Ryoyo Electro (jp:8068) - japanese net-net

The first individual company I would like to present is Ryoyo Electro Corporation, a classic Graham and Dodd net-net investment .

A Graham and Dodd net- net stock is a company, where the current assets minus all liabilities of a stock is worth more than the total business is valued on the stockmarket. Therefore an investor pays a significant discount on the most liquide assets of a company and gets the business for free (the typical paying 50 cents on the dollar). Those situations are very rare, but they do happen from time to time. Especially in circumstances where the economy of a country is in a depression. Benjamin Graham, the father of value investing and mentor of Warren Buffett, found many net- nets during the great depression of the 1930`s. He followed the theory, that an investment in a portfolio of those businesses, where the intrinsic value is significantly higher than the current market capitalisation, represents a sound investment. It offers a so called "margin of safety", because in case of theoretical liquidation the investor gets more cash paid out than his inital investment was. Usually net- net stocks are moneylosing businesses and one is speculating on a turn- around of the company. Graham therefore advised people to buy a basket of net- net stocks to minimise the risk that an individual company keeps on losing money, hence depleting its cash and finally going bancrupt.

I will refrain from going into more details regarding Benjamin Grahams investing princicples as there is plenty of resource to be found on the internet.


Ryoyo Electro Corporation engages in the distribution of semiconductors, computer systems and peripherals, and electronic devices mainly in Japan but also internationally. Therfore Ryoyo Electro is a classical trading company, that is not engaged in the production of electronic devices. It was founded in 1961, is headquartered in Tokyo, Japan and the stock is listed on the First Section of the Tokyo Stock Exchange (TSE).

The price of the stock as of today is 944 Yen and the market cap stands at 25.1 bln Yen. Ryoyo engages in a segement of the japaneses economy which is characterised by fierce competition, resulting in a wave of consolidation. Also Ryoyo wasn't able to isolate from this harsh business environment, which is reflected in a decline in net sales in the last several years.From 2003 til today sales at Ryoyo declined by a whooping 28%. Surpirsingly Ryoyo was able to isolate shareholder's equity from a significant decline. This is mainly attributable to a quite impressive control of the company's cost base and the avoidance of net losses, with only one losing year (2009) in the last decade.

Ryoyo has been consistantly paying a dividend in the last 10 years and is currently paying a dividend of 30 yen and therefore offering a 3 percent dividend yield, which is pretty good giving that the 10 year government bond in Japan (JGB) is yielding just a paltry 1%. Futhermore Ryoyo is engaging in treasury stock buy backs in a flexible manner and has so far bought back around 10% of its outstanding shares.

The average price- earning ratio (pe-ratio) of the last 9 years is 25, which is quite high. This is due to the fact that Ryoyo's operatinal and net margins are annoyingly low, consistantly hoovering around 1 percent.

Operating cash-flow is extremly volatile, given that Ryoyo is debt free and finances its working capital needs internally. Build- up and cut backs in working capital therefore has a big impact in operating cash- flow metrics. Also cash- flow of investing activities is volatile, as Ryoyo tends to invest and divest a lot in long term assets.

Hence it doesn't make really sence to make an analysis of the price cash flow ratio (pcf-ratio) or free cash flow yield.

What really strikes me at Ryoyo is its balance sheet, which is impressively strong. Actually one has to say that Ryoyo is extremely overcapitalized, which is quite common with japanese corporations.

Ryoyo's equity ratio is 86% and Book value per share (BPS) stands at 2300 yen, that leads us to a price to book ratio (P/B) of 0,4. But more impressive is the composition of the book value. It is rock hard with 915 yen in cash and cash equivalents per share, current assets at 2145 yen per share and an astonishing net-current asset value per share (NCAV = Net current assets - all liabilities) of 1798 yen. Given the stock price of 944 yen per share this gives us an impressive 47 % discount to NCAV and represents a extremely nice margin of safety.

Even the most stingent margin of safety analysis, the liquidation value, where I weight cash and cash equivalent by a factor of 1, accounts receivables by a factor of 0,7 and inventories by a factor of 0,5 and hence, more or less, simulate a fire sale of Ryoyo's assets, leaves us with a liquidation value of 1341 yen per share.

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Not included in the intrinsic value analysis is Ryoyo's investment portfolio. Investment portfolios in Japan are marked to market and in the majority of cases investments are marketable and liquid.  Ryoyo has got an investment portfolio which represents around 45% of its market cap, hence investments in long term assets are valued on the books at 442 yen per share. If I included it in the value analysis the margin of safety would rise significantly.

Given all the aforementioned  financial ratios I believe Ryoyo is extremely undervalued and offers good opportunity for the risk averse investor.


Disclosure: Long 8068 Ryoyo electro company