Thinking Points

  • Elematec (TSE: 2715) is a global trading company specialized in electronics with a particular focus on Japan and China.
  • The company quickly shifted its core business every few years to keep pace with the fast-changing electronics industry moving from flexible printed circuits to display components to smartphone components.
  • In 2012, however, Toyota Group trading company Toyota Tsusho took a majority stake in Elematec. Since then, the company has been focused on establishing its automotive electronics business for the long haul.
  • At 739 yen per share, Elematec trades at an adjusted EV/EBIT of 3.0x with a market capitalization of 30,260 million yen ($279 million USD).
  • Investors seeking mid-teen CAGR returns are advised to take a wait-and-see approach and revisit Elematec if or when share prices dip down to the low 600 yen level.

Introduction

Elematec (TSE: 2715) is a trading company specializing in the electronics industry. The company operates through four segments categorized by geographic region: Japan, China, Other Asia, and Europe & Americas.

Source: Kenkyo Investing, based on company data

Elematec operates in a fast-changing electronics industry where its core business was centered around components for flexible printed circuits (FPCs) in the early 2000s, LED/LCD display components in the late 2000s, and smartphone components after 2010. Since 2012, when Toyota Tsusho (TSE: 8015) became Elematec’s controlling shareholder, the company added automotive electronics to its focus area.

The business and environment

Elematec was originally founded in Gunma prefecture in 1942 as a manufacturer, but soon converted into a Tokyo-based trading company specializing in electrical insulation materials in 1945. Since the very beginning, Elematec has focused on the electronics and related industries.

Because Elematec is a trading company, it was relatively quick to open offices overseas, with much of the expansion starting in the late 1970s. As of FY03/19, the company operates out of 20 domestic offices and 38 overseas offices, most of which are located in Asia. It also has over 7,000 customers and 6,000 suppliers across the globe.

At its core, Elematec’s business model is simple. The company sources material from all over the world for various manufacturers and provides additional services such as design, development, outsourced manufacturing, and quality control. It deals with both raw materials and partially assembled components. 

One major turning point for Elematec was in 2012, when Toyota Group trading company Toyota Tsusho made a tender offer on the company and became the majority shareholder. This was done on friendly terms as the two companies had signed a partnership agreement in 2011, prior to the tender offer.

Since Toyota Tsusho took control, Automotive Electronics became a focal point for the company. In FY03/15, Elematec reorganized its previous revenue categories of electronic materials, electronic components, mechanical components, and other to Broad Market, Digital Electronics, and Automotive. 

Needless to say, Automotive revenues have gradually grown as the automotive industry remained generally stable:

Source: Kenkyo Investing, based on company data

Digital Electronics includes items such as LED/LCD screen components, touchpanels, mobile-related components, entertainment systems, etc while Broad Market includes items like industrial electronic components, medical device components, office equipment components, home appliance components, and more.

The intensifying US-China tensions have negatively impacted Elematec, especially as 17 of its 38 overseas offices are located in China. In fact, China accounts for the single largest overseas revenue source for Elematec:

Source: Kenkyo Investing, based on company data

The company does, however, maintain an asset light business as a trading company. Elematec managed to profitably sail through the 2008-2010 global financial crisis, although operating margins temporarily declined.

Source: Kenkyo Investing, based on company data

One important point to note, however, is that Elematec operates in a fast changing industry. Its core business went from flexible printed circuits to LED/LCD display components to smartphone components to now automotive electronics in the matter of two decades. 

Given Toyota Tsusho’s majority share, it’s likely that Elematec’s focus on automotive electronics is permanent. Interestingly, in 2016, Toyota Tsusho merged Toyotsu Electronics with Tomen Electronics (both wholly owned subsidiaries) to create Japan’s largest electronics trading company and the world’s largest automotive electronics trading company, NEXTY Electronics.

At the time of the merger, the companies combined for approximately 460 billion yen ($4.2 billion USD) in revenues. As a comparison, Elematec booked 183 billion yen ($1.7 billion USD) in revenues during FY03/19. While Toyota Tsusho denied growth through M&A, it is also determined to become the dominant global leader in automotive electronics. Furthermore, much of Elematec’s earnings presentations over the past several years emphasizes cooperation and synergies with Toyota Tsusho.

In the near term, however, the company is negatively affected by the slowdown in China, including the impact of the new coronavirus. For FY03/20, Elematec initially forecasted revenues of 201,000 million yen ($1.85 billion USD, +9.6% YoY) and operating profits of 6,750 million yen ($62.3 million USD, +6.5% YoY). This was revised downward in Q2 to revenues of 188,000 million yen ($1.73 billion USD, +2.5% YoY) and operating profits of 5,700 million yen ($52.6 million USD, -10.0% YoY) due to the slowdown in China as well as the smartphone market. 

