Thinking Points

  • Kawagishi Bridge Works (TSE: 5921) is primarily engaged in structural steel fabrication and secondarily engaged in precast concrete.
  • Looking at a 10 year time frame, the company generates ~1% in operating margins, and is susceptible to the volatility that comes with being in a commodity business.
  • With that said, Kawagishi has accumulated land over its 112 year history, which is roughly worth 11,000 million yen ($97.5 million USD), or more than its current market cap of 8,455 million yen ($74.9 million USD), but carries a book value of 3,462 million yen ($30.7 million USD).
  • Moreover, the company runs debt free, and trades at 55% of NCAV based on its current share price of 2,902 yen.
  • Investors can expect an investment CAGR of between 4.9% and 12.9% over a 5 to 8 years time period. Possibly more if the company’s land is priced in.

Introduction

Kawagishi Bridge Works (TSE: 5921) is mainly engaged in the fabrication and construction of structural steel and secondarily manufactures precast concrete. Founded in Osaka in 1906, the company has a rich 112 year history. Interestingly at one point, despite its founding in the Kansai region (central Japan), Kawagishi was considered one of the “big 3” firms in Kyushu, the westernmost region of Japan. What’s more, the move into Kyushu happened with Fumiko Kawagishi, arguably one of the earliest female CEOs in a male-dominant Japanese construction industry, at the helm.

Source: Kawagishi Bridge Works, founder Taichiro Kawagishi (left) and son Shigeyoshi Kawagishi (right)

 

Today, Kawagishi Bridge Works calls Tokyo its home, but operates six factories extending from Ibaraki (just outside of Tokyo) on the east all the way to Yamaguchi (entry point from mainland Japan to Kyushu) to the west.

 

The business & environment

The first thing to note with structural steel fabricators in Japan is that each fab needs a certification from the Japanese Ministry of Land, Infrastructure, Transport, and Tourism. There are five grades of this certification from highest to lowest:

Source: Kawagishi Bridge Works

 

The grades determine what sort of steel the fabs can produce (thickness, grade, process, etc) and what sort of buildings it can support.

As of October 2nd, 2018, there are 14 steel fabs in Japan with the S grade certification. Five S grade fabs are in the Kanto region (where Tokyo is situated), including Kawagishi’s Chiba Factory #1.

The remaining four Kawagishi steel fabs are H grade. There are 89 total H grade fabs, with some outside of Japan (China/Korea).

Other steel companies with S grade fabs are:

  • Kawada Technologies (TSE: 3443) subsidiary Kawada Industries with 3 fabs
  • Komai Haltec (TSE: 5915) with 2 fabs
  • Takada Kiko (TSE: 5923) with 1 fab
  • Takigami (TSE: 5918) with 1 fab
  • Tohoku Steel (Komai Haltec is largest shareholder) with 1 fab
  • Tomoe Corporation (TSE: 1921) with 1 fab
  • Shimizu Corporation (TSE: 1803) subsidiary Fabtec Japan with 3 fabs
  • Imabari Shipbuilding (private) subsidiary Metalfabrica with 1 fab

 

Historical Demand and Kawagishi’s position

According to the Japan Iron and Steel Federation (JISF), here’s what historical structural steel demand in Japan looks like:

Source: JISF (Japanese)

 

When Japan’s real estate bubble popped, structural steel demand plummeted for the next two decades. Then after 2010, demand started to pick back up.

Kawagishi’s production volume followed directionally, but with a little more volatility:

Source: historical filings, chart created by author

 

Kawagishi’s current steel production capacity, according to its website, is at 102,000 tons per year. That puts 2018 utilization at 76%. Without structural steel demand by region, it’s difficult to takeaway anything meaningful as the company’s fabs are spread out across Japan.

Source: Company website

 

As with many commodity makers, production volume doesn’t always translate to profit – spread does. And Kawagishi is a prime example of this:

Source: historical filings, chart created by author

 

The future of Japanese construction

While the consensus is that construction demand will soften after the 2020 Tokyo Olympics, Mizuho Research Chief Economist Hajime Takata argues that replacement demand, especially in the public sector, will fuel continued growth (Japanese). In fact, Hajime thinks labor shortage, which is particularly severe in construction, is more likely to be the bottleneck to continued growth.

Nikkei Asian Review’s Junichi Sugihara writes:

 

“Mass retirement awaits Japan’s construction industry. Of the 3.3 million people employed in the industry, one in four — around 800,000 — are 60 or older. Only 370,000 workers are in their teens or 20s. The infrastructure ministry predicts the industry will face a shortage of 470,000 to 930,000 employees in fiscal 2025.”

Source: Nikkei Asian Review

 

Now, incorporating foreign labor isn’t the only way Japan is trying to address this issue. The Japanese government launched the i-Construction initiative to improve productivity in the construction industry. While the media tends to highlight the “cool stuff” like drone surveying and remote control/autonomous construction machinery, frontloading the construction process is a big part of the initiative.

What this means is that, instead of pouring concrete in forms at the construction site (a labor intensive process with great variability), the process is completed in a factory (standardized). This is called precast concrete. The i-Construction Consortium specifically mentions precast concrete and prefabricated steel as a means to improve productivity (Japanese). And precast concrete is the other, much smaller business that Kawagishi is engaged in.

