Thinking Points

  • Teikoku Tsushin (TSE: 6763) is an electronic components manufacturer primarily making the equivalent of user interface components for everyday electronics like appliances and digital cameras.
  • The company’s operating business was significantly impacted by the 2008-2010 global financial crisis and the displacement of cameras by smartphones that followed.
  • While not enough to build a long term growth case, certain aspects of Teikoku, like its focus on in-house design and ability to handle small batch orders, suggest that the company operates a decently resilient business.
  • At 1,210 yen per share, Teikoku Tsushin trades at an adjusted negative EV with a market capitalization of 11,902 million yen ($110 million USD).
  • Investors can expect to see an investment CAGR of around 5%, inclusive of dividends, over the next three years.

Introduction

Teikoku Tsushin (TSE: 6763) manufactures and sells electronic components, namely integrated control blocks (ICBs), variable resistors, and fixed resistors. The company operates through two segments – Electronic Components and Other – but considering the Electronic Components segment consistently accounts for over 90% of total revenues, it’s more helpful to look at sales by region:

Source: Kenkyo Investing, based on company data

After the 2008-2010 global financial crisis, Teikoku Tsushin’s integrated control block sales plummeted, resulting in heavy losses for several years. Although sales have not recovered since, the company has managed to return to profitability.

The business & environment

Teikoku Tsushin was founded in 1944 as a joint company backed by Toshiba (TSE: 6502), NEC (TSE: 6701), Japan Radio Company, and several other companies to manufacture wireless communication components. 

Since the beginning, the company specialized in the design and manufacturing of electronic components, building its mainstay product lineup that consists of integrated control blocks (ICBs), variable and fixed resistors, and switches. 

In more understandable terms, ICB refers to the control panel that consumers use to operate things like car radios, appliances, or digital cameras. Resistors, in the case of Teikoku, are often components used in ICBs (think: the knobs you use to adjust the side mirror positioning in your car, or the joystick you use on video game controllers).

The company was early in its international expansion, opening its first overseas office in Taiwan in 1966, then proceeded to open offices and manufacturing facilities mainly in Asia. Today, Teikoku maintains offices in Japan, the US, China, Hong Kong, Taiwan, Korea, Singapore, and Thailand. It also operates manufacturing facilities in Japan, China, Taiwan, Thailand, and Vietnam.

When looking at Teikoku’s historical business performance, it’s immediately clear that the company suffered heavy losses from the 2008-2010 global financial crisis, and never fully recovered:

Source: Kenkyo Investing, based on company data

At first glance, this is characteristic of the fall of the Japanese electronics industry. At the same time, however, the steep decline likely has more to do with the dramatic shift in the contents of consumer electronics rather than elements of technological incompetence on Teikoku’s part.

This is mainly because, for a long time, the company’s key offering was ICBs for digital cameras and camcorders. During the 2008-2010 global financial crisis, smartphones started displacing digital cameras and camcorders. In other words, by the time the global economy was back on a recovery/growth trajectory, the landscape for the consumer electronics that Teikoku supplied dramatically changed. And this is evident in the company’s business performance:

Source: Kenkyo Investing, based on company data

It’s clear that Teikoku’s industry environment has not been kind to its business performance. There are, however, certain parts of Teikoku’s operating philosophy that removes concerns regarding the company’s competence level. These are things like the company’s focus on in-house design and ability to handle small batch orders. Still, given the company’s R&D focus on ICBs, it’s difficult to imagine a growth case for Teikoku.

For FY03/20, the company initially expected revenues of 13,500 million yen ($125 million USD, +2.2% YoY) and operating profit of 800 million yen ($7.4 million USD, -20.0% YoY). This was adjusted down to revenues of 13,000 million yen ($120 million USD, -1.6% YoY) and operating profit of 750 million yen ($6.9 million USD, -25.0% YoY) during Q2 FY03/20. As of Q2 (ending September 30, 2019), the company reported revenues of 6,511 million yen ($60 million USD, -1.6% YoY) and operating profit of 473 million yen ($4.4 million USD, -15.2% YoY). Teikoku also reported net income of 22 million yen ($202K USD, -95.7% YoY) largely as a result of one-time expenses related to the shutdown of its Indonesia operations.

Shareholders

For Q2 FY03/20 (ending September 30, 2019), Teikoku Tsushin had 10,141,833 shares issued and 304,843 shares in treasury, putting outstanding shares at 9,836,990.

Here are the major shareholders:

Source: Kenkyo Investing, based on company & Nikkei data

Interestingly, Teikoku has a large shareholder base for a company its size with 5,589 shareholders as of March 2019. Additionally, there are no controlling shareholders. 

The company does have a small number of stock options outstanding, but with no material effect (less than 1% of outstanding shares). 

Financials & Valuation

  • Teikoku Tsushin is an electronic components manufacturer primarily making the equivalent of user interface components for everyday electronics like appliances and digital cameras.
  • The company’s operating business was significantly impacted by the 2008-2010 global financial crisis and the displacement of cameras by smartphones that followed.
  • While not enough to build a long term growth case, certain aspects of Teikoku, like its focus on in-house design and ability to handle small batch orders, suggest that the company operates a decently resilient business.
  • At 1,210 yen per share, Teikoku Tsushin trades at an adjusted negative EV with a market capitalization of 11,902 million yen ($110 million USD).
  • Investors can expect to see an investment CAGR of around 5%, inclusive of dividends, over the next three years.

Since its founding in 1944, Teikoku Tsushin manufactured specialized electronic components. Over the course of its existence, the company developed ICBs, variable resistors, and fixed resistors into a core product categories.

During the global financial crisis, however, its ICB business plummeted. A significant part of the business consisted of supplying ICBs to digital camera and camcorder manufacturers. As the global economy transitioned onto a recovery track, smartphones started displacing digital cameras and camcorders, leading to a more or less permanent decrease in demand for ICBs in that end product category.

After suffering several years of losses, Teikoku managed to return to profitability despite lower revenues. In terms of balance sheet health, the company is already roughly where it was before the global financial crisis with a healthy equity to asset ratio of 0.84.

Although Teikoku managed to transition to profitability with smaller revenues, its business has not fundamentally changed. Moreover, the company’s research efforts are focused on ICB related developments. While there is no doubt the company still has staying power, it’s certain to be affected by cyclical factors just as it was before. Therefore, it’s fair to say Teikoku has a low to medium quality operating business.

At 1,210 yen per share, Teikoku Tsushin trades at an EV/EBIT of 2.6 with a market capitalization of 11,902 million yen ($110 million USD). Adjusted for long-term investment security holdings, however, the company trades at negative EV.

In recent years, the company has comfortably generated over 700 million yen ($6.5 million USD) in operating profits. Given the cyclical exposure, 500 million yen ($4.6 million USD) is a fair number for normalized operating profit. Taking this into consideration and assuming a fair value EV/EBIT multiple of 2x, investors can expect to see an investment CAGR of around 5%, inclusive of dividends, over the next three years.

The bottom line

Teikoku Tsushin is a specialized electronic component manufacturer that weathered through a difficult transition following the 2008-2010 global financial crisis. While the business itself has not fundamentally changed, it has managed to return to profitability despite lower revenues. Overall, the company runs a low to medium quality operating business and investors can expect an investment CAGR of about 5%, 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.