Four Japanese Chemical Small Caps
Growth, margin, yield and balance sheet in 深值国
I have been studying global small-cap chemicals for a few months, in search of opportunities. On the chemical side, the industry has been in the longest slump in memory, for almost 4 years already, and stock prices are lower than they have been in a decade. On the global side, ex-US stock valuations are also at a cyclical low versus US names.
I’m publishing the names that caught my attention in that search. My last article covered 3 Chinese chemical companies, with deep value multiples, that show growth and good cycle-average margins. This article covers 4 Japanese companies, which also show a combination of cash on the balance sheet, margins, growth, dividends, or multiples.
As far as I know, these names have rarely, if ever, been mentioned in Fintwit/Substack.
Without further ado, 行くぞ！
Disclaimer: The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. I own shares of all these companies.
Other articles on chemicals
Teaser
Note: When I comment on multiples about earnings or dividend yields, these are before netting cash from EV. That is, if I say a company has a P/E of 5x, and net cash is 60% of market cap, then the net-cash P/E is 2x, but I still say 5x.
Ishihara Chemicals - $4462.JP - 石原ケミカル株式会社
Developer of plating solutions (machinery, chemicals and processes) for PCBs. Exposed mostly to the smartphone and laptop market, but making inroads in servers. Growth of 7/8% CAGR for the past 8 years, trading at ~10x P/E (peak margins), with a dividend yield of 2% (dividend 3x since 2017), net cash and securities for 45% of market cap, and plans to repurchase shares (10% of sharecount repurchased last year).
Soken Chemical and Engineering - $4972.JP - 綜研化学
Pressure sensitive adhesives used in the digital display industry (LED/LCD/OLED). 15% CAGR since 2017, with significant exposure to China (55% of sales, most manufacturing investment). Margins usually between 5/10% but now closer to 13%. Current P/E 6/7x on peak margins. 40% of market cap is cash. Dividend yield is 4%, no plans to distribute cash.
Keiwa Incorporated - $4251.JP - 恵和株式会社
Also related to display markets, Keiwa manufactures optical films for light diffusion used in LCD displays. Largest market and manufacturing base in China. 6% CAGR since 2018, slump (recovering) since 2022, still with very good margins (15/25%). Trades at a P/E of 7/8x, with a dividend yield of 3%. Cash is ~40% of market cap, with no specific plans for distribution, albeit there have been some buybacks (4.5% of shares in 1Q25).
Natoco Co. - $4627.JP - ナトコ株式会社
More commoditized paint manufacturer, with 5% CAGR past 10 years. Trades at 11x earnings (current margins 5% on 5/10% margin-range), with net cash and securities equivalent to 130% of market cap. Payout ratio is guided for 40% of earnings, with no comments on potential distributions.
General comments
Although each company situation is different, there are a few general comments that paint a better picture of the opportunity set.
Electronics specialty chemicals
Except for Natoco, all of the companies depend on the electronics hardware cycle in Asia. Their end-markets are manufacturers of laptops, tablets and smartphones in China, Japan, Taiwan and South Korea. Hardware components is a cyclical and competitive industry.
Still, across cycles they show profitability and growth, which means their market position is somewhat protected. These are not commodity products, but rather technically complex high-purity compounds.
A deeper dive on the downstream electronics market and electronic specialty chemicals is beyond the scope of this article.
Deep value
All of the companies covered have a lot of cash on their balance sheet that is not being invested in the business.
The cash reserves provide a margin of safety, or some potential floor on price, plus some security in dividend payments. They additionally provide the promise of capital returns, via correct capital allocation.
The best catalyst in a deep value play is large dividends or repurchases. In part these companies are providing some of that, albeit slowly. They also invest, potentially at good ROEs, if the new businesses are as good as the current ones.
I would expect that the value from the balance sheets will be realized slowly rather than suddenly. Still, these names always retain that surprise optionality.
Ishihara Chemicals - $4462.JP - 石原ケミカル株式会社
Semiconductor plating
Ishihara’s main business lines are related to electronics plating.
Plating is the process by which a metallic compound is deposited in a surface. It is a step in the production of semiconductor wafers and other conductive surfaces like PCBs or displays. The company’s core business is tin and tin alloy plating, which is most exposed to markets like tablets, smartphones, and displays.
Ishihara sells complete solutions, including the machinery and the chemicals. The main plating segment does not differentiate between sales of chemicals and machinery. In addition to tin plating solutions, the company manufactures specialty ceramics pieces used in electronics machinery, and chemical process control equipment. That is, Ishihara is a mix between a chemical and a manufacturing process solutions company.
