TOKAI Holdings / 3167
COVERAGE INITIATED ON: 2013.05.31 LAST UPDATE: 2019.08.26
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. TOKAI Holdings / 3167 RCoverage LAST UPDATE: 2019.08.26 Research Coverage Report by Shared Research Inc. | www.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 ------4 Recent updates ------6 Highlights ------6 Trends and outlook ------9 Quarterly trends and results ------9 Full-year company forecasts ------15 Outlook ------17 Medium and long-term plans ------17 Strategy ------21 Business ------22 Business description ------22 Profitability snapshot, financial ratios ------33 Market and value chain ------36 Strengths and weaknesses ------41 Historical performance and financial statements ------42 Historical performance ------42 Income statement ------59 Balance sheet ------61 Statement of cash flows ------62 News and topics ------63 Other information ------66 History ------66 Major shareholders ------67 Top management ------67 Employees ------67 Dividends and shareholder benefits ------67 Investor relations ------68 Company profile ------69
02/70 TOKAI Holdings / 3167 RCoverage LAST UPDATE: 2019.08.26 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Executive summary
◤ TOKAI Holdings provides a diverse range of products and services in Shizuoka Prefecture, Kanto and other areas, and has a customer base of 2.9mn customers (as of end-FY03/19). Operations are energy and housing-related, which includes liquefied petroleum gas (LP gas) and information and communication (including a fiber-optic network and CATV). TOKAI Holdings Corporation was established on April 1, 2011, after the management integration of TOKAI CORPORATION (registered name: The TOKAI Corporation) and TOKAI Communications Corporation (formerly VIC TOKAI Corporation; name changed on October 1, 2011), and an accompanying transfer of shares to a holding company.
◤ The company’s businesses, which provide a diverse array of services targeting both retail and commercial customers, fall into six business segments: Gas & Petroleum; Information and Communications; CATV; Aqua; Building and Real Estate; and Others. The Gas & Petroleum, Information and Communications, and CATV segments account for the majority of sales and operating profit (see the business section for further details).
Trends and outlook
◤ On May 9, 2017, the company unveiled its new medium-term business plan, Innovation Plan 2020 “JUMP.” Designed to guide the company through FY03/21, the new business plan targets FY03/21 sales of JPY339.3bn (almost double the sales in FY03/17), operating profit of JPY22.5bn (roughly an 80% increase over FY03/17), and a ROE of 13%. Under the new plan the company has allocated JPY100bn for M&A, and intends to aggressively pursue opportunities for strategic mergers, acquisitions, and business alliances. The company makes it a priority to expand the revenue and customer base of its core businesses in gas, CATV, and information and communications through M&A.
◤ For FY03/19 (second year of the Innovation Plan 2020 “JUMP”), the company posted sales of JPY191.6bn (+3.0% YoY), operating profit of JPY13.1bn (+19.0% YoY), recurring profit of JPY13.3bn (+18.5% YoY), and net income attributable to parent company shareholders of JPY7.8bn (+17.4% YoY). Initiatives to acquire more customers and increase orders proved a success. Sales reached a record high on the benefit of expanded revenue from M&A in FY03/18, in addition to increased customer count. Operating Profit achieved double digit YoY growth to reach its highest level in two years thanks to higher sales in accordance with the increase in monthly subscriptions from increased customer count, as well as curtailment of upfront costs, including costs to acquire new customers.
◤ For FY03/20, the company forecasts consolidated sales of JPY200.8bn (+4.8% YoY), operating profit of JPY14.2bn (+8.5% YoY), recurring profit of JPY14.0bn (+5.9%), and net income attributable to parent company shareholders of JPY8.2bn (+5.9% YoY). The company is aiming for record high sales and operating profit for the second consecutive year. While continuing to expand its customer base, the company will pursue M&A, expand into new sales areas and advance into new locations overseas. It plans a dividend of JPY28 per share, which is the same as for FY03/19.
Strengths and weaknesses
Shared Research thinks TOKAI Holdings’ strengths center on its regional dominance providing greater profit contributions from non-gas businesses, flexibility to take business away from major utility companies, and beneficiary of structural reform and realignment of the LP gas industry. Weaknesses center on its lack of experience in cross-selling, structural decline in LP gas market, and intensifying competition in the CATV business.
03/70 TOKAI Holdings / 3167 RCoverage LAST UPDATE: 2019.08.26 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Key financial data
Income statement FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY 03/ 20 (JPYmn) Cons.* Cons.* Cons.* Cons.* Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Total sales 160,724 165,702 159,228 174,901 181,931 181,684 188,987 187,511 180,940 178,631 186,069 191,600 200,800 YoY 3.8% 3.1% -3.9% 9.8% 4.0% -0.1% 4.0% -0.8% -3.5% -1.3% 4.2% 3.0% 4.8% Gas and Petroleum 95,182 99,355 89,000 95,697 98,316 94,519 97,229 93,067 80,745 73,344 76,073 77,977 Information and Communications 42,024 45,322 34,672 34,725 37,943 38,497 38,803 40,118 44,246 49,508 50,894 51,234 CATV - - 15,653 22,647 24,292 23,786 24,187 24,359 24,608 25,396 28,386 30,511 Building and Real Estate 14,430 14,324 14,399 14,907 15,881 15,756 19,245 20,019 20,975 19,511 19,807 20,090 Aqua - - - - - 3,750 4,378 4,959 5,487 5,762 6,200 7,004 Other 9,087 6,699 5,502 6,923 5,498 5,374 5,142 4,987 4,875 5,108 4,706 4,781 Gross profit 52,800 58,809 63,347 67,445 69,537 68,809 68,341 68,932 69,812 73,040 75,336 76,159 YoY 0.2% 11.4% 7.7% 6.5% 3.1% -1.0% -0.7% 0.9% 1.3% 4.6% 3.1% 1.1% GPM 32.9% 35.5% 39.8% 38.6% 38.2% 37.9% 36.2% 36.8% 38.6% 40.9% 40.5% 39.7% Operating profit 6,362 8,279 10,029 10,755 10,923 8,934 7,392 9,003 8,245 12,750 10,971 13,057 14,170 YoY -19.7% 30.1% 21.1% 7.2% 1.6% -18.2% -17.3% 21.8% -8.4% 54.6% -14.0% 19.0% 8.5% OPM 4.0%5.0%6.3%6.1%6.0%4.9%3.9%4.8%4.6%7.1%5.9%6.8%7.1% Recurring profit 4,162 -257 10,822 9,489 9,818 8,065 7,013 8,549 8,150 12,775 11,191 13,259 14,040 YoY -12.7% - - -12.3% 3.5% -17.9% -13.0% 21.9% -4.7% 56.7% -12.4% 18.5% 5.9% RPM 2.6% - 6.8% 5.4% 5.4% 4.4% 3.7% 4.6% 4.5% 7.2% 6.0% 6.9% 7.0% Net income 518 -2187 3,080 2,152 2,715 3,085 2,598 3,934 3,458 7,337 6,620 7,772 8,230 YoY -85% - - -30.1% 26.2% 13.6% -15.8% 51.4% -12.1% 112.2% -9.8% 17.4% 5.9% Net margin 0.3% - 1.9% 1.2% 1.5% 1.7% 1.4% 2.1% 1.9% 4.1% 3.6% 4.1% 4.1% Per share data Shares issued (year-end; '000) 75,750 75,750 75,750 70,845 155,200 155,200 155,200 155,200 139,680 139,680 139,680 139,680 EPS 7.2 -30.6 43.5 30.5 27.2 29.9 22.7 34.2 30.0 64.5 51.2 59.4 62.9 EPS (fully diluted) - - 43.4 30.5 - - - 34.1 26.9 56.3 50.5 - Dividend per share 8.0 8.0 8.0 8.0 12.0 12.0 12.0 12.0 14.0 28.0 28.0 28.0 28.0 Book value per share 205.5 157.9 195.4 210.8 262.9 289.3 325.8 368.2 362.8 439.0 460.7 478.3 Balance sheet (JPYmn) Cash and cash equivalents 7,814 8,416 12,267 8,622 2,602 4,235 3,182 2,861 4,077 3,239 3,143 4,164 Total current assets 58,352 52,715 51,236 49,744 41,093 40,351 40,606 35,959 38,117 38,594 39,951 42,506 Tangible fixed assets 83,557 88,356 107,778 110,613 110,207 106,602 103,129 98,935 95,064 93,647 96,810 97,030 Investments and other assets 17,209 18,653 17,138 15,996 14,995 15,638 16,855 19,539 16,149 17,860 18,030 16,937 Intangible fixed assets 7,360 8,795 14,810 16,654 17,266 14,906 12,943 11,224 10,940 10,988 11,198 11,128 Total assets 166,802 168,554 191,036 193,239 183,735 177,642 173,620 165,702 160,303 161,112 165,993 167,606 Accounts payable 12,375 11,743 11,193 12,652 13,636 13,019 14,105 13,035 13,511 14,779 15,670 15,021 Short-term debt 55,415 66,592 66,667 56,756 50,834 48,614 44,169 36,279 28,586 26,888 27,358 25,966 Total current liabilities 87,339 98,308 96,682 89,783 85,179 82,563 78,905 71,160 62,958 61,304 63,705 61,385 Long-term debt 54,280 46,016 61,019 65,400 53,404 44,093 41,171 36,790 42,823 39,596 36,793 38,131 Total fixed liabilities 58,734 53,513 74,804 81,866 71,374 61,068 56,385 51,074 55,373 43,361 40,837 42,325 Total liabilities 146,073 151,822 171,486 171,649 156,553 143,631 135,291 122,234 118,332 104,665 104,543 103,711 Net assets 20,728 16,732 19,549 21,589 27,181 34,011 38,329 43,467 41,970 56,446 61,450 63,894 Total interest-bearing debt 109,695 112,608 127,686 122,156 104,238 92,707 85,340 73,069 71,409 66,484 64,151 64,097 Cash flow statement (JPYmn) Cash flows from operating activities 13,587 22,406 21,915 23,521 28,584 25,713 22,806 27,265 21,395 26,692 20,909 21,605 Cash flows from investing activities -14,610 -20,064 -25,665 -14,601 -10,037 -9,983 -9,664 -8,851 -11,015 -10,985 -11,488 -12,443 Cash flows from financing activities -875 -2,787 7,253 -11,278 -24,255 -14,051 -14,125 -18,764 -9,150 -16,643 -9,527 -8,147 Financial ratios ROA (RP-based) 2.5%-0.2%6.0%4.9%5.2%4.5%4.0%5.0%5.0%7.9%6.8%7.9% ROE 3.4% -16.8% 24.6% 15.0% 13.2% 10.4% 7.4% 9.8% 8.3% 15.2% 11.4% 12.6% Equity ratio 8.8% 6.7% 7.2% 7.7% 14.3% 18.6% 21.6% 25.7% 25.6% 34.5% 36.3% 37.4% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Results for FY03/11 and prior years are of TOKAI Corp.
04/70 TOKAI Holdings / 3167 RCoverage LAST UPDATE: 2019.08.26 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Segment sales and operating profit after allocation of overhead expenses Segment sales and OP FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) TOKAI cons. Cons.* Cons.* Cons. Cons.* Cons. Cons. Cons. Cons. Cons. Cons. Total sales 165,702 159,228 174,901 181,931 181,684 188,987 187,511 180,940 178,631 186,069 191,600 YoY 3.1% -3.9% 9.8% 4.0% -0.1% 4.0% -0.8% -3.5% -1.3% 4.2% 3.0% Gas and Petroleum 99,355 89,000 95,697 98,316 94,519 97,229 93,067 80,745 73,344 76,073 77,977 YoY 4.4% -10.4% 7.5% 2.7% - 2.9% -4.3% -13.2% -9.2% 3.7% 2.5% % o total sales 60.0% 55.9% 54.7% 54.0% 52.0% 51.4% 49.6% 44.6% 41.1% 40.9% 40.7% Information Communications 45,322 34,672 34,725 37,943 38,497 38,803 40,118 44,246 49,508 50,894 51,234 YoY 7.8% - 0.2% 9.3% 1.5% 0.8% 3.4% 10.3% 11.9% 2.8% 0.7% % o total sales 27.4% 21.8% 19.9% 20.9% 21.2% 20.5% 21.4% 24.5% 27.7% 27.4% 26.7% CATV - 15,653 22,647 24,292 23,786 24,187 24,359 24,608 25,396 28,386 30,511 YoY - - 44.7% 7.3% -2.1% 1.7% 0.7% 1.0% 3.2% 11.8% 7.5% % o total sales - 9.8% 12.9% 13.4% 13.1% 12.8% 13.0% 13.6% 14.2% 15.3% 15.9% Building and Real Estate 14,324 14,399 14,907 15,881 15,756 19,245 20,019 20,975 19,511 19,807 20,090 YoY -0.7% 0.5% 3.5% 6.5% -0.8% 22.1% 4.0% 4.8% -7.0% 1.5% 1.4% % o total sales 8.6% 9.0% 8.5% 8.7% 8.7% 10.2% 10.7% 11.6% 10.9% 10.6% 10.5% Aqua - - - - 3,750 4,378 4,959 5,487 5,762 6,200 7,004 YoY - - - - - 16.7% 13.3% 10.6% 5.0% 7.6% 13.0% % o total sales - - - -2.1%2.3%2.6%3.0%3.2%3.3%3.7% Other 6,699 5,502 6,923 5,498 5,374 5,142 4,987 4,875 5,108 4,706 4,781 YoY -26.3% -17.9% 25.8% -20.6% -2.3% -4.3% -3.0% -2.2% 4.8% -7.9% 1.6% % o total sales 4.0%3.5%4.0%3.0%3.0%2.7%2.7%2.7%2.9%2.5%2.5% Operating profit 8,279 10,029 10,755 10,923 8,934 7,392 9,003 8,245 12,750 10,971 13,057 YoY 30.1% 21.1% 7.2% 1.6% -18.2% -17.3% 21.8% -8.4% 54.6% -14.0% 19.0% OPM 5.0%6.3%6.1%6.0%4.9%3.9%4.8%4.6%7.1%5.9%6.8% Gas and Petroleum 6,434 7,111 6,154 4,577 5,200 4,520 5,549 6,973 6,942 4,967 4,434 YoY 85.7% 10.5% -13.5% -25.6% - -13.1% 22.8% 25.7% -0.4% -28.5% -10.7% OPM 6.5%8.0%6.4%4.7%5.5%4.6%6.0%8.6%9.5%6.5%5.7% % of total operating profit 77.7% 70.9% 57.2% 41.9% 58.2% 61.1% 61.6% 84.6% 54.4% 45.3% 34.0% Information Communications 4,255 3,586 4,310 4,197 3,746 3,049 3,486 829 3,065 1,866 2,593 YoY -7.0% - 20.2% -2.6% -10.7% -18.6% 14.3% -76.2% 269.7% -39.1% 39.0% OPM 9.4% 10.3% 12.4% 11.1% 9.7% 7.9% 8.7% 1.9% 6.2% 3.7% 5.1% % of total operating profit 51.4% 35.8% 40.1% 38.4% 41.9% 41.2% 38.7% 10.1% 24.0% 17.0% 19.9% CATV - 1,869 2,592 1,648 429 973 862 1,161 2,331 3,035 4,442 YoY - - 38.7% -36.4% -74.0% 126.8% -11.4% 34.7% 100.8% 30.2% 46.4% OPM - 11.9% 11.4% 6.8% 1.8% 4.0% 3.5% 4.7% 9.2% 10.7% 14.6% % of total operating profit - 18.6% 24.1% 15.1% 4.8% 13.2% 9.6% 14.1% 18.3% 27.7% 34.0% Building and Real Estate 351 161 856 555 209 926 495 676 461 655 954 YoY -20.8% -54.1% 431.7% -35.2% -62.3% 343.1% -46.5% 36.6% -31.8% 42.1% 45.6% OPM 2.5%1.1%5.7%3.5%1.3%4.8%2.5%3.2%2.4%3.3%4.7% % of total operating profit 4.2% 1.6% 8.0% 5.1% 2.3% 12.5% 5.5% 8.2% 3.6%6.0%7.3% Aqua - - - - -1,029 -2,107 -1,448 -1,275 101 26 520 YoY ------74.3%1895.8% OPM ------0.1%2.6% % of total operating profit - - - - -11.5% -28.5% -16.1% -15.5% 0.8% 0.2% 4.0% Other -684 -602 -274 -228 -17 -10 -386 -197 112 301 217 YoY ------41.2% 3760.0% -49.0% -156.9% 168.8% -27.9% OPM - - - - -0.3% -0.2% -7.7% -4.0% 2.2% 6.4% 4.5% % of total operating profit -8.3% -6.0% -2.5% -2.1% -0.2% -0.1% -4.3% -2.4% 0.9% 2.7% 1.7% Adjustments -2,077 -2,096 -2,883 174 396 41 445 78 -265 118 -105 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Segment operating profits are after allocation of overhead expenses.
05/70 TOKAI Holdings / 3167 RCoverage LAST UPDATE: 2019.08.26 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Recent updates
Highlights
On August 26, 2019, TOKAI Holdings Corporation announced a business partnership agreement with Isesaki Gas.
Background of business partnership
▷ Isesaki Gas Co., Ltd. supplies residential and industrial energy in Isesaki, Gunma Prefecture. The company operates several lines of businesses, including its city gas business, community gas business, power supply business, and other related businesses. Additionally, the company contributes to local industrial development by providing power to Isesaki’s new industrial park. ▷ Home to 17 total industrial parks and distribution complexes, the city of Isesaki is highly accessible from not only Tokyo, but also from other nearby prefectures. With industrial promotion efforts by the government, highly respected companies have opened operations in the city, and its population has continued to grow. ▷ Through the business partnership, TOKAI Holdings and Isesaki Gas will be sharing management resources and expertise, and expanding businesses as community-oriented companies.
Summary of business partnership
▷ Collaboration in city gas business ▷ Collaboration in LP gas business ▷ Mutual promotion of services
Business partnership details
▷ Setup a business partnership promotion meeting consisting of members from both companies to discuss and implement partnership approaches for each business ▷ As part of measures to strengthen the business relationship, TOKAI Holdings will own 20.7% of Isesaki Gas’ shares outstanding. ▷ TOKAI Holdings believes that the partnership will be a role model for community-oriented business and service expansion in a liberalized city gas industry. ▷ TOKAI Holdings expects the partnership’s impact on full-year FY03/20 results to be minimal.
On August 21, 2019, Shared Research updated the report following interviews with the company.
On July 31, 2019, the company announced the establishment of a new company and earnings results for Q1 FY03/20; see the results section for details.
The company decided to establish a new company to strengthen ties with the city of Nikaho, Akita Prefecture and collaborate with local companies, accompanying the takeover of Nikaho’s city gas operations by subsidiary TOKAI Gas Corporation.
Overview of new company
▷ Name: Nikaho Gas Corporation ▷ Business: City gas business in Nikaho, Akita Prefecture ▷ Location: Funabashi-4 Hirasawa, Nikaho, Akita Prefecture ▷ Capital: JPY10mn
06/70 TOKAI Holdings / 3167 RCoverage LAST UPDATE: 2019.08.26 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
▷ Ownership: TOKAI Gas Corporation (100%) ▷ Date of establishment: August 5, 2019 (planned) ▷ Application for business transfer: Early September 2019 (planned) ▷ Approval of business transfer: Late October 2019 (estimate) ▷ Business start: April 1, 2020 (planned)
The establishment of this business will have no impact on FY03/20 consolidated results.
On July 19, 2019, the company announced the acquisition of stock in AM’S Brain Co., Ltd. (converting it into a consolidated subsidiary).
The company’s wholly owned subsidiary TOKAI Communications Corporation has entered into a share transfer agreement with AM’S Brain Co., Ltd., making AM’S Brain Co., Ltd. a consolidated subsidiary.
Reasons for the stock acquisition
▷ As promoting digital transformation (DX) becomes important, TOKAI Communications Corporation offers services in the information and telecommunication field, to function as a one-stop service provider offering network infrastructure, data centers, and system development in an integrated manner. The company uses its own data centers and fiber optics networks
to provide corporate customers with optimal solutions that proactively respond to cutting-edge technology such as cloud, AI and IoT. ▷ AM’S Brain, through subsidiary company AM’S Unity, operates an information services business based around contracted software development, and systems operation and maintenance, in Okayama Prefecture. ▷ The company decided to implement the stock acquisition in order to take advantage of the business resources of both companies to improve development capability in the Information and Communications segment and create synergies based
around the company’s data centers in Okayama Prefecture, thereby boosting the enterprise value of both companies over the medium and long term. The two companies aim to achieve sustainable growth, while supporting the promotion of digital transformation and responding rapidly and flexibly to increasingly diverse customer needs. ▷ The company expects the impact of the share acquisition on results for FY03/20 to be minor.
Digital transformation (DX): the use of data and technology by a company to spark innovation in its products, services, and business model in order to address the changes in business environment and the needs of clients and the society at large; the establishment of a competitive advantage through transforming a company’s business itself, the organization, processes, culture and atmosphere leveraging data and technology.
Details of the stock acquisition
▷ Number of shares acquired: 198 shares (number of voting rights: 198; comprising ownership of 99% of voting rights after the transfer). ▷ The contract was concluded on June 27, 2019 and the effective date of the stock transfer was July 18, 2019.
AM’S Brain results and financial position over the last three years JPYmn FY03/17 FY03/18 FY03/19 Net assets 31 30 30 Total assets 34 33 33 Sales 0 0 0
07/70 TOKAI Holdings / 3167 RCoverage LAST UPDATE: 2019.08.26 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Operating profit -4.7 -0.4 -0.2 Recurring profit 43.4 -0.3 -0.2 Net income -40.2 -0.5 -0.2 Source: Shared Research based on company data
On July 11, 2019, the company announced that it acquired license for regional BWA in Suwa, Nagano Prefecture.
▷ LCV Corporation, which is responsible for the company’s CATV business, received a radio station license grant for regional BWA in Suwa, Nagano Prefecture from the Ministry of Internal Affairs and Communications Shinetsu General Communications Bureau ▷ TOKAI Holdings aims to utilize this regional BWA* to promote the provision of images of river surveillance cameras and other services that contribute to the local community in cooperation with the city of Suwa ▷ The company also plans to provide high-speed wireless broadband service for general users, and aims to strengthen its role as a core infrastructure provider in the region. By actively working with local governments and local companies, it looks to help improve the quality of life of residents
*Regional BWA: Regional broadband wireless access (BWA) is a radio system for telecommunications services that uses radio waves of 2.5GHz frequency bands to contribute to the promotion of regional and public welfare through the enhancement of public services in the local community and eliminating digital divides (i.e., disadvantaged areas).
On June 24, 2019, Shared Research updated the report following interviews with the company.
For previous releases and developments, please refer to the News and topics section.
