Idea: 40% Domestic Share In Automotive Rearview Mirrors – Murakami Kaimeido (TYO: 7292)

Talking Points

  • Self-driving cars and camera systems are a thing now, and camera systems are replacing automotive mirrors.
  • With increased competition, the future is tough but not impossible for Murakami Kaimeido, which holds a 40% domestic and 7% global share in automotive rearview mirrors.
  • Murakami’s business performance and price metrics may paint a compelling picture for some investors.

Self-driving cars are a thing now.

So who needs mirrors when the driver is a computer?

If you’ve kept up with automotive news, you’d probably agree that 90% of the industry news topics revolve around EVs (Tesla!) and self-driving cars. The other 10% is about Takata’s (TYO: 7312) impending doom.

But wait, self-driving cars aren’t the only ones taking away our car mirrors. Camera systems are becoming increasingly popular as a substitute for mirror systems.

We are still legally required to have wing mirrors on our cars in the US and Japan (and probably other parts of the world as well). The tide is shifting though, and the world is putting more faith in cameras.

In July 2016, the United Nations Economic Commission for Europe (UNECE) added verbiage regarding safety and image quality requirements for camera monitor systems. This can be found under regulation 46 here. To note, the US is one of the 56 UNECE members. Also, Japan adopted regulation 46.

So in addition to self-driving cars, camera systems are also a thing now.

With this backdrop, I would like to shed some light on Murakami Kaimeido (TYO: 7292). Murakami has been around for some 130 years. Over these years, the company has established itself in the automotive industry as a reliable supplier for automotive mirrors. This lead to Murakami’s current 40% domestic and 7% global share in automotive rearview mirrors.

But what good is a stronghold in a declining market?

Don’t discount Murakami Kaimeido’s future yet.

According to a Nikkei Automotive article (in Japanese), camera systems cost 5~10 times the standard mirror system. Perhaps it’s a race against time before the cost-benefit of a camera system outweighs that of a standard mirror system.

It’s not like Murakami has been twiddling their thumbs while waiting for the right time to close shop, though.

Source: Murakami Kaimeido Press Release (Japanese)

Yes, that is a rearview mirror. Yes, it is also a camera system. Yes, it is a Murakami product.

Murakami is planning for commercial-scale production of camera systems in 2018. Moreover, the company expects camera systems to account for more than 10% of production by 2025.

Okay, let’s discount Murakami’s future a little bit.

While I doubt any significant amount of new money would flow into building an automotive mirror producing factory, the same cannot be said for camera systems.

The competition here is tough. Big names in automotive mirrors are Gentex, Magna, Ficosa, and Valeo. It goes without saying that these guys are developing camera systems. Now, in addition to the legacy players, we’re looking at companies like Panasonic (TYO: 6752), JVC Kenwood (TYO: 6632), Pioneer (TYO: 6773), and Denso (TYO: 6902) pouring new money into automotive camera systems, and that’s only new Japanese money.

The two names I want to focus on are Valeo and Denso.

Why? Because Toyota Motors (TYO: 7203).

Toyota accounted for 35%+ of Murakami revenues for FY 2016. Denso produces powertrain, air conditioning, and safety systems among other systems. The company is also a well known Toyota-affiliate. In fact, Toyota Motors owns 24.7% of Denso.

So there’s one problem for Murakami: The biggest customer has a family member that wants to sell camera systems.

France’s Valeo has a 55% stake in Ichiko (TYO: 7244), which is Murakami’s largest domestic competitor for automotive mirrors. And yes, they are also interested in camera systems. Furthermore, Toyota, with its subsidiary Daihatsu, owns 9% of Ichiko.

Apparently, there is more than one family member wanting to sell camera systems.

But who knows? Maybe there is room for all parties involved.

Tearsheet

Surface level metrics show that Murakami is trading at a screaming discount (really? 0.8 EV/EBIT?!). However, let’s not forget that the automotive industry is producing cars at an all-time high, according to Organisation Internationale des Constructeurs d’Automobiles (OICA).

My best guess is that the industry won’t shift to self-driving cars and camera systems as quickly as most people would expect. The bigger the price tag is, the longer normal people wait to make a purchase decision. Additionally, defective cars can harm human lives. This typically means that changes happen slowly and carefully; and we’re not only talking about technical changes, but regulatory changes as well. Murakami Kaimeido probably has plenty of runway (5+ years) before the value proposition of standard mirror systems become noticeably inferior to that of camera systems.

Author: Clayton Young

Hi! I'm Clayton. My value investing journey began in 2012 during my college days. It was not until recently (2016!) that I decided to leverage my Japanese language skills to research Japanese equities. I hope to provide valuable insight on Japanese companies to the English-speaking world through this blog!

4 thoughts on “Idea: 40% Domestic Share In Automotive Rearview Mirrors – Murakami Kaimeido (TYO: 7292)”

  1. Hey Clay,

    I really enjoyed your analysis of Murakami, especially as a near to mid range play as I agree with your view that self driving cars are further from mainstream use than people expect.

    I have a question — and apologize if you’ve written on it already but I couldn’t find it on your blog — as someone who has never invested directly in a Japanese stock, what are the USD/JPY currency implications? Should they be considered when investing in Japanese stocks, or are they too difficult to predict (it seems like USD has strengthened a lot vs JPY), or if the company exports than their revenue growth makes any weakening of the home currency a wash?

    Thank you!
    Max

    1. Hi Max, thanks for the comment!

      I think it is useful to build a simple spreadsheet model that shows a company’s sensitivity to currency fluctuations. However, beyond that, currency falls into my “unknowable” category.

      There are Japanese companies that fill local demand with localized production. That might be an interesting way to hedge if the currency thing worries you.

      Cheers!
      Clay

Leave a Reply

Your email address will not be published. Required fields are marked *