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 Real Estate/Cash Flow JPY171.6bn (+2.0% YoY).
Earnings trends
◤ In FY12/20, the company reported full-year consolidated operating revenue of JPY6.2bn (+31.1% YoY), operating profit of JPY772mn (-58.4% YoY), recurring profit of JPY758mn (-57.9% YoY), and net income attributable to owners of the parent of
03/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
JPY525mn (-57.8% YoY). Operating revenue and recurring profit surpassed the company’s revised (December 18, 2020) forecasts of JPY5.9bn and JPY750mn, respectively. The five-year average for net income (attributable to owners of the parent) was JPY1.1bn (-1.7% YoY).
◤ The company’s full-year FY12/21 forecast calls for consolidated operating revenue of JPY3.5bn (-43.4% YoY), operating profit of JPY1.5bn (+94.2% YoY), recurring profit of JPY1.5bn (+98.0% YoY), and net income attributable to owners of the parent of JPY1.0bn (+90.4% YoY). In FY12/20, the company recorded a sizable amount of operating revenue related to restructuring of Spring REIT as principal investment.
◤ From FY12/19 through FY12/25, the company aims to maximize core fund revenues (performance fees) and enhancing revenues (management fees) from its frontier funds and solution business. For FY12/25, the company is targeting five-year average net income of JPY2.0bn or more (JPY1.12bn as of FY12/19 and JPY1.10bn as of FY12/20) and a 50% increase in equity capital (JPY12.2bn at end-FY12/19 and JPY11.9bn at end-FY12/20). On August 13, 2020, the company changed the target year for these quantitative targets from FY12/23 (five-year target) to FY12/25 (seven-year target).
Strengths and weaknesses
Shared Research sees Mercuria’s strengths as its relationships with DBJ and Itochu and the ability to expand its business overseas by leveraging overseas networks built up since its founding; being the only listed private equity fund management company in Japan*; and having an earnings structure in which a stable source of revenue covers most of its fixed costs. Its three main weaknesses in our view are the difficulty of controlling the timing of performance fee accrual; an organizational structure that is heavily dependent on the current management team, making it difficult for next-generation management to flourish, and the risk of competition with other companies affecting its earnings performance (see Strengths and weaknesses section for details).
*Mercuria is the only listed company that is a regular member of the Japan Private Equity Association (as of March 2021).
04/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Key financial data
Income statement FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 FY12/20 FY12/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Operating revenue 1,616 2,048 2,521 4,224 4,122 4,718 6,184 3,500 YoY - 26.7% 23.1% 67.6% -2.4% 14.5% 31.1% -43.4% Gross profit 1,616 1,878 2,245 4,150 4,034 3,735 2,426 YoY - 16.2% 19.5% 84.9% -2.8% -7.4% -35.0% GPM 100.0% 91.7% 89.0% 98.2% 97.9% 79.2% 39.2% Operating profit 940 906 1,280 2,230 2,117 1,856 772 1,500 YoY - -3.5% 41.2% 74.2% -5.1% -12.3% -58.4% 94.2% OPM 58.1% 44.3% 50.8% 52.8% 51.4% 39.3% 12.5% 42.9% Recurring profit 967 900 1,248 2,208 2,083 1,800 758 1,500 YoY - -6.9% 38.7% 76.9% -5.6% -13.6% -57.9% 98.0% RPM 59.8% 44.0% 49.5% 52.3% 50.5% 38.2% 12.3% 42.9% Net income 740 621 854 1,490 1,411 1,245 525 1,000 YoY - -16.1% 37.6% 74.3% -5.3% -11.8% -57.8% 90.4% Net margin 45.8% 30.3% 33.9% 35.3% 34.2% 26.4% 8.5% 28.6% Per-share data (JPY) Shares issued (year-end; '000) 9,540 11,718 13,716 17,235 17,466 17,607 17,645 EPS 79.0 59.2 70.5 107.5 81.7 72.0 30.9 59.5 EPS (fully dilut ed) - - 66.3 103.4 80.2 71.2 30.7 Dividend per share - - 15.0 17.0 18.0 19.0 20.0 20.0 Book value per share 225.5 275.4 363.3 605.1 664.5 704.0 709.4 Balance sheet (JPYmn) Cash and cash equivalents 1,899 3,084 4,952 12,423 13,334 13,936 12,503 Total current assets 2,303 3,488 5,409 12,834 13,725 14,785 13,987 Tangible fixed asset s 39 26 12 12 12 123 84 Investments and other assets 142 183 181 256 366 586 979 Int angible asset s 8 1 1 1 18 10 2 Total assets 2,492 3,699 5,603 13,103 14,121 15,504 15,053 Accounts payable 2 3 2 347 195 227 161 Short-term debt ------130 Tot al current liabilit ies 340 262 341 1,582 762 2,039 998 Long-term debt - - - 723 715 - 874 Tot al fixed liabilit ies - 114 149 932 1,177 722 1,586 Tot al liabilit ies 340 376 490 2,514 1,939 2,761 2,584 Total net assets 2,152 3,323 5,113 10,589 12,182 12,743 12,469 T ot al int erest -bearing debt - - - 723 715 1,203 1,297 Cash flow statement (JPYmn) Cash flow s from operat ing act ivit ies -412 304 506 765 -4,205 -454 -176 Cash flow s from invest ing act ivit ies -37 -31 -102 -19 -102 -28 -390 Cash flows from financing activities 16 747 893 4,673 131 -6 -150 Financial ratios ROA (RP-based) - 29.1% 26.8% 23.6% 15.3% 12.2% 5.0% ROE - 23.1% 20.8% 19.3% 12.9% 10.5% 4.4% Equity ratio 86.3% 89.8% 91.2% 80.8% 86.3% 82.2% 82.8% Source: Shared Research based on company data Notes: Figures may differ from company materials due to differences in rounding methods. The forecast for FY12/21 financial results by Mercuria Holdings is identical to the forecast made by Mercuria Investment in terms of operating revenue, operating profit, recurring profit, and after-tax income. However, at the level of earnings per share (calculated on a fully diluted basis), based on the number of shares outstanding at the time the holding company was established, Mercuria Holdings is projecting EPS of JPY59.48.
05/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Recent updates
Highlights
On August 12, 2021, Mercuria Holdings Co., Ltd. announced consolidated financial results for 1H FY12/21; see the results section for details.
On July 1, 2021, the company announced the establishment of Mercuria Holdings Co., Ltd. and released its earnings and dividend forecasts for FY12/21.
On June 22, 2021, the company announced that it invested in Tokyo Denkai Co., Ltd.
The company manages and operates Mercuria Japanese Industrial Growth Fund, through which it aims to support growth and business succession of medium-sized companies in Japan. The company recently invested in Tokyo Denkai through Tokyo Denkai Holdings, a special purpose company (SPC) established for the purpose of investing in Tokyo Denkai.
Established in 1950, Tokyo Denkai has top shares in the world of the markets for high-purity ingots used in the production of tantalum sputtering targets for semiconductor devices and niobium used in large-scale research facilities (e.g., International Linear Collider) for studying accelerator science.
JX Nippon Mining & Metals Corp., a world-leading manufacturer of sputtering targets for semiconductor applications, is jointly investing in the SPC. The company said that it plans to provide hands-on support to Tokyo Denkai with the aim of increasing the investee’s enterprise value, and in collaboration with JX Nippon Mining & Metals, work to build a structure to enable Tokyo Denkai to achieve sustainable growth. This development is expected to have a negligible impact on the company’s consolidated earnings performance, and it commented that it will disclose any matters that require disclosure in a timely manner.
On June 16, 2021, Shared Research updated the report following interviews with the company.
On May 13, 2021, the company announced earnings results for Q1 FY12/21; see the results section for details.
For previous releases and developments, please refer to the News and topics section.
06/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Trends and outlook
Quarterly trends and results
Cumulative FY12/19 FY12/20 FY 12/ 21 FY 12/ 21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2% of FYFY Est. Operating revenue 675 2,160 2,767 4,718 1,307 2,141 3,458 6,184 793 2,118 60.5% 3,500 YoY -66.1% -19.2% -21.4% 14.5% 93.5% -0.9% 25.0% 31.1% -39.3% -1.1% -43.4% Gross profit 552 1,317 1,889 3,735 126 948 2,331 2,426 719 1,935 YoY -71.6% -48.4% -44.9% -7.4% -77.2% -28.0% 23.4% -35.0% 470.9% 104.0% GPM 81.7% 61.0% 68.3% 79.2% 9.6% 44.3% 67.4% 39.2% 90.6% 91.3% SG&A expenses 447 816 1,165 1,879 387 759 1,299 1,654 410 795 YoY -38.0% -27.3% -22.2% -2.0% -13.4% -6.9% 11.5% -12.0% 6.0% 4.7% SG&A ratio 66.1% 37.7% 42.1% 39.8% 29.6% 35.4% 37.6% 26.7% 51.7% 37.5% Operating profit 105 502 723 1,856 -261 189 1,032 772 309 1,139 76.0% 1,500 YoY -91.4% -65.0% -62.6% -12.3% - -62.3% 42.6% -58.4% - 501.7% 94.2% OPM 15.5% 23.2% 26.1% 39.3% - 8.8% 29.8% 12.5% 38.9% 53.8% 42.9% Recurring profit 89 458 666 1,800 -272 171 1,044 758 370 1,185 79.0% 1,500 YoY -92.6% -67.6% -65.0% -13.6% - -62.6% 56.9% -57.9% - 591.1% 98.0% RPM 13.2% 21.2% 24.1% 38.2% - 8.0% 30.2% 12.3% 46.7% 55.9% 42.9% Net income 40 308 478 1,245 -202 117 632 525 255 823 82.3% 1,000 YoY -95.1% -67.5% -65.0% -11.8% - -62.2% 32.3% -57.8% - 606.2% 90.4% Net margin 6.0% 14.3% 17.3% 26.4% - 5.4% 18.3% 8.5% 32.1% 38.9% 28.6% Quarterly FY12/19 FY12/20 FY 12/ 21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2 Operating revenue 675 1,485 607 1,951 1,307 835 1,317 2,726 793 1,325 YoY -66.1% 117.0% -28.3% 225.0% 93.5% -43.8% 117.0% 39.7% -39.3% 58.7% Gross profit 552 766 571 1,846 126 823 1,382 96 719 1,216 YoY -71.6% 24.3% -34.7% 205.9% -77.2% 7.4% 141.9% -94.8% 470.9% 47.8% GPM 81.7% 51.6% 94.2% 94.6% 9.6% 98.5% 105.0% 3.5% 90.6% 91.8% SG&A expenses 447 369 350 714 387 372 540 355 410 385 YoY -38.0% -8.0% -7.0% 70.4% -13.4% 0.9% 54.3% -50.3% 6.0% 3.5% SG&A ratio 66.1% 24.8% 57.7% 36.6% 29.6% 44.6% 41.0% 13.0% 51.7% 29.1% Operating profit 105 397 222 1,133 -261 450 842 -259 309 831 YoY -91.4% 84.7% -55.6% 512.8% - 13.4% 280.3% - - 84.4% OPM 15.5% 26.7% 36.5% 58.1% - 54.0% 64.0% - 38.9% 62.7% Recurring profit 89 369 208 1,134 -272 443 873 -287 370 814 YoY -92.6% 80.3% -57.9% 536.0% - 20.1% 320.6% - - 83.6% RPM 13.2% 24.9% 34.2% 58.1% - 53.1% 66.3% - 46.7% 61.5% Net income 40 268 170 767 -202 318 515 -107 255 568 YoY -95.1% 112.4% -59.4% - - 18.9% 203.8% - - 78.6% Net margin 6.0% 18.0% 28.0% 39.3% - 38.1% 39.1% - 32.1% 42.9% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. The figures in the table above are for Mercuria Investment Co., Ltd., a subsidiary of Mercuria Holdings that is no longer a listed company.
Operating revenue by segment
Cumulative FY12/19 FY12/20 FY 12/ 21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2 Operating revenue 675 2,160 2,767 4,718 1,307 2,141 3,458 6,184 793 2,118 YoY -66.1% -19.2% -21.4% 14.5% 93.5% -0.9% 25.0% 31.1% -39.3% -1.1% Fund management: management fees 393 798 1,235 1,701 441 882 1,321 1,750 429 889 YoY -28.8% -27.5% -20.3% -14.0% 12.2% 10.5% 7.0% 2.9% -2.7% 0.8% Fund management: performance fees 152 152 152 1,246 - - 549 563 - 12 YoY -89.4% -89.5% -89.5% -14.8% - - 261.2% -54.8% - - Principal investment, other 130 1,210 1,379 1,772 866 1,259 1,588 3,871 365 1,216 YoY - 838.0% 162.2% 160.2% 566.2% 4.0% 15.2% 118.5% -57.9% -3.4% Quarterly FY12/19 FY12/20 FY 12/ 21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2 Operating revenue 675 1,485 607 1,951 1,307 835 1,317 2,726 793 1,325 YoY -66.1% 117.0% -28.3% 225.0% 93.5% -43.8% 117.0% 39.7% -39.3% 58.7% Fund management: management fees 393 405 437 466 441 441 439 429 429 460 YoY -28.8% -26.2% -2.7% 8.9% 12.2% 8.9% 0.5% -7.9% -2.7% 4.3% Fund management: performance fees 152 - - 1,094 - - 549 14 - 12 YoY -89.4%------98.7% -- Principal investment, other 130 1,080 169 393 866 393 329 2,283 365 851 YoY - 757.1% -57.4% 153.5% 566.2% -63.6% 94.7% 480.9% -57.9% 116.5% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: “-“ denotes YoY increase greater than 1,000%. The figures in the table above are for Mercuria Investment Co., Ltd., a subsidiary of Mercuria Holdings that is no longer listed.
07/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Consolidated results for the six-month period through Q2 FY12/21
The following is an earnings summary for Mercuria Investment Co., Ltd., a subsidiary that is no longer listed.
▷ Operating revenue: JPY2.1bn (-1.1% YoY; progress rate versus full-year target: 60.5%) ▷ Operating profit: JPY1.1bn (+501.7% YoY; 76.0%) ▷ Recurring profit: JPY1.2bn (+591.1% YoY; 79.0%) ▷ Net income*: JPY823mn (+606.2% YoY; 82.3%) *Net income attributable to owners of the parent
Key takeaways
▷ Operating revenue: The modest 1.1% decline in operating revenue reflects the dropout of a large chuck of revenue booked in the same period last year from the sale of units held in Spring REIT. ▷ Earnings: On the earnings front, the company logged a JPY390mn gain on its exit-sale of a company held by its Buyout Fund No. 1 and a JPY290mn gain on the addition of solar power generation facility to portfolio of Enex Infrastructure Investment Corporation.
Financial position At the end of Q2 FY12/21, the company’s consolidated balance sheet showed total assets of JPY17.1bn, an increase of JPY2.1bn over the end of FY12/20. The increase in the assets held by the company reflected a combination of a JPY2.9bn increase in operational investment securities holdings, a JPY679mn decline in cash/deposits, and a JPY178mn decline in deferred tax assets. The increase in its operational investment securities holdings resulted from its acquisition of a special-purpose holding company for a solar power generation facility for inclusion in the portfolio of the Enex Infrastructure Investment Corporation.
Net assets of JPY13.5bn were up JPY1.1bn over the end of FY12/20, with the increase reflecting a JPY407mn swing in the difference between the book cost and market value of other investment securities holdings and a JPY481mn increase in retained earnings. Shareholders equity was up JPY982mn versus the end of FY12/20, the increase stemming primarily from earnings reported for Q1 and Q2, and the rise in the market value of other investment securities holdings, leaving the company with valuation gains on those holdings versus valuation losses at the end of FY12/20. At the end of Q2 FY12/21, the company had a shareholders equity ratio of 75%, down from 79% at the end of FY12/20.
For previous quarterly and annual results, see the Historical performance section.
08/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Company forecast for FY12/21
FY12/19 FY12/20 FY12/21
(JPYmn) 1H Act. 2H Act. FY Act. 1H Act. 2H Act. FY Act. Initial Est. YoY
Operating revenue 2,160 2,558 4,718 2,141 4,042 6,184 3,500 -43.4% Cost of revenue 843 140 983 1,193 2,565 3,758 Gross profit 1,317 2,418 3,735 948 1,478 2,426 GPM 61.0% 94.5% 79.2% 44.3% 36.6% 39.2% SG&A expenses 816 1,064 1,879 759 895 1,654 SG&A ratio 37.7% 41.6% 39.8% 35.4% 22.1% 26.7% Operating profit 502 1,354 1,856 189 583 772 1,500 94.2% OPM 23.2% 52.9% 39.3% 8.8% 14.4% 12.5% 42.9% Recurring profit 458 1,342 1,800 171 586 758 1,500 98.0% RPM 21.2% 52.5% 38.2% 8.0% 14.5% 12.3% 42.9% Net inco me 308 936 1,245 117 409 525 1,000 90.4% Net margin 14.3% 36.6% 26.4% 5.4% 10.1% 8.5% 28.6% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Net income refers to net income attributable to owners of the parent. The figures in the table above are for Mercuria Investment Co., Ltd., a subsidiary of Mercuria Holdings that is no longer a listed company.
FY12/21 forecast by Mercuria Investment Co., Ltd. For FY12/21, the forecast by Mercuria Investment calls for consolidated operating revenue of JPY3.5bn (-43.4% YoY), operating profit of JPY1.5bn (+94.2% YoY), recurring profit of JPY1.5bn (+98.0% YoY), and net income of JPY1.0bn (+90.4% YoY).
The estimate for operating revenue does not assume any performance fees but does assume management fees of JPY2.0bn and JPY1.5bn revenue in Principal investment and other. The company commented that it expects to exit some investments, but none are likely to pay performance fees. The company has not factored in any impact of accounting for operating revenue and cost of revenue associated with the restructuring of Spring REIT as a gross, not net, amount.
FY12/21 forecast by Mercuria Holdings Co., Ltd. On July 1, 2021, Mercuria Holdings Co., Ltd. was established as the wholly owning parent company of Mercuria Investment Co., Ltd. by means of a sole share transfer, and listed its shares on the First Section of the Tokyo Stock Exchange.
With regard to the forecast for FY12/21, Mercuria Holdings made no changes in the full-year guidance initially provided by Mercuria Investment on February 12, 2021, explaining that the expenses associated with the changeover to a holding company structure had already been baked into its original forecast.
09/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Medium-term outlook Review of past performance between FY12/05 and FY12/18 The company views the years between its founding in October 2005 and early 2010s as the first stage of the company, and sees early 2010s and onward as the second stage. During the first stage, Mercuria laid out and implemented two themes; new approach with Growth investment strategy based on its cross-border theme and establishment of its revenue base with the exchange listing of Spring REIT.
During the second stage, the company has set out to reinforce its revenue base so as to achieve stable growth that is not swayed by changes in the external operating environment, achieving this by 1) increasing its ability to raise funds by enhancing its credibility with the help of a listing on the Tokyo Stock Exchange; and 2) becoming a fund management company that manages multiple funds pursuing different investment strategies. Toward this end, during the first half of the second stage (from early 2010s through FY12/18) the company has thus far achieved a listing on the Tokyo Stock Exchange (listing on the TSE 2nd Section in October 2016, then moving up to the 1st Section in December 2017) and has also raised money to fund Principal investment strategy by issuing new shares.
In FY12/16 the company raised a total of JPY893mn through a general public offering and third-party allotment of shares that accompanied its listing on the TSE 2nd Section, then in FY12/17 raised an additional JPY4.0bn through another public offering and third-party allotment of shares as it moved up to the TSE 1st Section.
Using the fund raised through these new share issues, Mercuria established the foundation of a fund management company to manage multiple funds pursuing different investment strategies, including new Buyout/Succession strategy and Cash Flow strategy funds.
Plans for seven-year period from FY12/19 through FY12/25 Priorities during the seven-year period FY12/19–FY12/25 and performance targets for FY12/25 From FY12/19 through FY12/25, the company aims to maximize core fund revenues (performance fees) and enhancing revenues (management fees) from its frontier funds and solution business.
For FY12/25, the company is targeting five-year average net income of JPY2.0bn or more (JPY1.12bn as of FY12/19 and JPY1.10bn as of FY12/20) and a 50% increase in equity capital (JPY12.2bn at end-FY12/19 and JPY11.9bn at end-FY12/20). On August 13, 2020, the company changed the target year for these quantitative targets from FY12/23 (five-year target) to FY12/25 (seven-year target).
The company had initially created a five-year management plan covering the five-year period from FY12/19 through FY12/23, during which it set the following priorities: First, maximize revenue (performance fees) from core funds it formed around the time of its stock exchange listing; and second, boost the revenue (management fees) coming from its frontier funds and from its solutions fund business. Under its initial five-year plan, for FY12/23 the company was targeting five-year average net income* of JPY2.0bn or more (JPY1.1bn as of FY12/20) and a 50% increase in equity capital** (roughly JPY11.9bn at end-FY12/20).
*Five-year average net income: In order to smooth out the impact on income stemming from differences in timing in company’s business cycle (which goes from planning, to new fund formation, to fund management) and performance fees, the company uses a five-year rolling average for net income to measure performance rather than earnings for a single year. **Equity capital (shareholder equity + total other comprehensive income): The company uses equity capital as an indicator of stability as a fund management company, as it takes into consideration comprehensive income, which is the cumulative total of net income attributable to owners of the parent.
In the wake of the COVID-19 pandemic, the company issued a downward revision to its full-year for FY12/20 forecast at the time of its 1H results announcement. Along with the downward revision to its outlook for FY12/20, the company pushed out the target date for its long-term performance targets by two years, from FY12/23 to FY12/25, but made no changes to its priorities or the target figures themselves, as detailed above.
10/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Shared Research thinks that the company’s revenue and earnings will be fairly stable during the first half of this seven-year period as management fees rise steadily on increases in assets under management, then grow rapidly during the latter half as more performance fees start flowing in.
▷ Shared Research thinks Mercuria aims to increase management fees by increasing assets under management and, toward this end, plans to offer new subscriptions to Buyout/Succession funds and form new Cash Flow strategy funds. ▷ Mercuria reported JPY563mn in performance fees in FY12/20, a 54.8% decline YoY. The Growth Fund No. 1 (Asuka DBJ) reached the stage where it would start generating performance fees at the end of 2017, and the company expects to continue exiting investments over the next two or three years from FY12/18. The company is also expecting to earn performance fees from the Buyout Fund No. 1 (Mercuria Japanese Industrial Growth Fund; formerly Fund No. 3) and the En Fund. ▷ With regard to expenses, the biggest expenses under SG&A expenses are employee salaries and bonuses. Based on indications from the company that it finished expanding its staff in FY12/18, we do not expect outlays for employee salaries to change much over the medium term. Bonuses are another matter, though, for the company which pays out 30% of its performance fees as bonuses to its employees, so bonus expense will vary directly with the company’s performance fees.
Accelerate growth by leveraging transition to holding company structure The company is scheduled to transition to a holding company structure effective July 1, 2021 by establishing Mercuria Holdings Co., Ltd. The company says that this will enable alliances with strategic partners in each business area and spur expansion through external growth. This development anticipates the Tokyo Stock Exchange market reorganization scheduled for April 2022.
Internal growth
▷ Buyout Fund No. 1 (formerly Fund No. 3): The company is looking to maximize its performance fee income by solid fund management (i.e., making good initial investments, adding value, and then exiting investments in a timely fashion) and, towards this end, is targeting an average annual IRR of 15% over five years, which would double the value of its original
investment. ▷ Buyout Fund No. 2: Leveraging its track record, the company is looking to create a second buyout fund as an extension of its first buyout fund, and for this new fund is looking to raise between JPY40bn and JPY50bn from overseas investors. ▷ En Fund, BizTech Fund, Kiraboshi Fund: Working closely with its business partners, the company is looking to manage these funds so as to achieve an average annual IRR of 15% over five years, thereby doubling the value of its original investment. ▷ China Fintech Fund: Looking to form new funds that will add value by expanding into the Chinese market.
