date: 1/18/2017 asahi holdings (5857, jp) · 2017-03-24 · buyers (low risk): price of precious...

Titlis Group Inc. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: [email protected] http://www.titlisgroup.com/

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Date:1/18/2017

AsahiHoldings(5857,JP) Recommendation:BUYExchange:TokyoStockExchange1 SharePrice:JPY2,078(1/17/2017)Sector:Environmental(WasteRecycling) TargetPrice:JPY2,947MarketCap:JPY76.8billion P/E:10.3x(3/17CE)P/B:1.4x(3/16act) Div.Yield:2.9%(3/17CE)

HighlightTitlisinitiatesBUYrecommendationofAsahiHoldings.Duetoitssolidcompetitivepositioningdealingwithawiderangeofwastecategoriesandmanagingcloserelationshipwithsuppliers,EnvironmentalPreservationbusinessmakesrobustprofitmargin,althoughwastevolumeinJapanremainsflat.PreciousMetalrecyclingbusinessisexpectedtoimprovein4Q,aspreciousmetalpriceshitthebottomin3QledbystrongerUSD/JPY.FurtherappreciationofUSD/JPYraisesJPYbasedpreciousmetalpricesandwouldpulltheprofitshigher,althoughfullyearearningsareexpectedtobeinlinewithcompanyoutlookatthismoment.Intermsofvaluation,consideringitsbreak-upvalueofbusinessvalueofeachbusinesssegmentplusnetcash,thesharepricelooksundervalued.Titlisdoesnotincludeassumptionoffurtherexpansiontooverseasmarketinmid-termprojectionforFY03/2020atthistime,butthesharepricewillreactpositivelyifAsahipromotestofurtherexpansionbyusingitsstablecashflow.Consideringitsfinancialstability,AsahishouldbeacandidateintheBUYlistforthemid-term.BusinessDescriptionAsahiHoldingswasestablishedin1952asAsahiChemicalLaboratoryandstartedsilverrecyclingbusinessfromphotographicfixingsolutions.Thecompanygrewonrapidexpansionofdemandforsilverinindustriesrelatedtosilverforphotosensitivematerialsaswellasphotography.In1982Asahidiversifiedtopreciousmetalrecyclingbusinessindentalindustryonexpectationsofthereductionofthephotoeffluenttreatmentmarket.Asahiexpandeditspreciousrecyclingtoelectronicscomponentsandjewelry,andhasdevelopedEnvironmentalPreservationbusinessotherthanphotographicfixingsolutions.In2014FujiiryokiwasconsoledinitsnewbusinesssegmentofLifeandHealthbusiness.AsahiacquiredAsahiRefiningUSAInc.&AsahiRefiningCanadaLtd.in2015.Now,thecompanyoperatesbusinessin3segmentssuchasPreciousMetal,EnvironmentalPreservationandLife&Health(See2pieChartsandaBarChartonleft).PreciousMetalPreciousmetalisthelargestsegment,addingNorthAmericanbusinessacquiredJohnsonMattheyGold&SilverRefinersin2015.PreciousmetalrecyclingbusinessthatoperatesinJapanandAsiagatherspreciousandraremetalsfromcustomersinavariousindustrysuchasdentistry,jewelry,photography,e-scrap,platingtreatment,precisioncleaning,catalystandLCD,processingthemtofinishingproductsasgold,silver,palladium,platinum,rhodiumandindium(seePicturebelow).


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Recyclingbusinessisoperatedby2waysofcontractorderandpurchase.ContractordersmakerevenueascommissionAsahiandreturnfinishedgoodstocustomers.Forpurchase,Asahitakesriskforafewmonthsofworkinginprogressandsellsfinishedgoodstocustomers.Therefore,theearningsgrowwhenpriceofpreciousandraremetalsareincreasing.NorthAmericanbusinessoperatespreciousmetalrefiningasAsahiRefiningUSAandCANADA,thatrefinesmine-derivedgoldandsilverfromminingcompaniestofinishedproductsandshipstocustomersinSaltLakeCityU.S.andBramptonCanada(seePicturebelow).Productionofgoldandsilveris450tand2,000trespectivelythatisatopmarketshareinNorthAmerica.

