The full research note can be found here.


Fujitec (6406) manufactures, installs and maintains elevators and escalators. The elevator and escalator (E&E) market can be split into three business segments – installation of new elevators, maintenance and modernisation.

Companies in the E&E market generally have a stream of cash flow from the entire life cycle of the elevator. The installation and modernisation businesses are cyclical while the maintenance business is stable, especially in developed countries. In Europe for example, about 80% of the maintenance contracts are handled by the OEM. In China, only about 30% of OEMs have the maintenance contract. In emerging markets, fewer regulations incentivise building owners to reduce maintenance costs and often handle maintenance by themselves or outsource to a third party.

Earnings growth for companies in the E&E market will depend on two factors:

  1. Number of new installations. This is mainly driven by urbanisation. Larger number of installed elevators can provide cash flows from the subsequent maintenance and modernisation contracts.
  2. The fraction of installed elevators that are converted into maintenance contracts. This largely depends on where the elevator is installed.

Fujitec currently trades at a price to tangible book ratio of 1.3. A company with ROE of 9.4% should not trade near its tangible book value. About 73% of earnings are retained by the company. With ROE at 9.4% and 73% earnings retention, tangible book value should grow at approximately 7% per year. Assuming there is no multiple expansion, investors today can expect to gain 7% through book value growth and a 2.1% dividend yield for a total return of 9% per year at a minimum.

A conservative DCF with FCF growing at 3% per year till perpetuity and a discount rate of 10% is applied, the present value of future cash flows is approximately 1900 Yen. This gives a 25% margin of safety based on the current share price of 1422 Yen with a 34% potential upside. A 3% FCF growth from now till perpetuity is very conservative. Assuming inflation runs at 3% annually, a 3% free cash flow growth rate becomes 0% growth in real terms. This scenario is unlikely to happen but sets a floor for the minimum fair value of Fujitec at 1900 Yen per share.

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