 

Major customers

In Japanese construction, there are five “super general contractors”. This is loosely defined as the general contractors with over a trillion yen in revenues. The five companies are:

  • Takenaka Corporation (private)
  • Shimizu Corporation (TSE: 1803)
  • Taisei Corporation (TSE: 1801)
  • Kajima Corporation (TSE: 1812)
  • Obayashi Corporation (TSE: 1802)

Customers that account for over 10% of revenues in a given year are disclosed on Japanese financial reports. Over the last decade, every one of the above five companies has shown up on Kawagishi’s financial reports. Kajima has appeared every single year for over ten years, often contributing between 30 to 50% of Kawagishi revenues. Taisei has also been a regular, showing up on 8 of the last 10 years of financial reports. In other words, a healthy Kajima and, to a lesser extent, Taisei is good news for Kawagishi.

 

Where is Kawagishi headed

Kawagishi does not publish its earnings presentations on its investor relations page. As such, it’s a little difficult to gain much insight on what exactly the management team is thinking or working on. With that said, it appears Kawagishi can expect to see consistent work for both its steel and concrete business. Gauging Kajima’s performance ought to be a pretty good way of keeping track of Kawagishi.

For fiscal 2019, the company is projecting a 22% decline in revenues and a 50% decline in operating income. This projection is largely due to a decline in backlogs and new orders.

 

Source: historical filings, compiled by author

 

With a projected dividend payment of 80 yen per share, that’s still a strong 2.7% dividend yield at the current stock price of 2,902 yen.

 

Shareholders

As of fiscal year end 2018 (ending September 30th, 2018), the company 3,000,000 shares issued and 87,854 shares in treasury, leaving outstanding shares at 2,912,146. So far, only the short form financials have been released. This does not contain the list of major shareholders. Also, the company did a 5-to-1 reverse stock split on April 1, 2018.

Here are the major shareholders from fiscal 2017, adjusted for the reverse split:

Source: Nikkei and company filings

 

Though Ryuichi Kawagishi is the board director, Kawagishi Bridge Works is not a family controlled business often seen in Japan. In fact, Itochu Marubeni Sumisho Techno Steel, Metal One, and JFE Steel all have members on the board. All the Japanese steel related trading companies have a stake in Kawagishi. For more information, read the “Shareholders” section of Chubu Steel Plate (NSE: 5461).

 

Financials & Valuation

  • Though Kawagishi Bridge Works owns one steel factory with the highest level of certification, the company is still in the business of making a commodity, susceptible to all the risks and fluctuations that come with it.
  • Recent business performance has been unusually strong, but management expects a slower fiscal 2019.
  • The company maintains a debt-free balance sheet and its profitability is largely dependent on the mix of raw material price vs. market price of finished goods.
  • Over its 112 years in business, Kawagishi has accumulated some land, which is recorded at purchase cost. The market price of this land is considerably higher than book value.
  • Investors can expect an investment CAGR between 4.9% and 12.9% over 5 to 8 years. Possibly even more if the land is properly accounted for.

Kawagishi is in a commodity business which has recently performed very well. Operating performance over the last three years came in around 4% while the years prior to that came in under 2%, with losses mixed in. Still, across the span of a decade, Kawagishi ought to remain slightly profitable. Moreover, Kawagishi has a rather consistent ~70 million yen ($620 K USD) of income from renting some of its properties.

Now, the most interesting thing about Kawagishi is the land it’s accumulated over its 112 year history. On the books, the company owns 3,462 million yen ($30.7 million USD) of land. The Chiba #1 factory and Yamaguchi factory account for 68% of this.

Source: 2017 filings and company website

 

Based on a rough estimation using Tochidai.com, a website that compiles the Ministry of Land, Infrastructure, Transport, and Tourism’s published estimate of land values, Kawagishi’s landholdings are worth somewhere in the neighborhood of 11,000 million yen ($97.5 million USD). This is more than the company’s current market cap of 8,455 million yen ($74.9 million USD), and Kawagishi trades at 55% of NCAV.

In many ways, the investment case for Kawagishi is similar to Chubu Steel Plate. Both companies have a solid operating business in a commodity market with land assets booked significantly below market. And they both trade well below NCAV. The main difference is that Kawagishi trades on the Tokyo exchange while Chubu Steel Plate trades on the Nagoya exchange.

 

Assuming a 5 to 8 year investment horizon and share prices reaching between 80% and 100% NCAV, investors can expect to see an investment CAGR of between 4.9% and 12.9%. As a reference, if more people realized the market value of the land Kawagishi owns, perhaps it’ll be included in the share price eventually.

 

The bottom line

Kawagishi, like Chubu Steel Plate, operates a solid business in a commodity market. Over its 112 year history, the company has accumulated land, which is booked at purchase cost and significantly below market price. Investors can expect an investment CAGR between 4.9% and 12.9% over 5 to 8 years. Possibly even more if the land is properly accounted for.

 


Kenkyo Investing
Kenkyo Investing

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