Asset-oriented funds
▷ Growth Fund No. 1 and Growth Fund No. 2: Expects to earn performance fees upon existing investments ▷ Spring REIT: Looking to increase acquisition fees and management fees by acquiring new properties ▷ Aircraft Leasing Fund No. 1, Thai mezzanine fund, infrastructure fund/warehousing fund for renewable energy projects, and real estate fund: Looking to attract total of JPY100bn into these cash-flow strategy funds from investors seeking stable cash flow. ▷ With respect to Principal investments, the company aims to generate a steady flow of dividend income from its investments in Spring REIT while at the same time generating a 15% internal rate of return by making strategic pre-formation investments and same-boat investments in the funds it manages.
11/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
External growth The company plans to leverage its transition to a holding company structure to focus on the following businesses: 1) solutions fund business; 2) Value investment strategy funds such as funds investing in aircraft; 3) private debt funds; and 4) inbound real estate investment funds. For solutions fund business, the company aims to deepen collaboration with a real estate development company to further develop its commission fee business. For Value investment strategy funds, the company will consider forming Aircraft Leasing Fund No. 2 with a value investment approach, because aircraft prices have slumped amid the COVID-19 pandemic.
Medium-term strategy by fund
Invest ment Inv est ment Inv est ees Stage Investment scheme Est. Size Investment strategies Targets approach type (incl. ones already exited)
Lifenet Insurance Company (exited), Growth Fund No.1 Hoken No Madoguchi Group (exited), Growth (Asuka DBJ Investment LP; Assets 2005 Minkabu the Infonoid (listed on TSE) formerly Fund No.1) Mothers March 2019; exited), SBI Biotech Overcoming the many obstacles to cross-border investing and Maximize performance drawing upon expertise built up in Japan to make investments fees on exits from in growth markets worldwide existing investments 21Vianet Group (exited), Thunip Holdings Growth Fund No. 2 (exited), Nippon Wealth Limited (private brand Growth Assets 2013 (formerly Fund No. .2) business in Hong Kong), Stellar Works (luxury furniture manufacturer based in Shanghai)
Listed REIT on Hong Kong Stock Exchange, specializes in Acquired properties leased by Kwik Fit in the investments in large grade-A office buildings in central urban Earn fees upon addition of new portfolio UK for JPY10bn (eqv.) in 2017; primary Real estate Spring REIT Assets 2008 commercial districts with the aim of benefiting from ongoing assets/ build up management fees on assets holdings are China Central Place (CCP) growth in the Beijing office building market and the consumer under management properties (Beijing) demand in China Core
Maximize performance fee income by solid Buyout Fund No. 1 Shinx (unlisted), Tsunoda (delisted 2018), »»Make cross-border investments in situations where can add fund management (make good investments, (Mercuria Japan Industrial Growth Businesses 2016 JPY21.3bn Pentel (sold), Izumi Products (sold) , Mizutani value and create win-win situations »»Seek add value, then exit investments ); target Fund Investment LP; formerly Sangyo Group investment opportunities where there are changes in control of annual IRR of 15% over five years for 100% Fund No. 3) companies, including business succession situations, delisting of return on original investment Buyout public companies, spin-offs/ carve-outs of noncore businesses »»With Buyout Fund No. 2, aim to make use of expertise in business turnarounds and invest in increasing number of businesses/companies needing to be restructured after being hit hard by downturn in economy in wake of the pandemic Based on track record of Growth Fund No. 1, Buyout Fund No. 2 Businesses 2020 JPY40.0bn looking to raise JPY40bn-JPY50bn from overseas investors for second growth fund
Invest in real assets (aircraft) with historically low price Cash Flow Aircraft leasing fund Assets 2018 JPY12.0bn+ Acquired mid-sized aircraft in 2018 volatility risk that should benefit from expected growth in international air travel over the long term
Established an investment corporation Cash flow strategy funds, looking to raise Frontier together with Itochu Enex, Sumitomo Mitsui total of roughly JPY100bn Cash Flow Enex infrastructure fund Assets 2019 Looking to raise money for renewable energy (solar) and Trust Bank, and Maiora Asset Management in warehousing fund to be put together by Enex Infrastructure 2018 Investment Corporation (listed as REIT in February 2019) Renewable energy-warehouse Cash Flow Assets 2020 fund Seek out investment opportunities in Japanese commercial real Cash Flow Real estate fund Assets 2020 estate with the aim of tapping funds from overseas investors
Working closely with business partners, aims to manage fund to achieve annual IRR EN Fund (investment advisor Work together with DBJ and CP Group to support ventures by Growth Businesses 2014 of 15% over five years, thereby doubling since 2014) Japanese companies overseas original investment, and also maximize performance fees
Working closely with business partners, Working together with Itochu Corporation, support growth in aims to manage fund to achieve annual IRR JPY5.0bn Total six companies including Bitkey, Piazza, Growth BizTech Fund Businesses 2019 companies through the application of advanced technologies in of 15% over five years, thereby doubling (target) , Styleport, and Rapyuta Robotics the fields of real estate and logistics original investment, and also maximize performance fees
Solution Working closely with business partners, »»Working together with Kiraboshi Bank, support growth and Invested in Mark Electronics; Japan Post Bank aims to manage fund to achieve annual IRR Kiraboshi Fund (Yume-Kagayaki smooth business succession of small and medium-size Buyout Businesses 2018 JPY2.62bn and Sumitomo Mitsui Trust Bank participated of 15% over five years, thereby doubling Fund No. 1 ) Japanese companies; »»Japan Post Bank invested in fund as in the fund as limited partners original investment, and also maximize limited partner performance fees
Chinese fintech company Beijing Seeking to put together new fund that can Created fund together Chinese fintech company Zhongkejin and Growth China Fintech Fund Businesses 2018 Zhongguancun Kejin Technology Co., Ltd. add value by facilitating expansion into Japanese bank Aozora Bank (Zhongkejin) Chinese market »» After early recovery of investment first project, made second investment in real estate development project jointly Thai Mezzanine Fund Assets 2019 Condominium development project with a Japanese developer (Gate City Bangkok project) »»Now looking to raise more money, mainly for joint- investment projects with Japanese developers
Vehicle for investing in nonperforming assets thrown off by portfolio clean-up of foreign - Project Sweep Businesses 2010 financial institutions downsizing their Exited fund, on the lookout for next investment opportunity operations in Japan; earned performance fees, completely exited in 2017 - Project CS Businesses 2012 Exited in 2017 Exited fund, looking for next investment opportunity Source: Shared Research based on company data At its FY12/19 results briefing, Mercuria announced name changes to some of its funds. At the same time, the company positioned Growth Fund No. 1, Growth Fund No. 2, Spring REIT, Buyout Fund No. 1 and Buyout Fund No. 2 (planned) as core funds, and other funds as frontier funds. The company says it aims to raise the earnings of these frontier funds and turn them into core funds in the future.
Outlook for assets under management between FY12/19 and FY12/25 AUM increased sharply from FY12/12 to FY12/14. AUM in FY12/14 was 2.7x what it was in FY12/11, mainly because of arranging Growth Fund No. 2 and an increase in the appraisal values of real estate investments. AUM decreased marginally in FY12/15 and
12/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
FY12/16 due to exiting investments before increasing 8.5% YoY in FY12/17 to JPY195.2bn. The upturn was the result of acquiring additional real estate assets. AUM in FY12/19 was JPY193.4bn (-0.2% YoY). Mercuria commented that it aims for AUM growth for both business investment and asset investment.
AUM
(JPYbn) 250.0
2013: Arranged No. 2 Fund 200.0 Listed Spring REIT 2008: Started asset management of 150.0 an office building in Beijing, China
2010: 100.0 Arranged Project Sweep 2005: Arranged No. 1 Fund 50.0
0.0 FY12/06 FY12/07 FY12/08 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19
Source: Shared Research based on company data
AUM by investment strategy (JPYbn) FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 Assets under management (AUM) 189.0 182.6 179.9 195.2 193.8 193.4 YoY 15.4% -3.4% -1.5% 8.5% -0.7% -0.2% Growth 28.1 24.9 24.5 22.2 12.1 7.2 YoY 11.5% -11.4% -1.6% -9.4% -45.5% -40.5% % of total AUM 14.9% 13.6% 13.6% 11.4% 6.2% 3.7% Buyout/Succession 1.5 1.5 3.2 4.7 10.1 2.1 YoY 0.0% 0.0% 113.3% 46.9% 114.9% -79.2% % of total AUM 0.8% 0.8% 1.8% 2.4% 5.2% 1.1% Real Estate/Cash Flow 157.5 154.7 151.0 168.2 171.6 184.0 YoY 17.4% -1.8% -2.4% 11.4% 2.0% 7.2% % of total AUM 83.3% 84.7% 83.9% 86.2% 88.5% 95.1% Value 1.9 1.5 1.2 0.2 - - YoY -36.7% -21.1% -20.0% -83.3% - - % of total AUM 1.0% 0.8% 0.7% 0.1% 0.0% 0.0% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
FY12/19–FY12/25 outlook for assets under management at business investment Investment strategies in business investment include Growth, Buyout/Succession, and Value funds. AUM totaled JPY9.3bn (-58.1% YoY) in FY12/19, of which Growth accounted for JPY7.2bn (-40.5% YoY) and Buyout/Succession for JPY2.1bn (-79.2% YoY). The company had no assets under management in Value funds due to exits made in 2017. In the medium term, the company expects an increase in assets of Buyout/Succession strategy to compensate for the decline in assets in Growth strategy.
AUM (Growth) Growth funds comprise Growth Funds No. 1 and No. 2, with Growth Fund No. 1 accounting for the bulk of AUM. The company commented that Growth Fund No. 1 reached the phase of earning performance fees at the end of 2017, and plans to exit from investments over two to three years starting in FY12/18.
From FY12/19 to FY12/25, Shared Research thinks the company aims to increase AUM in Growth strategy funds by creating a new China Fintech fund through cooperation with investees.
AUM (Buyout/Succession) The first subscription for Buyout Fund No. 1 (Mercuria Japanese Industrial Growth Fund; formerly Fund No. 3) was completed at a total of JPY8.1bn in August 2016. In April 2018, the final subscription for the fund was completed at a total of JPY21.3bn. In November 2018, the company formed the Kiraboshi Fund (Kiraboshi Capital Mercuria Investment Limited Partnership).
In FY12/21, the company also plans to begin subscriptions for Buyout Fund No. 2 (target fund size of JPY40bn) as an extension of Buyout Fund No. 1.
13/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
FY12/19–FY12/25 outlook for assets under management at asset investment Investment strategies in asset investment include Real Estate, Cash Flow, and Value. AUM totaled JPY184.0bn (+7.2% YoY) for Real Estate in FY12/19. As for Cash Flow, the company targets double-digit growth in AUM in the medium term by increasing AUM for the Real Estate and Cash Flow investment strategies.
AUM (Real Estate) Consolidated subsidiary Spring Asset Management Ltd. manages Spring REIT, which is listed on the Hong Kong Stock Exchange (stock code: 01426). Spring REIT mainly invests in office buildings in Beijing, China, although in 2017 it added commercial properties in the UK with a total value of JPY10.0bn to its portfolio. In the medium term, Spring REIT will continue to acquire more properties for external growth, with expectations of identifying investment properties by gathering investment information through a network of contacts and organizations it has built in the past few years.
AUM (Cash Flow) The Cash Flow investment strategy includes funds being formed or progressing to executing investments from FY12/18 onward, such as Aircraft Leasing Fund No. 1, Thai mezzanine fund, and Infrastructure Fund. Starting in FY12/19, the company is looking to attract a total of JPY100.0bn to form new Cash Flow strategy funds over the seven years from FY12/19 through FY12/25.
▷ Aircraft Leasing Fund No. 1: The fund acquires and owns used aircraft, sets up operating leases of the aircraft with airlines, and seeks investment gains from revenues from leasing fees and aircraft sales. The company’s Aircraft Leasing Fund No. 1 completed its first subscription in March 2018 at JPY5.0bn. It raised additional subscriptions through Q4 FY12/19 and its AUM
totaled over JPY12.0bn at final closing. In the medium term, the company expects to form a series of aircraft leasing funds but, in the wake of the pandemic, has pushed out plans for launching a second aircraft leasing fund until FY12/21 or later. ▷ Thai mezzanine fund: In August 2019, the company collaborated with Origin Property to form the Gate City Bangkok Mezzanine Fund, the second project for the two partners. The fund provided mezzanine investments to Knightsbridge Sukhumvit Thepharak, a condominium development project. In December 2017, the company invested its own funds in a real estate development project in Thailand (investment in preferred stock), and in February 2019 agreed to make its second
mezzanine investment in Bangkok real estate development. ▷ Infrastructure Fund: In August 2018, the company jointly established fund management company Enex Asset Management (in which Mercuria took a 22.5% stake) with Itochu Enex Co., Ltd. (50.1%), Sumitomo Mitsui Trust Bank, Limited (22.5%), and
Maiora Asset Management Pte. Ltd. (4.9%). In February 2019, Enex Infrastructure Investment Corporation, which was established with Enex Asset Management as the organizer, listed on the infrastructure fund market of the Tokyo Stock Exchange. The company is currently drawing up plans for funds focused on areas that have been largely unaffected by the
COVID-19 pandemic, such as warehousing funds for renewable energy projects. Because there is likely to be an increasing number of owners of such assets looking to sell, the company thinks there will be much investment opportunities in these areas.
FY12/19–FY12/25 outlook for management fees Shared Research thinks that management fees will grow as AUM continues to increase. Regarding business investment made under the Buyout/Succession strategy, we look for an increase in management fees due to the rise in capital commitments and total investment, on which management fees are based. We also forecast an increase in management fees with growth in AUM in asset investment.
FY12/19–FY12/25 outlook for management fees from business investment From FY12/19 to FY12/25, we expect total investments under Growth Fund No. 1 to decline as the fund exits investments over two to three years starting in FY12/18. However, for Growth Fund No. 1, the decrease in total investment does not affect management fees, because the company does not receive management fees associated with the extension of the investment period of the fund.
14/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
In contrast, at Buyout Fund No.1 (formerly Fund No. 3; Buyout/Succession strategy), we find capital commitments increasing by JPY13.2bn since August 2016 to JPY21.3bn in FY12/18. Shared Research expects management fees to increase in the medium term as the company increases AUM (capital commitments and total investment) by forming and completing subscriptions for a new fund (Buyout Fund No. 2), and in this relation note that the company is looking to attract another JPY40–50bn by forming new Buyout/Succession strategy funds between FY12/19 and FY12/25.
FY12/19–FY12/25 outlook for management fees from asset investment During FY12/19‒FY12/25, we see management fees from asset investment rising along with the increase in AUM. Spring REIT aims to continue adding assets (Real Estate), and the company is looking to attract another JPY100bn by forming new Cash Flow strategy funds, including Aircraft Leasing Fund No. 1, Thai mezzanine fund, and Infrastructure Fund. As a result, we expect growth of management fees accompanying the increase in AUM.
FY12/19–FY12/25 outlook for performance fees The company booked a total of JPY1.2bn in performance fees in FY12/19 (-14.8% YoY). In FY12/19‒FY12/25, Growth Fund No. 1 is at the phase of earning performance fees, and will progressively exit from investments over two to three years from FY12/18. In FY12/20, the company booked performance fees from Growth Fund No. 1 after exiting Lifenet Insurance Company.
Outlook for performance fees from Growth Fund No.1 In FY12/19, AUM of Growth strategy funds totaled JPY7.2bn. Growth Fund No. 1 entered the phase of earning performance fees at the end of 2017. The company plans to exit from investments over two to three years beginning in FY12/18. The company booked performance fees of JPY1.4bn from its Growth strategy funds in FY12/18 and JPY1.2bn in FY12/19. In FY12/20, the company booked performance fees of JPY549mn from exiting Lifenet Insurance Company.
Outlook for performance fees from En Fund and Buyout Fund No. 1 (formerly Fund No. 3) Formed in July 2014, the En Fund is a Growth strategy fund focused mainly on Japanese companies with strong brand power needed to expand sales channels in Asia. As the En Fund will surpass the five-year mark for operations during FY12/19‒FY12/25, it will approach the exit phase for some investments and should be able to start generating performance fees for Mercuria. In this relation, we note that Mercuria is only serving as the investment advisor for the En Fund, so the assets under management in the En Fund are not included in the AUM total for Mercuria.
Buyout Fund No. 1 (formerly Fund No. 3) was formed in August 2016 and, following the completion of the final subscription in April 2018, had brought in a total of JPY21.3bn. In October 2018, the fund sold its shareholdings in Izumi Products to Maxell Holdings (TSE1: 6810), and in 2019, exited its position in Pentel with a certain return on investment. Buyout Fund No. 1 will be four years old in FY12/20 and will have been in operation for a total of ten years by the end of FY12/25, therefore it should have advanced to the exit phase and be generating performance fees during FY12/19‒FY12/25.
Assuming the same five-year period from investment to exit and an IRR of around 15%, Fund No. 1 and No.3 should see net investment gains of 100% (1.155 = 2.0). Performance fees would come to around 20% of the (100%) investment gain on the amount invested. In the case of the En Fund, since Mercuria is serving only as the investment advisor, its performance fees would be paid in a different form.
Expenses SG&A expenses are mainly employee salaries and bonuses. Mercuria said it finished expanding its workforce in FY12/18 (increasing its headcount to 55, an increase of nine employees over the end of FY12/17). In FY12/20, the company had 61 employees (57 employees in FY12/19). With the number of employees expected to remain unchanged, we project payroll expenses (other than bonuses) to increase slowly between FY12/20 and FY12/25. As employee bonuses equal around 30% of performance fees, the amount of bonuses paid will vary year to year depending on performance fees received.
15/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Initiatives to secure long-term revenue sources Company initiatives to secure long-term sources of revenue include business succession matching platform BIZMA, investment in a Chinese fintech company, and formation of Chinese fintech fund.
Business succession matching platform BIZMA In March 2018, its subsidiary Business Market Co., Ltd. began operation of BIZMA, a business succession matching platform. As a platform, BIZMA does not charge a retainer or commission fee even when a business succession deal (M&A) is closed.
In September 2018, Business Market formed a business alliance with the Bank of Fukuoka, Ltd. and Kirayaka Consulting & Partners, Ltd., a subsidiary of Kirayaka Bank, Ltd. to offer the clients of these companies the possibility of support from around the country via BIZMA. In November 2018, the company formed Kiraboshi Fund (Kiraboshi Capital Mercuria Investment Limited Partnership), which utilizes BIZMA.
In October 2018, the company formed a capital alliance with Insource Co., Ltd. to deepen relationships with municipalities and business corporations by providing a broader range of solutions and services. Insource provides training programs (with instructors) and courses open to the public targeting municipalities and companies nationwide.
Kiraboshi Fund (Kiraboshi Capital Mercuria Investment Limited Partnership) Mercuria and Kiraboshi Capital (a subsidiary of Tokyo Kiraboshi Financial Group, Inc.) formed Kiraboshi Capital Mercuria Investment Limited Partnership to support the business succession and the growth of domestic mid-tier companies and SMEs.
The two companies and Kiraboshi Bank (also a subsidiary of Tokyo Kiraboshi FG) are to invest in the fund as limited partners. Planned total investment is over JPY2.0bn. The company commented that the fund, by temporarily holding shares in companies facing business succession issues, will facilitate a smooth transfer to the succeeding company through centralized share ownership and support the acquisition by a third party of companies without successors. This allows the choice of the best solution for a company depending on the stage of its life cycle.
The fund will utilize BIZMA, a business succession platform for SMEs, to solve a range of management challenges facing companies such as finding successors, increasing sales, cost reduction, overseas expansion, and business diversification.
Investment in Chinese fintech company and formation of China Fintech L.P. In June 2018, Mercuria invested in Beijing Zhongguancun Kejin Technology Co., Ltd. (Zhongkejin), an all-round financial services company that harnesses fintech.
Zhongkejin is a Chinese fintech company with advanced technologies that provides all-round financial services to individuals by the use of proprietary technologies. It develops all systems required to provide services in-house, such as customer attraction, credit, debt collection, biometric authentication, and big data analysis. It also responds to consumer needs with AI-based services that allow it to process loan application screenings and present lending terms in as little as three seconds. The Zhongkejin Group holds a nationwide consumer finance license (which are limited in number) and has grown to around 40mn registered users and 15mn borrowers since the service was launched two years ago. Executed loans totaled CNY70.1bn (approximately JPY1.2tn) in 2017. Zhongkejin is also launching auto finance and insurance businesses harnessing AI, providing online financial services that fulfill a diverse range of consumer needs.
In October 2018, Mercuria converted its pre-formation investment into a fund, establishing China Fintech L.P., a fund whose purpose is to invest in Zhongkejin. Total investment is JPY1.35bn and the fund period is 10 years. Aozora Bank has also invested in the fund.
In February 2019, Mercuria entered into a tripartite business alliance with Aozora Bank and Zhongkejin for the purpose of establishing a working relationship in fintech businesses, overseas businesses, and various investment-related fields.
16/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Business Overview
Business description
Mercuria is an alternative investment management company founded in 2005 with the 100% state-owned Development Bank of Japan Inc. (DBJ) as the main shareholder. Its main businesses are Fund management, which manages funds for domestic and overseas investors through investment limited partnerships and other vehicles (37.4% of operating revenue in FY12/20) and Principal investment and other, which invests the company’s own funds (62. 6%).
Businesses categories and description Business category Share of operating Description revenue Fund management 37.4％ Forms funds mainly as investment limited partnerships. Earns fund management fees by raising funds from investors in Japan and overseas, identifying investment candidates, and executing, monitoring, and selling investments. Also earns performance fees from funds linked to dividends paid to investors and investment performance. Principal investment 62.6％ Executes Principal investment primarily in the funds it manages for equity share of profit, as and other well as dividends and profit from the sale of these investments.
In Japan, the legal structure of private equity funds usually takes the form of investment limited partnerships governed by the Limited Partnership Act for Investment. Investment limited partnerships are formed by partners with limited liability and partners with unlimited liability. Generally, the fund management company invests in an investment partnership as a partner with unlimited liability as well as being responsible for fund management, while other investors invest in the partnership as partners with limited liability.
DBJ is a former government financial institution. The Ministry of Finance holds 100% of its shares. It was previously the Development Bank of Japan, established in 1951 as a bank that provides long-term finance (investments and loans) to facilitate economic restructuring and industrial development. DBJ handles senior loans, mezzanine loans, and equity finance as well as providing arrangement and advisory services. Its loan balance stood at JPY12.5tn at end-FY03/20 (JPY12.9tn at end-FY03/19).
The Development Bank of Japan Inc. (DBJ), previously a public corporation, has been Mercuria’s principal shareholder from the beginning, with approximately a 24% stake. DBJ collaborates with Mercuria by investing in funds formed and managed by the company and identifying investment candidates. Mercuria formed capital alliances in 2015 with Itochu (approx. 14% stake) for real estate investment and Sumitomo Mitsui Trust Bank (approx. 3%) for investment in business investment funds and identifying investment candidates.
These relationships have helped the company to expand its business overseas, such as a referral by Itochu resulting in additional acquisition of an asset in the UK by Spring REIT, which is managed by a Mercuria’s subsidiary. Mercuria’s investment concept is cross-border investment, focused on expanding business opportunities by investing across national borders and thinking outside the box. Its overseas network—capital alliance partners like DBJ and the management team’s powerful network of contacts—underpins the cross-border investment concept.
The company is accelerating businesses that leverage its overseas network. In 2014, after Spring REIT was liked on the Hong Kong Stock Exchange in 2013, the company won a contract to manage a joint fund between DBJ and Charoen Pokphand (CP) Group, a major Thai conglomerate. In 2018, group company Shinx and Biesse S.p.A., an Italian woodworking machinery manufacturer, formed a business alliance.
Mercuria is scheduled to transition to a holding company structure effective July 1, 2021 by establishing Mercuria Holdings Co., Ltd. It regards pursuing further growth opportunities through business expansion a management priority amid the change in industry structure spurred by the spread of COVID-19 and concluded that it needed to build a structure capable of nimble and
17/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
flexible decision-making to maximize the potential for corporate restructuring through M&A and other means. This development eyes the transition to the TSE prime market in April 2022.
Process of transitioning to a holding company: Step 1: Establish a holding company by share transfer effective July 1, 2021. The company will become a wholly owned subsidiary of the holding company, which will be the wholly owning parent. Step 2: After completing the required formalities with competent authorities, the company’s subsidiaries will be reorganized into subsidiaries of the holding company.
