Thinking Points

  • Car Mate (TSE: 7297) is primarily engaged in the manufacture and sale of aftermarket automotive goods and secondarily engaged in the manufacture and sale of outdoor sporting goods.
  • The company is in transition, recently selling off its nursing business, then issuing a sizable recall on one of its mainstay automotive goods.
  • While the business impact of the sale of its nursing business is minimal, the company’s near-term performance ought to recover as the recall costs are non-recurring.
  • At 948 yen per share, Car Mate trades at an adjusted EV/EBIT of negative 1.6x with a market capitalization of 6,687 million yen ($61.8 million USD).
  • Investors can expect an investment CAGR of between 17.1% and 19.6%, inclusive of dividends, over the next three years.

Introduction

Car Mate (TSE: 7297) primarily manufactures and sells aftermarket automotive accessories. Secondarily, the company manufactures and sells outdoor sports equipment. The company operates through two segments:

Source: Kenkyo Investing, based on company data

Until recently, Car Mate also operated a nursing care business. The company sold this business for 1,000 million yen ($9.2 million USD) to Solasto (TSE: 6197) in December 2018. Separately, Car Mate recalled a lineup of its car child seats in Q4 2019, which resulted in higher-than-normal SG&A costs.

The business & environment

Car Mate was founded in 1966, a year after it started selling headrests for car seats. Operating out of Tokyo, the company expanded into other aftermarket automotive accessories like door mirrors and ski racks in its early days. Towards the end of the 1970s, Car Mate opened an office in Osaka, expanding its sales network. 

The company continued focusing on aftermarket automotive accessories, with no real entrance into the OEM automotive parts market. The 1980s marked a decade of significant growth for Car Mate. The company opened offices in all major Japanese metropolitan areas, then opened its first overseas office in Hong Kong. Meanwhile, the company also released its first child car seat and non-metal snow chains (for tires), which remains a part of Car Mate’s core product line up today.

Car Mate continued its business expansion into the 1990s, venturing into outdoor sports goods for the first time by releasing a snowboard. At the same time, the company also built its first fully automated warehouse (1990).  Shortly thereafter in 1993, the company expanded manufacturing operations overseas for the first time, opening a factory in Shenzhen, China. 

In the 2000s through today, Car Mate more or less solidified its core automotive accessory offerings. These include car racks, snow chains, children’s car seats, drive recorders, and air fresheners.

Source: Company presentation

As for the outdoor sports segment, the company mainly sells snowboarding gear and bicycle equipment. Historically, automotive accessories have accounted for over 75% of company revenues:

Source: Kenkyo Investing, based on company data

According to Yano Research Institute, which conducted domestic market research on the aftermarket automotive goods industry until 2015, the market is slowly shrinking.

Source: Kenkyo Investing, based on Yano Research data (2015 & 2016 figures are estimates)

Domestically, Car Mate plans to continue bringing high value-add products to the consumer market while expanding its sales channels to include commercial vehicles (i.e., drive recorders). Meanwhile, the company plans to expand its sales network globally, with a particular focus on India, ASEAN countries, China, and the United States. In FY03/19, the company had 1,854 million yen ($17.1 million USD, 9.7% of overall revenues) in overseas revenues, down 12.0% YoY. 

What’s interesting about Car Mate’s business is that it’s performance is not necessarily correlated with the automotive industry. As seen in the historical revenues by segment chart above, Car Mate’s automotive revenues did not fluctuate materially during the global financial crisis (2008-2010). Another interesting fact about Car Mate’s business is that two customers – Autobacs  (TSE: 9832) and Yellow Hat (TSE: 9882) account for 36.8% of automotive revenues:

Source: Kenkyo Investing, based on company data

Back in 2006, Autobacs and Yellow Hat combined accounted for over half of Car Mate’s automotive revenues. In 2019, the two companies accounted for 36.8% of automotive revenues. Although revenues from the two customers slowly decreased over 13 years, Car Mate has been able to generate sales through other customers to more than make up for it.

With that said, Car Mate’s operating profits decreased sharply in FY03/19:

Source: Kenkyo Investing, based on company data

There are two recent events that materially affected Car Mate’s business. 

First, the company sold its nursing home business to Solasto for 1,000 million yen ($9.2 million USD)  in Q3 FY03/19. Although the nursing home segment was marginally profitable in FY03/19 and FY03/18, it generated operating losses for three consecutive years prior to that. Considering the downside risks, the sale likely has no meaningful impact on operating performance going forward.

