Thinking Points

  • Sanko (TSE: 6964) is a precision component manufacturer primarily catering to the electronics and automotive industries, with a particular focus on pressed and hinged products.
  • The last two decades have been rocky to say the least, and historical financials look dubious at best, but there is more than meets the eye.
  • The company effectively just went through a two-decade turnaround, starting out as an electronics components maker and transforming into an automotive component maker.
  • Moreover, Sanko also expanded into residential infrastructure products, like smart power meters, and is looking for more.
  • At today’s price of 459 yen per share, investors can expect an investment CAGR of between 8.2% and 13.4% over a 5 to 8 year timeframe, with a potential for further/quicker price appreciation if one of Sanko’s new business areas gains traction.

Introduction

Sanko (TSE: 6964) is a precision component manufacturer primarily catering to the electronics and automotive industries, with a particular focus on pressed and hinged products. Over the last several years, the company also expanded into residential infrastructure, or more specifically, smart power meters. Business performance over the last ten years has been less than stellar:

Source: Company filings


“Rocky” is one word that perfectly describes the last two decades at Sanko. The company went head on into the Japanese electronics industry decline, then into the automotive crisis, but managed to come out with a strong balance sheet and a solid operating business.

The business & environment

Sanko was founded in 1963 by three brothers, with Tomio Tamura (the second eldest) emerging as the key figure in scaling operations. With 23 employees, the company first started by manufacturing jigs and precision pressed products. Three years later in 1971, it started manufacturing tape player components, then camera and telecommunication components. By 1984, when Sanko went public, the company was deep into electronic components manufacturing, and had grown into a 500-employee operation.

By the turn of the century, the Japanese electronics industry was starting to feel the presence and pressures from Korean, Taiwanese, and Chinese electronics manufacturers. With margins on the decline and manufacturing increasingly shifting overseas, the pressure trickled down to Sanko as well. This is when Tomio passed the helm to his son, Masanori Tamura (2001).

Still nearly a pure electronics component manufacturer, Sanko’s revenue declined from 23,758 million yen ($209 million USD) to 16,726 million yen ($147 million USD), and operating income from 1,319 million yen ($11.6 million USD) to 55 million yen ($480K USD) just between fiscal 2001 and 2002. With Masanori as the CEO, Sanko expanded into automotive component manufacturing.

By fiscal 2008, automotive related revenues came in at 2,353 million yen ($20.7 million USD), or 16.6% of total revenues. And then the global financial crisis, along with the automotive crisis, hit. Surprisingly, Sanko’s automotive revenues declined by 1.7% between 2008 and 2009, then went right back on its growth track, which continues today. In 2018, 8,482 million yen ($74.7 million USD), or 64% of Sanko revenues came from automotive parts.

What’s more, Sanko further expanded into residential infrastructure over the last few years, primarily manufacturing smart power meters for Osaki Electric (TSE: 6644). In 2018, residential infrastructure accounted for 2,664 million yen ($23.5 million USD), or 20% of company revenues.

Source: Company filings


So far, even through the automotive crisis, Sanko’s automotive business has been on an incredibly stable growth track. Over the last seven years, revenues grew at 8.6% CAGR. Still, overall company performance doesn’t appear stable, mostly because of the decline in office equipment components and fluctuations in electronic components. While still susceptible to the cyclicality of the automotive industry, Sanko is an unknown turnaround success story, even in Japan.

In 2016, Sanko management announced a medium term plan with an incredibly tacky title: Swing 2020 (Sanko Wonder Innovative New Goal For the National and Global Achievement). Fortunately, the actual plan is less tacky. Management is expecting continued automotive growth, stable power meter and digital equipment, and a new and growing battery module business.

Source: Company medium term plan


Sanko currently operates 5 factories in Japan and 1 in Thailand. Management is looking into expanding overseas, namely into one more SE Asian market and one North American market.

For fiscal 2019 (ending March 31, 2019), Sanko management is guiding 13,500 million yen ($119 million USD, +1.7% YoY) in revenues and 600 million yen ($5.3 million USD, -9.4% YoY) in operating income. The reasoning behind the lower operating guidance mainly revolves around the uncertainty regarding global automotive trade, and management projects that the industry will trend towards local procurement. Two quarters in, the company has performed in line with guidance.

