Sold Nansin Co. (TYO:7399)

Nansin (TYO:7399) has been part of my Japanese basket of stocks for a few years. I’ve sold my shares recently. Unfortunately this wasn’t due to a rising market valuation. Nansin is as cheap as ever and looks like a nice bargain at first glance:

Share price: ¥543
Shares outstanding: 6.77m
Market cap: ¥3.7bn
Cash & deposits: ¥3.1bn
Price/NCAV (incl. long-term investments): 0.70x
Price/BV: 0.36x

Nansin’s revenue and profits have been pretty stable. The company also pays a small dividend. They are active in a very boring industry: the manufacture and sale of casters and dollies. It seems like a great candidate for a basket of net-nets or book value bargains.

I do monitor my Japanese holdings and try to review some company announcements from time to time, using Google Translate to try to make sense of things. A couple of Nansin’s filings from May, 2019 caught my eye.

Large share buyback

The first press release from May 15th announced the completion of a share buyback. The company bought back 900k shares, or 11.7% of the outstanding shares. The purchase price was ¥550 per share for a total of ¥495m. This is a huge deal for this company, because KaijiNet didn’t show any meaningful share repurchases for this company since 2008.

Large insider sale

The second filing, also posted on May 15th, showed a change in ownership. It looks like a member of the Saito family, which holds a number of managerial positions at Nansin, has sold 450k shares and decreased his ownership from 12.6% to 7.6%. Based on share ownership data from Marketscreener.com I think the person selling was Nobufusa Saito, the 75 year old former Chairman of the company.

So it appears that an insider who has been involved with Nansin for at least a few decades has sold a big chunk of his stock to the company at an extremely low price.

What does this mean for outside shareholders?

I think this is bad news. If an insider is willing to sell his stock at this price, I don’t think shareholders can expect to receive a much more reasonable price for their shares either. You hear regularly in financial media that Japanese management doesn’t focus much on shareholder value, but much more on things like employee well-being and extreme financial strength of the company. I think this transaction is just an example of how far this can go. Insiders themselves will sometimes sell their stock to the company at ridiculously low prices.

I think it is better to avoid the companies that are showing the most extreme signs of shareholder neglect. This transaction makes me pessimistic about any positive scenario developing at Nansin. Perhaps you could argue that this insider sale makes it easier for an activist to get a foot in the door, but I think that if management believed that risk existed, this insider sale wouldn’t have happened in the first place. I’m also not a big believer in activism in Japan in general, especially not in illiquid micro-caps that are not of interest to large investment funds.

This insider sale also makes it very unlikely that management is willing to think about a sale of the company in the coming years, because the former chairman could have made a lot more money by holding on to his shares. A merger is always an unlikely scenario, but mergers do happen in Japan. An example on this blog was Solcom in 2018. So a much decreased chance of anything like that happening should be factored in now.

All in all, I really didn’t like this development and decided to sell my shares, even though, when just looking at the numbers, the valuation looks very compelling.

Disclosure: no position in Nansin (TYO:7399)

Posted in Japanese stocks and tagged .

7 Comments

  1. Hi, Thanks. I completely missed the share repurchase of Nansin. Strangely it does not show up in the cash-flow statement (which I usually monitor) but maybe I overlooked something.

    I did not understand something in your argument: “You hear regularly in financial media that Japanese management doesn’t focus much on shareholder value, but much more on things like employee well-being and extreme financial strength of the company. I think this transaction is just an example of how far this can go. Insiders themselves will sometimes sell their stock to the company at ridiculously low prices. ”

    What’s the link between insiders selling at low prices to the company, and neglect of shareholder value? I didnt get that. Also note that the transaction is between two “insiders” (the buyer being the former chairman), but of course the argument can be made that current management is more involved than the previous chairman.

    • Hi Lupo Lupus,

      I’ve relied on KaijiNet and the press releases for the share count. I don’t think this company produces quarterly cash flow statements, but I’ve not dug into the Japanese filings.

      My argument is basically that some Japanese companies are so extreme in their neglect of creating shareholder value that some insiders will not even do the things that would benefit themselves the most. They would rather sell their stock back to the company at some depressed price and be seen to act honorably or something (I’m just guessing here, I really don’t know what they think) than to just do the things that would make everyone richer, most notably themselves. For example: do a tender offer that is open to all shareholders at a price that is somewhere close to book value.

      One of the reasons I wanted to write this post is that I think some investors have the tendency to see all share buybacks at low prices as good news for shareholders, but I think there are exceptions. Buybacks from insiders at very depressed prices do not seem like good news to me. Either the stock is not worth as much as I thought, or creating value for shareholders is much lower on the list of management’s priorities than I thought. Here I think it’s probably the latter.

