Newsletters - Asset Value Investors

AJOT

C Uyemura • October 2022

Having been one of the largest detractors earlier in the year, C Uyemura was the second largest contributor over the month with a share price increase of +12% adding 27bps to returns. C Uyemura manufactures highly specialised plating chemicals used in a wide variety of semiconductor products, including chips used in electric vehicle production which the Company expects to grow at a CAGR of 20-25%. They have so far been resilient to cost pressures, successfully passing on higher metal prices to customers and maintaining a near 20% operating margin. The market seems to underappreciate the quality of C Uyemura’s business, with its shares trading on an FCF yield of 8% and an EV/EBIT multiple of just 5.0x.

AJOT

C Uyemura • Q2 2022

On share price strength and increasing valuations, we slightly reduced our position in C Uyemura, and exited our small position in KING, selling into an off-market buyback program (at the prevailing share price). KING trades with net cash covering over 100% of its market cap and we had made good progress with our engagement, encouraging the Company to launch an e-commerce strategy and renovate its real estate portfolio. However, with a large percentage of allegiant shareholders on the register, we felt it better to focus our efforts elsewhere. The investment returned an underwhelming 4.1% vs 14.6% for the MSCI Japan Small Cap Index, as KING suffered from the closure of its stores during the COVID-induced lockdowns. The share price did however, fare better than peers, which over the same period fell by an average -45.1%.

AJOT

C Uyemura • May 2022

The standout performer over the month was C Uyemura whose +20.5% share price increase added 115bps to performance. C Uyemura manufactures specialised plating chemicals used in a variety of high-end applications from automotives to data centres. It is benefitting from strong end demand with its customers aggressively increasing manufacturing capacity. Profits grew 47% last year, after 26% growth the year before. Accompanying the strong profits was a more generous shareholder return policy. Next year’s dividend will be 38% higher, which is twice the dividend two years ago, and in combination with share buybacks, C Uyemura is targeting a 50% total shareholder return ratio. We have been actively engaging behind the scenes, and along with less tangible improvements, such as a mid-term plan and a renewed website, have been encouraged by management’s responses.

Despite the improvements and undemanding 4.8x EV/EBIT valuation, we decided to trim the position slightly to 5.3% of NAV at the end of the month vs 6.0% at the start. With several companies in our universe seeing share prices falling to multi-year lows we felt it sensible to reduce exposure to C Uyemura, which is not without cyclical downside risk, to build firepower for new opportunities.

AJOT

C Uyemura • Q4 2021

Following closely behind was C Uyemura adding 169bps, with a price increase of +32%. C Uyemura has been a beneficiary of increased electronic demand, most notably from its exposure to semiconductors. It supplies plating chemicals needed for electrical conductivity in chips and circuit boards, with the main end products being smartphones and automobiles. Given both the granularity and sensitivity of electronic circuits C Uyemura’s products are hard to replicate, which is why it has been able to achieve operating margins of more than 20% in its chemicals segment. Over the quarter C Uyemura reported H1 YoY profit growth of +64% and revised up its full year guidance by +43% to a record high, forecasting full year growth of +26%. C Uyemura trades on a 3.9x EV/EBIT and over 6% free-cash-flow yield (12% if it paid out all its cash). Despite releasing its first mid-term plan and committing to share buybacks, C Uyemura’s valuation hasn’t rerated, and the share price strength has been driven almost entirely by earnings growth. Considering the lowly valuation, strong earnings growth, and improved shareholder returns, we don’t mind that C Uyemura has become a 7.0% weight and top five position.

AJOT

C Uyemura • Q3 2021

C Uyemura’s -5% share price return can be attributed to little more than profit taking, having risen by +31% in the first 6 months of the year vs +10% for the MSCI Japan Small Cap Index. C Uyemura has been a beneficiary of increased electronic componentry demand, and for the last quarter saw sales and profits grow +28% and +43% respectively. FY guidance for a -12% fall in profits looks overly conservative and coupled with several shareholder friendly initiatives announced earlier this year, we expect that increased investor interest in C Uyemura can help lift its unjustifiably low 3.9x EV/EBIT valuation.

AJOT

C Uyemura • Q2 2021

C Uyemura, a manufacturer of chemicals used in the production of electronic devices, was the second largest contributor adding 101bps to performance as its share price rose +20%.

We put in a significant amount of effort to our private engagement, suggesting multiple ways in which C Uyemura could increase its corporate value. It was therefore pleasing that, in May, C Uyemura released a mid-term business plan for the first time, announced a new stock-based compensation scheme for directors, a 2-for-1 stock split to improve liquidity, a 9% buyback over the next 3 years and revised earnings upwards by +22% (to the highest in the Company’s history). The market reacted favourably to the news, and we think this could be the start of a change in investors’ perception of C Uyemura from a sleepy family-orientated company, to a more progressive shareholder-friendly one.

Despite the strong share price appreciation, C Uyemura still trades on a modest 4.6x EV/EBIT multiple, with net cash and investment securities covering 53% of its market cap. With C Uyemura being a candidate for promotion to the Prime Section under the new Tokyo Stock Exchange market structure, coupled with a strong earnings backdrop, we are optimistic about C Uyemura’s prospects.

AJOT

C Uyemura • May 2021

Over the month the largest contributors were Secom Joshinetsu (adding 65bps to performance) and C Uyemura (61bps). Alongside a 38% YoY increase in profits, C Uyemura announced a 2-for-1 stock split; the introduction of stock-based compensation; a mid-term management plan for the first time; and 8% worth of buybacks over the next three years.

AJOT

C Uyemura • October 2019

During October three companies in AJOT announced buybacks: Fukuda Denshi announced a 1% buyback, C Uyemura 2% and Sekisui Jushi 7%. None of these companies have announced buybacks since we launched AJOT and we saw commensurate share price reactions. Fukuda Denshi rose +2%, C Uyemura +19% over the following two days and Sekisui Jushi +7%. We have articulated our views on capital efficiency to all three companies and recently wrote extensive letters to Fukuda Denshi and C Uyemura in September and August. While it is impossible to attribute these buybacks solely to our engagement, we take comfort that senior management are agreeing with our arguments.

Since the launch of AJOT, the total number of companies that have conducted share buybacks stands at 11. After only a year and with a portfolio of just 28 companies we are pleased with this progress. We are seeing improved buybacks across all of Japan, with TOPIX-announced buybacks for Jan-October up +136% year-on-year. We think this is testament to the structural shift in attitudes underway in Corporate Japan.