Thinking Points

  • Goo Chemicals (TSE: 4962) is a specialty chemical company catering to the electronics, cosmetics, textile, and paper industries.
  • The business environment has been challenging recently, with a declining paper industry and tightening environmental regulations in China, among other factors.
  • Still, the company managed to remain profitable through the 2008-2010 global financial crisis, indicating that the operating business quality is at least decent.
  • At 1,305 yen per share, Goo Chemicals trades at 91% of adjusted NCAV with a market capitalization of 8,250 million yen ($75.9 million USD).
  • Investors can expect an investment CAGR of between 12% and 20.1%, inclusive of dividends, over the next 5 to 8 years.

Introduction

Goo Chemicals (TSE: 4962) develops, manufactures, and sells specialty chemicals, mainly to the electronics, cosmetics, textile, and paper industries. The company operates through two segments: Reactive Products and Mixed Products.

Source: Company filings

The company takes a deeply philosophical approach to research and development, specifically noting its focus on creating things that enrich people’s lives rather than making things that make life convenient. Goo Chemicals narrows its focus on chemical technology based on advanced polymer chemistry to create new products.

The business & environment

Although Goo Chemicals primarily serves the electronics, cosmetics, textile, and paper industries today, the company was originally founded in 1955 to produce agricultural chemicals and oil products.  Goo Chemicals’ first foray outside of its initial focus area happened in 1961, when the company started researching acrylate polymers for synthetic fibers. In 1966, Goo Chemicals proceeded to research cosmetic resins. In 1979, the company started researching chemicals for the electronics industry, shaping the company into what it is today.

Goo Chemicals’ first step outside of Japan came about early on through a technology licensing agreement with a Taiwanese firm in 1968. The company shared its technology related to creating synthetic pastes.

Its next destination was Indonesia in 1992 through the creation of a joint company. This eventually lead to another technology licensing agreement related to the manufacturing of warp yarn. The company’s foreign operations remain focused on Indonesia and Taiwan today.

The company’s key products for the cosmetic industry are mainly focused on hair products. Goo Chemicals has developed resins and oiling agents which have been used in hair products like shampoo and hair spray for decades.

Source: Company website

Its products geared for the electronics industry is used in components for smartphones, computers, and LED lights:

Source: Company website

Additionally, the company makes products used for rust-proofing sheet metal, binding textiles, plastic film surface modification, and base paint as well as varnish for UV proofing, vinyl coating, and pressure bonding of printed material.

Goo Chemicals’ segment reporting is broken down according to the way the products are processed. Reaction Products are made using kettle equipment and Mixed Products are made by using milling equipment. Generally speaking, the Mixed Products segment is equivalent to products for the electronics industry and the rest are under the Reaction Products Segment. The company has been reporting through these two segments since 2010.

Source: Company filings

Recent demand for both Reaction Products and Mixed Products has weakened. The company attributes the slowdown in Reaction Products to weakening foreign demand for high-end clothing related products, general movement away from paper products, weaker demand for packaging materials in Korea, weaker demand for transfer resins, and the Chinese government’s tightening of environmental regulations.

As for foreign exposure, Goo Chemicals historically generates 30 to 40 percent of its revenues from outside of Japan.

Source: Company filings

Interestingly, revenue performance remained relatively strong throughout the 2008-2010 global financial crisis. Although the company was comfortably profitable, operating performance declined materially during the crisis.

Source: Company filings

With many societies increasingly becoming digital and Goo Chemicals’ exposure to the paper industry, the next financial crisis may affect company performance to a greater extent.

For fiscal 2020, Goo Chemicals is guiding for 7,600 million yen ($69.9 million USD, +6.0% YoY) in revenues and 380 million yen ($3.5 million USD, +2.0% YoY) in operating income.

Shareholders

As of Q4 2019 (ending March 31st, 2019), Goo Chemicals had 6,992,000 shares issued and 669,882 shares in treasury, putting outstanding shares at 6,322,118.

