Nisshin Group Holdings (8881.T)
Profitable Japanese net net that's experiencing catalysts as the management is returning cash to shareholders. It's selling for a negative EBIT/EV (net cash), 5.8x MC/EBIT and 8.56% dividend yield.
Key Facts
Description: Nisshin Holdings (8881.T) is a regional real estate company in Japan operating primarily in the Tokyo metropolitan area. It is composed of a few separate but cooperating subsidiaries with the main business lines being real estate sales/development, general construction, and real estate management. It’s a net net with a long profitable history and catalysts happening right now. The company was founded in 1975 and is headquartered in Tokyo.
Track record: The company hasn’t lost money since 2008 (Great Financial Crisis). It has managed to remain profitable and double its book value since then despite the downturn in the Japanese real estate market cycle in 2018 that has been prolonged even more by Covid and the energy crisis with the construction material costs reaching a decade high.
Market cap: Its market cap as of the 25th of July 2023 is 24.07 billion JPY (~$170.5 million). It has grown 20.3% year-to-date. It is also ~23.8% up from its 52-week low.
Valuation: 8881.T trades at a 50% discount to its Net Current Asset Value (NCAV), negative EV/EBIT, 24% of the market cap in cash, MC/EBIT of 5.8x, dividend yield of 8.56%, and is experiencing management catalysts (increases in dividend pay-out ratios and renting the cash to shareholder described later are having a direct result on the share price).
Business Overview
Nisshin Holdings is a regional Japanese real estate company consisting of 14 subsidiaries grouped into 4 main business segments: real estate sales, construction, real estate management, and finance.
Real estate sales
This is the company’s primary line of business whereby it develops, sells, and rents condominiums. All of these activities are conducted by its main subsidiary, Nisshin Real Estate Co. Ltd. The group also includes real estate portfolio and fund management for other companies (Real Estate Investment Advisory Co. Ltd.), purchase and resale of used condominiums (Hishin Jyutaku Ryutsu Co. Ltd.), and development and sale of single-unit houses (Ricord Co. Ltd.)
Construction
One of the most important of Nisshin’s subsidiaries is its general contractor, Tada Construction, specialised in the construction of condominiums and the fulfilment of other outside civil engineering projects. Owning its own in-house construction company is rare for Japanese developers (Shinoken, now taken private, comes to mind) and allows Nisshin to build its condominiums, save money on outside contractor fees, and make its condominium prices more attractive to prospective buyers. Nisshin also has a smaller subsidiary that leases construction materials (Shinko Co. Ltd.)
Real estate management
Nisshin’s primary subsidiary here is Hishin Kanzai, which manages common areas of condominiums and individual buildings on consignment. It also conducts construction work like renovations and larger-scale repairs as a part of its management business. The company also established a new subsidiary in FY 2023 in this segment, Hishin Life Support Co. Ltd., that’s going to dispatch real estate managers/administrators who have previously gained experience at Hishin Kanzai.
Real estate finance
This is classified in the company’s reports as “Other” and includes Nisshin Finance Co. Ltd., which issues mortgage loans for real estate purchases and has a certain level of synergy with the rest of the business as it’s a classic part of the real estate development process in Japan and saves Nisshin extra money in a similar way that Tada Constriction does. The company used to own golf courses in Japan and the US but has sold all of them over the last 4 years.
So how does it make money?
First, Nisshin receives an order and acquires land and uses that land as collateral for a loan from a bank. It then uses its in-house contractor to build the condominium. The loan is repaid once the construction is completed. Once completed, the property is usually sold. This encompasses the majority of its operations. It usually does not sell real estate directly to investors in a Shinoken model, but rather follows a more typical development + construction route.
It also has other smaller sources of cash flow from the issuance of mortgage loans, managing condominiums, dispatching condominium administrators, leasing construction equipment, renting out its properties, or securitising some of its portfolio and selling REITs.
Market, Industry, and Expected Growth
Nisshin’s real estate business (both sales and management parts) operates primarily in the Tokyo metropolitan area and neighbouring prefectures. The construction and condominium resale businesses are spread throughout southern Japan (south of Tokyo). Nisshin’s medium-term strategy is focused on improving its real estate business in the Tokyo metro area, however, the company wants to use its construction business as a longer-term growth project.
Less focus on the already struggling construction business most likely comes from substantially increased construction materials prices in Japan. This is very likely to persist over the next 2/3 years. This is evident in the monthly price index for construction materials in Japan during the last two years.
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