Thinking Points

  • Techno Smart (TSE: 6246) manufactures and sells lithium-ion electrode manufacturing devices, LCD polarized film manufacturing devices, other film manufacturing devices, and precision instruments used for coating and lamination.
  • The company tends to deliver fluctuating business performance, mainly because it relies on a healthy capital investment environment.
  • Despite remaining optimistic about its core end markets and generating recently strong performance, Techno Smart set its FY03/22 medium term targets comparatively low.
  • At 972 yen per share, Techno Smart trades at 96.0% of NCAV and 0.3x EV/EBIT with a market capitalization of 12,049 million yen ($110 million USD).
  • Investors can expect an investment CAGR of between -5.7% and 6.8%, inclusive of dividends, over the next three years.

Introduction

Techno Smart (TSE: 6246) manufactures and sells lithium-ion electrode manufacturing devices, LCD polarized film manufacturing devices, other film manufacturing devices, and precision instruments used for coating and lamination. The company is a single segment operation, but breaks revenues down by region:

Source: Kenkyo Investing, based on company data

The manufacturing devices Techno Smart sells are used to make ingredients or components that go into products like automotive air bags, carbon fiber, lithium-ion batteries, screen protector films (i.e., for smartphones), and adhesives, among others. The company is particularly focused on further developing its coating applications for displays and lithium-ion battery related businesses.

The business & environment

Techno Smart got its start in 1912 as Inoue Steel Works. In 1929, the company became the first in Japan to design and manufacture aero-type finned tube heat exchangers, acquiring its first patent. In fact, Techno Smart didn’t start manufacturing coating machines until the 1970s, after 60 years in operation.

The company did, however, sign technology-sharing agreements with western corporations beginning in the 1960s. These were mostly for technologies related to drying equipment, signing with Overly Inc USA for floating dryers used in web offset printing and Norweigian Alfsen Gunderson for heat set machines used in paper making felt and sieves.

In 1983, Techno Smart started making manufacturing equipment for rechargeable battery electrode plates. But the company’s focus shifted toward coating equipment for the following two decades, developing a variety of coating equipment and acquiring several patents in the process.

Today, the company is almost exclusively involved in the design and manufacture of coating machinery. In FY03/19, 97.3% of revenues came from coating machinery. 

What’s more interesting, however, is Techno Smart’s presence overseas. While the company is significantly affected by the capital investment environment and revenues often fluctuate from year to year, its revenue sources show a clear shift toward overseas sources, most notably toward China.

Source: Kenkyo Investing, based on company data

It is important to note that the chart above categorizes revenues in certain regions under the “Other” category when revenues are comparatively low on certain years.

Based on the chart above, Japan has been the most stable market of all. However, in the recent three years, Japan-revenues fared weakly. While the company managed to offset this through revenues generated mainly in China and secondarily in S. Korea, recent trade tensions and the general capital investment environment may affect future performance negatively.

In its medium term management plan, Techno Smart targets revenues of 16,000 million yen ($147 million USD) and operating profit of 1,090 million yen ($10 million yen) for FY03/22. Compared to recent performance, this is a considerably low target:

Source: Kenkyo Investing, based on company data

The company makes no mention of pessimistic expectations or scaling down operations. In fact, it mentions that it expects the display market to continue growing globally. Meanwhile, Techno Smart expects its other core business – lithium-ion secondary battery (specifically for vehicles) – to face increased competition going forward.

For FY03/20, Techno Smart guided initially guided for revenues of 16,000 million yen ($147 million USD, -8.5% YoY) and operating profit of 1,580 million yen ($14.5 million USD, -32.7% YoY). Prior to its 1H FY03/20 earnings announcement, however, the company adjusted guidance upward to revenues of 16,000 million yen ($147 million USD, -8.5% YoY) and operating profit of 2,750 million yen ($25.2 million USD, +17.2% YoY). As of 1H FY03/20 (ending September 30, 2019), the company generated revenues of 10,809 million yen ($99.1 million USD, +25.6% YoY) and operating profits of 2,521 million yen ($23.1 million USD, +137.2% YoY).

