Thinking Points

  • Kanaden (TSE: 8081) is a 100+ year old electronics trading company mainly involved in factory automation, office automation, building maintenance systems, information communication systems and devices, and transportation infrastructure.
  • The company maintains a 90+ year relationship with Mitsubishi Electric, which is also its leading shareholder and largest supplier.
  • While one way to view Kanaden’s operating business is that it is overly exposed to Mitsubishi Electric, an alternative view is that it has a shared fate with one of Japan’s powerhouse industrial electronics companies.
  • At 1,177 yen per share, Kanaden trades at 3.6 EV/EBIT with a market capitalization of 33,524 million yen ($312 million USD). 
  • Investors can expect an investment CAGR of between -6.0% and 2.7%, inclusive of dividends, over the next three years.

Introduction

Kanaden (TSE: 8081) is an electronics trading company mainly involved in factory automation, office automation, building maintenance systems, information communication systems and devices, and transportation infrastructure. The company operates through four segments: Factory Automation, Building Equipment, Infrastructure, and Information & Devices.

Source: Kenkyo Investing, based on company data

The company is an equity method affiliate of leading Mitsubishi Electric (TSE: 6503), which is also Kanaden’s biggest supplier, accounting for 72.9% of purchasing in FY03/19. While the company calls itself a trading company, it acts more like a distributor or reseller for the Mitsubishi Electric group. Its overseas presence is modest, but growing.

The business & environment

Kanaden was founded in Tokyo prefecture (Tokyo area) in 1907 when a part of the trading division of Kanagawa Electric Light was spun out after merging with another power company (currently Tokyo Electric Power). Kanaden started out as an electrical contractor and a seller of electric equipment and materials. 

The company’s first breakthrough came about in 1922 when Mitsubishi Electric released its first electric fan, selling the new product through Mitsubishi Corporation (TSE: 8058). Kanaden worked with Mitsubishi Corporation, mainly selling in the Tokyo area as well as a couple of remote areas. Of the 30,000 annual units produced, Kanaden was responsible for handling about 3,000 units, solidifying its relationship with the Mitsubishi Group.

Fast forward to 1933 and Mitsubishi Electric products were more or less a mainstay offering of Kanaden. Although the company handled products from other manufacturers as well, the Mitsubishi Motor became a key offering along with lightning arresters and the above mentioned electric fan.

After becoming a designated war-time factory during World War II and going through a down period after, Kanaden signed a distribution agreement with Yokogawa Electric (TSE: 6841) in 1951. Japan’s economic miracle gained traction and the electronics grew explosively, with Mitsubishi Electric introducing an air conditioner in 1954 and a washing machine in 1961. Meanwhile, electric fan sales were robust.

Toward the late 1970s, Kanaden started exploring  industrial robots, which is a core part of its business today. More recently, the company started expanding in Asia, with offices in China, Vietnam, Thailand, Hong Kong, and Singapore.

Kanaden’s business consists of four segments: Factory Automation, Building Equipment, Infrastructure, and Information & Devices. The Factory Automation business mainly revolves around Mitsubishi Electric’s factory automation offerings like controller systems, precision laser machines, and electric discharge machines. 

The Building Equipment segment consists of uninterrupted power supplies, building management systems, elevators, escalators, air conditioning units, etc. The company is heavily involved with two Mitsubishi Electric subsidiaries Mitsubishi Electric Building Techno-Service and Mitsubishi Electric Living Environment Systems.

The Infrastructure segment mainly caters to traffic safety and control, offering transformers, LED devices, communication equipment, air traffic control systems, solar power generation equipment, etc. Finally, the Information & Devices segment provides semiconductor and electronic devices such as microcomputers, and security systems.

Source: Kenkyo Investing, based on company data

Part of the Information & Devices segment was split out to the Infrastructure segment in FY03/11. The Factory Automation segment is the only segment that’s recovered/grown since the 2008-2010 global financial crisis.

Aside from its heavy Mitsubishi Electric dependence and ownership, one key point of concern is Kanaden’s lack of directional clarity. In April 2018, the company announced a medium term management plan (FY03/19 — FY03/21) called “CI J3 (Challenge & Innovation – Joint)”. The financial targets for the plan are revenues of 145 billion yen ($1.35 billion USD), recurring profit of 5,300 million yen ($49.3 million USD), and an ROE of over 8.0%. 

In the plan, the company describes its aims to achieve business expansion through tightening collaboration efforts with business partners, geographic expansion both domestic and overseas, and enhanced efforts in growth areas (energy, robotics, IoT, AI, etc). However, there is considerable wiggle room with no specific focus areas or strategies mentioned. With that said, the high level of dependency on Mitsubishi Electric likely heavily influences Kanaden’s business strategy.