Share transfer method: Sole share transfer whereby the company is the wholly owned subsidiary of the holding company and the holding company is the wholly owning parent. Share transfer ratio: Shareholders of the company will be allotted one common share of the holding company for each common share held in the company. Share unit: 100 shares Number of shares to be issued (planned): 17,644,900 common shares Listing application of holding company: To apply for new listing on Tokyo Stock Exchange First Section (technical listing) Listing date: July 1, 2021 (the company’s shares are to be delisted on June 29, 2021)
Listing criteria for Tokyo Stock Exchange prime market: 1) Liquidity: Companies with abundant liquidity that diverse institutional investors can invest in safely will be selected. In the case of new listings: a) the company must be 800 or more shareholders, b) the company must have 20,000 or more tradable share units, c) market capitalization of tradable shares must be JPY10bn or more, and d) market capitalization must be JPY25.0bn or more. Companies maintaining their listing must satisfy a) – c) above as well as average daily traded value of JPY20mn. 2) Governance: Companies with a foundation that guarantees constructive dialogue between the listed company and institutional investors will be selected. With regard to openness of governance, no major shareholder and its allies should hold two-thirds or more of the total [voting rights] required to pass a special resolution at shareholder meetings. The minimum required percentage of tradable shares is 35% for both new listings and maintained listings. 3) Management performance and financial condition: Companies with a stable and superior earnings base and financial condition will be selected. The earnings base requirements are: a) total profit of the two most recent fiscal years of JPY2.5bn or more, and b) revenue of JPY10.0bn or more and market capitalization of JPY100bn or more. For financial condition, c) net assets of JPY5.0bn or more are required.
Fund management business (37.4% of operating revenue in FY12/20) Form and manage alternative investment funds In the Fund management business, the company raises funds from domestic and overseas investors in the form of investment partnerships to form and manage alternative investment funds. Alternative investments such as hedge funds, private equity funds, and REITs, have different risk/return properties from traditional investments in listed stocks and bonds, and are a form of investment that seeks absolute returns. Mercuria has formed and manages private equity funds engaging in hands-on investment mainly in unlisted companies, REITs, and leasing finance funds. As of FY12/19, AUM totaled JPY193.4bn (-0.2% YoY).
* Hands-on investment is a style of investment whereby the investor appoints the president and/or outside directors of the company it is investing in and is closely involved with its management.
** Private equity funds invest funds raised from investors in unlisted companies, improve intrinsic corporate value of the companies they invest in through involvement with their management, and distribute the capital gains made from these activities to investors. The investment period is usually 3–8 years, and funds usually acquire 50–100% of shares so they can be directly involved in management improvements. Venture capital firms also invest in unlisted companies, but they usually take a minority stake in companies at founding and/or the growth phase. Venture capital funds are a type of private equity fund, but generally play a supporting role to company founders (who retain more than 50% of the shares), by taking a 10–20% stake.
The company breaks down funds into two basic categories, business investment funds and asset investment funds.
Business investment The company offers business investment funds with three different investment strategies (Growth, Buyout/Succession, and Value) to institutional investors like pension funds and banks. These funds have an operating life of 5–10 years. After a fund is formed, it
18/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
identifies investment candidates, executes investments, increases the value of the investments, and exits from the investments. The target return (IRR) is around 15% per annum.
Asset investment Asset investment funds are broken down into Real Estate, Cash Flow, and Value investment strategies. In Real Estate strategy, the company manages Spring REIT, a REIT listed on the Hong Kong Stock Exchange and marketed to individual and institutional investors that mainly invests in office buildings in Beijing. Spring REIT has provided an average annual dividend yield of around 7%. In the Cash Flow strategy, the company has formed and is operating, or is preparing to form, Aircraft Leasing Fund No. 1, Thai mezzanine fund, and Infrastructure Fund.
Cross-border investment as an investment concept Mercuria’s investment concept is expanding cross-border investment. The company seeks to provide financial and business support to Japanese businesses and assets with growth potential, and offers to investors any returns that are generated as a result. Mercuria also seeks to form and manage financial products for investing in overseas businesses and assets that produce strong and stable returns, and to repatriate investment gains from these products to Japan.
Process from forming to exiting a fund Mercuria breaks down the process from forming to exiting a fund into five stages. The period from planning and forming a fund through to exit ranges from 5–10 years and the revenue the company receives from each fund varies according to the investment stage. The structure of fees paid by the fund to the company is different for each fund, but in all cases, fees comprise management fees (approximately 0.5–2.0% of AUM) and performance fees (around 20% of investment gains). In FY12/20, the company’s fund management business reported operating revenue of JPY2.3bn (-21.5% YoY), including management fees of JPY1.8bn (-2.9% YoY) and performance fees of JPY563mn (-54.8% YoY).
Investment stages and revenue structure of funds
Source: Shared Research based on company data
Planning a fund At the stage of planning a fund, the company analyzes economic and investment conditions and uses its contacts to devise an investment strategy. At the planning stage, the company does not receive any fees.
Prior to forming a fund, Mercuria may invest its own funds (independently or with another investor) in a company or property that it plans to include in the fund as a preparatory step (pre-formation investment).
19/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Forming a fund and searching for investment candidates To form a fund based on a plan, the company invites investors that approve of the fund’s investment strategy to subscribe.
At this stage, Mercuria searches for and evaluates investment candidates. The company searches for good investment candidates through management and other contacts/networks, and capital alliance partners DBJ and Itochu. It may also receive referrals from brokerages, banks, and M&A brokers. In identifying investment candidates, Mercuria focuses on direct negotiations with the candidate company, leveraging its management team’s contacts and networks.
If the investment candidate fulfills the fund’s criteria and can be considered for investment, Mercuria prepares and submits to the investment candidate an Expression of Interest describing the fund, post-investment scenario, and other aspects.
At the stage of forming a fund and searching for investment candidates, the fund has been formed and the company has started managing it, receiving a management fee of around 0.5%–2.0% of AUM (capital commitments). In cases where the company puts its own money in alongside investors (same-boat investments) or makes pre-formation investments, it may also receive dividends or other payments from the company in which it invests.
Executing investments At the stage of executing investments, the company first conducts due diligence of the management and financial condition of investment candidates whose owners are prepared to sell at the price offered by the fund and agree to all other terms and conditions. The company also designs an investment structure (transfer of shares, business transfer, company split, etc.), arranges financing, and concludes a purchase or investment agreement with the investment candidate.
We understand that investment candidates identified in the planning and formation stage of a fund are those with a strong probability of going ahead with investment, and thus the first investment of a newly formed fund is executed immediately. Thereafter, the company continues to source other investment candidates and executes investments. The period between forming a fund and completing all investments is around five years.
At the stage of executing investments, the company receives a management fee of approximately 0.5%–2.0% of AUM (total investment) from the fund.
By investing its own funds as well (same-boat investment), the company can also increase revenue from its Principal investment business. However, because these investments are not marked to market, revenue in Principal investment is only recognized on the income statement after the company has received a distribution from the fund or the investment has been sold and the gains are realized. In the case of same-boat principal investments or pre-formation investments, when the fund is at the point where it is making the investment, the pre-formation investment may be sold to generate a profit in cases where the asset in which the pre-formation investment was made is sold.
Increasing the value of and monitoring investments At this stage, the company may appoint directors and employees as required and engage in recruitment, provide training support, pioneer sales routes, and improve business operations based on a scenario produced at the time of executing the investment. The company works together with the employees of the company invested in to improve earnings and grow the business.
The period of increasing the value of and monitoring investments is generally 5–7 years.
During this period, the company receives a management fee of approximately 0.5%–2.0% of AUM (total investment) from the fund. As in the investment execution stage, the fund does not use mark-to-market valuations for investments; instead, returns in Principal investment are recognized on the income statement in case where the investment is sold and profits are realized.
20/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Exiting and profit distribution After the stage of increasing the value of and monitoring investments, resulting in enhanced corporate value, the company formulates and executes an exit strategy to recover its investment. This entails selecting an M&A broker, shortlisting potential buyers, responding to due diligence requirements, and negotiating a sale agreement. The company earns a profit from the sale of the investment through an IPO or transfer of the business to a third party (trade sale).
At the exit stage, the company receives performance fees of around 20% of investment gains from the fund. It also receives a distribution from the fund if it has invested its own funds. Revenue from the Principal investment will be recorded as equity-method income, such as gain on sales of operational investment securities or operational dividend income from its funds.
Two investment categories, five investment strategies Mercuria focuses on cross-border investment when forming and managing funds. The company commented that its strengths lie in investing in new businesses that combine existing products, technologies, and services in response to changes in society, rather than investing in new technologies or scientific discoveries.
Mercuria invests in businesses with strong growth potential and in assets likely to produce large returns that fit the above concept. In business investments it operates under Growth, Buyout/ Succession, and Value investment strategies, while in asset investments it operates Real Estate, Cash Flow, and Value investment strategies.
Investment targets and investment strategy categories
Source: Shared Research based on company data
21/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Investment strategies and stages of the company’s funds Investment phase Inv est ment Investment scheme Target Est. Planning; Invest ment Value addition; strategy Stage pre-formation Fund formation Exit; distribut ion execution monit or ing invest ment s Growth Fund No. 1 Core Assets 2005 (former Fund No. 1 [Asuka DBJ]) Growth Fund No.2 Core Assets 2013 (former Fund No. 2)
Growth Frontier BizTech Fund Businesses 2019
Frontier China Fintech Fund Businesses 2018
EN Fund Frontier Businesses 2014 (outsourced management from 2014) Buyout Fund No.1 (former Fund No. 3 Core Businesses 2016 [Mercuria Japanese Industrial Growth Fund]) Buyout/ Kiraboshi Fund Frontier Businesses 2018 Succession (former Yume-Kagayaki Fund No. 1)
Core Buyout Fund no. 2 Businesses Planned
- Project Sweep Businesses 2010 Value - Project CS Businesses 2012
Real Estate Core Spring REIT Assets 2008
Frontier Aircraft Leasing Fund No. 1 Assets 2018
Cash Flow Frontier Infrastructure Fund Assets 2018
Mezzanine fund Frontier Assets 2019 (Gate City Bangkok, Thailand） Source: Shared Research based on company data At its FY12/19 results briefing, Mercuria announced name changes to some of its funds. At the same time, the company positioned Growth Fund No. 1, Growth Fund No. 2, Spring REIT, Buyout Fund No. 1 and Buyout Fund No. 2 (planned) as core funds, and other funds as frontier funds. The company says it aims to raise the earnings of these frontier funds and turn them into core funds in the future.
The company plans and forms funds based on five investment strategies that take into consideration economic and social conditions and stock market trends, invites investors to subscribe to the funds, and executes investments. Trends in the balance of AUM and revenue are shown below.
AUM by investment strategy (JPYmn) FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 Assets under management (AUM) 189,000 182,600 179,900 195,200 193,800 193,400 YoY 15.4% -3.4% -1.5% 8.5% -0.7% -0.2% Growth 28,100 24,900 24,500 22,200 12,100 7,200 YoY 11.5% -11.4% -1.6% -9.4% -45.5% -40.5% % of total AUM 14.9% 13.6% 13.6% 11.4% 6.2% 3.7% Buyout/Succession 1,500 1,500 3,200 4,700 10,100 2,100 YoY 0.0% 0.0% 113.3% 46.9% 114.9% -79.2% % of total AUM 0.8% 0.8% 1.8% 2.4% 5.2% 1.1% Real Estate/Cash Flow 157,500 154,700 151,000 168,200 171,600 184,000 YoY 17.4% -1.8% -2.4% 11.4% 2.0% 7.2% % of total AUM 83.3% 84.7% 83.9% 86.2% 88.5% 95.1% Value 1,900 1,500 1,200 200 - - YoY -36.7% -21.1% -20.0% -83.3% - - % of total AUM 1.0% 0.8% 0.7% 0.1% - - Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
22/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Fees by investment strategy (JPYmn) FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 Fund management operating revenue 1,489 1,584 1,935 3,826 3,441 2,947 YoY - 6.4% 22.2% 97.7% -10.1% -14.4% Growth 310 460 460 870 1,740 1,540 YoY - 48.4% 0.0% 89.1% 100.0% -11.5% % of fund management operating revenue 20.8% 29.0% 23.8% 22.7% 50.6% 52.3% Management fees 310 460 460 440 310 290 YoY 55.0% 48.4% 0.0% -4.3% -29.5% -6.5% Performance fees - - - 430 1,430 1,250 YoY - - - - 232.6% -12.6% Buyout/Succession 30 30 400 270 590 430 YoY 50.0% 0.0% - -32.5% 118.5% -27.1% % of fund management operating revenue 2.0% 1.9% 20.7% 7.1% 17.1% 14.6% Management fees 30 30 70 270 590 430 YoY 50.0% 0.0% 133.3% 285.7% 118.5% -27.1% Performance fees - - 330 - - - YoY ------Real Estate/Cash Flow 1,020 1,010 970 1,050 1,080 980 YoY 9.7% -1.0% -4.0% 8.2% 2.9% -9.3% % of fund management operating revenue 68.5% 63.8% 50.1% 27.4% 31.4% 33.3% Management fees 1,020 1,010 970 1,050 1,080 980 YoY 75.9% -1.0% -4.0% 8.2% 2.9% -9.3% Performance fees ------YoY ------Value 130 90 90 1,640 30 - YoY 85.7% -30.8% 0.0% - -98.2% - % of fund management operating revenue 8.7% 5.7% 4.7% 42.9% 0.9% 0.0% Management fees 60 50 50 10 - - YoY -14.3% -16.7% 0.0% -80.0% - - Performance fees 70 40 40 1,630 30 - YoY - -42.9% 0.0% - -98.2% - Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: “-“ denotes YoY increase greater than 1,000%.
Business investment In its business investment, the company invites investors to invest mainly under an investment limited partnership to acquire shares in a company and works together with the management team of that company to formulate a strategy to grow its business and enhance corporate value. Mercuria makes a profit when it exits the investment, usually by selling the company through an IPO or to a third party (trade sale). Most investors are institutional investors such as banks and pension funds. The investment period of funds is usually 5–10 years with a target return (IRR) of 15%.
Mercuria does not engage in alternative investment strategies like hedge funds and venture capital funds. It does not actively trade to make a profit from short-term share price fluctuations. The company also does not aim for explosive growth of companies it invests in such as IPOs riding on a popular theme. Mercuria mainly invests in unlisted companies for over five years or more. In choosing companies to invest in, Mercuria focuses on cash flow generated by the business, not potentially popular themes in the stock market.
The company has three business investment strategies (Growth, Buyout/Succession, and Value) based on the “cross-border investment” concept and its investment philosophy. It forms funds by taking into consideration economic and investment conditions, executes investments, monitors them, and exits.
In FY12/19, AUM in business investment was JPY9.3bn (4.8% of all AUM), breaking down by investment strategy into Growth JPY7.2bn (3.7%) and Buyout/Succession JPY2.1bn (1.1%).
Growth investment strategy (3.7% of AUM in FY12/19, 52.3% of Fund management operating revenue in FY12/19) In this investment strategy, Mercuria aims to make a return on investment in companies that take on challenges without being restrained by existing business frameworks. Based on a medium- to long-term perspective, the company looks for:
▷ Companies that operate services for which demand is likely to grow with macroeconomic growth; ▷ Companies with a new business model in established industries that are under pressure to change amid a shift in social structure; ▷ Companies that are expanding overseas in businesses that harness Japan’s excellence in production management and expertise.
23/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
The main difference between Mercuria’s Growth investment strategy and venture capital funds is that Mercuria does not invest in new technologies, but in new businesses created by combining existing products, technologies, and services in response to changes in society. Further, venture capital funds usually hold around a 5% stake, whereas Shared Research understands, based on its investment track record, that Mercuria’s Growth funds will take at least a 15% stake. In terms of exit methods, venture capital funds generally exit through an IPO, whereas Mercuria’s Growth funds exit either through an IPO or a trade sale.
Mercuria’s Growth investment strategy track record includes Lifenet Insurance Company (TSE Mothers: 7157) and Hoken no Madoguchi Group.
As of FY12/20, the company managed four funds under the Growth investment strategy (excluding En fund, for which Mercuria mainly plays an advisory role), with combined AUM of JPY7.2bn (-40.5% YoY). The Growth strategy started with Growth Fund No. 1 (Asuka DBJ) formed in October 2005, with Growth Fund No. 2 (ADC Fund 2013) added in August 2013. AUM peaked at JPY28.1bn in FY12/14 and has been falling since then. As of March 2020, both these funds had completed the investment stage; Growth Fund No. 1 is in the exit/profit distribution phase, while Growth Fund No. 2 is in the phase of increasing the value of investments and monitoring them. Thus, under the Growth investment strategy, the company has been recording performance fees as well as management fees from FY12/17. In July 2019, in collaboration with Itochu Corporation, Mercuria formed the Mercuria BizTech Fund to support companies attempting to transform the real estate and logistics industries.
Growth investment strategy funds Fund Start (length of investment period) Status Growth Fund No. 1 (Asuka DBJ) October 2005 (10 years) Ongoing (exit/distribution stage) Reached stage of earning performance fees at end 2017 Growth Fund No. 2 (ADC Fund August 2013 (10 years) Ongoing (stage of increasing value of investments and 2013) monitoring them) China Fintech Fund In October 2018, Mercuria formed China Ongoing Fintech Fund for the purpose of investing in Beijing Zhongguancun Kejin Technology Co., Ltd. (Zhongkejin). The fund period is planned to be 10 years. BizTech Fund In July 2017, Mercuria formed the Mercuria Ongoing BizTech Fund in collaboration with Itochu Corporation Source: Shared Research based on company data
Growth Fund No. 1 (Asuka DBJ) Previous investments included Lifenet Insurance Company, Hoken no Madoguchi Group, and Minkabu the Infonoid Inc., operator of a website and social media for individual investors called Minna no Kabushiki. Minkabu the Infonoid listed on the Mothers market of the Tokyo Stock Exchange in March 2019 and the company exited the investment. The fund currently holds stakes in SBI Biotech Co., Ltd.
The fund participated in third-party allocation of shares in Lifenet Insurance in May and December 2007, acquiring 6,000 shares (24.75% of outstanding shares) for JPY2.0bn (Lifenet Insurance subsequently conducted a 1,000-to-one stock split in January 2012). When Lifenet Insurance listed its shares on the TSE Mothers market, the company sold part of its stake. As of March 31, 2018, the fund held 2,944,400 shares (5.8% stake) in Lifenet Insurance. In Q3 FY12/20, the company exited its investment in Lifenet Insurance and booked performance fees of JPY549mn. It has exited the investment in Hoken no Madoguchi Group by a trade sale.
Growth Fund No. 2 (ADC Fund 2013) The fund’s investments include Nippon Wealth Limited (unlisted), a private banking business based in Hong Kong, and Stellarworks Holdings Limited (unlisted), a luxury furniture manufacturer in Shanghai. It has exited the investment in Thunip Holdings. In FY12/20, the company sold part of its stake in Stellarworks Holdings Limited to Cool Japan Fund, Inc. The company
24/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
indicated that this was a good partial exit in terms of investment multiple and that its expectations for future performance fee collection have risen.
China Fintech Fund In June 2018, Mercuria invested in Beijing Zhongguancun Kejin Technology Co., Ltd. (Zhongkejin), a financial services company that harnesses fintech to provide a full range of financial services. In October 2018, Mercuria converted its pre-formation investment into a fund, establishing China Fintech Fund, a fund whose purpose is to invest in Zhongkejin. Total investment is JPY1.4bn and the fund period is 10 years. Aozora Bank has also invested in the fund.
Zhongkejin is a Chinese fintech company with advanced technologies that provides a full range of financial services to individuals through the use of proprietary technologies. Zhongkejin develops all systems required to provide services within its group, such as customer attraction, credit, debt collection, biometric authentication, and big data analysis. It also responds to consumer needs with AI-based services that allow it to process loan application screenings and present lending terms in as little as three seconds. The Zhongkejin group holds a nationwide consumer finance license (which are limited in number even in China) and has grown to around 55mn registered users and 17mn borrowers since the service was launched two years ago. For 2018, Zhongkejin reported a total of roughly JPY200bn in operating revenue, Zhongkejin is also launching auto finance and insurance businesses leveraging AI, providing online financial services that fulfill a diverse range of consumer needs.
BizTech Fund In July 2019, in collaboration with Itochu Corporation, the company formed the Mercuria BizTech Fund (“BizTech Fund”) to support companies attempting to transform the real estate and logistics industries. In addition to Itochu and Mercuria, the fund is looking for investments from companies operating in the real estate and logistics industries with an aim of reaching a total fund size of JPY5.0bn. At end-January 2020, the company completed an interim closing with investment from The Sankei Building Co., Ltd., Fuyo General Lease Co., Ltd., Nippon Tochi-Tatemono Co., Ltd., Sumitomo Mitsui Trust Bank, Ltd., and other companies. The fund accepted an investment of JPY500mn from Nippon Steel Kowa Real Estate Co., Ltd. in October 2020 and JPY300mn from ARUHI Corporation in March 2021.
Japan’s real estate and logistics (transport and warehousing) industries are said to have the lowest amount of investment in IT among Japan’s industrial sectors. The company plans to make growth investments and use hands-on support to maximize the enterprise value of companies aiming at industry innovation through next-generation technologies or unique business models or ideas. The targets of the fund are envisaged to be mainly companies involved in business-to-businesses solutions, primarily startups in the mid-stage or later, carve-outs from existing companies to create new businesses, Japanese subsidiaries of overseas companies trying to enter the Japanese market, and overseas subsidiaries of Japanese companies branching out from Japan.
In August 2019, the BizTech Fund invested in New York-based flexible office operator Knotel (main tenants are major companies). Knotel manages workspaces totaling more than 4.0mn sqft in over 200 locations in major cities in the US, UK, Germany, France, and South America.
In October 2019, the company invested in bitkey, which designs, develops, and operates a next-generation ID/passkey of the same name. Bitkey offers internally developed smartlocks for low monthly fees. It also markets bitlock LITE (no initial cost; monthly fees start at JPY300 [JPY500 for corporations]), a smartlock for private homes, and products that disengage automatic locks on doors to collective housing. These products allow doors to vacant homes to be opened for package pickup services or maid services without the need to hand over keys.
In December 2019, the BizTech Fund invested in Piazza, Inc., which develops and operates a social network site for local communities. Piazza’s service stimulates exchange between residents of high-rise condominiums in areas with growing populations such as Kachidoki and Musashi-Kosugi in cooperation with local governments, railway companies, and real estate companies, among others. The social networking site, much like circular notices and neighborhood associations, helps to facilitate the exchange of information pertinent to local communities. Mercuria noted that revitalizing the local community could affect real estate prices, independent of location or building grade.
25/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
In April 2020, the fund invested in Style Port Inc., which developed, operates, and sells ROOV®, a cloud-based online condominium gallery that harnesses its proprietary VR technology. It also invested in Rapyuta Robotic Co., Ltd. in July and in RoomClip Inc. (which operates RoomClip, a service where users can post and view photos of living spaces) in September. The company invested in its sixth company amid the COVID-19 pandemic, riding the wave of tech demand. In November 2020 (Q4), the company invested in Propy, Inc. (its seventh company).
Buyout/Succession investment strategy (1.1% of AUM in FY12/19, 14.6% of Fund management operating revenue in FY12/19) In the Buyout investment strategy, Mercuria invests in a company’s shares, participates in the investee’s management, and works to enhance corporate value by business expansion, reorganization, or restructuring. In short, Mercuria conducts a friendly takeover of a company with scope for increasing its corporate value by improving its management. Mercuria works with the management team to push forward reforms to grow the business and increase corporate value.
As of FY12/20, Buyout/Succession funds under management were the Buyout Fund No. 1 (Mercuria Japan Industrial Growth Fund; formerly Fund No. 3) and the Kiraboshi Fund (Kiraboshi Capital Mercuria Investment Limited Partnership). The company had stated that it planned to begin preparations for forming Buyout Fund No. 2 in 2020 (total fund size: JPY40–50bn), but decided to postpone until FY12/21 or later, due in part to the impact of the pandemic.
