Thinking Points

  • Chubu Steel Plate (NSE: 5461) manufactures steel plates often used in construction machinery, industrial machinery, and buildings.
  • The company delivers above industry average operating performance with industry leading balance sheet strength.
  • The estimated appraisal price of its headquarter/factory’s land alone, net of liabilities, is worth about as much as its current market capitalization.
  • Still, being in a tough commodity business and trading on a less liquid Nagoya exchange, catalyst seeking and liquidity sensitive investors should avoild.
  • Investors with more flexibility can expect a conservatively calculated investment CAGR of between 4.5% and 12.2% over the next 5 to 8 years at November 15th, 2018 closing price of 627 yen per share. This valuation does not take the company’s land holdings into consideration.

Introduction

Chubu Steel Plate (NSE: 5461) manufactures various types of steel plates with many applications, including construction machinery, industrial machinery, buildings, and more. The company specializes in electric air furnace steel manufacturing, and is the only steel company in Japan exclusively dealing in steel plates.

While the company is largely susceptible to raw material price fluctuations, it has maintained industry leading financial health. During the first half of 2017, Chubu Steel Plate held a 5.7% market share in the Japanese steel plate market, making it the fourth largest steel plate maker in Japan by tonnage. Though the company operates through four segments (steel, rental, logistics, and engineering), the Steel segment is by far the largest, having accounted for 93% of total revenues in fiscal 2018.

 

The business & environment

There are two methods commonly used to produce steel: Basic Oxygen Furnace method (BOF, most common) and Electric Arc Furnace (EAF) method.

The key difference is raw materials. The World Coal Association provides an overview on how steel is produced. But the short version is this: With BOF, iron ore and coke (made from coal) are the main inputs, along with scrap steel (~30%). With EAF, scrap/recycled steel (90-100%) is used. Steel is 100% recyclable. Another important note is that the BOF method is ideal for large batch production while the EAF method is more appropriate for small batch production.

According to the World Steel Association, Japan was the #2 producer of steel in the world in 2017:

Source: World Steel Association

 

Japan’s steel plate production volumes have been on the decline since 2010:

Source: Chubu Steel Plate (~2013) & Japan Iron and Steel Federation (2014~)

 

Chubu Steel Plate, though with some fluctuation, has more or less maintained its 4% market share in steel plates over the last decade. As for foreign players, Korean and Chinese imports are the key players, often accounting for over 90% of imports. While gradually increasing, imports only accounted for 7.2% of steel produced in Japan + imported.

The key players in Japanese steel plate manufacturing are:

Source: Chubu Steel Plate investor presentation

 

Chubu Steel Plate is the largest steel plate manufacturer using the EAF method. JFE, Nippon, and Kobe Steel are all primarily using the BOF method. Other companies using the EAF method include:

  • Tokyo Steel (TSE: 5423)
  • Nakayama Steel Works (TSE: 5408), Nippon Steel affiliated
  • Tokyo Tekko (TSE: 5445)
  • Godo Steel (TSE: 5410), Nippon Steel affiliated
  • Kyoei Steel (TSE: 5440), Nippon Steel affiliated
  • Osaka Steel (TSE: 5449), subsidiary of Nippon Steel

One thing to keep in mind is that Chubu Steel Plate is the largest steel plate manufacturer using the EAF method. “Plate” and “EAF” are the keywords here. The company is considered a mid-tier player as an EAF method steel manufacturer.

Source: GuruFocus data, chart created by author

 

While Osaka Steel is the undisputed operating performance leader among Japanese EAF steel makers, Chubu Steel remains consistently either average or above average. When taking this into account together with the balance sheet, Osaka Steel and Chubu Steel are both leaders in the industry:

Source: GuruFocus data, chart created by author

 

Summarily, Chubu Steel Plate is in exceptional financial health relative to its EAF steel maker peers, and generally delivers strong operating performance as well. While value-added manufacturers can deliver more consistent and higher operating performance, Chubu Steel Plate is about as good as it gets for a commodity maker.

 

Shareholders

As of Q2 2019 (ending September 30th, 2018), Chubu Steel Plate had 30,200,000 share issued and 2,337,100 shares in treasury, leaving outstanding shares at 27,862,900.

Here are the top 10 shareholders:

Source: Nikkei and company filings

 

Three of the largest Japanese steel-related trading companies are stakeholders in Chubu Steel Plate. The three companies are:

  • Metal One (60% Mitsubishi [TSE: 8058], 40% Sojitz [TSE: 2768])
  • NS&SB (Nippon Steel, Mitsui [TSE: 8031], Sumitomo [TSE: 8053])
  • Itochu Marubeni Steel (50% Itochu [TSE: 8001], 50% Marubeni [TSE: 8002])

NS&SB owns 4.17% and Itochu Marubeni Steel owns 1.8% of Chubu Steel Plate. The largest shareholder of the company is the Chubu Steel Plate Business Association with a 8.79% stake. Presumably Metal One, which accounted for 16.3% of Chubu Steel Plate revenues in fiscal 2018, has some shares in this association. Metal One owned a good 8.1% stake in Chubu Steel Plate back in 2009, but reduced its stake and no longer appears on the major shareholder list.

