A well-structured write-up and pleasure to read. The back-and-forth with their IR was definitely useful. I’ll dive in soon and leave more constructive thoughts! Btw, I also pitch investment ideas and would love to recommend your Substack to my readers. If you like my work (I think you can see the link here?), would you consider doing the same?
I have a feeling that main purpose of listing, with its inherent better liquidity/transferability of ownership and at least stated aim of "better corporate governance" could be estate planning; to be able to enable better transition of ownership into next generation, especially if there are several heirs. Given the stated age of the main shareholder it is even more likely that that could be the main reason. Are there any children involved in company's management or there have been any talk about succession?
There is very little information about Mr Shinno online, so I wasn't able to find anything about his family. There is no mention of Mr Shinno's children in listing documents, but I think you make a fair point. I didn't ask management about succession plans but I will next time I write to them.
I would point out though that the majority of Mr Shinno's stake is held through a corporation, which should address succession issues. Also, if the goal was to maximise wealth for his heirs, it would have been better for him to keep CEL private. Finally, from talking to a friend from Japan, it appears there are other reasons why he might want to list. There is a prestige attached to listings which could help CEL find customers/attract staff, etc.
Mr Shinno did two interviews after the listing. In the one with Nikkei he said: "I decided to go public because I wanted to strengthen governance and make it a better company . By listing, I can win social trust. I have made good proposals to customers so far . However, due to its low profile, it sometimes lost to competing major house makers."
He did another interview with Capital Eye where he said: "We have higher business potential, but we are sometimes asked, 'Are you okay?' Since we were listed on the stock exchange today, we have been able to gain some social trust, and I hope that we will earn that trust by continuing to build on that with solid performance. Quality and others are understood. The products and production are overwhelmingly good. However, it is undeniable that there are customers who are attracted by the name value of Sekisui House (and other major house builders), even if the business feasibility is somewhat poor."
My sense is that this is the bigger reason for the listing, but his family could have been part of the decision too. Thanks for sharing your thoughts, it's a good pick-up.
Here are the links to the interviews in case you are interested:
in their latest earning Q/A they stated, that they just want to invest 30-50% of that cash over a multiple year timespane. They stated they want to invest only 3-5 billion in investments/expansions. 1 billion in hiring/training , 1 billion in research/development. Also in addition in their latest stock report ( from 26.5, page 11 ) they stated they always want to have an equity ratio of > 60%, now we are at 85%. So dont expect all cash will be deployed. Investing 6-7 billion of that total cash of 18 billion is nice and good, but i would have hoped for more.
Great write-up, GaW. I like Cel Corp and think it's super cheap, but in their last Q report they now record shares held in a trust (that are part of a compensation plan for directors) as treasury shares. That's a bit weird, because if you just looked at the raw data you'd think they bought back shares, but the reality is they just bought those shares and put them in a trust whose purpose is to transfer those shares to the directors when they retire. Shouldn't that be recorded as an expense instead? Appreciate your help. Full disc.: I own a small position in Cel Corp.
Hoping you may be able to shed some light on something as my eyes are going cross-eyed with all this translated Japanese. They have a cash outflow LFY of a little over Y2b and a little over Y8B this most recent FY which they note little more other than that it's taxes paid?
I'm trying to understand what exactly is going on there and why that isn't/didn't just get sent through their income statement. The paid like Y6.5B in tax last year which seems to have included tax due on their Chinese seg. sale.
My main concern is as to whether they Y2B - Y8B is going to be somewhat recurring and thus chew away at their cash pile - as it did by ~Y5B this year.
The note in their financial statement is as follows:
"(Cash flow from operating activities) Funds used as a result of operating activities amounted to 4,181 million yen. This was mainly due to the sale of owned properties in the rental development business and a decrease in real estate for sale and real estate for sale in progress, resulting in the acquisition of funds of 2,180 million yen. This was due to the use of funds of 8,037 million yen as the amount of corporate taxes paid."
Sorry - I'm sure it'll be something super obvious when I hear it.
Stupid question. They use PBT rather than NI at the top of their CF statements and the CF statement shows the taxes were paid in differing periods to the actual liability?
