Thinking points
- Matsumoto Yushi-Seiyaku (TSE: 4365) is a small oleochemical manufacturer, holding a leading market share in surfactants for textiles and thermo-expandable microcapsules in Japan.
- Key challenges include downward pressure on earnings from rising prices of crude oil-derived raw materials and the increasing pressure from clients and shareholders to meet ESG demands.
- Key opportunities include the company’s dominant position in niche areas in the oleochemical industry, and access to rapidly growing APAC markets including Indonesia and Taiwan, while avoiding exposure to geographical risks surrounding mainland China.
- At JPY14,300 per share, MFS trades at an adjusted P/NCAV of 110.6% with a market capitalization of JPY64.5bn.
- Assuming a fair value P/NCAV of 80~120%, investors can expect an investment CAGR of between -1.5% and +6.2%, including shareholder returns, over the next 5 to 8 years.
Introduction
Matsumoto Yushi-Seiyaku Co., Ltd. (“MFS”) is a small surfactant manufacturer headquartered in Osaka, Japan. It commands a leading share in Japan for surfactants for textiles and thermo expandable microcapsules, which are mainly used in industrial processes.
MFS discloses regional segments only by production base, with Japan accounting for 98% of total revenue and Asia (excl. Japan) accounting for the rest. On the other hand, by product type, its business is roughly classified into surfactants, which account for 73% of total revenue, and polymer & inorganic products such as thermo-expandable microcapsules, which account for 27%. By sales destination, non-Japan revenues have already surpassed Japan revenues (Asia: JPY21bn, Japan: JPY12bn, and the others: JPY4bn).
Surfactants are materials with functions such as emulsifying difficult-to-mix substances, foaming and defoaming, and removing dirt. They are used in a wide range of applications, including for paper pulp, cleaning, rubber, and textiles, as well as soap and detergents. In the textile industry in particular, surfactants are used in the processes of spinning, weaving, scouring, dyeing and finishing.
Thermo-expandable microcapsules are a type of foaming agent that expands many times its volume when heated, and are used in automotive (undercoating, interior materials such as ceiling materials) and construction (sealing materials) applications.
Business & operating environment
Company History
MYS was founded in 1926 originally to manufacture and sell textile industrial oils needed for the weaving process. It was incorporated in 1939, and began producing and selling methylcellulose in 1957, followed by thermo-expandable microcapsules in 1979. In 1970, the company established Nipon Quaker Chemical as a joint venture with US-based Quaker Houghton (NWSE: KWR) to manufacture industrial oils and fats. In terms of overseas expansion, MFS established joint ventures in Taiwan and Indonesia in 1969 and 1992, respectively. The company listed its shares on the JASDAQ (current TSE Standard) in 2004.
Business Overview
Headquartered in Osaka, MFS handles spin finishes and spinning oil, functionalizing agents, sizing agents for weaving, knitting and weaving oil, scouring agents, and dyeing and processing agents for the textile industry. It also manufactures thermo-expandable microcapsules, microbeads, cosmetic and toiletry products, and civil engineering and construction related products. The company has a large share especially in surfactant and thermo-expandable microcapsules markets.
The Japanese surfactant market in 2022 was estimated to be worth JPY320bn, of which MFS held a 9% share. This made it the fifth in terms of market share, behind Kao (TSE: 4452), Adeka (4401), Toho Chemical (4409), and DKS (4461). When limited to textile applications, the market size is JPY32~45bn (10~15% of the total surfactant market), and MFS commands the largest share at around 20~30%.
As for thermo-expandable microcapsules, the global market size amounted to JPY27bn in 2016, according to Fuji Chimera Research. MFS was the second largest player behind Akzo Novel (Euronext: AKZA), and is the market leader in Japan.
The global surfactants market is expected to grow at a CAGR of 4.9% from USD43.5bn in 2022 to USD57.8bn by 2028, owing to the increasing need for surfactants in personal care, home care, and industrial and institutional cleaning, stemming from the growing population and rising living standards especially in the APAC region (source: Global Information). Meanwhile, the market of thermo-expandable microcapsules is also expected to grow at a CAGR of around 10% until the latter half of the 2020s.
