Waida
Manufacturing Limited
As of March 2019 [Jasdaq:6158]
(USD)
Market
Cap 5.47-5.8B (USD 50-55M)
Net
sales 8.74B (USD 80.8M)
EBIT 2.06B
Debt
894M
Cash
& S.T Inv. 3.98B
Enterprise
Value 5470 + 894 – 3940 = 2.424B
FCF
= 1.28B
Owner’s
earnings = 1.8-2.2B (USD19-20M)
Tangible
Book Value = 8B = fixed assets (2B) + working capital (8B – 3.9B - 1.5B)
Fixed
assets = 750M machinery + 130M construction in progress = 880M
Net
Property Plant & Equipment = Fixed Assets = 880 to 980M
Working
Capital = Current Assets – Current Liabilities = 1350 – 820 = 530B
Working
Capital – Cash = 530 – 580 = 50
Immediate
liquidity = Credit Facilities + Cash = 376 + 580 = 956M
Capital
Employed =
LT
Debt + pensions + Tangible Book + Working Capital
=
278M + 20M + 1B + 530M = 1.8B
Average
annual income = 300-350M
ROIC
= 13-17%
(ROIC
for previous 4 years = 11-16%
Book
value in 2014 668M
Book
value in 2020 1.127B
2014-2020
CAGR 9-11%
Waida Manufacturing is a good bargain for quality management
in Japan producing CNC machines in the worst sector possible for CNC –
grinding. There is a slight advantage accrued by good management and great
distributors, but Waida has no true sustainable competitive advantage— which
guarantees high rates of returns over the long term— due to a crowded field.
Lathes, mills, routers all possess better profit margins and
prospects. In addition, Waida’s customer base is 60% Japanese automobile
customers, which makes its demand cyclical. They don’t have planned
obsolescence in their products—machines sold to customers 50 years ago are
still in activity. This, however, brings in after sales services which is
12-16% of annual revenues. Waida does not hold back in providing the high of
quality machines, but can they demand high prices?
Waida produces CNC carbide tool grinding machines for
cutting, and die & mold. Waida has produced and sold high precision
grinders that can grind, polish, and cut hard, brittle materials such as
cemented carbide (tungsten carbide), ceramics, and sintered diamond compacts mainly
by using diamond (silicon carbide grains) abrasive grinding.
Waida’s products have applications in manufacturing of
drills/end mills/hobs, and index able insert tools; parts for precision dies,
jigs, and tools; surface infeed grinding; and airplane-related turbine blades. CNC
grinders are sold to manufacturers in industries such as electronic parts, home
appliances, semi-conductor production, automobile parts, etc.
Howard Marks of Oaktree would always quip along the lines
of, “when everyone believes something is risky, their unwillingness to buy
usually reduces the price to the point where it’s not risky.” To add to that,
“when everyone believes something embodies no risk, they usually bid it up to
the point where it’s enormously risky.”
Well, Waida is certainly cheap at multiples of 3-4x, and
excluding cash, 1-2x. While it isn’t a completely lousy company, it absolute isn’t
top tier, and it doesn’t have strong moats. Waida has little to no competitive
advantages, but has an impressive and extensive customer list (Toyota, Nissan,
Mazda, Mitsubitshi, Asahi Diamond, Seiko, Citizen Watch, YKK, Daikin, Foxconn,
Samsung, IMC, etc) and management which has produced recurring years of high
operating margins and double digit return on capital in the last 2 years,
2019-2020 (15%). In 2014-2015, ROIC was around 4-5%.
Japan’s manufacturing industry has a pyramidal structure,
with the big companies at the top, and the remaining 90% are small to medium
enterprises supporting the top. This structure allows huge companies to become
vertically integrated in favorable activities, and leaves slim pickings for the
rest (Waida and other contractors). Waida works behind the scenes to support
different industries, but needs a lot of customers to gain bargaining power.
As of 2020, Waida, with its small work force of 170-180
employees, produces and sells machine tools for 60% automobile clients and to
other industrial sectors. New customers from the smart phone and electronics
parts industry represents a golden opportunity for additional revenues through Waida’s
high precision stamping tools. Smartphones require compact and precise parts
such as micro connectors and fine pitch connectors which can only be done by a
few machines worldwide and Waida is one of them.
