Thinking points

  • Shinnihon Corporation (TSE1: 1879) is a construction company and real estate developer that handles the entire process from land acquisition to construction, sales, and management of condominiums. It is the largest independent developer in the Tokyo metropolitan area in terms of number of condos supplied, treading only the large conglomerate developers in scale. 
  • Key challenges include coping with the changing structure of households in the Tokyo metropolitan area and the aging demographic, as well as the need to diversify into non-residential projects. 
  • Key opportunities include possible large investments that leverage the company’s ample cash reserves. 
  • At JPY850 per share, Shinnihon Corporation trades at a P/NCAV valuation of 75.3% with a market capitalization of about JPY50.0bn.
  • Assuming a fair value P/NCAV of 80~120%, investors can expect an investment CAGR of 2.5% to 11.0% over the next 5~8 years.

Introduction

Founded in 1964, Shinnihon Corporation (1879) is a construction company and real estate developer engaged in the condominium business, mainly in the Tokyo metropolitan area. It is one of the largest independent developers in the Tokyo area after Nomura Real Estate Development and the conglomerates (Mitsui Fudosan, Sumitomo Realty & Development, and Mitsubishi Estate).

Shinnihon Corporation’s business segment consists of construction and development businesses.

Source: Kenkyo Investing, based on company data

In the construction business segment, the company undertakes civil engineering, construction, repair, and seismic reinforcement of residential buildings, as well as non-residential projects such as logistics facilities, accommodation facilities, and factories. After the GFC in 2008, sales declined by about 10-20%, but have been relatively steady and recovered to pre-GFC levels in FY03/17.

In the development business, the company sells the “Excellent City” series of condominiums in the Tokyo metropolitan area, based on its end-to-end in-house approach in which the company group handles the entire process from land acquisition to planning, design, construction, sales, management, and after-sales service. The company is also involved in non-residential projects such as nursing homes and hotels. This is a segment that is highly sensitive to the economy. After the GFC, sales fell by over 70%, but since FY03/14, sales have been improving rapidly as the economy recovers on the back of Abenomics.

Business & operating environment

The company was founded in Chiba Prefecture in 1964 by Mr. Kazuo Kanetuna, the current chairman of the board, and started building houses. It listed on the second section of the Tokyo Stock Exchange in 1994 and on the first section in 2002. Then in 2006, the company expanded into China’s Liaoning Province, but by 2018 it had sold off all of its equity stake in the local project, effectively withdrawing from the market. In 2019, the company’s founder, Mr. Kanetuna stepped down as chairman. His son-in-law, Mr. Takami, currently serves as the company’s representative.

The market for condominiums is generally highly sensitive to the economy, and changes in the number of households have a significant impact on supply and demand. The Tokyo metropolitan area has been an exceptional area where population inflow has continued even in Japan where the total population is declining. However, according to the demographic forecast by the Ministry of Internal Affairs and Communications, the number of households is expected to decline slowly after peaking in 2020. By household category, the number of single-person households is expected to continue increasing until 2035 (+4.6%, vs. 2015), but will be offset by the decline in married couple and nuclear family households.

In 2020, the supply of condominiums in the Tokyo metropolitan area was 27,000 units, a decrease of 12.8% compared to 2019, partly due to activity restrictions caused by the pandemic. On the other hand, by 2021, this figure is expected to reach 32,000 units, recovering to 2019-levels.

The company has been growing its business by covering a large part of the condominium supply chain through its end-to-end in-house approach in which the company group handles the entire process from land acquisition to planning, design, construction, sales, management, and after-sales service. In recent years, the company has been ranked in the top 5 to 10 in terms of the number of condominiums supplied in the Tokyo metropolitan area, selling 1,232 units in 2020. In addition, it is expanding into non-residential projects such as nursing homes, hotels, and logistics facilities, and is focusing on expanding its business horizontally. Furthermore, while most real estate developers and general contractors use interest-bearing debt to cover their real estate inventory, Shinnihon Corporation has used its operating cash flow to reduce interest-bearing debt and has been effectively debt-free since 2015.