Buyout/Succession investment strategy funds Fund Start (length of investment period) Status SONOKO AD (Project Beauty) March 2013 (four years) Exit completed in 2016 Buyout Fund No. 1 (Mercuria Japan Industrial August 2016 (10 years) Ongoing (investment stage or stage of increasing Growth Fund; formerly Fund No. 3) value of investments and monitoring them) Kiraboshi Fund November 2018 Ongoing (investment stage) (Kiraboshi Capital Mercuria Investment Limited Partnership)
Buyout Fund No. 1 (Mercuria Japan Industrial Growth Fund) The fund aims to improve corporate value of mid-tier companies with stand-out products, technologies, and services by helping them pioneer new businesses such as through overseas expansion. The company also aims for business succession by transferring shares in mid-tier companies to a third party.
The fund was formed by Mercuria and DBJ in August 2016. The first subscription for capital commitments to the fund was completed at JPY8.1bn, with investment from Sumitomo Mitsui Trust Bank, among others. More funds were raised by further subscriptions mainly for institutional investors including banks, and the final subscription was completed in April 2018 at a total of JPY21.3bn for the fund. As of March 2021, it had invested in six companies and exited two.
In March 2020, the fund invested in Mizutani Sangyo Group, which manufactures and sells aluminum diecasts mainly for automotive components. The purchase of the shares of Mizutani Sangyo K.K. and its Chinese subsidiary Mizutani Precision Components Manufacturing (Shanghai) Co., Ltd. were made via MSG Investment Limited Liability Partnership, established specifically for the purpose of investing in the two companies. Since its establishment, the company has adopted a “cross-border” approach as its core investment concept. This investment requires hands-on cross-border assistance between Japan and China. It is also significant in that it fulfills business succession needs of a traditional mid-tier manufacturing company.
Investments of Buyout Fund No. 1 Company Time of Business Reason for investment Investment SHINX Ltd. October 2016 Design, production, and sales of Overseas expansion of domestic manufacturing wood and metal processing business machines, LED lighting equipment, and food-related equipment Izumi Products November 2016 Precision equipment manufacturer Support growth of the leading domestic Company (exited investment engaging in manufacture and sales of manufacturer in August 2018) hydraulic tools/equipment for
26/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
electric utilities and home appliances Tsunoda Co., Ltd. November 2017 Real estate rental business, mainly Increase corporate value in the medium to long commercial land and condominiums term by effective utilization of quality assets Pentel Co., Ltd. March 2018 (exited Manufacturer of stationery (mainly Hands-on support for overseas business expansion investment in pens and markers), art supplies, and to develop business in Asia and other regions with September 2019) electronic products a growing middle-income and school age/working age population Mizutani Sangyo K.K. March 2020 Aluminum diecast manufacturing Investment that fulfills need for hands-on, and sales (mainly for auto parts) cross-border assistance (between Japan and China) as well as business succession needs of mid-tier companies E-TEQ Physical December 2020 Blue-chip, medium-size regional Seek further growth of E-TEQ Physical Distribution Distribution Co., Ltd. trucking company based in Kyoto by providing hands-on assistance in collaboration and Shiga prefectures. Capable of with companies in which BizTech Fund invests in. providing dry, chilled, and frozen distribution from its widely accessible base location.
SONOKO AD Investment Limited Partnership The fund was formed in March 2013 and exited the investment in 2016. The fund acquired Sonoko Co., Ltd., which manufactures and sells food, food supplements, and cosmetics with JPY1.5bn in AUM. After investing in Sonoko, the company invited a former brand management executive of the LVMH group to help improve the value of the Sonoko brand and grow the overseas business. In FY12/16, the company sold Sonoko to Toridoll Holdings Corporation (TSE1: 3397) and exited the investment. The company received performance fees of JPY330mn from the fund. Assuming a set percentage of profits at 20%, we estimate investment gains at JPY1.7bn, which means the company roughly doubled its investment in about four years.
Kiraboshi Fund (Kiraboshi Capital Mercuria Investment Limited Partnership) In November 2018, Mercuria and Kiraboshi Capital Co., Ltd., a subsidiary of Tokyo Kiraboshi Financial Group Inc. (Tokyo Kiraboshi FG), jointly formed Kiraboshi Fund (Kiraboshi Capital Mercuria Investment Limited Partnership).
In addition to Mercuria and Kiraboshi Capital, Kiraboshi Bank (a subsidiary of Tokyo Kiraboshi FG) will invest in the fund as a partner with limited liability. Planned total investment is over JPY2.0bn. Mercuria commented that the fund temporarily holding shares in companies facing business succession issues will facilitate a smooth transfer to the succeeding company through centralized share ownership and support the acquisition by a third party of companies without successors. The fund will utilize BIZMA, a business succession platform for SMEs, to solve a range of management challenges for these companies such as finding successors, increasing sales, cost reduction, overseas expansion, and business diversification.
BIZMA: In March 2018, Mercuria’s subsidiary Business Market Co., Ltd. began operation of BIZMA, a business succession matching platform. As a platform, BIZMA does not charge a retainer or commission fee even when a business succession deal (M&A) closes.
Asset investment The three strategies for Mercuria’s asset investment are Real Estate, Cash Flow, and Value. As of FY12/19, AUM totaled JPY184.0bn for asset investment (95.1% of total AUM), of which Real Estate accounted for JPY184.0bn (95.1%) and Value for nil.
Real estate investment strategy (95.1% of AUM in FY12/19, 33.3% of Fund management operating revenue in FY12/19) In the Real Estate investment strategy, consolidated subsidiary Spring Asset Management Limited, in which Mercuria has an 80.4% stake, manages Spring REIT, a real estate investment trust listed on the Hong Kong Stock Exchange.
Overview of Spring REIT Spring REIT (stock code: 01426) was listed on the Hong Kong Stock Exchange in December 2013. Individual investors in Japan can invest in Spring REIT through domestic brokerage firms. It mainly invests in income properties in mainland China to capture investment opportunities globally that contribute to improved investment returns. Under Hong Kong laws governing REITs,
27/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
borrowings must be no more than 45% of total assets. Spring REIT aims for an optimal capital structure that maintains an appropriate loan-to-value ratio (LTV) at the same time as maximizing portfolio revenue and dividends for shareholders.
AUM (appraised value of assets held) in FY12/19 was CNY9.9bn (+1.1% YoY). The Spring REIT property portfolio consists of two premium grade Beijing office buildings in China Central Place (“CCP properties”) and a commercial property portfolio in the UK (“UK properties”).
Overview of the CCP properties that are the primary investment holdings of Spring REIT The company invested in the CCP properties in 2006. The Chinese economy at the time was seeing robust growth driven by export industries, and most real estate investments were in Shanghai, which has a trading port, rather than Beijing, which is the center of government functions. Mercuria forecast that China would transition from foreign demand-driven to domestic demand-driven growth and accordingly predicted the development of Beijing, which is a convenient location for companies requiring government approval for product sales and other business activities. The company made the investment in CPP properties, expecting high occupancy rates and increasing rents for the large office buildings in Beijing, which are limited in supply.
Spring REIT: Earnings performance Operating results (USDmn) 2014 2015 2016 2017 2018 2018 2019 (USDmn) (USDmn) (USDmn) (USDmn) (USDmn) (CNY'000) (CNY'000) Revenue 81.5 80.5 75.4 76.7 84.3 558,831 546,592 YoY 22.8% -1.2% -6.3% 1.7% 10.0% - -2.2% Property operating expenses 19.3 19.2 18.6 19.6 21.0 138,637 139,772 Property management fee 1.6 1.6 1.6 1.7 1.8 11,968 11,523 Property tax 4.0 4.0 6.3 8.7 9.2 60,923 58,583 Business and other tax 4.6 4.6 1.4 - - - - Other tax 1.0 1.0 1.1 6,976 6,156 Withholding tax 8.2 8.1 7.6 7.3 8.0 53,046 50,328 Leasing Commission 0.6 0.8 0.6 0.8 0.6 3,676 5,445 Others 0.1 0.1 0.1 0.2 0.3 2,048 7,737 Net property income 62.2 61.3 56.8 57.1 63.4 420,194 406,820 YoY 25.5% -1.4% -7.2% 0.4% 11.0% - -3.2% Net property income margin 76.3% 76.1% 75.4% 74.4% 75.1% 75.2% 74.4% Total distributable income 37.7 41.2 35.9 34.0 34.0 205,490 232,291 Total distributions of the year 37.7 38.4 33.5 34.0 31.2 205,490 232,291 Payout ratio 100.0% 93.1% 93.3% 100.0% 91.8% 98.0% 100.0% Source: Shared Research based on Spring REIT materials
Spring REIT: Assets and borrowings Financial positions (USDmn) 2014 2015 2016 2017 2018 2018 2019 (USDmn) (USDmn) (USDmn) (USDmn) (USDmn) (CNY'000) (CNY'000) Appraised property value 1,306.6 1,283.6 1,296.6 1,488.1 1,419.5 9,764,060 9,873,265 CCP Property 1,306.6 1,283.6 1,296.6 1,387.8 1,322.4 9,096,000 9,174,000 UK Portfolio - - - 100.3 97.1 668,060 699,270 Total assets 1,392.4 1,377.2 1,381.2 1,586.6 1,495.1 10,283,930 10,429,369 Total borrowings 460.7 477.3 480.5 547.5 531.3 3,654,540 3,704,840 Gearing ratio 33.1% 34.7% 34.8% 34.5% 35.5% 35.5% 35.5% Net assets attributable to unitholders 894.2 864.2 866.7 1,000.4 925.1 6,363,435 6,447,775 Source: Shared Research based on Spring REIT materials
The CCP Property comprises all office floors of Office Buildings 1 and 2 (floors 4–28 of building 1, including equipment and emergency shelter facility on the 16th floor, and floors 4–32 of building 2, including equipment and emergency shelter facility on the 20th floor; office gross floor area of 120,245sqm) and underground parking spaces with total capacity of about 600 vehicles in Beijing’s world-class CCP complex. CCP is one of Beijing’s top-rated premium office complexes. The two office buildings owned by Spring REIT have many major companies as tenants and maintain high occupancy rates.
28/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
CCP properties in China Central Place, Beijing, China
Source: Shared Research, from Spring REIT materials
Overview of CCP properties CCP properties All office floors of Office Buildings 1 and 2 (floors 4–28 of Building 1 and floors 4–32 of Building 2) Brand value Multi-use buildings with four components of office, retail, hotels (The Ritz-Carlton, Beijing and JW Marriott Hotel Beijing), and residential Completion December 2006 Southeast corner of Beijing's Central Business District (CBD) in the narrow sense, or center of broader CBD. Approximately 7km from Location Tiananmen Square and 20km from Beijing Capital International Airports Purpose Premium grade office building Space Office area: 120,245sqm; parking area: 25,127sqm (capacity: 600 cars) Tenants Major Chinese and foreign company tenants, including Deutsche Bank, Conde Nast, Epson, NBA, Richemont, Pandora, Johnson & Johnson, other Occupancy rates Maintained high occupancy rate of over 94% since listing; average rent increasing at rate of 7.6% per year Source: Shared Research, from Spring REIT materials
Income from the CCP properties that are the primary investment holdings of Spring REIT Office rents (calculated as floor space in sqm x average monthly rent per sqm x occupancy rate) are the main revenue Spring REIT receives from its investments in CCP properties. In FY12/19, the average monthly rent per sqm was CNY362, and occupancy rate was 94.2%. Rents have increased 70% in the past five years and the occupancy rate has been trending at around 94%. Consequently, the company commented that Spring REIT’s dividend yield has averaged 7%. The company commented that in China, office occupancy rates are highest in Beijing. In the four years from 2018, the supply of offices is projected to increase by 6.0% per year, far lower than the 18.6% average forecast for other cities in China (see Market and value chain section).
Average rents and occupancy rates of CCP properties 2014 2015 2016 2017 2018 2019 Net average passing rents (CNY/sqm) 334.0 337.0 343.0 357.0 362.0 362.0 YoY 21.9%0.9%1.8%4.1%1.4%0.0% Average occupancy rates 96.0% 95.0% 94.0% 94.2% 95.4% 94.2% Source: Shared Research based on Spring REIT materials Note: Net passing rent represents effective rent on a net basis, exclusive of BT or VAT, as applicable.
Having completed a five-year refinancing (total amount: approximately JPY51.0bn) in FY12/19, Spring REIT has greatly reduced its financing costs and established a stable financial position.
External growth at Spring REIT REITs undergo internal and external growth. Internal (organic) growth is profit growth from increasing profitability of existing properties by increasing rents, raising occupancy rates, and reducing costs. External growth is expanded revenue by acquiring additional properties that have higher yields than existing properties in the portfolio. Shared Research understands that having a pipeline for property acquisitions is important for external growth, and ideally a fund has a system in place for a stable supply of properties from sponsors. Thus, as a rule, real estate companies serve as REIT sponsors, utilizing their information and networks to supply properties to the REITs. Mercuria says it obtains information on additional property acquisitions through alliances and management’s contacts with DBJ, Itochu, and Sumitomo Mitsui Trust Bank, which facilitates external growth of Spring REIT.
29/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
The first additional property purchase by Spring REIT was in July 2017, when it acquired properties in the UK for GBP73.5mn. The UK properties are a portfolio of 84 commercial properties leased by Kwik Fit (GB) Limited. Kwik Fit is the UK’s top automobile service operator with over 600 stores around the country. The 84 properties owned by Spring REIT have a 100% occupancy rate and provide an annual rental income of GBP4.5mn. All properties have 15-year leases with no cancellation provisions. Rents are raised every five years.
Collaboration with Sino-Ocean Group In August 2020, the company announced the transfer of shares (9.8% stake) in Hong Kong-based subsidiary Spring Asset Management Limited (SAML) to an investment consortium led by Sino-Ocean Group Holding Limited (Hong Kong Stock Exchange: 03377). Sino-Ocean Group is one of China’s leading real estate development companies whose shares are listed on the Hong Kong Stock Exchange. It develops and invests in offices and residential buildings in China’s major cities (mainly Beijing). Mercuria believes that having Sino-Ocean Group as a strategic shareholder will expand opportunities for acquiring new properties and contribute to external growth of Spring REIT.
Value investment strategy (no AUM in FY12/19) Mercuria defines Value investment as investment in businesses and assets traded at below their theoretical prices. The company’s Value investments were mainly securitized loans and investment assets with cash flow such as real estate being traded at below their theoretical price despite being stable assets/businesses, which were identified through the company’s own network and contacts of its directors and employees.
In Value investment, the company’s track record includes Project Sweep (formed in September 2010) and Project CS (October 2012). The company exited both funds in 2017. In FY12/20, the company had no assets under management in the Value investment strategy.
Project Sweep was a fund that invested in nonperforming loans, real estate, and other assets that were for sale by foreign financial institutions scaling back their operations in Japan. Real estate for investment was mainly rental properties in Tokyo and other major cities. The company says it improved net operating income (NOI) of almost all properties in which the fund invested by taking actions to increase their value, such as replacing tenants and conducting large-scale remodeling.
AUM of the Value investment strategy was JPY3.7bn in FY12/12 and performance fees totaled JPY1.88bn in FY12/12–FY12/17. Assuming performance fees are 20% of AUM, total investment gains of the Value investment strategy were JPY9.4bn. We thus estimate that investors almost doubled their investment after deducting performance fees.
Value investment strategy funds Fund Start (length of investment period) Status Project Sweep (ADP-CE Investment Limited Partnership) September 2010 (seven years) Exit completed in 2017 Project CS (ADP-CE Investment Limited Partnership) October 2012 (five years) Exit completed in 2017
Cash Flow investment strategy In the Cash Flow investment strategy, the company invests in assets likely to provide stable cash inflows such as social infrastructure and rental properties to provide stable asset management opportunities to investors. Mercuria has teamed up with partners that have global franchises and track records in each field to identify investment opportunities and manage funds.
As of March 2021, the company plans to form or begin investment in Aircraft Leasing Fund No. 1, Thai mezzanine fund, and Infrastructure Fund. Aircraft Leasing Fund No. 1 entered the management phase with the initial subscription totaling JPY5.0bn in March 2018. The fund had accumulated AUM of over JPY12.0bn by final closing in Q4 FY12/19. In FY12/17, the company began investing its own funds prior to formation of a mezzanine fund. In August 2018, the company joined a joint venture to form Enex Asset Management, a fund management company; this was followed in February 2019 with the listing of Enex Infrastructure Investment Corporation on Tokyo Stock Exchange infrastructure fund market, with Enex Asset Management acting as the fund’s organizer.
30/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Aircraft Leasing Fund No. 1 Although severely affected by the COVID-19 pandemic, Mercuria expects ongoing growth in world air passenger demand. According to Boeing’s “Commercial Market Outlook 2020–2039,” in the next 20 years, demand for new aircraft is estimated at 43,110 (previous forecast: 44,040 new aircraft) with a total value of USD6.8bn (USD6.4bn). The number of aircraft in operation is expected to double from 25,830 in 2018 to 50,660 in 2038. During the period covered by the forecast, Boeing assumes a CAGR of 2.7% for world GDP (previous forecast: 2.8%), 4.6% for air passenger demand (4.7%), and 3.4% for air cargo demand (4.2%).
According to the company, aircraft are a low risk, high-return investment, because supply of aircraft is tight amid increasing demand due to the dominance of two manufacturers (Boeing and Airbus), resulting in stable prices. Airlines maintain their aircrafts in compliance with their country’s regulations, which means planes are maintained in good condition. Investment in aircraft is limited, because aircraft servicing and legislation are highly specialized fields. Thus, aircraft leasing cash flow yields are likely to remain high, exceeding those of real estate investment (6–8% return per year on USD basis). Aircraft have an advantage over real estate in that they can be relocated to regions with high demand in response to changes in political and economic conditions, and are thus less affected by external factors.
In this context, Mercuria decided to form an aircraft leasing fund in June 2017 with German financial institution DVB Bank SE (DVB), and appointed DVB as the property manager for Aircraft Leasing Fund No. 1. The company notes that DVB has a world-class track record and expertise in aircraft financing, marketing, and management.
Aircraft Leasing Fund No. 1 invests in aircraft and seeks returns from leasing (leasing fee revenue) and selling them (sales revenue). The portfolio will mainly consist of narrow-body aircraft for which there is most demand, but the company plans to invest in more profitable wide-body aircraft* later on.
*Wide-body aircraft (also known as twin-aisle aircraft), are those with two aisles designed for long-haul flights. Narrow-body aircraft have only one aisle and are designed for shorter flights.
In March 2018, Mercuria announced that it had concluded a final agreement with DVB and others, and had entered the investment stage of Aircraft Leasing Fund No. 1. The company completed the first subscription at JPY5.0bn, with subscriptions from a broad range of investors including financial institutions and pension funds. The fund had AUM of over JPY12.0bn by its final closing in Q4 FY12/19. In December 2018, Aircraft Leasing Fund No. 1 completed its first purchase, a Boeing 787 plane. In May 2019, the company announced the signing of an MOU covering the purchase of two Airbus A320neo aircraft.
However, the COVID-19 pandemic and lockdowns around the world in 2020 led to revisions of leasing fees and aircraft prices, which had a widespread impact on the aircraft business. Although the company planned to form Aircraft Leasing Fund No. 2, this has been postponed until FY12/21 or later.
As of March 2021, the investment environment appears to be bottoming for the Aircraft Leasing Fund, because vaccines have been developed and vaccinations have started. Mercuria completed investments of Aircraft Leasing Fund No. 1 after the pandemic started. It added two new aircraft by taking advantage of excellent investment opportunities that reflected the impact of the pandemic.
Thai mezzanine investment The Thai economy has been growing since the July 1997 Asian financial crisis, with GDP growing at a CAGR of 4%. According to the company, real estate demand is likely to remain brisk in Thai capital Bangkok amid progressive urbanization accompanied by construction of new rail networks, and rising middle class incomes. Domestic bank loans in Thailand are failing to keep pace with the demand for funds among developers. As a result, Japanese developers have moved into the Thai real estate market in recent years.
In December 2017, the company teamed up with Thai real estate developer Origin Property Public Company Limited to invest in one of Origin’s condominium developments in Bangkok. The project is being developed by Origin’s subsidiary project company
31/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Origin Grand. Mercuria acquired preferred stock issued by Origin Grand through an investment vehicle (mezzanine investment). To hedge against currency risk associated with the investment, Mercuria borrowed funds in local currency (THB) from the Sumitomo Mitsui Trust Bank in Thailand.
Mezzanine investment is a form of finance that falls between shares (equity) and loans. A mezzanine is an intermediate floor between two main floors. Mezzanine funds invest in subordinated loans and bonds that are lower in priority for repayment than loans, and preferred stock, which are more likely to pay dividends than common stock.
Mercuria Investment committed to its second mezzanine investment in a Bangkok real estate development in February 2019, signing a joint venture agreement with Itochu Corporation (its strategic shareholder) and Magnolia Quality Development Corporation Limited (MQDC), a partner of CP Group, Thailand’s largest conglomerate.
This project is a complex consisting of commercial facilities and condominiums in the center of Bangkok, managed by Whizdom Quality Development Corporation Company Limited (Whizdom), a subsidiary and project company of MQDC. Mercuria is planning to participate in this project through the preferred stock of Whizdom. A project with Origin Property in 2017 and this project will bring the total number of condominiums in which it has invested to approximately 1,250.
Having gained such experience in the Thai real estate market, Mercuria is considering the formation of a fund comprising mezzanine investments in Thailand. The company signed a basic agreement with local companies that are potential partners in March 2018. As part of this strategy, in March 2018 the company established Mercuria (Thailand) Co., Ltd. and opened an office in Thailand in April as its third overseas base after Beijing and Hong Kong.
In August 2019, the company collaborated with Origin Property to form the Gate City Bangkok Thai Mezzanine Fund, the second project for the two partners. The fund provided mezzanine investments to Knightsbridge Sukhumvit Thepharak, a condominium development project promoted by Thai real estate developer Origin Property, with the participation of Japanese developer ES-CON Japan Limited. The plan is to build a condominium development with 474 residential units and one retail unit.
Unlike previous funds, joint venture investment with operating companies is progressively becoming a conventional style of the company’s mezzanine investment in Thailand.
Infrastructure fund/warehousing fund for renewable energy projects In FY12/17, Mercuria invested its own funds in a solar power generation facility prior to forming an infrastructure fund. The company also established fund management company Enex Asset Management Co., Ltd. (in which Mercuria took a 22.5% stake) with Itochu Enex Co., Ltd. (50.1%), Sumitomo Mitsui Trust Bank, Limited (22.5%), and Maiora Asset Management Pte. Ltd. (4.9%).
In August 2018, the same four companies established Enex Infrastructure Investment Corporation (to be listed on Tokyo Stock Exchange infrastructure fund market), with Itochu Enex Co., Ltd. holding a 50.1% share, Mercuria Investment 22.5%, Sumitomo Mitsui Trust Bank, Limited 22.5%, and Maiora Asset Management Pte. Ltd. 4.9%. Then on February 13, 2019, Enex Infrastructure Investment Corporation was listed on the infrastructure fund market of the Tokyo Stock Exchange.
In December 2020, Mercuria formed an infrastructure/warehousing fund and concluded a pipeline agreement. The basic strategy of the fund is to invest in solar power generation facilities and sell to Enex Infrastructure Investment Corporation. The company provides solar power generation facility pipeline information and warehousing function. This is an important project for the company in the area of ESG and as a way to achieve SDGs. Subscription was completed in March 2020, with investors committing JPY7.5bn in total.