08/70 TOKAI Holdings / 3167 RCoverage LAST UPDATE: 2019.08.26 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Trends and outlook
Quarterly trends and results
Quarterly FY03/18 FY03/19 FY03/20 FY03/20 FY03/20 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4% of 1H1H Est.% of FYFY Est. Sales 42,531 42,380 48,425 52,733 44,553 44,287 49,103 53,657 45,804 - - - YoY 2.2% 4.4% 7.1% 3.0% 4.8% 4.5% 1.4% 1.8% 2.8% - - - Gross profit 17,633 16,841 19,686 21,176 17,965 17,116 19,246 21,832 18,706 - - - YoY 1.4% 3.8% 5.0% 2.5% 1.9% 1.6% -2.2% 3.1% 4.1% - - - GPM 41.5% 39.7% 40.7% 40.2% 40.3% 38.6% 39.2% 40.7% 40.8% - - - SG&A expenses 15,481 15,879 16,221 16,784 15,575 16,030 15,684 15,812 15,475 - - - YoY 6.6% 8.1% 8.4% 4.2% 0.6% 1.0% -3.3% -5.8% -0.6% - - - SG&A ratio 36.4% 37.5% 33.5% 31.8% 35.0% 36.2% 31.9% 29.5% 33.8% - - - Operating profit 2,152 962 3,465 4,392 2,390 1,085 3,563 6,019 3,231 - - - YoY -25.0% -37.4% -8.5% -3.6% 11.1% 12.8% 2.8% 37.0% 35.2% - - - OPM 5.1% 2.3% 7.2% 8.3% 5.4% 2.4% 7.3% 11.2% 7.1% - - - Recurring profit 2,204 939 3,519 4,529 2,487 1,093 3,667 6,012 3,351 - - - YoY -24.0% -38.5% -7.8% 0.0% 12.8% 16.4% 4.2% 32.7% 34.7% - - - RPM 5.2% 2.2% 7.3% 8.6% 5.6% 2.5% 7.5% 11.2% 7.3% - - - Net income 1,182 64 2,189 3,185 1,432 304 2,230 3,806 2,239 - - - YoY -33.1% -89.6% -11.2% 28.1% 21.2% 375.0% 1.9% 19.5% 56.4% - - - Net margin 2.8% 0.2% 4.5% 6.0% 3.2% 0.7% 4.5% 7.1% 4.9% - - - Cumulative Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of 1H 1H Est. % of FY FY Est. Sales 42,531 84,911 133,336 186,069 44,553 88,840 137,943 191,600 45,804 ---49.5% 92,500 22.8% 200,800 YoY 2.2% 3.3% 4.6% 4.2% 4.8% 4.6% 3.5% 3.0% 2.8% - - - 4.1% 4.8% Gross profit 17,633 34,474 54,160 75,336 17,965 35,081 54,327 76,159 18,706 - - - YoY 1.4% 2.5% 3.4% 3.1% 1.9% 1.8% 0.3% 1.1% 4.1% - - - GPM 41.5% 40.6% 40.6% 40.5% 40.3% 39.5% 39.4% 39.7% 40.8% - - - SG&A expenses 15,481 31,360 47,581 64,365 15,575 31,605 47,289 63,101 15,475 - - - YoY 6.6% 7.3% 7.7% 6.8% 0.6% 0.8% -0.6% -2.0% -0.6% - - - SG&A ratio 36.4% 36.9% 35.7% 34.6% 35.0% 35.6% 34.3% 32.9% 33.8% - - - Operating profit 2,152 3,114 6,579 10,971 2,390 3,475 7,038 13,057 3,231 ---73.3% 4,410 22.8% 14,170 YoY -25.0% -29.3% -19.7% -14.0% 11.1% 11.6% 7.0% 19.0% 35.2% - - - 26.9% 8.5% OPM 5.1% 3.7% 4.9% 5.9% 5.4% 3.9% 5.1% 6.8% 7.1% - - - 4.8% 7.1% Recurring profit 2,204 3,143 6,662 11,191 2,487 3,580 7,247 13,259 3,351 ---76.9% 4,360 23.9% 14,040 YoY -24.0% -29.0% -19.2% -12.4% 12.8% 13.9% 8.8% 18.5% 34.7% - - - 21.8% 5.9% RPM 5.2% 3.7% 5.0% 6.0% 5.6% 4.0% 5.3% 6.9% 7.3% - - - 4.7% 7.0% Net income 1,182 1,246 3,435 6,620 1,432 1,736 3,966 7,772 2,239 - - - 94.9% 2,360 27.2% 8,230 YoY -33.1% -47.7% -29.2% -9.8% 21.2% 39.3% 15.5% 17.4% 56.4% - - - 35.9% 5.9% Net margin 2.8% 1.5% 2.6% 3.6% 3.2% 2.0% 2.9% 4.1% 4.9% - - - 2.6% 4.1% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
09/70 TOKAI Holdings / 3167 RCoverage LAST UPDATE: 2019.08.26 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Quarterly performance trends by segment (segment operating profits are before allocation of overhead expenses)
Segments (quarterly) FY03/18 FY03/19 FY03/20 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 Sales 42,531 42,380 48,425 52,733 44,553 44,287 49,103 53,657 45,804 - - - YoY 2.2% 4.4% 7.1% 3.0% 4.8% 4.5% 1.4% 1.8% 2.8% - - - Gas and Petroleum 17,392 15,385 20,368 22,928 17,608 16,340 20,727 23,302 18,577 - - - YoY -0.5% 2.5% 8.4% 4.0% 1.2% 6.2% 1.8% 1.6% 5.5% - - - Information and Communications 12,447 12,459 12,854 13,134 12,513 12,641 12,805 13,275 12,795 - - - YoY 5.7% 4.1% 3.1% -1.2% 0.5% 1.5% -0.4% 1.1% 2.3% - - - CATV 6,406 7,201 7,264 7,515 7,511 7,624 7,694 7,682 7,738 - - - YoY 2.6% 14.0% 14.6% 15.7% 17.2% 5.9% 5.9% 2.2% 3.0% - - - Building and Real Estate 3,617 4,732 5,142 6,316 4,166 4,821 4,859 6,244 3,777 - - - YoY 5.9% 2.3% 5.2% -4.1% 15.2% 1.9% -5.5% -1.1% -9.3% - - - Aqua 1,456 1,599 1,597 1,548 1,653 1,837 1,789 1,725 1,798 - - - YoY 2.2% 6.2% 9.2% 12.9% 13.5% 14.9% 12.0% 11.4% 8.8% - - - Other 1,211 1,003 1,201 1,291 1,100 1,023 1,229 1,429 1,116 - - - YoY -5.2% -12.5% -6.5% -7.8% -9.2% 2.0% 2.3% 10.7% 1.5% - - - Operating profit 2,152 962 6,579 4,392 2,390 1,085 7,038 6,019 3,231 - - - YoY -25.0% -37.4% -19.7% -3.6% 11.1% 12.8% 7.0% 37.0% 35.2% - - - Gas and Petroleum 1,324 238 3,857 3,507 1,182 -98 2,954 3,861 1,489 - - - YoY -39.7% -62.9% -30.5% -2.9% -10.7% - -23.4% 10.1% 26.0% - - - Information Communications 774 767 2,410 764 724 884 2,595 1,232 1,217 - - - YoY -15.2% -23.1% -19.5% -37.4% -6.5% 15.3% 7.7% 61.3% 68.1% - - - CATV 875 894 2,758 796 1,194 1,136 3,568 1,385 1,286 - - - YoY 22.0% 21.8% 29.8% 27.0% 36.5% 27.1% 29.4% 74.0% 7.7% - - - Building and Real Estate 90 298 681 649 213 341 915 700 213 - - - YoY 11.1% 22.6% 10.0% 35.5% 136.7% 14.4% 34.4% 7.9% 0.0% - - - Aqua 56 79 221 25 96 195 444 318 169 - - - YoY 194.7% -56.6% -26.1% - 71.4% 146.8% 100.9% 1172.0% 76.0% - - - Other and adjustments -970 -1311 -3350 -1349 -1022 -1370 -3442 -1477 -1145--- Segments (cumulative) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 Sales 42,531 84,911 133,336 186,069 44,553 88,840 137,943 191,600 45,804 --- YoY 2.2% 3.3% 4.6% 4.2% 4.8% 4.6% 3.5% 3.0% 2.8% - - - Gas and Petroleum 17,392 32,777 53,145 76,073 17,608 33,948 54,675 77,977 18,577 - - - YoY -0.5% 0.9% 3.6% 3.7% 1.2% 3.6% 2.9% 2.5% 5.5% - - - Information and Communications 12,447 24,906 37,760 50,894 12,513 25,154 37,959 51,234 12,795 - - - YoY 5.7% 4.9% 4.3% 2.8% 0.5% 1.0% 0.5% 0.7% 2.3% - - - CATV 6,406 13,607 20,871 28,386 7,511 15,135 22,829 30,511 7,738 - - - YoY 2.6% 8.3% 10.4% 11.8% 17.2% 11.2% 9.4% 7.5% 3.0% - - - Building and Real Estate 3,617 8,349 13,491 19,807 4,166 8,987 13,846 20,090 3,777 - - - YoY 5.9% 3.8% 4.4% 1.5% 15.2% 7.6% 2.6% 1.4% -9.3% - - - Aqua 1,456 3,055 4,652 6,200 1,653 3,490 5,279 7,004 1,798 - - - YoY 2.2% 4.3% 5.9% 7.6% 13.5% 14.2% 13.5% 13.0% 8.8% - - - Other 1,211 2,214 3,415 4,706 1,100 2,123 3,352 4,781 1,116 - - - YoY -5.2% -8.6% -7.9% -7.9% -9.2% -4.1% -1.8% 1.6% 1.5% - - - Operating profit 2,152 3,114 6,579 10,971 2,390 3,475 7,038 13,057 3,231 --- YoY -25.0% -29.3% -19.7% -14.0% 11.1% 11.6% 7.0% 19.0% 35.2% - - - Gas and Petroleum 1,324 1,562 3,857 7,364 1,182 1,084 2,954 6,815 1,489 - -- YoY -39.7% -45.0% -30.5% -19.6% -10.7% -30.6% -23.4% -7.5% 26.0% - - - Information and Communications 774 1,541 2,410 3,174 724 1,608 2,595 3,827 1,217 - - - YoY -15.2% -19.3% -19.5% -24.7% -6.5% 4.3% 7.7% 20.6% 68.1% - - - CATV 875 1,769 2,758 3,554 1,194 2,330 3,568 4,953 1,286 - - - YoY 22.0% 21.9% 29.8% 29.1% 36.5% 31.7% 29.4% 39.4% 7.7% - - - Building and Real Estate 90 388 681 1,330 213 554 915 1,615 213 - - - YoY 11.1% 19.8% 10.0% 21.1% 136.7% 42.8% 34.4% 21.4% 0.0% - - - Aqua 56 135 221 246 96 291 444 762 169 - - - YoY 194.7% -32.8% -26.1% -17.4% 71.4% 115.6% 100.9% 209.8% 76.0% - - - Other and adjustments -970 -2,281 -3,350 -4,699 -1,022 -2,392 -3,442 -4,919 -1,145 - - - Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Segment operating profits are before allocation of overhead expenses.
10/70 TOKAI Holdings / 3167 RCoverage LAST UPDATE: 2019.08.26 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Q1 FY03/20 results (out July 31, 2019)
▷ Q1 FY03/20 results: The company posted sales of JPY45.8bn (+2.8% YoY), operating profit of JPY3.2bn (+35.2% YoY), recurring profit of JPY3.4bn (+34.7% YoY), and net income attributable to parent company shareholders of JPY2.2bn (+56.4% YoY). ▷ Company forecast: Operating profit for Q1 FY03/20 came in above forecasts. On the other hand, the number of continuing customers were below expectations (net increase of 5,000 in Q1 FY03/20 compared to 100,000 planned for full-year FY03/20). The company plans to use a portion of the additional profits to acquire new customers and prevent contract cancellations. ▷ Progress: Versus 1H FY03/20 company forecasts, sales were 49.5% (50.1% of 1H sales in FY03/19), operating profit 73.3% (68.8%), recurring profit 76.9% (69.5%), and net income 94.9% (82.5%). Versus full-year FY03/20 company forecasts, sales were 22.8% (23.3% of full-year sales in FY03/19), operating profit 22.8% (18.3%), recurring profit 23.9% (18.8%), and net income 27.2% (18.4%). Profit progress was greater than in the prior comparable period in all cases. ▷ 2.8% YoY increase in sales: Initiatives to acquire more customers and increase orders proved a success. Sales reached a record high on increased customer count in the core businesses ▷ 35.2% YoY increase in operating profit: Operating Profit achieved double digit YoY growth to reach its highest level thanks to higher sales in accordance with the increase in monthly subscriptions from higher customer count, higher sales and profit in Information and Communications services for corporate clients as well as curtailment of costs. ▷ In the third year of its four-year medium-term business plan Innovation Plan 2020 “JUMP”: The company continued initiatives to expand its revenue base through the further development of existing business, M&A and forays into new businesses. In addition to working towards the realization of the TLC (Total Life Concierge) concept, the company is running initiatives under
the theme “ABCIR+S*” (leveraging new service technology for the next generation). ▷ The number of continuing customers: Increased 5,000 since end-FY03/19 to 2,907,000. Subscribers to TLC Membership Service increased 26,000 to 830,000. ▷ Initiatives: In April 2019, the company moved into the LP gas business in Mie Prefecture. In May 2019 it signed an agreement to acquire a CATV business operated by Shioya Limited in Mishima, Shizuoka Prefecture, and in July 2019 announced an agreement to buy a town gas business operated by Nikaho, Akita Prefecture (see Recent updates section for details).
* ABCIR+S refers to strategies toward technological innovation; the term is formed from the initials of AI (A), Big Data (B), Cloud (C), IoT (I), Robotics (R), and Smartphone (S).
Overview of sales and operating profit Sales Q1 FY03/20 sales totaled JPY45.8bn (+2.8% YoY). Sales increased YoY in all segments except the Building and Real Estate segment. Initiatives to acquire more customers and increase orders proved a success. Q1 FY03/20 sales reached a record high for the first quarter on the benefit of increased customer count (from the steady acquisition of customers in the LP Gas, CATV, and Aqua businesses). The business base also expanded in the core segment (the number of continuing customers increased 5,000 YoY). A breakdown of sales by segment is given below.
▷ Gas and petroleum: JPY18.6bn (+5.5% YoY) ▷ Information and Communications: JPY12.8bn (+2.3% YoY) ▷ CATV: JPY7.7bn (+3.0% YoY) ▷ Building and Real Estate: JPY3.8bn (-9.3% YoY) ▷ Aqua: JPY1.8bn (+8.8% YoY) ▷ Others: JPY1.1bn (+1.5% YoY)
11/70 TOKAI Holdings / 3167 RCoverage LAST UPDATE: 2019.08.26 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Operating profit Q1 FY03/20 operating profit amounted to JPY3.2bn (+35.2% YoY). Double-digit percentage operating profit growth was achieved in Gas and petroleum, Information and Communications, Building and Real Estate, and Aqua segments. Meanwhile, the CATV segment posted single-digit growth. Monthly subscription sales growth as a result of a growing customer base as well as sales and profit growth of information and communication services for corporate clients contributed to overall growth. Operating profit reached a record high for the first quarter in Q1 FY03/20.
A breakdown of operating profit (after overhead expense allocations) by segment is as follows.
▷ Gas and petroleum: JPY890mn (+45.8% YoY) ▷ Information and Communications: JPY919mn (+113.7% YoY) ▷ CATV: JPY1.2bn (+9.1% YoY) ▷ Building and Real Estate: JPY74mn (+15.4% YoY) ▷ Aqua: JPY104mn (+184.5% YoY) ▷ Others: JPY24mn (-0.5% YoY)
Customer count The number of continuing customers of the group was 2,907,000, up 5,000 (+0.2%) from end-FY03/19. Compared with end-FY03/19, the gas (LP, city gas) business had a net increase of 3,000 customers, the CATV business had a net increase of 7,000 customers, and the Aqua business had a net increase of 1,000 customers. In Information and Communications services, there was an increase of 2,000 customers for LIBMO compared with FY03/19, but a net decrease of 10,000 in ISP customers (net decreases of 8,000 subscribers for the conventional ISP service and 1,000 for Hikari Collaboration) and net decrease of 3,000 subscribers for the mobile service for an overall net decrease of 12,000 customers.
The number of continuing customers came in below expectations (net increase of 5,000 in Q1 FY03/20 compared to 100,000 planned for full-year FY03/20). The LP gas business reported particularly low numbers. From Q2 FY03/20 and on, the company plans to purchase commercial rights and invest in new customer acquisition and customer retention to achieve full-year targets.
Change in customer numbers, by service segment Number of customers FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 YoY ('000) Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Change Gas (LP gas, city gas) 671 642 629 627 625 634 645 664 687 23 Conventional ISP 704 775 834 858 802 595 507 451 411 -40 Hikari Collaboration - - - - 58 251 310 327 326 -1 LIBMO ------8 32 42 10 Mobile 175 198 217 229 235 235 232 225 214 -11 Information and Communications 879 972 1,049 1,087 1,095 1,081 1,057 1,035 992 -43 CATV 740 682 693 692 692 716 738 1,039 1,069 30 Aqua 87 99 105 126 130 134 138 151 157 6 Security 21 20 19 18 18 17 17 17 17 0 Total 2,378 2,392 2,471 2,526 2,537 2,557 2,570 2,883 2,907 24 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Customer numbers are duplicated for Information and Communications and CATV segments when shown separately, but not in the totals.
* MVNO (Mobile Virtual Network Operator): Business offering self-branded mobile communication services for mobile phones and PHS devices without building or operating wireless communication facilities, and instead leasing communication lines from major mobile communication carriers. ** The company is actively promoting LIBMO (http://www.libmo.jp/) as not only a method to capture new customers in mobile communication, but also as a strategic measure to acquire more contracts and prevent contract termination of fixed-line services, by packaging it with products such as Hikari Collaboration. Specifically, TOKAI is working in partnership with major electronics mass retailers to gain new customers. The company is also working to expand sales to its existing customers by awarding loyalty points in addition to its TLC membership services, and by utilizing flyers and email newsletters.
12/70 TOKAI Holdings / 3167 RCoverage LAST UPDATE: 2019.08.26 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Results by segment Segment results as reported by the company reflect allocated overhead expenses.
Gas and Petroleum
▷ Sales: JPY18.6bn (+5.5% YoY) ▷ Operating profit: JPY890mn (+45.8% YoY)
Sales and operating profit rose thanks to increased customer count and gas rates increasing due to energy regulations to reflect the change of natural gas prices.
The LP gas business had sales of JPY15.5bn (+4.8% YoY). Amid intensified competition from peers, the company focused on increasing customer count by strengthening customer acquisition and preventing cancellations in existing areas, and advancing into new areas (expanded into Mie Prefecture in April 2019). Customer count rose by 3,000 from end-FY03/19 to 631,000. Sales increased on the boost to sales prices from higher raw material costs as well. The company plans to continue acquiring commercial rights.
The city gas business had sales of JPY3.1bn (+9.1% YoY). Sales rose YoY despite the number of customers remaining steady YoY at 56,000 as gas rates rose due to energy regulations to reflect the change of natural gas prices. The company plans to takeover the Nikaho’s city gas business (Akita Prefecture). It is scheduled to apply for business transfer approval in early September 2019 and estimates that it will obtain approval in late October, with plans to take over operations on April 1, 2020.
Information and Communications
▷ Sales: JPY12.8bn (+2.3% YoY) ▷ Operating profit: JPY919mn (+113.7% YoY)
Operating profit rose YoY due to higher sales resulting from expansion of recurring revenue businesses for corporate clients and an increase in system development contracts. Operating profit came in above company forecast.
Services for consumers generated sales of JPY7.3bn (-6.2% YoY). Amid tougher competition with major carriers, LIBMO (TOKAI brand MVNO service) added 2,000 customers since end-FY03/19 to bring customer count to 42,000, but the number of ISP customers (aggregate of conventional ISP and Hikari Collaboration) declined by 10,000 to 736,000.
Compared to the company forecast for Hikari Collaboration customer numbers of 345,000 for FY03/20 (+18,000 vs. end FY03/19), Q1 FY03/20 customer numbers came in at 326,000, a net decrease of 1,000 from the end of FY03/19 (first net decrease since launching the service in March 2015). In order to get back on a growth trajectory, the company plans to strengthen its partnership with mobile carriers, ensuring that its @T COM ISP is chosen as a part of mobile and fiber bundle deals.
Sales for corporate clients reached JPY5.5bn (+16.2% YoY). Sales rose on expansion of recurring revenue businesses and an increase in system development contracts. Demand for cloud data centers, communication lines and network, and solutions are increasing, and order levels are steady in all areas covered by Tokai.
CATV
▷ Sales: JPY7.7bn (+3.0% YoY) ▷ Operating profit: JPY1.2bn (+9.1% YoY)
Sales and profit rose on a steady increase in customer count.
13/70 TOKAI Holdings / 3167 RCoverage LAST UPDATE: 2019.08.26 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
In CATV segment, the company sought to increase customers and prevent contract cancelations by enhancing price competitiveness through offering combination discounts for a broadcasting and communications bundle as well as combinations with smartphones in partnership with major cellphone carriers. It also strengthened its efforts to create community channel programs with a local focus. Consequently, the CATV business had 791,000 customers, up 2,000 from end-FY03/19, while customers of communications services increased by 5,000, to 278,000.
In May 2019, the company signed an agreement to acquire a CATV business operated by Shioya Limited in Mishima, Shizuoka Prefecture. Shioya Limited CATV broadcast coverage (no communication services) includes Kannami (Tagata District), Shimizu (Sunto District), Ohira (Numazu), and Izunokuni (formerly Nirayama) areas in Shizuoka Prefecture. The coverage area is near Tokai’s existing CATV coverage area. Hence, the company will be able to provide high quality triple-play services covering broadcasting, communications, and telephone services without major additional capital investment. Additionally, the company plans to start supporting advanced 4K and 8K broadcasting in October 2019.
Building and Real Estate
▷ Sales: JPY3.8bn (-9.3% YoY) ▷ Operating profit: JP74mn (+15.4% YoY)
Sales declined 9.3% YoY due to the absence of a large project the company had in Q1 FY12/19, but operating profit grew 15.4% due to cost control.
Aqua
▷ Sales: JPY1.8bn (+8.8% YoY) ▷ Operating profit: JPY104mn (+184.5% YoY)
The company aggressively promoted bottled water delivery service centered on its bottled water brand, Oishii Mizu no Okurimono - ulunom (the Gift of Delicious Water), at large commercial facilities. As a result, the overall customer count rose by 1,000 from end-FY03/19 to 157,000.
Others
▷ Sales: JPY1.1bn (+1.5% YoY) ▷ Operating profit: JPY24mn (-0.5% YoY)
▷ The nursing care business had sales of JPY285mn (+9.1% YoY) after the company logged more users. ▷ In ships business, higher volume of ship repairs led to sales of JPY356mn (+9.6% YoY). ▷ The bridal events business, sales were JPY274mn (-18.3% YoY) due to a decline in the number of wedding hosts.
M&A TOKAI Holdings has set an investment budget of JPY100.0bn over the four years of its medium-term management plan Innovation Plan 2020 “JUMP” ending FY03/21. As of April 2019, it has carried out five M&A deals (refer to full-year company forecasts section for details) at a total value of JPY5.0bn. M&A projects using up the remainder of the budget are also currently under consideration. The investment review committee examines each candidate for growth potential and decides whether or not to proceed with the acquisition.
For details on previous quarterly and annual results, please refer to the Historical financial statements section.
14/70 TOKAI Holdings / 3167 RCoverage LAST UPDATE: 2019.08.26 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Full-year company forecasts
FY03/18 FY03/19 FY03/20 (JPYmn) 1H Act. 2H Act. FY Act. 1H Act. 2H Act. FY Act. 1H Est. 2H Est. FY Est. Sales 84,911 101,158 186,069 88,840 102,760 191,600 92,500 108,300 200,800 YoY 3.3% 4.9% 4.2% 4.6% 1.6% 3.0% 4.1% 5.4% 4.8% Cost of sales 50,437 60,296 110,733 53,759 61,682 115,441 Gross profit 34,474 40,862 75,336 35,081 41,078 76,159 YoY 2.5% 3.7% 3.1% 1.8% 0.5% 1.1% GPM 40.6% 40.4% 40.5% 39.5% 40.0% 39.7% SG&A expenses 31,360 33,005 64,365 31,605 31,496 63,101 SG&A ratio 36.9% 32.6% 34.6% 35.6% 30.7% 32.9% Operating profit 3,114 7,857 10,971 3,475 9,582 13,057 4,410 9,760 14,170 YoY -29.3% -5.8% -14.0% 11.6% 22.0% 19.0% 26.9% 1.9% 8.5% OPM 3.7% 7.8% 5.9% 3.9% 9.3% 6.8% 4.8% 9.0% 7.1% Recurring profit 3,143 8,048 11,191 3,580 9,679 13,259 4,360 9,680 14,040 YoY -29.0% -3.6% -12.4% 13.9% 20.3% 18.5% 21.8% 0.0% 5.9% RPM 3.7% 8.0% 6.0% 4.0% 9.4% 6.9% 4.7% 8.9% 7.0% Net income 1,246 5,374 6,620 1,736 6,036 7,772 2,360 5,870 8,230 YoY -47.7% 8.5% -9.8% 39.3% 12.3% 17.4% 35.9% -2.8% 5.9% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
Overview
▷ For FY03/20, the company is forecasting consolidated sales of JPY200.8bn (+4.8% YoY), operating profit of JPY14.2bn (+8.5%), recurring profit of JPY14.0bn (+5.9%), and net income attributable to parent company shareholders of JPY8.2bn (+5.9%). ▷ The company is aiming for record high operating profit for the second consecutive year. It aims to enter a full-fledged profit growth phase in continuation to v-shaped recovery in FY03/19. While continuing to expand its customer base, the company
will pursue M&A, expand into new sales areas and advance into new locations overseas.
▷ Continuing customer count assumption: 3.002mn at end‐FY03/20 (+100,000 YoY)
・Gas (LP and city gas): 745,000 (+61,000 YoY) ・Information and Communications: 1.003mn (-1,000 YoY):384,000 in traditional ISP (-35,000 YoY), 345,000 in Hikari Collaboration (+18,000 YoY), 62,000 in LIBMO (+21,000 YoY), and 212,000 in mobile (-5,000 YoY).
・CATV: 1.09mn (+27,000 YoY) ・Aqua: 167,000 (+11,000 YoY)
・Security: 17,000 (flat YoY) Note: Figures rounded to the nearest thousand. Customer numbers overlap in Information and Communications and CATV (duplicates are deleted from totals). ▷ It plans a dividend of JPY28 per share, which is the same as for FY03/19.
Initiatives
▷ TLC concept: With competition for customers intensifying across industries and business lines from the entry of firms from
other industries and the formation of business partnerships amid deregulation, the company aims to become a TLC—a total life
concierge providing various daily life infrastructure with a focus on services for retail clients.
▷ “ABCIR+S*”: The company aims to strengthen and grow business profitability by expanding its customer base through
improving the quality of existing services and by creating new services so as to achieve the targets laid out in its Innovation
Plan 2020 “JUMP.” It will look to strengthen the Next-generation Management Strategy Division, a dedicated organization
established in April 2018, and build a digital marketing platform (DMP, or “Digima” as it’s known in house). Specifically, by
integrating the customer database for continuing customers (2.902mn at end–FY03/19, 3.002mn planned for end–FY03/20)
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and individual customer web browsing information, the company will be able to ascertain an individual’s preferences and
interests. It will then optimize sales activities and activities to prevent cancellations targeting individual family members, as
opposed to previous marketing that targeted households in general, and leverage this to strengthen its competitiveness.
* ABCIR+S refers to strategies toward technological innovation; the term is formed from the initials of AI (A), Big Data (B), Cloud (C), IoT (I), Robotics (R), and Smartphone (S).