Shareholders

As of Q2 2019 (ending September 30th, 2018), Sanko had 10,066,872 shares issued and 1,043,516 shares in treasury, leaving outstanding shares at 9,023,356.

Here are the major shareholders:

Source: Company filings & Nikkei


As you can see, the Tamura family (i.e., Masanori Tamura) controls the company. Interestingly, in December 2010, one director managed to vote Masanori out of the CEO role, and put himself in it (Japanese). The reasoning, as the director put it, was Masanori’s dogmatic leadership style resulting in loss of key personnel and poor business performance.

What’s particularly interesting is the fact that this director had only been with the company for six months when he made this happen. Shortly thereafter in April 2011, Masanori effectively kicked him out, although technically the director-turned-CEO resigned (Japanese). Masanori didn’t come back on as CEO. Instead, he proposed Kiyoshi Takemura, a long time employee and director, assume the CEO role. Today, Masanori sits atop as the board chairman while Kiyoshi remains the CEO.

Frankly, there isn’t a whole lot of information about Masanori. And the few bits and pieces available have been negative, like being ousted from his own company. The other more recent piece of news (2017) is the National Tax Agency pointing out underreported inheritance from when founder Tomio passed away in 2013. What the Tamura family reported as inheritance was mostly shares of the family fund. It’s not uncommon for the National Tax Agency and tax payers to have a dispute over the reported value of asset management companies like the Tamura family fund.

The company has no equity compensation plans.

Financials & Valuation

  • While it’s difficult to tell from Sanko’s historical financials, the company has gone through a dramatic transformation, effectively shifting from an electronics components manufacturer to an automotive component manufacturer.
  • In the process of transformation, Sanko walked straight into the automotive crisis with a still-struggling electronics business. Despite this, the company managed to weather through and come out with a steadily growing automotive business.
  • With operating margins just shy of 5% (2018), Sanko is still a ways from being an operationally healthy manufacturer. But the company is also pursuing other areas, like smart power meter components, and is moving in the right direction overall.
  • As with many aged companies that are net nets, Sanko sits on a healthy amount of cash and a good bit of land. The main differentiator for the company is that the operating business is worth more than 0.
  • At today’s price of 459 yen per share, investors can expect an investment CAGR of between 8.2% and 13.4% over a 5 to 8 year timeframe.

First, here is Sanko’s market cap, net cash position, and net current asset value:

Just about all of the non cash current assets are in receivables and inventories.

Sanko also owns the land that its factories sit on, mostly in Nagano prefecture, a relatively remote area in Japan. Thus, it was difficult to get a estimate on the market value of its land assets. With that said, using the few data points on four of Sanko’s factories, market value is estimated to be 2.6 times book value. For safe measure, if we scale this back to 2 times book value and apply it to all of Sanko’s land holdings, we’re looking at a market value of 1,576 million yen ($13.9 million USD).

Notable share repurchases were made in fiscal 2010, 2014, and 2015:

Source: Company filings


Unlike many net net stocks, Sanko’s operating business (after transformation) actually turns a profit. If Sanko stock were to trade at 100% NCAV instead of today’s 459 yen per share (53% NCAV), EV/EBIT would still be less than 3x. Under normal circumstances, we use 80% NCAV valuation as a baseline, however, considering Sanko’s transformation and future business prospects, it’s fair to raise the bar to 100% NCAV (or 860 yen per share).

Still, the Sanko story is under the radar, even in Japan. With a current market cap of 4,142 million yen ($36.5 million USD), it’s doubtful that the company would get much more attention without one or two other business areas gaining traction. Hence, we’ll leave the investment horizon at 5 to 8 years.

In short, over a 5 to 8 year timeframe, investors can expect an investment CAGR of between 8.2% and 13.4%, with the potential of further/quicker price appreciation if one of Sanko’s new business areas gains traction.

The bottom line

Sanko weathered through the Japanese electronics downturn, then through the automotive downturn. Though the high level historical financials don’t show it, the company essentially just came out of a two decade turnaround. And its future prospects, while susceptible to the automotive cycles, are looking good overall. At today’s 459 yen per share price, investors can expect an investment CAGR of 8.2% to 13.4% over a 5 to 8 year timeframe.


Kenkyo Investing
Kenkyo Investing

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