EnvironmentalPreservationBusinessAsahioperatesrecyclingbusinessotherthanpreciousmetalinthissegment.IndustrialMaterialconsistsof2growthproducts,dealingwithawiderangeofwastessuchaswasteoilandsludge,woodwaste,fireproofbrick,glassandorganicwasteliquidandsludge.


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Life&HealthBusinessThissegmentiscomprisedofacquiredcompaniesin2012,2013and2014fordiversifyingitsbusinessdomainontheexpectationsofgrowingdemandofhealthcarebusinessledbyincreasingseniorpopulation.Fujiiryokiprovidesmassagechairs,InterCentralprovidesradiantair-conditioningsystemequipmentandKoeikogyoprovidesfacilitiesforfire-prevention,air-conditioningandsanitationequipment(seePicturebelow)Ofthe3subsidiaries,Fujiiryokiisthelargestcontributiontothissegment.IndustryOverviewandCompetitivePositioningIndustryOverviewRecyclingmarketisdependingonwastevolume.Wastemarketisalsodependentoneconomicactivityofproductionandconsumerexpenditures.WastevolumeislikelytogrowslowerinJapan,asJapan’sindustrialproductionhasremainedflatandIPIndexofJapanstayedat97.6inQ3FY2016from100inFY2010(seeChartonbelowleft).ProductionbaseofJapanesemanufacturershasshiftedtooverseasandGDPwillnotgrowatfasterthanbeforeduetothedecreaseinpopulation.Meanwhile,recyclingmarketinworldwideisexpectedtodoublefromJPY20trillionin2010toJPY40trillionin2020accordingtoresearchbyMinistryofEconomy,TradeandIndustryofJapan(METI).RecyclingmarketinAsiaisexpectedtogrowfasterduetogrowthineconomyandpopulation(seeChartbelowright).


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CompetitivePositioningCompetitivePositioningisanalyzedeachgrowthandlegacyproductsin5Forces.PreciousMetalRecyclingBuyers(Lowrisk):Priceofpreciousmetalsistransparentstandardizedandgold,silver,platinumandpalladiumaretradedinexchangessuchasLME.AsahiisamemberofLBMA(LondonBullionMarketAssociation)andLPPM(LondonPlatinumandPalladiumMarket)anditsproductsarecertifiedasGoodDeliverybars.CustomersareverylikelytobuyAsahi’spreciousmetalsashighlyreliablequality.Suppliers(Low-Middlerisk):Wastevolumeinindustryisexpectedtoslowtogrowinlinewithslowergrowthineconomyandindustrialproduction.However,Asahibuyswastematerialsfromawidevarietyofsupplierssuchasdentists,jewelers,manufacturersandscrapcollectors.Asahi’soneofcompetitivenessisduetostrongnetworkinnationwide.Its400workforcesbuymaterialsfromsuppliersinvariousindustriesthroughdirectcontactaswellasactivityintegratedwithfieldengineerstomanufacturers.Duetohighlycapableforcesrespondingtosupplier’sneedandlong-termrelationshipwithsuppliers,riskofsupplierswouldbemarginal.Competition(Middlerisk):3preciousmetalrecyclingoperatorsleadthemarketinJapansuchasDowaEcosystemisDowaHolding(5714,JP)’ssubsidiaryandMatsudaSangyo(7456,JP).EachcompanydoesnotdisclosefinancialinformationofpurepreciousmetalrecyclingbusinessinsaleandOP.SaleofDowawasJPY62billionincludingsoilremediationbusiness,thatofAsahiisestimatedtobeJPY63billionexcludingNorthAmericanbusinessand

thatofMatsudawasJPY104billiondealingwithotherwastematerialsrecyclingforFY03/2016.All3companiesarecompetingoneanother,makingrevenuebetweenJPY50billionandJPY100billionpurepreciousmetalrecyclingbusiness(seeChartonleft).OPmarginofAsahiisafterDowa,butOPMofAsahi’spurepreciousmetalrecyclingwouldnotbelowerthanthatofDowaasrelativelyhighermarginofsoilcleanupbusinesswouldpullithigher.IndecreasingwastematerialsinJapan,smalloperatorsareunlikelymakeprofitwellandmarketconsolidationislikelytoadvancegoingforward.Foroneofmarketleadersriskofcompetitionwouldbemiddle,butAsahiseemstomaintaindecentprofitmarginrightnow.