Progress of the medium-term management plan, Innovation Plan 2020 “JUMP” Operating profit Aside from a divergence of approximately JPY2.0bn since FY03/19 in the LP gas procurement price (due to the procurement price increasing more than initially estimated), all other results are progressing largely in-line with the medium-term management plan (see the below table).
Progress of Innovation Plan 2020“JUMP” (actual results vs targets) (JPYmn) FY03/17 FY03/18 FY03/19 FY03/20 Customer count (mn) Planned (initial company estimate) - 2.88 2.99 3.72 Actual (latest estimate for FY03/20) 2.56 2.88 2.90 3.00 Difference - - -0.09 -0.72 Sales Planned (initial company estimate) - 189,400 202,000 224,400 Actual (latest estimate for FY03/20) 178,631 186,069 191,600 200,800 Difference - -3,331 -10,400 -23,600 Operating profit Planned (initial company estimate) - 11,400 14,000 16,200 Actual (latest estimate for FY03/20) 12,750 10,971 13,057 14,170 Difference - -429 -943 -2,030 Difference with initial est. for LP gas purchase price - - -2,600 -1,900 Other differences - - 1,657 -130 Source: Shared Research based on company data
M&A TOKAI Holdings has set an investment limit of JPY100.0bn over the four years of its medium-term management plan ending FY03/21. As of April 2019, it has carried out five M&A deals at a total value of JPY5.0bn. M&A projects using up the remainder of the budget are also currently under consideration.
▷ July 2017: Acquisition of Tokyo Bay Network Co., Ltd. (CATV) ▷ February 2018: Acquisition of TV Tsuyama Inc. (CATV) ▷ April 2018 (business succession in April 2019): Transfer of the Shimonita gas business (city gas) ▷ September 2018: Acquisition of Scythe Co., Ltd. (information and communications) ▷ March 2019 (business succession planned for April 2020): Acquisition of preferential negotiation rights for the Nikaho gas business (city gas)
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Outlook Medium and long-term plans
Medium-term plan, Innovation Plan 2020 “JUMP” Announced third medium-term plan and results of previous plans Four-year plan ending in 70th anniversary year On May 9, 2017, the company unveiled its new medium-term business plan, Innovation Plan 2020 “JUMP”—a four-year plan. It is TOKAI Holdings’ third medium-term plan following the first Innovation Plan 2013 (FY03/12–FY03/14) and second Innovation Plan 2016 “Growing” (FY03/15–FY03/17). Whereas the first and second were three-year plans, the third is a four-year plan (FY03/18– FY03/21), because the company wants the final year to coincide with its 70th anniversary, which falls in 2020 (FY03/21). Innovation Plan 2020 “JUMP” is an aggressive plan of investing in strategic M&A and alliances to increase topline growth.
Results of previous medium-term plans The company transitioned from management of individual companies to group management after establishing TOKAI Holdings in April 2011. The company made solid progress with the first medium-term plan, which focused on improving the balance sheet, and the second, which aimed to increase earnings capability. The company cut interest-bearing debt by over 50%, improved the equity ratio by 26.8pp, and increased operating profit by 18.8% versus FY03/11.
Targets and results of previous medium-term plans Innovation Plan 2013 Innovation Plan 2016 "Growing" (JPYbn) FY03/11 Act. FY03/14 Target FY03/14 Act. FY03/17 Target FY03/17 Act. Customers (mn) 2.34 2.68 2.52 2.73 2.56 Sales 174.9 197.2 189.0 209.5 178.6 Operating profit 10.8 13.7 7.4 12.6 12.8 EPS (JPY) 30.48 - 22.67 54.06 64.46 EBITDA 26.3 - 25.0 28.7 28.4 Interest-bearing debt 124.0 99.6 85.8 64.7 54.1 Equity ratio 7.7% 17.5% 21.6% 28.6% 34.5% Source: Shared Research based on company data Note: Targets are initial targets. Operating profit fell short of target in FY03/14 because of cost increases due to competition to acquire customers. Sales fell short of target in FY03/17 because of price cuts to reflect lower gas purchase prices. Sales are increasing in real terms due to the rise in the number of retail customers.
Summary of Innovation Plan 2020 “JUMP” Increasing customer base and services by M&A The company sees the liberalization of gas and electric power as an opportunity and plans to invest aggressively in strategic M&A and alliances (JPY100bn in total over four years; see below). Targets are companies likely to help expand existing businesses such as gas, CATV, and Information and Communications, as well as those with services and customers in new daily-life related business areas. TOKAI Holdings aims to increase consolidated earnings by M&A of companies with an earnings base in addition to organic growth of existing group businesses. It also aims to generate synergies by cross-selling of monthly fee-based daily life-related and other services acquired from other companies to harness the strengths of its business model.
Growing customer base and increasing lifetime value per customer The company aims to grow the number of customers from 2.56mn at end-FY03/17 to 4.32mn at end-03/21 and increase the percentage of customers using more than one of its services from around 7% at end-FY03/17 to 20% at end-FY03/21. Its goal is to increase average revenue per user (ARPU) and lower cancellation rates (i.e., increase lifetime value per customer) by taking advantage of its direct point of contact with customers to encourage use of multiple daily life infrastructure services. Around 20% of the group’s 4,000 or so employees have contact with retail customers.
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Numerical targets The new business plan targets FY03/21 sales of JPY339.3bn (1.9x the sales in FY03/17) and operating profit of JPY22.5bn (1.8x the operating profit in FY03/17). The company expects to achieve these targets by investing JPY100bn in M&A. It also targets an interest-bearing debt to EBITDA ratio of 2.6x, equity ratio of 31.6%, and ROE of 13.0% by management that prioritizes capital efficiency.
Numerical targets of Innovation Plan 2020 “JUMP” FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 Act. Target Target Target Target (JPYbn) Vs. FY03/17 Customer count (mn) 2.56 2.88 2.99 3.72 Over 4.32 1.7x Sales 178.6 189.4 202.0 224.4 339.3 1.9x Operating profit 12.8 11.4 14.0 16.2 22.5 1.8x Net income 7.3 6.4 7.9 8.7 11.5 1.6x Total assets 161.1 169.8 173.8 191.2 283.4 1.8x Interest-bearing debt / EBITDA 1.9x 2.0x 1.7x 1.8x 2.6x - Equity ratio 34.5% 33.9% 35.6% 34.9% 31.6% - ROE 15.2% 11.1% 12.8% 13.0% 13.0% - Source: Shared Research based on company data
Medium-term plan, Innovation Plan 2020 “JUMP”
Basic direction of the plan In the new medium-term plan, Innovation Plan 2020 “JUMP,” the company aims to
▷ Engage aggressively in M&A and alliances, investing JPY100bn over four years on a leveraged growth strategy. ▷ Acquire or partner companies that will expand the customer base of core businesses such as gas, CATV, and Information and Communications, and companies with new, monthly fee-based, daily life-related services that will help harness the strengths of
the group’s business model. ▷ Prioritize operating profit as well as sales, aiming to double both between FY03/17 and FY03/21, and ROE (FY03/21 target of 13.0%) ▷ Provide continuous and stable returns to shareholders.
M&A strategy Summary M&A plays a crucial role in the latest medium-term plan Innovation Plan 2020 “JUMP.” The company sees the liberalization of gas and electric power as an opportunity and plans to invest aggressively in strategic M&A and alliances (JPY100bn in total over four years; see below). Its two main objectives are to strengthen core businesses and acquire new services. Targets are companies likely to expand existing businesses such as gas, CATV, and Information and Communications, as well as those with services and customers in new daily-life related business areas. The company’s M&A strategy will be based on an investment rule that focuses on capital efficiency, targeting ROI (operating profit basis) of 8%.
M&A/alliance team The company has established a team dedicated to M&A and alliances, responsible for assessing investment projects, executing acquisitions and investments, and post-merger integration. The team acts as gatekeeper to support collaboration or integration between businesses run by each group company and the M&A target or alliance partner. The team will work closely with venture capital firms and buyout funds specializing in sectors such as energy/environment and corporate/consumer IT services to form an extensive network for gathering information about seeds of growth and potential M&A candidates.
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New medium-term plan: key points
The company believes that a key part of its group strategy lies in expansion of the customer base through the sale of packaged services. For the medium and long term, TOKAI said that it is paying attention to the liberalization of the electric power and gas industries. With the liberalization, the company intends to expand its customer base further by adding electric power service to the line-up of its services.
The company sees its strength of having direct contact with customers based on home visits by its sales staff while major electric power companies have only indirect sales channels and contact with consumers. TOKAI thus expects synergy effects by joining hands with power and gas companies on businesses related to the liberalization. The company is already in talks with power companies regarding possible partnerships.
Increase retail customer loyalty and secure multiple contracts TOKAI Holdings aims to increase the share of customers who use more than one service (multiple contracts) from 8% for the whole group at end-FY03/18 to 20% at end-FY03/21, seeking higher operating profit by preventing contract cancellation and increasing ARPU. The company will step up cross-selling to its customer base of 2.88 million as of end-March 2018.
Cross-selling strategies
▷ TOKAI Holding’s business model relies on revenues generated by retail customers. The company aims to increase these customers’ loyalty and offer more services. ▷ The company plans to make its TLC point scheme* more attractive by offering more rewards. ▷ It also plans to increase the TLC points conversion ratio, and promote multiple and ongoing contracts**.
* TOKAI Holdings launched TLC membership services in December 2012, offering users of multiple services loyalty points and other benefits. Customers can accumulate points by using the group’s daily life-related services such as gas, Internet, CATV, and Aqua (water home delivery service). The company launched TLC Kasatoku Plus in May 2017, offering extra loyalty points to customers who already use its service and signs up for two or more services, as well as to new customers signing up for two or more services. ** Customers signing up for multiple services tend to demonstrate relatively strong loyalty to the services. For example, the monthly cancellation rate in FY03/14 was 0.6% versus 1.15% for single-contract customers.
▷ The company plans to utilize customer information, engage in omni-channel retailing, provide a single call center for all services, and increase customer satisfaction by an integrated billing system as infrastructure to progress cross-selling.
A summary of strategies for each business follows.
LP gas The company aims to increase the number of LP gas customers (including new service areas) by 30% from 590,000 at end-FY03/17 to 760,000 at end-FY03/21, targeting a rise in customers in new service areas from 8,000 to 70,000 over the same period. Five new business bases are to be added for a total of 10. TOKAI plans to consolidate its LP gas customer base* (currently the third-largest in Japan) by an aggressive M&A strategy in established and new service areas amid the outlook** for contracting household and commercial demand for LP gas.
* The company has the top share of customers in Shizuoka Prefecture (24.0%) with 190,000 customers and 6.9% share in the Kanto area with 420,000 customers (source: LP Gas Research Report Facts & Figures 2018, Sekiyu Kagaku Shinbun Sha) ** METI’s oil market survey working group materials (April 3, 2017) forecast a 7.1% decline in household and commercial LP gas markets in the next four years. Consumption is expected to decline by around 2% per annum amid a declining population, more energy-efficient equipment, and users adopting energy-saving habits.
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LP gas business plan targets FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 Business Key indicator Act. Target Target Target Target LP gas Customers ('000) 590 610 650 690 760 (FY03/17 Act.＝100) 100 103 110 117 129 Source: Shared Research based on company data
City gas TOKAI expects competition in the city gas retail market fully liberalized in April 2017 will mainly be in the major cities, where large electric power companies will enter the market. The company aims to expand its service area by M&A and generate synergies in alliances with peers, as well as invest in pipeline extensions to attract new industrial demand. The city gas business is the group business where the company has made most progress with its TLC concept* (the share of multiple contracts in Shizuoka Prefecture was 37% at end-FY03/18). The company plans to promote TLC further in its medium-term plan. In the renovation business, which the group launched in April 2012 under the gas business, the company targets operating profit of JPY250mn in FY03/21 versus JPY50mn in FY03/17.
* Total Life Concierge (TLC): The company’s vision of providing a one-stop, one-contract, one-call center service that supports customers’ daily lives in a comprehensive way with close attention to detail
City gas business plan targets FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 Business Key indicator Act. Target Target Target Target City gas Reform business OP (JPYmn) 50 60 130 180 250 (FY03/17 Act.＝100) 100 120 260 360 500 Source: Shared Research based on company data
Broadband (Information and Communications) The company aims to increase average revenue per user (ARPU) and average margin per user (AMPU) by promoting Hikari Collaboration and packages with LIBMO and new services. Its FY03/21 target for Hikari Collaboration’s share of FTTH services is 85.1%. The company is encouraging long-term broadband use by adding services such as LIBMO and TOKAI SAFE (security service). By increasing the number of LIBMO customers to 140,000 at end-FY03/21, the company plans to increase sales further. Development of new IT-related services such as IT insurance to lift ARPU is also planned.
Broadband business plan targets FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 Business Key indicator Act. Target Target Target Target Broadband FTTH ARPU (JPY) 2,521 2,671 2,813 2,938 3,048 (FY03/17 Act.＝100) 100 106 112 117 121 Source: Shared Research based on company data
CATV The TOKAI group plans to maximize use of its own fiber-optic network in providing CATV services, aiming for close to 100% (97%) conversion to fiber optics at end-FY03/21 versus 71% at end-FY03/17. The company targets net increases of 30,000 broadcast customers and 60,000 telecoms customers in the next four years. With the help of government policy to grow demand for 4K broadcasting in the lead-up to 2020, the company plans to expand its customer base by offering cost-effective services that combine broadcasting with Internet.
CATV business plan targets FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 Business Key indicator Act. Target Target Target Target CATVOptical ratio 7179869297 Source: Shared Research based on company data
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Strategy
The company is involved in a wide-range of products and services. It has a relatively simple strategy of actively adding products and services that contribute to future growth and meet the needs of customers.
Since its founding, the company has focused on energy, such as LP gas, and information and communications, such as FTTH and CATV. Now it is focusing on its added value group-wide rather than the added value of each segment as a source of further growth, given that market growth is beginning to slow for these core businesses.
Only a fraction of the company’s customers use more than one product or service. TOKAI has begun launching various measures to encourage customers to use multiple products and services. If it can increase such customers, it will achieve synergies, reducing cancellations and improving sales efficiency.
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Business
Business description
The company provides a diverse range of products and services to 2.9mn customers in Shizuoka Prefecture, Kanto and other areas (as of end-March 2019). The company’s operations are energy and housing-related, which includes liquefied petroleum gas (LPG) and information communications, including a fiber-optic network and CATV.
TOKAI Holdings Corporation was established on April 1, 2011, after the management integration of TOKAI CORPORATION and TOKAI Communications Corporation, and an accompanying transfer of shares to a holding company. Prior to this, TOKAI Communications Corporation was a subsidiary of TOKAI CORPORATION.
Main business segments
The company’s businesses, which provide a diverse array of services targeting both retail and commercial customers, fall into six business segments: Gas & Petroleum; Information and Communications; CATV; Aqua Business; Building and Real Estate; and Others. The Gas & Petroleum, Information and Communications, and CATV segments account for the majority of sales and operating profit and has the largest number of customers, as summarized in the following table.
Customer count FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 ('000) TOKAI Cons. TOKAI Cons. TOKAI Cons. Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Est. LP gas 633 627 622 596 577 575 572 580 588 606 628 n.a. City gas 52 52 52 52 53 53 54 54 54 54 56 n.a. Gas total 685 679 674 648 629 628 626 634 642 661 684 745 Security 23 22 21 20 20 19 18 18 17 17 17 17 Aqua 39 57 71 97 102 122 130 133 135 146 156 167 Conventional ISP 758 816 854 859 633 528 465 419 384 Hikari Collaboration 4 219 299 323 327 345 LIBMO 2294162 Mobile 193 213 227 235 236 233 227 217 212 Information and Communications 664 759 855 951 1,028 1,081 1,099 1,088 1,061 1,044 1,004 1,003 Broadcasting 335 521 562 542 505 502 493 499 508 775 789 n.a. Telecommunication 98 164 178 180 186 191 197 211 225 257 274 n.a. CATV 433 685 740 722 691 693 690 710 733 1,032 1,063 1,090 Total 1,842 2,190 2,343 2,415 2,445 2,519 2,537 2,558 2,564 2,876 2,902 3,002 Source: Shared Research based on company data Note: Communication services overlap Information and Communications and CATV. Duplicate numbers are excluded from totals. Note: Figures may differ from company materials due to differences in rounding methods. Note: Results for FY03/11 and prior years are of TOKAI Corp.
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Segment sales and OP FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) TOKAI Cons. Cons.* Cons.* Cons. Cons.* Cons. Cons. Cons. Cons. Cons. Cons. Total sales 165,702 159,228 174,901 181,931 181,684 188,987 187,511 180,940 178,631 186,069 191,600 YoY 3.1% -3.9% 9.8% 4.0% -0.1% 4.0% -0.8% -3.5% -1.3% 4.2% 3.0% Gas and Petroleum 99,355 89,000 95,697 98,316 94,519 97,229 93,067 80,745 73,344 76,073 77,977 YoY 4.4% -10.4% 7.5% 2.7% - 2.9% 102.9% -13.2% -9.2% 3.7% 2.5% % of total sales 60.0% 55.9% 54.7% 54.0% 52.0% 51.4% 49.6% 44.6% 41.1% 40.9% 40.7% Information and Communications 45,322 34,672 34,725 37,943 38,497 38,803 40,118 44,246 49,508 50,894 51,234 YoY 7.8% - 0.2% 9.3% 1.5% 0.8% 3.4% 10.3% 11.9% 2.8% 0.7% % of total sales 27.4% 21.8% 19.9% 20.9% 21.2% 20.5% 21.4% 24.5% 27.7% 27.4% 26.7% CATV - 15,653 22,647 24,292 23,786 24,187 24,359 24,608 25,396 28,386 30,511 YoY - - 44.7% 7.3% -2.1% 1.7% 0.7% 1.0% 3.2% 11.8% 7.5% % of total sales - 9.8% 12.9% 13.4% 13.1% 12.8% 13.0% 13.6% 14.2% 15.3% 15.9% Building and Real Estate 14,324 14,399 14,907 15,881 15,756 19,245 20,019 20,975 19,511 19,807 20,090 YoY -0.7% 0.5% 3.5% 6.5% -0.8% 22.1% 4.0% 4.8% -7.0% 1.5% 1.4% % of total sales 8.6% 9.0% 8.5% 8.7% 8.7% 10.2% 10.7% 11.6% 10.9% 10.6% 10.5% Aqua 3,750 4,378 4,959 5,487 5,762 6,200 7,004 YoY - 16.7% 116.7% 10.6% 5.0% 7.6% 13.0% % of total sales 2.1% 2.3% 2.6% 3.0% 3.2% 3.3% 3.7% Other 6,699 5,502 6,923 5,498 5,374 5,142 4,987 4,875 5,108 4,706 4,781 YoY -26.3% -17.9% 25.8% -20.6% -2.3% -4.3% -3.0% -2.2% 4.8% -7.9% 1.6% % of total sales 4.0% 3.5% 4.0% 3.0% 3.0% 2.7% 2.7% 2.7% 2.9% 2.5% 2.5% Operating profit 8,279 10,029 10,755 10,923 8,934 7,392 9,003 8,245 12,750 10,971 13,057 YoY 30.1% 21.1% 7.2% 1.6% -18.2% -17.3% 21.8% -8.4% 54.6% -14.0% 19.0% OPM 5.0%6.3%6.1%6.0%4.9%3.9%4.8%4.6%7.1%5.9%6.8% Gas and Petroleum 6,434 7,111 6,154 6,857 7,358 6,506 7,679 8,991 9,161 7,364 6,815 YoY 85.7% 10.5% -13.5% 11.4% - -11.6% 18.0% 17.1% 1.9% -19.6% -7.5% OPM 6.5%8.0%6.4%7.0%7.8%6.7%8.3%11.1%12.5%9.7%8.7% % of operating profit 62.1% 58.6% 45.1% 44.3% 55.5% 53.7% 56.2% 67.8% 52.3% 47.0% 37.9% Information and Communications 4,255 3,586 4,310 5,544 4,934 4,412 4,956 2,308 4,213 3,174 3,827 YoY -7.0% - 20.2% 28.6% -11.0% -10.6% 12.3% -53.4% 82.5% -24.7% 20.6% OPM 9.4% 10.3% 12.4% 14.6% 12.8% 11.4% 12.4% 5.2% 8.5% 6.2% 7.5% % of operating profit 41.1% 29.6% 31.6% 35.8% 37.2% 36.4% 36.3% 17.4% 24.0% 20.3% 21.3% CATV - 1,869 2,592 2,298 1,251 1,808 1,669 1,975 2,752 3,554 4,953 YoY - - 38.7% -11.3% -45.6% 44.5% -7.7% 18.3% 39.3% 29.1% 39.4% OPM - 11.9% 11.4% 9.5% 5.3% 7.5% 6.9% 8.0% 10.8% 12.5% 16.2% % of operating profit - 15.4% 19.0% 14.8% 9.4% 14.9% 12.2% 14.9% 15.7% 22.7% 27.6% Building and Real Estate 351 161 856 977 633 1,386 1,029 1,266 1,098 1,3301,615 YoY -20.8% -54.1% 431.7% 14.1% -35.2% 119.0% -25.8% 23.0% -13.3% 21.1% 21.4% OPM 2.5%1.1%5.7%6.2%4.0%7.2%5.1%6.0%5.6%6.7%8.0% % of operating profit 3.4% 1.3% 6.3% 6.3% 4.8% 11.4% 7.5% 9.6% 6.3% 8.5% 9.0% Aqua - - - - -926 -2,001 -1,313 -1,119 298 246 762 YoY ------17.4%209.8% OPM ------5.2%4.0%10.9% % of operating profit - - - - -7.0% -16.5% -9.6% -8.4% 1.7% 1.6% 4.2% Other and adjustments -2,760 -2,698 -3,157 -4,754 -4,318 -4,719 -5,016 -5,175 -4,775 -4,699 -4,916 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Results for FY03/11 and prior years are of TOKAI Corp. FY03/12 YoY figures are vs. FY03/11 TOKAI Corp. results. Note: The aqua segment is included in gas and petroleum for FY03/12 and prior years. Note: Figures for FY03/11 and prior years are based on TOKAI Corp. data. FY03/12 comparisons are with FY03/11 TOKAI Corp. figures. Note: Segment operating profits are before allocation of overhead expenses.
Gas and Petroleum segment In FY03/19, this core segment saw JPY78.0bn in sales (accounting for 41% of overall company sales) and JPY6.8bn in operating profit before allocation of overhead expenses (accounting for 38% of overall operating profit).
The segment has four subsegments, of which the Liquefied Petroleum Gas & Petroleum (“LP gas”) subsegment accounts for the majority of sales and operating profit. In FY03/19, the LP gas business reported sales of JPY65.6bn and operating profit of JPY5.7bn, and the city gas business reported sales of JPY12.4bn and operating profit of JPY1.1bn.
LP gas This subsegment mainly sells LP gas, liquefied natural gas (LNG) and petroleum products, along with related equipment and services. The subsegment has approximately 628,000 customers spread over Tokyo and 13 other prefectures located mainly in the Tokai and Kanto regions. Of this total, Shizuoka accounted for approximately 182,000 customers and Kanto accounted for roughly 425,000 customers (as of March 31, 2019). The company has top market share (24%) in Shizuoka Prefecture, is second (7%) in Kanto, and is the third-largest LP gas business in Japan (source: LP Gas Annual Report: Facts and Figures, Vol 54, 2019, Sekiyu Kagaku Shinbun Sha).
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LP gas utilities No . o f d ir e c t Rank Company customers 1 Iwatani Corporation 870,000 2 Nippon Gas Co., Ltd. 760,000 3 TOKAI CORPORATION 593,856 4 Toho Liquefied Gas Co., Ltd. 351,000 5 Mitsuuroko Co., Ltd. 350,000 6 Itochu Enex Co., Ltd. 343,983 7 ENEOS Globe Energy Corporation 320,000 8 Saisan Co., Ltd. 287,886 9 Gaspal Corporation 250,106 10 Horikawa Sangyo Co., Ltd. 220,000 · · · · Total 22,819,000 Source: Shared Research, based on company data (source: LP Gas Annual Report: Facts and Figures, Vol 51, 2017, Sekiyu Kagaku Shinbun Sha)
City gas The company supplies city gas in the cities of Yaizu, Fujieda, and Shimada, located in central Shizuoka Prefecture, to 56,000 customers combined (as of March 31, 2019). Sales volume was 140mn sqm, of which large-lot users accounted for 120mn sqm and small-lot users for 20mn sqm. In April 2018, TOKAI Holdings concluded an agreement relating to the transfer of the gas business operated by the town of Shimonita in Gunma Prefecture. It obtained authorization for the transfer from the Kanto Bureau of Economy, Trade and Industry in October of the same year. It officially succeeded the business from April 2019. In March 2019, it also obtained preferential negotiation rights relating to the transfer of the gas business operated by the city of Nikaho in Akita Prefecture, with the view to succeed the business from April 2020. This shows that TOKAI Holdings is steadily expanding the city gas business across a wide area.
High-pressure gas The company manufactures and sells high-pressure gas products such as oxygen and nitrogen, as well as related equipment.
Security The company wholesales automated security services and other security systems to other security service providers.
