Japan Idea radar #4

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Hello. It’s been a while since I’ve done these.

I’m once again sharing a couple of ideas in my ever-growing ‘Do more work’ list of companies. As usual, these don’t go as deep as my usual write-ups, given that I’ve only looked at it at a superficial level but also haven’t even spoken to the company for the most part and/or there may be a fundamental reason why I’m currently not invested. As mentioned before this is aimed to help others start digging through the ideas before I do or disprove me - In the past some of these Japan Idea Radar Ideas have done better than my actual longs so…hopefully you’re smarter than me to figure out which ones are worth investing in today. (and if you do let me know, please. I beg you!!!)

Today’s will be an eclectic mix:

• a cheap recurring revenue company that looks way too cheap versus it’s growth;

• a growth company with significant tailwinds from defense spending;

• a deep value company with significant tailwinds from defense spending;

• a cheap company exposed to the DC chain with improving governance;

• to a deep value situation which has a significant RE/Equity portfolio including a valuable hidden Semiconductor holding and trading at a deep, deep discount to NAV;

Unlike my usual write-ups, which focus on small/micro cap stuff, these companies range anything from small caps to decent-sized large caps. I’m also trying to cast a wide net here… anything from growthy stuff to more ‘Balance sheet cheap’ stuff.

I’m ngl I had a blast writing this and reminded me I should do more of these. Writing summaries like this also helps force me to distill an investment idea into a few short paragraphs, so thank you.

Also random pro tip that no one asked for: If you ever just want to flex that Pharrell Williams and NIGO-san is technically your “business partner,” you can just buy shares in Human Made (Ticker: 456A.JP) where he owns close to 20% of the stock. lol. [NOT, a recommendation] Tbh the valuation is a little rich for me.

Anyways here we gooooooo:

• This is a cheap SaaS company with a ‘physical’ lock-in component which makes it less likely to be disrupted by AI. In fact it’s increasingly leaning into ‘physical AI’

• It’s trading at 1.8x EV/Sales, 8.7x EBITDA growing double digits with potential for acceleration and margin inflection.

• Hikari Tsushin has been buying. alot.

• Funny because this is also kind of a bet on Hikari betting on Hikari.

Photosynth is also relatively straightforward in that this is a cheap “SaaS” company which has been getting killed in the market along with all the other SaaS amid the SaaSpocalypse of whatever it’s called. (I’ve written about how I feel about the AI situation specifically for Japan [here]) Except this doesn’t make much sense for Photosynth given that the business has a pretty important physical element. So no, I don’t think AI is going to disrupt this into oblivion unless we get a situation where AI also destroys the physical world like in The Terminator. Even then they might benefit as they are leaning more into the ‘physical AI’ opportunity.

What Photosynth does is a cloud-enabled IoT solution. Which is a fancy way of saying they make smart locks for Corporate offices and facilities under their brand Akerun. This is being used by more than 5000 corporates today. It also has full integration with other software vendors like Freee for time management software to solve for adjacent workflows typical for businesses. The business model is such that it is a SaaS subscription model where the software to manage the locks is charged as a recurring fee. 87% of revenue is recurring and gross margins are north of 70%. Additionally, the business has expanded to complementary services/solutions and the B2C market with this.

Perhaps due to their physical ‘lock-in’ (no pun intended)the churn is quite impressive, averaging 0.93% today and has been steadily falling.

The company has been growing at a respectable mid-teens rate in recent periods and the negative here is that it’s been slowing until recently. BUT the company looks to re-accelerate to 20-30%, which we are starting to see thanks to their focus on cross-selling, winning larger customers and reducing overall churn. And here comes the full circle moment. Remember when I said Hikari is a powerful sales company once upon a time? (or something to that effect) Well, PhotoSynth signed a major partnership with Hikari Tsushin in order to sell their products to Hikari’s massive corporate client network. When it comes to selling, there’s really no better sales agent than Hikari, and I think this has real legs over the coming years. You can read about my analysis on Hikari Tsushin [Here]. What’s also interesting here is that management is saying the contribution from Hikari isn’t reflected in their 20-30% revenue growth target!

Not surprisingly, or perhaps because they know something, Hikari now owns a good chunk of Photosynth shares and has continued to increase their position here through multiple entities. If my math is right they own ~16%. As I’ve talked about in the past, I like it when Hikari is buying because 1) they only buy companies that are “obviously’’ cheap and has done well with it and 2) Hikari continuously buying stocks regardless of liquidity has mean that this provides a ‘floor’ to the stock price and namely, downside support, which again makes the risk/reward profile quite asymmetric.

The big difference this time round is because Hikari is operationally involved, they have real skin in the game and creates an added incentive to ensure they generate sales for Photosynth products! So in a way, Hikari may be betting on themselves through Photosynth LOL. Also notice how Hikari is really interested in Property management/Real Estate related services/solutions which they seem to be interested in. Another example would be Property Data Bank [Ticker:4389], although I no longer own. I like the odds of Hikari contributing to Photosynth’s sales because there is precedent for this.