Still doesn't really seems to line up with what I would guesstimate taxes due would have been? I wonder if it's got some finance/services costs in there too directly attributable to the asset sale and potentially some ruminants of their listing?
If you look at CEL's balance sheets, you'll see they had accrued tax liability of 5.3B yen in Q4 2022. That was paid off in that quarter. In Q1, 2023, that liability reduced to 92M and it's currently 6M as of Q1 FY24 (which ended at the end of May). Hopefully that explains your question about the taxes from the sale. You're right that the cash reduced in FY23, but that was used mostly to pay off liabilities (including the 5.3B in tax). CEL's cash reduced by ~5.26B in FY23, while their liabilities reduced by 6.04B. So that explains what happened to the cash.
Just wondering if I can get your thoughts now as of April 2023 - It's been a few months since you published, have your thoughts changed on the business, valuation, or some of the thesis' central points (cash balance, etc.)?
Hi, LC. My thesis hasn’t changed and CEL is still my largest position. Q3 earnings were more than the full year forecast, which I used in the write-up, so I think I have underestimated earnings power somewhat. We should know more when the full year results are released in a week or so.
Thanks for the kind words. I think Shinnihon could well be a decent investment from here, don't get me wrong. It's certainly cheap. I'm concerned about the capital allocation, and that keeps me away. Shinnihon has been building up its cash balance for a long time and unlike CEL, there are no announced plans to put it to work. Also, Shinnihon has cross-holdings, which I'm wary of in Japan. I'm just concerned that Shinnihon is a cheap company that will stay cheap, as the management does not seem very concerned with generating value for shareholders. Like I said, it seems very attractive on a statistical basis, and you will probably do well from here. (On a asset value basis though, CEL is still cheaper.) It's just not something that aligns with my investment philosophy at the moment.
Thanks for reading. I’m hoping to publish more write ups but I’m not working on something right now. I don’t have that many good ideas and unfortunately they don’t come along at a steady pace. CEL is still my best idea and my largest position by a wide margin. In fact, Q3 results show the business is performing much better than the forecasts I used in the write-up.
Hello, I'm Lenka, the co-founder of strike.market - a stock research web with alternative data. I love your content and would love to share it with our investors. What would you think about a short interview? I would send you a few questions.
Hi! Great write-up, a pleasure tu read. Definitely an interesting situation.
Only question I would have is about management compensation. Is there any high compensation by salary, bonus or related party transactions ? Always a risk for me with companies having large ammounts of cash.
Thanks for the kind words, Daniel. Japan doesn't have the best disclosure on remuneration. The FY22 annual report noted that the six non-independent directors received total remuneration of ¥179.25MM, which is roughly $2MM AUD. I'm assuming this includes Shinno's salary. That works out to roughly ¥30MM per director or $330K AUD. That does not seem excessive to me. There is certainly nothing I've seen suggesting management is doing anything dodgy to take cash out of the business. I hope that helps!
This was such a solid thesis, and it's nice to see that it has worked out so far, with potentially even more gains on the way. I still don't get why the founder sold shares or wasn't buying them back post-listing, but as the saying goes all's well that ends well.
A well-structured write-up and pleasure to read. The back-and-forth with their IR was definitely useful. I’ll dive in soon and leave more constructive thoughts! Btw, I also pitch investment ideas and would love to recommend your Substack to my readers. If you like my work (I think you can see the link here?), would you consider doing the same?
Thanks for the kind words, Johan. I’m not using recommendations myself just yet.
I have a feeling that main purpose of listing, with its inherent better liquidity/transferability of ownership and at least stated aim of "better corporate governance" could be estate planning; to be able to enable better transition of ownership into next generation, especially if there are several heirs. Given the stated age of the main shareholder it is even more likely that that could be the main reason. Are there any children involved in company's management or there have been any talk about succession?
There is very little information about Mr Shinno online, so I wasn't able to find anything about his family. There is no mention of Mr Shinno's children in listing documents, but I think you make a fair point. I didn't ask management about succession plans but I will next time I write to them.
