Thinking Points

  • Artnature (TSE: 7823) is the market leader in the Japanese men’s hair product market with a 33.9% share. Including women’s hair product, the company is a formidable #2 player with a 28.3% overall share.
  • With an influx of low cost products entering the market, however, business performance has weakened over the last several years.
  • Although recent performance show signs of stabilization, it’s too early to tell whether this will continue.
  • At 627 yen per share, Artnature trades at an adjusted 0.7x EV/EBIT with a market capitalization of 20,657 million yen ($188 million USD).
  • Investors can expect an investment CAGR of between -1% and 14.7%, inclusive of dividends, over a three year period.

Introduction

Artnature (TSE: 7823) manufactures and sells hair products like custom-made wigs, hair grain, and hair growth products through its 350 store network in Japan. The company reports through four segments: Men, Women, Women’s Products, and Other:

Source: Company filings

The company originally started with a focus on men’s custom-made wigs. Although Artnature started offering women’s products in 1987, it wasn’t until 2005 that the company started offering wigs for women. Since then, the company has been focusing on strengthening its women’s offering while improving its men’s offerings.

The business & environment

Artnature was founded in 1965 as a sole proprietorship specializing in men’s custom-made wigs. The following year, it opened an 140 square foot office and consultation room in Tokyo. The company quickly grew and by 1969, it worked its way out to Osaka while building a 4-story headquarter building in Tokyo. While the Osaka office was smaller than the original Tokyo office at 110 square feet, the new Tokyo headquarters was fully equipped with a hair salon, consultation rooms, office space, and manufacturing floor.

Source: Company website

This is largely the model that Artnature operates today: A hair salon with consultation rooms. Customers walk in, get their hair taken care of, and if they like they can custom-order a wig, purchase hair growth/gain products.

In 1970, Artnature internally developed artificial skin. This technology enabled the company to make its wigs look even more natural, particularly with hair partings, hair lines, and swirls. What was once a custom-wig market that only catered to women started gaining traction among men.

The company didn’t stop there either. In 1976, Artnature invented the world’s first wig attached to the hair with a special pin while most wigs back then used adhesives. In the 1980s, the company shifted away from using human hair, the industry standard. Instead, it started using artificial hair. By the mid 1980s, Artnature introduced ArtRon 180, an artificial hair that can withstand temperatures up to 180 degree celsius (356 degree fahrenheit) while maintaining its form.

In 1987, the company made its first foray into women’s hair products. Throughout the 1990s, Artnature continued to introduce new and better products. Not just wigs, but also hair growth and hair gain products.

The 2000s was the decade of women’s offering expansion along with a major development in technology. In 2001, Artnature opened its first women-only salon, Ladies Artnature, in Tokyo. Then in 2005, the company introduced Celaire, a brand of lightweight women’s wigs. Then came the major development: A 3D molding system which dramatically improved lead times by enabling stores to send mold data straight to the production floor.

Source: Company website

In 2008, Artnature launched its high-end ready-made women’s wig brand, Julia Olger. The following year, the company opened a foreign production facility in the Philippines. Today, the company continues expand its lineup of hair products, particularly its offerings for women. Artnature is the market leader in men’s hair and the #2 player in women’s hair market.

According to a 2017 investor presentation by competitor Aderans (Japanese), which is now private, here is the Japanese hair market size:

Source: Aderans, Yano Research. 2016-2020 data are estimates.

Based on 2015 data, Artnature had 33.9% of the men’s market and 22.8% of the women’s market. Combined, Artnature was the #2 player in the Japanese hair market with 28.3% market share while Aderans was slightly ahead with a 30.1% share in 2015.

While projections show the Japanese hair market growing slightly overall, Artnature’s revenues declined from 2016 and on:

Source: Company filings

In the same investor presentation by Aderans, the company noted an influx of low cost products entering the market, affecting high-end wig makers. Artnature didn’t specifically address this, but noted that the market was getting increasingly competitive. Meanwhile, the company’s recent new products mostly consists of improvements on existing products rather than groundbreaking new products or technologies like artificial skin, artificial hair, or 3D molding systems for head scans.

Operating Income, of course, is declining as revenues decline.

Source: Company filings

For fiscal 2019, the company guided for revenues of 38,000 million yen ($345 million USD, +2% YoY) and operating income of 2,796 million yen ($25.4 million USD, +8.4% YoY). Three quarters in, the company is performing roughly in line, with revenues of 27,469 million yen ($249 million USD, +1.2% YoY) and operating income of 2,266 million yen ($20.6 million USD, +22% YoY).

Interestingly, revenues for men’s products are up 2.4% while revenue for women’s products are down -0.2%. Operating performance has improved, however, the key question for Artnature is whether it can stabilize revenues.

