Thinking Points

  • Dainichi (TSE: 5951) is a niche manufacturer of kerosene fan heaters with a leading 50+% market share in the domestic market.
  • After surviving intense competition from powerhouse appliance makers, the company is now enjoying a dominant share in a small market with few competitors.
  • With a more than healthy operating business and no debt, the company is overcapitalized with an equity-to-asset ratio of 0.86.
  • At 688 yen per share, Dainichi trades at 63% of adjusted NCAV with a market cap of 11,217 million yen ($101 million USD).
  • Investors can expect an investment CAGR of between 6% and 13.8% over a 5 to 8 year period, inclusive of dividends.

Introduction

Dainichi (TSE: 5951) is a niche manufacturer of kerosene fan heaters with a dominant domestic market share. Additionally, the company manufactures humidifiers, coffee pots, and more. Although the company provides segment reporting by sales office, sales by product category is more meaningful. Here are the product categories:

Source: Company filings


Over the last two decades, the Japanese kerosene fan heater market went from intense competition among powerhouse appliance manufacturers like Panasonic (TSE: 6752), Sharp (TSE: 6753), Hitachi (TSE: 6501), Toshiba (TSE: 6502), and Mitsubishi Electric (TSE: 6503) to several mid-tier manufacturers surviving today. Dainichi fared particularly well, coming out with a dominant 50+% domestic market share.

The business & environment

Dainichi started out by manufacturing and selling oil stoves and heaters in 1957. From the beginning, the company was headquartered in Sanjo City, Niigata prefecture, a rather remote area of Japan. Interestingly, the company’s biggest competitor, Corona Corporation (TSE: 5909) was founded in 1950 in the same city. Today, Corona remains in Sanjo City while Dainichi is headquartered in nearby Niigata City.

By 1964, Dainichi was producing oil burners and bath heaters as well, with a variety of applications for burners like cooking, drying of agricultural products, and food processing. The second generation bath heaters, launched in 1966, became Dainichi’s core product, supporting the company’s growth early on.

Source: Dainichi Website


It wasn’t until the 1970s, however, that Dainichi’s focus shifted toward kerosene heaters. This was also the time when some of Japan’s largest appliance manufacturers entered the scene. Still, Dainichi managed to mark its presence after producing the “Blue Heater”, a game changing product at the time with no need of a chimney.

With competition further intensifying in the 1980s, Dainichi introduced its next game changer: A heater that can be lit in 40 seconds. During this period, competing products typically required 5 to 7 minutes for igniting. Additionally, Dainichi’s product carried a reputation for not having the kerosene smell commonly associated with kerosene heaters.

In the late 1980s, the company started producing oil heaters for emerging bix box retailers. At the same time, Dainichi started exploring other products, like smoke machines. In the 1990s, the company introduced a heater for gardening and a coffee maker with a roaster. Dainichi’s second core product today, the humidifier, was introduced in 2003.

The market for oil heaters started shrinking around this time, and many of the major appliance makers stopped manufacturing oil heaters in the 2000s. Thus, Dainichi was able to gain market share and maintain an elevated level of sales.

Although Dainichi is on the forefront of kerosene heater technology, it’s manufacturing management is a key strength as well. While long hours, low productivity, and limited opportunities for women are associated with many Japanese companies, Dainichi has managed to build a tightly knit and well run operation.

In an interview with GetNavi (Japanese), Dainichi CEO Hisao Yoshii shared insights into Dainichi’s operations, including its focus on Japanese manufacturing, inventory management, productivity improvement, and employee care.

Hisao explains that manufacturing in Japan is critical as outsourced manufacturing will eventually lead to a lack of technical talent in the future, costing the company more over the long run. The company does consciously take on productivity improvement efforts and brings new meaning to Japanese quality. In fact, employees are awarded for reporting mistakes. Hisao explains that this creates an environment where employees don’t have an incentive for hiding mistakes, and attributes the company’s no recall history to this program.

Inventory management for a company producing heaters is a sensitive topic. Essentially, companies won’t see much sales until winter comes along. Hence, companies often shut down factories after the winter for several months and are overloaded with work during peak winter months. Dainichi is no exception to the seasonal sales problem, but the company makes sure its factories are operating year-round. Of course, inventory piles up during off season and the factory is remains a little busier mid-season, but this brings a leveled workload for its employees. Unlike many Japanese manufacturers that bring temporary workers in, 90+% of Dainichi’s workers are full-time employees.

Even with a year-round production schedule, Dainichi is occasionally rushed by its customers to deliver more units during peak season. The company has built a process to enable shifting production lines in under ten minutes. Effectively, if a customer places a rush order today, Dainichi has the setup to deliver units tomorrow morning. Hisao calls this the “Hai Dozo”, or “Here you go” production system for its quick responsiveness.

