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Mercuria Holdings / 7347 Mercuria Holdings / 7347 COVERAGE INITIATED ON: 2019.01.10 LAST UPDATE: 2021.08.12 Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg. Research Coverage Report by Shared Research Inc. Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp INDEX How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report. Executive summary ----------------------------------------------------------------------------------------------------------------------------------- 3 Key financial data ------------------------------------------------------------------------------------------------------------------------------------- 5 Recent updates ---------------------------------------------------------------------------------------------------------------------------------------- 6 Highlights ------------------------------------------------------------------------------------------------------------------------------------------------------------ 6 Trends and outlook ----------------------------------------------------------------------------------------------------------------------------------------------- 7 Business ------------------------------------------------------------------------------------------------------------------------------------------------ 17 Overview ----------------------------------------------------------------------------------------------------------------------------------------------------------- 17 Earnings structure ----------------------------------------------------------------------------------------------------------------------------------------------- 33 Strengths and weaknesses ------------------------------------------------------------------------------------------------------------------------------------ 35 Market and value chain---------------------------------------------------------------------------------------------------------------------------- 37 Competition ------------------------------------------------------------------------------------------------------------------------------------------------------ 42 Historical performance and financial statements ------------------------------------------------------------------------------------------ 44 Income statement ----------------------------------------------------------------------------------------------------------------------------------------------- 53 Balance sheet ----------------------------------------------------------------------------------------------------------------------------------------------------- 54 Cash flow statement -------------------------------------------------------------------------------------------------------------------------------------------- 56 Other information ---------------------------------------------------------------------------------------------------------------------------------- 57 History -------------------------------------------------------------------------------------------------------------------------------------------------------------- 57 News and topics ------------------------------------------------------------------------------------------------------------------------------------------------- 58 ESG/SDGs initiatives -------------------------------------------------------------------------------------------------------------------------------------------- 61 Corporate governance and top management --------------------------------------------------------------------------------------------------------- 61 Major shareholders --------------------------------------------------------------------------------------------------------------------------------------------- 62 Dividend policy -------------------------------------------------------------------------------------------------------------------------------------------------- 62 (Reference) Alternative investment ----------------------------------------------------------------------------------------------------------------------- 63 (Reference) Differences between venture capital and buyout funds -------------------------------------------------------------------------- 64 Profile ---------------------------------------------------------------------------------------------------------------------------------------------------------------- 64 02/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp Executive summary Business overview On July 1, 2021, Mercuria Holdings Co., Ltd. was established as a wholly owning parent company of Mercuria Investment Co., Ltd. by means of a sole share transfer. The description and remarks below refer to Mercuria Investment Co., Ltd., now a subsidiary of Mercuria Holdings and no longer a listed company (as of August 12, 2021). ◤ The main businesses of Mercuria Investment Co., Ltd. are Fund management (37.4% of operating revenue in FY12/20), where it forms and manages funds for domestic and overseas investors, and Principal investment (62.6%), where it invests its own funds. In October 2005, Mercuria was founded with the Development Bank of Japan (DBJ) as its main shareholder and formed its Fund No. 1 (see Business description section for more information). When forming and managing investment funds, Mercuria focuses on cross-border investment opportunities, providing financial and business support to Japanese businesses and assets with growth potential outside Japan, and distributes returns from those investments to investors. Mercuria also forms and manages financial products to invest in overseas businesses and assets that provide strong and stable returns, and repatriates investment gains from these products. ◤ DBJ, a former public corporation, has been Mercuria’s top shareholder from its establishment with a roughly 24% stake. DBJ collaborates with Mercuria by investing in Mercuria’s funds and identifying investment candidates. Mercuria also formed capital alliances in 2015 with Itochu Corporation (roughly 14% stake) for real estate investment and with Sumitomo Mitsui Trust Bank (roughly 3% stake) for fund investment and identification of investment candidates in business investment and other strategies. ◤ For the Fund management business, the company raises money from investors in Japan and overseas using investment partnerships, and forms and manages funds. Targeting absolute returns, it specializes in alternative investments with a different risk/return profile from that of traditional assets such as publicly traded stocks and bonds. However, Mercuria does not pursue investment strategies such as hedge funds and venture capital. Within alternative investments, the company focuses mainly on private equity funds, which invest in unlisted companies, and real estate investment trusts (REITs). Mercuria does not engage in short-term trading, but invests for the longer term (five years or longer). Its stock selection is based on cash flow generated by the business rather than themes likely to become hot topics among stock market participants. It is the only listed company in Japan that is a member of the Japan Private Equity Association. ◤ Mercuria’s funds invest in either businesses or assets. In business investment, funds engage in one of three investment strategies: Growth, Buyout/Succession, and Value. The company offers these funds mainly to institutional investors such as pension funds and banks. The funds have an investment period of 5–10 years. After a fund is formed, the company sources investment candidates, executes investments, increases their value, and exits. Funds have a target internal rate of return (IRR) of around 15%. In asset investment, the company uses Real Estate, Cash Flow, or Value investment strategies. Under the Real Estate investment strategy, Hong Kong subsidiary Spring Asset Management Ltd. primarily invests in office buildings in Beijing Central Business District (CBD) and properties in the UK, and manages Spring REIT (Hong Kong Stock Exchange: 01426). Spring REIT has provided an average annual dividend yield of around 7%. ◤ At the Fund management business, which accounted for around 40% of operating revenue in FY12/20, the company receives 0.5–2.0% in management fees (based on assets under management or AUM; i.e., capital commitments and total investment) and around 20% in performance fees (based on investment gains) from the funds. In FY12/20, revenue from management fees totaled JPY1.8bn (+2.9% YoY) and performance fees came to JPY563mn (-54.8% YoY). The Real Estate and Growth investment strategies drove management fees and performance fees, respectively. AUM totaled JPY193.4bn (-0.2% YoY) in FY12/19. AUM by investment strategy: Growth JPY12.1bn (-45.5% YoY), Buyout/Succession JPY10.1bn (+114.9% YoY), and
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