32/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Earnings structure
(JPYmn) FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 Assets under management (AUM) 189,000 182,600 179,900 195,200 193,800 193,400 YoY 15.4% -3.4% -1.5% 8.5% -0.7% -0.2% Growth 28,100 24,900 24,500 22,200 12,100 7,200 YoY 11.5% -11.4% -1.6% -9.4% -45.5% -40.5% Buyout/Succession 1,500 1,500 3,200 4,700 10,100 2,100 YoY 0.0% 0.0% 113.3% 46.9% 114.9% -79.2% Real Estate/Cash Flow 157,500 154,700 151,000 168,200 171,600 184,000 YoY 17.4% -1.8% -2.4% 11.4% 2.0% 7.2% Value 1,900 1,500 1,200 200 - - YoY -36.7% -21.1% -20.0% -83.3% - - (JPYmn) FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 Operating revenue 1,616 2,048 2,521 4,224 4,122 4,718 YoY - 26.7% 23.1% 67.6% -2.4% 14.5% Fund management 1,489 1,584 1,935 3,826 3,441 2,947 YoY - 6.4% 22.2% 97.7% -10.1% -14.4% Management fees 1,410 1,546 1,562 1,771 1,978 1,701 Growth 310 460 460 440 310 290 Fee rate 1.2% 1.7% 1.9% 1.9% 1.8% 3.0% Buyout/Succession 30 30 70 270 590 430 Fee rate 2.0% 2.0% 3.0% 6.8% 8.0% 7.0% Real Estate/Cash Flow 1,020 1,010 970 1,050 1,080 980 Fee rate 0.7% 0.6% 0.6% 0.7% 0.6% 0.6% Value 60 50 50 10 - - Fee rate 2.4% 2.9% 3.7% 1.4% - - Performance fees 70 38 373 2,055 1,463 1,246 Growth - - - 430 1,430 1,250 Buyout/Succession - - 330 - - - Real Estate/Cash Flow ------Value 70 40 40 1,630 30 - Principal investment 67 463 571 398 673 1,739 YoY - 590.3% 23.3% -30.2% 69.0% 158.4% Gain on fund units 47 248 389 38 387 457 Gain on sale of operational inv estment securities - 153 21 189 64 963 Dividend income 20 62 75 170 190 263 Other 60 - 15 0 8 32 Cost of revenue 0 169 276 74 88 983 Fund management costs - - 246 - - - Cost of sale of operational investment securities - 169 22 58 38 924 Loss on fund units 0 0 0 16 50 84 Rev ersal of prov ision for refund of performance fees -25 Operating gross profit 1,616 1,878 2,245 4,150 4,034 3,735 SG&A expenses 676 972 965 1,920 1,917 1,879 YoY - 43.7% -0.7% 99.0% -0.2% -100.0% SG&A ratio 41.8% 47.5% 38.3% 45.4% 46.0% 39.0% Bonuses 72 101 483 233 220 Salaries and allowances 186 255 285 358 404 476 Compensations 77 137 120 227 294 233 Provision for directors' bonuses - - - 193 - - Directors' compensations 159 151 157 192 247 210 Retirement benefit expenses 11 38 13 18 27 39 Provision for directors' retirement benefits 78 11 11 9 - Other 239 277 438 703 701 Operating profit 940 906 1,280 2,230 2,117 1,856 YoY - -3.5% 41.2% 74.2% -5.1% -100.0% OPM 58.1% 44.3% 50.8% 52.8% 51.4% 39.3% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
Operating revenue Operating revenue consists of revenue from the Fund management and Principal investment businesses.
Operating revenue from Fund management business Revenue from the Fund management business consists of management fees and performance fees.
Management fees Mercuria receives management fees from the funds it manages. In business investment, management fees are based on AUM, at around 2.0% of capital commitments in the management phase of the fund and around 2.0% of total investment after the investment period ends.
33/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
The act of fund management companies collecting funds from investors when the need arises is known as capital call, which is designed to eliminate the needless retention of funds. Under this method, the upper limit of funds to be contributed by each investor is known as a “capital commitment” and the total of investment securities and investment intellectual property acquired by a fund by a certain date is known as “total investment.”
REITs pay management fees comprising a basic fee of 0.4% of the appraisal value, plus a variable fee of 3% of revenue after business expenses, and around 1.0% of the purchase price of a property as an acquisition fee. Management fees that Spring REIT pays Spring Asset Management breaks down as follows:
Management fees paid by Spring REIT to Spring Assets Management 2014 2015 2016 2017 2018 2018 2019 (USDmn) (USDmn) (USDmn) (USDmn) (USDmn) (CNY'000) (CNY'000) Manager's fee 7.4 7.5 7.3 8.2 8.3 54,726 54,120 Base fee 5.5 5.6 5.6 5.5 6.4 42,120 41,804 Variable fee 1.9 1.9 1.6 1.7 1.9 12,606 12,316 Acquisition fee - - - 1.0 - - - Source: Shared Research based on Spring REIT data
Operating revenue from Spring REIT is denominated in HKD and is thus affected by forex rate fluctuations. Spring Asset Management receives part of the management fee from Spring REIT as REIT investment units, which is affected by price movements of Spring REIT investment units.
Performance fees In business investment, the company receives performance fees of around 20% of investment gains (difference between value of asset and principal amount invested) or a figure exceeding a predetermined investment return at exit. The timing of accrual of performance fees varies according to the investment stage of the fund and/or exit timing of each investment. Similarly, investment gains differ between funds and businesses. Consequently, performance fees can vary widely.
Operating revenue from Principal investment business The Principal investment business derives revenue from joint investments in funds with clients (same-boat investment), comprising profit of fund units, gain on sales of operational investment securities, and operational dividend income from businesses in which the fund invests.
Expenses Expenses are cost of revenue and SG&A expenses.
Cost of revenue The main cost of revenue is the cost of sales of operational investment securities or the investment principal of operational investment securities in the Principal investment business.
SG&A expenses SG&A expenses are mainly personnel expenses.
Personnel expenses break down into salaries and allowances, bonuses, directors’ compensations, and directors’ bonuses (or provision for directors’ bonuses). Its salaries and allowances are trending up along with an increase in the number of employees. The company distributes a portion of performance fees as bonuses to employees under specified conditions. Directors’ compensations consist of basic remuneration and performance-linked remuneration.
Employee count (consolidated) and average annual salary (parent) (JPYmn) FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 Number of employees 26 33 38 46 55 57 Average annual salary - - 11 18 12 14 Source: Shared Research based on company data
34/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Strengths and weaknesses
Strengths
◤ Relationships with DBJ and Itochu and ability to expand overseas by utilizing network of contacts built up since its founding: Former public corporation DBJ has been Mercuria’s top shareholder (roughly 24% stake) from its establishment. DBJ collaborates with the company by investing in funds it forms and manages and helps to identify portfolio companies/projects. Shared Research thinks having DBJ as its top shareholder helps Mercuria gain the confidence of companies in which its funds invest and increase institutional investors’ confidence in the company. Mercuria also formed capital alliances with Itochu (approx. 14% stake) and Sumitomo Mitsui Trust Bank (approx. 3%) in 2015. It collaborates with the former in real estate investment strategy (jointly established BizTech Fund in 2019) and with the latter in business investment funds and searching for potential portfolio companies/projects. These relationships have helped the company to expand its business overseas, such as a referral by Itochu resulting in additional acquisition of an asset in the UK by Spring REIT, which is managed by a Mercuria’s subsidiary. The company is accelerating businesses that leverage its overseas connections. In 2014, after Spring REIT was listed on the Hong Kong Stock Exchange in 2013, the company won a contract to manage a joint fund between DBJ and Charoen Pokphand (CP) Group, a major Thai conglomerate.
◤ Being the only listed private equity fund management company in Japan: In the private equity funds business, Mercuria prefers friendly funding to hostile takeovers, focusing on improving corporate value along with top management in those companies. For owners considering the sale of their companies for business succession, in addition to the sales price, protection of employees’ jobs after the sale and the feasibility of business growth strategies are important factors when deciding on a buyer. Mercuria says being the only Japan Private Equity Association member company whose shares are listed on TSE First Section and having DBJ as its top shareholder help to gain the trust of businesses in which Mercuria invests because it is considered likely to honor conditions of sale other than the sales price. Shared Research thinks these factors (and the company’s policy of negotiating directly with companies) help to produce results, i.e., bring in performance fees. Being a company listed on TSE First Section is also likely a factor that increases institutional investors’ confidence in Mercuria.
◤ Earnings structure in which stable source of revenue covers most of its fixed costs: Mercuria receives management fees of around JPY1.1bn per year from Spring REIT, a real estate investment trust that mainly invests in office buildings in Beijing that accounted for 88.5% of AUM in FY12/18. Shared Research sees Spring REIT as a stable source of revenue over the medium to long term, because its main source of revenue is rents from office buildings in Beijing with high occupancy rates. The bulk of Mercuria’s expenses is SG&A expenses, centering on salaries and allowances, bonuses, and directors’ compensations and bonuses, of which bonuses are paid as a percentage of performance fees and thus vary depending on these fees. SG&A expenses totaled JPY1.9bn in FY12/19, of which fixed costs excluding performance-linked bonuses were JPY1.7bn. Management fees earned by Spring REIT, a stable source of revenue, cover most of the company’s fixed costs, helping to stabilize earnings performance.
Weaknesses
◤ Difficulty of controlling the timing of performance fee accrual: The company’s operating revenue consists primarily of revenue from the Fund management business, mainly business investment funds. Performance fees of JPY563mn (-54.8% YoY) in FY12/20 accounted for 9.1% of total operating revenue (down from 26.4% in FY12/19). Performance fees are generated during a fund’s exit phase, which usually lasts two to three years. If the company were to form a fund every three years, it could receive a steady stream of performance fees. However, in business investment, it is difficult to form a new fund at regular intervals, because it takes three to five years from forming a fund to completing the execution of investment, during which time the company cannot form a new fund with the same investment strategy, and the timing of forming a fund can be delayed depending on economic and investment conditions. For Mercuria, which aims for stable earnings growth as a listed company, the irregular timing of accruing performance fees can be considered a weakness, because it increases earnings instability. Taking its business cycle into consideration, we think it is appropriate to evaluate earnings performance using a five-year average. Based on this method, the company’s earnings trends have been stable. Its dividend policy is also based on five-year average of net income.
35/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
◤ Structure that is heavily dependent on the current management team, making it difficult for next-generation management to flourish: The three key players in the company are CEO Toshihiro Toyoshima and two executive directors who head the asset investment and business investment operations. The management team had worked at DBJ and foreign financial institutions, with experience in starting up real estate securitization, PFI, and business turnaround operations, cross-border M&A, and Japan’s first Debtor in Possession (DIP) finance (loans to companies that filed for court protection under the Civil Rehabilitation Act up to the point of confirmation of approval of their restructuring plans). Shared Research believes the management team’s experience and contacts have played an important role in running the company’s business, such as identifying investment candidates and fund subscriptions. Although Mercuria is strengthening its management structure by hiring and training to prepare for an emergency situation whereby the current management team is unable to perform their duties, a top-down management structure that is highly dependent on the management team provides fewer opportunities for employees to make their own decisions and solve problems, which we think is a weakness, because it is harder to train management candidates.
◤ Risk of competition with other companies affecting its earnings: Among financial services, the company’s mainstay fund management business has a relatively low entry barrier and thus constantly has plenty of competition. When competition intensifies, the company not only struggles to acquire and keep clients, but will also suffer from downward pressure on management fee and performance fee rates, which could impact negatively on its earnings. Shared Research thinks as Mercuria is a relatively small company with 61 employees as of end-December 2020, it is vulnerable to an earnings downturn if competitors were to poach its fund managers and other skilled employees, resulting in a depleted work force.
36/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Market and value chain
Market strategy History of private equity in Japan It became possible to establish private equity funds in Japan in 1997, after a revision of the Antimonopoly Law allowed pure holding companies. In October 1997, Advantage Partners began offering Japan’s first funds specializing in buyouts.
In 2002–2005, against the background of the bursting of the dot-com bubble starting in 2001, the bulk of projects undertaken by private equity funds were restructuring and cost-reduction of the businesses and subsidiaries of unprofitable corporations to enhance corporate value. Mercuria was founded, and formed Fund No. 1, in 2005. A typical project of this period was the acquisition of Aozora Bank by Cerberus NCB Acquisition L.P. in 2003.
In 2006–2007, after the Livedoor scandal, private equity funds’ main projects shifted from improving companies’ earnings by cost reduction to increasing their value by management improvements, such as developing overseas sales routes. One of the world’s largest private equity firms Kohlberg Kravis Roberts & Co. L.P. (KKR) established an office in Japan in 2006. A typical project of this period was the MBO by the Carlyle Group and Unison Capital of Toshiba affiliate Covalent Material Corporation (currently CoorsTek) in 2007.
According to Dealogic, the value of private equity fund-related domestic investment, which trended at around JPY1.5tn per year in 2004–2007, shrunk to JPY0.5tn–JPY1.0tn in 2008 onward after the global financial crisis. However, in 2009, diverse players appeared in the private equity business in Japan, such as Marunouchi Capital (with investment from Mitsubishi Corp. and the Bank of Tokyo-Mitsubishi UFJ), public-private sector partnership Innovation Network Corporation of Japan (INCJ), and funds affiliated with trading companies and public-private sector partnerships.
37/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
History of private equity funds in Japan
Early years Peak cost-cutting years Growth phase Stagnation phase 1997–2001 2002–2005 2006–2007 2008–
Overview Buyout firms appeared in Japan Private equity funds took over Number of investment Investment is slowing, but after 1997 law change allows businesses and subsidiaries portfolios peaked; primary diverse players have appeared establishment of pure holding suffering from non-performing method for increasing value in the market, including companies loans and undertook shifts from cost reduction to public-private sector restructuring and cost management improvements partnership funds and funds reduction affiliated with trading companies
Main firms Advantage Partners Japan Industrial Partners Kohlberg Kravis Roberts (Japan Marunouchi Capital established (Fund No. 1) (Fund No. 1) office) Innovation Network Tokio Marine Capital Phoenix Capital Corporation of Japan (INCJ) (Fund No. 1) Nippon Mirai Capital Unison Capital (Fund No. 1)
Related The Japan Private Equity Japan Buy-out Research organizations Association Institute established
Main MBO of Center for Acquisition of Aozora Bank by MBO by Carlyle Group and INCJ invests in the projects International Cultural Studies Cerberus NCB Acquisition L.P. Unison Capital of Covalent establishment of Japan Display and Education Material Inc. Acquisition of Long-Term Credit Bank of Japan by Ripplewood Holdings
Related Antimonopoly Law revised Commercial Code revised Financial Instruments and legislations (1997) (2001) Exchange Act (2007) Law governing small to Limited Partnership Act for medium-size venture capital Investment (2004) funds enacted (1998) Source: Shared Research based on “Research related to strengthening of industrial competitiveness of Japanese companies through sophistication of investment chain on funds,” Ministry of Economy, Trade and Industry
Trends in value of domestic investment in private equity funds According to Dealogic, the value of private equity fund-related domestic investment, which trended at around JPY1.5tn per year in 2004–2007, contracted from 2008 onward after the global financial crisis and was down to JPY0.5tn in 2010 as investment dried up. The value trended up slowly starting with 2010, and 2017 saw JPY3.1tn, 3.3x the 2016 figure. A reason for the spike was the involvement of private equity funds in large projects such as Hitachi Koki Co., Ltd. (currently Koki Holdings Co., Ltd.), Hitachi Kokusai Electric Inc., Toshiba Memory Corporation, and Asatsu-DK Inc. In particular, Toshiba Memory was a major investment project worth JPY2tn.
Value of domestic investment involving PE funds
Source: Shared Research based on “Private equity in Japan,” PwC Advisory G.K.
38/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Trends in funds raised by private equity funds in Japan and dry powder According to Thomson Reuters, sums raised by private equity funds in Japan have trended between just over JPY200bn and just over JPY300bn since 2013, remaining below the level before the global financial crisis. A survey by Preqin found that dry powder (unspent capital that has been raised from investors that is ready to be invested) of private equity funds with an interest in investing in Japan increased to almost JPY4tn at end-June 2017.
Sums raised by PE funds in Japan Dry powder of PE funds with an interest in Japan
Source: Shared Research based on “Private equity in Japan,” PwC Advisory G.K. Source: Shared Research based on “Private equity in Japan,” PwC Advisory G.K.
Asset allocation to alternative investments by institutional investors like pension funds Asset allocation to alternative investments by institutional investors Alternative investments in Japan became popular as an alternative to bonds after bond yields fell due to the government’s low interest rate policy since 2000. Japanese pension funds’ weighting of alternative investments trended up from 4% in 2009 to 11% in 2019, but remains lower than most developed countries as of 2019.
Regarding asset allocation trends of pension funds in Japan, we expect scaling back in the weighting of low-yield domestic bonds and expansion of alternative investments to continue. Government Pension Investment Fund (GPIF), the world’s largest pension fund, began alternative investments in 2013 and set a maximum portfolio weighting for alternative investments at 5% of pension reserve in 2015. Alternative investments accounted for 0.00% of pension reserves at end-March 2015, increasing to 0.61% at end-March 2020. Market capitalization of alternative assets totaled JPY944.5bn. (Source: Government Pension Investment Fund, “Annual Report Fiscal Year 2019”).
Portfolio comparison between pension funds of developed countries Japanese pension funds’ weighting of alternative investments
0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 100% 4.0% 3.0% 9.0% 11.0% 90% 3.0% Switzerland 31.0% 33.0% 5.0% 31.0% 3.0% 80%
Canada 44.0% 25.0% 2.0% 29.0% 70% 56.0% 60% 58.0% US 50.0% 22.0% 3.0% 25.0% 59.0% 50% Australia 50.0% 15.0% 13.0% 22.0% 40%
Netherlands 35.0% 49.0% 0.0%16.0% 30%
20% 37.0% UK 35.0% 53.0% 2.0%10.0% 31.0% 27.0% 10%
Japan 27.0% 59.0% 3.0%11.0% 0% 2009 2014 2019
Equities Fixed income Cash and deposits Alternative Equities Fixed income Cash and deposits Alternative
Source: Shared Research based on company data Source: Shared Research based on company data
A survey report by Daiwa Institute of Research on digital banking, SDGs, and alternative investments by financial institutions and pension funds (published February 28, 2020) found that pension funds’ policy asset mix called for a 13.0% (-1.5pp YoY) weighting of alternative investments in 2019. This broke down into private equity 1.0% (+0.3pp YoY), real estate 20.0% (-2.4pp YoY), and hedge funds 37.0% (-8.1pp YoY).
39/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
The Beijing office market Spring REIT (REIT listed on Hong Kong Stock Exchange) accounted for 88.5% of Mercuria’s total AUM in FY12/18 (calculated as Real Estate/Cash Flow investment strategy AUM divided by total AUM). Most of the AUM by Spring REIT are invested in premium offices in Beijing Central Business District (CBD), a new city center development in Beijing. Main indicators of the office market in central Beijing and Beijing CBD are discussed below.
Average monthly rent and occupancy rate of offices in central Beijing The average monthly rent of offices in central Beijing was CNY379/sqm in 2019 (CNY386/sqm in 2018). After bottoming in 2009 following the global financial crisis, average monthly rent increased by a CAGR of 14.3% until 2015. Since 2015, the average monthly rent has been trending at around CNY370/sqm. It rose to CNY386/sqm in 2018, but fell to CNY379/sqm in 2019.
The occupancy rate was 89.0% in 2019 (95.0% in 2018). It bottomed at 72% in 2009 after the global financial crisis before bouncing back to 97% in 2014, and has been on a slow downward trend since 2015.
Average monthly rent and occupancy rate of offices in Beijing CBD The average monthly rent of offices in Beijing CBD was CNY405/sqm in 2019 (CNY402/sqm in 2018). The average monthly rent rose at a CAGR of 32.3% from 2009 (after the global financial crisis) to 2012 and had been trending at around CNY377/sqm until 2017, but rose to CNY402/sqm in 2018 and to CNY405/sqm in 2019.
The occupancy rate was 84% (flat YoY) in 2019. It fell to 52% in 2009 after the global financial crisis, recovered to 94% in 2012, and had been stable at around 95% thereafter, but dropped in 2019.
New supply, net absorption, and occupancy rate of offices in central Beijing Average monthly rent of offices in central Beijing
New office supply Net absorption Occupancy (right axis) (CNY/sqm)
97.0% 97.0% 96.0% 450 1,500,000 95.0% 95.0% 93.0% 95.0% 100.0% 91.0% 89.0% 88.0% 386 379 90.0% 400 370 373 374 356 343 341 1,200,000 80.0% 350 74.0% 72.0% 293 70.0% 300
900,000 60.0% 250 207 50.0% 200 200 166 600,000 40.0% 150 30.0% 100 300,000 20.0%
10.0% 50
0 0.0% 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Shared Research based on Spring REIT data Source: Shared Research based on Spring REIT data
New supply, net absorption, and occupancy rate of offices in Beijing CBD Average monthly rent of offices in Beijing CBD
New office supply Net absorption Occupancy (right axis) (CNY/sqm) 450 950,000 94.0% 95.0% 96.0% 95.0% 95.0% 95.0% 100.0% 91.0% 402 405 88.0% 384 387 388 384 84.0% 90.0% 400 373 355 750,000 74.0% 80.0% 350 319
70.0% 300 60.0% 550,000 60.0% 250 52.0% 213 211 50.0% 200 166 350,000 40.0% 150 30.0% 100 150,000 20.0% 50 10.0% 0 -50,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0.0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Shared Research based on Spring REIT data Source: Shared Research based on Spring REIT data
Comparison or Grade-A office occupancy rate, office stock, and supply in China The occupancy rate of offices in central Beijing is higher than rates in other cities in China, but the ratio of new office supply in 2020–2023 to office stock (total floor area) in 2019 is low.
40/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
The occupancy rate of Grade-A offices in central Beijing was the second-highest of 20 Chinese cities at 89% (after Guangzhou, in the mid-90% range). The total floor area of Grade-A offices in central Beijing in 2019 was second only to Shanghai. Supply of Grade-A offices in central Beijing is forecast to increase in 2020–2023, but at a slower rate than the average 14.6% growth forecast for 20 Chinese cities.
Comparison of Grade-A office stock, supply, and occupancy rate in China
Source: Shared Research based on Spring REIT data
41/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Competition
The Japan Private Equity Association (JPEA) is the industry association for private equity firms in Japan with a regular membership of 43 organizations as of March 2020. The main private equity firms doing business in Japan are outlined below.
Company Year established Overview (started business in Japan) Carlyle Japan 2000 One of the world’s largest alternative investment companies based in the US. Assets under management exceed USD220.0bn. Investments in Japan include Chimney Group, Oyatsu Company, Simplex, and Tsubaki Nakashima. KKR Japan 2006 One of the world’s largest PE firms founded in1976 with AUM of USD208.4bn (as of end-September 2019). Known for its record-breaking LBO of RJR Nabisco in 1989. Investments in Japan include Pioneer DJ Corporation, Panasonic Healthcare, Calsonic Kansei, Hitachi Koki, and Hitachi Kokusai Electric. Blackstone Group Japan 2007 One of the world’s largest alternative investment firms, with AUM of USD545.0bn. Has an asset management business operating PE funds, real estate funds, and mezzanine funds, as well as offering services such as M&A advisory and private placement of bonds. Bain Capital Asia 2006 One of the world’s largest PE firms founded in 1984 by members of Bain & Company with AUM of USD75bn. Investments in Japan include Toshiba Memory, Asatsu DK, Macromill, Domino’s Pizza Japan, and Bellsystem24. Advantage Partners 1992 A pioneering domestic independent PE fund and the first in Japan to begin offering services to buyout funds in 1997. Total committed capital exceeds JPY400.0bn (as of February 2020). Advantage Partners’ philosophy is to nurture companies that it invests in so they continue to prosper after it has exited the investment. Its investment track record includes involvement in the Daiei turnaround and MBO of Pokka Corporation (currently Pokka Sapporo Food & Beverage). MBK Partners K.K. 2005 Founded by six former members of the Carlyle Group (US). An independent PE fund whose operations are based in Tokyo, Seoul, Hong Kong, and Shanghai. Assets under management exceed USD15.0bn. Investments in Japan include Yayoi, Universal Studios Japan, Tasaki & Co., Invoice Inc., and Komeda’s Coffee. Unison Capital 1998 A PE firm founded in Japan in 1998 by former employees of Goldman Sachs with AUM of over JPY330bn. One of its investment themes is Japan-Korea collaboration. Investments in Japan include Tohato, Kracie Holdings, and Akindo Sushiro. T Capital Partners 1991 (Company Formed its No. 1 buyout fund in 1998. Formerly Tokio Marine Capital, it changed its company (formerly Tokio Marine name changed name to T Capital Partners in October 2019 following a management buyout by Tokio Marine Capital) October 2019) Group. Total committed capital from institutional investors is about JPY140.0bn. Marunouchi Capital 2008 Fund management company formed by Mitsubishi Corporation and Mitsubishi UFJ Financial Group. Investments include Joyful Honda, Seijo Ishii, and Tomy Company, Ltd.
The table below has classified private equity market participants in Japan by the stage of companies that they invest in(from growth stage through to rehabilitation stage) and by the size of fund (source: HC Asset Management Co., Ltd.).
