Thinking Points

  • Kawasumi Laboratories (TSE 7703) has been a pioneer in Japanese medical equipment manufacturing with its roots traced to making the first Japan-made disposable plastic blood transfusion sets.
  • While profitable, company performance has stagnated over the last decade, with a noticeable decline in revenues over the last several years.
  • In order to turn things around, Kawasumi has kicked off restructuring efforts in 2016. This continues today and includes downsizing in workforce, refocusing business areas, and increased research and development.
  • At 750 yen per share, the company trades for an adjusted 104% net cash and 60% NCAV, with an operationally healthy business.
  • Investors can expect an investment CAGR of between 7.4% and 16.3% over the next 5 to 8 years, exclusive of dividends

Introduction

Kawasumi Laboratories (TSE: 7703) manufactures and sells medical equipment. These include products like blood bags, blood transfer sets, dialyzers, AVF needles, and more. The company operates through two segments: Blood Transfusion & Endovascular and Hemodialysis & Plasmapheresis

Source: Company filings


Kawasumi has delivered relatively weak revenue performance over the last five years. In an attempt to turn things around, the company has taken restructuring initiatives since 2016, and this continues today. Kawasumi expects to incur operating losses for fiscal 2019 as a part of the restructuring process.

The business & environment

Kawasumi Laboratories was founded in 1957 when it manufactured Japan’s first disposable plastic blood collection and transfusion sets for medical applications. Later in 1972, the company developed artificial kidneys (dialyzer). These two product types remain Kawasumi’s core business units today. Additionally, the company offers plasmapheresis, infusion therapy, and endovascular repair products.

Source: Company website


The company has three production facilities in Japan and 9 production facilities in Thailand. With its production network, the company supports sales offices in Japan, United States, and Germany. 70.3% of revenues were generated in Japan during fiscal 2018.

Although Kawasumi has remained a pioneer in disposable medical devices since its founding, business performance has stagnated over the last decade, with the last five years delivering considerably weaker performance.

Source: Company filings


In 2016, Kawasumi kicked off its restructuring efforts, announcing its medium term plan. The goal was to narrow the company’s focus and shift to a more research and development oriented operation. The restructuring effort continues today, and the company announced a new medium term plan in May of 2018 (Japanese). This is a proactive effort by Kawasumi, as the company has remained profitable:

Source: Company filings


Kawasumi is projecting further revenue decline through fiscal 2020, with a modest recovery in 2021. Meanwhile, the company plans to increase R&D expenditures.  


Source: 2018 Medium term plan (Japanese)


Much of the expected revenue decline is from planned withdrawals of unprofitable products, particularly in the Hemodialysis & Plasmapheresis segment. Instead, Kawasumi plans to refocus its efforts on endovascular offerings, aiming to double sales in the product category from 2019 to 2021. 2018 sales for the product category was 1,900 million yen ($17 million USD), or 7.5% of total 2018 revenues. Stent grafts and antiadhesives are the focal point of research going forward.

Kawasumi is also in the process of building a brand new research facility in Kawasaki City, Kanagawa Prefecture. The company purchased the land in 2017 with plans to invest 3,842 million yen ($34.3 million USD). The research facility is scheduled to open in April of 2021.

From a cost perspective, Kawasumi closed its Thailand sales office in December and consolidated its 8 sales offices in Japan to 3 in Tokyo, Osaka, and Fukuoka in September of 2018. Additionally, the company is in the process of soliciting 290 employees for early retirement. This is done in phases, and Kawasumi has so far solicited 134 employees for early retirement, recording a one-time loss of 1,167 million yen ($10.4 million USD) during Q3 2019 as planned. The company plans to put the cost savings to use for R&D.

Interestingly, Kawasumi ended its business partnership with Asahi Kasei Pharma, Asahi Kasei Medical, and Terumo (TSE: 4543) in August 2018. As a result, Kawasumi purchased 1,200,000 shares of company stock held by Terumo for 860.4 million yen ($7.7 million USD), or 717 yen per share. As a reference, Kawasumi shares trade for 750 yen per share as of March 1st, 2019.

For fiscal 2019, Kawasumi originally guided for 23,000 million yen ($205 million USD, -9.6% YoY) in revenues and -300 million yen (-$2.7 million USD) in operating income. Three quarters in, Kawasumi adjusted guidance upward for revenues of 23,500 million yen ($210 million USD) and operating income of 400 million yen ($3.6 million USD). The company noted that the restructuring plan’s impact on revenues were lower than expected and that some R&D expenditures will be recorded during a different period.

