Thinking Points

  • If you like secondary automotive markets, you’re in for a treat!
  • Fisco released 5 reports last week, 4 of which are accessible.
  • One of the companies covered is the biggest franchisee of Japan’s version of AutoZone.

If you like the automotive industry and the secondary markets that come with it, you’re in for a treat. Fisco released 5 reports last week, 4 of which are readable (1 seems to have a broken link). Two of the reports are companies involved in secondary automotive markets – One company buying and selling used cars and another that operates Autobacs franchise stores, which are similar to AutoZone.

 

Apple International (TSE: 2788)

Apple International buys and sells used cars. Before you ask, no, this company has no ties with the Apple known for iPhones and Macbooks.

Going forward, Apple is expanding into car rentals and leasing. The company intends to add used cars into the rental car mix, which might be an interesting twist in a new-car standard rental market. Additionally, it partnered up with Isuzu Motors (TSE: 7202) to build a used commercial vehicle import/export business.

Now, Isuzu isn’t well known in the US or probably even in Europe, but it’s a big name in Japan and Southeast Asia. The company is known for pickup and commercial trucks, with a particular strength in diesel engines.

Financials for Apple International over the last several years look atrocious. The short story is that the founder left the company years ago for health reasons, company diversified, and then the owner came back to clean things up. The huge sales drop from fiscal 2015 is a function of letting go of the China operations, which previously accounted for over half of company revenues.

Read the full Fisco Report here.

 

G-7 Holdings (TSE: 7508)

G-7 Holdings is the other secondary automotive market operator I mentioned. The company is the largest franchisee for Autobacs Seven (TSE: 9832), one of the two major aftermarket car parts retailer in Japan. The other one is Yellow Hat (TSE: 9882).

Aside from the car part retail franchisee operations, G-7 also has a food segment which makes up for two-thirds of company revenues. The main revenue source in this segment are the “Gyomu Super” (業務スーパー) franchise, which is a wholesale supermarket chain.

The Autobacs and Gyomu Super operations are the bulk of G-7 operations. The company also has several other franchisee operations, including Bike World (motorcycle shop) and Daiso (Japanese-equivalent of a dollar store). The company’s growth plan is to open more Autobacs and Gyomu Super stores, improving profitability for other franchisee operations, and M&A.

Read the full Fisco report here.

 

Unirita (TSE: 3800)

Unirita is a software development company focused on IT system operations. I’m not too familiar with the industry, but from an outsider, it sounds like Unirita develops systems to support IT systems operations.

The company operates through four segments: Cloud, product, mainframe, and solutions. According to Fisco’s report, Unirita is focused on the cloud business as a growth area. The mainframe business, which currently accounts for a third of company revenues, is a cash cow in a slowly declining market. The cloud business only accounts for 7% of revenues currently.

Though Unirita’s ROE sits at a meager sub-10%, ROIC is regularly above 50%. Just like many other Japanese companies, Unirita holds a huge cash balance. Net cash amounts to nearly a third of the company’s market cap. The company is consistently generates free cash flow and currently trades at a little below 4 times EV/EBIT.

Read the full Fisco report here.

 

Japan Lifeline (TSE: 7575)

Japan Lifeline is a medical device manufacturer and importer. From the looks of it, the company is more sophisticated than simply importing medical devices into Japan. Japan Lifeline signs exclusive sales agreements with some of its foreign manufacturers, basically taking care of everything on the Japan side. This includes regulatory applications, marketing, education, and sales promotions.

On the in-house manufacturing side, the company is a leader in the domestic cardiovascular field. Here’s a chart that means little to me (with no domain knowledge), but may be useful for you:

Source: Fisco Report

Management expects business performance to improve as Japan’s population ages further. It appears to me like the market has this priced in. The company traded around single digit EV/EBIT until 2013. It has since doubled revenues and triple operating income. The market cap has increased 37 fold since 2013.

Read the full Fisco report here.

 

Fisco Wrap up

In terms of which company is most interesting to me, Apple International tops the list. Again, the financials are atrocious. That said, the founder returning and cleaning things up is a sign of hope. A big sign of hope. From an investment perspective, however, Unirita looks more compelling with consistent free cash flow and a seemingly low market valuation. Hope you enjoyed this week’s Fisco Roundup!

Author: Kenkyo Investing

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