42/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Participants in Japan’s private equity market Size of fund Venture capital Growth Renewal/rebirth (restructuring/succession) Stressed, distressed, rehabilitation Sansei Capital Investment (V) D4V (V) Sapphire Capital (G) Japan Asia Investment (B) Brain and Capital Holdings (Mezz) Small ITOCHU Technology Ventures, Inc. (V) GrowthPoint Equity (G) New Frontier Japan Investment (B) Next Capital Partners (B) Nippon Venture Capital (V) Shinkin Capital (G) Solution Design (B) Regional Economy Vitalization C orporatio n o f Japan (Debt) TNP Partners (V) Iwakaze Capital (B) RISA Partners (Eq/Debt) Dream Incubator (V) NCB Capital (B) Okayama Capital Management (Debt) DOGAN (V/G), Femto Partners (V) Japan Private Equity (B) Shizuoka Capital (Debt/Mezz/V) F Ventures (V) Phronesis Partners (B) CHIBAGIN CAPITAL (Eq/Debt) Samurai Incubate Inc. (V) Oita Venture Capital (V) Will Capital Management (V) Nippon Technology Venture Partners (V) IT-Farm (V) VENTURE UNITED (V) Innovation Engine (V) Less than B Dash Ventures (V) JPY10bn Miyako Capital (V) Global Catalyst Partners (V) OSAKA University Venture Capital (V) Ibis Capital Partners (V) Tohoku University Venture Partners (V) Mobile Internet Capital (V) WERU INVESTMENT (V), East Ventures (V) MedVenture Partners (V) Spiral Ventures (V) Universal Materials Incubator (V) Future Venture Capital (V) Coral Capital (V) NISSAY CAPITAL (V) Archetype Ventures (V) Incubate Fund (V) Whiz Partners (G) Nippon Mirai Capital (B) Renaissance Capital Group (Debt) ANRI (V) WM PARTNERS (G) Try Hard Investments (B) RISA Partners (Eq/Debt) Infinity Ventures (V) Japan Growth Investments Alliance (G) JPH (DRC Capital) (B) DNX Ventures (V) Chiiki Sosei Solution (G) CITIC Capital Holdings (B) The University of Tokyo Edge Capital Partners (V) ACA Kakushin (B) DCI Partners New Horizon Capital (B) Eight Roads Ventures Japan (V) Growth Capital of Japan (B) Less than Mitsubishi UFJ Capital (V) Ant Capital Partners (B) JPY30bn STRIVE (V) Aspirant (B) DG Daiwa Ventures (V) Rising Japan Equity (G) Daiwa Corporate Investment (V/G) CAS Capital (B) Basic Capital Management (B) AZ-Star (B) ACA Group (G) Solution Design (B/Mezz) Endeavour United (Phoenix Capital) (B) Globis Capital Partners (V/G) Sunrise Capital (G) J-STAR (B) Keystone Partners (Debt/Mezz/Eq) Global Brain (V) iSigma Capital (B) TOPAZ CAPITAL (Debt) The Longreach Group (B) J-Will Partners (B) Mercuria Investment (B/G) Less than Trust Capital (Mezz) JPY50bn Nomura Mezzanine Partners (Mezz/B) Mizuho Capital Partners (Mezz/B) Mco (Mezz) FIVESTAR MEZZANINE (Mezz) JAFCO (V/G) Nippon Sangyo Suishin Kiko (G) Marunouchi Capital (B) WiL (V) Cool Japan Fund (G) Integral (B) SBI Investment (V/G) Advantage Partners (B) Less than Unison Capital (B) JPY100bn T Capital Partners (B)
Japan Post Investment (B/V) Japan Industrial Solutions (Eq/Mezz) The Carlyle Group (B) Over Large Japan Industrial Partners (B) JPY100bn Polaris Capital Group (B) Japan Investment Corporation (B) Note: Core strategy classification in parentheses [V = venture capital, G = growth, B = buyout, Mezz = mezzanine, Debt = debt, Eq = equity] Source: Shared Research based on HC Asset Management data Note: As of September 2020
43/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Historical performance and financial statements
Q1 FY12/21 results Summary of Results
▷ Operating revenue: JPY793mn (-39.3% YoY; progress rate versus full-year target: 22.7%) ▷ Operating profit: JPY309mn (loss of JPY261mn in Q1 FY12/20; 20.6%) ▷ Recurring profit: JPY370mn (loss of JPY272mn; 24.7%) ▷ Net income*: JPY255mn (net loss of JPY202mn; 25.5%) *Net income attributable to owners of the parent
In cumulative Q1 FY12/21, the company posted an operating revenue of JPY793mn (-39.3% YoY), recurring profit of JPY370mn (recurring loss of JPY 272mn in Q1 FY12/20), and net income of JPY255mn (net loss of JPY 202mn in Q1 FY12/20). The breakdown of the operating revenue JPY793mn are as follows; JPY429mn from management fees and JPY 365mn from principal investment (booked JPY290mn from sale of solar power generation facilities to Enex Infrastructure Investment Corporation). The YoY decrease in operating revenue reflects the absence of approximately JPY770mn in operating revenue and JPY940mn in operating costs the company has recorded in Q1 FY12/20 in relation to the restructuring of Spring REIT as Principal investment.
On the profit front, the company posted recurring profit of JYP370mn versus recurring loss in Q1 FY12/20 on transfer of Spring REIT units thanks in part to profit generated from the sale of solar power generation facility to Enex Infrastructure Investment Corporation.
Funds currently managed Buyout Fund No.1 On April 15, 2021, the company announced the transfer of shares on Tsunoda Corporation held by Buyout Fund No. 1 (Mercuria Japanese Industrial Growth Fund, which the company manages and operates. The shares will be transferred to Nippon Commercial Development. The company is performing same-boat investment in the funds it manages, and expects that the impact of the transfer of shares will be reflected by profit or loss resulting from Principal investment recorded in Q2 FY12/21.
Tsunoda: Since its establishment in 1926, the company has been engaged in manufacturing and selling of bicycles. It has grown to be listed on the Nagoya Stock Exchange. The company shrunk its bicycle business to adapt to the change of time and market environment and switched to a real estate leasing business using its superior former plant sites. In December 2017, Tsunoda became a portfolio company of the Buyout fund No.1. Since then, the fund has been striving to improve the corporate value in the medium to long term by effectively utilizing Tsunoda’s superior assets and brands. Nippon Commercial Development: The JINUSHI business is a real estate investment approach that uses fixed-term leasehold rights for business use. The JINUSHI business invests only in land without constructing buildings, and leases the land to create a safe real estate financial product with stable earnings with no additional investment. Nippon Commercial Development was interested in Tsunoda’s high-quality real estate, including former factory sites, thus decided to acquire all of Tsunoda’s issued shares from the fund, and make it a subsidiary.
Growth Fund No.1 On April 5, 2021, OXIDE Corporation, in which Mercuria’s Growth Fund No. 1 had invested, was listed on TSE Mothers. The fund’s stake in the company has been sold but still holds the portion in its same-boat investment in the funds that it manages. The fund expects to record performance fees in the future. Growth Fund No.1 recorded JPY549mn in performance fees due to its exit from Lifenet Insurance Company in Q3 FY12/20.
Buyout Fund No. 2 The first subscription is scheduled to begin in December 2021. Target fund size is JPY400mn to JPY500mn.
44/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Creation of new funds BizTech Fund The Mercuria BizTech Fund, formed in collaboration with Itochu Corporation and managed by Mercuria, completed the offering in April 2020, at total amount of JPY 3.1bn. Thus far, it has been receiving investments from The Sankei Building Co., Ltd., Fuyo General Lease Co., Ltd., Chuo Nippon Tochi-Tatemono Co., Ltd., Sumitomo Mitsui Trust Bank, Ltd., Nippon Steel Kowa Real Estate Co., Ltd, Aruhi Corporation, and Mitsubishi Logistics Corporation. The fund has been aiming to invest in companies in the real estate and logistics industries, with a total fund size of JPY3 0bn to JPY 5.0bn. The fund is working to transform and revitalize the real estate and logistics industries by investing in and supporting start-ups in these fields. The Japanese real estate and logistics industries are one of the most promising sectors for productivity improvement through digitalization. The company invests in the start-ups aiming to transform in these industries, giving them hands-on support, in an attempt to maximize their corporate value.
In April 2020, the fund invested in Style Port Inc., which developed, operates, and sells ROOV®, a cloud-based online condominium gallery that harnesses its proprietary VR technology. In July 2020, it invested in Rapyuta Robotic Co., Ltd. and in September, made an investment in RoomClip Inc., which operates RoomClip, an online service that allows users to post and view photos of living spaces. Driven by tech demand despite the spread of COVID-19, the fund newly invested in its sixth company. In November (Q4), the fund invested in US-based Propy, Inc. (its seventh company). The fund has invested in a total of eight companies.
Infrastructure/warehousing fund In March 2021, the company completed the offering of its infrastructure/warehousing fund. The total commitment amount is JPY7.5bn. The company has already invested in one solar power generation facility from this fund. In December 2020, the company had formed an infrastructure/warehousing fund and concluded a pipeline agreement. The basic strategy of the fund is to invest in solar power generation facilities and sell to Enex Infrastructure Investment Corporation.
Enex Infrastructure Investment Corporation In FY12/17, Mercuria invested its own funds in a solar power generation facility prior to forming an infrastructure fund. The company also established fund management company Enex Asset Management Co., Ltd. (in which Mercuria took a 22.5% stake) with Itochu Enex Co., Ltd. (50.1%), Sumitomo Mitsui Trust Bank, Limited (22.5%), and Maiora Asset Management Pte. Ltd. (4.9%). In August 2018, the same four companies established Enex Infrastructure Investment Corporation (to be listed on Tokyo Stock Exchange infrastructure fund market), with Itochu Enex Co., Ltd. holding a 50.1% share, Mercuria Investment 22.5%, Sumitomo Mitsui Trust Bank, Limited 22.5%, and Maiora Asset Management Pte. Ltd. 4.9%. Then on February 13, 2019, Enex Infrastructure Investment Corporation was listed on the infrastructure fund market of the Tokyo Stock Exchange. It has become one of Japan’s largest infrastructure funds as a result of investment in Matsusaka Solar Power Plant.
Business Planning Thailand business In April 2021, the company was contracted to provide investment management support for a condominium development project in Thailand led by Sotetsu Real Estate. The project in which Sotetsu Real Estate is investing, is a joint venture between Sotetsu Real Estate and Real Asset Development Co., Ltd. of Thai Summit Group, a leading auto parts manufacturer in Thailand. Sotetsu Real Estate will participate in the development of Building A, which will start first in a two-building condominium development project in Bangkok (Building A will have 29 floors with 477 units and facilities such as swimming pool, gym, multi-purpose room, large bath and sky garden). The company will manage the project’s progress through the local staff of its local subsidiary, Mercuria (Thailand) Co., Ltd.
Transition to holding company structure The company has decided to establish Mercuria Holdings Co., Ltd. as a holding company (wholly owning parent company) through a share transfer to be conducted solely by the company on July 1, 2021 (planned). The company has already been approved for initial listing on the first section of the TSE. The delisting date of the company’s shares is June 29, 2021. After the listing of the holding company, the subsidiaries will be recognized into subsidiaries of the holding company, subject to the necessary approvals from the relevant authorities and other prescribed procedures.
45/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Financial condition At end-Q1 FY12/21, total consolidated assets were JPY16.5bn, up JPY1.5bn versus end-FY12/20. A breakdown shows YoY decreases of JPY799mn in cash and deposits and JPY117mn in deferred tax assets, offset by an increase of JPY2.3bn in operational investment securities. Borrowings increased by JPY1.1bn, mainly due to the procurement of funds for the acquisition of solar power generation facility holding vehicles for the inclusion in Infrastructure Investment Corporation.
Net assets were up JPY317mn from end-FY12/20 to JPY12.8bn, due to increases of JPY277mn in other marketable securities holdings and JPY75mn in foreign currency translation adjustments. Although equity capital grew by JPY268mn, due primarily to gains on operational investment securities held, the equity ratio fell 5.5pp versus end-FY12/20 to 73.6% on an increase in total assets.
Full-year FY12/20 results Overview
▷ Operating revenue: JPY6.2bn (+31.1% YoY; achievement rate compared to revised full-year target: 104.8%) ▷ Operating profit: JPY772mn (-58.4% YoY; 103.0%) ▷ Recurring profit: JPY758mn (-57.9% YoY; 101.0%) ▷ Net income*: JPY525mn (-57.8% YoY; 105.0%) *Net income attributable to owners of the parent
The company posted FY12/20 consolidated operating revenue of JPY6.2bn (+31.1% YoY) and recurring profit of JPY758mn (-57.9% YoY). The five-year average for net income was JPY1.1bn, down 1.7% YoY. A breakdown of the JPY6.2bn in operating revenue shows JPY563mn in performance fees (of which Growth Fund No.1’s exit from Lifenet Insurance Company accounted for JPY549mn), JPY1.8bn from management fees for fund operations, and JPY3.9bn from revenue of Principal investment and other. Management fees were from the Buyout/Succession, Real Estate, and Cash flow investment strategies. Revenue of Principal investment and other included dividend income from Spring REIT. Principal investment recorded operating revenue of JPY2.8bn associated with the restructuring of Spring ERIT and cost of revenue of around JPY320mn (gross basis). Recurring profit declined YoY due to booking gross cost of revenue and in reaction to strong year-ago management fee revenue.
Impact of the COVID-19 pandemic on financial results The company’s business model is aimed at generating a steady stream of fund management fees from funds with five- to ten-year lives with which it can cover fixed costs, with additional upside potential coming from performance fees and profits on investments of its own capital. With this business model, the company will not see management fee income, its main source of revenue, take a direct hit in the near term as a result of the pandemic. In the medium to long term, however, the company said when it reported Q2 financial results that the pandemic-caused delays in the launching of new businesses and investment funds that are now in the planning stage will reduce its management fee income to some extent. Overall, the company has not changed its view that some return on investment will be recorded later than initially expected. However, the company also maintained that performance in the aviation industry, which was impacted by lockdowns implemented in some of the world’s largest cities, has already hit a nadir and is on its way back up. The company bases this view primarily on news reports regarding vaccine development and recovery in corporate value.
Shared Research expects the impact of the pandemic on Mercuria to gradually lessen over time as the market recovers. This is because private equity investments by their very nature are long-term investments and, as such, provide a foundation for a business model that is not swayed by the ups and downs of the market and the economy. We would also note that Mercuria differs greatly from companies that specialize in investing only in certain areas, such as real estate, as its lineup of a wide variety of funds using different investment strategies (including growth investments, value-oriented investments, real estate, aircraft, infrastructure investments, and mezzanine investments) also provides risk diversification. Shared Research believes that the company has maintained its proactive position on investment in anticipation of future trends following the COVID-19 pandemic.
46/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Mercuria continued to invest aggressively despite the spread of COVID-19. For example, the BizTech Fund invested in four new companies in 2020. In April 2020, the fund invested in Style Port Inc., which developed, operates, and sells ROOV®, a cloud-based online condominium gallery that harnesses its proprietary VR technology. It also invested in Rapyuta Robotic Co., Ltd. in July, RoomClip Inc. (which operates RoomClip, a service where users can post and view photos of living spaces) in September, and Propy, Inc. (its seventh company) in November (Q4). Buyout Fund No. 1 invested in the Mizutani Sangyo Group (which manufactures and sells aluminum diecasts mainly for automotive components) in March 2020 and E-TEQ Physical Distribution Co., Ltd. (which operates a truck transportation business based primarily in Kyoto and Shiga prefectures) in December. The fund is planning collaborations with companies that the BizTech Fund invests in. The Aircraft Leasing Fund also set up two new aircraft leases.
Management of existing funds
▷ With regard to buyout funds, fund investments have exhibited an adequate level of resistance to negative impact amid the COVID-19 pandemic. However, the company has indicated that restrained investment among buyers and falling asking prices
could affect exit timing and performance fee levels. In reality, when the company announced Q2 financial results, it also indicated its intent to preserve the investment capacities of its funds in response to the COVID-19 pandemic. As for Buyout Fund No. 2 (target fund size of JPY40–50bn) that Mercuria had been preparing to launch during 2020, the company said the
pandemic threw those plans off track and the launch is now not expected until FY12/21 or later. ▷ Growth Fund No.1 recorded JPY549mn in performance fees due to its exit from Lifenet Insurance Company in Q3. The performance fee of JPY14mn booked in Q4 is a project performance fee in the Value investment strategy associated with the
recovery of outstanding debt. ▷ Growth Fund No.2 sold a portion of its holdings in Stellar Works to Cool Japan Fund, Inc. The company indicated that this was a good partial exit in terms of investment multiple and that its expectations for future performance fee collection have risen. ▷ Plans for the company’s second aircraft leasing fund have been pushed back to FY12/21 or later due primarily to impact throughout the aircraft industry caused by adjustments to leasing fees and aircraft prices in response to global lockdowns. ▷ Spring REIT: Having completed a five-year refinancing in FY12/19, Spring REIT has greatly reduced its financing costs and established a stable financial position. Spring REIT may be susceptible to swings in the overall market in the near term, but the company does not see any problems with Spring REIT maintaining its enterprise value over the long term. In addition, Spring REIT has transferred a portion of its shares in a REIT management subsidiary to Sino Ocean Group, a major Chinese real estate
company, which it has welcomed as a strategic partner. The company noted that Spring REIT plans to invest in further assets.
Creation of new funds BizTech Fund The Mercuria BizTech Fund, formed in collaboration with Itochu Corporation and managed by Mercuria, completed an interim closing with investment from The Sankei Building Co., Ltd., Fuyo General Lease Co., Ltd., Nippon Tochi-Tatemono Co., Ltd., Sumitomo Mitsui Trust Bank, Ltd., and other companies. In October, it received a new contribution of JPY500mn from Nippon Steel Kowa Real Estate Co., Ltd.
Established mainly to invest in companies in the real estate and logistics industries, the Mercuria BizTech Fund is looking to raise up to JPY5.0bn in capital. In April 2020, the fund invested in Style Port Inc., which developed, operates, and sells ROOV®, a cloud-based online condominium gallery that harnesses its proprietary VR technology. In July 2020, it invested in Rapyuta Robotic Co., Ltd. and in September, made an investment in RoomClip Inc., which operates RoomClip, an online service that allows users to post and view photos of living spaces. Driven by tech demand despite the spread of COVID-19, the fund newly invested in its sixth company. In November (Q4), the fund invested in US-based Propy, Inc. (its seventh company). The fund has invested in a total of eight companies.
47/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Enex Infrastructure Investment Corporation In December 2020, the company formed an infrastructure/warehousing fund and concluded a pipeline agreement. The basic strategy of the fund is to invest in solar power generation facilities and sell to Enex Infrastructure Investment Corporation. The company provides solar power generation facility pipeline information and warehousing function. This is an important project for the company in the area of ESG and as a way to achieve SDGs. Subscription was completed in March 2020, with investors committing JPY7.5bn in total.
Enex Infrastructure Investment Corporation In FY12/17, Mercuria invested its own funds in a solar power generation facility prior to forming an infrastructure fund. The company also established fund management company Enex Asset Management Co., Ltd. (in which Mercuria took a 22.5% stake) with Itochu Enex Co., Ltd. (50.1%), Sumitomo Mitsui Trust Bank, Limited (22.5%), and Maiora Asset Management Pte. Ltd. (4.9%). In August 2018, the same four companies established Enex Infrastructure Investment Corporation (to be listed on Tokyo Stock Exchange infrastructure fund market), with Itochu Enex Co., Ltd. holding a 50.1% share, Mercuria Investment 22.5%, Sumitomo Mitsui Trust Bank, Limited 22.5%, and Maiora Asset Management Pte. Ltd. 4.9%. Then on February 13, 2019, Enex Infrastructure Investment Corporation was listed on the infrastructure fund market of the Tokyo Stock Exchange. It has become one of Japan’s largest infrastructure funds as a result of investment in Matsusaka Solar Power Plant.
Buyout Fund No. 2 The first subscription is scheduled to begin in December 2021.
Financial condition At end-FY12/20, total consolidated assets were JPY15.1bn, down JPY452mn versus end-FY12/19. A breakdown shows YoY decreases of JPY671mn in cash and deposits and JPY762mn in operational investment securities, and increases of JPY120mn in trade accounts receivable, JPY217mn in operating loans, and JPY293mn in short-term loans receivable.
Net assets were down JPY274mn from end-FY12/19 to JPY12.5bn, due to a JPY298mn increase in treasury shares and JPY348mn in valuation losses on other marketable securities holdings (smaller YoY), which offset a JPY198mn increase in capital surplus and a JPY187mn increase in retained earnings. Although equity capital decreased by JPY257mn, due primarily to losses on operational investment securities held, the company maintained a healthy financial position, with a high equity ratio of 79%.
Q3 FY12/20 results
▷ Operating revenue: JPY3.5bn (+25.0% YoY; progress toward full-year target [revised on August 13, 2020]: 93.5%) ▷ Operating profit: JPY1.0bn (+42.6% YoY; 137.6%) ▷ Recurring profit: JPY1.0bn (+56.9% YoY; 139.3%) ▷ Net income*: JPY632mn (+32.3% YoY; 126.4%) *Net income attributable to owners of the parent
Results summary For cumulative Q3 FY12/20, the company posted results significantly better than forecast, reporting consolidated operating revenue of JPY3.5bn (+25.0% YoY; progress vs. forecast: 93.5%) and recurring profit of JPY1.0bn (+56.9% YoY; 139.3%). Performance fees from Growth Fund No. 1’s exit from its investment in shares in Lifenet Insurance Company contributed significantly to operating profit. The company did not revise its FY12/20 forecast, despite cumulative Q3 performance finishing above full-year targets, because it may revalue some of its assets.
A breakdown of the JPY3.5bn in operating revenue shows JPY549mn in performance fees (exit from the Lifenet Insurance Company), JPY1.3bn from management fees for fund operations, and JPY1.6bn from principal investment and other sources. Recorded management fees included fees associated with buyouts and business succession investment strategies, as well as real estate investment strategies and cash flow investment strategies. Operating revenue from principal investment and other sources includes dividend income from Spring REIT.
48/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Impact of the COVID-19 pandemic on financial results The company’s business model is aimed at generating a steady stream of fund management fees from funds with five- to ten-year lives with which it can cover fixed costs, with additional upside potential coming from performance fees and profits on investments of its own capital. With this business model, the company will not see management fee income, its main source of revenue, take a direct hit in the near term as a result of the pandemic. In the medium to long term, however, the company said when it reported Q2 financial results that the pandemic-caused delays in the launching of new businesses and investment funds that are now in the planning stage will reduce its management fee income to some extent. Overall, the company has not changed its view that some return on investment will be recorded later than initially expected. However, the company also maintained that performance in the aviation industry, which was impacted by lockdowns implemented in some of the world’s largest cities, has already hit a nadir and is on its way back up. The company bases this view primarily on news reports regarding vaccine development and recovery in corporate value.
Shared Research expects the impact of the pandemic on Mercuria to gradually lessen over time as the market recovers. This is because private equity investments by their very nature are long-term investments and, as such, provide a foundation for a business model that is not swayed by the ups and downs of the market and the economy. We would also note that Mercuria differs greatly from companies that specialize in investing only in certain areas, such as real estate, as its lineup of a wide variety of funds using different investment strategies (including growth investments, value-oriented investments, real estate, aircraft, infrastructure investments, and mezzanine investments) also provides risk diversification. Shared Research believes that the company has maintained its proactive position on investment in anticipation of future trends following the COVID-19 pandemic.
