Thinking Points

  • Kimoto (TSE: 7908) primarily manufactures and sells surface treatment films like screen protective films for electronics.
  • Over the last decade, revenues have declined while Kimoto’s target industries have thrived, forcing the company to change direction and offer new services like data processing and consulting.
  • Although the company has offered its new services for several years, it has been unable to gain meaningful traction. In its current state, Kimoto’s operating business quality is less than mediocre.
  • At 172 yen per share, Kimoto trades at 64.9% of adjusted NCAV with a market capitalization of 8,405 million yen ($77.9 million USD).
  • Considering the substandard quality of Kimoto’s operating business and its lack of visible improvement, investors can expect an investment CAGR of 0%. Investors are advised to revisit the company if new business shows promising signs of growth or if the company finds new applications for its surface processing products.

Introduction

Kimoto (TSE: 7908) primarily manufactures and sells surface treatment films like screen protective films for electronics. Additionally, the company offers data processing services and consulting services. The company officially reports through four segments that are broken down by region. For the purpose of analyzing the company, however, it’s more practical to present revenues by product/service:

Source: Company filings

Revenues have almost continuously fallen over the last decade with fluctuations in profitability. More recently, Kimoto saw a sharp decline in revenues in fiscal 2015, largely due to declining sales in hardcoat touchscreen films for smartphones, tablets, and PCs. The company missed all medium term targets set for FY2019, with no visible improvement in revenue quality or profitability.

The business & environment

Kimoto was founded in 1949 by Ujihito Kimoto. The company started out by providing film processing services, specializing in aerial photogrammetry. In 1955, Kimoto developed a variant of the Kent paper, a type of paper commonly used in drafting, architectural perspectives, and graphic illustrations because of its smoothness.

After developing the AK Kent paper, which offered better dimensional stability and tear-resistance than regular Kent paper, Kimoto soon became the government designated paper for use in master drawings of maps. This established image processing and surface processing as two of Kimoto’s core technologies.

During the 1970s, Kimoto started establishing its presence in the electronics industry. The company applied its surface processing technologies used in paper and plastics to electronic components like printed circuit boards and liquid crystal displays. 

After building out its manufacturing operations in the United States in the 1980s, Kimoto made another transition. The company applied its surface processing technologies to create hardcoat films and optical diffusion films for emerging touchscreen products in the 1990s. 

Films for touchscreen products eventually became a key offering, establishing Kimoto as a flat panel display industry supplier. Meanwhile, Kimoto experimented with developing printing systems, projection screens, and photocatalysts in the 2000s. Unlike previous transitions, however, Kimoto has faced challenges in the 2010s.

Revenues took a sharp decline in fiscal 2015, dropping by 19.9% YoY. The drop was largely due to sluggish sales of hardcoat films geared for touchscreen products like smartphones, tablets, and PCs. Following the decline, Kimoto doubled down on sales efforts for flat panel display market related offerings in fiscal 2016.

However, business performance continued to decline in 2016. The company announced its 2017-2019 medium term after reporting 2016 earnings, which outlined a shift in focus from the flat panel display market to Internet-of-Things (IoT) related offerings, like films for smart appliances, LED lights, and automotive components.

As a part of the shift in focus, Kimoto reorganized its revenue categories. Since 2016, these categories are Film, Data Kitchen, and Consulting. Film is Kimoto’s mainstay business whereas Data Kitchen and Consulting are new business areas. 

The Data Kitchen business primarily offers data processing services. This includes services such as creating catalog picture files out of CAD data, combining various aerial photographs to create one large map image, and creating holograph rooms out of picture files.

Source: Medium Term Plan Fiscal 2017 – 2019

The Consulting business is primarily focused on improving productivity at manufacturing facilities through the betterment of on-site internal communications. Additionally, the company helps implement open office, flexible time, and mobile work programs for clients.

While previous business transformations have proven successful, the push for Data Kitchen and Consulting services has not yielded meaningful results so far. In its previous medium term plan (2017 — 2019), Kimoto outlined its plan to grow revenues for the two businesses to 1,400 million yen ($13.0 million USD) and 1,000 million yen ($9.3 million USD), respectively.