NewEntry(Lowrisk):Technologyisabarrierofnewentry.Asahihasstrongdatabasedanalyticskillsthatrequirehighlyprecisetechnologyofanalyzingcontentofpreciousmetalsinabunchofwastematerials.Also,refiningis


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anothertechnologyforprocessingfromwastematerialtopurepreciousmetallike99.99%gooddeliverybareffectively.Duetoitsadvancedtechnology,threatofnewentrywouldbelimited.Substitution(Lowrisk):Asdisposalofwastematerialsisabigissueacrossglobe,recyclingisavitalsolutioninenvironmentalissues.METIaimsatraisingrecyclingusefrom15%to17%anddecreasingfinaldisposalfrom19milliontofFY2010to17milliontofFY2020,inits3rdrecyclingbasicplanasofMay2013.Duetotheincreaseofglobalgovernmentpolicy,substitutionriskislow.NorthAmericanbusiness(PreciousMetalRefining)Buyers(Lowrisk):Asahi’sNorthAmericansubsidiary(formerJohnsonMatthey)has99yearshistoryinthisindustryandhasestablishedbrandnameinNorthAmerica.PriceofpreciousmetalsistransparentstandardizedandgoldandsilveraretradedinexchangessuchasLME.AsahiRefiningisamemberofLBMA,COMEXandTOCOManditsproductsarecertifiedasGoodDeliverybars.CustomersareverylikelytobuyAsahi’spreciousmetalsashighlyreliablequality,too.Suppliers(Low-Middlerisk):InitslongrelationshipwithminingcompaniesanditstopbrandinNorthAmerica,AsahiRefininghasstrongpositioninginNorthAmericanmarket.DuetocloserelationshipwithsuppliersinNorthAmerica,thesubsidiarydoesnotseemtofallintoimmediateriskbutshoulddevelopsuppliersinotherregionsasthecompanyisgrowing.Itsmaterialsarenotwelldiversified,coming31%fromUS,30%fromSouthAmerica,21%fromMexicoand11%fromCanada,whereasgoldproductioninWWminesisdiversifiedgloballyasgoldproductioninNorthAmericaandSouthAmericaaccountsforonly499t(15.8%)and554t(17.5%)respectivelyofworldproductionof3,157t.Competition(Middlerisk):DuetoitstopmarketshareinNorthAmericaandenhancedrefiningtechnologyandR&D,asamarketleaderthesubsidiaryisinadvantageouspositioningatthemoment.However,duetocontinuinglowerpreciousmetalprice,ifAsahiRefiningexpandstootherregionssuchasAsia,thecompetitionwouldbemoreintense.NewEntry(Lowrisk):Refiningtechnologyandbrandisentrybarrier.Refiningpurepreciousmetalslike99.99%gooddeliverybarandcertificationsbyworldgoldinstitutionsarekeyfactorsfordoingthisbusiness.Establishinganewbusinessinthisindustryisnoteasyforanewentrant.Substitution(Lowrisk):Preciousmetalisoneoflimitednaturalresources.Therefiningtechnologyandreliablebrandofgooddeliverybarwouldbehardlysubstituted.