In addition, the company is making inroads into copper plating. In particular, it recently announced the first installation of a copper plating solution in an overseas plant for high-performance packages (potentially high-performance memory).
In terms of competitive position, I believe Ishihara is strong, albeit I am not an expert in semiconductor equipment and chemicals. The company claims to be a leader in Japan in tin and tin alloy. I believe 2/3 of the company’s sales are exports (40% of total company revenues are exports and electronics is 60% of revenues), mostly to Asian semiconductor players (Taiwan 33%, China 25%, Korea 23%). This indicates some level of competitiveness. The business requires R&D investment (10% of revenues, 33% of employees). In addition, the electronics business enjoys 10/20% EBIT margins.
In terms of growth, plating is the driver of the company, not only because it is 60% of revenues and 70% of operating profits, but also because it has grown at a 9% topline CAGR since 2018 at least.
The electronics business shows cyclicality, with margins in a range of 10/20%. As of FY24 they sat at about 20%. This cyclicality has defined the company’s margins as well. It is currently at the top of the cycle.
Others
There's always weird unrelated segments with Japanese companies. In the case of Ishihara it is car polishing, painting and cleaning agents (15% of revenues) under the brand UNICON, and chemical commodities trading (25% of revenues).
The chemicals commodities trading business generates low comparative margins (2/4%), and not growing much (4% CAGR since 2018). It seems to be a legacy asset. The company started in chemicals trading 100 years ago.
UNICON, the car business, on the other hand, is more interesting. First it has sported 22/27% EBIT margins, without much volatility. Second, it has grown at a better CAGR of 6%. The business is also a legacy brand, started in 1953.
Capital allocation plans and valuation
Ishihara currently trades at a market cap of JPY 26.2 billion. The company expects to generate net earnings of JPY 2.5 billion in FY25 (ending March 2026). The company’s payout ratio has been 25%, or a dividend yield of 2.4% on the current market cap.
In addition, the company has JPY 6.5 billion in cash and JPY 5.5 billion in securities, representing 46% of its market cap. It has no debts and JPY 5 billion in total liabilities (vs ~ JPY 8 billion in current assets ex cash).
They do not expect to invest much above D&A for the next three years, approximately JPY 200/300 million on top of depreciation, mainly again to the electronics business. R&D is expected at 10% of revenues. That means the company’s potential FCF is about JPY 2.2 billion, or a potential FCF yield of 8.3%.
As mentioned, the company’s dividend payout ratio is 25%, but the dividend has tripled since 2016, and the company has stated its intentions to continue increasing it in the future. In addition, the company has stated that it expects to sell cross-shareholdings and buyback shares. Last year, it bought back about 10% of its share count.
The company expects grow revenues at a 7% CAGR, and to leverage earnings at a CAGR of 11%. 2/3s of the growth is expected to come from electronics, with the rest of the segments more muted (commodities trading adding the other 1/3).
Soken Chemical and Engineering - $4972.JP - 綜研化学
LCD display acrylic adhesives
Soken’s main business is acrylic pressure sensitive adhesives (PSAs) for optics applications (67% of revenues, undisclosed amount of profits).
This is a key component of all kinds of displays, in particular LCD. The adhesives have to keep the pieces together without movement, but at the same time allow light to go through without interference.
LCD displays are a mostly Chinese industry (70% of global capacity) and most of the company’s investments (70% of CAPEX past five years) and sales (55% of aggregate revenues) are in China. That is, the optical business of Soken is mostly a Chinese business, despite the company being Japanese.
The LCD display industry has seen several waves of cycles on each of the display sizes and technologies. Soken has seen these cycles, albeit margins have been on the 5/10% range, not that volatile, and revenues did not fell much. The company seems to have invested a lot countercyclically in 2021/22 in capacity in China, at a time when the industry seems to have been suffering a downturn from overcapacity. Investing during the downturn seems to have produced market share gains and higher margins in the current leg, with EBIT reaching 12%+. Since 2017, Soken has grown at a 15% CAGR, entirely driven by the adhesives business.
Capital allocation plans and valuation
Soken currently trades at a market cap of JPY 28 billion, and estimates earnings in FY25 (ending March 2026) of JPY 4 billion. This represents a 14% earnings yield.
