Hikari Tsushin: Mid-Cap Compounding Vehicle in Japan

Jiro Yasu and Patrick Rial of Varecs Partners presented their in-depth thesis on Hikari Tsushin (Japan: 9435) at Asian Investing Summit 2019.

Thesis summary:

Hikari Tsushin is a USD 10 billion market cap company that is unique in Japan for its highly rational capital allocation strategy. The company is one of the largest shareholders of Berkshire Hathaway in Japan. Jiro and Patrick view it as one of the most avoided stocks by Japanese portfolio managers due to its checkered past. The company sells a variety of products that generate recurring revenue streams. It invests the cash flows in customer acquisitions, stock buybacks, shares of U.S. compounders, and shares of undervalued Japanese stocks, creating steadily growing intrinsic value over time.

Hikari directly and indirectly distributes B2C and B2B products such as cellular phones, water-servers, insurance products, internet services, and fax machines. Hikari is a rare compounder in Japan, building businesses that produce recurring revenue and profit. There is a 30-40% IRR hurdle for new customer acquisition cost. The company maintains high operating margins due to one of the best cold-calling armies in Japan. Intrinsic value per share will compound through rational capital allocation; the cash flow will be invested in new customers, own shares, shares of U.S. compounders, and undervalued Japanese companies (both minority and majority stake). Here are some valuation metrics: EV/LTM EBIT: 13.3x, EV/LTM EBITDA OF 11.6x, PBR of 4.0x, 19.7x P/E and recent share price of JPY 20,600. Hikari’s share price has compounded at an annual rate of 21.8% for the last five years.

Jiro and Patrick believe Hikari is avoided by most portfolio managers in Japan due to its collapse in 2000. Hikari was one of the most popular stocks in the tech bubble days, and reached over a 5 trillion yen (approximately USD 50 billion) market capitalization in 1999. As the tech bubble busted in 2000, Hikari share price also dramatically collapsed. The shares were not traded for 20 trading days due to the TSE limit-low rules. It lost 95% of its value in two months. Currently, only 5% of its shares are owned by Japanese mutual funds.

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About the instructors:

Jiro Yasu has more than 15 years of investment experience in the Japanese equity markets including at Varecs Partners, First Eagle Investment Management and Daiwa Securities America. As the Representative Director of Varecs Partners, Jiro spearheads the investment firm’s efforts to identify mid-sized listed Japanese companies where corporate value can be realized for all stakeholders by working together with management. Jiro holds a BA in economics with a specialty in econometrics from Keio University.

Patrick Rial joined VARECS Partners in 2015 as Senior Analyst. He joined from J.P. Morgan Securities Japan where he worked in equity strategy and small cap research. Prior to J.P. Morgan, he was a product manager at Morgan Stanley MUFG Securities. Mr. Rial began his career as a financial journalist covering Japanese equity markets. He has been a CFA charterholder since 2011. He holds a BA in economics and history from Georgetown University.