Information and Communications segment In FY03/19, this segment reported JPY51.2bn in sales (accounting for some 27% of overall sales) and JPY3.8bn in operating profit before allocation of indirect expenses (accounting for 21% of overall profit). The segment has four subsegments. The ADSL/FTTH and Mobile subsegments target individual consumers, while the System Innovation Service (SIS) and Corporate Telecommunications subsegments serve corporate customers.
As of March 31, 2018, the number of customers was 1.004mn (1.044mn a year ago). The company was ranked as fourth largest Internet Service Provider (ISP) in terms of sales based on Nikkei Marketing Journal (November 5, 2014). According to the Ministry of Internal Affairs and Communications (MIC) Information & Communications Statistics Database, the company has top market share in Shizuoka Prefecture (20.9%) with 230,000 customers and a 2.5% share in the Kanto area with 390,000 customers as of end December 2017.
In FY03/19, ADSL/FTTH reported sales of JPY26.9bn and operating profit of JPY3.0bn; Mobile reported sales of JPY4.8bn and operating loss of JPY624mn; SIS reported sales of JPY12.7bn and operating profit of JPY1.2bn; and Corporate Telecommunications reported sales of JPY6.8bn and operating profit of JPY1.4bn.
ADSL/FTTH As an Internet Service Provider (ISP), the company sells services directly to consumers under three brands: @T COM, a nationwide brand focusing on the Kanto region; TOKAI Network Club (TNC) in Shizuoka Prefecture; and Web Shizuoka. Sales
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efforts for ISP were expanded to the Tohoku region in 2012. In Shizuoka Prefecture and the Kanto region, the company also wholesales ADSL circuits as a telecommunications carrier.
Mobile The company is an agent for Softbank Mobile Corporation (a subsidiary of Softbank Corporation; TSE1: 9984) in Shizuoka and Saitama prefectures through 12 stores primarily selling mobile handsets and service contracts.
In November 2012, the company began providing Mobile 4G high-speed data services as a Mobile Virtual Network Operator (MVNO). An MVNO does not maintain its own network infrastructure but instead leases wireless network infrastructure capacity from multiple telecommunications carriers. This service uses the Softbank Mobile Corporation 3G data network and the Advanced eXtended Global Platform (AXGP) provided by Wireless City Planning Inc. The company supplies services to end users as an MVNO.
Source: Shared Research based on company data SIS The SIS subsegment comprises two classes: EA business and SI and DCS business. EA is outsourced software development; SI is sales, maintenance, and operation of information systems; and DCS is data centers. In FY03/15, EA accounted for 49% of subsegment sales, and SI and DCS accounted for 51%. Operating profit (excluding overhead costs) were 41% and 59%, respectively.
DCS provides a range of outsourcing services, including colocation, e-mail, data backup, and cloud-computing platforms (virtual servers) from two data centers located in Yaizu, Shizuoka Prefecture (according to the company, these facilities are designed to withstand earthquakes up to level 7 on the Japanese seismic intensity scale). The company has jointly developed a third data center in Okayama Prefecture with Ryobi Systems Co., Ltd., which commenced services in April 2013. The three data centers have approximately 1,100 racks. Data-center operators from throughout Japan (23 companies) are collaborating to provide business continuity- and disaster recovery-related services. In March 2013, the company established Cloud Master Co., Ltd., in Taipei, Taiwan. The company will cooperate with this joint venture company and to provide secure and low-cost hosted private cloud services. The company intends to strengthen its operations through by providing enhanced services.
The company is a member of a data center alliance, which includes, as of end-June 2018, Hokkaido Telecommunication Network Co., Inc. (a subsidiary of Hokkaido Electric Power Co., Inc.; TSE1: 9509); Tohoku Intelligent Telecommunication Co., Inc. (a subsidiary of Tohoku Electric Power Co., Inc.; TSE1: 9506); ITOCHU Techno-Solutions Corporation; TSE1: 4739 (a subsidiary of ITOCHU Corporation; TSE1: 8001); Hokuden Information System Service Company, Inc. (a subsidiary of Hokuriku Electric Power Company; TSE1: 9505); OGIS-RI Co., Ltd. (a subsidiary of Osaka Gas Co., Ltd; TSE1: 9532); Ryobi Systems Co., Ltd.; Sakura KCS Corporation ( a subsidiary of Sumitomo Mitsui Banking Corporation); Kyuden Infocom Company, Inc. (a subsidiary of Kyushu Electric Power Co., Inc.; TSE1: 9508); Nishitetsu Information System Co., Ltd. (a subsidiary of Nishi-Nippon Railroad Co., Ltd.; TSE1: 9021); Sakura Information Systems Co., Ltd. (a subsidiary of OGIS-RI Co., Ltd.); BSN Information NETwork Service; AGS Corporation; LCV Corporation (a subsidiary of TOKAI Holdings Corporation; TSE1: 3167); iTEC Hankyu Hanshin Co., Ltd.; LAC Co., Ltd. (JASDAQ: 3857); Ryomo Internet Data Center Co., Ltd.; GMO Cloud WEST; TOKAI Communications Corporation (a subsidiary of TOKAI Holdings); MEIKO TECHNOS; data doc Inc; UNIADEX, Ltd.; OKIGIN SPO; and NTT TechnoCross Corporation. The alliance may implement platform service linkage and network service interconnections.
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The EA and SI businesses have a combined total of approximately 700 engineers (as of March 31, 2018) and provide total solutions from consulting and system development through to operation and maintenance. These businesses serve a broad variety of industries and fields, including the restaurant industry, the health care sector, and the public sector, with emphasis on such systems as accounting and human resources.
Corporate Telecommunications The company provides Internet connection services and interoffice telecommunications services to the corporate market via a proprietary fiber-optic network covering an area stretching from northern Kanto region in the east to Osaka in the west. The network is approximately 7,000km long. Within the subsegment, the Leased Line business—which offers interoffice telecommunications services—accounts for about 90% of sales, and the remainder is made up of other businesses such as the wire leasing business offering optical fiber lines. On April 1, 2013, the company extended its fiber-optic network to Okayama Prefecture, accompanying the opening of the Okayama Data Center and strengthening the company’s telecommunications infrastructure in western Japan.
CATV segment In FY03/19, this segment reported JPY30.5bn in sales (accounting for 16% of overall sales) and JPY5.0bn in segment profit before allocation of overhead expenses (accounting for 28% of overall profit). The company provides broadcasting services and telecommunications services (ISP) in six prefectures: Shizuoka, Tokyo, Kanagawa, Chiba, Nagano, and Okayama. In FY03/19, broadcasting services accounted for 47% of subsegment sales and telecommunications services accounted for 53%.
The Broadcasting Services business provides local information through community channels and a multichannel digital broadcasting service offering up to 160 channels.
The Telecommunications Services business provides, in addition to conventional CATV internet, fiber-optic internet and telephone services. These services utilize the company’s proprietary fiber-optic network, which has a backbone network as well as fiber-to-the-home (FTTH). The Telecommunications Services business had 274,000 subscribers (as of March 31, 2019).
The number of households serviceable by the company’s broadcasting and telecommunications network infrastructure is 1.38 million, of which 789,000 households (as of March 31, 2019) are subscribers. Hence, the broadcasting subscription ratio (subscribers ÷ number of serviceable households) is approximately 55%. Among these households, 61% subscribed only to broadcasting services, 28% to both broadcasting and telecommunications services, and 11% to telecommunications services only (as of March 31, 2019).
Building and Real Estate segment In FY03/19, this segment reported JPY20.1bn in sales (accounting for 11% of overall sales) and JPY1.6bn in segment profit before allocation of overhead expenses (accounting for 9% of overall profit). The company designs, constructs, and renovates housing and retail stores; sells equipment and appliances; and develops, sells, leases, and brokers real estate. Contributions from leasing of retail and office space accounts for a high percentage of sales. Renovation accounted for around 25% of total sales, equipment and appliance for roughly 23%, and installation work for 12% (in FY03/19).
The company entered the housing equipment business in 1970 and is involved in a broad array of operations, from the construction of single-dwelling units and rental apartments to renovation services, as well as construction of condominiums, offices, and other large-scale projects. The company also promotes the development of high-quality residential land and is involved in urban development. It wholesales housing-related equipment to house manufacturers and small-scale builders, installs air-conditioning equipment, and carries out plumbing and sewage work. In addition, in April 2010, the company acquired 61% of the total floor area of Aoi Tower, located near JR Shizuoka Station, and it leases retail and office space in this complex.
The company made a full-scale entry into the general renovation business when it launched TOKAI WILL Reform in April 2012. Through its gas business and strong ties to local communities, the company has built up a solid track record in plumbing-related renovation work. Utilizing its technical know-how and over 600,000 customers in its gas business, the company is determined to
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grow its renovation business. Also, the company actively employs female planners, producing proposals and designs that meet the needs of homemakers and other female customers.
Aqua segment In FY03/19, sales were JPY7.0bn (accounting for around 4% of overall sales) and segment profit before allocation of overhead expenses was JPY762mn (accounting for 4%). The company manufactures, sells, and delivers drinking-water products. The company considers the Aqua business as a main growth area.
The aqua business has developed into a significant segment and separated from the Gas and Petroleum segment, and became the Aqua segment in Q1 FY03/14.
In November 2007, the company commenced a returnable-bottle service (bottles are collected, washed and sterilized, and subsequently reused) in Shizuoka Prefecture, and in March 2011 it launched a nationwide one-way bottle service (bottles are home delivered and disposed of after use similar to PET bottles). The service has around 156,000 customers, of which 73,000 are in Shizuoka Prefecture using the returnable bottle service. The Shizuoka Prefecture service has a market penetration rate of about 5%, giving it the prefecture’s largest market share. The nationwide one-way bottle service has 83,000 customers (all figures are as of March 31, 2019).
The company’s returnable-bottle service is affectionately known as the “Oishii Mizu no Takuhaibin” (“Delicious Water Home Delivery”) brand. Its one-way bottle service was rebranded as “Oishii Mizu no Okurimono - ulunom” (“The Gift of Delicious Water”) in May 2013, focusing mainly on the Kanto area and targeting child rearing mothers who are highly concerned about their family’s drinking water.
The product’s main characteristic is its natural water qualities from its local area of Mt. Fuji. The company sources its water from the base of Mt. Fuji on Asagiri Plateau (Fujinomiya, Shizuoka Prefecture). According to the company, Asagiri Plateau is well-known as a high-quality water source area and is said to have abundant natural spring water with useful mineral content that has been filtered through the layer of basalt from which Mt. Fuji is formed.
The company has produced water in returnable bottles at its own TOKAI Aqua Yaizu Plant (Yaizu, Shizuoka Prefecture) since April 2008. However, to meet growing demand for its one-way bottle product and as part of BCP, in March 2013 it commenced operations at a second plant—Aqua Fujisan Plant—located in the Fujisan Nanryo Industrial Park (Fujinomiya, Shizuoka Prefecture).
The company has expanded the service from Shizuoka to cover the entire country, and in April 2012 it established a subsidiary in Shanghai, China, named TOKAI (Shanghai) Trade & Commerce Co. Ltd. Under the product name “Fujishigen” it commenced sales in June 2012 and targets an affluent market segment.
The ARPU is around JPY4,300, or about two bottles per user (one bottle of Ulunom “Fuji-no-Tennensui” (natural water from Mt. Fuji) costs JPY2,050 including tax (as of March 31, 2019).
Others In FY03/19, this segment reported JPY4.8bn in sales (accounting for some 3% of overall sales). The Others segment includes three businesses.
Bridal, Events, and Hotel These operations include Grandair Bouquet Tokai, a facility within Aoi Tower near Shizuoka Station.
Ship Repair The company undertakes ship repairs, including for ocean-going and in-shore fishing vessels.
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Other Services This includes life and casualty insurance agency, travel-agency services, and operating of nursing care facilities. The company is working to strengthen its nursing care facility operations. In light of Japan’s rapidly aging population, the TOKAI Group opened its first nursing care facility, Refrea Shimizu Komagoe Day Service, in April 2011 (Shimizu Ward, city of Shizuoka, Shizuoka Prefecture). In May 2012, a second facility, Refrea Hijiri Isshiki Short Stay, opened in the Suruga ward of the same city. Furthermore, the company intends to open a third facility, Refrea Shimizu Matsumura (Shimizu Ward, city of Shizuoka, Shizuoka Prefecture) in August 2013. The company intends to cater to the growing needs, and enhance its day care, short stay, and nursing care facilities, and expand its businesses while benefiting the local communities.
Business model
Centering on the Kanto region and Shizuoka Prefecture, the company has 2.902mn customers, to whom it offers a wide variety of products and services. Historically, the company simply sold a variety of products and services, without co-branding or bundling. In May 2011, the company stated its new strategy of becoming a “Total Life Concierge” (TLC), offering one-stop service and product menu to its customers. As of March 31, 2019, there were 805,000 TLC members (up 106,000 members YoY).
There is still some way to go with the TLC model and Shared Research thinks that it makes more sense to evaluate the company as a sum of its individual businesses. The importance of increasing the number of customers that use multiple services is shown by the fact that as of end-March 2019, of the company’s 2.902mn customers, that number stood at only around 17.8%.
In December 2012, the company began issuing the “TLC WAON” card, using Aeon Co., Ltd.’s (TSE1: 8267) WAON e-money. This marked the launch of the integrated TLC Member Service covering the entire TOKAI Group offering. Under this system, members accumulate points as they use various services provided by the company. There are eight options for exchanging these points, including WAON Points and MI Points (e-money). Shared Research thinks these new initiatives have potential and will be following developments of the service and any similar measures closely.
Business portfolio In the recent years TOKAI Holdings has become more focused on its core competencies, seeing its services as a single business portfolio as opposed to a random array of unrelated services.
Although Gas & Petroleum is the company’s core segment, the market itself is shrinking. The company sees this business primarily as a cash cow as well as a sales platform, enabling it to offer customers other TOKAI group services and products. The gas business, historically the main growth driver, operates from 63 locations across Tokyo and 13 prefectures, centering on the Tokai and Kanto areas (as of March 31, 2019). It employs a sales force of around 400, and accounted for 38% of the company’s overall operating profit (pre-unallocated corporate expenses) in FY03/19. Another cash cow for the company is the CATV segment.
In contrast, Aqua and Information and Communications (with SIS and Corporate Telecommunications subsegments as key drivers) are growth segments and the company is aggressively investing in these businesses.
Geographic expansion As of end-March 2019, the TOKAI Holdings group had 2.5mn customers mainly in the Kanto region and Shizuoka Prefecture and 2.9mn nationwide.
The outline of operations in each area is as follows.
Kanto The company has steadily expanded its customer base in the Kanto region, including Tokyo, with the number of customers totaling 1.3mn as of end-FY03/19, mainly in the LP gas and information and communications businesses. Kanto is the largest
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consumer market in Japan though there is intense competition. The company considers there is still wide room for finding new customers.
Shizuoka As of end-FY03/19, the number of customers of the group’s services in the Shizuoka area was 940,000 households, accounting for some 64% of all households in Shizuoka Prefecture. In the area, the company operates the LP gas business mainly in the suburbs and the CATV and city gas services mainly in cities. It also runs the internet and Aqua businesses all over the prefecture. Though the rate of population decline, expected for 20 years later, will be high in Japan, Shizuoka is ranked second after Tokyo in all prefectures in terms of income of residents. Accordingly, the company believes that there is wide room for expansion of profits by encouraging customers to use multiple services.
Other main areas The company had a total of roughly 400,000 customers in other regions as of end-FY03/19. In Suwa, Nagano Prefecture, central Japan, there were 89,000 customers of the CATV service (94%). In Kurashiki, Okayama Prefecture, western Japan, there were 97,000 CATV customers. The company opened its third data center in the Okayama area in April 2013. In the western Japan region, where TOKAI advanced in April 2012, the information and communications business is to turn black in FY2015. TOKAI took part in the market of Fukuoka in the western Japan (Kyushu) in April 2014. With the launch of the around-the-clock call center service outsourced from real estate companies, TOKAI started selling equipment and making efforts to find customers of its LP gas service in the Kyushu region.
Extending operating areas to expand customer base In addition to efforts to enlarge its businesses in existing areas, the company plans to extend the territories to surrounding areas, focusing on the LP gas and Aqua businesses. In the LP business, now it is operating mainly in the Kanto region and Shizuoka, and has advanced into the southern Tohoku region in northeastern Japan and the Chubu and Tokai areas of central Japan from 2015. For the Aqua business, the company plans to expand it to the Hokuriku and Chugoku regions, starting from the Kansai western Japan region.
The company was founded in 1950 with the objective of selling city gas in Yaizu, Shizuoka Prefecture. In 1959, the company launched its LP Gas business to expand the sales territory. After the LP Gas business achieved the top market share in Shizuoka Prefecture, in 1979 the company entered the Kanto region and simultaneously diversified its Shizuoka stronghold through the launch the CATV and ISP businesses.
Aqua TOKAI Holdings has used its reputation, customer relationships, and distribution know-how cultivated in the LP gas business to start up the Aqua business, a water cooler distribution business.
The company thinks that selling water is an exceptional addition to its traditional LP gas retailing business—the demand for water peaks in summer while the peak for gas consumption is during winters as consumers take hot baths. Although Aqua is the company’s first manufacturing business, it is also a simple one—the company has secured a water source that provides it with a reliable supply of water at a low price. Unlike LP gas, which is purchased at market prices, the Aqua business enjoys extremely stable input costs.
Although Aqua business has its own dedicated sales force, in Shizuoka Prefecture and other areas where the company has an established customer base, sales staff of the LP Gas business also conduct sales activities for the Aqua business. This business segment also utilizes LP Gas’ existing logistics know-how.
As discussed in the Market Overview section, the water delivery market has been expanding, and the potential for future growth appears to be large. In this environment, leveraging the “Mt. Fuji brand” and the company’s sales capabilities can achieve significant market penetration in Shizuoka Prefecture, as can gradually expanding the sales area. The company stated that with its outright-owned water sources it can respond adequately to future demand growth.
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Shared Research understands that while the Aqua business requires a significant up-front investment, it has high incremental margins. Once the breakeven has been reached, the profitability can be remarkable.
The cost of goods sold has two components, water servers and the water itself (extraction at the source and other related costs). (See Profitability Snapshot, Financial Ratios for more detailed discussion). The water servers are the main cost here and as the business gains scale, the cost per server could decline somewhat.
Customer acquisition (an SG&A component) is the largest cost which is high enough to make the business lose money in the initial growth phase. However, once the cash flow from existing customers exceeds the new customer acquisition costs, margins start expanding rapidly. The business segment turned profitable in FY03/17.
Information and Communications An important characteristic of the SIS and Corporate Telecommunications subsegments is the company’s trinity of services: data centers, system development, and corporate interoffice telecommunication services utilizing the company’s proprietary fiber-optic network infrastructure.
The important strength of the company’s business model in this segment is that it combines in one package one-off revenues of development projects and recurring revenues of its corporate interoffice telecommunications services and data-center operations. In order to grow the profitability however, the company thinks it needs to develop cloud-based services for medium-size firms. Doing so will allow to boost its data center utilization rates (a major driver of segment profitability).
CATV Sales of the CATV segment are ARPUs times the number of subscribers. ARPU change depending on whether users buy higher priced services or use multiple services. The number of subscribers is the subscription rate times the number of households in the service area. Changes in ARPU drive profit margins. In addition, more subscribers give the company bargaining power vis-à-vis suppliers of hardware and programming content. As a side note, depreciation accounts for a large proportion of cost of sales.
Comparing the company with the CATV industry leader, Jupiter Telecommunications Co., Ltd., two firms have the following growth strategies in common: localized sales effort tailored to its region geography and other unique characteristics; rich service lineup; and the use of M&A to buy growth. For the company, its expertise in selling locally door-to-door, the original strength of both its LP gas and CATV businesses, could also mean a higher probability of success in pushing the “total concierge” strategy, cross-selling other products and services using the same sales force.
Reference: LP gas LP gas is a fuel made primarily from butane and propane, which easily liquefy at room temperature when compressed. This makes LP gas cylinders easy to refill and transport. For this reason, in suburban areas and small cities where there is no city gas pipeline network, LP gas is a common household thermal source.
In contrast, “city gas” refers to gas delivered via an urban pipeline network and is primarily made from natural gas (methane). Unlike butane and propane, liquefying natural gas requires not only pressure but also cooling to minus 16 degrees Celsius (about three degrees Fahrenheit) or below. For this reason, it is not suited for transportation in cylinders but instead is supplied to households in gas form through underground pipes.
LP gas usage categories (FY2017)
Usage Share in Main features domestic demand
Household & 43.7% Propane is the main ingredient and cylinders are installed on-site to supply households and commercial use commercial facilities.
General industrial use 22.1% Used in ferrous and non-ferrous metal processing as a thermal source, and for such applications
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as drying of industrial components and foodstuffs.
Chemical raw material 18.9% Demand is on an upward trend for butane as a raw material in the manufacture of such chemical products as ethylene and propylene.
City gas 7.6% Although the main ingredient of city gas is methane, LP gas is an additive to increase thermal power
Automobile use 6.4% Used in domestic LP gas-powered vehicles, butane is the main ingredient.
Electricity generation 1.2% Used as a backup fuel at thermal power stations.
Large-scale steelmakers 0.5% Used in the steel industry for heating and heat-treating steel materials. Source：Shared Research based on data from the Japan LP Gas Association
◤ On a nationwide basis, 24.0 million households use LP gas (approximately 45%). By contrast, within Shizuoka Prefecture—the company’s core territory—around 60% of households uses LP Gas (2015).
◤ The LP gas industry has a three-tier structure comprising primary suppliers (“motouri”), wholesalers, and retailers. As of March 31, 2012, there were eight primary suppliers, approximately 1,100 wholesalers, and 21,518 retailers. Based on the 2013 LP Gas Industry Report, the industry has several tiers (the company is mainly a retailer but also has some wholesale operations):
◤ Primary suppliers: Import and sell gas from producer countries, as well as refine crude oil and sell refined petroleum products. Fierce competition has seen significant realignment and consolidation of this part of the industry. In 1980, there were 25 primary suppliers, but by 2011 this had shrunk to eight companies.
◤ Wholesalers: Purchase LP gas from primary suppliers and sell to retailers who have direct relationships with end users. Each region has dominant wholesalers, and entry by such companies into the retail business is accelerating.
◤ Retailers: Purchase LP gas from wholesalers and sell to households and other customers as well as delivery, safety assurance, and collection of fees. There are a large number of small-scale retailers who maintain very close links with their respective local communities. These operators face a trend of rising costs for delivery and safety assurance.
User charges, unlike those for electricity and city gas, are set by each seller based on its own calculation method. Whereas the basic law governing city gas suppliers is the Gas Utility Industry Law, the basic law governing LP gas suppliers is the Law Concerning the Securing of Safety and the Optimization of Transaction of Liquefied Petroleum Gas (LP Gas Law). Under the revised LP Gas Law (effective April 1997), to make tariff systems more transparent, suppliers are obligated to disclose the tariff structure to consumers in an easily understood way and indicate the content of services covered by those charges. Types of tariff structures include two-tier, three-tier, minimum usage, and multiple. As of 2015, the most common structure is a two-tier tariff.
The two-tier tariff structure comprises a base charge and metered volume charge. The basic charge is a fixed amount per customer (dwelling or premises) that is not dependent on usage volume, and covers 1) the cost of equipment necessary for supply, such as cylinders and meter; and 2) the cost of safety and meter reading as well as gas alarm rental. The metered volume charge is tariff based on gas usage volume and comprises the gas input cost as well as the delivery cost.
LP gas is mostly imported, and the price varies depending on the contract price (CP) and cost, insurance, and freight (CIF). CP refers to the price determined by Saudi Aramco, the national oil and natural gas company of Saudi Arabia—a major LP gas producer—based on a combination of factors, including crude oil price trends and spot bid prices for gas sold by Saudi Arabia and other gas-producing countries. Bid prices are unpublished, hence CP is to some extent a unilaterally notified price (CP is the handover price at the port of the exporting country and is denominated in dollars/ton). CIF refers to one type of basic set of conditions used in the conduct of international trade transactions and is nowadays the most commonly used benchmark. It is the delivered price including freight and insurance. In Japan, it is usually the price to a Japanese port denominated in yen/ton.
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LP gas retail, wholesale, CIF, and contract prices
(JPY/sqm) CIF price Wholesale price Retail price CP (right axis) (USD/MT) 900 1,400
800 1,200 700 1,000 600
500 800
400 600 300 400 200 200 100
0 0
Source: Shared Research based on data from the Oil Information Center
Domestically, added to CIF are: import primary supplier costs (coastal freight, safety expenses, gas terminal expenses, general administrative expenses, and petroleum gas tax); wholesale costs (personnel expenses, delivery expenses, costs of operating charge stations, safety expenses, and general administrative expenses); and retail costs (personnel expenses, delivery expenses, depreciation expenses, safety expenses, fee collection and meter-reading expenses, and general administrative expenses). LP gas tariffs are set in accordance with the business conditions of each supplier.
Margins (charges less costs) are generally determined by such factors as the competitive situation, and the time lag between cost fluctuations and tariff increases or decreases. Although a change in the import price of LP gas has a short-term impact on the earnings performance of an LP gas supplier, earnings tend to level out over time.