Second, the company issued a sizable recall for one of its children’s car seat products in Q4 FY03/19. As a result, SG&A expenses temporarily increased by about 200 million yen ($1.9 million USD) as the company set aside reserves for recall costs. 

As for the steep decline in 2015 (when the company also posted net losses), this was largely due to flood damage at one  logistics facilities and one manufacturing facility as a result of heavy rain in the Kanto region. The company’s automated warehouse and manufacturing functions were temporarily out of commission.

For FY03/20, Car Mate is expecting revenues of 16,843 million yen ($156 million USD, -11.7% YoY) and operating profits of 1,106 million yen ($10.2 million USD, +64.7% YoY). As of Q1 FY03/20, the company generated revenues of 3,591 million yen ($33.2 million USD, -13.8% YoY) and operating profit of 76 million yen ($703K USD, net loss of 77 million yen [$711K USD] in Q1 FY03/19). The company expects lower revenues as a result of the sales of the nursing business and improved operating profits as a result of lower SG&A due to lower product recall costs.

Shareholders

As of Q1 FY03/20 (ending June 30, 2019), Car Mate had 7,928,885 shares issued and 874,658 shares in treasury, putting outstanding shares at 7,054,227.

Here are the major shareholders:

Source: Kenkyo Investing, based on company data and Nikkei

MT Industries is the Murata family’s fund (founding family). Cumulatively, the Murata family holds a controlling stake in the company. 

The company does not offer an executive equity compensation plan and has no unexercised stock options outstanding.

Although the company has not made any meaningful share repurchases in the last decade, it repurchased 545,100 shares for 580 million yen ($5.4 million USD), or at 1,065 yen per share, in FY03/19. 

Financials & Valuation

  • Car Mate is primarily engaged in the manufacture and sale of aftermarket automotive goods and secondarily engaged in the manufacture and sale of outdoor sporting goods.
  • The company is in transition, recently selling off its nursing business, then issuing a sizable recall on one of its mainstay automotive goods.
  • While the business impact of the sale of its nursing business is minimal, the company’s near-term performance ought to recover as the recall costs are non-recurring.
  • At 948 yen per share, Car Mate trades at an adjusted EV/EBIT of negative 1.6x with a market capitalization of 6,687 million yen ($61.8 million USD).
  • Investors can expect an investment CAGR of between 17.1% and 19.6%, inclusive of dividends, over the next three years.

Car Mate is an established manufacturer and seller of aftermarket automotive products like car racks, snow chains, children’s car seats, drive recorders, and air fresheners. In addition to this, the company manufactures and sells outdoor sports equipment, mainly snowboard gear and bicycle equipment.

Since the company isn’t an OEM parts maker, it is less susceptible to the cyclicality of the automotive industry. Instead, the company heavily relied on two key customers – Autobacs and Yellow Hat – for its revenues for decades. With that said,  the company has been able to find other sales channels over the last decade or so, reducing its customer concentration considerably. 

More recently, the company sold its nursing home business in Q3 FY03/19. The sale has minimal impact on overall business operations as the nursing home segment generated marginal profits recently, and meaningful losses between FY03/15 – FY03/17. 

Separately, the company issued a recall for one of its key children’s car seat products in Q4 FY03/19. As a result, SG&A increased by about 200 million yen ($1.9 million USD) in FY03/19. Since the recall costs are non-recurring, the company expects operating profits to grow 64.7% YoY. Meanwhile, Car Mate’s balance sheet is more than healthy with a net cash balance and an equity to asset ratio of 0.66.

At 948 yen per share, Car Mate trades at an EV/EBIT of 0.2x with a market capitalization of 6,687 million yen ($61.8 million USD). Adjusted for long-term investment security holdings, most of which is invested in Autobacs and Yellow Hat, the company trades at a negative 1.6x EV/EBIT.

Aside from natural disasters, the company has remained consistently profitable, even through a down cycle in the automotive industry. Given this, a fair value EV/EBIT multiple of 3x is appropriate. 

Assuming operating profits land below forecast at somewhere between 800 million yen ($7.4 million USD) and 1,000 million yen ($9.2 million USD) over the next three years, investors can expect an investment CAGR of between 17.1% and 19.6%, inclusive of dividends.

The bottom line

Car Mate is an established manufacturer and seller of aftermarket automotive goods and outdoor sports equipment. After a recent product recall, the company’s operating performance deteriorated sharply. However, the recall costs are non-recurring and performance is expected to recover in FY03/20. With this in mind, investors can expect an investment CAGR of between 17.1% and 19.6%, 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.