With its market cap of ¥56 billion, it may be too small for you, but I want to alert you to this strong sales and profit grower. Its 16x P/E ratio versus its 12% expected operating profit growth in FY8/24 suggests a significant undervaluation, especially considering its strong yen-beneficiary business model. Transaction grew its operating profits at CAGR of 22% since FY8/18 to FY8/23. Please take a closer look at the following sections on “Oshikatsu” and “Valuation” and let me know if I am off base in arguing for higher multiples.
My 10/30/23 note attached emphasized the company’s ability to select the right products, produce them at high quality but at a low cost, and introduce them to both their business customers (B2B) and end users/consumers (D2C). Management has focused on “sustainability,” but now their added area of focus is “oshikatsu.” This update note focuses on the potential of “oshikatsu,” which the company estimates could account for 30% of total sales.
I. The recap of Transaction Co., Ltd. (TC)
Transaction plans, manufactures, and sells design goods and handles the custom production of promotional novelty items. They procure products in a blank state through overseas suppliers and then perform printing, inspection, assembly, etc., before providing them to client companies. Their product range includes towels, acrylic stands, T-shirts, bags, bottles, mirrors, and more.
The company has built its first factory in July 2019, to strengthen its production system and to diversify its production sources.
My initial investment thesis laid out in the 10/30/23 report focused on the company’s “fabless” business model:
Its unique business model is based on its ability to:
1. Uncover hidden latent needs in the marketplace.
2. Procure products in bulk at low cost and in plain form through overseas suppliers.
3. Add high-quality value to these plain products through internal printing and processing.
4. Offer them at low prices with short delivery times, regardless of the quantity.
Differentiators:
1) E-commerce business
The company has recently developed the “MARKLESS Connect*” system, to strengthen the ecommerce business with the clients.
* This is a system that allows TC to complete transactions, such as checking the inventory status of its products, order receipt and placement, design submission, and payment, by linking them to e-commerce sites operated by the client entities, thereby improving efficiency without human intervention.
2) Ability to Design and produce unique products.
9 of the company’s products (out of 1,000 total products submitted) won the “Japan Best Packaging Award 2025” in early Aug 2024.
An example of the unique products introduced:
Holdable Sun/Rain Umbrella
This ¥3,960 mini umbrella features built-in UV protection and comes with a tube holder to prevent the contents of your bag from getting wet. Sun umbrellas are increasingly becoming must-have items for men during Japan’s brutal summer heat.
II. Investment Thesis:
1) Solid Financial performance as a proof of the company’s business model
The company has demonstrated its ability to grow profitability despite high costs for imported materials and semi-finished goods in a weak yen environment.
Financial recap (FY8/18-FY8/23)
1) Sales
The above period includes the COVID-affected slowdown in large events where TC sells promotional items. Its wellness division sold a significant number of masks to offset the slowdown in promotional activities in FY8/20, but FY8/21 was impacted by the lack of mask sales. This led to the company not recording its 12th consecutive year of sales growth post-listing. However, sales growth resumed in FY8/22, and sales reached a historical high in FY8/23.
It’s important to note that the company’s diversified product offerings (masks) helped it to smooth out the impact of a large negative factor (Covid).
2) Operating profits
While sales declined in FY8/21, operating profits grew due to increased productivity in internal production. This improvement, along with sales recovery, allowed the company to achieve its 8th consecutive historical high in operating profits in FY8/23.
Q1-Q3 FY8/24 Highlights
1) One of the major management’s initiatives is to grow EC (electronic commerce) group sales. As discussed above, the EC platform developed internally automates a series of interactions, reducing human involvement. This led to an increase in sales at TC and their client companies. EC group sales grew 26.8% y/y, accounting for 22.1% (+3.3% y/y) of the entire sales (vs. TC’s FY8/25 goal of 30%). The customers accepted the 4th Price hike in 1/24. Furthermore, Oshikatsu-related Original goods (TC’s own brands) contributed to this robust growth as well.
2) Numerous mitigants to the headwind of weak yen
2-a) Non-Yen-based marketable securities.
The company holds Non-un denominated bonds to mitigate the impact of exchange rate fluctuations (about ¥3.8 billion), about 80-90% is in USD. TC holds these bonds to their maturity. If Yen weakens, that will have negative impacts on these bonds, which will amply be offset by the currency benefits to TC’s core operations.
2-b) Production
The company secured multiple production sites and optimized logistics to respond to exchange rate fluctuations and rising raw material prices, enhancing price competitiveness. They developed new suppliers to strengthen price competitiveness and maintain profit margins. At the second factory, completed in June, TC introduced advanced printing machines and optimized the layout to boost productivity.