In 2018, the total orders was USD81M, of which domestic sales
were USD54M and foreign sales, USD27M. Most sales were centered on the APX
series, specifically the APX-105. New models such as GIG-202 and iPG-X were
also well received by customers, and have won steady orders.
A slowdown of the Chinese economy and the US-China trade relations
declined orders for die-related grinders, especially the SPG series.
In January 2019, the Company absorbed and merged with its
wholly-owned subsidiary, Japan EMM Co., Ltd., in Hamamatsu City, Shizuoka
Prefecture and established an office in Matsu.
In 2017, domestic sales comprised of 70% of all sales, and
foreign sales was 30%. Waida has expanded their international sales in 2018 and
2019, with 40-60% of revenues coming from abroad (China, Indonesia, the Middle
East, and Europe) and United States and 50% domestic (from Japan).
Waida makes up a very small part of the entire CNC industry.
Experts forecast that by 2025, the CNC industry will expand to 105B, with the
greatest demand and growth coming from Europe at 8-10% per year. Waida hopes to
see foreign sales grow, and has opened branches in China, Thailand, Taiwan, USA
and a partnered in Germany with HAAS.
Waida opened an American North Carolina sales branch in May,
2018 and established a system for maintenance and repair works.
In Europe, Waida’s a critical sales alliance with German CNC
expert, HAAS Schleifmaschinen GmbH leads to expanding sales for cutting tools. HAAS’s
products in Asia, except for China, are promoted by Waida. Haas is a specialist
in high precision grinding technologies— they have certain machines Waida is
unable to produce for Aerospace.
For Asia, First Machinery Trade Co (FMTC) is Waida’s
exclusive distributor and agent for Indonesia. Waida also increased their market
share in Asia through a Taiwanese consolidated subsidiary, Wada Yuka Seiki Co.,
Ltd.
Waida has had a long history with Taiwan, starting from 2012
with the signing of a four-party (Taiwan’s Fair Friend Enterprise Group and Japan’s
Citizen Machinery Miyano, Marubeni, and Waida) investment agreement Aug. 28 in
Tokyo to expand in China. Together, they established a joint company in Taiwan,
the Waida Feeler Precision Machinery. On August 28, 2012, Waida acquired shares
of a Taiwan-based associate company, for 11 million yen, from Citizen Machinery
Miyano and Marubeni. This signed pact will help with purchases of locally
produced components and assist in upgrading the manufacturing.
“The deal is the largest in scale involving Taiwan and
Japan’s machine tool sectors,” Deputy MOEA Minister of Taiwan Francis Kuo-hsin
Liang said at the signing ceremony. “This partnership will serve as an example
for future bilateral industrial collaboration.” Liang said Fair Friend’s
extensive sales network in mainland China established over the past 20 years is
a major reason for the Japanese move. Fair Friend, founded in 1979, is Taiwan’s
leading supplier of machine tools with 18 recognized brand names and 30
production facilities worldwide. Citizen and Waida are known for their
specialty products and niche market expertise.
Total sales in 2018 was 8.7 billion yen (USD 80.8M), half of
all foreign revenues came from China, a quarter came from South East Asia, and
the other quarter was from other regions.
While Japan and China constitute more than half of sales,
4.39B yen or USD40M, and 2.18B yen or USD 20M respectively, sales in Europe,
despite its small contribution to revenue, has grown 4 fold from 2018 to 2019
due to a cooperation with HAAS in Germany for European cutting tools.
From March 2017 to March 2019, Domestic revenues have not
grown much, but sales in China has tripled, while sales in Asia has doubled
while other regions has increased five-fold. This growth is amazing, but
referring the past 2 decades, what is worrying is that the sales hasn’t been
consistent. Perhaps March 2019 was only a good year which cannot be sustained.
For 2019, approximately 30-33% of sales were grinders for dies
and molds. 55% were grinding machines for cutting tool related grinding
machines, other machinery (NC plotters or drawing machines) was less than 2%,
and after sales service was 18-20%.
