Description

Brief Introduction 

Kobayashi (4967 JP) is one of my favourite companies in the world, a 125+ year old Japanese company, with an exceptionally wide moat, due to its "idea culture" of creating and dominating niches, with products that do not require "change" and therefore with a higher predictability. The company is as old as Coke and Wrigley's Chewing Gum and I believe meet's Mr. Buffett's threshold for a very high quality company. 

Kobayashi is rare in Japan (and Asia) for its culture of empowering employees to propose nearly 58000 new ideas every year, as a result over 30 new products are launched each year and in the past, new product contribution was as high as 20% in year 3/4.

Kobayashi has had 23 consecutive periods of profit growth and has increased dividends successively and bought back stock (during crisis periods).

Kobayashi has earned 40% returns on incremental capital even during crisis periods. It has created a ROIC tree for each business and incentivizes staff on ROIC, breaking down the key drivers. Returns on tangible equity ex cash are as high as 50%. Cost of capital negligible, so large excess value creation. It had divested its original wholesale business in 2008 (1/2 of sales), so there was a large drop in sales, but increased in margins, asset efficiency and cash conversion. 

The opportunity exists as the stock has declined over 31% this year due to lockdowns in Japan and Asia, and a sharp decline in foreign visitors to Japan. In Aug 2021, Japan had just 26000 international visitors, down 99% from Aug 2019 where it had an astounding 2.5 million! 

The company's goal is to achieve consolidated sales of Y280bn by 2030, of which Y90bn will originate from markets outside Japan, this international sales is expected to increase by 4.5 times. Currently, sales are Y150bn and Y20bn from overseas. 

At current stock price, the company trades at approx 10% normalized operating cash flow yields and 3-4% normalized free cash flow yields, earnings multiples are around 25x after adjusting for one offs and cash/LT investments. I expect over the next decade the stock to return high teens annual CAGR and potentially higher, if Mr. Market provides even better entry prices. This is not a get rich fast stock, but will certainly beat the Japanese market and elsewhere over the next decade, the company already has since 2013.

* Unfortunately, I lost my detailed draft along the edits and so I had to rewrite a shorter version below but it should provide a jist for VIC members * 

Idea Company with Exceptional Decentralized Culture is a Hidden Moat

Kobayashi has a unique philosophy of “big fish in a small pond” with 40-60% market share in niches. This means i) finding an undiscovered pond, ii) dominating the niche, iii) growing the pond large and repeating by iv) creating new niches.

Kobayashi had a history of creating niches  like body warmers, oral hygiene, lens cleaner, toilet bowl cleaners, obesity remedies, baby products, etc.  

Each year 55,000 ideas are submitted by employees, a process that began in 1982. This de-centralized culture led to new niches in new markets contributing 20-25% of sales in 4 years. Unique initiatives include President’s special award for outstanding ideas and idea competitions.

Please see below filing extract that highlights the company's exceptional idea culture 

The Netsusama Sheet Story: Kobayashi’s Unique Idea Culture

The graphic below illustrates a niche, the Netsusama Sheet. The idea was recommended by one employee. Today it sells 400mm sheets in 20 countries with 56% of sales derived outside Japan. Today, it is amongst the 12 must buy Japanese products in China.

There are hundreds of such niche products, that Kobayashi has invented that could be targetted to consumers in Asia over the next 10 years.

The company has a free and open culture, with employees encouraged to propose new ideas, each year over 57000 new ideas are proposed at all levels of the company.

Historical context : A Century of Value Creation Dominating Niches

Please see below filing extract that highlights the company's 125+ year old history of value creation.

150+ Brands and Niche Products That Consumers Love

Please see below filing extract that highlights the company's unique niche products and model for creating new markets 

Please see below filing extract that highlights the company's mission to create brands that also solve social issues (consider that Japan has one of the oldest demographics in the world).

Please see below filing extract that highlights some of the best selling products during COVID.

ROIC Tree: The Kobayashi Way

Kobayashi has earned 40% returns on incremental capital even during crisis. It has created a ROIC tree (below) for each business and incentivizes staff on ROIC, breaking down the key drivers. 

Please see below filing extract that highlights the company's own version of its ROIC tree, and its vision to be an exemplary company.

New Products

Please see below filing extract that highlights the new products the company is launching in Fall 2021. In the past, its new product contribution was as high as 20%. This figure has declined recently, and I expect it to go back up to the high teens, which is exceptional relative to its peers.

Financials 

Kobayashi has been consistently profitable for 22 years without raising debt or equity. It has 150 brands, with 43 brands having #1 market share. Like Coke and Wrigley’s, it fosters repeatable, low unit price transactions. Consumers love the products with little interest or ability to negotiate prices. The company's ROE tangible ex cash is nearly 50% and headline figures of 10% are misleading.

Kobayashi Stakeholder Relationships

Please see below filing extract that highlights the company's approach to stakeholder relationships. For a long-term competitive advantage, it is critical that companies have a positive stakeholder relationship with its ecosystem.

Risks to Thesis

Given the older demographics in Japan, it is getting harder to find young workforce and it is also pushing up personnel costs. 

New Product contribution rate staying at low teens is a risk

Disclaimer: The information contained in this VIC writeup is strictly for informational purposes only and should be considered neither an offer nor a solicitation to invest in any funds and or managed accounts, both now and in the future. The information has been obtained from or is based upon sources believed to be reliable but is not guaranteed as to its accuracy, adequacy, or completeness.  Liability for errors or omissions is expressly disclaimed. The information is provided without obligation and on the understanding that any person or entity who acts upon it does so entirely at their own risk. This presentation does not purport to be replace any managed account agreements and or fund offering documents but is to be used for explanatory purposes only.  Potential investors in funds and or managed accounts should obtain independent legal, financial, tax, accounting, and other professional advice in respect to investing. No regulatory authority has reviewed this presentation. For detailed terms and conditions and subscription process please refer to a fund’s information memorandum, fund supplement and subscription documents and or managed account documentation. The views contained in this document are views expressed by the Analyst who reserves the right to change his view to accommodate current developments.  

Catalyst

Post pandemic recovery

International sales growth 

Stock decline creates value