      Another exception could be share buybacks at depressed prices that would make it easier for insiders to delist a company in the future. If you can’t hold shares in a delisted, essentially private company, you’ll be forced to sell in the future and the value created by the previous buybacks will be harvested by the people who are able to hold that stock. I’ve seen some examples of this in Australia.

      You said: “(the buyer being the former chairman)”. Did you mean “seller”? Because from what I’ve read, it seems the former chairman sold 450k shares and the company bought these shares, not another insider. KaijiNet also shows the company is holding ~942k shares of treasury stock as of June 30, versus 42k treasury shares in March. I think the filing from May 14 also shows that the former chairman has indicated he wanted to sell shares in this offer: https://www.nansin.co.jp/ir/news/tostnet-3.php

  2. Hi, thanks for the clarification. Interesting point indeed. Buybacks at depressed prices from outside shareholders are probably a good idea, but if the buyback is from insiders its less clear. Agreed!

    Sorry about the confusion about buying and selling insiders, I misread something in your article.

    Nansin is on my sell-list as well, like you I am losing faith in management creating acceptable returns going forward. They continue to reinvest earnings into low margin business, and let excess cash get rusty on the balance sheet!

  3. Thanks for your thoughts about this, I also missed the news of the share buyback. As you surely know, reasoning why an insider buys shares is a lot easier than figuring out why an insider sells his shares. There are a million reasons why people sell their shares (did you see this picture of Mr. Saito his giant mansion on the beach?). He also kept about ~50% of his shares, so it’s not all bad.

    Selling such a cheap company while Mr. Saito just needed to pay off his new Maserati seems like a shame. So at that point it becomes a matter of figuring out the odds of him selling because of reasons relating to the company or for personal reasons. I find this impossible to estimate but if he didn’t sell for personal reasons, I agree that it would be bad news and it would destroy a lot of the upside for Nansin. Given the number of cheap small-cap Japanese companies it might be better to look for another steady boring business.

    Disclaimer: AFAIK Mr. Saito does not have a beach mansion or a maserati.

    • Hi David,

      Yes, there can be good reasons for an insider sale. I think the price at which he sold to the company is the most important factor here. What are his reasons for selling at such a depressed price and what does that mean for other shareholders? It seems super unlikely to me that Mr. Saito was in any sort of financial need, but who knows? Perhaps there is a good reason after all.

      I’ve seen this once before in Japan, but I’ve forgotten the company name. That was also a case where a relatively old insider was selling a big block of stock back to the company at a super low price. I think this is just what some of corporate Japan sees as “the right thing to do”. When I see indications of that type of thinking I’m likely to just sell and move on. Like you said, there’s no shortage of cheap small caps in Japan.

  4. Good post. I’m less pessimistic about what this means for outside shareholders though. A 75 year-old former chairman selling 1/3 of his shares seems perfectly sensible to me. Yes, the price might be low, but it is the market price .. I’d be more worried if they bought back shares from insiders at a premium.

    From the companies perspective I really like that the company is buying back shares at depressed prices. And from the seller’s perspective: we’re talking about a 75-year old Japanese guy. I imagine there are a lot of cultural / societal reason why the sale was desirable or even socially compulsory, regardless of the valuation. I doubt the seller tried to calculate the IRR of holding vs. selling. Basically I don’t read too much in the transaction and I don’t read too much in the price either.

    I’m not holding any Japanese companies because I think that they will be sold soon, because Carl Icahn will go ballistic at them or because management will become shareholder-friendly in the near term. I’m just buying them because they are ridiculously cheap. That hasn’t changed with Nansin. The transaction doesn’t really influence my thesis and I’m still happily holding.

    • Yeah, I can understand this viewpoint as well. Nansin does look super cheap when looking at the numbers.

      I would have liked to see a tender offer that was open to all shareholders at a price that was close to book value. It seems that would have been possible and would have been fair to everyone. And everyone would have been richer. But, like you said, there are probably non-financial reasons why that didn’t happen.

      This transaction seems to be the only meaningful buyback in the history of the company. There are a bunch of Japanese companies that do have a much better record of buying back stock (not from insiders) at very depressed prices. I also think this transaction increases the chance that in the next few years the share price will anchor around the price that the insider was paid. Ultimately I just lost patience here and this transaction was the final push that made me sell.

Leave a Reply

Your email address will not be published. Required fields are marked *