Management of existing funds
▷ With regard to buyout funds, fund investments have exhibited an adequate level of resistance to negative impact from the COVID-19 pandemic. However, the company has indicated that restrained investment among buyers and falling asking prices could affect exit timing and performance fee levels. In reality, when the company announced Q2 financial results, it also indicated its intent to preserve the investment capacities of its funds in response to the COVID-19 pandemic. As for Buyout
Fund No. 2 (target fund size of JPY40–50bn) that Mercuria had been preparing to launch during 2020, the company said the pandemic threw those plans off track and the launch is now not expected until FY12/21 or later. ▷ Growth Fund No.1 recorded JPY549mn in performance fees due to its exit from Lifenet Insurance Company in Q3. ▷ Growth Fund No.2 sold a portion of its holdings in Stellar Works to Cool Japan Fund, Inc. The company indicated that this was a good partial exit in terms of investment multiple and that its expectations for future performance fee collection have risen. ▷ Plans for the company’s second aircraft leasing fund have been pushed back to FY12/21 or later due primarily to impact throughout the aircraft industry caused by adjustments to leasing fees and aircraft prices in response to global lockdowns. The aircraft leasing fund has postponed initiatives related to securing investment capacity and return until after the conclusion of the COVID-19 pandemic with the goal of maximizing earnings. However, the company maintained that related performance
has reached its nadir and is on its way back up; it based this view primarily on reports on vaccine development and recovery in corporate value. The company has acquired excellent investment opportunities resulting from the COVID-19 pandemic and has submitted a statement of intent to purchase two aircraft. Shared Research believes that the company has reached the point
at which it will begin work on its next aircraft leasing fund. ▷ Spring REIT: Having completed a five-year refinancing in FY12/19, Spring REIT has greatly reduced its financing costs and established a stable financial position. Spring REIT may be susceptible to swings in the overall market in the near term, but the
company does not see any problems with Spring REIT maintaining its enterprise value over the long term. In addition, Spring REIT has transferred a portion of its shares in a REIT management subsidiary to a major Chinese real estate company.
49/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Creation of new funds The Mercuria BizTech Fund, formed in collaboration with Itochu Corporation and managed by Mercuria, completed an interim closing with investment from The Sankei Building Co., Ltd., Fuyo General Lease Co., Ltd., Nippon Tochi-Tatemono Co., Ltd., Sumitomo Mitsui Trust Bank, Ltd., and other companies. In October, it received a new contribution of JPY500mn from Nippon Steel Kowa Real Estate Co., Ltd.
Established mainly to invest in companies in the real estate and logistics industries, the Mercuria BizTech Fund is looking to raise up to JPY5.0bn in capital. In July 2020, it invested in Rapyuta Robotic and later, in September, made an investment in RoomClip Inc., which operates RoomClip, an online service that allows users to post and view photos of living spaces. Driven by tech demand despite the spread of the COVID-19 pandemic, the fund newly invested in its sixth company. In November (Q4), the fund invested in US-based Propy, Inc. (its seventh company).
Business planning Subsidiary Business Market Co., Ltd. began operating a business succession matching/support service on behalf of the city of Sapporo in Hokkaido in March 2020. It also entered into a business alliance with Zeiri4.com (a website for tax accountants), operated by Bengo4.com, Inc. (TSE Mothers: 6027), a company specializing in legal services. Business Market’s service contract with the city of Sapporo has two main elements, the first being the creation and operation of a portal website that will aid the sale of existing local businesses by broadly disseminating information about existing businesses that owners are looking to sell and finding people that are looking to buy those businesses. The second element involves providing face-to-face consultation and other succession support services for local business owners looking to sell their businesses. Business Market’s alliance with zeiri4.com comes in here, as Sapporo’s business succession support service will make use of zeiri4.com to recruit local tax accountants to come in and handle all related tax issues.
In the wake of the pandemic, the company expects to see an increasing number of companies looking to liquidate assets or find buyers to take over their business. In preparation for this, the company has started making plans to launch new funds to invest in such areas as warehousing funds for renewable energy projects, as well as Japanese real estate funds aimed at overseas investors.
Financial condition At end-Q3 FY12/20, total consolidated assets were JPY15.2bn, down JPY275mn versus end-FY12/19. A breakdown shows YoY decreases of JPY292mn in cash and deposits and JPY656mn in operational investment securities, and an increase of JPY258mn in deferred tax assets, and increase of JPY285mn in short-term loans to affiliated companies. Net assets were JPY12.5bn, down JPY289mn from end-FY12/19 due to JPY617mn in valuation losses on other marketable securities holdings and a JPY298mn decrease in treasury shares, despite a JPY298mn increase in retained earnings. Although equity capital decreased by JPY355mn, due primarily to losses on operational investment securities held, the company maintained a healthy financial position, with a high equity ratio of 78%.
1H FY12/20 results
▷ Operating revenue: JPY2.1bn (-0.9% YoY; progress toward revised full-year target: 57.9%) ▷ Operating profit: JPY189mn (-62.3% YoY; 25.3%) ▷ Recurring profit: JPY171mn (-62.6% YoY; 22.9%) ▷ Net income*: JPY117mn (-62.2% YoY; 23.3%) *Net income attributable to owners of the parent
For 1H FY12/20, the company reported consolidated operating revenue of JPY2.1bn (-0.9% YoY; progress vs. forecast: 57.9%) and recurring profit of JPY171mn (-62.6% YoY; 22.9%). The biggest impact was loss of about JPY250mn related to operational investment securities, primarily at Spring REIT, which is managed by the company. The loss was caused mostly by valuation losses arising from a drop in market prices at the end of Q2. More recently, however, market prices have been recovering.
50/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
The company made a downward revision to its full-year FY12/20 forecast in light of the impact of the COVID-19 outbreak. The revised forecast calls for operating revenue of JPY3.7bn and recurring profit of JPY750mn.
1H results overview Operating revenue rose YoY as the company booked operating revenue of JPY770mn and cost of revenue of JPY940mn related to restructuring of Spring REIT under the Principal investment business. A breakdown of the JPY2.1bn in operating revenue shows JPY0mn in performance fees, but JPY882mn from management fees for fund operations. Principal investment and other contributed another JPY1.3bn.
▷ Management fees: The company booked fees earned on its various funds under management, including those using buyout/succession strategies, real estate investment/cash flow strategies. ▷ The company earned no performance fees during 1H. ▷ Principal investment-other: The company reported total operating revenue of JPY1.3bn, of which JPY770mn came from the restructuring of Spring REIT. At the same time, under the cost of revenue the company booked some JPY250mn in valuation losses on operational investment securities, most of which are shareholdings in Spring REIT. It should be emphasized, though, that these were valuation losses that did not involve new outlays of capital and whose main cause was downturn in the overall
market.
Impact of the COVID-19 pandemic on financial results (1) Impact on Mercuria itself The company’s business model is aimed at generating a steady stream of fund management fees from funds with five- to ten-year lives with which it can cover fixed costs, with additional upside potential coming from performance fees and profits on investments of its own capital. With this business model, the company will not see management fee income, its main source of revenue, take a direct hit in the near term as a result of the pandemic. In the medium to long term, however, the company says the pandemic-caused delays in the launching of new businesses and investment funds that are now in the planning stage will reduce its management fee income to some extent.
With nearly JPY1.9bn in cash and deposits on hand at end-June 2020, the company has ample liquidity and has no worries on the working capital front. The JPY1.7bn decline in cash and deposits versus end-FY12/19 was the result of cash outflows in connection with previously planned investments.
(2) Impact of pandemic on existing fund management operations In order to maximize the revenue generated by its Buyout Fund No. 1 and aircraft leasing fund, the company has been maintaining cash reserves (i.e., the capacity to make new investments) and delaying its exit from existing investments until after the pandemic has passed. In contrast, at its BizTech Fund, the company continued putting money into new investments aimed at capturing the rising demand for telework-related and other technologies that are thriving as a result of the changes in the operating environment in the wake of the pandemic.
Buyout fund: The companies in which Mercuria’s buyout fund has invested are well-positioned to weather the storm, but the economic disruptions caused by the pandemic may impact the exit timing for investments and/or the level of performance fees collected owing to cutbacks in new investments on the part of would-be buyers and lower bidding prices. In response to this change in circumstances, the company has decided to husband the cash reserves of its Buyout Fund No. 1 and maintain the capacity of the fund to make new investments. As for Buyout Fund No. 2 (target fund size of JPY40–50bn) that Mercuria had been preparing to launch during 2020, the company said the pandemic threw those plans off track and the launch is now not expected until FY12/21 or later.
Aircraft leasing fund: The worldwide lockdowns precipitated by the pandemic hit the aircraft industry hard, driving down both aircraft prices and leasing rate. The aircraft leasing fund managed by Mercuria is still in the initial investment stage and has the
51/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
financial wherewithal to make it through the price adjustment process, but the disruptions to the airline industry caused by the pandemic have delayed the launch of the company’s second aircraft leasing fund until FY12/21 or later.
Spring REIT: Having completed a five-year refinancing in FY12/19, Spring REIT has greatly reduced its financing costs and established a stable financial position. Spring REIT may be susceptible to swings in the overall market in the near term, but the company does not see any problems with Spring REIT maintaining its enterprise value over the long term.
Shared Research expects the impact of the pandemic on Mercuria to gradually lessen over time as the market recovers. This is because private equity investments by their very nature are long-term investments and, as such, provide a foundation for a business model that is not swayed by the ups and downs of the market and the economy. We would also note that Mercuria differs greatly from companies that specialize in investing only in certain areas, such as real estate, as its lineup of a wide variety of funds using different investment strategies (including growth investments, value-oriented investments, real estate, aircraft, infrastructure investments, and mezzanine investments) also provides risk diversification. While the near-term impact of the pandemic on Mercuria is undeniable, as evident from the downward revision to the company’s full-year forecast at the time of its 1H results announcement, Shared Research thinks the impact was mostly seen in the extended timeline for investment and exit plans, and Mercuria still plans to make aggressive investments after the pandemic ends.
Business planning Subsidiary Business Market Co., Ltd. began operating a business succession matching/support service on behalf of the city of Sapporo in Hokkaido in March 2020. It also entered into a business alliance with Zeiri4.com (a website for tax accountants), operated by Bengo4.com, Inc. (TSE Mothers: 6027), a company specializing in legal services. Business Market’s service contract with the city of Sapporo has two main elements, the first being the creation and operation of a portal website that will aid the sale of existing local businesses by broadly disseminating information about existing businesses that owners are looking to sell and finding people that are looking to buy those businesses. The second element involves providing face-to-face consultation and other succession support services for local business owners looking to sell their businesses. Business Market’s alliance with zeiri4.com comes in here, as Sapporo’s business succession support service will make use of zeiri4.com to recruit local tax accountants to come in and handle all related tax issues.
In the wake of the pandemic, the company expects to see an increasing number of companies looking to liquidate assets or find buyers to take over their business. In preparation for this, the company has started making plans to launch new funds to invest in such areas as warehousing funds for renewable energy projects, as well as Japanese real estate funds aimed at overseas investors.
Creation of new funds The Mercuria BizTech Fund, formed in collaboration with Itochu Corporation and managed by Mercuria, completed an interim closing with investment from The Sankei Building Co., Ltd., Fuyo General Lease Co., Ltd., Nippon Tochi-Tatemono Co., Ltd., Sumitomo Mitsui Trust Bank, Ltd., and other companies. Established mainly to invest in companies in the real estate and logistics industries, the Mercuria BizTech Fund is looking to raise up to JPY5.0bn in capital and, in terms of investments, has finalized a total of six investments thus far.
Financial position At end-1H FY12/20, total consolidated assets were JPY13.6bn, down JPY1.9bn versus end-FY12/19. A breakdown shows YoY decreases of JPY1.7bn in cash and deposits and JPY1.1bn in operational investment securities, and an increase of JPY326mn in deferred tax assets. Net assets were down JPY1.2bn from end-FY12/19 due to JPY743mn in valuation losses on other marketable securities holdings and a JPY164mn increase in treasury shares. Shareholders’ equity fell JPY1.1bn mainly due to losses on operational investment securities held. The company maintained a healthy financial condition, with a high equity ratio of 81%.
52/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Income statement
Income statement FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 FY12/20 (JPYmn) Cons.Cons.Cons.Cons.Cons.Cons.Cons. Operating revenue 1,616 2,048 2,521 4,224 4,122 4,718 6,184 YoY - 26.7% 23.1% 67.6% -2.4% 14.5% 31.1% Cost of revenue 0 169 276 74 88 983 3,758 Gross profit 1,616 1,878 2,245 4,150 4,034 3,735 2,426 GPM 100.0% 91.7% 89.0% 98.2% 97.9% 79.2% 39.2% SG&A expenses 676 972 965 1,920 1,917 1,879 1,654 SG&A ratio 41.8% 47.5% 38.3% 45.5% 46.5% 39.8% 26.7% Operating profit 940 906 1,280 2,230 2,117 1,856 772 YoY - -3.5% 41.2% 74.2% -5.1% -12.3% -58.4% OPM 58.1% 44.3% 50.8% 52.8% 51.4% 39.3% 12.5% Non-operating income 27 2 2 6 20 3 67 Non-operating expenses 0 8 33 28 54 59 82 Recurring profit 967 900 1,248 2,208 2,083 1,800 758 YoY - -6.9% 38.7% 76.9% -5.6% -13.6% -57.9% RPM 59.8% 44.0% 49.5% 52.3% 50.5% 38.2% 12.3% Extraordinary gains - 16 - - - - - Extraordinary losses - 14 0 46 0 0 - Income tax charges 227 237 338 616 622 523 181 Implied tax rate 23.5% 26.3% 27.1% 28.5% 29.9% 29.1% 23.9% Net income attributable to non-controlling interests 0 44 55 56 50 32 52 Ne t in c o me attributable to owners of the parent 740 621 854 1,490 1,411 1,245 525 YoY - -16.1% 37.6% 74.3% -5.3% -11.8% -57.8% Net margin 45.8% 30.3% 33.9% 35.3% 34.2% 26.4% 8.5% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
See Earnings structure section for income statement items from revenue through operating profit. The effects of non-operating income and extraordinary loss on earnings are minimal and require no explanation.
53/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Balance sheet
Balance sheet FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 FY12/20 (JPYmn) Cons.Cons.Cons.Cons.Cons.Cons.Cons. ASSETS Cash and deposits 551 1,589 2,871 8,259 4,052 3,551 2,880 Accounts receivable–trade 368 314 286 271 285 254 374 Operational investment securities 1,348 1,495 2,080 4,164 9,282 10,385 9,623 Operating loans receivable - - - - - 430 647 Advances paid 30 34 13 16 27 109 72 Short-term loans receivable - - 94 - - - 293 Deferred tax assets 3 44 41 109 45 - - Other 3 13 24 15 34 56 98 Total current assets 2,303 3,488 5,409 12,834 13,725 14,785 13,987 Buildings (net) 32 20 8 7 6 117 77 Tools, furniture, and fixtures (net) 7 6 4 5 6 6 7 Total tangible fixed assets 39 26 12 12 12 123 84 Software 2 1 1 1 1 1 1 Goodwill 6 - - - 17 9 2 Total intangible assets 8 1 1 1 18 10 2 Investment securities 107 93 98 149 260 283 305 Lease and guarantee deposits 28 53 52 58 57 57 60 Deferred tax assets 7 35 30 48 49 247 593 Other 0 1 1 1 1 0 21 Investments and other assets 142 183 181 256 366 586 979 Total fixed assets 189 211 194 269 396 719 1,065 Total assets 2,492 3,699 5,603 13,103 14,121 15,504 15,053 LIA BILITIES Short-term loans payable ------293 Current portion of long-term loans payable - - - - - 1,203 130 Accounts payable–trade 2 3 2 347 195 227 161 Consumption taxes payable 11 - 11 163 - 18 - Accrued expenses 112 137 240 269 288 168 179 Income taxes payable 213 118 60 576 243 376 192 Directors' bonuses - - - 193 - - - Provision for reversal of success fees - - 25 25 25 - - Deferred tax liabilities 0 1 - 4 0 - - Other 3 3 3 5 10 48 42 Total current liabilities 340 262 341 1,582 762 2,039 998 Long-term loans payable - - - 723 715 - 874 Provision for directors' retirement benefits - 78 90 101 105 105 103 Provision for directors' share-based remuneration 87 137 Provision for employees' share-based remuneration 4 11 Retirement benefit liability - 36 48 64 75 87 137 Long-term accounts payable–other - - - 32 233 349 292 Long-term deposits - - 12 12 12 12 12 Total long-term liabilities - 114 149 932 1,177 722 1,586 Total liabilities 340 376 490 2,514 1,939 2,761 2,584 NET A SSETS Capital stock 84 429 876 2,962 2,998 3,020 3,026 Capital surplus 54 401 870 2,984 3,064 3,106 3,303 Retained earnings 1,756 2,376 3,231 4,515 5,642 6,573 6,760 Treasury stock - - -0 -0 -150 -299 -597 Total shareholders' equity 1,894 3,206 4,977 10,460 11,554 12,399 12,492 Valuation difference on marketable securities 227 -8 23 34 123 -35 -383 Valuation and translation adjustments 258 20 7 -31 -31 -233 -584 Share subscription rights - 1 1 1 1 1 0 Non-controlling interests 0 95 128 158 658 577 560 Total net assets 2,152 3,323 5,113 10,589 12,182 12,743 12,469 Total liabilities and net assets 2,492 3,699 5,603 13,103 14,121 15,504 15,053 Total interest-bearing debt - - - 723 715 1,203 1,297 Net debt -1,899 -3,084 -4,952 -11,700 -12,620 -12,734 -11,207 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
54/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Assets Mercuria does not require tangible fixed assets other than office-related equipment to run its business. Most of its assets are therefore current assets.
Current assets At end-FY12/20, current assets accounted for 92.9% of total assets, mainly comprising cash and deposits and operational investment securities.
Cash and deposits Cash and deposits are the company’s own funds used as working capital and in principal investments. Mercuria says it has some JPY3.0bn of its own funds in hand to take advantage of any investment opportunities that arise as a result of a sudden change in economic conditions or other circumstances.
Operational investment securities Operational investment securities are joint investments in the funds the company forms and manages (same-boat investment) and its own funds invested in assets prior to forming a fund that will invest in them (pre-formation investment).
Same-boat investments tend to increase with the number of funds formed and AUM. Consolidated subsidiary Spring Asset Management receives part of the management fee for Spring REIT as investment units, which also tend to increase.
Pre-formation investment is an upfront investment of the company’s own funds in portfolio company candidates prior to forming a fund. Once a fund has been formed (or the investment executed), the company usually sells most of its investment to the fund’s investors, which results in a decrease in operational investment securities.
Liabilities Most of the company’s current liabilities are accounts payable-related and require no explanation. In fixed liabilities, the company recorded long-term loans payable of JPY723mn in FY12/17. This is a THB-based loan from Sumitomo Mitsui Trust Bank (Thai) Public Company Limited to hedge against currency risk when investing in preferred stock issued by a real estate development company in Thailand (mezzanine investment) in December 2017. Long-term loans payable totaled JPY874mn at end-FY12/20. Loans associated with the restructuring of Spring REIT resulted in a change from short-term loans to long-term loans.
Net assets Net assets increased in FY12/17 due to retained earnings (net income) and financing (issue of new shares). Financing in the past five years include a capital increase by third-party allocation of shares to Itochu and Sumitomo Mitsui Trust Bank (JPY690mn) in FY12/15, and public offerings and third-party allocations of shares in FY12/16 when listed on Tokyo Stock Exchange Second Section (JPY893mn) and FY12/17 (JPY4.0bn) when transferred to the TSE First Section.
55/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Cash flow statement
Cash flow statement FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 FY12/20 (JPYmn) Cons.Cons.Cons.Cons.Cons.Cons.Cons. Cash flows from operating activities (1) -412 304 506 765 -4,205 -454 -176 Pre-tax profit 967 902 1,248 2,162 2,083 1,800 758 Change in provision for directors' bonuses - - - 193 -193 - - Change in accounts receivable -54 54 20 6 -19 29 -131 Change in operational investment securities -840 -457 -577 -2,093 -5,064 -1,417 73 Change in operating loans receivable -430 -217 Income taxes paid -284 -335 -399 -174 -936 -467 -649 Cash flows from investing activities (2) -37 -31 -102 -19 -102 -28 -390 Purchase of tangible fixed assets -41 -2 -2 -6 -3 -3 -6 Payments of short-term loans receivable - - -94 -90 - - Collection of operating loans receivable 298 Operating loan advances -585 Collection of short-term loans receivable - - - 147 - - Free cash flow (1+2) -449 273 404 745 -4,307 -482 -566 Cash flows from financing activities 16 747 893 4,673 131 -6 -150 Proceeds from long-term loans - - - 723 - 1,273 1,004 Proceeds from share issuance 58 690 893 4,155 72 44 12 Repayment of long-term loans payable -858 -1,203 Cash dividends paid -42 - - -206 -293 -314 -335 Purchase of treasury shares - - -0 - -150 -150 -299 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
Cash flows from operating activities The main variables in cash flows from operating activities are net income before income taxes, income tax payable, and increase/decrease in operational investment securities.
Operational investment securities are joint investments in the funds the company forms and manages (same-boat investment) and its upfront investment in portfolio company candidates prior to forming a fund that will invest in them (pre-formation investment). Same-boat investment increases with the number of funds managed and/or AUM, and tends to have a negative impact on cash flow from operating activities. For pre-formation investment, the company usually sells most of its upfront investment to the fund after it is formed or when it executes an investment. The sale of operational investment securities to the fund’s investors has a positive effect on cash flow from operating activities.
Cash flows from investing activities Mercuria’s business requires almost no capital spending in tangible fixed assets, etc., and thus cash flows from investing activities are small.
Cash flows from financing activities Cash flows from financing activities consist of cash inflows from long-term loans and issue of shares, and outflows from dividend payments.
There has been a net cash inflow due to the following issue of shares: a third-party allocation of shares to Itochu and Sumitomo Mitsui Trust Bank in FY12/15, and public offerings and third-party allocations of shares in FY12/16 when listed on Tokyo Stock Exchange Second Section, and FY12/17 when transferred to the TSE First Section.
56/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Other information
History
Mercuria’ s CEO Toshihiro Toyoshima joined the World Bank in 2001 after working on turnarounds, real estate securitization, and project financing at DBJ in the 1990s. His business experience at the World Bank exposed him to expanding trade blocs such as China joining the WTO and the emergence of the EU, which made him realize how giant markets were forming around the world. He felt that if Japanese companies were to survive, they would need to take advantage of the growth of overseas markets and do more business overseas, because the Japanese market was small and had limited growth potential.
Toyoshima recalls that companies in Japan at the time were focused on competing with each other for a share of the limited domestic market despite having excellent technologies. He concluded that this was due to the lack of knowledge for expanding their businesses overseas and insistence on doing everything themselves without considering alternatives. He saw potential in cross-border risk-taking via equity investment (i.e., investment across national borders unconstrained by traditional ideas) as an alternative to loans, which were mainstream in Japan. On returning to DBJ, he founded Mercuria with DBJ as the main shareholder in 2005 as a company that invests in growth companies engaging in cross-border businesses. At the same time, he formed Fund No. 1 (Asuka DBJ).
The formation of Spring REIT and its listing on the Hong Kong Stock Exchange were subsequent milestones. The company invested in two premium office buildings in China Central Place (CCP) in Beijing in 2006. The Chinese economy at the time was seeing robust growth driven by export industries, and most real estate investments were in Shanghai, which has a trading port, rather than Beijing, where government agencies concentrate. Mercuria forecast that China would transition from foreign demand-driven to domestic demand-driven growth and accordingly predicted the development of Beijing, which is a convenient location for companies requiring government approval for product sales and other business activities. The company executed its investment, expecting high occupancy rates and increasing rents for the limited large office buildings in Beijing. It began asset management of CCP in 2008 and Spring REIT, whose portfolio included CCP, was listed on the Hong Kong Stock Exchange in 2013. Spring REIT’s average annual yield has been around 7% due to a rise in occupancy rate and rent.
Mercuria formed capital alliances with Itochu and Sumitomo Mitsui Trust Bank in 2015, collaborating with the former in real estate investment strategy and with the latter in investment in funds and identifying potential investments.
The company has been working on investment strategies to expand earnings opportunities. It started the Value investment strategy in 2008, Buyout/Succession in 2013, and Cash Flow in 2017.
Date Event October 2005 Established Asuka DBJ Partners with the Development Bank of Japan (DBJ) as the main shareholder Formed Fund No. 1 (Asuka DBJ) April 2012 Lifenet Insurance Company, one of the investments of Fund No. 1, is listed on the Tokyo Stock Exchange Mothers market January 2013 Established Spring Asset Management Limited（SAML）in Hong Kong as REIT management company with Hong Kong asset management license August 2013 Formed Fund No. 2 (ADC Fund 2013) December 2013 Spring REIT, managed by Mercuria’s subsidiary Spring Asset Management Limited, is listed on Hong Kong Stock Exchange September 2014 Wins contract to manage En Fund formed by DBJ and a major Thai business group Charoen Pokphand Group (CP Group) May 2015 Capital increase via third-party allocation of shares to Itochu Corporation December 2015 Capital increase via third-party allocation of shares to Sumitomo Mitsui Trust Bank, Limited October 2016 Shares listed on Tokyo Stock Exchange Second Section December 2017 Listing changed to Tokyo Stock Exchange First Section
57/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
News and topics April 2021 On April 15, 2021, the company announced the transfer of shares held in Tsunoda Corporation Limited.