Shareholders

As of Q3 2019 (ending December 31st, 2018), Artnature had 34,393,200 shares issued and 1,846,139 shares in treasury, putting outstanding shares at 32,547,061.

Here are the major shareholders:

Source: Company filings & Nikkei

Yoshitaka Igarashi is the current CEO of Artnature. He was involved in the business when Artnature was still a sole proprietorship under the founder, Saburo Akutsu. Ai Corporation operates as the Igarashi family’s fund, and the family collectively controls 32.4% of outstanding shares.

Yoshitaka was involved in a shareholder-led lawsuit in 2012. The lawsuit was related to two transactions: Yoshitaka purchasing company treasury shares in 2003, and Yoshitaka and 3 other directors purchasing shares through third party allotment in 2004. The shareholder claimed that both transactions happened at prices below what the company stock was worth at the time. In 2012 the Tokyo District Court ruled that the 2003 transaction was fair and the 2004 transaction was unfair, ordering Yoshitaka and 3 directors to pay 220 million yen ($2 million USD) (Japanese). In 2015, however, the Supreme Court overruled the District Court and dismissed the case (Japanese).

Currently, unexercised stock options account for less than 1% of issued shares.

Financials & Valuation

  • Artnature is among the biggest players in the 140 billion yen ($1.27 billion USD) Japanese hair goods market with a particular strength and leading position in men’s hair products.
  • The company’s current market position (33.9% share in men’s, 22.8% share in women’s market) was built through innovations like artificial skin, artificial hair, and 3D molding systems.
  • More recently, business performance has weakened, and the company’s new products has mostly been improvements on existing products rather than breakthrough innovations.
  • At 627 yen per share, Artnature trades at an adjusted 0.7x EV/EBIT with a market capitalization of 20,657 million yen ($188 million USD).
  • Investors can expect an investment CAGR of between -1% and 14.7%, inclusive of dividends, over a three year period.

Founded in 1965 with a specific focus on custom-made wigs for men, Artnature created a market that previously didn’t exist. As Japan progressed through its economic miracle, the market for men’s custom-made wigs grew. Artnature continued its innovation, introducing products incorporating artificial skin, artificial hair, and a modern 3D molding system for head scans.

Today, Artnature is one of the leading companies in the Japanese hair market with a 28.3% market share position. Its biggest competitor is Aderans, which commands the #1 position with a 30.1% share. When segmenting by gender, however, Artnature is the clear leader with a 33.9% share compared to Aderans’ 16%.

Although Artnature has been around since before Japan’s asset price bubble, its key land holdings are booked in-line with market prices. To be sure, much of the land in its filings are recorded in regional groupings, making it difficult to identify which locations the company owns.

With an influx of low cost products coming into the Japanese hair market, a pessimistic scenario would mean continued revenue decline. With that said, recent business performance shows signs of stabilization. Taking this into consideration, a realistic valuation would include a worst case scenario of continued decline and a best case scenario of stabilized revenues.

At 627 yen per share, Artnature trades at 1.3x EV/EBIt with a market capitalization of 20,657 million yen ($188 million USD). Adjusting for investment securities of approximately 2,000 million yen ($18.2 million USD), the company trades for 0.7x EV/EBIT.

Assuming business performance stabilizes at 2018 levels with fair value EV/EBIT of 3x, investors can expect an investment CAGR of 14.7%, inclusive of dividends, over a three year period. This estimates share price at 880 yen and cumulative dividends paid of 80 yen per share at the end of fiscal 2022.

If business performance continues its decline, operating income would quickly shrink to almost break even at the end of fiscal 2022 as SG&A would remain constant at about 23,000 million yen ($209 million USD) per year. At this point, EV/EBIT wouldn’t be a useful metric, and an EV of 0 would likely be an adequate substitute. With this scenario, investors can expect an investment CAGR of -1%, inclusive of dividends, over a three year period. This estimates share price at 590 yen and cumulative dividends paid of 27 yen per share at the end of fiscal 2022.

Overall, investors can expect an investment CAGR of between -1% and 14.7%, inclusive of dividends, over a three year period.

The bottom line

Artnature is a market leader in the Japanese men’s hair product market with a 33.9% share. Including the women’s market, the company is still a formidable #2 player in the industry with a 28.3% overall market share. With an influx of low cost products entering the market, however, business performance has weakened over the last several years. Although recent performance show signs of stabilization, it’s too early to tell whether this will continue. With that in mind, investors can expect an investment CAGR of between -1% and 14.7%, inclusive of dividends, over a three year time period.


Kenkyo Investing
Kenkyo Investing

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