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Profitability snapshot, financial ratios
Profit margins FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Cons.* Cons.* Cons.* Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Gross profit 58,809 63,347 67,445 69,537 68,809 68,341 68,932 69,812 73,040 75,336 76,159 GPM 35.5% 39.8% 38.6% 38.2% 37.9% 36.2% 36.8% 38.6% 40.9% 40.5% 39.7% Operating profit 8,279 10,029 10,755 10,923 8,934 7,392 9,003 8,245 12,750 10,971 13,057 OPM 5.0% 6.3% 6.1% 6.0% 4.9% 3.9% 4.8% 4.6% 7.1% 5.9% 6.8% EBITDA 20,089 23,064 26,300 28,826 26,381 24,963 26,232 24,979 28,391 26,182 28,147 EBITDA margin 12.1% 14.5% 15.0% 15.8% 14.5% 13.2% 14.0% 13.8% 15.9% 14.1% 14.7% Net margin - 1.9% 1.2% 1.5% 1.7% 1.4% 2.1% 1.9% 4.1% 3.6% 4.1% Financial ratios ROA (RP-based) -0.2% 6.0% 4.9% 5.2% 4.5% 4.0% 5.0% 5.0% 7.9% 6.8% 7.9% ROE -16.8% 24.6% 15.0% 13.2% 10.4% 7.4% 9.8% 8.3% 15.2% 11.4% 12.6% Total asset turnover 0.99 0.89 0.91 0.97 1.01 1.08 1.11 1.11 1.11 1.14 1.15 Inventory turnover 10.6 10.5 11.6 12.8 13.9 14.8 15.9 18.1 19.8 21.2 21.4 Days in inventory 34.3 34.7 31.3 28.6 26.2 24.7 22.9 20.2 18.4 17.2 17.0 Working capital 18,250 17,990 17,237 16,595 16,066 16,146 13,745 13,405 13,117 13,525 15,166 Current ratio 53.6% 53.0% 55.4% 48.2% 48.9% 51.5% 50.5% 60.5% 63.0% 62.7% 69.2% Quick ratio 29.6% 33.7% 32.2% 29.1% 30.5% 32.0% 32.2% 40.3% 42.5% 42.3% 47.2% OCF / Current liabilities 0.24 0.22 0.25 0.33 0.31 0.28 0.36 0.32 0.43 0.33 0.35 Net debt / Equity 628.8% 596.5% 525.9% 373.9% 260.1% 214.3% 161.5% 160.4% 112.0% 99.3% 93.8% OCF / Total liabilities 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.3 0.2 0.2 Cash conversion cycle (days) 41.7 38.0 33.2 28.6 26.4 25.2 22.2 18.4 14.6 12.8 14.8 Change in working capital -3,576 -260 -753 -642 -529 80 -2,401 -340 -288 408 1,641 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Results for FY03/11 and prior years are of TOKAI Corp.
The company’s OPM in FY03/13–FY03/16 was generally lower than the previous level of around 6.0%, but improved to 7.1% in FY03/17. Although sales declined due to price cuts to reflect lower gas purchase prices, this makes minimal impact on profits due to the company’s earning structure, and the profitability of priority businesses such as Hikari Collaboration and Aqua improved. ROA and ROE also improved significantly in FY03/17 as a result of higher profitability. ROE had been trending down since FY03/10, but improved to 15.2% (+6.9pp YoY) in FY03/17. However, in FY03/18, the first year of the new medium-term management plan Innovation Plan 2020 “JUMP,” which ends at the end of FY03/21, the company made upfront investments to expand its earnings base in the future. As a result, profitability and efficiency worsened YoY. OPM fell 1.2pp YoY to 5.9% and ROE fell 3.8pp to 11.4%. V-shaped recovery was achieved in FY03/19, with OPM increasing 0.9pp to 6.8%, and ROE rising 1.2pp to 12.6%.
Gas and Petroleum In FY03/19, the segment OPM (before allocating overhead expenses) was 8.7%. In the mainstay LP Gas business, the lowest OPM since FY03/07 was 3.6% in FY03/08 and the highest was 12.5% in FY03/17. The decline in OPM in FY03/08 reflected a substantial rise in purchase prices. The increase in FY03/10 reflected a revision in selling prices (i.e., passing on higher costs to the end user in terms of price hikes). The OPM declined in FY 03/14, partly because selling prices failed to reflect higher purchase costs exactly. Since FY03/15, OPM improved due to the correction to the previous year’s situation and rationalization efforts. However, in FY03/18, sales were solid as the company raised sales prices to match higher procurement prices and sales volume rose due the increase in customer count. On the other hand, profits were weak due to higher costs to secure new customers and prevent contract cancellations. OPM fell 2.8pp YoY to 9.7%. In FY03/19, OPM fell 1.0pp to 8.7% due to the impact to LP gas sales volume from higher temperatures and the surge in LP gas procurement costs.
For reference, a USD10/ton fall in contract price (CP) adds JPY130mn to operating profit, and a one yen fall in the yen versus the USD adds around JPY50mn to operating profit (FY03/19 base). However, although there is a slight time lag between purchase price and selling price, they move in tandem for the most part and generally are stable. The company’s OPMs are high compared with industry peers, the fact that Shared Research attributes to a high weight of residential customers (not businesses) in the company’s mix. As the LP gas market faces gradual decline, a key issue is maintaining profitability by pursuing efficiency. Acquisitions of similar operators and thus boosting the scale of the business are one way of doing this. In addition, if the company was able to take advantage of industry realignment and utilize M&A to boost its size, it may gain some room for lowering its purchase price though greater economies of scale.
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The city gas business has approximately 55,000 customers, the number that has remained more or less stable over time. The same can probably be said about profitability—the regulated city gas business is a small but stable part of the company’s portfolio.
Aqua The Aqua business turned profitable at operating profit level for the first time in FY03/17. In FY03/18, the business maintained profitability, although OPM fell 1.2pp YoY to 4.0%. OPM increased 6.9pp to 10.9% in FY03/19 on a reduction in distribution expenses resulting from the business alliance with Toell Co., Ltd. The company commented that its bottled water commands a GPM of approximately 50%. An improvement in usage rates and an increase in customers who are both LP gas and Aqua customers will lead to a decrease in cancellation rates and costs.
Information and Communications The OPM (base before allocating overhead expenses) was 7.5% in FY03/19, up 1.2pp YoY. The OPM declined after hitting its latest high of 14.6% in FY03/12 and dropped to 5.2% in FY03/16, mainly due to heavy promotional spending on the new fiber-optical service Hikari Collaboration. Earnings improved in FY03/17 as Hikari Collaboration began contributing to sales. In FY03/18, the company made upfront investments (secure new customers, prevent cancellations, sales promotions in MVNO business, etc.) to expand its earnings base in the future. As a result, OPM fell 2.3pp YoY. However, OPM improved 1.2pp to 7.5% in FY03/19 with the optimization of LIBMO customer acquisition costs (changed focus to the acquisition of users that are certain to continue to use the service).
CATV In FY03/19, OPM was at a record high for the second consecutive year, reaching 16.2% (+3.7pp YoY) compared with 11.9% in FY03/11 and the previous record of 12.5% in FY03/18. Though competition with major telecommunications carriers becomes fierce, the company is enjoying successful results from such measures as the bundling of broadcasting and telecommunications services and discounts for long-term subscribers to increase customer loyalty.
Group companies
TOKAI Holdings was established in April 2011 to coincide with the 60th anniversary of the founding of the TOKAI Group. As of March 2019, the company has 29 operating companies, led by TOKAI CORPORATION and TOKAI Communications Corporation (24 consolidated subsidiaries and five equity method affiliated companies). The figures in parentheses indicate the company’s holding ratio.
Core operating companies
◤ TOKAI CORPORATION (100.0%): In Tokyo and 12 prefectures from Aichi to Miyagi, the company provides a diverse range of products and services to the household sector, including LP gas, Aqua (returnable and disposable bottles), housing-related products and services, solar panels and other environmental and energy products, security, and insurance.
◤ TOKAI Communications Corporation (100.0%): Provides ICT services.
◤ TOKAI GAS CORPORATION (100.0%): A city gas supplier in cities of Yaizu, Fujieda, and Shimada, Shizuoka Prefecture. Also a supplier of LP gas and provides renovation services.
◤ TOKAI Cable Network Corporation (100.0%): In addition to providing CATV digital multichannel broadcasting services, the company also offers FTTH Internet services and telephone services utilizing proprietary CATV fiber-optic lines.
Gas and Petroleum, LP Gas subsegment
◤ Y.K. Osuga Gas Service (100.0%)
◤ Joynet Co., Ltd. (50.0%)
◤ Energy Line Corporation (100.0%)
◤ TOKAI Home Gas Corporation (100.0%)
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◤ TOKAI Myanmar Company Limited (60.0%)
Aqua
◤ TOKAI (Shanghai) Trade & Commerce Co. Ltd. (100.0%): Conducts home water delivery service under the “Fujishigen” brand in Shanghai, China.
Information and Communications
◤ Cloud Master Co., Ltd. (50.0%): A joint venture established in March 2013 in Taiwan with SYSCOM. Set up with the objective of providing information and communications services in the Asia market, beginning with Japan, Taiwan, and China.
◤ Scythe Co., Ltd. (100.0%): Operates the information services business specializing in consignment development of systems and provision of in-house developed survey systems mainly for use in online research.
CATV
◤ Tokyo Bay Network Co., Ltd. (90.1%): Operates a CATV business in Chuo and Koto wards in Tokyo.
◤ EAST Communications Co., Ltd. (100.0%): Operates a CATV business in the city of Chiba, Chiba Prefecture.
◤ Ichihara Community Network TV Corp. (90.6%): Operates a CATV business in Ichihara, Chiba Prefecture.
◤ Atsugi Isehara Cable Network, Inc. (99.2%): Operates a CATV business in Atsugi, Kanagawa Prefecture.
◤ LCV Corporation (89.2%): Operates a CATV business in the Suwa/Okaya/Tatsuno area of Nagano Prefecture.
◤ KCT Corporation (98.3%): Operates a CATV business in such cities as Kurashiki, Soja and Tamano in Okayama Prefecture.
◤ TV Tsuyama Inc. (96.0%): Operates a CATV business in Tsuyama, Okayama Prefecture.
◤ TOCO Channel Shizuoka Co., Ltd. (84.9%): Operates a CATV business in the city of Shizuoka, Shizuoka Prefecture.
◤ Net Technology Shizuoka Co., Ltd. (55.0%)
Others
◤ Tokai City Service Co., Ltd. (100.0%): Operates the Grandair Bouquet Tokai bridal and banquet hall.
◤ TOKAI LIFE PLUS CORPORATION (100.0%): Operates a day service and other nursing care services in the city of Shizuoka, Shizuoka Prefecture.
◤ TOKAI Management Service Corporation (100.0%): Undertakes administrative duties for internal departments.
◤ TOKAI Human Resources EVOL Corporation (39.0%): Operates a labor dispatch business.
◤ TOKAI Zosen Unyu Co., Ltd. (90.8%): In the shipbuilding business, conducts ship repairs; in the transportation business, operates LP gas tanker trucks from Oigawa Gas Terminal. In the Aqua home-delivery service, delivers water bottles and servers from Shizuoka Prefecture to household and office customers.
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Market and value chain
Market overview
Gas & Petroleum LP gas demand (household and commercial use) peaked in 2006 and had been in decline due to a falling average number of persons per household, the penetration of energy-conserving appliances, declining volume usage driven by increased environmental awareness, and changes in energy source. However, moderate recovery was seen in 2017.
LP gas demand (household use)
('000 MT)
7,897 7,942 7,969 8,000 7,802 7,827 7,933 7,710 7,603 7,500 7,404 7,312 7,153 7,134 7,000 6,811 6,631 6,535 6,384 6,500 6,297 6,275
6,000
5,500
5,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 201520162017
Source: Shared Research based on data from the Japan LP Gas Association
According to the National Institute of Population and Social Security Research, after peaking in 2019, the total number of households in Japan will begin to decline. The average number of persons per household is also expected to fall. In light of this trend, LP gas and city gas usage per household is anticipated to decline. In other words, the gas business operates in a market that started a secular decline.
Japan's households and people per household
Number of households Number of people per household (right axis) (mn) 60.0 3.2 51.8 52.9 53.1 52.4 46.8 49.1 50.0 3.1 43.9 3.0 40.7 40.0 2.9 2.8
30.0 2.7 2.6 2.6 20.0 2.4 2.4 2.3 10.0 2.3 2.2 2.3
0.0 2.0 1990 1995 2000 2005 2010 2015 2020 2025 (Est.) (Est.) (Est.)
Source: Shared Research based on Ministry of Internal Affairs and Communications, National Institute of Population and Social Security Research data
Aqua The company is strengthening Aqua, its new water delivery business, where the market has expanded rapidly. According to the Japan Water Home Delivery Association, in 2019 the estimated number of customers was 4.3mn servers (up 350,000 units YoY, with the market estimated at JPY168.4bn, up JPY14.4bn).
Note: Water delivery refers not to PET bottles filled with water, but to water delivered in larger containers. A dedicated water server is placed in a home or office, which is used to dispense cold or hot water whenever users desire.
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Water delivery market and production amount Number of delivery water customers (thousands of servers)
Production volume ('000 kl) Market size (JPYbn) ('000) 5,000 OW・BIB Returnable 1,400 1,246 4,300 3,950 1,200 1,167 1,111 1,095 1,328 4,000 3,700 3,380 3,500 1,206 3,274 3,306 1,000 1,114 2,928 2,400 3,000 2,050 978 2,490 1,385 1,500 1,750 800 1,286 1,321 1,986 1,083 2,000 790 600 420 468 664 1,320 933 400 286 1,000 670 1,988 1,995 1,985 2,000 1,950 1,900 1,900 1,566 1,700 1,845 383 1,320 117 121 119 129 140 143 154 670 933 200 68 91 28 38 49 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0 (F) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Shared Research based on data from the Japan Delivery Water & Server Association Note: “Returnable” means reuse containers. OW (one way) and BIB (bag in box) indicate disposable containers.
According to the Japan Mineral Water Association, per capita mineral water consumption in Japan continues to increase annually. The water-delivery market is growing faster than the overall domestic water market. In 2010, the per capita consumption of mineral water in Japan was 19.8 liters, substantially lower than other developed countries (Italy: 174.5 liters, U.S.: 88.6 liters, UK: 33.9 liters). Based on this fact, it is possible to infer a large amount of latent market growth.
According to the company, 8.8% of households planned to use water-delivery services in 2011, equal to 4.8 million households. Because there were 2.49 million existing users, the latent user market (market growth potential) is approximately 2.3 million households. Of these, the company revealed that around 800,000 are in the Kanto region, which had a higher ratio of prospective users than the national average, coming in at 10.3%.
Information and Communications The fixed broadband market for individual consumers, which is handled by the Information and Communications segment, has slowed significantly in recent years. According to the Ministry of Internal Affairs and Communications, as of December 31, 2018, there were 31.0 million fiber-optic line subscribers, a 2.9% increase from a year earlier. However, the growth rate has slowed gradually and the number of increase in FY2015 was up 4.7% from the previous year. This is largely due to the penetration of smartphones and tablet devices, as well as an increase in the number of single-person households—particularly young people—who do not subscribe to a fixed line service.
In 2014, the Nippon Telegraph and Telephone Corp. group, the largest provider of fiber-optic lines in Japan, announced a change in selling policy to launch the wholesaling of its fiber-optic services. Various business operators, including mobile telecommunications carriers, have announced their plans to introduce services using this collaboration model. They started such services in the spring of 2015 and the market is expected to be active. TOKAI, one of the companies starting the new services, also deserves attention.
Shared Research anticipates growth in the SIS and Corporate Telecommunications businesses. According to MM Research Institute, the market scale of the public cloud (SaaS/FaaS/PaaS/IaaS) is expected to grow from JPY388.3bn in 2016 to JPY1.1tn in 2021, achieving 22.1% yearly growth. According to a survey by IDC Japan, a research institution specializing in IT, the data center services market in Japan is expected to grow from JPY1.1tn in 2016 to JPY1.6tn in 2021, achieving 8.1% yearly growth.
CATV According to the Ministry of Internal Affairs and Communications, the number of CATV subscribers stood at 30.4mn households on September 30, 2018, translating to a penetration rate of 52.4%. However, with the penetration rate already exceeding 50%, the market is transitioning to a mature industry.
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Cable TV subscriber households and penetration rates
(mn) Subscriber households Penetration rate (right axis)
52.2% 52.3% 52.3% 52.6% 52.4% 40 50.4% 51.6% 51.8% 51.5% 50% 35 29.8 30.22 30.42 30 40% 25 28.64 29.18 29.48 26.92 27.65 28.04 30% 20
15 20% 10 10% 5 0 0% Mar. 2011 Mar. 2012 Mar. 2013 Mar. 2014 Mar. 2015 Mar. 2016 Mar. 2017 Sep. 2017 Sep. 2018
Source: Shared Research based on data from the Ministry of Internal Affairs and Communications
Building and Real Estate The company has positioned the housing-renovation business as a growth field, and under the “New Growth Strategy” approved by the Japanese cabinet in June 2010, the housing renovation market was indeed targeted to double from JPY6.0tn in 2010 to JPY12.0tn in 2020. Although the governing party at the time, the Democratic Party of Japan (DPJ) lost power in 2012 to the Liberal Democratic Party (LDP), we do not expect to see any change vis-à-vis this market. The main reason for this expectation is that the original proposal for stimulating the housing-renovation market was made during the previous LDP administration. According to the Ministry of Land, Infrastructure, Transport and Tourism, there are particularly high needs in the plumbing field related to kitchen, toilet, and bathroom renovation. In addition, since the Great East Japan Earthquake, instability in the electricity supply has led to increased renovation needs and energy conservation.
Barriers to entry
The company’s main businesses, including LP Gas, Information and Communications, and CATV, require large-scale capital investment, making the barriers to entry high. In contrast, the Aqua business and the housing-renovation business are not necessarily market pioneers and do not require large initial investments. For such reasons, barriers to entry are not as high. However, to build these businesses to a certain level of momentum, it is necessary to have some attributes of differentiation. Shared Research sees the company’s differentiation in its LP Gas customer base and the “Mt. Fuji” brand. Around the foot of Mt. Fuji, there are increasing moves to regulate the taking of water, meaning it is not easy to drill new wells.
Competition
Gas & Petroleum The number of direct customers in the LP Gas business is 628,000 (March 31, 2019). This gives the company the third largest customer base in Japan. Competitors include industry leader Iwatani Corporation (TSE1: 8088) and the second-largest operator, NIPPON GAS CO., LTD. (TSE1: 8174). In its stronghold of Shizuoka Prefecture, the company has a 24.1% market share, putting it in top place. In the Kanto region (including Fukushima Prefecture in the Tohoku region), it has a 7.2% market share (based on the number of subscribers; (source: LP Gas Research Report Facts & Figures 2019, Sekiyu Kagaku Shinbun Sha). Looking at historical trends, there are few cases of drastic fluctuations in market share, but competition in the industry tends to be relatively fierce.
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LP gas retailers
30,000
25,112 24,394 25,000 23,582 22,847 22,513 22,062 21,614 21,064 20,522 19,907 20,000 19,024 18,516
15,000
10,000
5,000
0 Mar. 2007 Mar. 2008 Mar. 2009 Mar. 2010 Mar. 2011 Mar. 2012 Mar. 2013 Mar. 2014 Mar. 2015 Mar. 2016 Mar. 2017 Mar. 2018 Source: Shared Research based on LP Gas Annual Report data
There are approximately 8,500 LP gas retailers in Japan. Although this number is in decline, the company expects a major realignment in the industry over a relatively brief period, which may decrease the number of small operators and spawn an oligopoly. Consequently, to expand the customer base, the company has indicated it will consider the use of M&A and business alliances.
Aqua In the Aqua business, competitors include NAC Co., Ltd. (TSE1: 9788) and Aqua Clara, Inc. These two companies have around 20% of the market, but TOKAI's market share is around 4% (all market share figures are for 2016; source: Yano Research Institute Ltd.). Still, it has almost a 50% share when looking only at the Shizuoka area. Using the “Mt. Fuji” brand and its sales capabilities as key advantages, the company is preparing for a major sales push in the Kanto region. Water Direct Corporation (TSE Mothers: 2588) also operates a water-delivery service using natural water sourced from the foot of Mt. Fuji. Shared Research considers the company’s competitive advantage its existing relationship with LP Gas customers.
CATV Originally, the company utilized such leading-edge technologies as CATV-FTTH to offer Internet access and multichannel broadcasting, and leveraged its sales capabilities to expand the CATV business. However, the full transition to terrestrial digital broadcasting in Japan in July 2011 shrunk the area affected by signal interference, revitalizing the multichannel market. Major telecommunications carriers have also expanded into offering bundled broadcasting, Internet, and telephone services, further intensifying competition.
For the company, key competitors include major telecommunications carriers, which boast abundant capital resources, infrastructure assets, and purchasing power, and utilize these to offer a rich array of content, hence leading to differentiation.
In addition to efforts to reinforce its customer base by making Tokyo Bay Network a consolidated subsidiary (in July 2017), the company is aiming to generate synergies (increase ARPU) by packaging its services with the assorted comprehensive lifestyle services of the group. The CATV business of the TOKAI group is ranked third in the industry in sales, sixth in number of broadcasting households, and fourth in number of subscribing households (source: TOKAI Holdings). The company can offer one-stop access to broadcasting services, FTTH Internet access, and telephone services. It also provides broadcasting services to approximately 800,000 households (home pass total: 1.38mn households as of March 31, 2018) whom it already knows, and through strong local community-based sales it has a direct relationship with customers and is able to provide close after-sales service. The company thinks that the major telecommunications carriers are not able to cultivate such advantages.
In particular, unlike the commercial free-to-air broadcasters, who are tied to programming that is backed by advertising sponsors, CATV operators have much greater freedom in deciding their programming and are able to focus on their strengths in providing content that is valuable to viewers in their defined service area. Based on this attribute, the company is working to strengthen its role as a core infrastructure provider in its respective service areas. This includes offering services that focus on local traditions and culture and services that have a strong local community perspective.
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Information and Communications According to TOKAI, in terms of sales for the ISP business (ADSL/FTTH), the company boasts the top market share in Shizuoka Prefecture, and the fourth largest share nationwide.
Unlike many ISPs, the company is highly cost competitive due to its proprietary infrastructure, such as relay transmission and IP transit. Another key feature is its customer base focusing on the Kanto region and Shizuoka Prefecture.
In the Corporate Telecommunications and SIS businesses, the company is likely to face intensified competition from the large system integration (SI) companies, which were previously not direct competitors. This change reflects a general move in the information industry toward cloud services, which has prompted the large SI companies to target second-tier companies rather than blue chip companies. Hence, the previously existing segmented market structure is undergoing significant changes. Meanwhile, as the cloud business market expands, operations and business-support platforms, as well as application providers such as Platform as a Service (PaaS) and Software as a Service (SaaS) are expanding.
In this environment, the company is striving to differentiate itself by combining hardware- and software-based services, based on a full lineup of services from data centers and network infrastructure through to SI services performed by IT engineers. In addition, SYSCOM, the company’s local partner in its Taiwan joint venture, provides price-competitive cloud services. Based on these services, the company intends to roll out cloud services targeting SMEs.
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Strengths and weaknesses
Strengths
◤ Regional dominance providing greater profit contributions from non-gas businesses: The company began selling LP gas in Shizuoka Prefecture, and expanded to the Kanto area. It has leveraged its high market share (over 20%) and customer base in Shizuoka Prefecture, where it built its LP gas business, to successfully launch CATV, ISP and other businesses, and as with the LP gas business, it has expanded these businesses into other areas, using Shizuoka Prefecture as a base. Its customers have grown to 2.9mn as of end-March 2019, from 1.80mn in FY03/09. The company expects to continue growing its customer base through regional expansion and offering a diversified product line-up.
◤ “Lean and mean” provides flexibility to take business away from major utility companies: In the wake of the liberalization of Japan’s electric power industry, the large utility companies have, through their group companies, attempted to expand their operations beyond the electricity business. The top three electric power companies have aggressively expanded into the telecommunications business. However, after determining that earnings were unlikely to improve owing to intensified competition, they pulled out of this business, and focused exclusively on energy-related operations. The enormous size proved too costly. However, the company has been able to penetrate this area due to its lower cost structure, aggressive management, and regional focus, expanding into other regions departed by the major electric companies. For example, the operating profit-to-sales ratio of the Information and Communications segment, the second biggest business of the segment in terms of sales, stood at an average of 8.0% for the past five years up to FY03/19, showing a stable profit status.
◤ Beneficiary of structural reform and realignment of the LP gas industry: There are nearly 20,000 gas operators supplying LP gas nationwide. Demand for LP gas is on a declining trend, and in view of this situation, Shared Research thinks that there will be an eventual realignment of the gas industry. Given its stronghold in mainstay gas operations, coupled with an improving financial position (i.e., reducing interest-bearing debt one year ahead of schedule), the company is well situated to be an “acquirer” rather than an “acquiree.” For that reason, the realignment of the gas industry will not only mean an easing of price competition, but may also provide new growth opportunities for the company.
Weaknesses
◤ Lack of experience in cross-selling: Despite the company’s successful sales of multiple products, only around 18% of the company’s customers use multiple products or services of the company as of the end of March 2019. To turn the proverbial “conglomerate discount” into a “conglomerate premium,” the company needs to boost the cross-selling ratio of multiple product and services.
◤ LP gas market is in structural decline: The company’s core business operates in declining market (driven by demographic factors) but is competitive (due to a commodity nature of the product offered and limited consolidation).