Here are the major shareholders:

Source: Company filings & Nikkei

Goo Sangyo, the largest shareholder of Goo Chemicals, is effectively a holding company. There are 7 partners that own Goo Sangyo, including Goo Chemical CEO Haruki Fujimura, who represents Goo Sangyo. With that said, Haruki does not have a controlling stake in Goo Sangyo.

During fiscal Q1 2019, Goo Chemicals repurchased 208,300 shares for 291 million yen, or 3.2% of outstanding shares at the time for 1,401 yen per share. This was the first repurchase since fiscal 2016, which was at about half of the scale.

Considering Goo Chemicals had 763 total shareholders as of Q2 2019 and Tokyo Stock Exchange requires a minimum shareholder count of 400 to remain listed, it’s unlikely that Goo Chemicals will further repurchase shares. Instead, the company may pay higher dividends in the future.

There is no equity compensation offered to management.

Financials & Valuation

  • Goo Chemicals is a specialty chemical company catering to the electronics, cosmetics, textile, and paper industries.
  • Recent business performance has been weak, with a declining paper industry and tightening environmental regulations in China, among other factors.
  • Still, the company’s business performance remained relatively strong during the last financial crisis, indicating that the operating business quality is at least decent.
  • At 1,305 yen per share, Goo Chemicals trades at 91% of adjusted NCAV with a market capitalization of 8,250 million yen ($75.9 million USD).
  • Investors can expect an investment CAGR of between 12% and 20.1%, inclusive of dividends, over the next 5 to 8 years.

Goo Chemicals develops and sells specialty chemicals. While the company was originally founded to produce agricultural chemicals and oil products, Goo Chemicals mainly serves the electronics, cosmetics, textile, and paper industries today. Its products are used in everything from smartphones and computers to hair sprays and high end clothing.

The company sailed through the 2008-2010 global financial crisis profitably, though with meaningfully deteriorated operating performance. With the paper industry, a key industry for Goo Chemicals, on a long-term decline, the next financial crisis may have more severe consequences.

With that said, the company carries no debt and a strong equity to asset ratio of 0.86. In fact, the company has a net cash balance of 706 yen per share compared to its 1,305 yen share price. Adjusted for investment securities, net cash balance comes out to 893 yen per share, or 68.4% of the current share price.

At 1,305 yen per share, Goo Chemicals trades at 104% of NCAV with a market capitalization of 8,250 million yen ($75.9 million USD). Adjusted for investment securities, the company trades for 91% of NCAV. With the niche nature of the company’s products and a track record of profiitably weathering through the last global financial crisis, it’s fair to say that Goo Chemical’s operating business is at least medium quality.

Over the last decade, the company generated an average annual operating income of 691 million yen ($6.4 million USD). At the same time, Goo Chemicals is guiding for 380 million yen ($3.5 million USD) in operating income for fiscal 2020. Here, we will layout two cases: a conservative case where the company performs in-line with 2020 guidance and a optimal case where the company performs in line with history.

Assuming a 200% NCAV fair value figure in the conservative case, investors can expect an investment CAGR of between 12% and 18.9%, inclusive of dividends, over the next 5 to 8 years. With a 200% NCAV fair value figure in the optimal case, investors can expect an investment CAGR of between 13.1% and 20.1%, inclusive of dividends, over the next 5 to 8 years.

Source: Kenkyo Investing estimates

Key roadblocks to share price appreciation include prolonged historically weak operating performance and illiquidity. At the same time, recovering to historically normal operating profits would likely shift investor sentiment and interest positively, resulting in share price appreciation.

The bottom line

Goo Chemicals is a specialty chemical maker mainly catering to the electronics, cosmetics, textile, and paper industries. With the niche nature of the company’s offerings and a track record for weathering through the 2008-2010 global financial crisis profitably, it’s safe to say Goo Chemicals’ operating business is at least medium quality. Investing at 1,305 yen per share, investors can expect an investment CAGR of between 12% and 20.1%, inclusive of dividends, over a 5 to 8 years 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.