Thinking Points

  • Chuoh Pack Industry (NSE: 3952) designs, manufactures, and sells packaging materials like cardboard boxes and bubble wrap.
  • Its largest customer and shareholder is the Toyota Group, which accounts for over 15% of revenues and holds 24.2% of outstanding shares.
  • In recent years, increasing cardboard material prices pressured margins, leading to a decline in operating profit. However, the company has remained profitable through difficult times in the past.
  • At 1,258 yen per share, Chuoh Pack Industry trades at 65.6% of adjusted NCAV and -3.0x adjusted EV/EBIT with a market capitalization of 6,248 million yen ($57.5 million USD).
  • Investors can expect an investment CAGR of between 15.5% and 18.6%, inclusive of dividends, over three years

Introduction

Chuoh Pack Industry (NSE: 3952) designs, manufactures, and sells packaging materials like cardboard boxes and bubble wrap. The company runs a two-segment operation, with its segments split out by regions:

Source: Kenkyo Investing, based on company data

Before continuing, Chuoh Pack Industry trades on the Nagoya Stock Exchange. Investors without access to the exchange may want to consider skipping this report. For investors still interested, one of the most notable things about Chuoh Pack is its affiliation with Toyota Motor (TSE: 7203), which generally accounts for about 15% of company revenues.

The business & environment

Chuoh Pack Industry was founded in Nagoya in 1957 to produce cardboard products. Interestingly, there is very little information available on the company. Aside from maintaining an updated website, Chuoh Pack  generally stays out of public view, with no CEO interviews or company coverage offered anywhere.

In any case, a major turning point for the company came about in 1997, when Chuoh Pack officially joined the Toyota Group, which is also headquartered in Nagoya.  

Source: Kenkyo Investing, based on company data

The Toyota revenues listed in the chart above are specifically for Toyota Motors and does not include revenues from Toyota affiliates. In the past, however, Toyota Group companies have appeared on Chuoh Pack’s key customer list (companies accounting for 10+% of annual revenues) and accounts receivables. For example, Toyota Boshoku (TSE: 3116) appeared on the key customer list in 2012 when it accounted for 10.1% of revenues.

Another point of interest is the stability of revenues from Toyota Motors. Toyota-related revenues actually increased during the 2008-2010 global financial crisis. 

What’s more, the company remained comfortably profitable through the global financial crisis:

Source: Kenkyo Investing, based on company data

Factors that likely drove stable and profitable performance include: the built-to-order nature of Chuoh Pack’s business, value-added product offerings, and the Toyota Group. The last point goes without saying, and the first two points come hand-in-hand. Chuoh Pack’s offerings aren’t plain cardboard boxes used when moving into a new home. In fact, the company holds 58 patents and has 27 pending patent applications related to packaging.

Source: Kenkyo Investing, based on company data

There is little reason to believe that Toyota’s business will go away or change meaningfully anytime soon. However, cardboard material prices have gone up over the last couple of years, which pressured margins across the industry. Along with its peers, Chuoh Pack raised prices to account for this, but still suffered a degree of margin contraction. More importantly, a key risk for Chuoh Pack is its ability to negotiate pricing, especially for customers like Toyota. 

For FY03/20, Chuoh Pack expects revenues of 10,700 million yen ($98.6 million USD, -13.1% YoY) and operating profit of 700 million yen ($6.5 million USD, -14.8% YoY). As of 1H 03/20, results have been in-line with forecasts with revenues of 5,277 million yen ($48.6 million USD, -13.3% YoY) and operating profit of 343 million yen ($3.2 million USD, -14.9% YoY).  

Shareholders

As of 1H FY03/20 (ending September 30, 2019), Chuoh Pack Industry had 5,225,008 shares issued and 258,022 shares in treasury, putting outstanding shares at 4,966,986. 

