Thinking Points

  • Zaoh (TSE: 9986) is a trading company specializing in industrial cleaning and washing equipment, with overseas purchasing accounting for more than 70% of total purchasing.
  • In addition to operating as a trading company, Zaoh makes customization requests to vendors in order to tailor products for the Japanese market.
  • What’s more, the company internally designs some of its products, leaving the manufacturing to its vendors and generally maintaining mid-teen operating margins.
  • At 1,446 yen per share, Zaoh currently trades at an adjusted 132% of NCAV and an adjusted EV/EBIT of 2.5x with a market capitalization of 9,216 million yen ($84.4 million USD).
  • Investors can expect an investment CAGR of between 7.3% and 10.0%, inclusive of dividends, over the next three years.

Introduction

Zaoh (TSE: 9986) is a trading company specializing in importing and selling industrial cleaning and washing equipment. The company runs a single segment operation, but breaks revenues down by category: Cleaning equipment, Washing equipment, and Other.

Source: Kenkyo Investing, based on company data


Although Zaoh is mostly known as a specialized trading company, it has designed some of its own products. In fact, the company often times makes customization requests to foreign original equipment manufacturers when placing orders to make sure products are specifically tailored to the Japanese market.

The business & environment

Zaoh was founded in 1955 in Tokyo by Hideo Sasaki to sell measuring equipment, machinery, and steel products. A few years later in 1959, the company opened a sales office in Osaka. It wasn’t until 1967, however, that Zaoh started selling cleaning and washing equipment like industrial vacuum cleaners, automatic floor washers, and environmental cleaning equipment.

Another decade later in 1978, the company set up its first logistics facility in Tokyo, which also served as an R&D facility. It later expanded its service area, with offices in every major region in Japan.

Most of the products that Zaoh sells are purchased overseas. According to company filings, about 73% of its purchasing happened overseas in FY03/19. 

Source: Kenkyo Investing, based on calculations derived from company estimates


As far as currencies go, Zaoh was most heavily exposed to the US Dollar (61.4% of imports, 45% of total purchases) and secondarily exposed to the Euro (38.6% of imports, 28% of total purchases) in FY03/19. A little over a decade ago, the company was more exposed to the Euro than the US Dollar, but that has since shifted. Although the company hedges its risk through foreign exchange forward contracts, a weaker yen against either of these currencies will have a negative effect on business performance.

There are a couple of other notable risks for Zaoh’s overseas purchasing as well. The company appears to maintain a concentrated set of vendors, with Italy-based Integrated Professional Cleaning (IPC) often accounting for over 20% of purchases over the last decade or so. Aside from IPC, vendors in the US-based Minuteman International Group like Minuteman and Powerboss, as well as a couple of Chinese vendors, have appeared on Zaoh’s important vendors list in the past.

Source: Zaoh English website

What’s particularly interesting is that Zaoh does not have formal agreements with any of its main vendors. In its filings, the company notes that purchases are based on gentlemen’s agreements. This is somewhat surprising, especially since Zaoh makes customization requests to modify existing products for the Japanese market. Additionally, the company designs some of its own products, outsourcing the manufacturing functions to its vendors.

On the sales side, Zaoh takes a hands-on approach. Its sales personnel visits customers with the equipment and offers free demonstrations. According to the company, this is one of its competitive advantages as Zaoh’s equipment customization requests are often based on information gained from these customer visits.

The company’s customers are primarily in the manufacturing and building maintenance industries. Despite selling equipment and machinery that would generally be categorized as capital expenditures, Zaoh appears to be less susceptible to cyclical swings than we would normally expect. In fact, the company managed to remain comfortably profitable through the 2008-2010 global financial crisis.

Source: Kenkyo Investing, based on company data


Operating margins generally range between 14 and 16 percent during good times. In 2010, at its lowest point in recent history, Zaoh delivered operating margins of 9.4%. 

