Thinking points

  • Maezawa Kyuso Industries (TSE: 6485) mainly manufactures water supply equipment and holds a 40% share of the Japanese market. More recently, the company has also focused on housing equipment-related components such as for water heaters and floor heating systems.
  • Key challenges include a shrinking housing market, which is closely linked to the company’s sales, as well as changes in commodity prices such as copper and synthetic resins, which are used in its products.
  • Key opportunities include the rise in replacement demand for Japan’s aging water infrastructure, heightening demand for earthquake-resistant products, and the creation of synergies between the recently acquired floor heating business and existing businesses.
  • At JPY1,115 per share, Maezawa Kyuso trades at an adjusted P/NCAV of 97.5% with a market capitalization of JPY24.9bn.
  • Assuming a fair value P/NCAV of 80~120%, investors can expect an investment CAGR of between 2.8% and 13.2%, including shareholder returns, over the next 5 to 8 years.

Introduction

Maezawa Kyuso Industries (TSE: 6485) is a water supply and housing equipment manufacturer that commands a 40% share of the Japanese water supply equipment market. Major customers include waterworks contractors and home builders. The company has four reporting segments: Water Supply Equipment, Housing Equipment, Merchandise, and Other.

Source: Kenkyo Investing, based on company data

Business & operating environment

Water supply systems in Japan are operated by the Ministry of Health, Labor and Welfare under the Waterworks Law, with main lines owned by local governments. Meanwhile, the lines connecting the main line to homes and buildings are privately owned. However, the Waterworks Law restricts water supply equipment work to designated companies, and these companies are Maezawa’s customers.

Japan’s water pipes were laid out mainly during the economic growth period in the 1960s, and since the legally designated useful life of these pipes is 40 years, there has been a major uptick in replacement demand since the 2000s. According to a survey conducted by the Ministry of Health, Labor and Welfare, over 15% of water pipes have already exceeded their useful life, and since another 20% of water pipes will need to be replaced in the 20 years between 2020 and 2040, the pace of replacement will need to be accelerated to about 1.5 times that of recent years. In addition, the demand for earthquake-resistant water pipes has been on the rise since the Great East Japan Earthquake in 2011.

The demand for Maezawa’s products is highly sensitive to housing demand, especially new housing starts. Housing starts were at 880,000 units in 2019, but this has fallen to 815,000 units in 2020 because of the COVID-19 pandemic. In addition, a Nomura Research Institute report projects that this figure will fall to 630,000 units in 2030 and 410,000 units in 2040 as the population declines. In contrast, renovation demand is expected to remain strong, and the market is expected to continue growing slightly at a 0.3% CAGR through 2040.

For Maezawa, the key challenge in its Water Supply Equipment business lies in whether it can capture more of the water supply infrastructure replacement demand as new housing starts gradually declines. In terms of upside, the Housing Equipment business, which has remained relatively strong, is positioned to capture renovation demand, diversify its business portfolio and sales channels (e.g., hotels and large facilities), and benefit from integrating the recently acquired floor heating business with its existing businesses.

Business and operating environment

Since its establishment in 1937, Maezawa Kyuso Industries has gradually expanded its domestic manufacturing footprint and sales channels, building its current main factory in Fukushima in 1994. The company listed on the Second Section of the Tokyo Stock Exchange in 1998. In the 2000s, the company opened a sales office in China. In 2020, it acquired a floor heating business from Sumisho Metalex for JPY1.5bn and renamed it to Maezawa Living Solutions.

Source: Kenkyo Investing, based on company data

Sales and segment sales ratios have remained generally stable. Although the company suffered a drop in sales following the global financial crisis, it has since gradually recovered. In FY03/21, the company expects sales in the Water Supply Equipment business to fall, partly due to fewer new housing starts resulting from the spread of COVID-19, while it expects sales in the Housing Equipment business to rise substantially with the newly acquired floor heating business contributing to full-year sales. Overall, the company expects sales to climb 12% YoY to JPY27bn in FY03/21.

Source: Kenkyo Investing, based on company data

While OPM has fared above 10% over the last four years, the company expects OPM to fall to 8% and operating profit to drop YoY in FY03/21 owing to sluggish sales in the high margin Water Supply Equipment business combined with a substantial boost in sales in the lower margin Housing Equipment business.

With the main raw materials for its products being copper and synthetic resins, Maezawa is susceptible to changes in commodity prices. It is worth noting that the company does not engage in hedging activities using derivatives such as commodity futures or similar instruments.

Shareholders

As of end-March 2021, the company had 23,000,000 shares issued and 637,000 shares in treasury, putting outstanding shares at 22,363,000. Foreign corporations accounted for 12% of shareholders. The major shareholders are below.