Seeing that 4 out of 7 EAF steel plate makers are affiliated to Nippon Steel, you might figure that there is a real possibility of Nippon Steel building a stake in Chubu Steel Plate. The two companies were actually partnered from 2007 to 2016, with Nippon Steel taking a 5% stake in Chubu Steel Plate. During this time, Chubu Steel Plate manufactured steel plates for Nippon Steel. But as demand slowed down, Nippon Steel decided to end the partnership, selling most of its stake.

Now, Nippon Steel has an interesting story. Its trading arm, Nippon Steel Trading was bailed out by Mitsui & Co (TSE: 8031) in 2002, when the company was struggling. Mitsui secured a 20% stake in the company through this. But in 2012, Nippon Steel and Sumitomo Metals merged. And so did both companies’ trading arms, forming Nippon Steel & Sumikin Bussan (NS&SB, TSE: 9810), reducing Mitsui’s stake in the process. Then in 2017, Mitsui sold a portion of its steel trading business to NS&SB and used the proceeds to increase its stake in NS&SB back to 20% (Japanese).

Mitsui Bussan Steel, a wholly owned subsidiary of Mitsui & Co, is the second largest shareholder of Chubu Steel Plate with a 8.4% stake. And as you can see, NS&SB holds a 4.17% stake in Chubu Steel Plate as well.

 

Financials & Valuation

  • Chubu Steel Plate is in the business of making a commodity and susceptible to all the risks that come with it – like fluctuation in raw material prices, global price competition, and more.
  • That said, the company maintains above industry average operating performance as well as industry leading balance sheet strength in Japan.
  • Moreover, the land that Chubu Steel Plate owns is recorded at purchase cost, far below today’s market price.
  • At today’s price of 627 yen per share (November 15, 2018 closing), Chubu Steel Plate trades at 56% NCAV. A positive shift in sentiment can provide investors with an investment CAGR of between 4.5% and 12.2% over the next 5 to 8 years, with invested capital secured by the company’s land.
  • Still, investors with liquidity requirements should take caution. The company is only traded on the Nagoya exchange, which is harder to access than the Tokyo exchange.

 

Chubu Steel Plate maintains above industry average operating performance and industry-leading balance sheet. Despite this, the company trades cheaply, with net cash & equivalents sitting at 36.4% of current market cap and the stock price at 56% of NCAV (as of November 15, 2018 closing price of 627 yen).

What’s more, the company’s land holdings on its balance sheet doesn’t come close to reflecting current market price. While I am unable to find information on when the land was purchased, the company has been operating from its current location since 1957. Presumably, the land was purchased around this time as well.

Regardless, Chubu Steel Plate’s headquarters/factory sits on 241,264 square meters (2,596,944 sq. ft.) of land, the book value of which is 917 million yen ($8.1 million USD). Taking the average of the appraised land prices (Japanese) of four areas nearest to Chubu Steel Plate’s headquarters comes out to a square meter price of 110,425 yen ($974). This puts the market price of Chubu Steel Plate’s land at 26,642 million yen ($235 million USD). Net of liabilities, we are looking at 17,543 million yen ($155 million USD) compared to November 15, 2018 closing market cap at 17,470 million yen ($154 million USD). By book value, this is about half of the land that Chubu Steel Plate owns.

Now, Chubu Steel Plate is only listed on the Nagoya exchange. This means lower liquidity, though not as inaccessible as Sapporo or Fukuoka exchanges. Applying a 5 to 8 year investment horizon and assuming share price will reach 80 to 100% of NCAV (which assigns 0 value to the land), here is the sort of investment CAGR you can expect:

Again, this does not include the land that Chubu Steel Plate owns.

While Chubu Steel Plate’s operating business is sound and its assets are even more attractive, only catalyst and liquidity agnostic investors should consider taking a position in Chubu Steel Plate.

 

The bottom line

Chubu Steel Plate maintains above industry average operating performance and industry-leading balance sheet. Moreover, the company trades at 56% NCAV and its headquarters’ land alone, net of liabilities, is worth about the company’s current market capitalization. Though investors catalyst seeking and liquidity sensitive investors should pass up on the opportunity, investors with a greater amount of flexibility can expect a conservatively calculated investment CAGR of between 4.5% and 12.2% over a 5 to 8 year time horizon.

 


Kenkyo Investing
Kenkyo Investing

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