🎌 Stock Focus : Kawai Musical 河合楽器製作所 [7952]

 

As can be seen from the snapshots in '58,'76,'78,'90,'91,'96,'98,'16, '19 & '23, the piano maker & instructor's book value & capital adequacy[CAR] has increased steadily over time as well as cumulatively +64% & 16% points respectively compared to 3 decades ago [note the increasing losses in the consecutive years '94 till '96]. In 1996, Kawai, on top of waning demand for upright pianos in the US & Japan, was also hobbled by 'endaka' or yen strength while the opposite situation currently should contribute to improving results, EPS having taken a sharp dip to ¥47 last year, down from a record ¥587, then ¥427 & ¥323.7 in the previous years '22-'24. 

Curiously, the stock more than doubled by June '18  from mid-'17 even though its EPS only rose 26% from '17-'19  & then nearly doubled by July '21 perhaps anticipating the +95% rise in EPS from '21-'22. The sole dividend in March has increased 27% since that EPS record 4 years ago & stands 90% higher than 30 years ago when earnings were spotty despite turnover being 20% lower now, yet projected '26 revenue is still 39% above its lowest level in '13 & only 35% below its all-time record of  ¥117.675 billion in 1991. This forecast figure of  ¥76 billion was first surpassed in '86 when the NTA was 35% lower. The latest Grahamian net-net per share is about ¥1,856, compared to -ve working capital in 1998, when borrowings were 7.5x higher. The ¥520 low in '02, which amazingly matched the 1958 low four years after listing, was printed in the midst of big impairment & restructuring losses of (¥3.342 billion),(¥2.715 billion) & (¥7.077 billion) in '02 - '04, causing NTA to plunge to ¥455 in '05 [ low of ¥320 in '04], when CAR bottomed out at 12.7% before rising to 28-43% in the next 8 years. Dividends halted in the 5 years between '02-'06.

 

 I bought it today after stalking the stock for many months & was delighted to get a fill at  ¥2,778, just two ticks above the intraday low & with 63% of the commission discounted by the close. This is a price barely above the '95 low of ¥2,750, when the yen's strength was a headwind rather than the tailwind which it is now in light of the export ratio exceeding 40%.

Possible risks? The de facto China boycott of Japanese exports due to the recent political spat. Also interesting is the fact that my entry point was first surpassed way back in 1960[!] before the price declined nearly 90% from its 1961 peak of ¥3,870 by 1969. The old record was approached once again in 1973, followed by a 46% drop by the tail end of the 1974 bear market. It rose above this entry level price the next year & did not revisit this price despite a 65% decline from the 1976 fresh record of ¥8,180 in the following 5 years. Post '85 Plaza Accord, the stock nearly quintupled in the Bubble Era to set a fresh high of ¥15,200 by Feb '90. Based just on the intervals between historic highs, Kawai's next peak could come in '30 -'31, perhaps on the wave of what some project as 100,000 points on the Nikkei index!

Another area of concern is that free cash flow is (¥3.989 billion), accompanied by operating cashflow of (¥1.698 billion) in '25.  

A 44% discount to book that I obtained, backed by a forecast EPS that is double '25's figure, plus the maintained 3.4% dividend, will be comprise a buffer of safety for this investment choice that could bear fruit as early as March!

*As an aside, I have honed my piano playing skills on a Kawai instrument that has lasted 45 years & still works well despite some very minor issues: a testament to the quality of their product!