Although MFS performance fell temporarily in FY2021 due to the drop in apparel demand caused by COVID-19, its sales have continued to grow at a 12-year CAGR of 3.4%. Growth is particularly strong in Asia (excl. Japan) at +6.3% as well as the rest of the world at +9.8%, and MFS’ core strategy is aimed at capturing growth in Asia.
In terms of profits, the company maintains a high profit margin thanks to its strong market share in niche markets such as surfactants for textiles and thermo-expandable microcapsules. Its average OPM over the last decade is 15.5%, even higher than that of peers as illustrated in the chart below.
Shareholders
As of the end of March 2023, the company had 4,512,651 shares issued and 1,610,915 shares in treasury, putting outstanding shares at 2,901,736. Foreign shareholders accounted for approximately 9.66% of total. Major shareholders are as follows.
Source: Kenkyo Investing, based on company data
Matsumoto Kousan is an asset management company of the founding family.
Yoshiki used to be the company’s executive and seems to be a member of the founding family as he was assigned as a director just after graduating from university. The current president, Naoki Kimura, also appears to be a member of the founding family as he has held his position since 1986. Kimura ltd is presumably their asset management company, which would mean that the founding family may be holding over 35% of outstanding shares.
The Dai-ichi Life Insurance is one of the largest life insurers and institutional investors in Japan, and the core business of Dai-ichi Life Holdings (TSE: 8750). Nippon Shokubai (TSE: 4114) is a large chemical manufacturer specializing in ethylene oxide and acrylic resin.
The company has paid a dividend of around 20% of operating profit for the past five years, and plans to pay a dividend of around 17% in FY2023. In March 2023, the company also completed a JPY5bn share buyback.
Financials & valuation
- Matsumoto Yushi-Seiyaku (TSE: 4365) is a small oleochemical manufacturer, holding a leading market share in surfactants for textiles and thermo-expandable microcapsules in Japan.
- Key challenges include downward pressure on earnings from rising prices of crude oil-derived raw materials and the increasing pressure from clients and shareholders to meet ESG demands.
- Key opportunities include the company’s dominant position in niche areas in the oleochemical industry, and access to rapidly growing APAC markets including Indonesia and Taiwan, while avoiding exposure to geographical risks surrounding mainland China.
- At JPY14,300 per share, MFS trades at an adjusted P/NCAV of 110.6% with a market capitalization of JPY64.5bn.
- Assuming a fair value P/NCAV of 80~120%, investors can expect an investment CAGR of between -1.5% and +6.2%, including shareholder returns, over the next 5 to 8 years.
As a result of its consistently high profitability, MFS has been operating completely debt-free since FY03/15. Over the past 10 years, its cash & equivalent position has risen at a CAGR of 8.3%, resulting in its strong 84% equity ratio as of March 2023. Although the company plans to maintain its dividend per share at JPY350 in FY2023, it is likely that the company will execute share buybacks from time to time.
Some of the challenges the company faces include a downward pressure on earnings from rising prices of crude oil-derived raw materials and pressure from sustainability-minded clients and stakeholders to shift from carbon-intensive to environmentally-friendly products, so their supply chain carbon emission can be curbed.
In terms of opportunities, it is fair to expect MFS’s global niche leader strategy to contribute to stable revenues and high margins. Additionally, MFS is not overly dependent on the Chinese market, and is accessing Asian markets from Indonesia and Taiwan subsidiaries, which lowers its exposure to geopolitical risk.
At JPY14,300 per share, MFS currently trades at an adjusted P/NCAV of 110.6% with a market capitalization of JPY64.5bn. Assuming a fair value P/NCAV ratio of 80% to 120%, investors can expect an investment CAGR of between -1.5% and +6.2%, including shareholder returns, over the next 5 to 8 years.
The bottom line
Matsumoto Yushi-Seiyaku is a small industrial chemical manufacturer specializing in surfactants for textiles and thermo-expandable microcapsules. Although the company faces some challenges such as risk of crude oil-derived raw material price hikes and pressure to meet ESG demands, it also has tailwinds such as the successful execution of its global niche leader strategy in rapidly growing industries, which can lead to high profitability. Buying in at JPY14,300 per share, investors can expect an investment CAGR of between -1.5% and +6.2%, including shareholder returns, over the next 5 to 8 years.
