Thinking Points

  • Nagoya Electric Works (NSE: 6797) is the largest manufacturer of highway information equipment in Japan.
  • Additionally, the company manufactures other information equipment, lighting systems, and solder paste inspection equipment.
  • Although the inspection equipment arm tends to drag overall business performance, Nagoya Electric Works collectively maintains an adequately healthy operating business.
  • Like many other Japanese net nets with a long operating history, Nagoya Electric Works has significant land holdings on the books at below market prices. Moreover, at today’s share price of 570 yen, the company trades at 59.3% NCAV.
  • With a decent operating business and sizeable assets, Nagoya Electric Works is undervalued. Investors can expect an investment CAGR of between 6.8% and 15.2% over the next five to eight years.

Introduction

Nagoya Electric Works (NSE: 6797) is the largest manufacturer of highway information equipment in Japan. Additionally, the company manufactures other information equipment (i.e., disaster info, weather monitoring systems, mobile, etc), lighting systems, and solder paste inspection equipment. The company reports through two segments: Information Equipment and Inspection Equipment:

Source: Company filings

A significant portion of Nagoya Electric Works’ revenues depends on business from the Ministry of Land, Infrastructure, Transport, and Tourism (MLIT) and West/Central/East Nippon Expressway.

The business and environment

Nagoyo Electric Works was founded in 1944 as an electronics repair shop by Kiyoshi Hattori. In the 1950s, the company expanded its business into the manufacture and sale of power distribution and control equipment. 1966 was a turning point for the company, as it became the first to use NTT’s (TSE: 9432) phone network for something other than a telephone call. Nagoya Electric Works created Japan’s first remote controllable traffic information board.

Source: Company website


Prior to the remote control traffic board, updating a traffic board was quite a hassle, often requiring a phone call to someone in the neighborhood to update the information. This was a timely development as the Japanese government had just taken on large scale highway development for the 1964 Tokyo Olympics. Soon, Nagoya Electrics Works’ new product started taking in orders from all across the country, marking the beginning of the Information Equipment business.

According to Ama City’s (where the company HQ is located) company introduction (Japanese), founder Kiyoshi had an industrious and innovative mind. Aside from the remote control traffic board, Kiyoshi also developed Japan’s first parking meter (1971) and a traffic signal for the blind (1975). Occasionally, he was a bit ahead of his time, working on things like landslide detection sensors and rearview monitoring systems for cars.

This sort of advanced development eventually lead to Nagoya Electric Works’ manufacturing the world’s first laser-based solder inspection machine in 1987, marking the birth of the inspection equipment business.

Today, Nagoya Electric Works is lead by Kiyoshi’s grandson, Takaaki Hattori, and operates the Information Equipment and Inspection Equipment segments:

Source: Company filings


Information Equipment

Nagoya Electric Works is best known for its highway information equipment, but the company makes a variety of other information equipment as well. Here are some examples:

Source: Company website


The biggest customers for the company are the Ministry of Land, Infrastructure, Transport, and Tourism (MLIT), East Nippon Expressway, Central Nippon Expressway, and West Nippon Expressway.

Source: Company filings


The above chart is missing some data, as companies are only required to report major customers that account for over 10% of annual revenues. With that said, it’s safe to say that the above 4 organizations collectively account for over half of Nagoya Electric Works’ business.

While there is some variability on how much business Nagoya Electric Works’ gets from each organization from year to year, the Information Equipment segment has historically maintained stable profitability, with the exception of a couple of years:

Source: Company filings


Inspection Equipment

The inspection equipment segment consists of various types of solder paste inspection equipment:

Source: Company website


This equipment is mainly used by automotive companies to inspect printed circuit boards for electronic controls. Although none of the automotive customers show up as major customers in Nagoya Electric Works’ filings, the company discloses Toyota (TSE: 7203) and Denso (TSE: 6902) on its website. Apart from automotive customers, Nagoya Electric Works also has companies like Sohgo Security Services (TSE: 2331), Mitsubishi Electric (TSE: 6503), and Panasonic (TSE: 6752) as customers.

Unfortunately, the inspection equipment segment has consistently been a loss making business:

Source: Company filings


Invariably, when Information Equipment segment performance comes in weak, the company generates losses. In other words, when public investments are weak, Nagoya Electric Works’ delivers weak performance:

Source: Company filings


Management guidance

For fiscal 2019, Nagoya Electric Works guided for revenues of 17,300 million yen ($158.9 million USD, -1.3% YoY) and operating income of 600 million yen ($5.5 million USD, -31.6% YoY). The company expects continued public investments, but lower contract margins due to new competitors entering the market.

Shareholders

As of Q2 2019 (ending September 30th, 2018), Nagoya Electric Works had 6,422,000 shares issued and 651,990 shares in treasury, putting outstanding shares at 5,770,010.

Here are the major shareholders:

Source: Company filings


Collectively, the Hattori family holds enough shares (~17% of outstanding) to remain influential, but does not hold a controlling stake.

The company offers no management stock options.

Financials & Valuation

  • Nagoya Electric Works currently maintains an adequately healthy operating business that is bound to perform well as long as public investments remain healthy.
  • Unfortunately, the inspection equipment segment has historically dragged the company’s overall performance. When public investments are weak, the company suffers deep losses (i.e., 2012 and 2013).
  • At today’s 570 yen per share price, Nagoya Electric Works trades at 59.3% of NCAV. Like many other established net nets, the company has significant land holdings that are booked below market.
  • Over a 5 to 8 year period, investors can expect an investment CAGR of between 6.8% and 15.2%

Aside from the consistently loss making Inspection Equipment segment, Nagoya Electric Works has a perfectly healthy operating business. The company tends to generate weaker business performance when public investment is weak. Presumably, the Information Equipment segment ought to remain comfortably healthy even if public investment is mildly weak, but the Inspection Equipment tends to drag overall business performance. Collectively, Nagoya Electric Works maintains an adequately healthy business.

Like many other Japanese net nets with a long operating history, Nagoya Electric Works has significant land holdings on the books at below market prices:

Source: Company filings, website, Tochidai.info, and author calculations


Nagoya Electric Works’ current market cap is 3,285 million yen ($30.2 million USD). The market price of its land holdings just about covers that. For conservative measure, it’s probably appropriate to assign two-thirds of the estimated market price to the company’s land holdings. This comes out to 2,175 million yen ($20 million USD).

With an adequately healthy operating business and significant land holdings, Nagoya Electric Works ought to trade at or above NCAV (currently at 963 yen per share). Investing at the current share price of 570 yen, investors can expect an investment CAGR of between 6.8% and 15.2% over the next five to eight years:

The bottom line

Nagoya Electric Works is an adequately healthy manufacturer of information equipment and inspection equipment. Like many other Japanese net nets with a long operating history, the company has significant land holdings on its books far below current market prices. With significant assets and a decently healthy operating business, the company ought to trade at or above NCAV. At today’s share price of 570 yen, investors can expect an investment CAGR of between 6.8% and 15.2% over the next five to eight years.


Kenkyo Investing
Kenkyo Investing

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