2020CompanyTurnover
#1Nomura RE Holdings, Inc. (3231)2698
#2Sumitomo Realty & Development Co., Ltd. (8830)2530
#3Mitsui Fudosan Co., Ltd. (8801)1995
#4Mitsubishi Estate Company CO., LTD. (8802)1354
#5SHINNIHON CORPORATION1232
Source: Kenkyo Investing, based on company data

Source: Kenkyo Investing, based on company data

After the GFC, sales declined significantly in both segments. Since FY03/14, with the recovery of the Japanese economy, performance has improved significantly, mainly in the development business and other segments. In FY03/19, sales exceeded the pre-crisis level. During this period, the company has avoided operating losses, and its profit structure has improved with a profit margin of 12-15% in recent years.

In FY03/21, sales are expected to decline by about 8% due to the impact of a sharp drop in the number of condominium contracts signed due to the spread of COVID-19.

Shareholders

As of the end of December 2020, the company had 61,360,720 shares issued and 2,900,100 shares in treasury (4.7%), putting outstanding shares at 58,460,620. Of the shareholders, 17% are foreign corporations. Major shareholders are as follows.

Source: Kenkyo Investing, based on company data

The largest shareholder, Shinnihon Com, is the asset management company of the founder/chairman of the board, Mr. Kanetuna. Although the details of Union Site are unclear, the company’s address is the same as that of Shinnihon Com, suggesting that it is also a corporation related to the founding family. The Shinnihon Scholarship Foundation is a charitable organization, of which the founder, Mr. Kanetuna, is the president.

Based on the above, treasury shares and shares held by the founding family account for at least 40% of issued shares, and this figure rises above 50% when including Union Site. The likelihood of a hostile takeover happening appears low.

Despite its ample cash reserves, the company has not repurchased shares in over five years. It does not have a clear policy on dividends, but its payout ratio is generally around 11%.

Financials & valuation

  • Shinnihon Corporation is a construction company and real estate developer that handles the entire process from land acquisition to construction, sales, and management of condominiums. It is the largest independent developer in the Tokyo metropolitan area in terms of number of condos supplied, treading only the large conglomerate developers in scale. 
  • Key challenges include coping with the changing structure of households in the Tokyo metropolitan area and the aging demographic, as well as the need to diversify into non-residential projects. 
  • Key opportunities include possible large investments that leverage the company’s ample cash reserves. 
  • At JPY850 per share, Shinnihon Corporation trades at a P/NCAV valuation of 75.3% with a market capitalization of about JPY50.0bn.
  • Assuming a fair value P/NCAV of 80~120%, investors can expect an investment CAGR of 2.5% to 11.0% over the next 5~8 years.

Shinnihon Corporation is a construction company and condominium developer in the Tokyo metropolitan area, and its strength lies in its integrated services provided within the group. The company is also involved in non-residential projects such as nursing homes, logistics facilities, and hotels.

One of the challenges going forward is the changing supply and demand structure in the condominium market in the Tokyo metropolitan area, due to an aging Japanese demographic and the changes in household structure. Competition for existing family-type condominiums is expected to intensify further, coupled with an increase in the number of vacant houses. On the other hand, there is a high probability that inquiries for nursing homes and housing for single persons will increase.

Due to the large exposure to real estate development, which is highly sensitive to the economy, there is an urgent need to diversify the business into non-residential projects. Since FY03/14, the housing market has been uplifted by a low interest rate environment due to monetary easing, and demand may drop sharply when interest rates rise. On the other hand, the company’s strong financial base enables it to make large investments. It has no debt, which is unusual for a real estate developer, and the company can respond more flexibly to large projects than other companies in the industry.

At JPY850 per share, Shinnihon Corporation trades at a P/NCAV valuation of 75.3% with a market capitalization of about JPY50.0bn. Its net current assets were at JPY66.4bn, giving Shinnihon Corporation a considerably low P/B ratio of 0.65. Assuming a fair value P/NCAV of 80~120% with sales and EBIT flat from FY03/21, investors can expect a CAGR of 2.5-11.0%, including shareholder returns, over the next 5-8 years.

The bottom line

Shinnihon Corporation is a leading Tokyo-area independent construction company and real estate developer that handles the entire process from land acquisition to construction, sales, and management of condominiums. Although the company faces some challenges, such as coping with the changing structure of households in the Tokyo metropolitan area, the aging demographic, and the need to diversify into non-residential projects, it also has great flexibility compared to its peers thanks to its ample cash reserves. At JPY850 per share, investors can expect an investment CAGR of 2.5% to 11.0% over the next 5-8 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.