Thinking Points

  • DMW Corporation (TSE: 6365) primarily manufactures, sells, and installs custom large scale pumps and blowers used for industrial and infrastructure related facilities.
  • The company has an operating history of over 100 years with a reputation for reliable technology and products.
  • More recently, DMW Corporation is focused on developing its seawater desalination business and international presence.
  • At 2,085 yen per share, DMW Corporation trades at an adjusted 63.8% NCAV with a market capitalization of 8,957 million yen ($83.5 million USD).
  • Investors can expect an investment CAGR of between 8.1% and 15.7%, inclusive of dividends, over a 5 to 8 year period.

Introduction

DMW Corporation (TSE: 6365) is mainly engaged in the manufacturing, installation, and sale of large scale wind and water equipment. Additionally, the company sells valves and control equipment. Although the company runs a single segment operation, it categorizes revenues by product type:

Source: Kenkyo Investing, based on company filings

Many of DMW’s products are seen in water treatment facilities, factories, power plants, offshore drilling facilities, tunnels, and other industrial & infrastructure related facilities. Due to its focus on large scale industrial pumps and blowers, all of DMW’s products are custom-made. For FY03/19, domestic government related work accounted for 66.8% of revenues.

The business & environment

DMW’s roots can be traced back to 1910, when electrical construction company Dengyosha setup a water turbine department. In addition to the development and manufacture of water turbines, the department was tasked to manufacture various types of pumps. 

In 1915, what started as a small department of Dengyosha officially became its own company: The Dengyosha Water Turbine Manufacturing Company. In 1919, Dengyosha Water Turbine setup Dengyosha Motor Manufacturing. Shortly after in 1920, the two companies merged.

Today’s DMW, which is short for Dengyosha Machinery Works, came about in 1955 when Dengyosha Water Turbine was split into two: the water turbine business and industrial machinery business (pumps, blowers, and diesel engines). Toshiba (TSE: 6502) inherited the water turbine business while the industrial machinery business was passed on to the newly formed DMW.

The business has mostly kept its focus on pumps and blowers, although it did sell American pumps (ClydeUnion Pumps) for a period from 1961 through 2001. Although the company has sold products across the globe, it wasn’t until 2014 that the company first setup its overseas office in India.

Source: Kenkyo Investing, based on company filings

DMW operates as a single segment and does not disclose operating profits by product category. Hence, only a revenue breakdown is made available in company filings:

Source: Kenkyo Investing, based on company filings

With DMW’s focus on large scale pumps and blowers, the company’s customers tend to be government-related as the products are used in infrastructure facilities like power plants, dams, tunnels, and water treatment plants. The company started disclosing revenues by customer type in 2016. According to filings between FY03/16 and FY03/19, Japanese government related revenues accounted for between 63.3% and 69.8% of annual revenues.

The biggest customer for DMW over the last decade has been a trading company called Moritani Shokai, which specializes in industrial machinery. Publicly listed Japanese companies are required to disclose the names of customers that account for more than 10% of company revenues. In the last 10 years, Moritani Shokai’s name appeared on filings in every year except for FY03/17. Generally, Moritani Shokai has accounted for ~15% of DMW revenues.

DMW prides itself in its reliable technology, which has been recognized by non-Japanese industry publications in the past. Referring to blowers manufactured by DMW, the February 2009 issue of Hydrocarbon Processing noted:

“The best mean-time-between-failures (MTBFs) for the tie-rod-type blowers averaged two years, with a mean-time-between-overhaul (MTBO) of three years…  since 2003 this vendor has won five separate competitive orders to supply blowers to the owner-user’s facilities; Fig. 2 shows a 1,000-hp/750-kW blower. Referring back to the old machines and as of late 2008, neither failures nor vibration problems had occurred on any of them. Varying from 350 hp/260 kW to 1,200 hp/900 kW they have, at one remote location, operated for 20 years without failures. In other words, the blowers achieved a 20-year MTBF.”