Actual results came in considerably weaker, with Data Kitchen yielding 503 million yen ($4.7 million USD, -64.1% vs. target) in revenues and Consulting yielding 8 million yen ($74K USD, -99% vs. target). Meanwhile, the Film business continued on its declining trajectory, generating 12,280 million yen ($114 million USD, -31.8% vs. target). 

With the flat panel display market remaining healthy, Kimoto’s revenue decline is likely a function of foreign competition providing lower cost alternatives.

For fiscal 2020, Kimoto is guiding for revenues of 13,500 million yen ($125 million USD, -0.5% YoY) and operating profit of 100 million yen ($930K USD, +185.8% YoY). While the company may achieve its profitability targets through cost cutting measures, it faces long term structural problems operationally.  

Shareholders

As of FYE2019, Kimoto had 54,772,564 shares issued and 5,622,118 shares in treasury, putting outstanding shares at 49,150,446.

Here are the major shareholders:

Source: Company filings

It is unclear who stands behind Seiwa as the company appears to have held shares before EDINET (the Japanese equivalent of US SEC’s EDGAR) existed. Presumably, this is either a Kimoto family fund, or a key supplier/customer to Kimoto. 

There are no unexercised stock options or management equity compensation plans in place.

Financials & Valuation

  • Kimoto primarily manufactures and sells surface treatment films like screen protective films for electronics.
  • Over the last decade, revenues have declined while Kimoto’s target industries have thrived, forcing the company to change direction and offer new services like data processing and consulting.
  • Although the company has offered its new services for several years, it has been unable to gain meaningful traction. In its current state, Kimoto’s operating business quality is less than mediocre.
  • At 172 yen per share, Kimoto trades at 64.9% of adjusted NCAV with a market capitalization of 8,405 million yen ($77.9 million USD).
  • Considering the substandard quality of Kimoto’s operating business and its lack of visible improvement, investors can expect an investment CAGR of 0%. Investors are advised to revisit the company if new business shows promising signs of growth or if the company finds new applications for its surface processing products.

Kimoto got its start not long after the end of World War II. In its early days, the company specialized in film services for aerial photogrammetry. After developing its own variant of the Kent paper, the Japanese government designated the paper for use in master drawings of maps.

From then on, the company established itself around two key technologies: image processing and surface processing. With Japan’s continued post-war reconstruction and growth, Kimoto expanded into the electronics industry. This was followed by a transition into various films for touchscreen flat panel displays in the 1990s.

More recently, however, business performance has deteriorated amid a healthy flat panel display market, presumably as a result of increased competition. In another attempt to transition its business, Kimoto set out to develop its new Data Kitchen and Consulting businesses.

Both new businesses have significantly underperformed expectations so far. Making matters worse, its core business in flat panel display films continues to deteriorate. Without promising developments in any of its business areas, Kimoto’s revenue quality is substandard.

At 172 yen per share, Kimoto trades at 69.4% of NCAV with a market capitalization of 8,405 million yen ($77.9 million USD). Adjusted for long term investment security holdings, the company trades for 64.9% of NCAV. One good thing about Kimoto’s balance sheet is that it is awash with cash. In fact, the company trades at 122% of net cash.

According to its filings, Kimoto has an HQ office in Tokyo. Interestingly, however, the company combines the square area and book value of its US factory into the same line-item as the Tokyo office, making it difficult to assess whether the book value of either property is above or below recent market prices.

Based on recent performance and the progress rate of new business, an optimistic scenario for Kimoto is one where the company is able to maintain slight profitability. With that said, the company is on a trajectory of continued deterioration of business performance. 

With this in mind, investors can expect an investment CAGR of 0%. Investors are best advised to revisit the company if new business shows promising signs of growth or if Kimoto manages to find a new application for its line of surface processing products.

The bottom line

Kimoto has been on the forefront of technology for decades since its inception through continuous transformations. Its core business today is in flat panel display related films, which has been deteriorating in recent years. In need of another business transformation, Kimoto’s operating business quality is substandard to say the least. With this in mind, investors can expect an investment CAGR of 0%.


Kenkyo Investing
Kenkyo Investing

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