Elematec further lowered guidance toward the end of Q4 to revenues of 172,000 million yen ($1.59 billion USD, -6.2% YoY) and operating profits of 4,550 million yen ($42.0 million USD, -28.2% YoY) as the Chinese economy further slowed down (including the impact of the new coronavirus) and the automotive industry tightened capital investments. As of Q3 FY03/20, the company generated revenues of 134,422 million yen ($1.24 billion USD, -4.0% YoY) and operating profits of 3,654 million yen ($33.7 million USD, -25.1% YoY). 

Shareholders

As of Q3 FY03/20 (ending December 31, 2019), Elematec had 42,304,946 shares issued and 1,358,653 shares in treasury, putting outstanding shares at 40,946,293.

Here are the major shareholders:

Source: Kenkyo Investing, based on company data and Nikkei

Elematec does not offer any equity compensation plans to company management. One key point worth noting, however, is that Elematec will likely lean heavily toward the Toyota Group moving forward. In fact, 5 of 13 board members have affiliations with Toyota Tsusho.

The company made small share repurchases from FY03/08 to FY03/11, but has not repurchased any shares since. Meanwhile, it consistently paid out dividends with a dividend payout ratio generally around 30%, but more recently raising its dividend payout ratio to above 40%.

Financials & Valuation

  • Elematec is a global trading company specialized in electronics with a particular focus on Japan and China.
  • The company quickly shifted its core business every few years to keep pace with the fast-changing electronics industry moving from flexible printed circuits to display components to smartphone components.
  • In 2012, however, Toyota Group trading company Toyota Tsusho took a majority stake in Elematec. Since then, the company has been focused on establishing its automotive electronics business for the long haul.
  • At 739 yen per share, Elematec trades at an adjusted EV/EBIT of 3.0x with a market capitalization of 30,260 million yen ($279 million USD).
  • Investors seeking mid-teen CAGR returns are advised to take a wait-and-see approach and revisit Elematec if or when share prices dip down to the low 600 yen level.

Elematec is a trading company specializing in the electronics industry with over 38 global offices, the bulk of which are in Asia. The company’s core business shifted every few years to keep up with the fast-changing industry. In 2012, however, Toyota Group trading company Toyota Tsusho acquired a majority stake in Elematec, shifting the company’s direction to include automotive electronics as a focus area.

The business model for Elematec is similar to any other trading company in Japan. The company sources various materials and components all across the world and delivers it to a manufacturer. With the global nature of the business, this often means longer cash conversion cycles and higher cash position/lower receivables when business slows down.

Its debt-free balance sheet has remained remarkably stable with an equity to asset ratio floating around 0.50 for the most part. More recently, Elematec’s cash position essentially doubled over two to three years (as of Q3 FY03/20) with the US-China trade tensions intensifying. Hence, when thinking about valuation ratios, it’s important to consider what a normalized receivable and inventory balance looks like and adjust cash accordingly.

Perhaps the most interesting part about Elematec’s financials is that it managed to profitably sail through the 2008-2010 global financial crisis. With no visible end to the US-China trade war and the new coronavirus essentially shutting down many manufacturing functions, it’s difficult to say whether Elemate can manage to remain profitable in the near term, especially if the spread of the virus continues.

Over the long-term, however, Elematec essentially has a Digital Electronics business that fluctuates wildly from year to year, a Broad Market business that’s difficult to predict, and a historically steady growth Automotive business which is sure to remain a core business as long as the company remains in the Toyota Group. While susceptible to cyclicality, Elematec operates a respectable medium quality business.

At 739 yen per share, Elematec trades at an EV/EBIT of 0.7x with a market capitalization of 30,260 million yen ($279 million USD). In Elematec’s case, however, its cash position should be adjusted to reflect a normalized inventory and receivables balance. After adjustment, the company trades at about 3.0x EV/EBIT– a rather fair valuation for a medium quality business that may be entering a down cycle. 

Given the company’s historical resilience to downturns, investors should feel at ease with holding Elematec shares. With that said, however, forward investment returns (~ three years) are likely below ~7% CAGR, and the company will be a much more interesting mid-teen CAGR investment opportunity should shares dip down to the low 600 yen level. Investors are advised to revisit the company if or when share prices come down to this level.

The bottom line

Elematec is a perfectly healthy medium quality trading company specializing in electronics. In the past, its core business quickly transitioned to keep up with the fast-changing electronics industry. However, with Toyota Tsusho becoming the majority shareholder in 2012, automotive electronics is sure to be a core business over the long-term. Investors seeking mid-teen CAGR returns are advised to take a wait-and-see approach and revisit Elematec if or when share prices dip down to the low 600 yen level.


Kenkyo Investing
Kenkyo Investing

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