I would point out though that the majority of Mr Shinno's stake is held through a corporation, which should address succession issues. Also, if the goal was to maximise wealth for his heirs, it would have been better for him to keep CEL private. Finally, from talking to a friend from Japan, it appears there are other reasons why he might want to list. There is a prestige attached to listings which could help CEL find customers/attract staff, etc.
Mr Shinno did two interviews after the listing. In the one with Nikkei he said: "I decided to go public because I wanted to strengthen governance and make it a better company . By listing, I can win social trust. I have made good proposals to customers so far . However, due to its low profile, it sometimes lost to competing major house makers."
He did another interview with Capital Eye where he said: "We have higher business potential, but we are sometimes asked, 'Are you okay?' Since we were listed on the stock exchange today, we have been able to gain some social trust, and I hope that we will earn that trust by continuing to build on that with solid performance. Quality and others are understood. The products and production are overwhelmingly good. However, it is undeniable that there are customers who are attracted by the name value of Sekisui House (and other major house builders), even if the business feasibility is somewhat poor."
My sense is that this is the bigger reason for the listing, but his family could have been part of the decision too. Thanks for sharing your thoughts, it's a good pick-up.
Here are the links to the interviews in case you are interested:
https://www.nikkei.com/article/DGXZQOUC10C050Q2A310C2000000/
http://c-eye.co.jp/eq/ipo-eq/61158
Some adds:
in their latest earning Q/A they stated, that they just want to invest 30-50% of that cash over a multiple year timespane. They stated they want to invest only 3-5 billion in investments/expansions. 1 billion in hiring/training , 1 billion in research/development. Also in addition in their latest stock report ( from 26.5, page 11 ) they stated they always want to have an equity ratio of > 60%, now we are at 85%. So dont expect all cash will be deployed. Investing 6-7 billion of that total cash of 18 billion is nice and good, but i would have hoped for more.
Really, really great write-up, hopefully the first of many (subscribed!).
I'm always mystified by these uber cash-rich Japanese businesses, but this one is definitely worthy of some DD... These numbers are mind-boggling.
Thanks very much! It does seem wildly cheap to me too.
Great write up. Made some decent money on Shinoken in the past. Will have a closer look. When I first looked I didn't like the Chinese part....
Great write-up, GaW. I like Cel Corp and think it's super cheap, but in their last Q report they now record shares held in a trust (that are part of a compensation plan for directors) as treasury shares. That's a bit weird, because if you just looked at the raw data you'd think they bought back shares, but the reality is they just bought those shares and put them in a trust whose purpose is to transfer those shares to the directors when they retire. Shouldn't that be recorded as an expense instead? Appreciate your help. Full disc.: I own a small position in Cel Corp.
Great write up GaW.
Hoping you may be able to shed some light on something as my eyes are going cross-eyed with all this translated Japanese. They have a cash outflow LFY of a little over Y2b and a little over Y8B this most recent FY which they note little more other than that it's taxes paid?
I'm trying to understand what exactly is going on there and why that isn't/didn't just get sent through their income statement. The paid like Y6.5B in tax last year which seems to have included tax due on their Chinese seg. sale.
My main concern is as to whether they Y2B - Y8B is going to be somewhat recurring and thus chew away at their cash pile - as it did by ~Y5B this year.
The note in their financial statement is as follows:
"(Cash flow from operating activities) Funds used as a result of operating activities amounted to 4,181 million yen. This was mainly due to the sale of owned properties in the rental development business and a decrease in real estate for sale and real estate for sale in progress, resulting in the acquisition of funds of 2,180 million yen. This was due to the use of funds of 8,037 million yen as the amount of corporate taxes paid."
Sorry - I'm sure it'll be something super obvious when I hear it.
Thanks again for the write up.
Stupid question. They use PBT rather than NI at the top of their CF statements and the CF statement shows the taxes were paid in differing periods to the actual liability?
Still doesn't really seems to line up with what I would guesstimate taxes due would have been? I wonder if it's got some finance/services costs in there too directly attributable to the asset sale and potentially some ruminants of their listing?
