Carlit Co Ltd (4275)
Niche monopoly defense player at 4.5x EV/EBIT
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Carlit is a small Japanese conglomerate that happens to control a critical chokepoint: it is Japan’s monopoly producer of ammonium perchlorate (AP), a key material that’s needed to produce missiles and rockets.
Carlit trades has a market cap of 32bn yen and has 4.5bn in net cash and 8.6bn of long-term investment securities. It trades at an EV/EBIT of 4.5x (FY27ce) or P/E of 10x (which becomes 6.3x after adjusting for net cash and investment securities). In today’s world, what do you think is an appropriate multiple for a monopoly defense player?
What is ammonium perchlorate (AP) and why it matters
Earth’s upper atmosphere and space contains little to no oxygen, so missiles and rockets have to carry their own source of oxygen for combustion. This is where AP comes in.
AP is an oxidizer, which means when ignited, it decomposes rapidly and “donates” oxygen to produce high-temperature combustion. It’s mixed with fuel, binders, and other chemical agents as part of the solid propellant for missiles and rockets. AP comprises 50-70% of the weight of the solid propellant.
There is no other oxidizer that can match AP’s combination of high performance, cost, and track record. AP has been used globally as the dominant oxidizer for the last seven decades. You can read about “green” oxidizers or other experimental alternatives in the labs today but for now, AP is irreplaceable.
Demand
Modern wars are increasingly fought with missiles, with boots on the ground reserved as a last resort. It’s worth noting that the current missile stockpiles maintained by countries around the world are essentially “peacetime stockpiles.” These levels are insufficient for a sustained conflict (as the recent Iran/Israel exchanges have clearly shown).
The trend is clear: countries are now scrambling to build more missiles. And among them, Japan stands out for having underinvested in this area. Japan is now playing catch up. Japan’s defense spending plans for FY2019–2023 vs.FY2023–2027 illustrate the scale of this shift:
The budget for “stand-off defense capabilities” will jump from 0.2 trillion yen to 5 trillion yen (a 25x increase!) This covers offensive missiles designed to strike enemy ground, sea, and air targets.
The budget for “integrated air and missile defense capabilities” will rise from 1 tn to 3 tn, which are defensive systems to intercept incoming missiles.
The budget for “cross-domain operation capabilities” will increase from 3 tn to 8 tn, which includes investments in the space domain.
Japan also plans to expand its space program, spanning both government and private-sector efforts. To support this, the government will revisit its space regulations, with new rules expected by 2026 in order to promote greater activity and increase private sector launches.
Carlit will be a direct beneficiary, since the company is Japan’s monopoly supplier of AP to both the defense and space programs (with defense expected to be the bigger contributor to growth). Currently, 100% of Carlit’s AP production is consumed domestically. Japan’s rising demand alone is absorbing all the capacity but in the future I think there could also be a market for exports.
Supply
Carlit is currently undergoing AP capacity expansion that will increase its total production by 2–3x. This expansion is demand-driven as outlined earlier.
Total investment is 2.5bn yen across three phases. Phase 1 is complete; Phase 2 will be complete in the first half of FY2026/3 (i.e. by September 2025); and Phase 3 is expected to be complete in the second half (i.e. by March 2026). Full operations are slated to begin from April 2026 onward.
The supply chain works as follows: Carlit produces AP and supplies it to NOF (4403), which blends the AP with other materials to manufacture solid propellant. NOF then delivers the solid propellant to IHI (I’ve covered IHI, see here for my deep-dive), which integrates it into a rocket motor, before supplying to final assemblers such as Mitsubishi Heavy Industries.
It’s also worth noting that NOF itself is undertaking a major capacity expansion for solid propellant, with completion timeline around September 2027. This means that while Carlit’s expansion will be finished by March 2026, there may be a lag before sales can fully ramp (depending on NOF’s current capacity, so the exact timing of the ramp remains somewhat uncertain).
The moat
The biggest question investors may have is why Carlit is the monopoly producer of AP (and whether this is sustainable).
Actually, Japan is not an exception. AP production in most countries around the world currently operate under a monopoly or duopoly structure.
United States: Duopoly in theory (American Pacific and Northrop Grumman) but in reality American Pacific dominates.
Japan: Monopoly (Carlit).
Continental Europe: Duopoly (French state-owned Eurenco and ArianeGroup, which is a JV between Airbus and Safran).
UK: Monopoly (Chemring).
Russia: Monopoly (state-owned ANOSIT).
India: Monopoly (state-owned APEP), although Solar Industries and Premier Explosives are trying to enter.
China: The only exception, with multiple SOEs producing AP.
Historically, there were more producers. For example, the U.S. had four producers during the Cold War. But decades of industry consolidation driven by defense budget cutbacks reduced the number of suppliers. Now that governments are scrambling to increase missile production, AP has emerged as a critical chokepoint. Every country wants more AP suppliers, but the challenge is that introducing new suppliers is easier said than done.
Why?