NKK Switches Co Ltd (6943:TYO)

Recent Share Price: ¥4,770

Accounting: Japanese Accounting Standards

Fiscal Year: Mar. 31st

Market Cap: ¥3.9 billion ($37 million)

Industry: Industrials / Switchgear Manufacturing

NKK Switches Co., Ltd., formerly NIHON KAIHEIKI IND. CO., LTD., is mainly engaged in the manufacture and sale of various industrial switches. The company offers illuminated, process sealed, miniature, specialty, surface mount and LCD programmable switches. The company also manufactures toggle, rocker, pushbutton, slide, DIProtary, keypad and keylock switches.

The company was established in 1953 by then chairman, Shigeo Ohhashi. The Ohhashi family remains deeply involved in the company via operations and ownership.

InsidersShares%
YK Big Bridge*132,00016.0%
Hiroshige Ohhashi – Europe & China Sales29,3003.5%
Naoko Ohhashi28,0003.3%
Chizuko Ohhashi20,1002.4%
Tomoshige Ohhashi – President19,2002.3%
*May be part of Ohhasi family

The Company operates in three business segments (company and five subsidiaries). The Asia segment is involved in the assembly processing of switch products in China, and the sale of products in Hong Kong, China, and rest of Asia.

  • NKK Switches of America, Inc. (Scottsdale, AZ)
  • NKK Switches Hong Kong Co., Ltd. (Hong Kong) 2004
    • 2015 – China (Shanghai) Hirakiseki Co., Ltd
  • NKK Switches Mactan, Inc. (Philippines)
    • 3rd production base circa 2015
Revenue – JPY (in million)20182019%
Japan¥4,466¥4,48258%
United States¥2.499¥2,41432%
Asia¥761¥76910%
Largest Customers by Revenue- JPY (in million)20182019%
Chiyoda Electronic Equipment Co., Ltd.¥1,470¥1,43818%
Nippon Denka Industries¥1,036¥99513%

The company has developed a medium-to-long term plan of pushing global growth beginning in 2017 called “Change100” [google translate].

The company aims to break away from mere switch sales, from the “design process” of Kawakami to “production process” of the downstream.

This 4-year initiative to accelerate international growth is not gaining traction, based on the numbers. Management has sited a slowdown in China and trade disputes as headwinds. They also point to increasing raw material costs, rising labor costs (in China and Japan), and costs due to the “Mactan plant construction”.

Because of this, the company has lowered their 4-year goal from ¥10 billion in revenue and a 10% operating margin to ¥9 billion in revenue and a 7.8% operating margin (¥700 million). As of recent annual report, order backlog is at ¥8.4 billion.

Reverse stock split 1-10 in 2017

The company holds ~¥1 billion in common securities which is ~10% of TBV.

The company owns rental real estate that generated non-operating income of ¥10 million in 2018 and has an estimated market value of ¥391 million which is ~4% of TBV.

Financials

Disclosure: We own shares in NKK Switches Co Ltd (6943:TYO)

6 thoughts on “NKK Switches Co Ltd (6943:TYO)

  1. Hi Brent,

    Just discovered this site and am loving it. I suspect you already know, but FYI this stock has always traded well below its NCAV since 2014 (I don’t have any data before that). What makes you think now is the time it will jump?

    Regards,
    Alan

    Like

    1. Hi Alan,

      Happy to hear that you are enjoying it!

      Though sometimes difficult, I strive to adhere to strict Graham/Schloss principles. Within this framework, there is not much to be said on the issue of “timing”. I would love to have a framework for timing, but I haven’t figured that out yet.

      The value quants of today, e.g. O’Shaughnessy, Arnott, and Asness, would say timing is really really hard.

      https://www.aqr.com/Insights/Perspectives/Never-Has-a-Venial-Sin-Been-Punished-This-Quickly-and-Violently

      (Many of the stocks are too thinly traded to implement a momentum factor, IMO, and many times I’m only able to build positions while the majority are trying to get out.)

