I'm working my way through a list of Japanese net-net's again and I'm scoring them against a simple criteria:
- 10 years of positive EBIT
- 10 years of positive net income
- No debt
- Pays a dividend
- Shares decreasing or stable
I know this seems really strict, but believe it or not out of 100 or so companies that passed a strict net-net screen I'm getting companies that match the above criteria. Because my approach to Japanese net-net's is mostly mechanical in nature I want the best possible companies I can find. I'll leave the turnarounds and special situations for a Japanese equities specialist. I just want to find cheap companies that should be mean reverting.
I am going to do this post a little different than most, I want to go over three profitable net-net's. I will give a short business summary and background, and a look at the balance sheet through my net-net template. I'm also going to use this post to roll out something new, a Japanese net-net comparison spreadsheet. As I look at these companies I'm compiling some relevant metrics into a big spreadsheet so I can compare over a variety of data points.
I know it seems a bit ironic that after doing a post on how stocks are businesses I'm now posting financial details on three Japanese companies with a focus on financials and not the actual business. The reality is when looking at net-net's in Japan I'm taking a bit of a quant approach. I don't read/speak Japanese, I've never been there, I don't understand the culture, so the best I can do is make a judgement based on some numbers. Without further ado:
Ryoyo Electric (8068, last trade ¥939)
Ryoyo Electric is a semiconductor company, seems like most cheap stocks are these days. The company has three segments, integrated circuits, application specific circuits, and large scale integration circuits. Ryoyo's products are a commodity and they end up being a price taker so they're subjected to the whims of the market. The company is located in Tokyo.
- Net cash company if you include long term investments, ¥950/sh
- Negative cash flow one of the last five years.
- Tokyo Exchange
- Debt free
- EV/EBITDA of 1.73
- NCAV of ¥2183
- NWCC of ¥1770
Choukeizai Sha (9476, last trade ¥340)
Choukeizai Sha is a book publishing company, they publish five magazine subscriptions and over 450 throughout the years. The books mostly related to economics, management, law, accounting and tax related subjects. I realize the publishing industry isn't the best right now but this company is trading at an absurd valuation.
- The company has been profitable the last ten years.
- Positive cash flow and FCF for the past five years.
- ROE ex cash of 10%, the overcapitalization is penalizing the business.
- Osaka traded
- Debt free
- NCAV of ¥813
- NWCC of ¥677
- Net Cash ¥395, slightly above the last trade.
Shinko Shoji (8141, ¥715 last trade)
Shinko Shoji is a small cap exporter of electronic components, they import components from abroad, assemble them and then resell them internationally. They sell memory chips, LCDs, semi-conductors, capacitors, and complete PC systems.
- While posting a positive EBIT and positive net income for the past 10 years the cash tells a different story. Cash flow is lumpy with big years ¥6b yen, and then years of ¥7b losses.
- Capex requirements appear to be very minimal.
- Tokyo listed (easier purchase for some investors)
- Sizable dividend yield above 4%.
- Paltry net margin
- NCAV ¥1395
- NWCC ¥806
Here are the three companies compared, I plan on adding to this spreadsheet as I research more Japanese net-net's. I'm guessing of the original 100 companies I'll end up researching 10-15 and maybe purchasing 2-5, we'll see how it turns out.
Disclosure: Long 9476, and trying to acquire more shares.