“In many cases, the company might have significant cash or stock holdings that make up a lot of the stock price… I want to see evidence that the company is investing to grow the business, buying back stock, paying dividends, or making accretive acquisitions.”
Michael Burry, September 4, 2019
In a 2019 interview with Bloomberg, Dr. Burry disclosed some of his Japanese holdings and was quoted in the article on characteristics he’s looking for in Japan. Using Dr. Burry’s quote as a checklist for finding mispriced assets, I decided to review his position, which he initiated in 2020, in Daisue Construction (1814.T) and apply his checklist to his own position and compare that to Shinnihon Corp (1879.T) of today. Although the two businesses are slightly different, they are both in the Construction & Engineering industry and so offer a reasonable comparison.
Significant Cash
Below is the Daisue balance sheet Dr. Burry was most likely looking at. Although not a net-cash stock (i.e., cash greater than total liabilities), the balance sheet would easily fall under the category of significant cash with a negative enterprise value at the time of purchase.
Shinnihon has a negative enterprise value as well but also has more cash on hand than total liabilities. So I would put Shinnihon slightly ahead on this one, but both companies would pass the test for significant cash.
Stock Holdings
At the time of Dr. Burry’s purchase, Daisue listed about ¥915 million in stock holdings.
On September 9, 2020, Dr. Burry filed a large shareholding report with EDINET once his position (536,700 shares outstanding) of shares owned triggered the 5% Rule. The report states that he added 27,100 shares during the previous 60 days. He presumably bought the other 509,600 shares in Q2 (Fiscal Q1).
Based on a reasonable approximation, I’ll guess his average purchase price was around a market cap of ¥8.4 billion. ¥915 million in stock holdings is about 11% of the market cap. At 11%, I would assume this was a contributing factor in the buy decision.
With a market cap of ¥42.6 billion, Shinnihon has about ¥580 million in stock holdings (or less than 2% of the market cap), so Daisue easily wins on this metric.
However, 11% of the market cap is not a huge number when compared to other Japanese stocks. Many small regional banks trade at a market cap that is a half or a third (sometimes even less) of the value of their stock holdings. For an industrial company, consider TYK Corp (5363.T), a net-net, with a market cap of ¥11.8 billion that has 56% of its market cap, or ¥6.6 billion, in stock holdings.
Investing to Grow the Business
Either using depreciation as a proxy or using the long-term average ratio of PPE to sales, it does not appear that Daisue was investing (or spending growth capex) to grow the business and that capex was primarily deployed for maintenance capex. Also, I could not find any significant news in 2020 that announced any growth initiatives for Daisue.
In Shinnhihon’s case, although they have spent ¥293 million in the past 2 years on capex, which is considerably more than they have in the previous 7 years, it still is not enough to move the needle significantly.
I would say both fail on this criteria.
Buying Back Stock
No activity on this for either company. Both fail on this criteria.
Paying Dividends
Shinnihon has a yield of 2% and a 5-year average yield of 1.6%. It’s payout ratio is 11.3% with a 5-year average payout ratio of 11.2%
Daisue had a yield of around 4% with an average payout ratio of around 18%. Due to the significant stock price declines during that time, the yield had risen materially. When Dr. Burry purchased the stock, dividends held steady at ¥20 and have increased in recent years. It is most likely that Dr. Burry saw this prior to his purchase.
In general, I don’t see anything spectacular here for either company since almost every company in Japan offers a dividend. However, if Dr. Burry bought with a yield at 4% this would have been on the higher end of yields offered at that time.
Although both companies pass this test, I would give the edge to Daisue.
Accretive Acquisitions
Neither company has made any significant acquisitions.
Summary
Of the 6 criteria mentioned by Dr. Burry, Daisue passed 3 of the 6 and Shinnihon passes 2 of the 6. Looking at the stock price performance of both companies, starting around the time of Dr. Burry’s purchase, we see that performance trended closely between the two until Daisue broke out in November 2021 when it released results–resulting in a 90% return for Daisue while Shinnihon traded flat.
The pop in Daisue’s stock price is somewhat puzzling (compared to that of Shinnihon) because their report in November was not spectacular, only that the company showed a rebound from the Covid-induced lows. When looking at revenue, we see that Daisue surpassed its 2020 level in two years, whereas it appears Shinnihon will do it in 3 years. Also, although the overall trend in revenue growth is better at Shinnihon, coming out of the Covid environment, Daisue is growing revenue quicker which may be attracting more attention to the stock. So maybe this is something Dr. Burry anticipated and was betting on.
From a quality perspective, Shinnihon is just better across the board. Combined with stronger long-term results, Shinnihon shows greater consistency and profitability.
At the end of the day, Dr. Burry clearly saw something beyond the 3 criteria met by Daisue in 2020. It will be interesting to watch how the company does going forward, as Dr. Burry continues to hold the stock (having only trimmed his position size). (Scion is currently below the 5% threshold, so it’s also possible he is already completely out.)
Disclosure: We own shares in Shinnihon Corp (1879.T) and in TYK Corp (5363.T). Leaven Partners, LP may hold any securities mentioned on this blog and may buy or sell these securities at any time.
Leaven Partners 