      This is what I wrote in a previous comment: In Security Analysis (1934, 1940), Ben, many times, referenced a previous high for a potential net-net, but he never mentioned that it was a primary criterion (to my knowledge). I have learned over the years that if Ben Graham mentioned something, briefly or not, it is wise to take it very seriously. In other words, he had that data point in the book for a reason; it wasn’t on a whim. So I agree with you; it is a factor worth looking at.

      I will say that I take notice of how the stock has traded relative to net assets over the past 10 years, but it is not a primary screening criteria for me.

      On the upside, the strategy is powerful enough that you don’t have to get the timing right to do just fine. But figuring out how to get the timing right WHILE being able to build a sizable position would supercharge returns.

      Like

  2. Hello to both of you.

    I read your discussion and also wanted to add my two cents.

    I think investing in net-nets is a bet on mean reversion to push the business upwards, as net-nets rarely really end up in liquidation. We invest in companies with high liquidation values because it gives managements some breathing room and ammunition to make the company profitable again. That is why insider ownership is so important while investing in net-nets.

    It is therefore better to invest in net-nets like NKK Switches, which are currently distressed, but when profitable, they trade at double the current market price. For the same reason, it is better not to invest (in my opinion) into net-nets like Kikukawa Enterprise (6346), as it is currently valued by the market based on a multiple of earning, without any regard to the fact that its market cap is almost half the net cash, because it is not a distressed company. It is therefore unlikely, that the cash is going to get reflected in the price in near future (3-5 years) (another examples can be Treasure ASA (TRE:Oslo) and Urbana corp (URB:TSE), although they are deep value opportunities, not net-nets)

    I have not managed to find this anywhere in Buffet’s letters (however I did not read Berkshire, only Partnership so far) or in the Intelligent Investor, even though I believe it is an important aspect of net-net investing. I got this idea from one simple sentence by Geoff Gannon from Focused Compounding in a podcast and also Evan Bleker’s book about net-net investing.

    Best regards.

    Vaclav

    Like

    1. Hi Vaclav! Thanks for your reply. I think you make really great points. I am invested in Kikukawa also because of something Geoff said on focused compounding which was his recommendation to invest in net nets where their NCAV is made up primarily of cash. I never considered the point you made which I certainly appreciate! Feel free to get in contact with me for a chat at campbellgee256@gmail.com

      Liked by 1 person

    2. Thanks for the dialogue!

      I agree with you, Vaclav, that mean reversion is a key lever in value realization, but it’s not the only lever.

      Taken directly from Security Analysis:

      1. The creation of an earning power commensurate with the company’s assets. This may result from:
      a. General improvement in the industry.
      b. Favorable change in the company’s operating policies, with or without a change in management. These changes include more efficient methods, new products, abandonment of unprofitable lines, etc.
      2. A sale or merger, because some other concern is able to utilize the resources to better advantage and hence can pay at least liquidating value for the assets.
      3. Complete or partial liquidation.

      Ben thought mean reversion happens either through a general improvement in the industry as a whole or in specific actions taken by management to right the ship. But he also pointed out two other ways of value realization: sale and liquidation. Both of which do not involve mean reversion and would support buying stocks that have a high net-cash position (e.g., Kikukawa).

      I agree with you fully on money-losing net-nets. Plenty of studies (Carlisle, Oppenheimer, etc.) show a statistical outperformance of money-losing (in the past year) net-nets compared to profitable net-nets (albeit with higher volatility).

      But I don’t know anyone who strictly buys money-losing net-nets. Geoff only buys profitable net-nets (albeit he has concentrated portfolios). When he bought the Japenese basket back in 2012 or so, he only bought net-nets that were net-cash and had 10 years of profitability. Ben Graham had examples of money-losing net-nets in his books, but I’ve never read where he recommended buying only money-losing net-nets Buffett, of course, didn’t do it either. Or Schloss. Joel Greenblatt supported buying low P/E net-nets.

      Managing personal money or outside money will also play a role. Leaven Partners has about 1/5 of its investments in money-losing net-nets and I’m more likely to decrease this weighting than to increase it.

      Like

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