Making sense of the Global Market, Euromonitor International Ltd.

Yu Mitsuhashi

Making sense of the Global Market

Euromonitor International Ltd.

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Thematic (Sector/Industry)

<h2>Overview</h2>The industry’s production value declined in 2016, largely due to shrinking production output of tyres and other rubber products. Production of the aforementioned products declined due to weak demand for rubber products from automotive producers. In 2016 automotive manufacturers continued to outsource their production abroad, resulting in shrinking car production volumes in Japan and consequently weak OEM demand for tyres. To add, shrinking car production and hybridisation of cars eroded demand and production of rubber transmission belts.Production of tyres and other rubber parts is forecast to stagnate over 2016-2021. Weak domestic demand and automotive production outsourcing are set to hinder the rubber products industry’s performance. Furthermore, Japanese tyre manufacturers increasingly invest into production facilities in rapidly growing Asian and American markets, thus tyre production volumes in Japan are likely to stagnate.After a weak 2015 the construction industry’s spending on rubber products expanded in 2016. The increase was thanks to the rise in residential housing construction in 2016, infused by Japan’s Central Bank’s loose monetary policy and low interest rates on mortgages.The construction industry is forecast to provide a temporary demand boost for rubber piping, hoses, roofing and similar materials by 2020, as Japan prepares for the Tokyo Olympics. In total, JPY10 trillion is set to be invested into sporting, transportation and hotel infrastructure, with most of the gains expected over the period of 2017-2018.

OverviewThe industry’s production value declined in 2016, largely due to shrinking production output of tyres and other rubber products. Production of the aforementioned products declined due to weak demand for rubber products from automotive producers. In 2016 automotive manufacturers continued to outsource their production abroad, resulting in shrinking car production volumes in Japan and consequently weak OEM demand for tyres. To add, shrinking car production and hybridisation of cars eroded demand and production of rubber transmission belts.Production of tyres and other rubber parts is forecast to stagnate over 2016-2021. Weak domestic demand and automotive production outsourcing are set to hinder the rubber products industry’s performance. Furthermore, Japanese tyre manufacturers increasingly invest into production facilities in rapidly growing Asian and American markets, thus tyre production volumes in Japan are likely to stagnate.After a weak 2015 the construction industry’s spending on rubber products expanded in 2016. The increase was thanks to the rise in residential housing construction in 2016, infused by Japan’s Central Bank’s loose monetary policy and low interest rates on mortgages.The construction industry is forecast to provide a temporary demand boost for rubber piping, hoses, roofing and similar materials by 2020, as Japan prepares for the Tokyo Olympics. In total, JPY10 trillion is set to be invested into sporting, transportation and hotel infrastructure, with most of the gains expected over the period of 2017-2018.

