Iwatsuka 2221
June 28, 2016 - 11:58am EST by
2016 2017
Price: 3,550.00 EPS 0 0
Shares Out. (in M): 6 P/E 0 0
Market Cap (in $M): 197 P/FCF 0 0
Net Debt (in $M): -4 EBIT 0 0
TEV ($): 193 TEV/EBIT 0 0

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  • Discount to NAV


Want Want China (151.HK) can be bought 50% off, by buying 2221.JP instead.  This is not the result of temporary market dislocations.  It represents a discount due to illiquidity, corporate governance and capital allocation.  But this discount appears excessive relative to history, and the perceived risk of future value destruction.   





As other VIC readers have pointed out, a visit to Want Want China’s HQ can be an unconventional experience[1] [2].  It might also be profitable. The bust of Mr Maki Keisaku[3] shows why.  Referred to by the company as the “Father of Want Want”, he was also the father of Iwatsuka’s President Mr Maki Haruo, and left a legacy for all Iwatsuka’s shareholders[4]: a stake in Want Want China worth $418 million pre-tax today, compared to Iwatsuka’s enterprise value of $193 million.





The significant “hidden” value of Want Want shares held by Iwatsuka has been known to fully paid-up readers of Wikipedia since at least 2009[5].   This is not investment advice and is not intended to be distributed in any jurisdiction where it would contravene local laws.  The author or affiliated parties might buy or sell this or related securities without further notification. 



Investment Thesis


Discount to NAV play.


1.     Stock trades at more than 50% discount to NAV.

a.     TBV comprises 608,434,480 shares of Want Want Holdings (151.HK) that Iwatsuka owns[6], fully taxed, plus small assets that support Iwatsuka’s operating business. 

b.     So TBV should be a good indicator of intrinsic value.

2.     This is an average discount for this stock (range since 2008: 0.3x-0.7x TBV).

3.     But the underlying is cheaper than normal at 16x P/E.

4.     Downside risks:

a.     Illiquidity discount widens.  Most buyers of Want Want China, a $8.7 billion market cap, cannot instead buy the much cheaper Iwatsuka due to its mere $197 million market cap.

b.     Value destruction by the operating business / poor capital allocation.  The 20% share of the Japanese rice cracker market has generated consistent but small operating profits for the past 25 years.  Nevertheless most people seem more prone to blow windfalls than fruits of their own endeavors.  Dividends from the newly-public Want Want China were deployed into a significant marketing campaign for Iwatsuka post IPO, which did not meaningfully increase its profitability or value.  Maybe management learnt their lesson.  

c.     Poor corporate governance.  Managers are partially aligned with shareholders at both companies.  Insiders own 15% of Iwatsuka and 50% of Want Want China[7].  Iwatsuka’s Maki Haruo sits on Want Want China’s board.

5.     Upside for the stock.  This only really works if in the long term Want Want China positively compounds and Iwatsuka management does not destroy value.  Short-term catalysts are absent: activism is discouraged by takeover defenses; management is unlikely to sell the stake in the near future.



Why now?


·      Underlying security is the least expensive since 2008 IPO.

·      Discount to NAV is back to its historical average, which is cheap.

·      Ugly and unpopular.  Buying the stock unhedged represents long 151.HK, long China, short ¥ FX.  Not the most obvious or elegant thesis to discuss at the Hamptons.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.



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