Shareholders

As of 1H FY03/20 (ending September 30, 2019), Smart Techno had 12,401,720 shares issued and 6,663 shares in treasury, putting outstanding shares at 12,395,057.

Here are the major shareholders:

Source: Kenkyo Investing, based on company data and Nikkei

The founding family hasn’t had a controlling stake for at least a decade. The last published record of founding family ownership goes back to FY03/10 with Hiroko Inoue owning 210,000 shares, or a 1.94% stake in the company.

Today, the company has no controlling stakeholder. With that said, specialized trading company Tsubakimoto Kogyo (TSE: 8052) is often Techno Smart’s biggest customer in any given year. In FY03/19, Tsubakimoto Kogyo accounted for 36.4% of Techno Smart revenues.

The company hasn’t performed any meaningful share repurchases in recent history. In fact, it issued new shares in 2018 to secure funds. Meanwhile, Techno Smart has kept its dividend payout ratio around 20%, but plans to keep this above 30% through the medium term management plan (~FY03/22).

Financials & Valuation

  • Techno Smart (TSE: 6246) manufactures and sells lithium-ion electrode manufacturing devices, LCD polarized film manufacturing devices, other film manufacturing devices, and precision instruments used for coating and lamination.
  • The company tends to deliver fluctuating business performance, mainly because it relies on a healthy capital investment environment.
  • Despite remaining optimistic about its core end markets and generating recently strong performance, Techno Smart set its FY03/22 medium term targets comparatively low.
  • At 972 yen per share, Techno Smart trades at 96.0% of NCAV and 0.3x EV/EBIT with a market capitalization of 12,049 million yen ($110 million USD).
  • Investors can expect an investment CAGR of between -5.7% and 6.8%, inclusive of dividends, over the next three years.

Techno Smart started as a steel mill over 100 years ago, but has since turned into a specialized manufacturer of lithium-ion electrode manufacturing devices, LCD polarized film manufacturing devices, other film manufacturing devices, and precision instruments used for coating and lamination.

Although the company managed to weather through the 2008-2010 global financial crisis, and the ensuing challenging years profitably, its business performance is heavily dependent on a healthy capital investment environment. Future downturns may paint a different picture for Techno Smart, however, as the company’s predominantly Japan-based revenues declined and appears to be replaced by China-based revenues in recent years.

Meanwhile, rather than repurchasing shares, the company issued new shares in FY03/18 to secure funds. Whether this was necessary is up for debate, especially as the company already had a decently capitalized, effectively net-cash balance sheet (including long-term investment security holdings) with an equity-to-asset ratio of 0.66.

Considering the company’s dependency on a healthy capital investment environment, its profitability through the most recent downturn, and shift in revenue source, it’s fair to say that Techno Smart operates a low to medium quality business.

At 972 yen per share, Techno Smart trades at 105.9% of NCAV and 1.5x EV/EBIT with a market capitalization of 12,049 million yen ($110 million USD). Adjusted for long-term investment security holdings, the company trades at 96.0% of NCAV and 0.3x EV/EBIT.

Given Techno Smart’s low to medium quality operating business, 80% of adjusted NCAV should lean towards the pessimistic side of fair value and an EV/EBIT of 2x toward the optimistic side of fair value, putting its current valuation in the middle. To be sure, there may be significant favorable or unfavorable swings in business performance depending on the business environment. Overall, under these assumptions, investors can expect an investment CAGR of between -5.7% and 6.8%, inclusive of dividends, over a three year period. 

The bottom line

Techno Smart manufactures specialized lithium-ion, coating, and lamination related equipment. Although the company has remained profitable the most recent downturn, its revenue source has shifted, and a deterioration in the business environment may equate to operating losses in the future. Taking this into consideration, investors can expect an investment CAGR of between -5.7% and 6.8%, inclusive of dividends, over a three year period.


Kenkyo Investing
Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.