Thinking Points

  • Japan’s aging population and low fertility rates may have deterred investors from looking at the childcare industry.
  • However, a lack of childcare infrastructure seems to be one of the contributing factors to the country’s low fertility rates.
  • Childcare facility operators trade at lofty multiples now, but there are opportunities in other related businesses.

You probably already know about Japan’s aging population and its low fertility rate. It’s hard to find Japan-related macro commentary that doesn’t mention low fertility rates or the aging population. But did you know about Japan’s shortage of childcare workers?

I’m guessing this is your first time hearing about it.

As of October 2017, there were 5.99 job listings for every job-seeking qualified childcare worker in Tokyo. The national average was over 2 job listings per childcare worker, with the heaviest shortages in highly populated areas in and around Tokyo as well as Osaka.

With news about low fertility rates, you would think Japan should have a growing list of childcare workers looking for jobs. In fact, there are 26,081 infants and toddlers on a waitlist to enter federally approved childcare facilities. Meanwhile, Asahi Shinbun points at the narrow definition of the waitlist’s inclusion criteria, mentioning that the real waitlist ought to be 69,224.

For non-Japanese investors flooded with doom and gloom news about Japan’s aging population, it’s easy to overlook the opportunities in childcare. It’s counter-intuitive. In any case, I figured a quick industry overview would be helpful, so here we go.

 

The childcare problem is structural

If you’ve been reading Kenkyo for a while, you might recall my article from late 2016 about JP Holdings (TSE: 2749), the largest childcare operator in Japan. In this article, I outlined the differences between daycares and kindergartens as well as some of the regulatory constraints for daycare operators.

More specifically, the constraint I want to highlight is the legal child to teacher ratio requirement:

In addition to the ratio constraint, which heavily affects toddlers and infants, there are tuition constraints.

Federally-approved facilities can only charge a maximum of 104,000 yen per month ($962 US Dollars). If you’ve got 3 children under the age of 5, the tuition for the second child is half price, and the third is free.

And then we have space constraints.

For toddlers under 2 years old, the infant room must have a minimum of 1.65 square meters (17.8 sq. ft.) per person and the playroom 3.3 sqm (35.5 sq. ft.) per person. For those above the age of two, 1.98 sqm (21.3 sq. ft.) of playroom and 3.3 sqm (35.5 sq. ft.) of outdoor play space per person is required.

Combine the child to teacher ratio, tuition, and space constraints and we have a business model that increases costs and (sometimes) reduces revenues as the number of children under care increases.

Where are the opportunities?

Interestingly, the Japanese population problems in the 1970s was mostly about overpopulation. For a resource starved country, this is a legitimate concern. In some ways, a smaller population is good news for Japan. Nevertheless, a sudden and steep decline in population is scary, to say the least. Therefore, Japan probably ought to get its fertility rate as close to 2.1 births per woman, as soon as it can.

So where do we look to?

The Japanese government has gradually and progressively increased its support for childcare workers and facilities. Naturally, I think most people will start by looking at childcare center operators, just as I did. However, many of them seem to trade at lofty multiples. I didn’t dig deep into any single company, but here’s a short list that I pulled up:

wdt_IDCompanyExchTickerEV/EBITEquity/Asset
1JP HoldingsTSE2749310.28
2Like KidsnextTSE606590.28
3Global GroupTSE6189140.38

I also found childcare related companies with better business performance, like Pigeon (TSE: 7956) and Youji Corporation (TSE: 2152).

Let’s take a quick look at Youji Corporation. The company specializes in physical education courses for children, but also operates child care centers. Presumably, savings in childcare costs would lead to increased spending on physical education courses.

The business performance reminds me of Hiroshi Tsukakoshi’s book Tree Ring Management. It’s a solid and consistent slow growth company. According to the 2017 Youji business report, the company has continuously increased revenues for the past 45 fiscal periods! We have a company with a net cash balance sheet and consistent business performance trading at 4.15 EV/EBIT. Moreover, foreign ownership is at 5.8% according to Nikkei, which tells us that either the story isn’t well known outside of Japan or the story is known, but the company is too small. Current market cap is at 9,757 million yen ($90.2 million USD).

The bottom line

It’s easy to look at Japan’s low fertility rate and aging population to disregard childcare as an investment area. However, it seems the lack of childcare infrastructure has been one of the many contributing factors to the low fertility rate. I highly encourage tracking the industry as a whole, especially as the government takes tangible steps to improve childcare. Though many of the childcare operators seem to trade at lofty multiples, there are other related companies (like Youji Corp.) that can benefit from the government’s improvement initiatives.

Author: Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.