Open House (3288-JP): Part 1

The US$4bn market-crushing compounder that you've never heard of

Introduction

Open House (3288-JP) is a niche homebuilder in Japan that has a special expertise in building/selling cheap detached homes in urban areas. It participates in many segments of the residential property market, though earns the lions share (~60-65%) of its profits from the single-family homes business. Despite its relatively modest profile in the investment community, the company has a ~US$4bn capitalization. It trades at ~1.3x 2023e P/B and ~6.8x P/E.

In Yen, the market cap is 615bn. It has a trailing book value (Dec-22) of 400bn Yen, and I forecast that it will generate net profit of ~90bn yen this year. It will generate an ROE of ~22-25%. It has a rock-solid balance sheet with ~500bn in debt and 350bn in cash, against land of ~550bn. It will generate sales of ~1.1T yen this year, representing a ~2x turnover rate on it’s land.

So what! Another cheap Japanese stock that will never grow, re-rate or return capital? Well, maybe not. Since IPO in 2013, Open House has achieved the following:

• TSR of ~30% including dividends.

• Sales have grown 10-fold over 10-years.

• Consistently produced an ROE >25% with modest leverage.

• Has remained founder-led, and Mr. Arai still owns ~40% of the business.

• Has been shareholder-friendly (~3% dividend and periodic buybacks). Last year Open House returned ~7.5% of capital to shareholders whilst still growing double-digits.

• Developed a well-considered ESG policy.

Below is the company’s sales, profits and dividends development since IPO. Pretty impressive. The company’s EPS is higher today than its share price was at IPO in 2013 (and quite considerably so, too).

Why has this little homebuilder done so well if the Japanese housing market is in structural decline?