4 New Deep Value Double Net Net Additions To The Cheap Japanese Basket

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I’ve added several deep value names to my Japanese portfolio over the last few months. While there are many net-nets in Japan, the names below are either double net nets or close, meaning if these stocks doubled, they would still be net nets. 

There are cheaper names in Japan, but I’m filtering a bit for profitability. Since I don’t know when value will be realized, I don’t want to own melting ice cubes. The names below and just about everything else in my Japan bucket are consistently profitable and have a history of growing book value per share.

Nichia Steel (TYO 5658)

• Market Cap: $107m USD

• Net Current Assets (Net of Total Liabilities): $119m

• Investment Securities: $122m

• Net Current Assets + Investment Securities: $241m

• P/TBV: ~0.3

• P/E: 13

Nichia Steel is a dirt cheap listed subsidiary of Nippon Steel (they own 24.1%) that manufactures bolts, wire products, and galvanized sheets. The company has been consistently profitable over the last 20 years, only ever reporting a small net loss in 2009 and 2011.

The market ascribes negative $134m value to the operating business, which seems extreme, as the company has generated net profit for over 11 years straight. Even ignoring investment securities, Nichia Steel is a net-net, but adding these back in and we’re in double net-net territory. Only 1/3 or so of investment securities are publicly listed stocks. The other 2/3 are mostly corporate bonds and other fixed income securities.

Shareholder returns have improved recently. Nichia began buying back stock earlier this year for the first time in a decade. Since July the company’s outstanding shares have declined a little less than 1%. The company continues to repurchase shares, albeit extremely slowly, with the most recent purchases made just last month. Dividend payments also increased from ¥6 in 2021 to ¥10, which yields 3.15%.

Nippon Steel has been in the news lately as they announced a buyout of U.S. Steel for $15 billion. The obvious question is why would Nippon Steel look for these massive acquisitions overseas when they could just buy out Nichia? The answer is pretty simple. At $15 billion, U.S. Steel moves the needle for Nippon Steel while Nichia does not.

Thesis: Dirt cheap. Maybe Nippon Steel buys out this listed subsidiary eventually or it keeps chugging along growing book value and paying out a modest 3.15% dividend. 

Sanyu (TYO 5697)

• Market Cap: $21m USD

• Net Current Assets (Net of Total Liabilities): $30m

• Investment Securities: $4m

• Net Current Assets + Investment Securities: $34m

• P/TBV: ~0.3

• P/E: 5.6

Sanyu is another dirt cheap listed subsidiary of Nippon Steel (they own 35.1%) which the market values at -$13m. While it’s not as cheap as Nichia, it offers a much higher dividend yield of 6.3%. It operates a largely undifferntiated business that manufactures and markets cold-finished bars and cold-heading wire.

Sanyu has only ever really lost money twice. Once during the great financial crisis in 2009 and again during the covid cash in 2020. Revenue has grown steadily over the last 20 years as well. The company has not repurchased shares recently.

Thesis: Same as Nichia. Dirt cheap, good dividend, cheap on both P/E and P/B basis.

Sanko Co (TYO 6964)

• Market Cap: $35m USD

• Net Current Assets (Net of Total Liabilities): $61

• Investment Securities: $6m

• Net Current Assets + Investment Securities: $67m

• P/TBV: ~0.4

• P/E: 8.3

Sanko is a manufacturer of precision parts for automobiles, appliances, and other products. The Automotive segment makes up the bulk of the company’s revenue. 

While the company’s dividend hasn’t grown since 2019, it yields 2.3%. Over the last 20 years Sanko has lost money only in 2009-2011 and 2014.

Sanko also repurchased shares for the first time since 2013 last year reducing their share count by 1.1% in May 2022. Prior to this, the company repurchased ~5% of its outstanding shares back in 2013. These repurchases aren’t large, but they’ve been accretive.

Thesis: Dirt cheap, consistently profitable, and decent dividend.

Marufuji Sheet Piling (TYO 8046)

• Market Cap: $65m USD

• Net Current Assets (Net of Total Liabilities): $127m

• Investment Securities: $7m

• Net Current Assets + Investment Securities: $134m

• P/TBV: ~0.3

• P/E: 7.5

Marufuji Sheet Piling is a commodity player in the construction materials business selling and renting sheet piles, h-beams, and other construction products. They also take on construction projects as contractors. They do not manufacture their own products, but instead sell products produced by Nippon Steel.

Not only is this company dirt cheap, but in the last 20 years they’ve only lost money twice: once in 2006 and again in 2011.

In terms of capital returns, they haven’t bought back any meaningful amount of stock since 2007. Dividend-wise though, the stock yields 3.48%.

Thesis: Dirt cheap, consistently profitable, and decent dividend.

Conclusion:

I suspect we’re going to get many management-led buyouts in 2024 as one answer to the Tokyo Stock Exchange reforms. Reuters reported that 85% of listed companies felt “larger listing-related burdens” and 14% of those have considered going private due to the recent push for improved corporate governance. I suspect that this figure will increase as additional pressure is applied and the burdens of being listed increases.

Several takeouts have already happened which many investors decried as unfairly cheap, but I’m not greedy. I would gladly sell my shares in the above listed names for a mere 100% premium. The buyers get the entire business basically for free as well as all the other fixed assets which we totally ignored, while I get a double. It’s a win-win!

There aren’t many double net net names in Japan that aren’t melting ice cubes and most of them are tiny and illiquid, which means most bigger players aren’t looking at them. It also means you won’t be able to deploy much capital here, so be careful if you trade these names.

While I’ve shifted my Japanese portfolio more towards deep value, the best performing names in my portfolio have been a bit higher quality. I’ll likely share an update on the entire cheap Japanese basket sometime in January.

Disclosure: I own positions in the stocks mentioned in this article as part of my Japanese basket.