Initiating Coverage on Niterra Co. (5334 JP: No Model)

Date of Initiation: September 30, 2024

Price Target: ¥6280.80

Conviction: 9/10

Holding Period: 2 Years

Model: EV Adoption Model.xlsx

Disclaimer: I modeled Niterra using a template which is confidential, and thus can't publish it here.

Niterra Corporation is the largest holding in my portfolio as of December 16, 2024. I am continually looking to size this position as I see opportunities present themselves. I have my highest conviction in Niterra because I believe that the company's potential future earnings power is being severely misunderstood by the market. I believe that Niterra has incredible market positioning in an industry with natural barriers to entry along with attractive valuation because of the hype around Electric Vehicles.

Company Overview

Niterra's core competency is ceramics and their ceramics technologies. They use this competency to operate in a variety of different markets. Most of their revenue comes from selling spark plugs and oxygen sensors for automotive end users. This is classified as their "Automotive" business. They also have "Ceramics" and "New Businesses" segments which are a smaller portion of revenue. The Ceramics segment consists of manufacturing oxygen concentrators for hospitals and patients and electrostatic chucks used in the semiconductor manufacturing process. New Businesses is a grouping of business ventures that rely on Niterra's ceramics technology but are not yet self-sustaining. The most exciting New Business is Niterra's EV bearing balls products. They recently acquired Toshiba Materials, adding to their existing bearing balls operations, which will make this activity around 5% of consolidated revenue.

Market Positioning

Niterra's spark plug operations currently hold around 48% market share globally and I believe they have a clear pathway in getting to 80% of market share in the medium-term future. Niterra is finalizing talks to acquire Denso's spark plug operations, and they expect the acquisition to be finalized in the summer of 2025. This would take Niterra's market share from ~48% to ~60%. Denso's operations are the second biggest player in the market behind Niterra, with Bosch's and Champion Auto Parts' being third and fourth respectively. Bosch and Champion have both signaled that they will likely be divesting from their spark plug operations, leaving another ~20% of the market up for grabs. I have a hard time imagining a competitor of Niterra grabbing this voided market share when Niterra already has ~60% of the market and a product that is of much higher quality. Thus, Niterra could reach 80% of the global spark plugs market.

On top of increasing market share, Niterra is also seeing wonderful margin expansion. While some of this is attributable to the weak Yen, it's equally important to recognize the benefits of higher-margin special metals spark plugs and advanced oxygen sensors. Over the past few years, Niterra has begun selling special metals spark plugs as opposed to nickel spark plugs. They get a much better margin on a special metals plug and it's common practice for these plugs to be replaced every two years, much like a regular nickel plug. Special metals plugs have better pricing attributes and similar replacement to that of nickel plugs. Oxygen sensors are being priced more favorably as regulation forces OEMs to increase spending on monitoring what their vehicles are releasing into the air. Consolidated margins will also see benefits from improving dynamics in the oxygen concentrators business moving into 2025. The oxygen concentrators operations have been a major drag on the Ceramics segment margins, but the company believes that will change soon.

EV Adoption

Niterra's stock has been hit hard by the EV hype. The company traded for as low as 6-7x earnings for much of 2022-2023. The market was concerned that EVs would quickly dominate the road, which would be disastrous for Niterra's earnings. Niterra's spark plugs and oxygen sensors can only be used in ICE vehicles or hybrid vehicles, meaning a future where EVs are the only cars on the road would render much of their offerings obsolete.

However, a future where EVs are the only car on the road is distant. I've built a mini-model which suggests that EV's and ICE vehicles could make up a similar percentage of total cars on the road in 2050. When I first approached analysis on Niterra, I had an uneducated assumption that all ICE vehicles could be off the road as soon as 2030. I believe the much more accurate assumption is that a substantial portion of cars on the road in 2050 will still be ICE vehicles, meaning a continued market for Niterra's automotive products.

The scare from the EV hype has created natural barriers to entry for any competitor seeing Niterra's current success. Why would any rational economic actor want to make the massive initial capital outlay to compete with an established player in a declining market? I believe Niterra's current standing is similar to that of the companies that operated in the lead additive business for decades before it finally went extinct. In "Competition Demystified" by Bruce Greenwald, he writes about the success of these companies for years in a dying industry because they were protected by a metaphorical "Do Not Enter" sign on the front of their industry.

Conclusion

Niterra is a well-run company with great market positioning in an industry that has a much longer lifespan than the market is expecting. I will be monitoring this company in the following quarters to ensure that the thesis plays out as I expect it to.