Thinking Points

  • Asahi Kogyosha (TSE: 1975) is an established construction company specializing in air conditioning and sanitary facility installation.
  • As an extension of its sanitary facility business, the company manufactures and sells precision environmental control equipment used in semiconductor and LCD manufacturing facilities.
  • As such, the company is susceptible to some industry swings, but generally remains profitable over the long run.
  • At 2,370 yen per share, Asahi Kogyosha trades at an adjusted -1.1 EV/EBIT, or 71% of adjusted NCAV, with a market capitalization of 15,460 million yen ($143 million USD).
  • Investors can expect an investment CAGR of between 17.4% and 23.2%, inclusive of dividends, over a three year period.

Introduction

Asahi Kogyosha (TSE: 1975) is a construction company specializing in air conditioning and sanitary facility installation. Secondarily, as an extension of its construction business, the company manufactures and sells precision environmental control equipment like those used in semiconductor and LCD manufacturing facilities. Asahi Kogyosha operates through two segments: Installation and Equipment.

Source: Company filings

As a part of its medium term plan announced in 2017, the company is targeting industrial customers, developing business in the environmental area (like energy efficient buildings), and expanding renovation/maintenance related work.

The business & environment

Asahi Kogyosha was founded in Osaka in 1925 to build and install temperature and humidity control devices, spray humidifiers, and dust removers for textile-spinning companies in Japan. These companies were the focal point for Asahi Kogyosha early on, driving the company to design and install increasingly sophisticated air conditioners and drying equipment as technology advanced.

Shortly after the war in 1948, the company established its first office outside of the Tokyo & Osaka metropolitan areas in Sapporo. Over the following decade, the company quickly expanded its domestic geographic footprint, opening offices in Nagoya, Fukuoka, Sendai, and Hiroshima, covering all major Japanese metropolitan cities.

After expanding its office footprint, the company dropped its textile focus and expanded its offering to other industrial facilities and buildings, which continued into the 1970s. In fact, Asahi Kogyosha was among the first to develop energy-efficient, variable airflow systems.

From the mid-1970s into the 1980s, the company’s offerings became increasingly sophisticated. Asahi Kogyosha started working on computer centers, pharmaceutical plants, and hospitals, among other facilities with a higher sanitation requirement. The company also started building super clean rooms for semiconductor fabrication plants during this time.

As an extension of its sanitary facility offerings for semiconductor fabrication plants, Asahi Kogyosha started manufacturing sanitary equipment. As a general trend, the company has  increasingly focused its efforts on sanitary and energy-saving equipment and systems. Additionally, the company started expanding its renovation business, proposing energy-saving systems to clients.

On a negative note, the Japanese government placed a 60-day business suspension order on Asahi Kogyosha for antitrust violation on the Hokuriku bullet train project in 2014. The suspension order only affected government funded and subsidized projects, but not private projects. The business impact of this event was minimal.

The company’s revenues have remained relatively consistent historically, with the exception of 2012/2013, the post-2011 Tohoku earthquake period where capital investment for large LCD displays declined significantly.

Source: Company filings

Aside from the capital investment slowdown in LCD display manufacturing, the company is also affected by the semiconductor industry. So far, however, Asahi Kogyosha has managed to profitably weather through the 2008-2010 global financial crisis and quickly recover from losses in 2014 back to relatively normalized business performance in 2014.

Source: Company filings

In its medium term plan (fiscal 2018-2021), Asahi Kogyosha set financial targets of 89,300 million yen ($826 million USD) in revenues and 3,600 million yen ($33.3 million USD) in operating income. The company plans to achieve these targets primarily through expanding its maintenance and renovation business, focus on energy-efficient offerings, and expansion into other LCD/semiconductor manufacturing related areas.

Its 2020 guidance, however, is weaker than 2019 operating performance. The company is guiding for revenues of 92,000 million yen ($851 million USD, +3.4% YoY) and operating income of 2,200 million yen ($20.3 million USD, -33.5% YoY). Asahi Kogyosha is expecting top-line growth associated with continued strong capital investment environment. At the same time, the company is also expecting a general rise in labor and material costs as well as other operating costs related to productivity improvement initiatives for 2020, resulting in weaker guidance for operating performance.