To be sure, the business relationship has historically delivered consistent profitability, even during the 2008-2010 global financial crisis:

Source: Kenkyo Investing, based on company data

During FY03/19, the company purchased an office building in Tokyo to use as its new headquarters for 6,475 million yen ($60.2 million USD). As of August 2019, Kanaden headquarters is located in the new building. The company sold its old headquarters, but did not disclose the price due to the buyer’s request. According to FY03/19 filings, the company booked income from sales of fixed assets of 3,550 million yen ($33.0 million USD). According to the announcement of the sale (and purchase of new building), the company was expected to book 1,400 million yen ($13.0 million USD) in gains. In Q2 FY03/20, the company booked 1,433 million yen ($13.3 million USD)  in gains.

For FY03/20, Kanaden forecasted revenues of 127 billion yen ($1.18 billion USD, +3.0% YoY) and operating profit of 4,250 million yen ($39.5 million USD, -4.8% YoY). As of Q3 FY03/20 (ending December 31, 2019), the company reported revenues of 84,214 million yen ($783 million USD, +0.4% YoY) and operating profit of 1,840 million yen ($17.1 million USD, -22.8% YoY).

Shareholders

As of Q3 FY03/20 (ending December 31, 2019), Kanaden had 28,600,000 shares issued and 95,350 shares in treasury, putting outstanding shares at 28,504,650.

Here are the major shareholders:

Source: Kenkyo Investing, based on company data & Nikkei

Despite collectively owning 30.2% of outstanding shares, the Mitsubishi Group likely effectively has majority level board control as more than 70% of Kanaden’s purchasing was from the Mitsubishi Group. 

Kanaden made meaningful share repurchases in FY03/15, FY03/18, and FY03/19.

Source: Kenkyo Investing, based on company data

In FY03/20, the company  increased its target dividend payout ratio from 30% to 35%.

Financials & Valuation

  • Kanaden (TSE: 8081) is a 100+ year old electronics trading company mainly involved in factory automation, office automation, building maintenance systems, information communication systems and devices, and transportation infrastructure.
  • The company maintains a 90+ year relationship with Mitsubishi Electric, which is also its leading shareholder and largest supplier.
  • While one way to view Kanaden’s operating business is that it is overly exposed to Mitsubishi Electric, an alternative view is that it has a shared fate with one of Japan’s powerhouse industrial electronics companies.
  • At 1,177 yen per share, Kanaden trades at 3.6 EV/EBIT with a market capitalization of 33,524 million yen ($312 million USD). 
  • Investors can expect an investment CAGR of between -6.0% and 2.7%, inclusive of dividends, over the next three years.

Kanaden is a long established electronics trading company that mainly acts as a distributor and reseller for Mitsubishi Electric, its leading shareholder and biggest vendor. As such, Kanaden’s operating business is intertwined with the Mitsubishi Electric Group – the company’s Factory Automation segment mainly sells Mitsubishi Electric’s factory automation equipment and solutions while the Building Equipment segment is closely tied to Mitsubishi Electric subsidiaries Mitsubishi Electric Building Techno-Service and Mitsubishi Electric Living Environment Systems.

Historically, the close ties with Mitsubishi Electric has been consistently profitable. In fact, Kanaden managed to profitably sail through the 2008-2010 global financial crisis. While revenues have not recovered to pre-crisis levels, growth in the higher margin Factory Automation segment pushed overall operating profit to pre-crisis levels in recent years.

Kanaden’s operating business quality is difficult to analyze. On the one hand, the company is entirely dependent on Mitsubishi Electric. On the other hand, the dependency has historically resulted in consistent profitability. Seeing that Mitsubishi Electric is the leading shareholder, however, it’s safe to assume a continued healthy relationship, and therefore also assume a medium quality operating business. The biggest risk for Kanaden is a deterioration in the Mitsubishi Electric Group’s business. It’s also unlikely that Kanaden will generate strong growth because of the Mitsubishi Electric Group constraint, which some may view as a risk.

In terms of balance sheet strength, Kanaden is debt free with an equity to asset ratio of 0.64. The company generally maintains an equity to asset ratio of around 0.50, but this figure has recently increased after selling the old company headquarters in Q2 FY03/20. Following the purchase of its new headquarters building, however, it is prudent not to expect the company to repurchase shares in the next year or two. While capital allocation is an issue, Kanaden has maintained high single digit ROE over the last several years.

At 1,177 yen per share, Kanaden trades at 4.6 EV/EBIT with a market capitalization of 33,524 million yen ($312 million USD). Adjusting for long-term investment security holdings (at a 33% discount), Kanaden trades at 3.6 EV/EBIT.

Considering its sluggish medium quality business and the recent slowdown in the global economy, investors can expect an investment CAGR of between -6.0% and 2.7%, including dividends, over the next three years. In other words, Kanaden is trading at roughly fair value.

The bottom line

Kanaden is an established electronics trading company with strong ties to the Mitsubishi Electric Group. The relationship has resulted in consistent profitability for Kanaden, even through the global financial crisis. At 1,177 yen per share, investors can expect an investment CAGR of between -6.0% and 2.7%, 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.