Another interesting part of Dainichi’s operations is its short-time production line that operates between 9am and 4pm instead of the company’s standard 8:30am to 5:30pm. This line is designed for women with children under three years old, giving ample time for mothers to pick up and drop off their children. Moreover, the company provides its employees with congratulatory compensation whenever an employee has a newborn (Japanese). 300,000 yen ($2,700 USD) for the first child, 400,000 yen ($3,600 USD) for the second, and 500,000 yen ($4,500) for the third.

Dainichi has taken a balanced approach in building a high quality business. It’s core product, however, is still the kerosene heater, which now competes with air conditioners and more recently, gas heating systems. Here are the historical sales figures by product category for Dainichi:

Source: Historical filings, compiled by Kenkyo Investing


The Environmental Equipment category mainly consists of humidifiers. The Other category includes coffee makers and service parts.

After a brief period of increasing demand in the late 2000s, Kerosene fan heater sales have declined and then stabilised at around two million units per year:


Source: Japan Industrial Association of Gas and Kerosene Appliances (Japanese), 2018 and 2019 figures are estimates.


Today, kerosene fan heater manufacturing is done by three main companies: Dainichi, Corona Corporation, and Toyotomi. Every major appliance maker has backed out from the scene. Recently, Noritz (TSE: 5943) pulled out of manufacturing heaters, bringing Dainichi on as its OEM manufacturer in 2017. Hence, Dainichi continues to generate strong business performance despite a shrinking market.

Source: Company filings


The 2010-2013 years came in particularly strong with a stretch of cold winters, then kerosene prices started rising, affecting demand thereafter.

For fiscal 2019, the company guided 20,600 million yen ($186 million USD) in revenues and 900 million yen ($8.1 million USD) in operating income. It’s difficult to gauge business performance from Q3 reporting as the start of winter is in Q3, continuing through Q4. With that said, Japan had a relatively warm winter in 2018, so it wouldn’t be a surprise if sales came in weaker than expected.

Shareholders

As of Q3 2019 (ending December 31st, 2018), Dainichi had 19,058,587 share issued and 2,872,928 shares in treasury, putting outstanding shares at 16,185,659 shares.

Here are the major shareholders:

Source: Company filings and Nikkei


Recently in November 2018, Dainichi repurchased 1,497,700 shares from a foundation setup by the founder of Dainichi (Japanese). The Yoshii family effectively controls 26.8% of outstanding shares.

There is no equity compensation plan offered to management and no unexercised stock options outstanding.

Financials & Valuation

  • Dainichi is a niche manufacturer of kerosene fan heaters with a 50+% dominant domestic market share.
  • Over the last two decades, the company survived intense competition from powerhouse appliance makers by introducing technologically advanced heaters.
  • Although the Japanese kerosene fan heater market has been in a decline recently, Dainichi has maintained strong business performance as other companies withdraw from the scene.
  • At 688 yen per share, Dainichi trades for 63% of adjusted NCAV with a market cap of 11,217 million yen ($101 million USD).
  • Investors can expect an investment CAGR of between 6% and 13.8% over a 5 to 8 year period, inclusive of dividends.

Dainichi is an industry leading niche manufacturer of kerosene fan heaters with a 50+% domestic market share. It’s dominant share today is a result of surviving intense competition from powerhouse appliance makers over the last couple of decades. The key threats today are alternative heating solutions, like air conditioners and eco heaters (from hot water heaters).

Dainichi’s financials are best analyzed on a full-year basis, as kerosene fan heater sales are considerably influenced by seasons. The company builds inventory between Q1 and Q2, then depletes inventory in Q3 and Q4.

The company carries no debt and regularly holds cash about equivalent to cost of goods sold at fiscal year end. Its equity-to-asset ratio is at 0.86, a high figure for a manufacturer. Considering this, combined with its healthy operating business, Dainichi is overcapitalized. It’s fair to expect the company to be valued at or above adjusted NCAV.

At today’s price of 688 yen per share, investors can expect an investment CAGR of between 6% and 13.8% over a 5 to 8 year period, inclusive of dividends. For investors worried about price appreciation, the company pays out 22 yen per share in dividends, equivalent to a 3.2% dividend yield.

Source: Kenkyo Investing estimates, CAGR adjusted to include dividends


Dainichi owns land, mostly in Niigata prefecture, but the book value is mostly in line with current market prices.

The bottom line

Dainichi is a niche manufacturer of kerosene fan heaters with a leading 50+% market share in the domestic market. After surviving intense competition from powerhouse appliance makers, the company is now enjoying a dominant share in a small market with few competitors. The operating business is healthy and the balance sheet is overcapitalized. At 688 yen per share, investors can expect an investment CAGR of between 6% and 13.8% over a 5 to 8 year period, inclusive 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.