Shareholders

As of Q4 2019 (ending March 31st, 2019), Asahi Kogyosha had 6,800,000 shares issued and 414,273 shares in treasury, putting outstanding shares at 6,385,727.

Here are the major shareholders:

Source: Company filings

The two business associations that are Asahi Kogyosha’s largest shareholders consist of the company’s suppliers and customers. Collectively, Asahi Kogyosha’s suppliers, customers, and employees own 21% of the company.

There are no management equity compensation plans.

Financials & Valuation

  • Asahi Kogyosha is an established construction company specializing in air conditioning and sanitary facility installation.
  • As an extension of its sanitary facility business, the company manufactures and sells precision environmental control equipment used in semiconductor and LCD manufacturing facilities.
  • As such, the company is susceptible to some industry swings, but generally remains profitable over the long run.
  • At 2,370 yen per share, Asahi Kogyosha trades at an adjusted -1.1 EV/EBIT, or 71% of adjusted NCAV, with a market capitalization of 15,460 million yen ($143 million USD).
  • Investors can expect an investment CAGR of between 17.4% and 23.2%, inclusive of dividends, over a three year period.

Asahi Kogyosha is a construction company specializing in air conditioning and sanitary facility installation. Additionally, the company manufactures and sells precision environmental control equipment used in semiconductor and LCD manufacturing.

Since its founding in 1925, the company expanded its geographical footprint across all major Japanese metropolitan areas. In the process, Asahi Kogyosha took on increasingly sophisticated projects, eventually working its way toward clean rooms for semiconductor manufacturers and data centers.

Business performance has been mostly stable, sailing profitably through the 2008-2010 global financial crisis. With the LCD manufacturing exposure, however, the company briefly posted losses in 2013 when the industry slowed down.

At 2,370 yen per share, Asahi Kogyosha trades at 2.5x EV/EBIT with a market capitalization of 15,460 million yen ($143 million USD). Some financial sources miscalculate EBIT, resulting in a lower EV/EBIT ratio. Adjusted for long term investment security holdings, however, Asahi Kogyosha trades at -1.1 EV/EBIT. Moreover, the company is also in deep value territory with a 71% NCAV on an adjusted basis.

In addition to the company’s low earnings-based valuation, Asahi Kogyosha is rich in land assets. In early 2018, the company HQ moved to its brand new building in Tokyo. The company has had an office on the same plot of land since 1955.

On the books, this land is listed with a 366 million yen ($3.4 million USD) book value. Although the filings show the land area at 6,482 square meters (69,800 sq. ft.), it is likely that this is more in line with building square footage. Based on the company’s 2018 business report, the land area would be closer to 750 square meters, or 8,100 square feet. Still, market value of the land is likely worth around 1,500 million yen ($13.9 million USD) based on our estimates.

While the company expects weaker operating performance in fiscal 2020, some of this is due to proactive productivity improvement initiatives, and not due to a decline in revenue performance. As such we will outline two basic investment cases for valuation: one with continued strong performance in-line with medium term plans and another with normalized performance levels.

Assuming a fair value EV/EBIT of 2x with continued strong business performance, investors can expect an investment CAGR of 23.2%, inclusive of dividends, over a three year period.

With normalized business performance and a fair value EV/EBIT of 2x, investors can expect an investment CAGR of 17.4%, inclusive of dividends, over a three year period.

Factors that may negatively influence investor sentiment include a decline in semiconductor industry capital investment, another business suspension order by the Japanese government, or another global financial crisis.

The bottom line

Asahi Kogyosha is an established construction company specializing in air conditioning and sanitary facility installation. Additionally, the company manufactures and sells precision environmental control equipment used in semiconductor and LCD manufacturing. At first glance, Asahi Kogyosha does not own much land. However, a closer look shows that its Tokyo land is on the books at a significant discount to market value. With a decent operating business, the company’s outlook is good. At 2,370 yen per share, the company trades at a negative 1.1x EV/EBIT. Investors can expect an investment CAGR of between 17.4% and 23.2%, inclusive of dividends, over the next three years.


Kenkyo Investing
Kenkyo Investing

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