The company is about to complete its Mid-Term plan and CAPEX has been below D&A since 2022, meaning FCF is higher than net income. For FY25 the trend is expected to reverse towards higher investment again, for JPY 1.5 billion above D&A.
Soken has established a 30% dividend payout ratio, which on the earnings above implies a 4% dividend yield. The company has not commented on additional plans to distribute funds to shareholders, but has cash and securities for JPY 16 billion, against debt of JPY 4 billion (so net cash and securities for 40% of its market cap).
The company’s 1H25 results are expected to be really bad, as much as 30% down on operating income, but the company expects this to be temporary, and had already guided for such a result in at the end of FY24 (March 2025). Still, the industry behind the company’s main revenue driver might suffer from cycles ahead, specially with the effect of tariffs. This might be behind the current discount on earnings.
Keiwa Incorporated - $4251.JP - 恵和株式会社
Optical films
Keiwa’s products are probably in contact with Soken’s products. The company manufactures optical films used in LCD displays (I was not able to determine exactly which part, as LCD displays have dozens of layers). The optical segment is almost 80% of revenues and more than 95% of profits.
Just like Soken, the company’s business is very exposed to the Chinese LCD industry. The company’s assets are in Japan (90% of fixed assets), but exports are 80% of the optical segment’s revenues, and China is 50% of total company revenues.
Despite the cyclicality in revenues and margins, the business’ margins are high, as much as 30/40% at the segment level. The company’s pre-COVID margins are lower because when it went public, the other segment (construction supplies) was a larger share of revenues (40% of sales) and it has a very low margin (0-2%). However, at the time the optical segment already had 25% margins.
Capital allocation plans and valuation
The company’s market cap is JPY 21 billion, and it expects to generate net income this year of JPY 2.6 billion, or a P/E of 7/8x.
For 2025 the company expects lower aggregate margins, with EBIT at 16% versus 24% for FY24, with flat revenues. However, I don’t think the optical business is going to do much worse. Rather, it seems that operating margins will be affected by impairment in the other segment, and by FX variations. Unfortunately, my AI Japanese translation skills (and Keiwa’s kind of convoluted financials) are not helping here.
The company’s dividend payout policy is 25%, or a 3% dividend yield (Yahoo Finance says 6% for some reason). It had established a plan to buy back as much as 5% of its shares in 2025, and it was fully carried out in 1Q25, with no renewal.
The company has about JPY 8 billion in cash (38% of market cap) with no debt. However, the company is expecting to invest JPY 5 billion, or almost 2x D&A next year. That will remove from FCF.
Natoco Co. - $4627.JP - ナトコ株式会社
Industrial paints
Natoco manufactures (or maybe I should say prepares) paints, coatings and solvents for industrial uses.
The business is significantly less specialized than the previous companies. Still, given that the company participates in many segments (machinery, furniture, buildings, and even electronics), and seems to have a huge number of SKUs, it seems that it has some level of customer-supplier stickiness. This shows up in margins, around 5/10% for most of the past two decades. The company has sported a very long-term 4% CAGR, and expects to continue growing at about the same rate going forward.
Capital allocation plans and valuation
The company trades at a market cap of JPY 11 billion. It expects to generate JPY 1 billion in net earnings in FY25, or a P/E of about 11x. Natoco expects to generate JPY 2 billion in operating income in FY27, versus JPY 1.5 billion on a TTM basis. It does not expect a significant margin cyclical recovery, but only topline growth.
The company has JPY 10.5 billion in cash, and JPY 3 billion in securities (130% of market cap). The company’s dividend payout policy is 40%, implying a dividend yield of about 3%. The company has stated plans to invest JPY 6 billion in the next few years on M&A, but this is expected to come from CFO, so that the cash reserves remain free, albeit unallocated.
Conclusions and risks
These companies are not exempt from risks.
One is a cyclical reversal in Asian, specially Chinese, electronics, in particular displays. Another one is a revaluation of the Yen, decreasing competitiveness, as these companies are exporters. For the companies manufacturing in China, tariffs are also a risk. The macro and geopolitics risks are hard to predict for any country, and for the industry cycle risk a more detailed industrial analysis is needed.
Still, the companies offer some protections.
They are specialized and earn good margins in technical industries. They were growing before the Yen depreciation and during a decelerating China. Finally, they have strong balance sheets with low impact on the stock price.
This is what I believe makes them interesting.
Lots of cheap chemical companies in Japan! Many net nets. I own 4627 from your list. Don't expect to get rich owning it, but it's too darn cheap.