5423.T - Tokyo Steel Manufacturing

[Nelg]

Have been looking at some Japanese companies and was wondering if anyone has a good way to translate Japanese annual reports. The below information may not be entirely correct as I've tried to gather it from a bunch of (English) sources and I'm also not familiar with steel companies, so any insights are really appreciated!

 

Tokyo Steel Manufacturing (5423.T) came up on a screen. A quick overview - all numbers in USD for ease of viewing.

- $750m market cap; $631m cash/equivalents with negligible debt as at Sept 30

- LTM 3Q20 OCFs of $235m, capex of $68m = LTM FCF of $167m

- Since 2015, FCF has ranged from $99-229m/year

- LTM share repurchases of $93m (plus another $133m repurchases in the prior 3 years) + dividends of $19m

 

It is the largest EAF steel producer in Japan, and operates 4 plants with combined ~6mt/year of production capacity. Its newest plant (built in ~2010) I think is the largest in the world at 2.5mt, next oldest was built in 1995, and the other 2 plants were built in the 1960s though one of these plants was upgraded in 2006ish.

 

Products vary by plant, but are generally steel beams used in construction and flat/rolled coils. I understand they're trying to make more steel products that go into cars. Almost all their steel is sold within Japan.

 

Steel sales volumes are currently weak. I believe their largest/newest plant is only running at ~40% capacity. There are at least 2 analysts (Jefferies and Morgan Stanley) that cover it and there is some concern that China has just removed its scrap steel import restrictions, meaning scrap steel prices are expected to increase = higher input costs for EAF plants. Even so, both analysts are forecasting FCF of ~$100m/year for the next few years. No idea whether that is too high or low.

 

Some historical background that I can find:

- Since 1998, there have been 3 years with negative operating CFs (2010 -$51m, 2013 -$31m, and 2014 -$25m). There were negative EBITDA margins in 1994-1997, but I don't have CF statement info for those years.

- Since 1998, operating CFs excl-2005 (see comment below) have a mean and median of ~$150m, with a standard deviation of $125m.

- During 2006-2011, capex was enormous at $2.2b cumulatively. This was due to the upgrade of one of their 1960s plants, and building the new plant. In 2005, the company generated anomalous/record operating CFs of $734m vs capex of $49m, and the cash on hand ($1.2b at YE 2005) must've been burning a hole in their pocket. 

- Maintenance capex currently appears to be running at ~$70m/year, but has been increasing in recent years. Other than the 2006-2011 period, capex levels have consistently been ~$30-70m.

 

I understand in Japan/Asia, blast furnace plants are still mostly used. Comparing Tokyo Steel (EAF) with JFE and Nippon Steel (I believe they're mostly BF plants) in the last ~30 years, Tokyo Steel's EBIT margins have historically had a higher "beta" - during good times, it was ~2x JFE and Nippon Steel's margins, but the latter fared much better during the 1990s and early 2010s downturns.

 

In the last ~5 years, Tokyo Steel, JFE and Nippon Steel's margins have all seemed to converge, with Tokyo Steel being the outperformer, and interestingly JFE and Nippon Steel's EBIT margins have declined in the last 2 years while Tokyo Steel's has increased. But I have no idea how/why/if this is sustainable. 

 

I initially got interested in Tokyo Steel because they're one of the very few Japanese companies I've seen that are using their cash to aggressively repurchase shares (I'd love to hear of others though!).

[neil9327]

It seems to have its annual report (with accounts) in English:

http://www.tokyosteel.co.jp/pdf/annual_report.pdf

[AG]

was wondering if anyone has a good way to translate Japanese annual reports.

 

I use this page to translate pdfs and it works quite well. They use the google translate engine.

https://www.onlinedoctranslator.com/en/translationform

[Spekulatius]

was wondering if anyone has a good way to translate Japanese annual reports.

 

I use this page to translate pdfs and it works quite well. They use the google translate engine.

https://www.onlinedoctranslator.com/en/translationform

 

Yes, that site is great. I also use tikr.com for a first look at the financials:

https://app.tikr.com/stock/financials?cid=875981&tid=20178992

[Nelg]

Thanks for the suggestions everyone. I do have access to Capital IQ for financials, and I just double-checked the numbers from the broker reports and the one English annual report on their website.

 

Any thoughts/insights anyone has on what's happening in the EAF vs BF industry in Asia/Japan (or anything else on the company) would be much appreciated too!

[Morgan]

Thank you Nelg for the write up. This looks quite interesting. A few questions:

 

[*]Do you think sales will continue to decrease next year and the next five years? Or is this slump mostly from COVID-19? Or is there a structural reason Tokyo Steel Manufacturing is in a less competitive position than other steel companies?

