Thinking Points

  • Tokai Electronics (NSE: 8071) is a Nagoya-based trading company specializing in electronics, primarily catering to the automotive and factory automation industries.
  • Although the company gets more than half of its revenues from the automotive industry, it managed to remain profitable through the 2008-2010 global financial crisis, though with weaker business performance.
  • Similar to most trading companies, Tokai Electronics is light on fixed assets, mainly owning some land and buildings for its offices and rental properties.
  • At 2,684 yen per share, the company trades at an adjusted EV/EBIT of 2.7 with a market cap of 5,832 million yen ($53 million USD).
  • Investors can expect a three year investment CAGR of between 8.6% and 13.2%, inclusive of dividends, assuming the automotive industry remains healthy.

Introduction

Tokai Electronics (NSE: 8071) is a specialized trading company focused on electronic components. The company mainly caters to the automotive, factory automation and communications industries while serving the medical and energy industries to a lesser extent. Although the company has segment reporting, the segments are impossible to understand as an outsider, even for native Japanese speakers.

Source: Company filings


With that said, the company does provide a breakdown of sales by industry in its annual report, which we will present later. Investors should also note that Tokai Electronics trades on the second section of the Nagoya Stock Exchange, making it relatively difficult to access, especially from non-Japanese brokerage accounts.

The business & environment

Tokai Electronics was founded in 1945 as a sole proprietorship in Nagoya. The company started out as a wholesaler of electrical insulation. It started supplying Mitsubishi Electric (TSE: 6503) with insulation paper for motors, then became a distributor for Mitsubishi Electric’s alloy and rubber products in 1953.

Since then, Tokai Electronics expanded into various industries with a focus on electrical related products and services. Today, the company mainly serves the automotive and factory automation industries, and to a lesser extent, the communications, medical, and energy industries.

Until 2010, Tokai Electronics categorized its segments by product type, but has since changed its segment reporting to company groups. From an investor’s point of view, besides being able to tell how much of the company’s sales came from outside of Japan, there is very little utility to the company’s current segment reporting.

Source: Company filings


Revenues by industry, which is presented in the company’s annual report since 2015, but not in any of its filings, is more helpful. However, it is still difficult to estimate how the various industries affect Tokai Electronics’ profitability and overall business performance.

Source: Company reports


Tokai Electronics’ high exposure to the automotive industry had negative effects on business performance during the 2008-2010 global financial crisis, with revenues declining from 45,940 million yen ($417 million USD) in 2007 to 29,413 million yen ($267 million USD) in 2010, a 26% decline. Interestingly, however, the company managed to remain profitable throughout the crisis.

Source: Company filings


The company’s biggest customers are currently Aisin Seiki (TSE: 7259) and Denso (TSE: 6902) accounting for 24.9% and 10.7% of 2018 revenues, respectively. As both of these companies are affiliated with Toyota (TSE: 7203), it is safe to say that Tokai Electronics’ business performance depends on a healthy Toyota.

For fiscal 2019, Tokai Electronics guided for 42,500 million yen ($USD , +1.7% YoY) in revenues and 1,020 million yen ($USD , -11.8% YoY) in operating income. Three quarters in, the company has maintained this guidance.

Shareholders

As of Q3 2019 (ending December 31st, 2018), Tokai Electronics had 2,360,263 shares issued and 187,524 shares in treasury, putting outstanding shares at 2,172,739.

Here are the major shareholders:

Source: Company filings & Nikkei


Tokai Electronics doesn’t have much information about its founding family available. Additionally, it seems the management team tends to stay out of the press. It’s unclear whether the Eguchi and Okura families are the founding families.

The company issues a small number of stock options for the management team each year. As of this writing (March 2019), there are 39,400 unexercised stock options.

Financials & Valuation

  • Tokai Electronics is a Nagoya-based trading company specializing in electronics, primarily catering to the automotive and factory automation industries.
  • Although the company gets more than half of its revenues from the automotive industry, it managed to remain profitable through the 2008-2010 global financial crisis, though with relatively weaker business performance.
  • Much like most trading companies, Tokai Electronics is asset light. It owns some of its land and buildings, and the rest are financial assets.
  • At 2,684 yen per share, the company trades at an adjusted EV/EBIT of 2.7 with a market cap of 5,832 million yen ($53 million USD).
  • Investors can expect a three year investment CAGR of between 8.6% and 13.2%, inclusive of dividends, assuming the automotive industry remains healthy.

Starting as a electrical insulation wholesaler in 1945, Tokai Electronics built itself into a small and reputable wholesaler in Nagoya. The company started supplying Mitsubishi Electric, then took the opportunity to become a distributor of Mitsubishi Electric’s alloy and rubber products in 1953. Tokai Electronics expanded into various electronics related materials and components, shaping the company into its current form.

Today, Tokai Electronics mainly serves the automotive, factory automation, and communications industry. Much of its sales are tied to well known Toyota-affiliated companies, like Aisin Seiki and Denso. Although the 2008-2010 global downturn severely impacted the Japanese automotive industry, Tokai Electronics managed to remain profitable.

Much like many other Japanese trading companies, Tokai Electronics owns very little in terms of fixed assets, with land and buildings being about the only fixed assets the company owns. Upon reviewing prices of land in areas close to Tokai Electronics’ properties, it appears that the book value of these properties are roughly in line with current market prices.

At 2,684 yen per share, the company trades at 3.6x EV/EBIT with a market cap of 5,832 million yen ($53 million USD). Some data sources have the company’s historical operating income wrong, but figures appear to be correct for the last couple of years. Adjusting for Tokai Electronics’ 892 million yen ($8.1 million USD) in investment security holdings, current EV/EBIT multiple comes out to 2.7x.

Without getting a clear view of Tokai Electronics’ business quality, it’s difficult to determine an appropriate multiple for the company. With that said, the company has remained profitable throughout the 2008-2010 global downturn. Given the company’s scale and resilience, 3 to 4 times EV/EBIT is a fair multiple as long as the automotive industry remains in good health.

Assuming revenues and operating income continue at similar levels to today, investors can expect an investment CAGR of between 8.6% and 13.2%, inclusive of dividends and adjusted for options, as long as the automotive industry remains healthy.

The bottom line

Tokai Electronics is a trading company specializing in electronics. The company primarily serves the automotive, factory automation, and communications industries, and to a lesser extent, the medical and energy industries. Although there is not a lot of qualitative information about the company publicly available, Tokai Electronics appears to have a fairly resilient business, as it managed to turn profits during the 2008-2010 global downturn. Investing in the company today’s 2,684 yen per share, investors can expect a three year investment CAGR of between 8.6% and 13.2%, inclusive of dividends and adjusted for options, as long as the automotive industry remains healthy.


Kenkyo Investing
Kenkyo Investing

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