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EnvironmentalPreservationBuyers(Middlerisk):Recycledproductsaresoldtomanufacturersatmarketprice.Duetolowercommoditypricesandslowerindustrialproduction,priceandvolumeofrecycledproductsarelesslikelytogainandrecycledpricesarelikelytocomeunderpressurebybuyers.Suppliers(Low-Middlerisk):Asmentionedearlier,wastevolumeinindustryisexpectedtoslowtogrowinlinewithslowergrowthineconomyandindustrialproduction.However,Asahicollectsmaterialsfromsuppliersbyincreasingthenumberandthefieldofwastematerials.Somewastesthatrequiredisposalfacilitywithpermissionbygovernmentaredifficulttodisposeinenvironmentalissues,butAsahiownssuchacapabilityinitsgroupcompanies.Inthisadvantage,thecompanyhasexpandeditemsofindustrialwasteitemsinnationwidetosuchdifficultofdisposalitemsbyacquiringrecyclingoperators.Suchawide-rageofdealingitems,Asahiisexpectedtobuymaterialsatfavorablepricefromsuppliers.Competition(Low-Middlerisk):Wasterecycleoperatorsarerequiredgovernmentpermissionlicenseineachwastecategory.Businessofeachrecyclecategoryoritemisnoteasyandthecompetitionisnotlooseduetolowercommoditypriceandslowerindustrialproduction.However,Asahi’srecyclingsubsidiariesoperateinawiderangeofcategories,includingitemsthatgovernmentwouldhardlygrantpermissiontobuildawastedisposalsite.Thiswouldbenefittothecompany,asasupplierthatproducesmorethanakindofwasteisverylikelytoprovideAsahitorecyclewastematerials.NewEntry(Lowrisk):Duetogovernmentlicenseofwastedisposalthereisentrybarrier.Eachwasteitemalsoneedsgovernmentlicenseandrecycletechnology.Substitution(Lowrisk):Astheenvironmentalissueisgrowingglobally,demandofrecyclingwastematerialsisanecessarilyincreasing.Eventhoughrecyclingtechnologyisevolving,substitutionriskislowforrecyclingbusiness.Life&HealthBuyers(Middlerisk):DuetoslowrecoveryofconsumerspendinginJapan,healthcareequipmentmarketisexpectedtocontinuemodestgrowth,althoughseniorpopulationisincreasingto2020andgovernmentencouragesself-healthcaretoreducemedicalexpense.Fujiiryoki’scoreproduct,massagechairsgrewslowduetoanemicconsumerspending,whilewearabledeviceledtheoverallself-healthcareequipmentmarketthatisanticipatedtogrow2%forFY2015after3.2%growthforFY2014.Fujiiryokihaspromotedexpandingitsdistributionchannelfrom‘BtoC’suchasretailers,largeapplianceretailersandmailorderto‘BtoB’channelsuchasfitnessgym,resorthotels,airport,amusementparkandnursingcarehomes.However,luxuriousmassagechairsforJPY300,000havehitbyslowerconsumerspending.


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Suppliers(Lowrisk):Self-carehealthequipmentsuchasmassagechair,hearingaidandhydrogenwaterisconsumergoods.Switchingriskofsuppliersislow.Competition(Middle-Highrisk):FormassagechairthecompetitionisnothighforFujiiryokithatisamarketleadersharingwithPanasonic(6752,JP).Butforotherproductssuchashearingaidandhydrogen,Fujidoesnothaveatopmarketshare.Thecompetitionisrelativelyhigherforconsumermarket.NewEntry(Middle-Highrisk):Duetoincreasingagingpopulation,riskofnewentryisrelativelyhigher.DifferentfromAsahi’sother2-businesssegment,thereisnobarrierintechnologyandgovernmentregulation.Substitution(Middle-Highrisk):Innovationoftechnologywouldhelptodevelopalternativeequipmentaswearablehealthcarecheckdevicearepopularrightnow.Hydrogenwaterisboomingatthismoment,butitwouldbereplacedatanytimewhensomethingneworseeminglymoreeffectiveforhealthwillbeintroducedinmarketplace.InvestmentSummaryBusinessOutlookDuetoappreciationofUSD/JPY,preciousmetalpricesinJPYbasehavereboundedsince3Qend.Fullyearearningsareexpectedtobeinlinewiththecompanyprojection.Inthemid-term,Asahi’srecyclingbusinessiscompetitiveindomesticmarketandlikelytomaintainstableprofit,butrevenuegrowthisdependingonpriceincrease,asrecyclingmaterialinvolumewillnotincreaseinJapan.FurtherexpansiontoAsianmarketisakeyforthecompany,althoughTitlisdoesnotassumefurtherM&Aandexpansiontooverseasmarketintheprojection.CompetitivePositioningandRisksPreciousMetalbusinessisrelativelystrongpositioningduetoitstightrelationshipwithsuppliersthrough400workforceswhoprocurewastematerialsdirectlyatbetterpricesthanbrokerchannel.RecyclingbusinessissupportedbyAsahi’swiderangeofwasteitems,asasupplierthatproducesmorethanakindofwasteismorelikelytoprovidematerialstoAsahi.NorthAmericanpreciousmetalrefiningbusinessisalsocompetitiveinNorthAmericanmarketduetoitsstrongbrandinthelocalmarket.However,thesubsidiaryneedstodevelopothermarketgoingforwardforfurthergrowth.OnLife&Healthbusiness,itspositioningisrelativelyweak.Consumerproductsmarketisseverercompetitionandlowerentrybarrier.Anumberofplayersarecompetinginthemarketonexpectationsofgrowinghealthcaredemand.ValuationThesharepriceseemstobeundervalued.AnalyzingbusinessvalueandnetcashonSum-of-the-partsNAV,NAVsforFY03/2017(E)andFY03/2020(E)


