Thinking Points

  • Nadex (TSE: 7435) is a low resistance welding control equipment maker with a specialized trading arm offering factory automation solutions and electronic components.
  • The nature of Nadex’s offerings are highly technical and specific, generally resulting in a higher barrier to entry for new competitors.
  • With a large exposure to the automotive industry, the company is dependent on a healthy capital investment environment.
  • At 800 yen per share, Nadex trades at an adjusted EV/EBIT of 0.5x with a market capitalization of 7,378 million yen ($67.3 million USD).
  • Investors can expect an investment CAGR of between 13.3% and 14.9%, inclusive of dividends, over a three year period.

Introduction

Nadex (TSE: 7435) primarily manufactures and sells resistance welding equipment and systems. Secondarily, the company purchases and sells electronic components and factory automation systems. Nadex operates through four segments broken down by country: Japan, USA, China, and Thailand.

Source: Company filings

The company is historically dependent on the automotive industry. More recently, however, Nadex has focused its research efforts on laser technology with aims to expand business into the manufacturing and shipbuilding industries, among others.

The business & environment

Nadex was founded in 1955 in Nagoya to manufacture and sell Selenium rectifiers and welding equipment. Six years later in 1961, the company built its first industrial scale factory, producing rectifiers and control equipment. By 1962, Nadex started manufacturing low resistance welding control equipment.

In 1966, the company setup a new factory specifically for producing low resistance welding control equipment. Nadex started targeting automotive and electronics manufacturers in the Kanto region (Tokyo area) in 1975, selling low resistance welding control equipment.

As the company scaled, it expanded into mechatronics, marking its first step in factory automation related offerings. By the late 1980s, the company started expanding outside of Japan, first setting up Weltronic/Technitron Corporation in the United States.

The company continued its efforts in the United States, acquiring Robotron Corporation’s low resistance welding division in 1999, then setting up Welding Technology Corporation several months later.

Meanwhile, Nadex also started expanding into China in 2001 through a capital partnership with Fujix Corporation, a factory automation solutions provider. By 2003, Nadex setup Nadex Shanghai to manufacture and sell welding equipment and automotive manufacturing lines.

Today, the company operates out of Japan, USA, China, Thailand, Indonesia, and Mexico.

Source: Company filings

Nadex’s current segment reporting started in 2011. Over a short time frame, it appears the company grew significantly through foreign expansion, however, Nadex faced challenging times during and after the global financial crisis:

Source: Company filings

Prior to the global financial crisis, over 90% of Nadex’s revenues were generated within Japan. While revenues haven’t fully recovered to pre-crisis levels, revenue mix has improved significantly, with foreign revenues accounting for over 20% of annual revenues in 2018.

What’s particularly interesting about Nadex is that, while the company manufactures and sells its own welding equipment, it also acts as a specialized trading company. Nadex incorporates its suppliers’ and customers’ products to deliver solution-based factory automation offerings. In fact, its showroom includes welding robots from Yaskawa Electric (TSE: 6506):

Source: Company website

More recently, Nadex is focusing on laser technology. The company has developed and patented a method of deep penetration welding using laser technology. R&D efforts continue with an aim to create a welding system more affordable than the traditional electron beam welding systems.

For fiscal 2019, Nadex originally guided for 34,310 million yen ($313 million USD, +0.1% YoY) in revenues and 1,330 million yen ($12.1 million USD, -34.5% YoY) in operating income. The company made adjustments to H1 2019 guidance, but kept full year forecasts unchanged.

As of Q3 2019 (ending January 31st, 2019), the company recorded 23,431 million yen ($214 million USD, -6.7% YoY) in revenues and 1,123 million yen ($10.2 million USD, -35.4%) in operating income.

Shareholders

As of Q3 2019 (ending January 31st, 2019), Nadex had 9,605,800 shares issued and 367,435 shares in treasury, putting outstanding shares at 9,238,365.

Here are the major shareholders:

Source: Company filings

Art Gallery Fujimi has been the largest shareholder for as far back as electronic filings go. Presumably, the company inherited the stake when the founder passed away. There are no EDINET filings in recent years indicating any major changes in large shareholders.

Additionally, there aren’t any public profiles on the founder of Nadex. In a Shachomeikan Interview, a past CEO of Nadex talked about the founder without mentioning his name. With that said, his last name is likely Furukawa, with three Furukawa family members on the major shareholder list and Masataka Furukawa on the board.

During fiscal 2019, the company started offering restricted shares as a part of management compensation. The cumulative compensation package equates to less than 1% of outstanding shares.

Financials & Valuation

  • Nadex is primarily a low resistance welding control equipment maker and secondarily a specialized trading company offering factory automation solutions and electronic components.
  • The nature of Nadex’s offerings are highly technical and specific, generally resulting in a higher barrier to entry for new competitors.
  • With a large exposure to the automotive industry, the company is dependent on a healthy capital investment environment.
  • At 800 yen per share, Nadex trades at an adjusted EV/EBIT of 0.5x with a market capitalization of 7,378 million yen ($67.3 million USD).
  • Investors can expect an investment CAGR of between 13.3% and 14.9%, inclusive of dividends, over a three year period.

Since its founding in 1955, Nadex has focused on welding equipment. Its specialization in low resistance welding came shortly after founding, and with the expansion into mechatronics in the 1980s, the company made a leap into factory automation.

For several decades, the company has been dependent on a healthy automotive industry. More recently, Nadex has been working to improve its exposure to other industries, like manufacturing and shipbuilding.

While revenue performance has not recovered to pre-crisis levels, the quality of revenues have improved with a more diverse exposure geographically. Over the last decade, the company’s geographical footprint expanded meaningfully in the United States, China, and Thailand. In fiscal 2018, foreign revenues accounted for 22% of annual revenues compared to less than 10% a decade ago.

The company is effectively debt free with an equity to asset ratio of 0.60. Although Nadex has several key land assets, the book values of these assets appear to be in line with current market prices.

At 800 yen per share, Nadex currently trades for an EV/EBIT of 2.3x with a market capitalization of 7,378 million yen ($67.3 million USD). Adjusted for investment security holdings of approximately 2,600 million yen ($23.7 million USD), EV/EBIT comes out to 0.5x. Some investors may be delighted to discover that the company is also a deep value stock, trading at 65.4% of adjusted NCAV.

Due to Nadex’s historically high reliance on the automotive industry, it’s best to analyze performance on a normalized basis.

On a 10-year normalized basis with a fair value EV/EBIT of 3x, investors can expect an investment CAGR of 13.3%, inclusive of dividends, over a three year period. If we account for a rough improvement in revenue quality (more diverse geography & industry exposure), investors can expect an investment CAGR of 14.9%, inclusive of dividends, over a three year period.

The bottom line

Nadex is a low resistance welding control equipment maker with a specialized trading arm offering factory automation solutions and electronic components. The company offers highly technical and advanced solutions for the automotive industry, and is increasingly focused on gaining exposure to other industries. At 800 yen per share, Nadex trades at an adjusted 0.5x EV/EBIT and an adjusted 65.4% NCAV. Investors can expect an investment CAGR of between 13.3% and 14.9%, inclusive of dividends, over a three year 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.