[*]Since China has removed their scrap steel import restrictions, do you think this will affect the global steel scrap market? i.e., will the cost of scrap go up for all steel manufactures and thus the increase costs will be passed on to customers or will countries geographically closest to China bear the brunt of increased costs? (Is the scrap market global, or is the price of scrap in South Africa different than the price in Japan?)

[*]Will the company need to retool some portion of their plants to make steel for cars or have they already spent the money to do that?

[*]As Japans population declines, public projects will presumably decline as well. How well do you think they'll be able to sell abroad? How long will it take to generate meaningful sales abroad?

[*]The management is quite old except one guy (pg 13 in this: http://www.tokyosteel.co.jp/pdf/annual_report.pdf). Do you know if they have a succession plan for the next 5-10 years. It looks like most of the upper management will be retiring soon-ish.

[*]Do you have a rough idea of what universities the majority of the management attended? Japanese business is very much relationship based and much of those relationships are based on what university you graduated from. The more people in management from University of Tokyo, Waseda University and Keio University the better.

[Nelg]

I'll take a crack at some of the questions but you may find the answers lacking. I'm still in the early stages of learning about the industry and company in general, and not quite sure what types of things to look out for other than comparing financial performance vs other companies.

 

Sales:

I believe there was a minor slump going into covid, but most of the decline this year was overwhelmingly due to covid. Next year will probably be better than this year (in terms of revenues), and I understand domestic steel sentiment/prices are improving right now, and the company raised prices this month.

 

Cost competitiveness:

Apparently ~85% of Tokyo Steel's SG&A is trucking fees (ie, linked to domestic gasoline prices) to client sites...can't imagine this helps their cost competitiveness. On China scrap steel imports, I understand China's scrap steel imports have effectively been nil since 2019. From ~2014-2018, China was importing 200k tonnes; in the few years prior they were importing ~300-600k tonnes.

 

I assume restarting imports would impact the global prices of scrap steel...in the short-term, presumably most countries would see a rebound in industrial activity, and in the long-term I understand (?) China is trying to become more self-sustaining for their own scrap steel, along with all the other stuff reported in the news. I have no idea what the impact (net of the above comment) over time will be.

 

Retooling for steel in cars/selling abroad:

Quoting from a Jefferies initiating coverage report from 2015: "Tokyo Steel made a huge investment and built the Tahara plant,

the company’s first new factory in decades, opened in ’09 in Tahara city, located 4.2km from the Toyota facility that produces Lexus models. Long story short, the expansion to auto steel didn’t work out as expected, and the company had to take a massive haircut. Tokyo Steel wrote down the whole plant in Mar ’13.

 

Tokyo Steel spent ¥160bn+ to build a top-notch facility in Aichi prefecture, making it easier to ship metal sheets to carmakers and electronics producers. The rationale for this was 1) construction demand in Japan was in a structural declining trend, and 2) auto/electronics were in an upswing. Also, the company had a lot of cash in hand, and demand was ripe when they did the FID."

 

Other than that, I really don't know!

 

Management/succession plan:

I don't know on succession planning. Fwiw, from that same Jefferies report: "Tokyo Steel’s president, Toshikazu Nishimoto, is the first one outside the Ikegami family appointed to top management in Jun ’06. He has extensive experience in managing the steelmaker; we believe Tokyo Steel regrets the Tahara mishap and is now more careful in allocating capital." 

 

Universities:

Interesting question, I had never thought about that. The only person's education background I can find is Toshikazu Nishimoto's, who went to Waseda.

 

 

 

I was viewing Tokyo Steel more as a candidate for a basket of these types of situations - being something that looks extremely cheap with a management team that is doing something about it (ie, repurchases), and where the business is not obviously atrocious.

 

I'd like to get a better sense of where this company sits on the regional cost curve...but as this involves learning about a couple of related industries as well as other regional (Korea/China) players, it seems a little more complicated than I thought.

 

Anyway, I figure if they go through a rough patch, they may burn say $100m of cash (based on historical financials). So then they'll have $500m of cash instead of $630m, but I figure their land+PP&E is probably also worth a couple billion; as long as I'm somewhat in the ballpark of ~$100m through-the-cycle annual FCF and they keep repurchasing shares, I think the investment will do OK. I'm not sure if this is too naive of a thesis though - I'd like to hear why the future may not be like the past that I described in my initial post (OCF history since 1998).

 

Some of your questions get to the heart of what might go structurally wrong with the business, and I have to admit I don't have a good sense of that right now.