If you look at CEL's balance sheets, you'll see they had accrued tax liability of 5.3B yen in Q4 2022. That was paid off in that quarter. In Q1, 2023, that liability reduced to 92M and it's currently 6M as of Q1 FY24 (which ended at the end of May). Hopefully that explains your question about the taxes from the sale. You're right that the cash reduced in FY23, but that was used mostly to pay off liabilities (including the 5.3B in tax). CEL's cash reduced by ~5.26B in FY23, while their liabilities reduced by 6.04B. So that explains what happened to the cash.
Excellent, yep I'm sure that'll make sense once I take another browse.
Thanks and thanks again for the write ups!
Hi G&W - just came across this writeup.
Just wondering if I can get your thoughts now as of April 2023 - It's been a few months since you published, have your thoughts changed on the business, valuation, or some of the thesis' central points (cash balance, etc.)?
Cheers
Hi, LC. My thesis hasn’t changed and CEL is still my largest position. Q3 earnings were more than the full year forecast, which I used in the write-up, so I think I have underestimated earnings power somewhat. We should know more when the full year results are released in a week or so.
Hi, excellent, detailed write up, congrats!
I have a long pos in Shinnihon and I wonder why you think it is inferior to CEL, because Shinnihon has:
- better margins
- better returns on equity
- higher growth
So it operating business looks better than CEL's but is valued a lot cheaper.
Yes they have built up a lot of cash but note that they have been heavily indebted in the past and only recently paid off all of their debt.
They are also increasing their dividends every year (although very slowly).
Anyway, I'd rather own a company with too much cash than one with too much debt, the latter is easier to solve :)
Thanks for the kind words. I think Shinnihon could well be a decent investment from here, don't get me wrong. It's certainly cheap. I'm concerned about the capital allocation, and that keeps me away. Shinnihon has been building up its cash balance for a long time and unlike CEL, there are no announced plans to put it to work. Also, Shinnihon has cross-holdings, which I'm wary of in Japan. I'm just concerned that Shinnihon is a cheap company that will stay cheap, as the management does not seem very concerned with generating value for shareholders. Like I said, it seems very attractive on a statistical basis, and you will probably do well from here. (On a asset value basis though, CEL is still cheaper.) It's just not something that aligns with my investment philosophy at the moment.
Really like this write up. Are there more coming down the pipe?
Thanks for reading. I’m hoping to publish more write ups but I’m not working on something right now. I don’t have that many good ideas and unfortunately they don’t come along at a steady pace. CEL is still my best idea and my largest position by a wide margin. In fact, Q3 results show the business is performing much better than the forecasts I used in the write-up.
Hello, I'm Lenka, the co-founder of strike.market - a stock research web with alternative data. I love your content and would love to share it with our investors. What would you think about a short interview? I would send you a few questions.
If you are interested, you might look at the last interview with the two youngest portfolio managers in Europe: https://strike.market/academy/interviews/interview-jacob-tobias-schober
Let me know, what you think via Twitter message. My account is: https://twitter.com/Lenka_Schanova
Thank you.
Hi Lenka, thanks for getting in touch, but I’d prefer to stay anonymous for now due to my employment situation.
Sure. You can stay anonymous. It's not a problem at all. I have done an interview with ToffCap who also didn't disclose his name, just the Twitter nickname (https://strike.market/academy/interviews/toffcap-im-most-bullish-on-surgepays)
Thorough write up. Thank you.
Thanks for reading!
Hi! Great write-up, a pleasure tu read. Definitely an interesting situation.
Only question I would have is about management compensation. Is there any high compensation by salary, bonus or related party transactions ? Always a risk for me with companies having large ammounts of cash.
Thanks for the work.
Dani
Thanks for the kind words, Daniel. Japan doesn't have the best disclosure on remuneration. The FY22 annual report noted that the six non-independent directors received total remuneration of ¥179.25MM, which is roughly $2MM AUD. I'm assuming this includes Shinno's salary. That works out to roughly ¥30MM per director or $330K AUD. That does not seem excessive to me. There is certainly nothing I've seen suggesting management is doing anything dodgy to take cash out of the business. I hope that helps!
This was such a solid thesis, and it's nice to see that it has worked out so far, with potentially even more gains on the way. I still don't get why the founder sold shares or wasn't buying them back post-listing, but as the saying goes all's well that ends well.