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areJPY2,947andJPY3,373ashare,bothofwhicharehigherthantheclosingpriceasofJanuary17th2017.EV/EBITDAwilldeclinefrom5.7xforFY03/2016to4.4xforFY03/2017(E)and3.9xforFY03/2020(E),whichisslightlylowerthan5xonaveragefromFY03/2014toFY03/2016.FinancialStabilityAsahihassolidbalancesheetandpositivenetcashandnetworkingcapitalbackedbystablypositivefreecashflow.EBITDAmarginmaintainsdoubledigitbutislesslikelytoincreasefurther,asLife&Healthbusinesspullsitlower.Suchanissueofenhancingbusinessportfolioremains,butAsahiHoldingsisfinanciallystableenough.BusinessOutlook2QFY03/2017Totalsalewasdown17.7%YoYtoJPY51,691million,butOPwasup0.1%YoYtoJPY5,696million,EBTdown1.9%YoYtoJPY5,499millionandNPup7.0%YoYtoJPY3,81million.SalebysegmentmostlylostsaleinPreciousMetalsegmentduetolowerpriceofpreciousmetalsexceptsilver,whilevolumeofrecyclematerialsremainedflatfromayearago.Goldwasdown0.5%YoY,Palladiumplunged8.8%YoYandPlatinumfell8.4%YoY,whereassilvergained9.6%YoYfrom2QFY2016.OnOPbysegment,lowerprofitofPreciousMetalwasoffsetbyhigherprofitofEnvironmentalPreservation.OPmarginofEnvironmentalPreservationsegmentincreasedto19.5%from15.5%forthesameperiodofthepreviousfiscalyearledbytheincreaseofprofitableprojects.FullYearFY03/2017OutlookbyCompanyAsahiHoldingskeptitspreviousoutlookanddividendonholdforfullyearFY03/2017.Sale,OP,EBTandNPareprojectedtobeJPY110,000million,JPY10,000million,JPY10,000millionandJPY6,600millionrespectively.ThecompanychangedaccountingprincipletoIFRSfromthisfiscalyear.DividendwillbepaidJPY30ashareforsemiannually(annuallyJPY60ashare).FullYearFY03/2017byTitlisTitlisexpectsitsfullyearsalesandprofitstobeinlinewithcompanyoutlook.SaleisexpectedtobeJPY109,865million,andOPtobeJPY10,441million,EBTtobeJPY10,244millionandNPtobeJPY6,994million(seeTablebelow).Earningsbysegment,PreciousMetalisexpectedtoimprovesaleandprofitduetorecoveryofpreciousmetalpriceledbystrongerUSD/JPYin4QandEnvironmentalPreservationmaintainssolidearningsonprofitableprojects,whereasLife&Healthcontinuesslowerforentireyearduetoslowconsumerspending(seeTablebelow).


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Mid-termProjectionFY03/2020byTitlisRecyclingvolumeinJapanisunlikelytogrowfaster.ThedomesticrecyclingbusinessofPreciousMetalRecyclingandEnvironmentalPreservation(otherindustrialwasterecycling)wouldnotgrowatsolidpace.AlthoughAsahiexpandsoverseasbasesinKorea,ChinaandTaiwan,it’snotenoughtoaffectitsearningssignificantly.LookingbeyondFY03/2018afterongoingitsmid-termmanagementplan,furtherexpansiontoAsiawouldberequiredforRecyclingbusinessandPreciousMetalRefiningbusiness.Life&Healthbusinessishardlyexpectedsynergywithotherbusinesses.Moreover,itscompetitivepositioningisnotstrongenoughandseemstobedifficultgoingforward.Duetolowentrybarriercompetitionintheindustryisverylikelytoremainintense.TitlisdoesnotfurtherM&AandexpansioninAsianmarketintheprojection.Mid-termearningsareexpectedtogrowatmoderaterateforFY03/2020,assumingpreciousmetalpricesofJPYbasewillremainflat(seeTablebelow).Incaseofaggressiveexpansion,themid-termoutlookshouldberevisedpositively.