The chairman, and CEO, Mitsuo Waida, in an interview with
Worldfolio in 2019, laments that Sony and Panasonic are going for lower priced
machinery— “During Japan’s two lost decades, competitors such as China and
Korea emerged, and their strategy was to keep prices as low as possible. One of
the main reasons why Japanese companies, especially in the home electrical
appliances and electronics, saw regional competitors catch them up is because
they forgot the importance of their own manufacturing and began outsourcing. This
can be said of Panasonic, Sony, Sharp and many big Japanese firms— this is one
of the main reasons of their decline. Our strategy is to emphasize on quality—highly
complicated, fully-automated grinding machines combined with unbeatable quality
and value.”
Waida has characteristics I fear the most. They produce
machine tools which aren’t niche enough or technologically advanced enough for extremely
delicate turbine blades or high end medical equipment, such as HAAS with more
advanced machining tools. And with their limited size both financially and in
terms of staff, they can’t scale up to compete on price. Another area to
investigate—how much of their current production is now automated?
Peer
analysis- Waida’s Competitors of similar size
Waida has a significantly higher gross margin than its peers
at 42%. However, in the last decade, it has dropped as low as 31%. Since Waida
does not have economies of scale large manufacturers enjoy, they do not compete
on price, but on durability and quality. However, cutting machines without
proprietary technology can charge higher prices. This is reflected in the
fluctuating gross margins. The high profit margins and return on capital
compared with the rest of the industry is a bonus.
Cash conversion cycle improved from 270 days in 2013 to 171
days in 2020, largely due to receivables being collected in half the time,
which is possible with a greater customer base. A single large customer leaving
will be detrimental, but not catastrophic to Waida. Days receivables is largely
in line with industry standards and nothing to write home about.
They now have greater leverage in collecting their fees
earlier. Inventory management has improved from 170-200 days to 140-150 days.
Days payable has largely remained the same at 50-60 days. Compared to its
peers, they could probably have more leeway to pay suppliers a bit later, say
80-100 days.
The quick ratio is at 4x, and current ratio is at 5.3x.
While some investors may think this is safe, I am wary, this could meant that
there may be potential working capital problems since it is so high, which
warrants further investigation.
In the big picture in the industry of CNC machines, Waida is
still a small player with a multiple of 5x.
While Waida is not drowning in excessive cash compared to
some of its peers, it has a low debt to equity ratio of 11% compared to 61% it
had in 2012.
Total assets may have increased 1.1B yen to 10.3B yen total,
but this was due to cash increases of 777M yen, and accounts receivable increasing
by 423M yen, whereas machinery and equipment only increased by 196M yen.
Change in working capital was all negative from 2010-2016,
which ranged from 250-500 million yen or about USD3-4.5M. From 2017 on forward,
there has been a positive change in working capital every year.
In the last 3 years, cash from operations has been
consistent at 1.1-2.4B yen, or USD18-22M, with capital expenditures of less
than a million dollars US. Dividends are about 250M yen or USD3M annually and
increasing. While shareholders may not benefit from buybacks, Waida has consistently
been paying a dividend.
Total equity or capital employed in 2019 would be working
capital plus tangible fixed assets. Fixed Assets were 2B yen, and Working
capital was 5.7B yen, which amounted to 7.7B yen, or USD71M. Assume capital
returned can be at a consistent rate of 20M annually. Capital returned, 20M
divided by capital employed 71M, is 28%. That’s a really high rate of return,
however, Waida is cyclical by nature, so I’d like to discount this to a range
of 13-19%.
Such a high ROIC indicates good management in finances.
However, the lack of treasury stock and initiative to do buybacks, especially
after being hit by the Corona virus is concerning. In Waida’s entire history,
the stock has only been split once on April 2005 (1 for 2).
Tangible book value has grown 15-16% from 2016-2019. Expect
the worse 2020-2022 grow at 7-10%. Growth from 2017-2018 was truly incredible. Other
products, which include HAAS machines and drawing plotters (NC machines) grew 252.5%
despite its small contribution to the bottom line at USD2M. Cutting tools increased 111% to USD44M due to
increased sales in Europe and the U.S. Dies and Molds were almost stagnant in
comparison, with 2% growth.
References:
Waida announcements and annual reports
Waida Website
HAAS website
Grinding and Cutting magazines and websites
CNC magazines and websites
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