◤ Intensifying competition in the CATV business: Within the company’s business portfolio, the CATV business has been identified as a growth area. However, there is increasing momentum in service bundling by telecommunications carriers, not only in the ISP field but also in such areas as IP telephony, terrestrial digital broadcasting, and satellite digital broadcasting (BS/CS). This means intensifying competition for customers.
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Historical performance and financial statements
Historical performance
FY03/19 results Key points
▷ Full-year FY03/19 results: The company posted sales of JPY191.6bn (+3.0% YoY), operating profit of JPY13.1bn (+19.0% YoY), recurring profit of JPY13.3bn (+18.5% YoY), and net income attributable to parent company shareholders of JPY7.8bn (+17.4% YoY). ▷ Progress against full-year FY03/19 forecasts: The company achieved 98.0% of sales, 93.5% of operating profit, 95.5% of recurring profit, and 98.1% of net income attributable to parent company shareholders, with both sales and profit marginally short of forecasts. Impacting results was weaker household LP gas sales volume amid high temperatures (impacting by approximately JPY600mn) and a surge in LP gas procurement costs (about JPY2.8bn) (refer to the “Results by segment” section below). Excluding these negative impacts, operating profit exceeded the initial forecast by more than JPY2.0bn. ▷ 3.0% YoY increase in sales: Sales increased YoY in all segments. Initiatives to acquire more customers and increase orders proved a success. Sales reached a record high on the benefit of M&A in FY03/18, in addition to increased customer count (from the steady acquisition of customers in the LP Gas, CATV, and Aqua businesses). The business base also expanded in the core segment (the number of continuing customers increased 26,000 YoY: refer to the bullet point below). ▷ 19.0% YoY increase in operating profit: All segments achieved double-digit YoY growth in profit, except for Gas and Petroleum and Others. The company realized higher sales in accordance with the increase in monthly subscriptions from an increased customer count, as well as curtailment of upfront costs, including costs to acquire new customers. As a result, operating profit
reached its highest level in two years (all segments except Gas and Petroleum achieved record high operating profits). Higher profit offset the negative impact of weaker household LP gas sales volume amid high temperatures and a surge in LP gas procurement costs in Gas and Petroleum. ▷ In the second year of its medium-term business plan Innovation Plan 2020 “JUMP”: The company continued initiatives to expand its revenue base through the further development of existing business, M&A and forays into new businesses. In addition to working towards the realization of the TLC (Total Life Concierge) concept, the company launched initiatives under
the theme “ABCIR+S*” (leveraging new service technology for the next generation). ▷ The number of continuing customers: Increased 26,000 YoY to 2,902,000. Subscribers to TLC Membership Service increased 106,000 YoY to 805,000. ▷ Initiatives: In June 2018, the company established a sales office in Kyushu for the purpose of expanding the LP gas business into the Kyushu area. In September 2018, it consolidated CYZE Inc., which provides in-house developed survey systems concentrated in the area of online research. In October 2018, it obtained approval to acquire the city gas business operated by the town of Shimonita in Gunma Prefecture. In November 2018, it concluded a business alliance agreement with Toell Co., Ltd. under the bottled water delivery business. In February 2019, it launched “Minnano Hatake,” an assistance-combined urban farm service. In March 2019, it signed a partnership agreement with iCracked Japan and launched an iPhone repair service.
* ABCIR+S refers to strategies toward technological innovation; the term is formed from the initials of AI (A), Big Data (B), Cloud (C), IoT (I), Robotics (R), and Smartphone (S).
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Overview of sales and operating profit Sales Sales totaled JPY191.6bn (+3.0% YoY). Sales increased YoY in all segments. Initiatives to acquire more customers and increase orders proved a success. Sales reached a record high on the benefit of M&A in FY03/18, in addition to increased customer count (from the steady acquisition of customers in the LP Gas, CATV, and Aqua businesses). The business base also expanded in the core segment (the number of continuing customers increased 26,000 YoY). A breakdown of sales by segment is given below.
▷ Gas and petroleum: JPY78.0bn (+2.5% YoY) ▷ Information and Communications: JPY51.2bn (+0.7% YoY) ▷ CATV: JPY30.5bn (+7.5% YoY) ▷ Building and Real Estate: JPY20.1bn (+1.4% YoY) ▷ Aqua: JPY7.0bn (+13.0% YoY) ▷ Others: JPY4.8bn (+1.6% YoY)
Operating profit Operating profit amounted to JPY13.1bn (+19.0% YoY). All segments achieved double-digit YoY growth in profit, except for Gas and Petroleum and Others. The company realized higher sales in accordance with the increase in monthly subscriptions from an increased customer count, as well as curtailment of upfront costs, including costs to acquire new customers. As a result, operating profit reached its highest level in two years (all segments except Gas and Petroleum achieved record high operating profit). Higher profit offset the negative impact of weaker household LP gas sales volume amid high temperatures and a surge in LP gas procurement costs in Gas and Petroleum (refer to the below for a detailed breakdown of figures).
A breakdown of operating profit by segment is as follows.
▷ Gas and petroleum: JPY4.4bn (-10.7% YoY) ▷ Information and Communications: JPY2.6bn (+39.0% YoY) ▷ CATV: JPY4.4bn (+46.4% YoY) ▷ Building and Real Estate: JPY954mn (+45.6% YoY) ▷ Aqua: JPY520mn (+1,895.8% YoY) ▷ Others: JPY217mn (-27.9% YoY)
Factors in operating profit growth (+JPY2.1bn, or 19.0% YoY): (1) Effect of sales activities: +JPY4.5bn Increased customer acquisition: +JPY3.4bn (Gas: JPY800mn, CATV: JPY1.4bn, Hikari Collaboration: JPY200mn, Corporate Telecommunications: JPY300mn, Aqua: JPY500mn, and Renovation: JPY200mn) Lower upfront investments in the telecommunications MVNO service (LIBMO): +JPY200mn Lower customer acquisition and retention costs: +JPY900mn (2) Factors other than sales activities: -JPY2.4bn Impact from high temperatures: -JPY600mn Surge in procurement costs: -JPY1.8bn
Customer count The number of continuing customers of the group was 2,902,000, up 26,000 (+0.9%) from end-Q3 FY03/18. Compared with a year ago, the gas (LP, city gas) business had a net increase of 23,000 customers, the CATV business had a net increase of 31,000 customers, and the Aqua business had a net increase of 10,000 customers. In Information and Communications services, while there was a net increase of 4,000 customers for Hikari Collaboration and 12,000 customers for LIBMO compared with FY03/18, there was an overall net decrease of 40,000 customers primarily due to net decreases of 46,000 subscribers for the conventional ISP service and 10,000 subscribers for the mobile service.
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Change in customer numbers, by service segment Number of customers FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 YoY ('000) Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Change Gas (LP gas, city gas) 648 629 628 626 634 642 661 684 23 Conventional ISP 758 816 854 859 633 528 465 419 -46 Hikari Collaboration 4 219 299 323 327 4 LIBMO 2 29 41 12 Mobile 193 213 227 235 236 233 227 217 -10 Information and Communications 951 1,029 1,082 1,099 1,088 1,063 1,044 1,004 -40 CATV 722 691 693 690 710 733 1,032 1,063 31 Aqua 97 102 122 130 133 135 146 156 10 Security 20 19 19 18 18 17 17 17 0 Total 2,415 2,445 2,519 2,537 2,558 2,564 2,876 2,902 26 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Customer numbers are duplicated for Information and Communications and CATV segments when shown separately, but not in the totals.
* MVNO (Mobile Virtual Network Operator): Business offering self-branded mobile communication services for mobile phones and PHS devices without building or operating wireless communication facilities, and instead leasing communication lines from major mobile communication carriers. ** The company is actively promoting LIBMO (http://www.libmo.jp/) as not only a method to capture new customers in mobile communication, but also as a strategic measure to acquire more contracts and prevent contract termination of fixed-line services, by packaging it with products such as Hikari Collaboration. Specifically, TOKAI is working in partnership with major electronics mass retailers to gain new customers. The company is also working to expand sales to its existing customers by awarding loyalty points in addition to its TLC membership services, and by utilizing flyers and email newsletters.
Results by segment Segment results as reported by the company reflect allocated overhead expenses.
Gas and Petroleum
▷ Sales: JPY78.0bn (+2.5% YoY) ▷ Operating profit: JPY4.4bn (-10.7% YoY)
▷ Operating profit declined YoY despite increased sales because of a surge in procurement costs. Notwithstanding a downturn in gas sales volume amid high temperatures (1.3°C hotter than average, impact on sales volume in the Gas business estimated at
approximately JPY600mn), sales increased in consequence of a rise in the selling price. However, a surge in LP gas procurement costs to USD600/ton, compared with the company estimate of USD400/ton, negatively impacted operating profit by approximately JPY2.8bn.
The LP gas business had sales of JPY65.6bn (+1.6% YoY). Amid intensified competition from peers, the company focused on increasing customer count by strengthening customer acquisition and preventing cancellations in existing areas, and advancing into new areas. Sales increased 1.6% YoY on the boost to sales prices from higher raw material costs. In the Gas and Petroleum segment, the city gas business had sales of JPY12.4bn (+7.4% YoY). Sales rose 7.4% YoY as a result of the number of customers increasing 2,000 to 56,000 from end-FY03/18, and gas rates increasing due to energy regulations to reflect the change of natural gas prices.
The company carried out two M&A deals in the city gas business in FY03/19. The first was the purchase of the gas business operated by the town of Shimonita in Gunma Prefecture, which was agreed in April 2018 (authorization was granted by the Kanto Bureau of Economy, Trade and Industry for the transfer in October 2018, and TOKAI Holdings officially succeeded the business from April 2019); the second was the bidding for the gas business operated by the city of Nikaho in Akita Prefecture, for which TOKAI Holdings received preferential negotiating rights in March 2019 (the contract is due to be agreed by June 2019, with TOKAI Holdings expecting to succeed the business from April 2020).
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Although both these businesses are small in scale, they are expected to lead to an increased ARPU due to the businesses overlapping with lifestyle services offered by the company, along with expansion of the Gas business through wide-area development. In other words, it will increase the share of multiple contracts in the company’s vision to become a TLC (Total Life Concierge). This is the first time the group has advanced into Akita Prefecture. In the company’s place of establishment, Shizuoka Prefecture (Yaizu, Fujieda, and Shimada), the multiple contracts ratio, which is linked to the LP gas business, is a high 62.8%, compared with 17.8% for the group as a whole (showing the importance of city gas businesses with close regional ties in promoting the spread of TLC services). In the town of Shimonita, where business has already commenced, the company projects the monthly continuing customer count to increase 2.5-fold as a result of TLC promotions (five-year plan to sell multiple products and services).
Information and Communications
▷ Sales: JPY51.2bn (+0.7% YoY) ▷ Operating profit: JPY2.6bn (+39.0% YoY)
▷ Operating profit rose 39.0% YoY due to higher sales resulting from expansion of recurring revenue businesses for corporate clients and an increase in system development contracts. ▷ Services for consumers generated sales of JPY30.8bn (-2.8% YoY). Amid tougher competition with major carriers, Hikari Collaboration added 4,000 customers from end-FY03/18, bringing its customer count to 327,000. However, the number of
customers in traditional ISP service dropped by 46,000 to 419,000. LIMBO, a new MVNO service launched on a full scale in February 2017, as noted above, had 41,000 customers, an increase of 12,000 from end-FY03/18. ▷ Sales for corporate clients reached JPY20.4bn (+6.4% YoY). Sales rose 6.4% YoY on expansion of recurring revenue businesses and an increase in system development contracts.
In September 2018, TOKAI Holdings acquired all outstanding shares of Scythe Co., Ltd. (operates the information services business specializing in consignment development of systems and provision of in-house developed survey systems mainly for use in online research). In the same month, it also entered into a capital and business alliance with Tripleize Co., Ltd. (a startup company possessing strength in advanced technologies such as IoT, AI, and Blockchain). TOKAI Holdings will create synergy by combining the strengths of its core company, TOKAI Communications Corporation, namely its fiber optics networks, data center management services, and system development capabilities (800 engineers), with the strengths of the above two companies to further expand its Information and Communications business.
CATV
▷ Sales: JPY30.5bn (+7.5% YoY) ▷ Operating profit: JPY4.4bn (+46.4% YoY)
Sales rose 7.5% YoY and operating profit increased 46.4% YoY on the smooth increase in customer volume in existing areas, in addition to the boost from M&A activities in FY03/18.
In CATV segment, the company sought to increase customers by enhancing price competitiveness through offering combination discounts for a broadcasting and communications bundle as well as combinations with smartphones in partnership with major cellphone carriers.
By improving customer satisfaction, the company won new clients and managed to prevent many existing customers from switching to its rivals. The company also sought to prevent contract cancelations at its call center. In its broadcasting service, the company strove to promote fiber optic networks that are capable of supporting 4K broadcasts launched since December 2018, and television broadcasts which contain regional information. In its communications service, the company began an
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ultra-high-speed fiber optic network service (maximum speed of 10Gbps). These initiatives are part of an effort to improve customer satisfaction through enhancing services. Consequently, the CATV business had 789,000 customers, up 14,000 from end-FY03/18, while customers of communications services increased by 17,000, to 274,000.
Building and Real Estate
▷ Sales: JPY20.1bn (+1.4% YoY) ▷ Operating profit: JPY954mn (+45.6% YoY)
Renovation and building and facilities construction business deals steadily increased.
Aqua
▷ Sales: JPY7.0bn (+13.0% YoY) ▷ Operating profit: JPY520mn (+1,895.8% YoY)
The company aggressively promoted bottled water delivery service centered on its bottled water brand, Oishii Mizu no Okurimono - ulunom (the Gift of Delicious Water), at large commercial facilities. As a result, the overall customer count rose by 10,000 from end-FY03/18 to 156,000.
Others
▷ Sales: JPY4.8bn (+1.6% YoY) ▷ Operating profit: JPY217mn (-27.9% YoY)
▷ The nursing care business had sales of JPY1.1bn (+3.8% YoY) after the company logged more users. ▷ In ships business, a decreased volume of ship repairs led to sales of JPY1.5bn (+5.8% YoY). ▷ The bridal events business, sales were JPY1.5bn (-3.7% YoY) due to a decline in the number of wedding hosts.
Q3 FY03/19 cumulative results Results summary
▷ Cumulative Q3 results: The company posted sales of JPY137.9bn (+3.5% YoY), operating profit of JPY7.0bn (+7.0% YoY), recurring profit of JPY7.2bn (+8.8% YoY), and net income attributable to parent company shareholders of JPY4.0bn (+15.5% YoY). ▷ 3.5% YoY increase in sales: Except for the Others business, sales increased in all business segments on higher customer count and the benefit of M&A in FY03/18, leading to record quarterly sales for Q3. ▷ 7.0% YoY increase in operating profit: Higher sales offset the negative impact (about JPY4mn) of weaker household LP gas sales volume amid high temperatures and a surge in LP gas procurement costs (about JPY1.6bn). The company passed on about 20% of the increase in procurement cost of LP gas to customers during the fall of 2018. Further passing on the cost increase to consumers in January 2019 helped minimize the negative impact of procurement cost hike to earnings. Except for the Gas and Petroleum business, performance in cumulative Q3 FY03/19 either met or exceeded the company forecasts. ▷ Progress rate in cumulative Q3, against full-year FY03/19 company forecasts was 70.5% for sales (vs. 71.7% in cumulative Q3 FY03/18 against full-year FY03/18 results), operating profit 50.4% (60.0%), recurring profit 52.2% (59.5%), and net income attributable to parent company shareholders 50.1% (51.9%). Despite modestly sluggish progress in cumulative Q3, the
company seems to be on track to achieve record high profits for the full-year since FY03/17.
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TOKAI Holdings, under its medium-term business plan Innovation Plan 2020 “JUMP,” is seeking to increase the number of customers re-subscribing to its services as part of an ongoing management theme. It also plans to expand its sales areas and to have more customers sign up for multiple services based on its Total Life Concierge (TLC) concept, targeting acquisitions and alliances valued at JPY100bn over four years through FY03/21. The goal is to see a twofold increase in the number contracts, sales, and operating profit by FY03/21, the final year of the business plan, from the figures achieved in FY03/17. Note that FY03/19 is the second year of the medium-term plan.
Sales
▷ Sales in cumulative Q3 FY03/19 were JPY137.9bn (+3.5% or JPY 4.6bn YoY) ▷ Except for the Others business, sales increased in all segments on an increase in the number of customers and effects of M&A conducted in FY03/18. The company posted a record Q3 quarterly sales in Q3 FY03/19. ▷ Sales by business segment were as follows: Gas and Petroleum JPY1.5bn (+2.9% YoY), Information and Communications JPY199mn (+0.5% YoY), CATV JPY2.0bn (+9.4% YoY), Building and Real Estate JPY355mn (+2.6% YoY), Aqua JPY627mn (+13.5% YoY), Others JPY63mn (-1.8% YoY).
Operating profit
▷ Operating profit was JPY7.0bn (+7.0% or JPY459mn YoY).
▷ Factors contributing to an increase in operating profit were: Sales increase due to a grow in customer count boosted operating profit by JPY1.6bn overall. By segment, Gas and Petroleum contributed JPY300mn in an increase in operating profit, CATV JPY800mn, Hikari
Collaboration JPY100mn, Communications (corporate) JPY100mn, and Aqua JPY200mn Promotion expenses and costs to retain customers declined total JPY900mn (JPY200mn for LIBMO and JPY700mn in Gas and Petroleum)
▷ Negative factors to operating profit were lower JPY400mn decline in household LP gas sales because of lower sales volume due to high temperatures and an JPY1.6bn increase in LP gas procurement costs.
Customer count YoY Comparison The number of continuing customers of the group was 2,898,000, up 59,000 (+2.1%) from end-Q3 FY03/18. Compared with a year ago, the gas (LP, city gas) business had a net increase of 21,000 customers, the CATV business had a net increase of 53,000 customers, and the Aqua business had a net increase of 14,000 customers. In Information and Communications services, while there was a net increase of 9,000 customers for Hikari Collaboration and 18,000 customers for LIBMO compared with end-Q3 FY03/18, there was an overall net decrease of 30,000 customers primarily due to the net decrease of 48,000 subscribers for the conventional ISP service.
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Change in customer numbers, by service segment Number of Customers FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 YoY ('000) Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Change Gas (LP gas, city gas) 656 631 629 624 629 635 653 674 21 Conventional ISP 752 803 848 866 686 538 478 430 -48 Hikari Collaboration - - - - 173 288 319 328 9 LIBMO ------21 39 18 Mobile 186 207 225 234 235 234 229 220 -9 Information and Communications 938 1,010 1,073 1,099 1,094 1,060 1,047 1,017 -30 CATV 726 688 694 689 704 728 1,002 1,055 53 Aqua 97 103 121 133 134 135 143 157 14 Security 20 20 19 18 18 17 17 17 0 Total 2,414 2,427 2,510 2,540 2,553 2,551 2,839 2,898 59 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Customer numbers are duplicated for Information and Communications and CATV segments when shown separately, but not in the totals. Versus end-FY03/18 The number of continuing customers rose by 22,000 from 2,876,000 at end-FY03/18 to 2,898,000. Breakdown by service was gas (LP, city gas) business at a net increase of 13,106 customers (+11,094 in Q3 FY03/18), CATV net increase of 22,786 (+17,966), and Aqua (bottled water delivery) net increase of 11,116 (+8,320). The number of subscribers for a new, TOKAI brand MVNO* business called LIBMO** launched in February 2017 was up by 11,000 to 39,000.
Members of the TLC (Total Life Concierge) Membership service rose 84,000 from end-FY03/18 to 783,000. The company embarked on initiatives toward the second theme “ABCIR+S *³” (leveraging new service technology for the next generation) in FY03/19, as well as its efforts to achieve the TLC concept, the company’s long-held theme. It launched a smartphone app, aiming to improve customer convenience of TLC Membership service in October 2018.
*¹ MVNO (Mobile Virtual Network Operator): Business offering self-branded mobile communication services for mobile phones and PHS devices without building or operating wireless communication facilities, and instead leasing communication lines from major mobile communication carriers. *² The company is actively promoting LIBMO (http://www.libmo.jp/) as not only a method to capture new customers in mobile communication, but also as a strategic measure to acquire more contracts and prevent contract termination of fixed-line services, by packaging it with products such as Hikari Collaboration. Specifically, TOKAI is working in partnership with major electronics mass retailers to gain new customers. The company is also working to expand sales to its existing customers by awarding loyalty points in addition to its TLC membership services, and by utilizing flyers and email newsletters. *³ ABCIR+S comes from the first letters of the key words representing the company groups’ strategies toward technological innovation; AI (A), Big Data (B), Cloud (C), IoT (I), Robotics (R), and Smartphone (S).
Results by segment Segment results as reported by the company reflect allocated overhead expenses. (The previous table shows operating profit prior to distributing overhead expenses.)
Gas and Petroleum
▷ Sales: JPY54.7bn (+2.9% YoY) ▷ Operating profit: JPY1.2bn (-41.5% YoY)
Operating profit declined YoY despite increased sales because of weaker gas sales volume due to high temperatures (about JPY400mn) and a surge in procurement costs (about JPY1.6bn). The company passed on about 20% of the increase in procurement cost to customers during the fall of 2018 (JPY1.6bn after deduction of about 20% recovery from the total increase in procurement costs). Further passing on the cost increase to consumers in January 2019 will minimize the negative effects even though it will not compensate all.
The LP gas business had sales of JPY45.8bn (+2.0% YoY). The number of customers reached 620,000, an increase of 13,000
from end-FY03/18. The company focused on increasing the number of customers by advancing into new areas, in addition to stepping up efforts to win new customers and prevent contract cancelations in existing business areas. While gas sales volume
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dropped because of higher temperatures than in Q3 FY03/18, sales increased on the boost to sales prices from higher raw material costs.
In the Gas and Petroleum segment, the city gas business had sales of JPY8.9bn (+7.6% YoY). While the number of customers remained almost unchanged at 55,000, sales rose YoY as the gas rates increased due to energy regulations to reflect the change of natural gas prices.
Information and Communications
▷ Sales: JPY38.0bn (+0.5% YoY) ▷ Operating profit: JPY1.7bn (+17.1% YoY)
Both sales and profit rose YoY due to higher sales resulting from expansion of recurring revenue businesses for corporate clients and an increase in system development contracts.
Services for consumers generated sales of JPY23.2bn (-2.2% YoY). Amid tougher competition with major carriers, Hikari
Collaboration added 5,000 customers from end-FY03/18, bringing its customer count to 328,000. However, the number of customers in traditional ISP service dropped by 35,000 to 430,000. LIMBO, a new MVNO service launched on a full scale in February 2017, as noted above, had 39,000 customers, an increase of 11,000 from end-FY03/18.
Sales for corporate clients reached JPY14.7bn (+5.1% YoY). Sales rose on expansion of recurring revenue businesses and an
increase in system development contracts. Although sales increased YoY, the progress rate seemed to have undershot the company forecast.
CATV
▷ Sales: JPY22.8bn (+9.4% YoY) ▷ Operating profit: JPY3.2bn (+34.4% YoY)
Sales and profit rose sharply on smooth increase in customer volume in existing areas, in addition to the boost from M&A activities in FY03/18.
In CATV segment, the company sought to increase customers by enhancing price competitiveness through offering combination discounts for a broadcasting and communications bundle as well as combinations with smartphones in partnership with major cellphone carriers.
By improving customer satisfaction, the company won new clients and managed to prevent many existing customers from switching to its rivals. The company also sought to prevent contract cancelations at its call center. In its broadcasting service, the company strove to promote fiber optic networks that are capable of supporting 4K broadcasts and television broadcasts which contain regional information. In its communications service, the company began an ultra-high-speed fiber optic network service (maximum speed of 10Gbps). These initiatives are part of an effort to improve customer satisfaction through enhancing services. Consequently, the CATV business had 785,000 customers, up 10,000, while customers of communications services increased by 13,000, to 270,000.
Building and Real Estate
▷ Sales: JPY13.8bn (+2.6% YoY)
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▷ Operating profit: JP435mn (+130.3% YoY)
Renovation and building business deals increased.
Aqua
▷ Sales: JPY5.3bn (+13.5% YoY) ▷ Operating profit: JPY351mn (+653.7% YoY)
The company aggressively promoted bottled water delivery service centered on its bottled water brand, Oishii Mizu no Okurimono - ulunom (the Gift of Delicious Water), at large commercial facilities. As a result, the overall customer count rose by 11,000 from end-FY03/18 to 157,000.
Others
▷ Sales: JPY3.4bn (-1.8% YoY) ▷ Operating profit: JPY103mn (-37.0% YoY)
The nursing care business had sales of JPY806mn (+3.7% YoY) after the company logged more users. In ships business, a decreased volume of ship repairs led to sales of JPY937mn (-3.6% YoY).
The bridal events business, sales were JPY1.1bn (-4.4% YoY) due to a decline in the number of wedding hosts.
