Thinking Points

  • Ohashi Technica (TSE: 7628) is an automotive-specialized trading company equipped with a growing manufacturing arm.
  • The company has several layers of strengths which include a proposal-based sales team, in-house design capabilities, proprietary technologies, and a network of manufacturers, including in-house manufacturing.
  • While the company does get affected by the automotive cycle, it weathered through the 2008-2010 downturn without posting any losses.
  • At 1,487 yen per share, Ohashi Technica trades at negative EV and 88.4% of NCAV with a market capitalization of 21,548 million yen ($197 million USD).
  • Investors can expect an investment CAGR of between 15.7% and 21.7%, inclusive of dividends, over the next three years.

Introduction

Ohashi Technica (TSE: 7628) is an automotive-specialized trading company equipped with a growing manufacturing arm. With an increasingly global presence, the company operates six business segments by region.

Source: Kenkyo Investing, based on company data


The above chart shows only segments with revenues generated from external customers. Taiwan is also a segment, but only generates inter-company revenues.

Ohashi Technica primarily operates as a specialized trading company, placing highly trained sales consultants in its customers’ design process, then designing high precision automotive components in-house, and outsourcing the manufacturing process. More recently, however, the company has focused on in-house manufacturing and global expansion. 

The business & environment

Ohashi Technica was founded in Tokyo in 1953 to sell nuts and bolts. The company’s first exposure to the automotive industry was in 1965, when it started handling cutting and pressed products. 

Gradually, Ohashi Technica moved toward higher levels of specialization, taking on custom-designed automotive components as its main products in 1970, then handling precision cutting parts in 1973.

The company also started selling outside of the automotive industry in 1973, offering precision cutting parts to home appliance makers. Ohashi Technica continued its expansion into other industries, offering precision cutting parts for office automation and audio visual equipment makers in 1980. 

In 1987, Ohashi Technica made its first move outside of Japan, setting up a sales office in the US. This was followed by setting up its first manufacturing operations in 1994, again in the US. A few years later in 1998, the company reinforced its manufacturing capabilities by adding manufacturing operations to its newly setup Thailand operations.

Today, Ohashi Technica maintains its presence in Japan, US, Mexico, China, Thailand, UK, and Taiwan. This more or less mirrors its segment breakdown, which is categorized by region:

Source: Kenkyo Investing, based on company data


In 2007, Ohashi Technica got its first Japan-based manufacturing arm through M&A. Prior to the acquisition, in-house manufacturing accounted for less than 10% of cost of goods sold. After the acquisition, in-house manufacturing accounted for 17 to 20% of cost of goods sold through FY03/19. 

Based on comments made by CEO Mamoru Shibasaki in the company’s 1H FY03/20 interim report, in-house manufacturing currently accounts for 25% on a sales basis. In other words, Ohashi Technica successfully captures additional margin through in-house manufacturing.

With a strong sales arm and an asset light operation, Ohashi Technica managed to weather through the 2008-2010 global financial crisis profitably, although margins were close to 0. 

Source: Kenkyo Investing, based on company data


While this probably appears as good news for most investors researching Ohashi Technica, there are some concerns going forward. One example is that combustion engine components and transmission components are the company’s core products. With the emergence of electric vehicles, future demand for combustion engine components and transmission components are likely to decline, which may result in an increasingly competitive environment.

To be sure, the company does have 12 domestic patents related to press-fit projection welding technologies used by almost all major automotive manufacturers for engine control devices and transmission components, giving the company a strong footing in the automotive industry. More importantly, Ohashi Technica is still asset-light, with one of its major strengths being its ability to capture customer needs, design products, and outsource manufacturing.

For FY03/20, Ohashi Technica initially guided for revenues of 40,000 million yen ($366 million USD, +1.4% YoY) and operating profits of 4,100 million yen ($37.5 million USD, +0.6% YoY). With a slowdown in the automotive industry, the company adjusted guidance down to revenues of 36,000 million yen ($329 million USD, -8.8% YoY) and operating profits of 3,300 million yen ($30.2 million USD, -19.0% YoY).

