Thinking Points

  • Sonocom (TSE: 7902) manufactures and sells plates (masks) used in screen printing and photolithography, primarily for printed circuit boards and related components in the electronics industry.
  • The geographical shift in electronics manufacturing combined with the 2008-2010 global financial crisis put the company in a difficult position, with declining revenues and widening losses.
  • After consolidating production facilities in FY03/14, Sonocom managed to downsize operations and return to profitability in FY03/15.
  • At 868 yen per share, Sonocom trades at an adjusted 59.6% of NCAV and a negative EV with a market capitalization of 3,174 million yen ($29.0 million USD)
  • Investors can expect an investment CAGR of between 11.2% and 23.7%, inclusive of dividends, over the next three years. Investors should also note that there are no identifiable positive catalysts for the investment case.

Introduction

Sonocom (TSE: 7902) manufactures and sells screenmasks, photomasks, metalmasks, and other related equipment and materials. The company is composed of three segments: Screen mask, Photo mask, and Other.

Source: Kenkyo Investing, based on company data


The company has mainly been involved in manufacturing screenmasks used in the electronics industry. With a weakening Japanese electronics industry amid emerging overseas competition followed by the 2008-2010 global financial crisis, Sonocom went through a period of losses and restructuring. Over the last 5 years, however, the company managed to downsize operations and generate profits. 

The business & environment

Sonocom was founded in 1962 in Tokyo as a manufacturer and seller of lacquer paint and printing equipment and materials. In the following year, the company started manufacturing plates used for printed circuit board (PCB) screen printing, otherwise known as screenmasks.

This was an early adaptation of traditional screen printing methods, like you would see with t-shirt printing, but for PCBs used in electronics. While still leaning on the analog side of technology, screen printing increasingly became a viable option for higher precision printing on essentially any material surface.

For printed circuit boards, screen masks are often used to print the component number, its desired location, warnings, etc.  

Source: Youtube


By 1970, Sonocom closed its lacquer paint operation and focused exclusively on manufacturing screenmasks geared for electronics. Within the following ten years, the company started manufacturing high precision screenmasks geared for thick-film integrated circuits, combination metal masks for electronic components, and rigidized wire mesh screenmasks.

Over the ensuing decades, Sonocom worked on improving precision, cost-effectiveness, durability, and material selection of the screenmasks. The Screenmask segment accounted for 73.3% of revenues in FY03/19.

Photolithography, on the other hand, essentially serves a similar purpose as screen printing, but through the use of light and chemicals. Photomasks are the equivalent of screenmasks in the screen printing process, but for the photolithographic process. The Photomask segment accounted for 11.6% of revenues in FY03/19.

The industry is highly competitive, with a long list of competitors including Japan’s two largest printing companies Toppan (TSE: 7911) and DNP Group (TSE: 7912). Additionally, major electronics companies often produce screenmasks internally.

The electronics industry’s shift in manufacturing from Japan to China, Korea, Taiwan, and other Asian nations hasn’t been favorable to Sonocom either. With the increasing demand for precision and cost effectiveness, product quality and cost preservation in the shipping process has had a negative impact as well.

Source: Kenkyo Investing, based on company data


After shutting down one of three production facilities in FY03/14, Sonocom managed to scale down operations and return to profitability in FY03/15.

Source: Kenkyo Investing, based on company data


Without industry specific knowledge, it’s difficult to gauge the quality of Sonocom’s operating business. At the very least, it is clear that the company has cyclical exposure. Moreover, it’s safe to assume that a weaker yen is beneficial for Sonocom with the electronics industry spreading out to nearby Asian countries.

For FY03/20, Sonocom expects revenues of 2,250 million yen ($20.5 million USD, +3.4% YoY) and operating profit of 260 million yen ($2.4 million USD, +3.5% YoY). As of Q2 FY03/20, the company posted revenues of 1,061 million yen ($9.7 million USD, -4.1% YoY) and operating profit of 125 million yen ($1.1 million yen, -22.7% YoY). Sonocom management attributed the decline in revenues to a slowdown in smartphone, automotive electronics, solar battery, and OLED display production.

Shareholders

As of Q2 FY03/20 (ending September 30, 2019), Sonocom had 5,000,000 shares issued and 1,335,036 shares in treasury, putting outstanding shares at 3,664,964.

Here are the major shareholders:

Source: Kenkyo Investing, based on company and Nikkei data


Toshio Sono is the founder of Sonocom. Koichi Sono is Toshio’s son and Kikuko Dan is Toshio’s daughter. KSC is the Sono family’s fund. Collectively, the family controls 49.7% of outstanding shares.

There is no management equity compensation plan.

Financials & Valuation

  • Sonocom manufactures and sells plates (masks) used in screen printing and photolithography, primarily for printed circuit boards and related components in the electronics industry.
  • The geographical shift in electronics manufacturing combined with the 2008-2010 global financial crisis put the company in a difficult position, with declining revenues and widening losses.
  • After consolidating production facilities in FY03/14, Sonocom managed to downsize operations and return to profitability in FY03/15.
  • At 868 yen per share, Sonocom trades at an adjusted 59.6% of NCAV and a negative EV with a market capitalization of 3,174 million yen ($29.0 million USD)
  • Investors can expect an investment CAGR of between 11.2% and 23.7%, inclusive of dividends, over the next three years. Investors should also note that there are no identifiable positive catalysts for the investment case.

Sonocom is a Tokyo-based manufacturer and seller of screenmasks and photomasks often used for printed circuit boards in the electronics industry. With a weakening Japanese electronics industry amid emerging overseas competition followed by the 2008-2010 global financial crisis, Sonocom went through a period of losses and restructuring. Over the last 5 years, however, the company managed to downsize operations and generate profits. 

The company’s balance sheet is a prime example of the general overcapitalized image associated with Corporate Japan. Sonocom boasts an equity-to-asset ratio of 0.90, with 44.9% of assets held in the form of cash & equivalents.

What’s more, the bulk of Sonocom’s 1,464 million yen ($13.4 million USD) held in long-term investment security holdings are corporate bonds. As of end FY03/19, corporate bonds worth 826 million yen ($7.5 million USD) had a maturity date coming up within 1 to 5 years, expected to further pile up the company’s already large cash chest of 3,936 million yen ($35.9 million USD).

The management team has been able to successfully weather through significant challenges, restructuring the company and returning to profitability over the last 5 years. With that said, assessing Sonocom’s operating business quality requires industry expertise. The company has formidable competitors both within and outside of Japan, and price competition appears to be fierce.

At 868 yen per share, Sonocom trades at 82.2% of NCAV and a negative EV with a market capitalization of 3,174 million yen ($29.0 million USD). Adjusted for long-term investment security holdings, the company trades at 59.6% of NCAV. As a side note, the company trades at 69.8% of net cash.

Assuming 80% of NCAV as a worst case scenario and 2x EV/EBIT as a best case scenario, investors can expect an investment CAGR of between 11.2% and 23.7%, inclusive of dividends, over the next three years. Investors ought to keep in mind that there are no specific positive catalysts for Sonocom.

The bottom line

Sonocom is a long-time manufacturer and seller of screenmasks and photomasks often used for printed circuit boards in the electronics industry. After the 2008-2010 global financial crisis, the company underwent restructuring and emerged as a smaller but profitable company. Though with no identifiable positive catalyst, investors can expect an investment CAGR of between 11.2% and 23.7%, 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.