Shareholders

As of Q3 2019, Kawasumi had 22,948,003 shares issued and 2,332,593 shares in treasury, putting outstanding shares at 20,615,410.

Here are the major shareholders:

Source: Company filings & Nikkei


Asahi Kasei remains a major shareholder in Kawasumi. With subsidiaries Asahi Kasei Pharma and Asahi Kasei Medical no longer in a business partnership with Kawasumi, there is a good probability that Asahi Kasei is looking to sell its shares. Much like how Kawasumi purchase Terumo’s stake, there is a chance that Kawasumi will purchase the stake from Asahi Kasei.

There are no management equity compensation plans.

Financials & Valuation

  • Kawasumi Laboratories is an established medical equipment manufacturer which got its start in disposable blood collection and transfusion sets and dialyzers.
  • Although the company has been a pioneer in Japanese medical equipment manufacturing, company performance has stagnated over the last decade, particularly over the last five years.
  • In order to turn things around, Kawasumi has taken on restructuring efforts, downsizing its workforce and refocusing its business areas. So far, the company has executed above expectations.
  • At 750 yen per share, Kawasumi trades at 134% Net cash and 68.7% NCAV with a market cap of 16,363 million yen ($146 million USD). Adjusted for investment security holdings, however, the company trades at 104% net cash and 60% NCAV.
  • Investors can expect an investment CAGR of between 7.4% and 16.3% over the next 5 to 8 years, exclusive of dividends.

Kawasumi Laboratories has been a pioneer in Japanese medical equipment manufacturing, making the first Japan-made plastic blood collection and transfusion sets in 1957, then the first Japan-made dialyzers in 1972. The company maintains 3 production facilities in Japan and 9 facilities in Thailand, with sales offices in the US, Germany, and Japan.

Although the company is a pioneer in Japanese medical equipment manufacturing, business performance has stagnated over the last decade. Still, the company has remained profitable. In order to turn things around, Kawasumi started restructuring efforts in 2016. The efforts started out with a focus on narrowing the company’s focus and shifting to a more research and development oriented operation.

These efforts continue today, and fiscal 2019 has so far been an eventful year. Kawasumi has ended partnerships with Asahi Kasei Pharma, Asahi Kasei Medical, and Terumo, repurchasing 1,200,000 shares (5.2% of issued shares) from Terumo. Additionally, the company closed its Thailand sales office and consolidates its 8 sales offices in Japan down to 3. Moreover, Kawasumi has solicited 134 early retirement volunteers, all in fiscal 2019.

Meanwhile, Kawasumi adjusted its fiscal 2019 guidance upward, originally expecting an operating loss of 300 million yen (-$2.7 million USD), but now expecting operating profits of 400 million yen ($3.6 million USD).

Interestingly, the company holds a large 18,212 million yen ($163 million USD) cash position, with a net cash position of 12,193 million yen ($109 million USD). Net current asset value is at 23,851 million yen ($213 million USD). At 750 yen per share, the company currently has a market cap of 16,362 million yen ($146 million USD), or 134% of net cash and 67% of NCAV. Additionally, Kawasumi holds 3,603 million yen ($32 million USD) in investment securities. Adjusted for this, the company trades at 104% net cash and 60% NCAV.

Kawasumi’s 2018 filings show 2,156 million yen ($19.3 million USD) in land holdings. Approximately 1,667 million yen ($14.9 million USD) of this is in the company’s headquarters, its three Japan factories, and its recently acquired (2017) land for the new research facility. Although the land holdings for its headquarters and three Japan factories appear undervalued compared to current market prices, a conservative estimate on real estate prices near its recently acquired research facility shows that market prices may have dropped since Kawasumi’s purchase. Overall, the land values reported on Kawasumi’s fiscal 2018 balance sheet appears approximately in-line with market prices.

Overall, Kawasumi’s operating business is profitable and the company is proactively making efforts to built it into an even more profitable one. Meanwhile, its assets are largely in the form of cash. The company is more than healthy both operationally and financially, and should be valued at or above 100% of adjusted NCAV.

Source: Kenkyo Investing estimates


Investors interested in Kawasumi Laboratories can expect an investment CAGR of between 7.4% and 16.3% over the next 5 to 8 years, exclusive of dividends.

The bottom line

Kawasumi Laboratories is a pioneer in Japanese medical equipment manufacturing. Although business performance over the last decade has been stagnant, the company is taking proactive measures to turn things around. Overall, the company has been operationally profitable with healthy assets, most of which is in cash, yet priced far below net current asset value. Investors can expect an investment CAGR of between 7.4% and 16.3% over the next 5 to 8 years, exclusive of dividends.


Kenkyo Investing
Kenkyo Investing

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