Firstly, I would like to thank you for your feedback and your support. It really is a great help.
I don't see any margin erosion, quite the contrary. The EBIT margin increased from 16% Q2´23 to 25% Q2´24.
In previous fiscal years, orders received exceeded production capacity. To fix that, the company and customers adjusted the order placement and receipt. The company really had a bottleneck on the demand side and due to the limitation of its production capacity.
Regarding the factories, it must be said that the one in Qingdao (China) is a small part that produces components for Japan and machinery for the domestic market. The main factories are in Japan, where the parts that are exported (SKD) to North Carolina for final assembly. The U.S. is the growth driver and the main market. That is why they had to build the Carolina facility and implement a more efficient and less costly export method. In my opinion, he reason for maintaining that structure (with the Sakaki and Aoki factories as the operations center) is purely strategic. Takeuchi wants the operations center to be close to the Head Office.
I would like to reiterate my thanks for your comments and invite you to subscribe if you haven't already.
Thanks for the response, I am following you now. Sorry, I should have been more clear in my response.
In your DCF pic, EBIT margins are declining. I was wondering what is causing that to happen in the forecast period? Why did you assume EBIT margins drop to 11%?
I understand they didn't have capacity to fulfill orders and have improved that situation, but why did orders received decline? Did they purposely not take more orders? If customers are willing to wait, I don't see much downside to having a backlog. Or is this an indication that demand not as strong as before?
Indeed, I think demand will fall. Or rather, it will stabilize because finished goods inventory is growing faster than sales despite an increase in raw materials and/or work in process inventory (I hope I'm wrong).
I try to be conservative, and I think that a fall in gross margin, an increase in salaries and fixed costs could erode the EBIT margin in the future.
Even so, it must be taken into account that we would be talking about a margin of 11% being very conservative, which is around the margin of 2019 pre-covid. I don't think it's irrational at all. Although it may seem strange, it is the vision that I am able to have, with the information available. My way of modelling is more on the side of maintaining a certain common sense in the assumptions and pivoting quarter by quarter.
Magnífico artículo y que gran gestión en esta empresa familiar. El cápital allocation es simplemente espectacular. Para enseñar a los alumnos de finanzas como se debe gestionar una empresa de verdad. Análisis top Eloy.
Muchas gracias Jaime. Se agradece el feedback de cara a seguir trabajando y publicando. En cierta manera, Takeuchi es el ejemplo claro de empresa muy bien gestionada y con dueño de referencia. Hay veces que una empresa con dueño puede representar algún riesgo en términos de Principal-Agent conflict. En este caso, debido a que no hay exceso de control, y que el background de fundador y CEO en términos de creación de valor es brillante, me parece un strenght clarísimo. Saludos.
Really enjoyed the post, learned a lot. Thanks for the detailed work.
What is leading to the decline of EBIT margins?
Quarterly orders received have dropped; what led to this decline? Is demand dropping?
How come sales in China and Japan are so low despite having a manufacturing plant there?
Hello Alan.
Firstly, I would like to thank you for your feedback and your support. It really is a great help.
I don't see any margin erosion, quite the contrary. The EBIT margin increased from 16% Q2´23 to 25% Q2´24.
In previous fiscal years, orders received exceeded production capacity. To fix that, the company and customers adjusted the order placement and receipt. The company really had a bottleneck on the demand side and due to the limitation of its production capacity.
Regarding the factories, it must be said that the one in Qingdao (China) is a small part that produces components for Japan and machinery for the domestic market. The main factories are in Japan, where the parts that are exported (SKD) to North Carolina for final assembly. The U.S. is the growth driver and the main market. That is why they had to build the Carolina facility and implement a more efficient and less costly export method. In my opinion, he reason for maintaining that structure (with the Sakaki and Aoki factories as the operations center) is purely strategic. Takeuchi wants the operations center to be close to the Head Office.
I would like to reiterate my thanks for your comments and invite you to subscribe if you haven't already.
Thanks for the response, I am following you now. Sorry, I should have been more clear in my response.
In your DCF pic, EBIT margins are declining. I was wondering what is causing that to happen in the forecast period? Why did you assume EBIT margins drop to 11%?
I understand they didn't have capacity to fulfill orders and have improved that situation, but why did orders received decline? Did they purposely not take more orders? If customers are willing to wait, I don't see much downside to having a backlog. Or is this an indication that demand not as strong as before?
Indeed, I think demand will fall. Or rather, it will stabilize because finished goods inventory is growing faster than sales despite an increase in raw materials and/or work in process inventory (I hope I'm wrong).
I try to be conservative, and I think that a fall in gross margin, an increase in salaries and fixed costs could erode the EBIT margin in the future.
Even so, it must be taken into account that we would be talking about a margin of 11% being very conservative, which is around the margin of 2019 pre-covid. I don't think it's irrational at all. Although it may seem strange, it is the vision that I am able to have, with the information available. My way of modelling is more on the side of maintaining a certain common sense in the assumptions and pivoting quarter by quarter.
Nice post. Am finding lots of potential value investments in Japan Company Handbook. Best of luck to you.
Hi Tim.
Thanks for your comment. I think so, too. Keep an eye on EF Deep Research, because I might include a Japanese company soon.
Anyway, pay attention to this article, please:
https://open.substack.com/pub/eloyfernandez/p/yonex?r=c1r07&utm_campaign=post&utm_medium=web&showWelcomeOnShare=true
Greetings.
Fantastic, thanks Eloy.
Don't stop there, keep digging! (sorry about the terrible pun).
Hi, Jeffrey.
The support from subscribers is what encourages me to improve and add value. Infinitely grateful I am.
Magnífico artículo y que gran gestión en esta empresa familiar. El cápital allocation es simplemente espectacular. Para enseñar a los alumnos de finanzas como se debe gestionar una empresa de verdad. Análisis top Eloy.
Muchas gracias Jaime. Se agradece el feedback de cara a seguir trabajando y publicando. En cierta manera, Takeuchi es el ejemplo claro de empresa muy bien gestionada y con dueño de referencia. Hay veces que una empresa con dueño puede representar algún riesgo en términos de Principal-Agent conflict. En este caso, debido a que no hay exceso de control, y que el background de fundador y CEO en términos de creación de valor es brillante, me parece un strenght clarísimo. Saludos.