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Compounders Portfolio · Methodology

Four Key Squares

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In a chess endgame, a few squares decide the whole game. We score every company on four. Everything is scored from filings — never from hope. Each company's four squares →

Square 1 · Demand Is the market this company sells into growing for reasons that outlast one cycle?
  • How fast is the industry growing, and why should that continue — a government budget, an aging population, a rule that forces spending?
  • How much of next year's revenue is already promised under contracts customers renew?
  • What is the one substitution that could make this product unnecessary? That is the break we watch for.
The market grows — the contracted part grows faster year 1 → year 6 revenue already under contract to repeat next year
Square 2 · Moat — market share × pricing power Can the company keep taking share from rivals while charging more than they do?
  • What lets it win customers from competitors — a dataset, a network of users, a cost of switching away?
  • When it raised prices, did customers stay? That is pricing power you can check in filings.
  • This is the square we most often leave open — the profiles keep working on it.
Two lines, one company: share up and price up share price If both rise at once, customers have nowhere better to go.
Square 3 · Capital allocation What forces this company to hand its cash to shareholders, rather than merely allows it?
  • Tokyo Stock Exchange listing standards push companies priced below book value to explain themselves — and the usual fix is paying out more.
  • Governance investors vote against managers who hoard. An activist on the register raises the cost of doing nothing.
  • A founder approaching retirement often wants dividend income, and tax rules make dividends attractive to a controlling holder.
  • We score the disclosures as they land: buybacks, dividend-policy changes, statements on the cost of capital, new 5% holders.
payout rises listing rules governance votes activist arrives founder wants income
Square 4 · Valuation — the starting point Is the price low against the profit the company's capital produces?
  • Every name here passed the screen: priced at 2–12 years of operating profit, capital earning 15% or more, real cash generation.
  • The cheaper it gets, the closer the cash-pile floor — see below.
  • The only valuation exit: the multiple re-rates out of the screen. We publish no target prices.
Cash climbs toward the market cap market cap The nearer that day, the harder the floor under the price.

The valuation floor

A company that earns more than it pays out adds the difference to its balance sheet every year. Run that arithmetic on several of these holdings and it ends somewhere unusual: net cash equal to the entire market capitalization. That is Benjamin Graham’s net-net — reached not by the price falling, but by the cash rising. A price like that carries an assumption: the cash will never reach shareholders. The four pictures below show why that assumption is unstable — whatever management does with the payout, the outcome converges on the shareholder. One holding as the worked example:

The example: 5843 Nippon Insure — rent-guarantee services PRICE VS PROFIT4.0 years of operating profit NET CASH¥2.4bn = 40% of market cap PAYOUT TODAY10% of profit paid as dividend PROFIT YIELD10.4% profit ÷ market cap
1 · If nothing changes, the cash pile alone equals the whole market cap in about 6.4 years market cap = 100% Y040%Y1Y2Y368%Y4Y5Y696%Y7 Net cash as % of today's market cap. Profit and dividend held flat. This is Benjamin Graham's "net-net" — priced below its own cash.
2 · The payout ratio is the valve — it sets how fast the cash fills the box (the box is today's market cap) ← market cap 40%Y087%Y5100%Y10payout 10%keeps ¥555M of ¥617M profit each yearbox is FULL in ~6.4 years — a Graham net-net 40%Y066%Y592%Y10payout 50%keeps ¥309M each yearfull in ~11.5 years 40%Y040%Y540%Y10payout 100%keeps nothing — all profit paid outnever fills — you get a 10.4% yield instead 40%Y025%Y59%Y10payout 130%pays out ¥185M more than it earnsdrains — special dividends normalize it Each bar: net cash as a share of today's market cap. Same company, same profit — only the payout choice differs.
3 · The dividend yield each payout would create at today's share price — and where 6% sits 6% — the yield where Japanese small caps historically find buyers 1.0%payout 10%3.1%payout 30%5.2%payout 50%6.0%payout 58%10.4%payout 100% At a 58% payout the yield touches 6% — the red bar. Everything beyond it sits above the floor, which argues for a higher share price instead.
4 · The clock: how long until the dividend yield hits the 6% floor? Payout stays at 10%never reaches 6% — but cash = market cap in 6.4 years insteadPayout rises 10 points a yearreaches 6% in ≈ 4.8 yearsPayout jumps to 100% nowyield is 10.4% today — already past the floor Either way the shareholder wins: a fast payout rise hits the yield floor within years; no rise at all drives the balance sheet to Graham's net-net.

The same clock, every holding

NameEV/EBITROCENet cash / mcapPayoutYield at 100% payoutYears to cash = mcap
5843 Nippon Insure4.0x29.0%40.3%10.2%10.4%6.4
2477 Temairazu4.5x23.8%46.6%21.3%8.1%8.4
4168 Yappli8.1x22.6%11.2%20.6%10.2%11.0
5570 Jenoba6.7x22.9%36.8%17.1%6.6%11.6
2301 Gakujo5.4x15.4%31.8%50.4%9.7%14.1
4194 Visional10.8x30.8%22.6%0.0%5.0%15.5
3984 User Local8.6x22.7%33.0%25.0%5.4%16.7
7378 ASIRO5.8x42.3%14.7%47.0%9.6%16.7
4058 Toyokumo9.2x38.5%17.8%22.6%6.1%17.4
6037 Rakumachi10.5x29.1%3.7%19.5%6.7%17.9
4377 ONE CAREER9.0x38.4%19.8%29.4%6.3%18.0
4493 Cyber Security Cloud12.2x23.9%18.8%7.1%4.8%18.2
4776 Cybozu9.2x56.0%10.8%31.1%6.9%18.8
4475 HENNGE13.6x42.6%17.8%11.7%4.7%19.9
6947 Zuken9.1x13.1%37.3%55.5%5.9%23.9
2353 Nippon Parking Development8.5x18.8%5.3%49.3%7.5%25.1
6532 BayCurrent12.7x41.7%7.4%41.0%5.4%28.9
4071 Plus Alpha Consulting13.1x42.6%13.6%40.8%4.6%31.8

How to read the table: “Years to cash = mcap” counts the years until today’s net cash plus retained profit equals today’s market capitalization, holding this year’s profit and dividend flat. Buybacks are excluded — they would only shorten the count. “Yield at 100% payout” is profit divided by market capitalization: the dividend yield at today’s price if every yen of profit were paid out. Above 6% — the level where Japanese small-cap yields have historically found buyers — a full payout alone would argue for a higher share price. Figures restate as prices and filings change.

This seriesPortfolio · Four Key Squares · Allocation strategy · Four Key Squares by company Research behind itCompounder profiles · Screening universe · Screening methodology DataPrices: J-Quants · Filings: EDINET, TDnet · © Japan Investor Interface Co., Ltd.