Source: Kenkyo Investing, based on company data

Major shareholders Maezawa Industries (TSE: 6489) and Maezawa Kasei Industries (TSE: 7925) are sister companies of Maezawa Kyuso. Both are waterworks-related manufacturers with Maezawa Industries manufacturing sewage and water purification equipment and Maezawa Kasei Industries manufacturing water and sewage-related products. Maezawa Kyuso also holds shares in both companies, and the three companies own around 5% of one another’s shares. Yasumitsu Shigeta, founder of Hikari Tsushin (TSE: 9435) and a well-known value investor in Japan, holds a 3% stake, while other major shareholders are mostly Japanese financial institutions.

It is worth noting that activist firm Brandes Investment Partners submitted a large shareholding report in August 2016 with over a 5% stake, but this has been reduced to less than 5% as of September 2020. In response, the company introduced a poison pill mechanism as a takeover defense measure (free allotment of stock acquisition rights in response to large-scale acquisitions) in May 2020.

In terms of shareholder returns, the company has repurchased 120,000 shares (approximately 1% of outstanding shares) for two consecutive years in 2019 and 2020. Subsequently, in January 2021, the company retired 500,000 treasury shares. It then carried out a 1:2 stock split in April 2021. The dividend payout ratio for the last three years has been around 25%, but for FY03/21, the company has already announced a 12.5% increase in its year-end dividend (from JPY40 per share to JPY45 per share). Based on the FY03/21 earnings forecast, the projected dividend ratio comes out to around 30%.

Financials & valuation

  • Maezawa Kyuso Industries mainly manufactures water supply equipment, and holds a 40% share of the Japanese market. In recent years, the company has also focused on housing equipment-related components such as for water heaters and floor heating systems.
  • Key challenges include a shrinking housing market, which is closely linked to the company’s sales, as well as changes in commodity prices such as copper and synthetic resins, which are used in its products.
  • Key opportunities include the rise in replacement demand for Japan’s aging water infrastructure, heightening demand for earthquake-resistant products, and the creation of synergies between the recently acquired floor heating business and existing businesses.
  • At JPY1,115 per share, Maezawa Kyuso trades at an adjusted P/NCAV of 97.5% with a market capitalization of JPY24.9bn.
  • Assuming a fair value P/NCAV of 80~120%, investors can expect an investment CAGR of between 2.8% and 13.2%, including shareholder returns, over the next 5 to 8 years.

Maezawa Kyuso is a water supply and housing equipment manufacturer that commands 40% share of the Japanese water supply equipment market. Recent results have been stable and the company is debt free. In 2020, it acquired a business to strengthen its Home Equipment business.

Some of the challenges that Maezawa faces include a decline in the housing market leading to lower demand for its products. Although demand related to water infrastructure replacement and renovations is expected, new housing starts will likely continue to fall. As such, sales may gradually decline over the long term unless the company is able to raise prices in existing markets (i.e., by introducing high value-added products such as earthquake-resistant products) and entering new markets (i.e., by expanding its product portfolio through M&A and R&D). 

In addition, since most of its products are made from copper and synthetic resins, and the company does not hedge its exposure with commodity derivatives, a sharp rise in commodity prices may pressure profits.

In terms of opportunities, the Water Supply Equipment business will likely benefit from the expected rise in replacement demand for Japan’s aging water infrastructure and higher demand for earthquake-resistant products. As for the Housing Equipment business, the company gained a new sales channel to gas companies with its recently acquired floor heating business, which is positioned to yield synergies with its existing businesses. Additionally, in the short term, the resumption of hotel construction in preparation for the 2025 Osaka Expo will likely boost sales further.

Moreover, of the JPY43bn in total assets, JPY13bn is in cash equivalents, and the company has a high current ratio of 446%. This puts Maezawa in a position to expand its business through further M&A and carry out shareholder return programs such as further share repurchases.

At JPY1,115 per share, Maezawa Kyuso trades at an adjusted P/NCAV of 97.5% with a market capitalization of JPY24.9bn. Although its P/E ratio is around 14x, the stock is trading at a low P/B ratio of around 70% compared to its net assets of JPY36bn. Assuming sales, profit margins, and dividend payout ratios remain constant going forward with a fair value P/NCAV ratio of 80% to 120%, investors can expect an investment CAGR of between 2.8% and 13.2%, including shareholder returns, over the next 5 to 8 years.

The bottom line

Maezawa Kyuso Industries is a leading water supply and housing equipment manufacturer commanding a 40% share of the Japanese water supply equipment market. Although the company faces some serious challenges such as a shrinking Japanese housing market, it also has tailwinds such as the rising replacement demand for Japan’s aging water infrastructure as well as opportunities to leverage its cash-heavy position to carry out M&A to expand its business. Buying in at JPY1,115 per share, investors can expect an investment CAGR of between 2.8% and 13.2%, including shareholder returns, over the next 5 to 8 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.