Shareholders

As of Q2 FY03/20 (ending September 30, 2019), Ohashi Technica had 16,240,040 shares issued and 1,493,953 shares in treasury, putting outstanding shares at 14,746,087.

Here are the major shareholders:

Source: Kenkyo Investing, based on company and Nikkei data


There is no single stakeholder with control over the board and the company. 

Ohashi Technica has a history of sporadic, but sizable share repurchases. In FY03/09, Ohashi Technica repurchased 3,262,100 shares, or 17.3% of outstanding shares, for 2,312 million yen, or an average of 709 yen per share. The company also repurchased shares in FY03/15, FY03/16, and FY03/19, adding 1,406,300 treasury shares.

The FY03/09 repurchase was likely motivated by outside influence, as the FY03/08 major shareholder register shows Goldman Sachs International as the leading shareholder with 2,694,900 shares while Goldman Sachs International does not appear anywhere in the major shareholder register for FY03/09.

Nevertheless, Ohashi Technica still has a history of repurchasing shares when the opportunity arises. The company also generally maintains a dividend payout ratio of between 20 and 30%.

Financials & Valuation

  • Ohashi Technica is an automotive-specialized trading company equipped with a growing manufacturing arm.
  • The company has several layers of strengths which include a proposal-based sales team, in-house design capabilities, proprietary technologies, and a network of manufacturers, including in-house manufacturing.
  • While the company does get affected by the automotive cycle, it weathered through the 2008-2010 downturn without posting any losses.
  • At 1,487 yen per share, Ohashi Technica trades at negative EV and 88.4% of NCAV with a market capitalization of 21,548 million yen ($197 million USD).
  • Investors can expect an investment CAGR of between 15.7% and 21.7%, inclusive of dividends, over the next three years.

Ohashi Technica started as a reseller of nuts and bolts, then gradually narrowed its focus to precision automotive components while expanding its geographical footprint. Today, the company operates in 7 countries while strengthening its in-house manufacturing capabilities.

Some of Ohashi Technica’s biggest strengths include its proposal-based sales team, in-house design capabilities, proprietary technologies, and network of manufacturers, including its own. One key threat to the company’s operating business is its exposure to the automotive industry, and more specifically its focus on combustion engine components and transmission components.

Even considering Ohashi Technica’s weaknesses, the company is still structurally asset-light, and in a good operating position to withstand industry headwinds. With the exception of FY03/09, when net income was at the lowest point in recent history, the company has remained comfortably free cash flow positive. More importantly, Ohashi Technica’s balance sheet is overcapitalized, with no debt and cash accounting for nearly half of total assets. The company had an equity to asset ratio of 0.74 as of 1H FY03/20.

At 1,487 yen per share, Ohashi Technica trades at a forward EV/EBIT of 0.4 and 96.1% of NCAV with a market capitalization of 21,548 million yen ($197 million USD). Adjusted for long-term investment security holdings, the company trades at negative EV and 88.4% of NCAV.

Interestingly, Ohashi Technica’s market capitalization doubled between March 2009 and March 2019 while EV went from 9,557 million yen in March 2009 to 1,478 million yen in January 2020.

With a strong operating business exposed to the automotive cycle, Ohashi Technica’s overall operating business quality is somewhere between medium and high. More interestingly, the company is at a point where it needs to consider a further increase in dividends or a larger scale repurchase program unless it has attractive large scale investment opportunities ahead. This is likely good news for investors as the company does have a history of share repurchases and growing dividends.

Assuming a fair value EV/EBIT of 2-3x, investors can expect an investment CAGR of between 15.7% and 21.7%, inclusive of dividends, over the next three years.

The bottom line

Ohashi Technica is an asset-light automotive specialized trading company with a small but strong manufacturing arm. Although the company faces some challenges as the automotive industry shifts toward electric vehicles, Ohashi Technica is more than well equipped to handle the shift with a proposal-based sales team and a strong network of manufacturing partners. Investors can expect an investment CAGR of between 15.7% and 21.7%, 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.