Thinking Points

  • Fujix (TSE: 3600) is Japan’s largest sewing thread manufacturer with global operations.
  • The operating business is mediocre at best, but the company holds valuable property recorded far below market value on the books.
  • The only immediately obvious catalyst is a sale of these properties. With that in mind, patient investors can expect a 7.5% investment CAGR played out over 10 years.

This post was originally published on August 10th, 2018 as a part of the Kenkyo Deep Value offering

Introduction

Fujix (TSE: 3600) is Japan’s largest sewing thread manufacturer with operations in Japan, Vietnam, China, and Thailand. One look at the company’s historical financials would tell you that the operating business is mediocre on a great day. With that said, Fujix currently trades at 50% of net current asset value.

Moreover, the company recently sold its Tokyo satellite office, resulting in capital gains of 1,325 million yen ($11.9 million USD), which is more than 20% of the company’s annual revenues. I’d compare the capital gains against operating income, but Fujix has operated at a loss for most of the last ten years.

Historical domestic-to-Asia revenue split has been around 80:20.

Source: Filings, chart created by author

Operating Business

Fujix’s business is the manufacturing of sewing thread. Again, the business is mediocre on a great day. The historical trend is that Fujix’s Japan operations regularly generates losses while the Asia operations generally turns a profit. The core part of Fujix’s Asia operations has been in China, however, labor rates have been increasing and companies have been leaving for Southeast Asia. Though Fujix expanded operations into Thailand and Vietnam, business performance for Asia operations has declined in recent years.

Source: Company website

Despite Fujix’s Asian operations generally remaining profitable, it hasn’t been enough to offset the losses generated through the Japanese operations. As a result, the company only delivered positive operating income once in the last ten fiscal years. It’s also worth noting that capex has averaged out around 5% of revenues over the same time frame. Depreciation and amortization, on the other hand, has averaged out around 4% of revenues.

Frankly put, there is no indication any sort of material change will take place in the operating business. From an investment perspective, assuming the best case scenario as breakeven would be most prudent.

Assets

Net-cash is 1,710 million yen ($15.4 million USD), or 57.8% of the company’s 2,960 million yen ($26.7 million USD) market cap. If we adjust 740 million yen ($6.7 million USD) of minority interest out, however, net-cash is down to 970 million yen ($8.7 million USD), or 32.8% of market cap.

The most notable recent event with Fujix was the sale of its Tokyo satellite office in Taito ward:

Source: Google Maps Street View

The fiscal 2017 filing listed the book value of this property at 345 million yen ($3.1 million USD), before the sale happened. The disclosure statement regarding the sale of the property listed capital gains at 1,325 million yen ($11.9 million USD). The company first moved its satellite office to this location in 1977. The current building was built in 2012.

The official land price (Japanese) closest to the Tokyo satellite office location had a square meter price of 842,000 yen ($76k USD). Multiply this by 419 square meters (4,510 sq. ft) and we get 352.8 million yen (3.2 million USD) just for the land. Book value was recorded at 235.2 million yen ($2.1 million USD) in fiscal 2017. Given that the property is a corner lot and practically on top of Tokyo Metro’s Kuramae station, the actual land value is probably higher than 842,000 yen per square foot. As a reference, Taito ward’s average official land price was 1,237,000 yen ($11,140 USD) per square meter.

At the very least, I figured digging into land values for Fujix’s other locations would be useful:

Source: Company filings and Tochidai.info (Japanese)

The company has been in the Kyoto main office since 1970. The production facility has been in use since 1996. Land was purchased in Tokyo for the new satellite office, but the building hasn’t been built yet. Fujix currently operates out of a temporary office. Keep in mind, the above figures are for land only. Book values of the facilities above minus the land comes out to 576 million yen ($5.2 million USD).

Napkin Valuation

If you’re buying Fujix, it won’t be for the operating business. The company has been pouring money into a leaky bucket, and there is no indication that this will change any time soon. Fortunately, the losses haven’t been substantial so far.

Naturally, if you are buying Fujix, it would be for the assets. The sale of the Tokyo satellite office realized a capital gain of 1,325 million yen ($11.9 million USD) earlier this year. We can expect similar capital gains if the company decides to sell its Kyoto and Shiga properties.

All in all, the difference between book and market values of Fujix’s land alone comes out to 975 million yen ($8.8 million USD). Adjusting for this differential, net asset value (minus minority interest) comes out to 10,184 million yen ($91.7 million USD) vs. current market cap of 2,960 million yen ($26.7 million USD).

Several warnings/assumptions to keep in mind:

  • Operating business eats up about 150 million yen ($1.35 million USD) per year.
  • No sign of material change in operating business or management strategy to shift investor sentiment.
  • Company could sell its properties tomorrow… or never.

60% of adjusted net asset value is probably a sufficiently discounted figure for valuation purposes. This puts fair value at 6,110 million yen ($55 million USD), or 4,437 yen per share vs. today’s 2,150 yen per share. Played out over ten years, investment CAGR is 7.5%.

The bottom line

If you’re buying Fujix, you’re buying it for the assets, not the operating business. The recent Tokyo satellite office sale highlighted this, with land purchased forever ago and recorded on the balance sheet at original purchase cost. The company can expect similar gains on its other properties if it decides to sell. Investors can expect a 7.5% investment CAGR over ten years, with the only immediately obvious catalyst being the sale of property.

Author: Kenkyo Investing

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