Okamoto Industries (MV $851m): Japan’s #1 Condom Player

ROE 14.2% and trading at EV/EBIT 11.7x, EV/EBITDA 8.8x, EV/Sales 1x

Okamoto Industries (TYO: 5122) is Japan’s #1 condom brand with a dominant 50-60% market share leadership and is also the global #3 player and #2 in China (22% market share), where its first China condom plant in over 80 years is operational in March 2016 after building up strong demand from successful sales in leading online marketplaces JDmall and Alibaba’s Tmall. Since the launch of its game-changing innovative new product 0.01mm condom, the TTM Dec 2015 (YE March) sales is up 7.2% and EBIT soared 67.6%. Under the motto of using science to enrich everyday lives, Okamoto is a quiet innovator in leveraging upon its accumulated deep material science and chemistry know-how to continuously launch innovative new products, from ultra-thin condoms to OsmoPad that helps heal wounds by absorbing moisture, a technology that it adapted from its popular food wrapping film household product, to protective film-coated lining for motorcycle seats where it commands a 90% market share in US. For its YE March 2015, its industrial division contributes 59.1% of total sales and 48.3% of operating profit while its household & lifestyle division contributes 40.77% of sales and 48.7% of operating profit. The lifestyle division spans a wide range of general consumer items, including condoms, dehumidifying agents, heating pads and gloves. The core products in the industrial division are vinyl and PVC films used in a broad range of applications in industries such as construction, automotive, food, agriculture and medicine, as well as high value-added automotive interiors. In 2011, Okamoto started full operation at its Okamoto Sandusky factory in US and this business has hit a tipping point in 2015/16 in making a significant contribution to earnings. There has been annual share buybacks in recent years (average of ~¥1bn over the last 10 years). Treasury stock is also retired at varying intervals, which Okamoto can afford to do because of its strong free cash flows and healthy net-cash balance sheet. Founded in 1934 by Minosuke Okamoto, the Okamoto family and management owns 13.7% stake in Okamoto Industries.

1) What Makes It a Wide-Moat Business?

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