1. NGK Insulators (TSE.5333)
NGK is over 100 years old, has weathered multiple economic cycles and continues to innovate. The business is now moving away from fossil-fuel vehicles and towards energy storage and digital applications. Recent new products include the first megawatt-class NaS (sodium-sulfur) battery and an ultra-compact lithium rechargeable battery used in small electronics called EnerCera.
The business has over 7,800 patents filed globally against its intellectual property. It also spends 5 per cent of its revenue on research and development annually, with 70 per cent dedicated to future-facing industries. It’s built customer relationships over decades and is embedded deeply within end products. Regarding valuation, NGK trades at a 17 per cent discount to its book value and on an earning multiple of 8.5.
2. Amada Co. (TSE.6113)
The company has developed fibre laser machines that cut more accurately and safely than incumbent carbon dioxide laser machines. It also uses around a third of the energy, and while more expensive upfront, the operating costs of fibre machines are significantly less. Sectors such as manufacturing, aerospace and automotive are expected to drive demand for metal fabrication over the medium term. Amada will also benefit from falling population demographics in countries such as China, where machines will be needed to replace manual labour.
The business has offices and operations around the globe, with 61 per cent of sales from international markets. Amada has a conservative balance sheet, with a third of its market capitalisation in net cash. Valuation-wise, the company is trading on an earnings multiple of 10.5 and at a 27 per cent discount to its book value.
3. Shin-Etsu Chemicals (TSE.4063)
The company has built decades of proprietary insights and relationships with customers. It also has a vast international network of manufacturing facilities and intellectual property. New innovations include silicon monoxide anode materials for high-capacity and high-power lithium batteries in anticipation of the shift to electric vehicles. It has also developed equipment that can transfer micro-LED chips quickly and is now a one-stop shop for original equipment manufacturers.
Shin-Etsu is highly profitable, with an operating margin of 32 per cent. Moreover, its return on invested capital is 27 per cent and hasn’t fallen below 15 per cent over the past five years. Shin-Etsu has a conservative balance sheet with nearly a quarter of its market capitalisation in cash. The company trades on a price-earnings ratio of 10 and analysts have continued to upgrade earnings estimates over the past year.