1H FY03/19 results Results summary
▷ Sales: JPY88.8bn (+4.6% YoY) ▷ Operating profit: JPY3.5bn (+11.6% YoY) ▷ Recurring profit: JPY3.6bn (+13.9% YoY) ▷ Net income*: JPY1.7bn (+39.3% YoY) * Net income attributable to the parent company shareholders
In 1H FY03/19, sales rose 4.6% YoY and operating profit rose 11.6% as the earnings base expanded from an increase in customer count (mentioned below) and the M&A enacted in FY03/18. The company posted record-high sales for 1H, as they rose YoY for all core businesses, which include the Gas, Information and Communications, and CATV businesses. In terms of profit, average temperatures were 1.4℃ higher than 1H FY03/18, which was a primary factor contributing to a decline in LP gas sales (some say gas consumption in the LP gas industry falls 3% for every 1℃ rise in temperature). Despite being unrelated to marketing efforts, this rise in temperature had a negative effect of about JPY300mn on sales volume. Additionally, LP gas procurement costs rose from a CP (contact price: shipping price in Saudi Arabia) of USD300–399 per ton between May and August of 2017 to USD600 per ton in September 2018 (note: CP was USD540 per ton in November 2018). This rise in cost was a chief factor contributing to a decline in profit of about JPY600mn. However, the company recorded a two-digit YoY increase (11.6%) in operating profit, primarily thanks to total contributions of about JPY1.2bn from rises in customer count and paid contract numbers, which were partly the result of marketing efforts and M&A.
Progress rate Both sales and profits finished 1H slightly below company forecasts. Sales reached 98.6% of the company’s 1H FY03/19 forecasts, operating profit 93.9%, recurring profit 98.1%, and net income attributable to parent company shareholders 91.9%. While there were negative factors such as low sales volume for household LP gas due to high temperatures and higher costs to procure LP gas (a negative factor of approximately JPY400mn on operating profit), this impact was somewhat absorbed by the increase in
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subscribers for the CATV, Information and Communications, and Aqua businesses (a positive factor of approximately JPY300mn on operating profit), leading to operating profit only falling short of forecasts by JPY225mn or 6.1pp.
In 1H, progress rates versus full-year FY03/19 company forecasts were sales 45.4% (vs. 45.6% in 1H FY03/18 of full-year FY03/18 results), operating profit 24.9% (28.4%), recurring profit 25.8% (28.1%), and net income attributable to parent company shareholders 21.9% (18.8%)
FY03/19 is the second fiscal year of the company’s medium-term plan TOKAI Holdings, under its medium-term business plan Innovation Plan 2020 “JUMP,” is seeking to increase the number of customers re-subscribing to its services as part of an ongoing management theme. It also plans to expand its sales areas and to have more customers sign up for multiple services based on its Total Life Concierge (TLC) concept, targeting acquisitions and alliances valued at JPY100bn over four years through FY03/21. The goal is to see a twofold increase in the number contracts, sales, and operating profit by FY03/21, the final year of the business plan, from the figures achieved in FY03/17. M&A in FY03/18 (Tokyo Bay Network Co., Ltd., with a customer count of 260,000; TV Tsuyama Inc., with a customer count of 10,000) already demonstrated positive effects in 1H FY03/19, which included an expansion in the company’s earnings base. FY03/19 is the second fiscal year of the company’s medium-term management plan, while FY03/21 (2020) is a symbolic year, marking the 70th anniversary of the group’s establishment.
Customer count The number of continuing customers of the group was 2,893,000, up 66,000 (+2.3%) from the end of 1H FY03/18. Compared with a year ago, the gas (LP, city gas) business had a net increase of 22,000 customers, the CATV business had a net increase of 51,000 customers, and the Aqua business had a net increase of 15,000 customers. In Information and Communications services, while there was a net increase of 13,000 customers for Hikari Collaboration and 23,000 customers for LIBMO compared with end-FY03/18, there was an overall net decrease of 22,000 customers primarily due to the net decrease of 52,000 subscribers for the conventional ISP service.
Change in customer numbers, by service segment Number of customers FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 YoY ('000) Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Change Gas (LP gas, city gas) 668 635 629 626 627 634 648 670 22 Conventional ISP 729 785 841 861 742 565 492 440 -52 Hikari Collaboration - - - - 117 272 315 328 13 LIBMO ------13 36 23 Mobile 180 202 221 231 234 234 231 223 -8 Information and Communications 909 986 1,062 1,093 1,093 1,071 1,050 1,028 -22 CATV 727 682 693 690 698 722 995 1,046 51 Aqua 95 102 120 132 132 135 141 156 15 Security 21 20 19 18 18 17 17 17 0 Total 2,398 2,405 2,498 2,535 2,543 2,554 2,827 2,893 66 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Customer numbers are duplicated for Information and Communications and CATV segments when shown separately, but not in the totals.
The number of continuing customers rose by 17,000 from 2,876,000 at end-FY03/18 to 2,893,000. Breakdown by service was gas (LP, city gas) business at a net increase of 9,060 customers (+6,149 in 1H FY03/18), CATV net increase of 14,357 (+11,132), and Aqua (bottled water delivery) net increase of 9,466 (+6,057). The number of subscribers for a new, TOKAI brand MVNO* business called LIBMO** launched in February 2017 was up by 7,000 to 36,000.
Members of the TLC Membership service rose 58,000 from the end of FY03/18 to 757,000.
* MVNO (Mobile Virtual Network Operator): Business offering self-branded mobile communication services for mobile phones and PHS devices without building or operating wireless communication facilities, and instead leasing communication lines from major mobile communication carriers. ** The company is actively promoting LIBMO (http://www.libmo.jp/) as not only a method to capture new customers in mobile communication, but also as a strategic measure to acquire more contracts and prevent contract termination of fixed-line services, by packaging it with products such as Hikari Collaboration. Specifically, TOKAI is working in partnership with major electronics mass retailers to gain new customers. The company is also working to expand sales to its existing 2.6mn customers by awarding loyalty points in addition to its TLC membership services, and by utilizing flyers and email newsletters.
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Results by segment Segment results as reported by the company reflect allocated overhead expenses.
Gas and Petroleum
▷ Sales: JPY34.0bn (+3.6% YoY) ▷ Operating loss: JPY52mn (JPY393mn operating profit in 1H FY03/18)
Operating profit declined YoY despite increased sales because of weaker gas sales volume due to high temperatures.
The LP gas business had sales of JPY28.3bn (+2.9% YoY). The number of customers reached 615,000, an increase of 9,000 from end-FY03/18. While gas sales volume dropped because of higher temperatures than in Q1 FY03/18, sales increased on the boost to sales prices from higher raw material costs.
In the Gas and Petroleum segment, the city gas business had sales of JPY5.7bn (+7.3% YoY). While the number of customers remained almost unchanged at 55,000, sales rose YoY as the gas rates increased due to energy regulations to reflect the change of natural gas prices.
In April 2018, the company concluded an agreement enabling the purchase of the gas business operated by the town of Shimonita, Gunma Prefecture. This purchase was certified by the Kanto Bureau of Economy, Trade, and Industry in October 2018, and the company will take over the business from April 2019. TOKAI had been conducting city gas business in some areas in Shizuoka Prefecture but will take its first step toward wide-ranging expansion once it assumes responsibility for the business in Gunma Prefecture. Using this purchase as an opportunity, the company will strive toward further expansion in the city gas business.
Information and Communications
▷ Sales: JPY25.2bn (+1.0% YoY) ▷ Operating profit: JPY1.0bn (+11.0% YoY)
Both sales and profit rose YoY due to higher sales resulting from expansion of recurring revenue businesses for corporate clients and an increase in system development contracts.
Services for consumers generated sales of JPY15.5bn (-1.3% YoY). Amid tougher competition with major carriers, Hikari Collaboration added 5,000 customers from end-FY03/18, bringing its customer count to 328,000. However, the number of customers in traditional ISP service dropped by 25,000 to 440,000. LIMBO, a new MVNO service launched on a full scale in February 2017, as noted above, had 36,000 customers, an increase of 7,000 from end-FY03/18.
Sales for corporate clients reached JPY9.7bn (+4.9% YoY). Sales rose on expansion of recurring revenue businesses and an increase in system development contracts.
In September 2018, TOKAI Communications Corporation, a wholly owned subsidiary of TOKAI Holdings, acquired all issued shares of Scythe, making it a consolidated subsidiary of the company. Scythe’s core business involves developing and providing survey systems used mainly in online research. In the same month and year, TOKAI Communications Corporation also concluded a capital and business alliance with Tripleize, which possesses strength in advanced technologies such as IoT, AI, and Blockchain (for more information, refer to the “Recent updates” section). The company group believes that it can create new synergies by combining this strength with the network, data center, and system development capabilities connected to its Information and Communications business.
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CATV
▷ Sales: JPY15.1bn (+11.2% YoY) ▷ Operating profit: JPY2.1bn (+37.3% YoY)
Sales and profit rose sharply on smooth increase in customer volume in existing areas, in addition to the boost from M&A activities in FY03/18.
In CATV segment, the company sought to increase customers by enhancing price competitiveness through offering combination discounts for a broadcasting and communications bundle as well as combinations with smartphones in partnership with major cellphone carriers.
By improving customer satisfaction, the company won new clients and managed to prevent many existing customers from switching to its rivals. The company also sought to prevent contract cancelations at its call center. In its broadcasting service, the company strove to promote fiber optic networks that are capable of supporting 4K broadcasts and television broadcasts which contain regional information. In its communications service, the company began an ultra-high-speed fiber optic network service (maximum speed of 10Gbps). These initiatives are part of an effort to improve customer satisfaction through enhancing services.
Consequently, the CATV business had 781,000 customers, up 6,000, while customers of communications services increased by 8,000, to 265,000.
In December 2018, the company began BS and 110-degree CS digital broadcasting at resolutions of 4K and 8K. New chips and antennas that enable receivers (televisions, tuners, etc.) and conditional access systems (CASs) to receive 4K and 8K broadcasts in accordance with new specifications are necessary when viewing non-CATV broadcasts (direct reception). Viewing CATV broadcasts becomes possible with (conversion to) 4K broadcast tuners* if the viewer has a television designed for 4K viewing (either a 4K-compatible television without a 4K tuner or a television equipped with an internal 4K tuner). In other words, no antennas are required in this case. The company intends to rake in 4K demand before the spread of televisions equipped with internal 4K tuners and antennas.
*The most prominent characteristic of the company’s CATV business is that it has been promoting conversion to optical fibers in all CATV circuits, from headend systems (center facilities) to household V-ONUs (terminating devices), since 2006 with an eye on fusing broadcasting and communications. In other words, it relies on Fiber to the home (FTTH) instead of coaxial cable for its “last mile” (final leg of connectivity delivery). The company plans to have converted nearly 100% of its CATV areas to fiber optics by FY03/21. FTTH does not require each television set to be connected to a set-top box (STB), as is the case for coaxial cable. With 4K broadcasting tuners, broadcasting in both 4K and 8K resolutions can be enjoyed on 4K-compatible televisions throughout the house.
Building and Real Estate
▷ Sales: JPY9.0bn (+7.6% YoY) ▷ Operating profit: JPY223mn (+290.0% YoY)
Renovation and building business deals increased.
Aqua
▷ Sales: JPY3.5bn (+14.2% YoY) ▷ Operating profit: JPY159mn (+1,184.9% YoY)
The company aggressively promoted its bottled water brand, Oishii Mizu no Okurimono - ulunom (the Gift of Delicious Water), mainly at large commercial facilities. As a result, the overall customer count rose by 9,000 from end-FY03/18 to 156,000.
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Others
▷ Sales: JPY2.1bn (-4.1% YoY) ▷ Operating loss: JPY10mn (JPY18mn operating profit in 1H FY03/18)
The nursing care business had sales of JPY5.3mn (+5.2% YoY) after the company logged more users. In ships business, a decreased volume of ship repairs led to sales of JPY627mn (-8.6% YoY), while in the bridal events business, sales were JPY624mn (-7.1% YoY) due to a decline in the number of wedding hosts.
In August 2018, the company concluded a capital and business alliance agreement with Minna-Denryoku, Inc., a new venture electricity company, and began formal discussions geared toward entering the renewable energy field. From 2019 onward, an increasing amount of solar electricity will reach the expiry of application of fixed-price purchase agreements under the Feed-in Tariff (FIT) Act. In addition to individuals owning renewable energy sources nearing the expiration of the FIT period, corporates that choose to use renewable electricity as a way to contribute to society from the perspective of RE100*, ESG**, and CSR, and municipalities aiming for local production and consumption of electricity are expected to drive the distribution of renewable energy sources.
* An international association of corporates that are committed to using 100% renewable electricity. ** An initialism for Environment, Social, and Governance; indicates whether a company is capable of sustainable growth.
FY03/18 results Results summary
▷ Sales: JPY186.1bn (+4.2% YoY) ▷ Operating profit: JPY11.0bn (-14.0% YoY) ▷ Recurring profit: JPY11.2bn (-12.4% YoY) ▷ Net income*: JPY6.6bn (-9.8% YoY) * Net income attributable to the parent company shareholders
Sales reached 98.2% of the company’s FY03/18 full-year forecasts, operating profit 96.2%, recurring profit 98.5%, and net income attributable to parent company shareholders 102.6%. Excluding net income attributable to parent company shareholders, results were slightly below forecasts.
The main reason that operating profit and recurring profit did not reach company forecasts is that upfront spending to expand the earnings base was JPY1.2bn higher than planned (planned JPY2.5bn YoY increase in spending; however, actual spending was JPY3.7bn). The company invested more than expected (see below) in order to prevent service suspensions or cancellations and secure new customers as competition has been fierce in the Gas business and the company has been locked in harsh competition with major telecommunications carriers in the Information and Communications segment. On the other hand, contribution from YoY sales increase was JPY700mn higher than plan (JPY1.1bn planned, JPY1.8bn actual). As a result of subtracting the increase in profits from the increase in upfront spending, operating profit results were less than JPY500mn (JPY439mn) lower than company forecasts. However, the customer base (number of customers) rose 312,000, to a total of 2,876,000. As such, the company expects for monthly fee income to rise from FY03/19.
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FY03/18: Increase in upfront spending and impact of higher sales (JPYmn) Init. Est. Act. Notes Investments (YoY change) ① +2,500 +3,700 Ex pansion in gas business area, other Construction of new locations +300 +200 New LP gas sites in Kurashiki, Okayama and T ajimi, Gifu Customer acquisition costs +400 +800 New LP gas customer: 47,000 (up 6,000) Customer acquisition commissions +400 +700 Beginning a new communication service LIBMO sales expansion +500 +700 LIBMO customer count: net increase of 27,000 Prevention of cancellation Gas business, other +300 +500 LP gas cancellation: 28,000 (reduced by 5,000) Communication, other +600 +800 Broadband cancellation: 115,000 (reduced by 9,000) Customer count increase and other sales contributions ② +1,100 +1,800 LP gas, CATV, Hikari Collaboration, corporate communications businesses LP gas unit consumption increase ③ - +300 Other ④ - -200 Consolidated operating profit (YoY change) (②+③+④-①) -1,400 -1,800 Source: Shared Research based on company data
TOKAI Holdings, under its third medium-term business plan Innovation Plan 2020 “JUMP,” is seeking to increase the number of customers re-subscribing to its services as part of an ongoing management theme. It also plans to expand its sales areas and to have more customers sign up for multiple services based on its Total Life Concierge (TLC) concept, targeting acquisitions and alliances valued at JPY100bn over four years through FY03/21. The goal is to see a twofold increase in the number contracts, sales, and operating profit by FY03/21, the final year of the business plan, from the figures achieved in FY03/17.
In FY03/18, TOKAI Holdings made upfront investments to win more contracts and achieve the goals set forth in the medium-term business plan. As expected, the cost of winning new customers and retaining existing contracts resulting from aggressive sales activities, led to a profit decline YoY, despite the enlarged revenue base. Even so, sales rose because of an increased number of customers and M&A activity. Specifically, as well as expanding its sale area and launching a new communication service (LIBMO, described below) in order to maximize profitability from FY03/19 onwards, the company increased upfront investments by JPY3.7bn YoY (on cancellation prevention, etc.). Meanwhile, customer base expansion contributed JPY1.8bn to profit and established a revenue base for FY03/19 and onwards.
Customer count
At the end of FY03/18, the number of customers re-subscribing to the company’s services across the group rose to 2,876,000 from 2,564,000 at end-FY03/17 (+312,000, +12.2%). Of the net increase of 312,000, 273,000 were the result of M&A. Excluding M&A, the net increase of the re-subscribing customers in the existing business in FY03/18 were 39,000, six-plus times more than 6,000 in FY03/17. The effect of the company’s upfront investment and aggressive sales activities, targeting an expanded revenue base, has been robust.
The net number of customers for CATV rose 299,000 compared with end-FY03/17 (an increase of 273,000 from the acquisition of Tokyo Bay Network Co., Ltd. and TV Tsuyama Inc., and 26,000 from existing areas), contributing greatly to the overall customer count. In addition to efforts to increase its existing customer base by improving customer satisfaction (see below) through cancellation prevention and service enhancement, the company boosted customer count due to the 250,000 customers from its acquisition in July 2017 of Tokyo Bay Network Co., Ltd., which operates a CATV business in two wards of Tokyo (235,000 for broadcast service; 15,000 for communications service). Members of the TLC Membership Service rose to 699 000, up 113,000 compared with end-FY03/17.
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Change in customer numbers, by service segment Number of customers FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 YoY ('000) Q4 Q4 Q4 Q4 Q4 Q4 Q4 Change Gas (LP Gas, City Gas) 648 629 628 626 634 642 661 19 Conventional ISP 758 816 854 859 633 528 494 -34 Hikari Collaboration 4 219 299 323 24 Mobile 193 213 227 235 236 233 227 -6 Info. Comm. Total 951 1,029 1,082 1,099 1,088 1,061 1,044 -17 CATV 722 691 693 690 710 733 1,032 299 Aqua 97 102 122 130 133 135 146 11 Security 20 19 19 18 18 17 17 0 Total 2,415 2,445 2,519 2,537 2,558 2,564 2,876 312 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Customer numbers are duplicated for Information and Communications and CATV segments when shown separately, but not in the totals.
Aside from CATV, compared with end-FY03/17, the gas (LP, city gas) business had a net increase of 19,000 customers, and the Aqua business had a net increase of 11,000 customers. In Information and Communications services, while there was a net increase of 24,000 customers for Hikari Collaboration compared with end-FY03/17, there was an overall net decrease of 17,000 customers primarily due to the net decrease of 34,000 subscribers for the traditional ISP service. The number of subscribers for a new, TOKAI brand MVNO* business called LIBMO** launched in February 2017 was 29,000 as of the end of FY03/18.
* MVNO (Mobile Virtual Network Operator): Business offering self-branded mobile communication services for mobile phones and PHS devices without building or operating wireless communication facilities, and instead leasing communication lines from major mobile communication carriers. ** The company is actively promoting LIBMO (http://www.libmo.jp/) as not only a method to capture new customers in mobile communication, but also as a strategic measure to acquire more contracts and prevent contract termination of fixed-line services, by packaging it with products such as Hikari Collaboration. Specifically, TOKAI is working in partnership with major electronics mass retailers to gain new customers. The company is also working to expand sales to its existing 2.6mn customers by awarding loyalty points in addition to its TLC membership services, and by utilizing flyers and email newsletters.
Results by segment
Segment results as reported by the company reflect allocated overhead expenses.
Gas and Petroleum
▷ Sales: JPY76.1bn (+3.7% YoY) ▷ Operating profit: JPY5.0bn (-28.5%)
Operating profit declined YoY despite increased sales due to increased customer acquisition and cancellation prevention costs.
The LP gas business had sales of JPY64.5bn (+3.3% YoY). Sales increased YoY thanks to an increase in the volume of LP gas sales due to customer growth and higher sales prices owing to a rise in purchase prices. In addition to strengthening initiatives to win new clients in existing areas and retaining existing contracts amid increasing competition, the company increased customers by entering new areas. As a result, the number of customers reached 606,000, an increase of 19,000 from end-FY03/17.
The city gas business had sales of JPY11.6bn (+6.1% YoY). While the number of customers remained almost unchanged at 55,000, sales rose YoY as the gas rates increased due to energy regulations to reflect the change of natural gas prices.
Information and Communications
▷ Sales: JPY50.9bn (+2.8% YoY) ▷ Operating profit: JPY1.9bn (-39.1%)
Operating profit declined YoY despite increased sales due to increased sales promotion expenses for the MVNO business and others.
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Services for consumers generated sales of JPY31.7bn (-0.7% YoY). The company sought to acquire new customers for the Hikari Collaboration broadband service and urged existing customers to switch to this service. As a result, Hikari Collaboration added 24,000 customers from end-FY03/17, bringing its customer count to 323,000. However, the number of customers for the overall FTTH services declined by 29,000 to 691,000 because of increasing competition with major mobile phone carriers. The number of customers for the overall broadband services declined by 39,000 to 755,000, due to cancellations of ADSL contracts. LIMBO, a new MVNO service launched in February 2017, as noted above, had 29,000 customers as of end-FY03/18.
Sales for corporate clients reached JPY19.2bn (+9.2% YoY). Sales rose after the company increased its fee-generating services, such as cloud services, and an increase in system development contracts.
CATV
▷ Sales: JPY28.4bn (+11.8% YoY) ▷ Operating profit: JPY3.0bn (+30.2%)
The increase in sales and earnings was driven by the expansion of the company's CATV customer base.
The company's CATV business continued to acquire new customers by offering combination discounts for a broadcasting and communications bundle as well as combinations with smartphones in partnership with major cellphone carriers. By improving customer satisfaction, the company won new clients and managed to prevent many existing customers from switching to its rivals. The company also sought to prevent contract cancelations at its call center. In its broadcasting service, the company strove to promote fiber optic networks that are capable of supporting 4K broadcasts and television broadcasts which contain regional information. In its communications service, the company began an ultra-high-speed fiber optic network service (maximum speed of 10Gbps). These initiatives are part of an effort to improve customer satisfaction through enhancing services. Additionally, 273,000 customers were added to the customer count through M&A with the acquisition of Tokyo Bay Network Co., Ltd. and TV Tsuyama Inc., (254,000 broadcast customers and 18,000 communications customers). Consequently, the CATV business had 775,000 subscribers, up 267,000 from end-FY03/17, while subscribers to communications services increased by 32,000, to 257,000.
Building and Real Estate
▷ Sales: JPY19.8bn (+1.5% YoY) ▷ Operating profit: JPY655mn (+42.0%)
Orders at the renovation and housing sales businesses fell YoY. However, the number of installation works and properties handled by the building management support services increased.
Aqua
▷ Sales: JPY6.2bn (+7.6% YoY) ▷ Operating profit: JPY26mn (-74.4%)
The company aggressively promoted its bottled water brand, Oishii Mizu no Okurimono - ulunom (the Gift of Delicious Water), mainly at large commercial facilities. As a result, the overall customer count rose by 11,000 from end-FY03/17 to 146,000. Increased cost to acquire customers was the main reason operating profit fell YoY.
Others
▷ Sales: JPY4.7bn (-7.9% YoY) ▷ Operating profit: JPY301mn (+167.4%)
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Sales decreased YoY, but recovery in profitability continued, resulting in an increase in operating profit.
The nursing care business had sales of JPY1.0bn (+18.0% YoY) after the company logged more users. In the shipbuilding business, a decreased volume of ship repairs led to sales of JPY1.4bn (-5.9% YoY), while in the bridal events business, sales were JPY1.5bn (-23.2% YoY) after the company shut down its Vrai Cloche Bouquet Tokai Mishima bridal and banquet hall at end Mach 2017.
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Income statement
Income statement FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Cons.* Cons.* Cons.* Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Total sales 165,702 159,228 174,901 181,931 181,684 188,987 187,511 180,940 178,631 186,069 191,600 YoY 3.1% -3.9% 9.8% 4.0% -0.1% 4.0% -0.8% -3.5% -1.3% 4.2% 3.0% Gas and Petroleum 99,355 89,000 95,697 98,316 94,519 97,229 93,067 80,745 73,344 76,073 77,977 Information and Communications 45,322 34,672 34,725 37,943 38,497 38,803 40,118 44,246 49,508 50,894 51,234 CATV - 15,653 22,647 24,292 23,786 24,187 24,359 24,608 25,396 28,386 30,511 Building and Real Estate 14,324 14,399 14,907 15,881 15,756 19,245 20,019 20,975 19,511 19,807 20,090 Aqua - - - - 3,750 4,378 4,959 5,487 5,762 6,200 7,004 Others 6,699 5,502 6,923 5,498 5,374 5,142 4,987 4,875 5,108 4,706 4,781 Cost of sales 106,892 95,880 107,455 112,393 112,875 120,646 118,579 111,128 105,591 110,733 115,441 Gross profit 58,809 63,347 67,445 69,537 68,809 68,341 68,932 69,812 73,040 75,336 76,159 YoY 11.4% 7.7% 6.5% 3.1% -1.0% -0.7% 0.9% 1.3% 4.6% 3.1% 1.1% GPM 35.5% 39.8% 38.6% 38.2% 37.9% 36.2% 36.8% 38.6% 40.9% 40.5% 39.7% SG&A expenses 50,529 53,317 56,690 58,614 59,874 60,948 59,928 61,567 60,290 64,365 63,102 SG&A ratio 30.5% 33.5% 32.4% 32.2% 33.0% 32.2% 32.0% 34.0% 33.8% 34.6% 32.9% Operating profit 8,279 10,029 10,755 10,923 8,934 7,392 9,003 8,245 12,750 10,971 13,057 YoY 30.1% 21.1% 7.2% 1.6% -18.2% -17.3% 21.8% -8.4% 54.6% -14.0% 19.0% OPM 5.0% 6.3% 6.1% 6.0% 4.9% 3.9% 4.8% 4.6% 7.1% 5.9% 6.8% Non-operating income 1,885 3,266 973 1,095 983 1,006 747 772 719 774 774 Non-operating expenses 10,422 2,472 2,240 2,200 1,852 1,385 1,201 868 693 555 555 Recurring profit -257 10,822 9,489 9,818 8,065 7,013 8,549 8,150 12,775 11,191 13,259 YoY - - -12.3% 3.5% -17.9% -13.0% 21.9% -4.7% 56.7% -12.4% 18.5% RPM - 6.8% 5.4% 5.4% 4.4% 3.7% 4.6% 4.5% 7.2% 6.0% 6.9% Extraordinary gains 1,070 130 265 270 59 486 203 215 172 829 829 Extraordinary losses 1,878 2,317 3,533 2,626 1,954 1,508 1,210 1,929 840 1,113 1,113 Tax charges 143 4,546 3,015 4,695 3,073 3,381 3,573 2,924 4,685 4,176 4,176 Implied tax rate - 52.6% 48.5% 62.9% 49.8% 56.4% 47.4% 45.4% 38.7% 38.3% 32.2% Net income attrib. to non-controlling interests 977 1,008 1,054 52 11 10 33 52 85 Net income attrib. to parent company shareholders -2,187 3,080 2,152 2,715 3,085 2,598 3,934 3,458 7,337 6,620 7,772 YoY - - -30.1% 26.2% 13.6% -15.8% 51.4% -12.1% 112.2% -9.8% 17.4% Net margin - 1.9% 1.2% 1.5% 1.7% 1.4% 2.1% 1.9% 4.1% 3.6% 4.1% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Results for FY03/11 and prior years are of TOKAI Corp.