For FY03/20, the company expects revenues of 7,520 million yen ($68.8 million USD, +8.2% YoY) and operating profits of 1,114 million yen ($10.2 million USD, +2.1% YoY). As of Q2 FY03/20, Zaoh recorded revenues of 3,341 million yen ($30.6 million USD, +2.1% YoY) and operating profits of 474 million yen ($4.3 million USD, -2.6% YoY).

Shareholders

As of Q2 FY03/20 (ending September 30, 2019), Zaoh had 6,266,000 shares issued and 1,327 shares in treasury, putting outstanding shares at 6,264,673.

Here are the major shareholders:

Source: Kenkyo Investing, based on company filings and Nikkei


Kenji Sasaki is a member of the founding family. As recently as 2015, he held 1,400,530 shares (24.0% of issued shares).

In 2015, Kenji sold 374,000 shares for 1,314.95 yen per share. He also had transactions in 2017 and 2018 where he gave away 462,000 shares. No further details are available in the filings.

There are no equity compensation plans offered to management and no outstanding stock options.

Financials & Valuation

  • Zaoh is a trading company specializing in industrial cleaning and washing equipment, with overseas purchasing accounting for more than 70% of total purchasing.
  • In addition to operating as a trading company, Zaoh makes customization requests to vendors in order to tailor products for the Japanese market.
  • What’s more, the company internally designs some of its products, leaving the manufacturing to its vendors and generally maintaining mid-teen operating margins.
  • At 1,446 yen per share, Zaoh currently trades at an adjusted 132% of NCAV and an adjusted EV/EBIT of 2.5x with a market capitalization of 9,216 million yen ($84.4 million USD).
  • Investors can expect an investment CAGR of between 7.3% and 10.0%, inclusive of dividends, over the next three years.

Zaoh is an established trading company specializing in industrial cleaning and washing equipment. The company primarily deals with overseas original equipment manufacturers, with over 70% of annual purchases coming from overseas.

Although the company maintains an asset-light operation, its balance sheet is overcapitalized with net cash & equivalents of 4,484 million yen ($41.0 million USD, or 48.7% of its market capitalization) and an equity-to-asset ratio of 0.87. 

At 1,446 yen per share, Zaoh currently trades at 136% of NCAV and an EV/EBIT of 2.7x with a market capitalization of 9,216 million yen ($84.4 million USD). Adjusted for long-term investment security holdings, however, Zaoh trades at 132% of NCAV and an EV/EBIT of 2.5x.

Interestingly, the company notes that it has unrealized losses on its land. Zaoh took advantage of the opportunity to adjust its land values in 2001 (was allowed between 1998 and 2002). According to the company, the assessed values for its land have fallen collectively since the adjustment. 

As of FY03/19, the company’s unrealized losses amounted to 958 million yen ($8.8 million USD). Seeing that Zaoh has no idle land assets and no plans to sell, the unrealized losses are more of a side note.

Another interesting point about the company is that, despite its main customers being in a cyclical manufacturing industry, the company managed to profitably sail through the 2008-2010 global financial crisis.

Although Zaoh maintains a stable operating business, it’s difficult to imagine a growth scenario to any significant extent. On a similar note, however, another downturn would surely deteriorate the company’s business as it did in 2008-2010.

With normalized performance as the base line, FY03/19 performance as the optimistic assumption, and a fair value EV/EBIT of 4x, investors can expect an investment CAGR of between 7.3% and 10.0%, inclusive of dividends, over the next three years.

It’s worth noting that Zaoh’s forward dividend yield stands at an attractive 4.19%.

The bottom line

Zaoh is an established trading company specializing in industrial cleaning and washing equipment. Beyond its role as a trading company, the company designs some of its own products and makes Japan-tailored customization requests to foreign original equipment manufacturers. Despite its cyclical exposure, Zaoh maintains a remarkably stable operating business. At 1,446 yen per share, investors can expect an investment CAGR of between 7.3% and 10.0%, 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.