The company has decided to transfer all shares held in Tsunoda Corporation Limited by Mercuria Japanese Industrial Growth Fund, which the company manages and operates. The shares will be transferred to Nippon Commercial Development, which invests in real estate using commercial fixed-term land leaseholds. The decision to transfer these shares was reached because Nippon Commercial Development expressed interest in superior former plant sites and other real estate held by Tsunoda.
The company is performing same-boat investment in the funds it manages, and expects that the impact of this transfer of shares will be reflected by profit or loss resulting from Principal investment recorded in Q2 FY12/21. Meanwhile, the company has made no changes to its FY12/21 consolidated earnings forecast.
February 2021 On February 19, 2021, the company announced its transition to a holding company structure through a single-company share transfer.
The company has decided to establish Mercuria Holdings Co., Ltd. (“the holding company”) as a holding company (wholly owning parent company) through a share transfer to be conducted solely by the company on July 1, 2021 (planned). This share transfer is contingent upon the adoption of a corresponding resolution during the annual general meeting of shareholders scheduled for March 30, 2021, as well as the completion of other relevant procedures.
Since its establishment, the company has adopted a “cross-border” approach as its core concept. While observing macroenvironmental trends, the company has formulated a variety of investment strategies, including a growth investment strategy, a value investment strategy, a buyout and succession investment strategy, a real estate investment strategy, and a cash flow investment strategy. It has established a foundation for itself as a multi-strategy fund administrator by establishing and managing new funds in accordance with these investment strategies.
In response to structural changes caused within the industry by the COVID-19 pandemic, the company has included the pursuit of further growth opportunities through business expansion among its core management issues. Furthermore, the company has recognized that establishing a system enabling quick and flexible management decisions will be necessary when preparing for possibilities associated with future M&A-based corporate restructuring.
Procedures for transitioning to a holding company structure Step one: Establish a holding company through a single-company share transfer on July 1, 2021 and convert Mercuria Investment into a wholly owned subsidiary of this holding company Step two: After receiving approval from relevant authorities and undergoing all necessary procedures, convert the company’s subsidiaries into subsidiaries of the holding company.
Method of share transfer ・ Single-company share transfer converting Mercuria Investment into a wholly owned subsidiary and the holding company into a wholly owning parent company ・ Share transfer ratio: Mercuria Investment’s shareholders will receive one share in the holding company for each common share held in Mercuria Investment. ・ Number of shares per unit: 100 ・ Number of shares planned for issue: 17,644,900 common shares ・ Holding company listing application: The company plans to apply for a new listing (technical listing) on the First Section of the Tokyo Stock Exchange ・ Listing date: July 1, 2021 (delisting of current Mercuria Investment shares planned for June 29, 2021)
58/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
December 2020 On December 25, 2020, the company announced investment in E-TEQ Physical Distribution Co., Ltd.
The company invested in E-TEQ Physical Distribution Co., Ltd. (E-TEQ) through Mercuria Japanese Industrial Growth Fund it manages and operates. E-TEQ operates a truck transportation business based primarily in Kyoto and Shiga prefectures, and excels in transport of dry, chilled, and frozen goods from locations with access to wide-ranging areas. Through investing in E-TEQ, the company intends to support the investee’s business growth, and also have it collaborate with an investee of the Mercuria BizTech Fund the company jointly operates with Itochu Corporation. Mercuria said that this development has only a minor impact on its consolidated earnings.
On December 18, 2020, the company announced revisions to its full-year earnings forecast for FY12/20.
FY12/19 FY12/20 Rev. FY Est. Rev. FY Est. (JPYmn) 1H Act. 2H Act. FY Act. 1H Act. 2H Est. (Dec. 18, (Aug. 13, Init . FY Est . 2020) 2020) Operating revenue 2,160 2,558 4,718 2,141 3,759 5,900 3,700 3,500 Cost of revenue 843 140 983 1,193 Gross profit 1,317 2,418 3,735 948 GPM 61.0% 94.5% 79.2% 44.3% SG&A expenses 816 1,064 1,879 759 SG&A ratio 37.7% 41.6% 39.8% 35.4% Operating profit 502 1,354 1,856 189 561 750 750 1,500 OPM 23.2% 52.9% 39.3% 8.8% 14.9% 12.7% 20.3% 42.9% Recurring profit 458 1,342 1,800 171 579 750 750 1,500 RPM 21.2% 52.5% 38.2% 8.0% 15.4% 12.7% 20.3% 42.9% Net in co me 308 936 1,245 117 383 500 500 1,000 Net margin 14.3% 36.6% 26.4% 5.4% 10.2% 8.5% 13.5% 28.6% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
Reason for revision The company expects operating revenue to exceed the previous forecast, since it is highly likely that operating revenue related to the restructuring of the Spring REIT business scheduled for FY12/20 will be accounted for as a gross rather than net amount. There is no impact on operating profit, recurring profit, and net income attributable to owners of the parent. Hence no adjustments have been made to profit.
On the same day, the company announced that the Mercuria BizTech Fund has received new investment.
The company announced that Mercuria BizTech Fund, jointly formed with Itochu Corporation, has signed a JPY300mn partnership with ARUHI Corporation (“ARUHI”). ARUHI is the largest provider of mortgages in Japan. ARUHI explains the rationale of its investment as being to promote support for start-up companies that have a high affinity with its own business, build networks with real estate tech companies and accelerate its medium- to long-term growth strategy.
November 2020 On November 16, 2020, the company announced investment in Propy, Inc.
The company, jointly with Itochu Corporation, has formed the Mercuria BizTech Fund to support companies that aim to transform the real estate and logistics industry. Through the fund, the company invested in real estate tech company Propy, Inc., which provides transaction management tools for online real estate transactions mainly in the US.
October 2020 On October 2, 2020, the company announced that the Mercuria BizTech Fund (the BizTech Fund) has accepted new investment.
59/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
▷ Investor: Nippon Steel Kowa Real Estate Co., Ltd. ▷ Investment amount: JPY500mn ▷ Meaning of the investment: Nippon Steel Kowa Real Estate stated that it aims to promote new business development and create new revenue sources in the medium to long term by collaborating with startup companies in the real estate tech and logistics tech field in which the fund invests.
The BizTech Fund was formed together with Itochu Corporation with a target total fund size of JPY5.0bn, and primarily solicits investment from companies operating in the real estate and logistics industries. The fund has already made six investments since its launch.
September 2020 On September 15, 2020, the company announced the transfer of shares of Stellarworks International Co., Ltd.
The company has transferred some shares of Stellarworks International Co., Ltd. owned by ADC Fund 2013 LP, which is managed and operated by the company, to Cool Japan Fund, Inc. The company has invested in this business through Growth Fund No. 2 (the company’s core, growth investment strategy fund, established in 2013). The company has indicated that the impact of the transfer of shares on consolidated earnings will be minor, and that there will be no change in the earnings forecast for the current fiscal year.
▷ Stellarworks (Head office: Shanghai, China)
Stellarworks is a luxury furniture manufacturer from Shanghai. It has developed a luxury furniture brand that manufactures and sells furniture and lifestyle products that incorporate Japanese materials and manufacturing technology for luxury hotels, restaurants, offices, etc. around the world. As a unique furniture manufacturer, it combines high-end, high-design qualities from Asia with a Japanese heritage.
▷ Buyer: Cool Japan Fund, Inc.
60/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
ESG/SDGs initiatives Basic stance With its “cross-border” approach as its core investment concept, straddling existing frameworks and countries, Mercuria’s corporate philosophy is to increase the sum total happiness of all stakeholders through effective utilization and circulation of funds through diverse investment activity. Its priority is to build a relationship of trust with a broad range of stakeholders and support the businesses of the companies it invests in with a medium- to long-term perspective that incorporates ESG and SDGs to help the businesses grow.
Examples of ESG/SDGs initiatives Environment ▷ Clean energy: A sponsor of Enex Infrastructure Investment Corporation, which invests in renewable energy. Reduces industrial waste and energy consumption, and effectively utilizes resources. ▷ Rigorous environmental measures applied to office buildings held by Spring REIT (listed on Hong Kong Stock Exchange), which is managed by Hong Kong subsidiary SAML ▷ Invests in Loft Orbital Solutions Inc., a US company that aims for a ride-sharing business for satellites, which can contribute toward addressing climate change and protection of land and marine resources
Society ▷ Economic growth, providing employment, industrial technology innovation, and community revitalization: Operates funds that facilitate business succession and support growth of small and medium-size companies; operates funds that support innovation in real estate and logistics industries; subsidiary BIZMA operates business problem-solving support platform ▷ Eliminating poverty and improving convenience through greater financial inclusion: Operates fund whose purpose is to invest in Chinese fintech company Beijing Zhongguancun Kejin Technology Co., Ltd.
Governance ▷ Helping to make governance features more sophisticated: Operates funds to facilitate business succession and support growth of small and medium-size companies
Corporate governance and top management Overview of corporate governance
Corporate governance (updated on April 7, 2021) Organization type and capital structure Organization type Company with auditors Controlling shareholder No Parent company stock code ― Directors Number of directors per Articles of Incorporation 10 Term of directors per Articles of Incorporation One year Chairman of directors President Number of directors 7 Number of outside directors Four Other Participation in electronic voting platform Will consider as required English-language notice of General Meeting of Shareholders Will consider as required (summary) Introduction of a stock option system Yes Disclosure of directors’ compensations Some information disclosed Policy for determining compensations or calculation method Yes Anti-takeover measures No
61/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
Top management Toshihiro Toyoshima, CEO Toyoshima graduated from the University of Tokyo’s Faculty of Law and completed a master’s degree in urban planning at Massachusetts Institute of Technology. He joined the Development Bank of Japan (DBJ) in 1985, going on to hold positions such as head of the Growth and Cross-border Investment Group and senior deputy director of the World Bank in charge of the private sector. As an expert in growth investment at DBJ since 2005, he became a founding member of Mercuria and was appointed CEO in 2008. He has experience in real estate securitization, PFI, and launching turnaround management business, and was involved in the privatization of African public companies at the World Bank.
Major shareholders
Shareholding Top shareholders Shares held ratio Development Bank of Japan Inc. 4,200,000 24.54% Itochu Corporation 2,426,000 14.18% Goldman Sachs Int ernat ional 1,048,863 6.13% Goldman Sachs & Co. REG 962,900 5.63% Custody Bank of Japan, Ltd. (Trust account) 679,100 3.97% Sumitomo Mitsui Trust Bank, Limited 582,000 3.40% Toshihiro Toyoshima 526,400 3.08% The Master Trust Bank of Japan, Ltd. (Trust account) 481,000 2.81% Union Bay G.K. 424,000 2.48% Hideya Ishino 326,400 1.91% SUM 11,656,663 68.13% Source: Shared Research based on company data *As of December 31, 2020. *Excludes treasury shares
Dividend policy
Mercuria Holdings has said it intends to stick with the basic dividend policies establish by Mercuria Investment, now under its corporate umbrella as a wholly owned subsidiary. For now, the company says it will be aiming for a dividend payout ratio of 30%, except the payout ratio it uses will be calculated not on earnings reported for a single year but rather on average annual earnings reported over a five-year timeframe. Explaining its reasoning, the company said it wants to maintain a stable dividend from year to year but that large swings in income from performance-based fees makes this very difficult, so it will instead smooth the earnings it uses to calculate its dividend payout ratio by using the five-year average. That said, the company noted that it is still looking to raise the amount of dividends it pays out as the five-year average for after-tax earnings rises in the years ahead.
Basic dividend policies under Mercuria Investment Co., Ltd. Mercuria’s basic policy is to return profits regularly to shareholders in accordance with earnings performance over the long term while securing retained profit and based on a comprehensive assessment of its business, including financial condition and management performance. The company commented that while a dividend payout ratio of 30% remains a target, it would use the five-year average net income attributable to owners of the parent as the profit indicator in its calculations to limit the effect of single-year profit and loss to stabilize dividends, because performance fees have a significant impact on earnings. In FY12/20, the company paid a dividend of JPY20 per share and in FY12/21 expects to pay a dividend of JPY20 per share.
62/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
(Reference) Alternative investment
Alternative investment is investment in private equity (venture capital, buyouts, and turnarounds), real estate (publicly traded REITs, private REITs, and private placement funds), and hedge funds as an alternative to investing in traditional assets like stocks and bonds. Investors can gain returns with different properties to those from traditional assets.
Comparison of alternative investments Type Features Investment Liquidity Timing of Capital period returns contribution method
Private equity Venture Investment in companies at the early stage Approx. No No investment As required capital of launching a business (e.g., companies 10 years cancellations gains for (capital call) with technologies, but no capital) several years Buyout Investment in mature companies (e.g., Approx. acquiring one business division) 10 years Turnaround Investment in failing companies, or those 5–7 years requiring business or financial restructuring Real estate Publicly Real estate investment trust product that Unlimited No Immediately Lump sum traded REIT offers publicly traded investment units cancellations after investing deposit (marketable) Private REIT Real estate investment trust product that Unlimited Cancellations uses the REIT structure, but does not offer permitted publicly listed investment units Private Real estate investment trust product with 3–7 years No placement distinctive features, subject to looser cancellations fund investment regulations than REITs Hedge fund - Fund that invests in traditional assets and - Cancellations Immediately Lump sum financial products, seeking absolute returns permitted after investing deposit through short selling strategy and derivatives Source: Shared Research based on various materials
Image of risk and return by product High
Venture capital
Buyout
Return Turnaround Listed stock Real Estate REIT
Corporate bond Government Low bond
Low Risk High Source: Shared Research based on various materials
63/65 Mercuria Holdings / 7347 RCoverage LAST UPDATE: 2021.08.12 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
(Reference) Differences between venture capital and buyout funds
According to the company, venture capital and buyout funds have different risk/return profiles, because of differences in assets they invest in, shareholding ratios, exit methods, and source of investment returns. Due to these differences, venture capital tends to be high risk and high return investment, whereas buyout funds are more likely to be medium-risk, medium-return investments.
Venture capital versus buyout funds Venture capital Buyout fund Fund investment period Manages fund over period of 5–10 years Manages fund over period of 5–10 years (same as venture capital) Investment targets Invests in unlisted companies offering potential Investment in unlisted or listed companies with established track for innovative products, technologies, and record in products, technologies, services, and customers, and a services, with limited track record and yet to medium- to long-term market valuation. Investors focus on the establish a market valuation. Investment focuses company’s business track record or business base and expect it on growth potential and attractive future market to generate similar cash flow levels going forward. (Example: valuation. (Example: Investment in startups Investment in companies in the later growth stage to maturation between founding and early growth stage) stage) Stake In principle, a minority stake (around 5%) In principle, a majority stake (51% or more) Exit method In principle, by an IPO of shares of the company IPO or trade sale to third party (M&A) depending on the type of invested in business Investment risk/return ・Stock market valuation of growth potential of ・Growth of cash flow generated by the business in which the properties business is the source of investment returns fund invested as a result of business growth and/or restructuring ・Affected by changes in market conditions, support, and an increase in share price associated with an regulations, and competitive environment as a improvement in valuation between time of investment and sale result of new players entering the market of the company are the source of investment returns. ・Informed projections of business performance/business base are possible. Source: Shared Research based on various materials
Profile
Company Name Head Office Mercuria Holdings Co., Ltd. Daibiru 6 floor, 1-3-3 Uchisaiwaicho, Chiyoda-ku Tokyo Phone Listed On 81-3-3500-9870 The First Section of the Tokyo Stock Exchange Established Exchange Listing October 2005 October, 2016 Website Financial Year-End http://www.mercuria.jp/english/ December 31 IR Contact IR Web http://www.mercuria.jp/english/contact/ http://www.mercuria.jp/english/news/index.html
64/65 About Shared Research Inc. RCoverage Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp
We offer corporate clients comprehensive report coverage, a service that allows them to better inform investors and other stakeholders by presenting a continuously updated third-party view of business fundamentals, independent of investment biases. Shared Research can be found on the web at https://sharedresearch.jp.
Current Client Coverage of Shared Research Inc.
Advance Create Co., Ltd. Dream Incubator Inc. KI-Star Real Estate Co., Ltd. RESORTTRUST, INC. ADJUVANT COSME JAPAN CO., LTD. Earth Corporation KLab Inc. ROUND ONE Corporation Aeon Delight Co., Ltd. Edion Corporation Kondotec Inc. RYOHIN KEIKAKU CO., LTD. Aeon Fantasy Co., Ltd. Elecom Co., Ltd. Kumiai Chemical Industry Co., Lt d. SanBio Company Limit ed Ai Holdings Corporation en Japan Inc. Lasertec Corporation SANIX INCORPORAT ED AI inside Inc. Estore Corporation. Locondo, Inc. Sanrio Company, Ltd. AirTrip Corp. euglena Co., Ltd. LUCKLAND CO., LTD. Sanyo Trading Co., Ltd. ALINCO INCORPORATED FaithNetwork Co., Ltd. Marumae Co., Ltd. SATO HOLDINGS CORPORATION and factory, inc. Ferrotec Holdings Corporation MATSUI SECURITIES CO., LTD. SBS Holdings, Inc. ANEST IWATA Corporation FIELDS CORPORATION Media Do Co., Ltd. Seikagaku Corporation AnGes Inc. Financial Products Group Co., Ltd. Medical System Network Co., Ltd. Seria Co.,Ltd. Anicom Holdings, Inc. First Brothers Co., Ltd. MEDINET Co., Ltd. Serverworks Co.,Ltd. Anritsu Corporation FreeBit Co., Ltd. MedPeer,Inc. SHIFT Inc. Apaman Co., Ltd. Gamecard-Joyco Holdings, Inc. Mercuria Holdings Co., Lt d. Shikigaku Co., Lt d. ARATA CORPORATION GameWith, Inc. Metaps Inc. SHIP HEALTHCARE HOLDINGS, INC. Artspark Holdings Inc. GCA Corporation Micronics Japan Co., Ltd. SIGMAXYZ Inc. AS ONE CORPORATION Good Com Asset Co., Ltd. MIRAIT Holdings Corporation SMS Co., Ltd. Ateam Inc. Grandy House Corporation Monex Goup Inc. Snow Peak, Inc. Aucfan Co., Ltd. GiG Works Inc. MORINAGA MILK INDUSTRY CO., LTD. Solasia Pharma K.K. AVANT CORPORATION Hakuto Co., Ltd. Mortgage Service Japan Limited. SOURCENEXT Corporation Axell Corporation Hamee Corp. MRT Inc. Space Value Holdings Co., Ltd. Azbil Corporation Happinet Corporation NAGASE & CO., LTD Star Mica Holdings Co., Ltd. AZoom, Co., Ltd. Harmonic Drive Systems Inc. NAIGAI TRANS LINE LTD. Stream Media Corporation Base Co., Ltd HENNGE K.K. NanoCarrier Co., Ltd. Strike Co., Ltd. BEENOS Inc. Hoosiers Holdings NEC Networks & System Integration Corporation Sunnexta Group Inc. Bell-Park Co., Lt d. Hosokaw a Micron Corporat ion Net Marketing Co., Ltd. SymBio Pharmaceut icals Limit ed Benefit One Inc. Hope, Inc. Net One Systems Co.,Ltd. Synchro Food Co., Ltd. B-lot Co.,Ltd. HOUSEDO Co., Ltd. Nichi-Iko Pharmaceutical Co., Ltd. TAIYO HOLDINGS CO., LTD. Broadleaf Co., Ltd. H2O Retailing Corporation NIHON CHOUZAI Co.,Ltd. Takashimaya Company, Limited CanBas Co., Ltd. IDOM Inc. Nihon Denkei Co., Ltd. Take and Give Needs Co., Ltd. Canon Marketing Japan Inc. IGNIS LTD. Nippon Commercial Development Co., Ltd. TEAR Corporation Career Design Center Co., Ltd. i-mobile Co.,Ltd. Nippon Koei Co., Ltd. Tenpo Innovation Inc. Carna Biosciences, Inc. Inabata & Co., Ltd. NIPPON PARKING DEVELOPMENT Co., Ltd. 3-D Matrix, Ltd. CARTA HOLDINGS, INC Infocom Corporation NIPRO CORPORATION The Hokkoku Bank,Ltd. CERES INC. Infomart Corporation Nisshinbo Holdings Inc. TKC Corporation Chiyoda Co., Lt d. Int elligent W ave, Inc. Nisso Corporat ion T KP Corporation Chori Co., Ltd. ipet Holdings CO., Ltd. NS TOOL CO., LTD. Tsuzuki Denki Co., Ltd. Chugoku Marine Paints, Ltd. Itochu Enex Co., Ltd. OLBA HEALTHCARE HOLDINGS,Inc. TOCALO Co., Ltd. cocokara fine Inc. ItoKuro Inc. OHIZUMI MFG. CO., LT D. TOKAI Holdings Corporation COMSY S Holdings Corporat ion JAFCO Co.,Ltd. Oisix ra daichi Inc. T okyu Construction Co., Ltd. COTA CO.,LTD. JMDC Inc. Oki Electric Industry Co., Ltd. TOYOBO CO., LTD. CRE, Inc. JSB Co., Ltd. ONO SOKKI Co., Ltd. Toyo Ink SC Holdings Co., Ltd. CREEK & RIVER Co., Ltd. JTEC Corporation ONWARD HOLDINGS CO.,LTD. Toyo Tanso Co., Ltd. Daiichi Kigenso Kagaku Kogyo Co., Ltd. J Trust Co., Ltd Pan Pacific Int ernat ional Holdings Corporat ion T ri-St age Inc. Daiki Axis Co.,Ltd. Japan Best Rescue System Co., Ltd. PARIS MIKI HOLDINGS Inc. T SURUHA Holdings Daiseki Co., Ltd. JINS HOLDINGS Inc. PCA CORPORATION VISION INC. Daiwabo Holdings Co.,Ltd. JP-HOLDINGS, INC. PIGEON CORPORATION VISIONARY HOLDINGS CO., LTD. Demae-Can CO., LTD. KAMEDA SEIKA CO., LTD. Premium Water Holdings V-cube,Inc. DIC Corporat ion Kanamic Network Co., LTD. P3, inc. W orld Holdings Co., Ltd. Digital Arts Inc. KANEMATSU CORPORATION QB Net Holdings Co., Ltd. WOW WORLD Inc. Digital Garage Inc. kaonavi, inc. RACCOON HOLDINGS, Inc. YELLOW HAT LTD. Doshisha Corporation KFC Holdings Japan, Ltd. Raysum Co., Ltd. YOSHINOYA HOLDINGS CO., LTD. ZAPPALLAS, INC. Attention: If you would like to see companies you invest in on this list, ask them to become our client, or sponsor a report yourself.
Disclaimer: This document is provided for informational purposes only. No investment opinion or advice is provided, intended, or solicited. Shared Research Inc. offers no warranty, either expressed or implied, regarding the veracity of data or interpretations of data included in this report. We shall not be held responsible for any damage caused by the use of this report. The copyright of this report and the rights regarding the creation and exploitation of the derivative work of this and other Shared Research Reports belong to Shared Research. This report may be reproduced or modified for personal use; distribution, transfer, or other uses of this report are strictly prohibited and a violation of the copyright of this report. Our officers and employees may currently, or in the future, have a position in securities of the companies mentioned in this report, which may affect this report’s objectivity.
Japanese Financial Instruments and Exchange Law (FIEL) Disclaimer: The report has been prepared by Shared Research under a contract with the company described in this report (“the company”). Opinions and views presented are ours where so stated. Such opinions and views attributed to the company are interpretations made by Shared Research. We represent that if this report is deemed to include an opinion from us that could influence investment decisions in the company, such an opinion may be in exchange for consideration or promise of consideration from the company to Shared Research.
Contact Details Shared Research Inc. 3-31-12 Sendagi Bunkyo-ku Tokyo, Japan https://sharedresearch.jp Phone: +81 (0)3 5834-8787 Email: [email protected]
65/65