Here are the major shareholders:

Source: Kenkyo Investing, based on company and Nikkei data

Toyota Motors is the leading shareholder of Chuoh Pack with 24.2% of outstanding shares. Although Toyota-revenues have remained stable, the Toyota Group involvement isn’t always positive for subsidiary companies. Governance issues are fairly common in Keiretsu structures, where the Keiretsu head company owns a minority stake in a company, but effectively remains in full control. The most famous case is likely T. Boone Pickens’ fight for a board seat on Toyota-supplier Koito Manufacturing (TSE: 7276) back in 1989.

While T. Boone Pickens is well-known as a corporate raider, he did expose some valid governance issues in Japan. In Chuoh Pack’s case, Toyota is the leading shareholder with 24.2% of outstanding shares. Meanwhile, at least the last three CEOs (including Masashi Yamashita, the current CEO) were sent in from Toyota. 

There are no unexercised stock options.

Financials & Valuation

  • Chuoh Pack Industry designs, manufactures, and sells packaging materials like cardboard boxes and bubble wrap.
  • Its largest customer and shareholder is the Toyota Group, which accounts for over 15% of revenues and holds 24.2% of outstanding shares.
  • In recent years, increasing cardboard material prices pressured margins, leading to a decline in operating profit. However, the company has remained profitable through difficult times in the past.
  • At 1,258 yen per share, Chuoh Pack Industry trades at 65.6% of adjusted NCAV and -3.0x adjusted EV/EBIT with a market capitalization of 6,248 million yen ($57.5 million USD).
  • Investors can expect an investment CAGR of between 15.5% and 18.6%, inclusive of dividends, over three years

Chuoh Pack Industry designs, manufactures, and sells packaging materials like cardboard boxes and bubble wrap. Since 1997, Toyota has owned a stake in the company and has become its largest customer.

While the Toyota Group involvement has led to stable revenues, even through difficult times, one key concern for shareholders is Chuoh Pack’s ability to effectively negotiate pricing with Toyota. Not only is Toyota the largest customer for Chuoh Pack, it is also the largest shareholder. Moreover, the last three CEOs (including current CEO) was sent in from Toyota. In other words, the Toyota Group effectively controls the company.

On a brighter note, Chuoh Pack has consistently turned a profit (OP margins of 4.8% ~ 11.7%)  and generated free cash flows (FCF margins of 2.5% ~ 8.7%) for over 10 years straight. In recent years, however, margins have been on a declining trend with increasing cardboard material prices. Some sources (Japanese) recently noted falling prices for recycled cardboard driven by a combination of tightening environmental regulation and sluggish demand in China.

Taking a look at Chuoh Pack’s balance sheet, its cash balance has continuously grown while liabilities remained steady.

Source: Kenkyo Investing, based on company data

Chuoh Pack’s balance sheet is overcapitalized with a net cash balance and an equity to asset ratio of 0.85. While the company has clear flaws in governance, the Toyota-connection has so far yielded positive results. Chuoh Pack has generated remarkably stable business performance, consistently producing profits and free cash flow for over a decade.

At 1,258 yen per share, Chuoh Pack Industry trades at 71.6% of adjusted NCAV and -2.0x adjusted EV/EBIT with a market capitalization of 6,248 million yen ($57.5 million USD). Adjusted for long term investment security holdings, the company trades for 65.6% of NCAV and at -3.0 EV/EBIT.

It’s difficult to tell whether the company’s share price has gone roughly nowhere (highest price of 1,499 yen over 10 years) because of its Nagoya exchange listing or its governance issues. In any case, Chuoh Pack runs a decent but not spectacular business with the only major quirk being Toyota’s effective control.

Assuming fair value EV/EBIT is somewhere between 0.0 and 1.0 on an adjusted basis, investors can expect an investment CAGR of between 15.5% and 18.6%, inclusive of dividends, over three years. As a side note, an EV/EBIT of 1.0 in three years is equivalent to 99.5% of adjusted NCAV.

The bottom line

Chuoh Pack Industry is a healthy and established packaging company with strong ties to the Toyota Group. While the Toyota connection effectively gives away control to Toyota, from a business performance perspective, the company has been remarkably stable. At today’s 1,258 yen per share price, investors can expect an investment CAGR of between 15.5% and 18.6%, inclusive of dividends, over 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.