy sauce under the nation’s oldest registered trademark. 

His son (Stanford Masters / Ohio PhD) inherited leadership of a firm with untapped profit potential.  He’s already meaningfully increased earnings while their value share has continued to grow.

Sempio market share (by value) vs. #2 Brand:

Source: Statistical Site & Author’s Analysis

This is a simple business.  Sempio seems to sell ~65+ million bottle equivalents (930ml) of soy sauce annually with the main flavor’s MSRP around ~$5/standard bottle.  I’d estimate they make pretax profit of just under ~$0.50/bottle (author judgement, as they sell other food products as well).

I think they could raise prices ~$0.25+/bottle without losing significant market share.  Perhaps they could even do that twice or three times in the medium or longer term.  That first $0.25/bottle might increase their earnings by ~40%.

Despite potentially having pricing power, Sempio seems cheap at ~6.5x LTM growing earnings (with net cash). 

Kikkoman is probably a good comp and trades at ~50x forward earnings.  That’s a big spread.

I think it’s not totally unreasonable to feel the business might be worth ~18x NPAT on ~$1 pretax earnings power/bottle equivalent (~65m+ bottle equivalents), plus the value of their other food products (~40% of sales, estimating smaller % of earnings). 

Perhaps add a pinch of retained earnings for a waiting period or existing net cash and there might be some good upside. 

There is some rhyming precedent of comparable ideas working out OK for value investors.  The below quote is from everyone’s favorite Vice Chairman:

“Let me give you an example. One guy in Korea, he cornered the sauce market. And when I say cornered, he had like 95% of all the sauce in Korea. And he couldn't stand anybody else ever selling any sauce. So he could have made two or three times as much if he wanted to by raising the prices.  Li Lu figured that out. It's called Ottogi. And of course we've made 20 for 1.” 

Downside protection wise – I think Sempio is fine.  The category seems stable and defensive.  The business is net cash.  With flat earnings the business would generate the market cap in FCF pretty quickly.  The brand is strong.  It may be logistically challenging to lose market share rapidly, since soy sauce is fermented and aged a bit (analogy - more difficult to scale a whisky brand vs. vodka).

Taking all of these factors together, I believe the risk-reward here is attractive (and have an investment in the company).

Final note – I think their soy sauce is very good! 

FOOTNOTE: In reality pricing likely isn’t quite that simple.  There are different tiers of their soy sauce formulations/quality (501, 701, F-3, etc.), and people buy in different quantities and for different cooking purposes – all of which likely have different price points and price elasticity.  

Risks: I don’t speak Korean and I didn’t grow up with these brands.  Volume growth would probably have to come from international markets.  Per-capita consumption trends probably won’t be good, and the Korean capita figure also has issues.  Perhaps pricing power may not be what I think.  Korean capital allocation is always a risk.  Sempio and the CEO don’t seem to have a strong corporate governance reputation in either direction, and governance thus-far basically seems pretty average by local standards.

Disclosure: Have ownership interest in Sempio Foods Company at the time of this write-up that can change at any time without notice. There are no plans to provide future updates on the authors buying or selling activities for this or other stocks. The author may buy or sell shares of Sempio Foods Company without notice for any reason at any time.

Catalyst

Hopefully charging a little more per bottle