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ValuationAsahisharepricelooksundervaluedonsum-of-thepartsvaluation.TheNAVforFY03/2017(E)andFY03/2020(E)is30%and38%discountfromclosingpriceasofJanuary17th2017,whichshowssomeupsideroomforthesharepriceonitsbusinessvalueandnetcashpointofview.ExaminingEV/EBITDA,themultiplewillgodownto4.4xforFY03/2017(E)from5.7xforFY03/2016.Sum-of-thePartsValueSum-of-the-Parts(SOTP)valueisestimatedbyaggregatevalueofbusinessvalueineachbusinesssegmentthatisnormalizedEBIT,EBITDAandFCFfromFY03/2013toFY03/2017(E),andnetcashandlong-terminvestmentsecuritiesandland.SOTPvalueforFY03/2017(E)isestimatedtobeJPY2,947ashare(30%discountofclosingpriceofJanuary17th2017).SOTPvalueforFY03/2020(E)isestimatedtobeJPY3,373ashare(38%discountofclosingpriceofJanuary17th2017),asshowntablebelow.ThesharepriceasofJanuary17th2017islowerthanbothvaluesabove.Thebusinessvalueofeachsegmentiscomputedby10xofEBIT,5xofEBITDAand15xofFCFandeitherofthehighervalueisappliedtobusinessvalueofasegment.Thesemultiplesdonotseemtobehigh.Therewouldbeupsidepotentialfortheshareprice.

EV/EBITDAEV/EBITDAforFY03/2017(E)isestimatedtobe4.5xandwillslightlydeclineto4.0xforFY03/2020(E)from5.7xforFY03/16.

FinancialAnalysisAsshownkeyfinancialratiosintablebelow,Asahihasstrongbalancesheet,asnetcashandnetworkingcapitalaswellaspositivefreecashflow.Grossprofitmarginhasimprovedoveryearswhilepreciousmetalpricesremainedlower.Thisshowsthecompany’scompetitivenessandifsalesturntoexpansion,profitmarginsandcashflowssignificantlyimprove.


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InvestmentRisksLowerpreciousmetalandcommodityprices(Likely,MiddleRisk)Incaseoflowerpreciousmetalandcommodityprices,recyclingbusinesshardlymakesenoughprofit.Howeverrecyclingotherthanpreciousmetalsimprovedprofitabilityfor1HFY2017duetoitsadvantagesofdealingwithwiderangeofwastematerials.Lowerpricespullprofitabilitylower,butAsahimakestheriskminimize.Regulation(Likely,Low-MiddleRisk)Recyclingbusinessrequirespermissionbygovernment.Ifregulationchangessignificantly,itwouldaffectimpactonthebusinessmodel.However,governmentorMETIpromotesrecyclingin3rdrecyclingbasicplanasofMay2013.StrongJPYrate(Likely,MidRisk)RecyclingpricesaredeterminedbypreciousmetalorcommoditypriceinJPYbaseandUSD/JPYratesignificantlyaffecttheearnings.Currenciesarefluctuateandhardlytoexpectthemovement.USD/JPYbouncebacktolowerwouldbepossible,butAsahihastriedtodevelopcustomers/supplierstomakeenoughprofit,asmentionedearlier.Globaleconomicdownturn(Likely,Mid-HighRisk)Inglobalrecession,plungingcommoditypriceanddepreciationofUSD/JPYsimultaneouslywouldoccur.Moreover,industrialproductionwilldecreaseandwastematerialsvolumewilldecline.Thiswouldresultsinlowerdemandofrecyclingproductsandlowercommodityprices.

AkiMatsumoto,[email protected]


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Appendix

date: 1/18/2017 asahi holdings (5857, jp) · 2017-03-24 · buyers (low risk): price of precious...

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