As a result
Consolidated sales for Q1-Q3 FY8/24 were ¥18.92 billion (an increase of ¥ 1.369 billion, or 7.8% y/y)
Operating profit was ¥3.984 billion (an increase of 288 million, or 7.8% y/y)
Guidance for FY8/24:
Note that I included the JPY/USD exchange rate of the first day of a year for the financial periods covered in the table. On 1/1/23, the rate was ¥130.73 and ¥141.13 on 1/1/24. Still, the company is guiding a 9.8% Y/Y increase in FY8/24 sales and 12% in operating income. Q1 -Q3 FY8/24 sales reached 75% of annual target.
Solid balance sheet
Since its listing in 2010, the company has maintained a strong balance sheet due to its capex-light “fabless” business model. To ensure product quality and supply consistency, it has increased domestic production. As of FY8/23, its capital ratio was 78.8%, providing ample support for potential capex increases.
Shareholder returns:
Since going public, it has raised dividends for 12 consecutive years and plans to increase them for the 13th year in FY 2024.
Additionally, on 7/11/24, it announced a share buyback of up to ¥500 million, or 300,000 shares (1.03% of the total issued shares excluding treasury stock), by 12/24. About 73% of the target, or nearly 220,000 shares, had already been acquired by the end of July. In April, the company was selected as a margin trading stock by the Tokyo Stock Exchange, but the recent margin buying balance is less than 200,000 shares, so there is no weight from margin balances.
2) Oshikatsu – New Market
推し活 (oshikatsu) is a Japanese slang term that refers to activities and efforts undertaken to support one’s favorite celebrity, idol, character, or interest. It represents a significant aspect of modern Japanese pop culture and fan engagement, highlighting the active role fans play in supporting their interests.
Common Activities
– Purchasing merchandise or CDs
– Attending live events, concerts, or handshake events
– Watching TV shows or movies featuring the idol/actor
– Visiting locations related to anime or other media
– Promoting the subject on social media
– Collecting memorabilia
– Hobbies or interests (e.g., trains, specific foods)
According to a survey by the Consumer Affairs Agency, a third of people in their 20s admit to spending money on their “oshi” or beloved idols, with the “Oshikatsu” market now worth over ¥620 billion a year (reported on 3/14/24 by NewsOnJapan). A survey by “Oshicoco”, an online Oshikatsu platform with 100,000 followers, revealed that about 39% of 230 respondents spend ¥30,000/month for their fan activities. This amount is rather higher, considering Oshikatsu enthusiasts tend to be younger at this point. However, as they grow older, their fan activities likely get mature with higher spending.
In addition to traditional markets such as music, theater, and sports events, large-scale real events in the gaming, anime, and new media content industries (such as the metaverse and YouTube) have emerged as new growth markets.
Original T-shirts and Uchiwa (fans) are now considered staple Oshikatsu items. Due to increasing demand, the company has strengthened its production system by completing a second factory equipped with the latest full-color printing equipment in Saitama Prefecture in 6/24.
Does Japanese Gen Z make a good enough market?
Gen Z’s purchasing power in Japan is limited compared to older generations:
They make up only about 13% of Japan’s total population, which is significantly lower than the global average of one-third. The long tradition of seniority-based remuneration in Japan creates a wage gap between senior and young consumers. Senior households hold the majority of household savings in Japan.
Consumption Habits
Despite limited purchasing power, Gen Z in Japan shows distinct consumption patterns:
They are more susceptible to impulse buying compared to other age groups. Also, Gen Z integrates technological services into their shopping journey to make smart spending decisions. Also, they are open to exploring new brands, especially in the luxury sector.
3) Valuation
The company’s unique business model makes a peer comparison hard.
MonotaRo, often dubbed the “Amazon of the construction tool industry,” offers an extensive range of products—approximately 22.9 million items. Among these, 659 SKUs are available for same-day shipment. The company’s monthly sales for the first seven months of 2024 increased by an impressive 22% year-over-year. Its origins as a corporate venture capital (CVC) initiative within Sumitomo Corp have significantly contributed to its success in attracting large corporate clients.
As One’s historical strength lies in its medical R&D product sales with the recent upside resulting from its exposure to semiconductor clean room-related products. This association with AI may explain its P/E of 30x.
Askul has established close relationships with corporations and gets substantial co-marketing benefits from its 45% parent, Yahoo. This may explain its P/E of 19x.
TC simply can’t compete with MonotaRo on the scale. Its stock price is sensitive to ¥/$ exchange rate fluctuations, while MonotaRo’s are driven by domestic capex expectations. In disaster-prone Japan, there is a constant need for maintenance and construction tools due to infrastructure rebuilding. MonotaRo’s high P/E of 47x can also be attributed to its recognition among global investors.
However, is the year-to-date stock performance gap of 60% justified? TC’s operating profits are 15% of MonotaRo’s, but its market cap is only 5% of MonotaRo’s. TC’s OP margin at 20.3% is superior to MonotaRo’s 12.3% since MonotaRo is more vertically integrated with a higher fixed asset burden.
I may settle with TC trading at least at Askul’s P/E of 19x, albeit not at MonotaRo’s level. After all, Askul’s operating margin is much lower at 4% compared to TC’s 20%.