Steven Towns on Coca-Cola West

Steven Towns is a co-founder of Nippon Value Capital, an activist hedge fund startup seeking to enhance Japanese equity valuations through improved asset efficiency, excess capital allocation, and corporate action. He is the author of Investing in Japan, published in 2012, a book for those looking to capitalize on Japan’s abundance of undervalued equities.

That Coca-Cola is not the drink of choice of Japanese people is not exactly surprising. Perhaps that canned coffee, named Georgia, is Coca-Cola’s best-selling product in Japan. The beverage business in Japan is something else. Whereas vending machines are often eyesores, out-of-order, or short-changing customers in the U.S., they are high-tech and ubiquitous fixtures in Japan. And Coca-Cola bottlers own a large majority of them. It is also the leading brand in most drink segments, including cola.

COCA-COLA WEST — MIX BY BRAND, 2010-2011

Source: Company presentation dated February 2012.

The largest Coca-Cola bottler listed in Japan is Coca-Cola West (Tokyo: 2579), which has a strong market share in western Japan, spanning the Kansai region (including metropolitan areas like Osaka and Kobe) and as far south as Kyushu (Japan’s most southern island group beside the Ryukyus). Coca-Cola and “discount” aren’t often heard in the same sentence, even among bottlers. But Coca-Cola West’s deep discount is real.

At a recent market capitalization of JPY159 billion ($1.95 billion) Coca-Cola West trades at 0.7x book value [0.9x tangible book value], with gross cash and securities exceeding 30% of market cap, and fixed assets (including land holdings and long-term investment securities) that exceed 50% of market cap even when discounting PP&E by half and long-term securities by a quarter. Debt-to-equity is less than 0.3x, with long-term liabilities consisting largely of two bonds (at 0.68% fixed due 2014 and 1.48% fixed due 2019) used to acquire health foods and products maker Q’sai, which is already proving to be a prudent acquisition as it has much higher margins than the beverage business. Q’sai accounted for around 9% of revenue and 30% of operating income in 2011.

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