Asahi Kagaku Kogyo - A Nanocap $12m Japanese Net Net That Owns Land Near Shanghai Worth ~5x its Market Cap
An interesting deep value opportunity, but one I ultimately am not very excited about
Asahi Kagaku Kogyo (TYO 7928) is a $12m market cap net-net industrial plastics manufacturer that over the last 10 years mostly operates around breakeven. The business itself isn’t interesting, but it’s a positive that they aren’t losing money. There also isn’t a single writeup on this company or any mentions of it on X/Twitter, so it’s definitely under the radar.
Asahi Kagaku entered China in 2001 and completed a new factory in Kunshan City in 2004 which sits on 27,257 sqm of land. They spent about $6m on this venture and given its proximity to Shanghai it has appreciated considerably. It’s likely worth at least $50m today. Kunshan is one of the most productive areas of China boasting a GDP of $70B USD and is also the richest county-level city in China.
Asahi Kagaku’s current assets are $26.38m ($16m of which is cash) against total liabilities of $9.25m, which puts NCAV at $17.13m. Their market cap sits at ~$12.2m, which values the company -$4.93m. Remember, we’re only looking at current assets vs all liabilities and ignoring the most interesting asset, which is the land near Shanghai.
So how much is this property worth exactly? I haven’t searched Chinese sources but according to a news post by S&P Global in 2019, a 68,114 sqm property in Kunshan was acquired for ¥1.4B RMB, or ~$195m USD. Adjusting for property size and using the same valuation, Asahi Kagaku’s property would be worth ~$78m USD. This is a very high level view and these 2 parcels are likely nowhere near perfect comparables. It’s safe to say the property is worth multiples of current market cap.
In addition to their factory in China, the company also owns a large facility in Hekinan City, Aichi Prefecture near Nagoya and a factory in Thailand. We’re not even going to bother valuing these assets, but they’re likely worth a lot relative to the company’s miniscule $12m market cap. The China business is the only consistently profitable part of the company. The domestic and Thai divisions are not profitable.
Why does this opportunity exist?
First of all, is there even an opportunity here? Finding and researching names like Asahi Kagaku Kogyo can be fun, but it’s hard to see a path to realizing value. The problem here is we have a dirt cheap illiquid Japanese company where most of the value is in real estate in China. Getting money out of China isn’t easy even if Asahi Kagaku wanted to sell this asset, which they don’t.
The only way shareholders ever realize value here is through an eventual buyout by management which will likely be done at a premium to current market value. Even a 100% premium doesn’t come close to capturing fair value, but a more realistic premium would be 30-60%.
On the positive side the company does pay a dividend of 2.5% and historically hasn’t been very volatile. Company policy is to pay out at least 30% of net income as dividends with a minimum of 10 yen. Their stock price has been flat since 2000 with spikes corresponding to periods of strong earnings.
This isn’t a terrible bet as there’s 2 ways to win. You buy and hold and the stock likely goes nowhere while you collect the dividend with the eventual hope of a strong move upwards from either improving fundamentals or a buyout. A third way to win which is likely never happening is they sell the asset in China and dividend out the cash. Better yet, they could sell all their assets and liquidate the entire company, but again this isn’t likely.
Asahi Kagaku’s underlying business is poor, but the net net valuation reflects that. Despite being a net-net, business quality is much worse than many of the net-nets I own. Just take a look at historical results:
To top things off, the company revised their medium term forecasts sharply downwards and now expects to earn JPY ¥180m in 2025, down from their initial forecast of ¥580m.
Conclusion:
While I’m a big believer in deep value investing, I always prefer companies with growing revenues and consistent profits. Most companies in my Japanese basket routinely compound book value at least 3% over long periods of time. Asahi Kagaku on the other hand has a 10 year tangible book value CAGR of -0.5%. This is after dividends of course, but this still isn’t good.
Still, I can’t help but want to own this name, so for that reason I took an absolutely inconsequential 4bps position. If they 10x or go to 0 it won’t make a difference in my portfolio. There are simply better opportunities in Japan which don’t rely on monetizing Chinese real estate. The Keihin investment thesis for example is much cleaner and also involves undervalued real estate. Asagami is also a better play on undervalued real estate as it doesn’t involve China.
Disclosure: None of this is investment advice. Everything in this post is my own opinion and I could be wrong. Do your own due dilligence.
It may well make sense to invest in such small stocks. One of the reasons is that this company has such a small market capitalisation. There are some studies that suggest high returns from the smallest 10% of companies, see for example this link. However, there is no good explanation for this effect.
https://microcapclub.com/excessive-history-microcaps/
Awesome writeup! What website do you use to look at a quick snapshot of the financial statements of these japanese companies? For example I use quickfs.net for american and european companies but they don't offer japanese companies.