Industrial Capsule: Rubber Products in Japan

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Event-Driven

Kinugawa Rubber Industrial / Event-Driven

The Nikkei newspaper carried an <a href="http://asia.nikkei.com/Business/Deals/Kinugawa-Rubber-to-go-private-via-tender-offer-by-DBJ" target="_blank">article</a> Friday morning telling the world <a href="https://www.smartkarma.com/entities/14988" target="_blank" data-smartkarma-citation="entities:14988">Kinugawa Rubber Industrial</a>  would be taken private through a tender offer the government-owned <a href="http://www.dbj.jp/en/" target="_blank">Development Bank of Japan</a> at "around 50 billion yen." The company responded with a confirmation that talks were being held and a board meeting would be held later in the day. The stock was limit up. After the close, Kinugawa confirmed the deal. The stated goal of DBJ's takeover is to help Kinugawa Rubber diversify its customer base. There may be some truth to this. Kinugawa gets more than half its sales from <a href="https://www.smartkarma.com/entities/72" target="_blank" data-smartkarma-citation="entities:72">Nissan</a>  and its subsidiaries (~55% in FY2015) and sales to partner <a href="https://www.smartkarma.com/entities/15064" target="_blank" data-smartkarma-citation="entities:15064">Toyo Tire &amp; Rubber</a> at 14.7% of total (possibly not including some of Toyo Rubber's subsidiaries) mean that sales are quite concentrated. But I expect there is some reading-between-the-lines to be done.A few things strike me about this deal.<ol><li>Outside observers will note Nissan is ridding itself of one of its last remaining parts supplier cross-holding relationships. There is actually less to this than it seems.</li><li>The deal is being done at 5.5x trailing 12-month EBITDA, which is not exactly expensive in the grand scheme of things, but it ignores capex. Including capex, the EV/EBITDA+capex is more like 10x.</li><li>At low rates for a long time, decent cashflow is its own reward, and no matter whether cars become electric, hybrid, wind- or pedal-assist powered, closed vehicles will continue to require weatherstripping, bushings, internal bumpers, gaskets, spring coil protection, air-con hoses, pedals for the car, and brake and brake lining parts.</li><li>The deal is being done by a Japanese government-owned entity - one which has been the instrument of policy support measures in the past. This is the first time it is being done on a listed company (though JDB has funded other take-private or rescue situations in the past). This may affect the timetable. And possibly the deal itself.</li><li>Kinugawa Rubber was the 9th-ranked non-tire rubber company in Japan ranked by 2015 revenues (and 33rd globally) according to one report available online but one of the higher OPM companies in the sector globally. One wonders why another company is not the acquiror...</li><li>There is possibly some optionality for arbitrageurs, but there are caveats.</li></ol> More below the fold for subscribers...

The Nikkei newspaper carried an article Friday morning telling the world Kinugawa Rubber Industrial  would be taken private through a tender offer the government-owned Development Bank of Japan at "around 50 billion yen." The company responded with a confirmation that talks were being held and a board meeting would be held later in the day. The stock was limit up. After the close, Kinugawa confirmed the deal. The stated goal of DBJ's takeover is to help Kinugawa Rubber diversify its customer base. There may be some truth to this. Kinugawa gets more than half its sales from Nissan  and its subsidiaries (~55% in FY2015) and sales to partner Toyo Tire &amp; Rubber at 14.7% of total (possibly not including some of Toyo Rubber's subsidiaries) mean that sales are quite concentrated. But I expect there is some reading-between-the-lines to be done.A few things strike me about this deal.Outside observers will note Nissan is ridding itself of one of its last remaining parts supplier cross-holding relationships. There is actually less to this than it seems.The deal is being done at 5.5x trailing 12-month EBITDA, which is not exactly expensive in the grand scheme of things, but it ignores capex. Including capex, the EV/EBITDA+capex is more like 10x.At low rates for a long time, decent cashflow is its own reward, and no matter whether cars become electric, hybrid, wind- or pedal-assist powered, closed vehicles will continue to require weatherstripping, bushings, internal bumpers, gaskets, spring coil protection, air-con hoses, pedals for the car, and brake and brake lining parts.The deal is being done by a Japanese government-owned entity - one which has been the instrument of policy support measures in the past. This is the first time it is being done on a listed company (though JDB has funded other take-private or rescue situations in the past). This may affect the timetable. And possibly the deal itself.Kinugawa Rubber was the 9th-ranked non-tire rubber company in Japan ranked by 2015 revenues (and 33rd globally) according to one report available online but one of the higher OPM companies in the sector globally. One wonders why another company is not the acquiror...There is possibly some optionality for arbitrageurs, but there are caveats. More below the fold for subscribers...

Japan

Bando Chemical Industries, Ltd. is a processor of rubber and other chemical materials.  The Company's major products are industrial rubber belts, such as conveyor belts and V-belts.

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Bando Chemical Industries (5195 JP)

Industrial Capsule: Rubber Products in Japan

OverviewThe industry’s production value declined in 2016, largely due to shrinking production output of tyres and other rubber products. Production...

Euromonitor International Ltd.

Kinugawa Rubber: Unfortunate Deal

The Nikkei newspaper carried an article Friday morning telling the world Kinugawa Rubber Industrial would be taken private through a tender...

Travis Lundy

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