Thinking Points

  • Fisco published four reports last week, two of which we will highlight today.
  • One company is in the pachinko industry and another is a big-time franchisor of cram schools.
  • Neither company looks attractive as an investment, but may offer Japan-interested investors a curious take on the cultural angle.

Fisco published four reports last week, all on companies I’ve come across at one point or another. I’ll introduce two that are interesting. Also, we skipped two reports last week – one on a biotech and another on a difficult to understand leasing company with a vague value proposition. You can always keep up with all of Fisco’s English language reports here or follow them on Twitter.


Daikoku Denki (TSE: 6430)

Daikoku Denki develops information management systems for pachinko hall operators. If you’re not familiar with pachinko, it’s a Japanese form of gambling. You can read more about it here. The short story is that regulatory pressure is increasing and the whole industry is struggling to survive.

Source: Daikoku Denki Website


The services Daikoku offers is recurring in nature, but with the steep decline in pachinko halls, Daikoku’s business performance is suffering too. Fiscal 2018 operating income was less than a tenth of what it was just 5 short years ago. Although the company maintains a clean balance sheet, there’s no telling whether the industry will face even stronger headwinds. The company currently trades for 12 times EV/EBIT and can either continue its nosedive or see some stabilization if regulatory pressures ease up.

Read Fisco’s report on Daikoku Denki here.

FYI – If you want further details on pachinko, I strongly recommend reading IR material from Dynam Holdings. The company is listed on the Hong Kong exchange (HK: 6889) and provides English information.


Meiko Network Japan (TSE: 4668)

Meiko Network Japan is the franchisor of “Meiko Gijuku”, a cram school chain in Japan. Cram schools are common in Japan, especially among those preparing for high school and college entrance examinations. The company is considered the pioneer in individual focused learning.

Source: Meiko Gijuku Website


Meiko’s revenue growth has slowed down recently, thanks to intensifying competition. Some of this is due to population decline, but newer companies leveraging computer based systems have emerged as well. With that said, value investors would probably like the frequent share repurchases and generous dividend payouts. The company produces healthy free cash flow consistently and runs on a clean balance sheet, however, gross and operating margins have fallen considerably over the last decade. Today, the company trades at 12.8 times EV/EBIT.

Read Fisco’s report on Meiko Network Japan here.


The bottom line

I found both companies interesting, but neither of them look particularly attractive as an investment. Daikoku doesn’t have much control over its own destiny and Meiko operates in a cram school industry with increasingly intensifying competition.


Author: Kenkyo Investing

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