Source: Hydrocarbon Processing (February 2009)

More recently, DMW has been working to develop its seawater desalination business, first in Japan, then targeting India, Africa, and the Middle East for future growth. For FY03/20, DMW is forecasting 19,000 million yen ($177 million USD, +3.7% YoY) in revenues and 1,370 million yen ($12.8 million USD, -20.1% YoY) in operating profit. As of Q1 FY03/20, revenues are down 12.1% YoY and the company generated 300 million yen in operating losses (compared to loss of 9 million yen in Q1 FY03/19).

Shareholders

DMW Corporation has 4,776,900 shares issued and 480,751 shares in treasury, putting outstanding shares at 4,296,149.

Here are the major shareholders:

Source: Kenkyo Investing, based on company filings and Nikkei

GM Investments is the parent company of DMW’s biggest customer, Moritani Shokai. Although GM Investments only became a major shareholder of DMW in 2007, the business relationship between the two companies and its affiliates appear to extend to at least 1974, when GM Investments group company Iwaki Moritani Denko became a distributor of DMW. Iwaki Moritani Denko still operates as a vendor for DMW at a small scale.

There are no unexercised stock options outstanding.

Recently, DMW Corporation has started to repurchase a meaningful amount of shares. In August 2018, the company repurchased 81,000 shares (1.8% of outstanding shares) for a total purchase price of 185 million yen ($1.7 million USD), or 2,284 yen per share. More recently in April 2019, the company repurchased 27,300 shares (0.6% of outstanding shares) for a total purchase price of 58 million yen ($541K USD), or 2,126 yen per share. In both cases, the company noted that the purchase was made to improve capital efficiency.

Financials & Valuation

  • DMW Corporation primarily manufactures, sells, and installs custom large scale pumps and blowers used for industrial and infrastructure related facilities.
  • The company has an operating history of over 100 years with a reputation for reliable technology and products.
  • More recently, DMW Corporation is focused on developing its seawater desalination business and international presence.
  • At 2,085 yen per share, DMW Corporation trades at an adjusted 63.8% NCAV with a market capitalization of 8,957 million yen ($83.5 million USD).
  • Investors can expect an investment CAGR of between 8.1% and 15.7%, inclusive of dividends, over a 5 to 8 year period.

DMW Corporation is an established manufacturer of large scale custom made pumps and blowers for industrial and infrastructure related facilities. With over 100 years in operating history and a strong focus on technology, the company is known for its products’ reliability. While its international presence is still marginal, an American industry publisher recognized DMW’s highly reliable blowers in an article published back in February 2009.

More recently, DMW Corporation is focused on developing its seawater desalination business and international presence. For seawater desalination, the company aims to establish itself first in Japan, then expand into India, Africa, and the Middle East. Additionally, DMW setup its first foreign subsidiary in India in 2014.

At 2,085 yen per share, DMW Corporation trades at an unadjusted 76.0% of NCAV with a market capitalization of 8,957 million yen ($83.5 million USD). Adjusted for long-term investment security holdings, however, the company trades at 63.8% NCAV. 

Although DMW’s technological capability and therefore competitive advantage is inherently high due to the large scale and customized nature of its work, company revenues should be considered somewhere between medium and high quality as projects tend to have a cyclical nature. With this in mind, a fair valuation of between 100% to 120% of adjusted NCAV is reasonable.

Assuming business performance generates a more normalized operating profit of 1,000 million yen ($9.3 million USD) over the next decade or so, investors can expect an investment CAGR of between 8.1% and 15.7%, inclusive of dividends, over a 5 to 8 year period. Gains may be realized sooner if DMW continues to repurchase shares in order to improve capital efficiency.

The bottom line

DMW Corporation is an established and reputable pump and blower manufacturer. While the company maintains a high level of technological competence, its revenues should be considered somewhere between medium to high quality as they are largely dependent on a healthy economic environment. With this in mind, investors can expect an investment CAGR of between 8.1% and 15.7%, inclusive of dividends, over the next 5 to 8 years. Gains may be realized sooner if DMW continues to repurchase shares to improve capital efficiency.


Kenkyo Investing
Kenkyo Investing

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