FY03/09 results The company achieved an operating profit of JPY8.3bn during the fiscal year, but recorded non-operating expenses of JPY10.4bn, including a JPY6.8bn loss related to derivative trading. Non-operating income of JPY1.9bn did little to offset these losses, and consequently, the company suffered a recurring loss of JPY257mn for the fiscal year.
By segment, Information and Communications (currently separated into two segments, Information and Communications and CATV) recorded a decline operating profit, while the Gas & Petroleum segment achieved a significant increase in operating profit. Start-up costs affected profits in the aqua business, and lower purchasing expenses and adjustments in retail price improved LPG operations significantly.
FY03/10 results The company achieved record high operating profits despite a decline in sales. In addition to the favorable growth in operating profit, recurring profits increased significantly, supported by a rise in non-operating income, mainly due to a JPY2.1bn gain in derivatives trading (recorded derivative losses as non-operating charges in FY03/09) during the fiscal year.
By segment, operating profit expanded in the Gas & Petroleum segment due to lower purchasing costs and customer growth in the aqua business. Information and communications (currently separated into two segments—Information and Communications and CATV business) also achieved significant operating profit growth, supported by a rise in intra-firm communication projects, together with an increase in CATV customers as a result of an acquisition.
FY03/11 results The company recorded its highest-ever sales and operating profits in FY03/11. However, recurring profit declined mainly due to gains from derivatives trading (non-operating income) recorded a year earlier.
By segment, Gas & Petroleum operations suffered a decline in operating profit, hurt by an increase in purchasing costs and decline in unit consumption by households, despite profit improvement in the aqua business. However, operating profit for the Information and Communications segment increased, supported by improvements in the mobile business. CATV segment
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operating profit increased, supported by its FTTH service and contributions from two CATV companies made into subsidiaries in FY03/10. Operating profit for the building and real estate segment increased due to improved profitability on real estate leasing operations of Aoi Tower.
FY03/12 results Sales were JPY181.9bn (+4.0% YoY), operating profit was JPY10.9bn (+1.6%), recurring profit was JPY9.8bn (+3.5%), and net income was JPY2.8bn (+26.2%). The company achieved record-high sales and operating profit for the fiscal year. The company was able to absorb costs of roughly 1.6 billion related to becoming a holding company, and managed to increase operating profit. By segment, Gas & Petroleum operations, and Information and Communications business contributed to the increase in profits.
FY03/13 results Sales were JPY181.7bn (-0.1% YoY), operating profit was JPY8.9bn (-18.2%), recurring profit was JPY8.1bn (-17.9%), and net income was JPY3.1bn (+13.6%). Information and Communications services saw higher sales, but other segments struggled. As a result, despite the decline over the previous year, operating profit was better than the company’s forecast, which was revised up on July 31, 2012.
The number of customers for the company’s recurring services grew by 30,000 compared with the start of FY03/13, to 2.4 million households as of end of FY03/13. An increase in broadband subscribers in the Information and Communications segment made up for a decline in customers in the LP Gas and Petroleum, and CATV segments. In addition, the number of TLC memberships, a new customer service introduced in December 2012, reached 105,000 members as of end of March 2013.
TLC membership is a service that allows member customers to earn points from using the company’s electronic money card, “TLC WAON card” for its various services.
FY03/14 Results Sales were JPY189.0bn (+4.0% YoY), operating profit was JPY7.4bn (-17.3%), recurring profit was JPY7.0bn (-13.0%). Sales were up but profits were down YoY, due to higher promotional expenses in the FTTH and Aqua businesses and delays in passing on increased procurement costs of LP gas. However, results outperformed forecasts announced in January 2014.
The customer base for recurring services increased by 73,000 over the year, to 2.5mn. The broadband and Aqua businesses both saw robust growth in subscriber count. TLC membership also increased by 201,000 over the year, to 306,000. TOKAI launched the TLC Membership Service in December 2012, to increase customer loyalty. The TLC Membership Service allows customers who hold multiple service contracts to earn loyalty points.
FY03/15 results Sales were JPY187.5bn (-0.8% YoY), operating profit was JPY9.0bn (+21.8%), recurring profit was JPY8.5bn (+21.9%), and net income reached record highs at JPY3.9bn (+51.4%).
Sales increased due to a rising subscriber count in the aqua and broadband businesses. Profits increased significantly—the result of lower marketing, customer acquisition, and advertising costs in the aqua business due to more efficient sales, coupled with higher productivity and other streamlining initiatives in the LP gas business. Operating profit surpassed the company’s latest target of JPY8.9bn, which had been revised upward from the initial forecast of JPY8.2bn when it announced its 1H FY03/15 results. On a segment basis, the three main businesses of Gas and Petroleum, Information and Communications and Aqua drove the overall improvement in group earnings. In particular, the Gas and Petroleum segment, which made efforts to streamline distribution, administrative and other expenses in the LP gas business, made significant contributions.
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Balance sheet
Balance sheet FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Cons.* Cons.* Cons.* Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. ASSETS Cash and deposits 7,405 11,084 8,622 2,602 4,235 3,182 2,861 4,077 3,239 3,143 4,164 Marketable securities 1,0111,183 Accounts receivable 20,653 20,298 20,321 22,180 20,944 22,073 20,085 21,305 22,838 23,806 24,798 Inventories 9,340 8,885 9,568 8,051 8,141 8,178 6,695 5,611 5,058 5,389 5,389 Others 14,306 9,786 11,233 8,260 7,031 7,173 6,318 7,124 7,459 7,613 8,155 Total current assets 52,715 51,236 49,744 41,093 40,351 40,606 35,959 38,117 38,594 39,951 42,506 Buildings, net 35,603 49,735 50,084 48,186 45,598 42,157 38,413 35,178 33,718 34,280 33,756 Machinery and equipment, net 26,360 25,563 24,507 23,353 22,830 22,081 21,684 22,074 21,848 23,096 23,592 Land 18,165 21,994 21,918 21,584 21,799 21,918 22,006 21,825 22,634 22,842 22,921 Other fixed assets, net 8,228 10,486 14,104 17,084 16,375 16,973 16,832 15,987 15,447 16,592 16,761 Total tangible fixed assets 88,356 107,778 110,613 110,207 106,602 103,129 98,935 95,064 93,647 96,810 97,030 Investments and other assets 18,653 17,138 15,996 14,995 15,638 16,855 19,539 16,149 17,860 18,030 16,937 Goodwill 7,490 13,186 15,022 15,540 12,632 10,241 8,270 6,589 5,861 5,430 5,044 Other 1,305 1,624 1,632 1,726 2,274 2,702 2,954 4,351 5,127 5,768 6,084 Total intangible fixed assets 8,795 14,810 16,654 17,266 14,906 12,943 11,224 10,940 10,988 11,198 11,128 Total fixed assets 115,805 139,727 143,265 142,470 137,147 132,928 129,699 122,153 122,496 126,038 125,097 Total assets 168,554 191,036 193,239 183,735 177,642 173,620 165,702 160,303 161,112 165,993 167,606 LIA BILITIES Accounts payable 11,743 11,193 12,652 13,636 13,019 14,105 13,035 13,511 14,779 15,670 15,021 Short-term debt 66,592 66,667 56,756 50,834 48,614 44,169 36,279 28,586 26,888 27,358 25,966 Other current liabilities 19,973 18,822 20,375 20,709 20,930 20,631 21,846 20,861 19,637 20,677 20,398 Total current liabilities 98,308 96,682 89,783 85,179 82,563 78,905 71,160 62,958 61,304 63,705 61,385 Long-term debt 46,016 61,019 65,400 53,404 44,093 41,171 36,790 42,823 39,596 36,793 38,131 Other fixed liabilities 7,497 13,785 16,466 17,970 16,975 15,214 14,284 12,550 3,765 4,044 4,194 Total fixed liabilities 53,513 74,804 81,866 71,374 61,068 56,385 51,074 55,373 43,361 40,837 42,325 Total liabilities 151,822 171,486 171,649 156,553 143,631 135,291 122,234 118,332 104,665 104,543 103,711 Net assets Capital stock 14,004 14,004 14,004 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 Capital surplus 8,511 4,786 2,207 21,868 22,183 22,183 22,315 19,258 24,286 25,525 25,527 Retained earnings -8,477 -2,239 -651 1,780 4,225 5,436 7,803 9,870 15,048 17,768 21,863 Treasury stock -2,434 -2,700 -135 -11,224 -8,313 -8,191 -8,033 -6,409 -3,285 -2,223 -2,222 Others -364 -51 -546 -149 1,006 3,992 6,460 4,344 5,606 5,250 3,459 Share Warrants - 112 278 327 324 318 260 208 0 0 0 Non-controlling interests 5,492 5,637 6,432 578 584 588 662 699 791 1,130 1,267 Total net assets 16,732 19,549 21,589 27,181 34,011 38,329 43,467 41,970 56,446 61,450 63,894 Working capital 18,250 17,990 17,237 16,595 16,066 16,146 13,745 13,405 13,117 13,525 15,166 Total interest-bearing debt 112,608 127,686 122,156 104,238 92,707 85,340 73,069 71,409 66,484 64,151 64,097 Net debt 105,203 116,602 113,534 101,636 88,472 82,158 70,208 67,332 63,245 61,008 59,933 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Results for FY03/11 and prior years are of TOKAI Corp.
Assets For the past few years, the company has been aggressively investing in growth, placing priority on improving profitability. Consequently, total assets have expanded to JPY193.2bn as of FY03/11. However, with the establishment of TOKAI Holdings, the company improved its financial position by reducing working capital and only investing in areas where it can achieve high returns. As a result, total assets were decreasing. In FY03/17, however, total assets increased YoY, because the value of investment securities rose due to a rise in the market value. Total assets have continued to increase since FY03/18 due to business expansion through M&A.
Liabilities As a result of the company’s aggressive investment strategy, which was mainly debt-financed, its interest-bearing debt grew to JPY127.7bn in FY03/10. The company will focus on developing a more stable financial position going forward and aims to reduce interest-bearing debt to less than JPY100bn by the end of FY03/14 as part of its medium-term business plan developed following the establishment of TOKAI Holdings Corporation. Hence, interest-bearing debt totaled JPY92.7bn as of FY03/13, achieving its target one year ahead of schedule. The debt amount further improved in FY03/19, totaling JPY64.1bn.
Net assets Equity ratio was 7.7% as of FY03/11, but as mentioned, the company has been improving its financial position by reducing interesting-bearing debt and increasing retained earnings. As a result, its equity ratio improved to 18.6% at the end of FY03/13. The company has been improving its equity ratio even prior to merging its business operations (TOKAI Corporation with VIC TOKAI Corporation in 2010) and achieved its equity ratio target of at least 17%, as highlighted in its medium-term business plan, one year ahead of schedule. The ratio stood at 37.4% in FY03/19.
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The company held 8.3 million shares of treasury stock (6.0% of shares outstanding) as of end of March 2019. The company has suggested that it will consider capital tie-ups or alliances going forward.
Per share data Per share data (JPY) FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 Cons.* Cons.* Cons.* Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Shares issued (year end; '000) 75,750 75,750 70,845 155,200 155,200 155,200 155,200 139,680 139,680 139,680 139,680 EPS -30.6 43.5 30.5 27.2 29.9 22.7 34.2 30.0 64.5 51.2 59.4 EPS (fully diluted) - 43.4 30.5 - - - 34.1 26.9 56.3 50.5 - Dividend per share 8.0 8.0 8.0 12.0 12.0 12.0 12.0 14.0 28.0 28.0 28.0 Book value per share 157.9 195.4 210.8 262.9 289.3 325.8 368.2 362.8 439.0 460.7 478.3 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Results for FY03/11 and prior years are of TOKAI Corp.
Statement of cash flows
Cash flow statement FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Cons.* Cons.* Cons.* Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities (1) 22,406 21,915 23,521 28,584 25,713 22,806 27,265 21,395 26,692 20,909 21,605 Cash flows from investing activities (2) -20,064 -25,665 -14,601 -10,037 -9,983 -9,664 -8,851 -11,015 -10,985 -11,488 -12,443 Free cash flow (1+2) 2,342 -3,750 8,920 18,547 15,730 13,142 18,414 10,380 15,707 9,421 9,162 Cash flows from financing activities -2,787 7,253 -11,278 -24,255 -14,051 -14,125 -18,764 -9,150 -16,643 -9,527 -8,147 Depreciation and amortization (A) 11,810 13,035 15,545 17,903 17,447 17,571 17,229 16,734 15,641 15,211 15,090 Capital expenditures (B) -16,999 -21,438 -13,845 -11,193 -10,747 -10,083 -9,712 -11,435 -11,331 -11,665 12,423 Working capital changes (C) -3,576 -260 -753 -642 -529 80 -2,401 -340 -288 408 1,641 Simple FCF (NI + A + B - C) -3,800 -5,063 4,605 10,291 10,314 10,006 13,852 9,097 11,935 9,758 33,644 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Results for FY03/11 and prior years are of TOKAI Corp.
Cash flows from operating activities The company has a stable source of operating cash flow and has managed to reduce its debt repayment period (interest-bearing debt ÷operating cash flow) from 5.8 years in FY03/10 to 3.0 years in FY03/19.
Cash flows from investing activities The company’s investment cash flow changes in tandem with capital expenditures.
Cash flows from financing activities The company has been free cash flow positive since FY03/11 and has been using excess cash to reduce interest-bearing debt.
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News and topics
May 2019 On May 20, 2019, the company announced the acquisition of a cable television broadcasting business operated by Shioya Limited.
The company's subsidiary TOKAI Cable Network Corporation (TCN) has signed an agreement to acquire the cable television business operated by Shioya Limited.
▷ Shioya provides cable television services within Shizuoka Prefecture (mainly around Kannami, Shimizu, Ohira [Numazu], and Izunokuni). ▷ To cope with advancement of broadcast technology, TCN will actively invest in the area’s infrastructure to provide high quality triple-play* service combining broadcasting and communication services including 4K and 8K broadcasting. ▷ The contract was concluded on April 19, 2019 and the business transfer is expected on October 1, 2019. ▷ The impact on the business results for FY03/20 is expected to be negligible.
* Triple-play refers to a telecom service offering voice, video, and data communication (telephone, TV, and the internet) packaged on one line.
April 2019 On April 22, 2019, the company announced an expansion of its sales area in the LPG business (an establishment of Tsu Office in Mie Prefecture).
TOKAI Corporation, a wholly owned subsidiary of TOKAI Holdings established “Tsu Office” in Mie Prefecture on April 22, 2019. With this move, the company will expand the LP gas retail business to Mie Prefecture, increasing its sales area to further strengthen its profitability.
Medium-term management plan for the LP gas business: policy and the expansion
▷ Under the new medium-term management plan, Innovation Plan 2020 “JUMP” announced in May 2017, the company intends to make aggressive investment through FY03/21, the final year of the plan, aiming to expand its LP gas business to the new
business areas and to further increase its share in the areas. ▷ The company also aims to increase the number of customers of the LP gas business to 760,000, a 30% increase over the four years through FY03/21. ▷ The company has expanded to five bases (the Chubu area [Gifu and Aichi prefectures] and the Tohoku area [Miyagi Prefecture]) in FY03/16, to Okayama and Gifu prefectures in FY03/18, and to Fukuoka Prefecture in FY03/19. With the establishment of Tsu Office, the company intends to grow customer bases into the Mie Prefecture.
December 2018 On December 12, 2018, the company announced that its subsidiary TOKAI Cable Network has entered a comprehensive collaboration agreement with the city of Shizuoka, Shizuoka Prefecture.
TOKAI Cable Network Corporation (TCN), which manages the group’s CATV business, has concluded a comprehensive collaboration agreement with the city of Shizuoka, Shizuoka Prefecture, on December 12, 2018 to engage in collaborative activities that effectively utilize each other’s resources with the aims of revitalizing the city of Shizuoka and enhancing regional services for local residents.
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The agreement calls for mutual cooperation between TCN and the city of Shizuoka, drawing on TCN’s expertise and experience in ICT utilization, information delivery to the Greater Tokyo Area, and promotion of cities to support revitalization of Shizuoka that faces an urgent issue of declining population. TCN and the city of Shizuoka plan to roll out various initiatives including setting up Wi-Fi networks in public areas by utilizing a regional broadband wireless access (BWA)* system, producing movies to encourage migration to the city, and collaborating on hosting regional events such as Shizuoka Festival and Abekawa Fireworks Festival and providing videos of such events.
Upon conclusion of the agreement, as a part of the regional revitalization effort, TCN will make preparations to obtain a wireless license to operate regional BWA system in the city of Shizuoka. Further, TCN will open a wireless station in the city and prepare to provide wireless services to the local municipality.
* Regional BWA: A wireless system that uses radio waves in different frequency bands than those used by major telecommunication carriers and whose goal is to improve public services for local communities.
November 2018 On November 8, 2018, the company announced entering a business alliance with Toell, Co., Ltd.
On November 1, 2018, the company’s wholly-owned subsidiary TOKAI Corp. entered a business alliance agreement with Toell regarding delivery operations of Tokai Corp.’s drinking water delivery service.
TOKAI Corp. currently serves about 150,000 customers in Japan in its Aqua business (drinking water delivery service) launched in 2007. It ranked the 7th in Japan in terms of the number of customers for drinking water delivery service (source: Yano Research Institute Ltd.’s “Mineral Water Market in Japan: Key Research Findings 2018”), and has the top market share in Shizuoka Prefecture with some 70,000 customers (50% share, TOKAI Corp. estimate).
Toell operates businesses centered on LP gas sales and drinking water delivery service in the Kanto region. Toell has 250,000 customers for its drinking water delivery service, and has established its own delivery network. By entering the business alliance, TOKAI Corp. will be able to utilize Toell’s delivery system to deliver its drinking water products in the Kanto region. By doing so, the company looks to improve efficiency of its delivery services, cut costs, and strengthen points of interactions with customers with the aims of improving service quality of and growing the Aqua business.
September 2018 On September 14, 2018, the company announced the conclusion of a capital alliance agreement with Tripleize Co., Ltd.
The company’s wholly owned subsidiary TOKAI Communications (hereinafter TOKAI Com) entered into a capital alliance agreement with Tripleize, a startup whose strengths lie in cutting-edge technologies of IoT, AI, and blockchain.
Tripleize has technological and developmental capabilities in areas including IoT, AI, and blockchain, and offers products and services using such capabilities. Upon conclusion of the capital alliance agreement, combining TOKAI Com’s infrastructure (e.g., network data centers) and technological capabilities and developmental resources in system integration and backbone systems and Tripleize’s strengths in cutting-edge technology is expected to generate synergy effects including expansion and improvement of the system development business, development of new businesses and services, and securing stability of the contract development business.
The agreement is expected to have only a minor impact on consolidated earnings for FY03/19.
On September 5, 2018, the company announced acquisition of shares in Scythe Co., Ltd., making it a subsidiary.
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The company’s wholly owned subsidiary TOKAI Communications Corporation (hereinafter TOKAI COM) resolved to acquire all shares in Scythe and subsequently concluded a share purchase agreement on August 27, 2018. Share transfer is scheduled to take place on September 13, 2018.
Reasons for the share acquisition TOKAI COM operates the company group’s Information and Communications business and provides various services in the information and communications field such as the company’s own fiber-optic networks and data centers to individual and corporate clients. Scythe is a provider of information services that specializes in consignment development of systems and provision of in-house developed survey systems mainly for use in online research. Scythe provides a wide range of services from research systems-related product development to consulting. Its strength lies in its ability to meet the demand for order-made products centered on its propriety, highly expandable development system.
The company plans to strengthen its digital marketing strategy for the group’ existing clients by utilizing Scythe’s data collection solution. Further, the company aims to create synergies by taking advantage of both companies’ customer bases, business expertise, and resources. The company has concluded that the share acquisition will lead to enhancing its group’s corporate value in the medium to long term.
The company stated that the share acquisition would only have minor impacts on FY03/19 earnings.
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Other information
History
The company was established as Yaizu Gas Co., Ltd., and began operations as a city gas supplier in 1950. It changed its name to TOKAI Gas Corporation in 1956 and expanded by establishing TOKAI Gas Transportation Corporation in 1967 and Yaizu Cable Vision Corporation in 1977. Yaizu Cable Vision Corporation changed its name to VIC TOKAI Corporation in 1978. TOKAI Gas Corporation went public in 1981, listing its shares on the First Section of the Nagoya Stock Exchange. The company listed its shares on the First Section of the Tokyo Stock Exchange in 1987 and changed its name to TOKAI Corporation. VIC TOKAI Corporation listed its shares on the JASDAQ in 2002. TOKAI Corporation announced a merger with VIC TOKAI Corporation in 2010. The two companies established a joint holding company, TOKAI Holdings Corporation in April 2011, and listed its shares on the First Section of the Tokyo Stock Exchange. In October 2011, VIC TOKAI Corporation changed its name to TOKAI Communications Corporation.
Source: Shared Research based on company data
Business development The company began its mainstay operations in energy as a city gas supplier in 1950. However, its city gas business was regulated by the government, which limited its service area. Consequently, the company expanded into the liquefied petroleum gas (LP gas) business in 1959, an industry that offered an unregulated service area. Since then, the company has developed into a diversified service provider involved in a wide-range of operations that include its mainstay energy business, housing business (started in 1970), bridal business (1972), insurance business (1973), security business (1984) and, in recent years, its aqua business (2007), nursing care business (2011), and electric power sales business (2016).
In addition, the company has expanded operations in its Information and Communications segment to include SIS business (1983), data center services (1985), CATV business (1988), Internet operations (1996), broadband business (2001), and mobile operations (2006), and has gradually transformed into a comprehensive information and communications provider.
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Major shareholders
Shareholding Top shareholders Shares held ratio The Master Trust Bank of Japan, Ltd. (Trust account) 8,781,200 6.68% Japan Trustee Services Bank, Ltd. (Trust account) 7,740,600 5.89% Aioi Nissay Dowa Insurance Co., Ltd. 7,559,820 5.76% Suzuyo Shoji Co., Ltd. 5,799,700 4.42% Tokio Marine & Nichido Fire Insurance Co., Ltd. 4,986,887 3.80% The Shizuoka Bank, Ltd. 4,065,527 3.09% Sumitomo Mitsui Trust Bank, Ltd. 3,816,000 2.91% TOKAI Group Employee Stock Holding Association 3,709,701 2.82% Mizuho Bank, Ltd. 3,588,577 2.73% Astomos Energy Corporation 2,724,848 2.07% Shares outstanding (ex. 8,320,611 treasury shares) 131,359,366 100.00% Source: Shared Research based on company data (As of March 31, 2019)
Top management
Katsuhiko Tokita, President and Representative Director Born in 1945, Mr. Tokita joined the Ministry of International Trade and Industry (currently, Ministry of Economy, Trade and Industry) in 1968. In 1992, he was promoted to director-general’s secretariat at the Agency for Natural Resources and Energy. In July 1993, Mr. Tokita became vice-governor of Kyoto. Mr. Tokita served as Chief of the Central Procurement Office at the Ministry of Defense in 1996, Director-General of the Small and Medium Enterprise Agency in 1998, and Director of the Japan National Oil Corporation in 1999. Mr. Tokita became an advisor to TOKAI Corporation in 2002, and subsequently served in various senior executive positions, eventually becoming TOKAI Holdings President and Representative Director and Chairman of TOKAI Cable Network in 2012. He became Chairman and Representative Director of TOKAI Gas Corporation and TOKAI Management Service Corporation in 2013, and Chairman and Representative Director of TOKAI Corporation in 2016.
Employees
The company had 4,001 employees (consolidated basis) and 804 part-time workers as of the end of March 2019. In addition, there were 93 employees at the holding company. Average years worked there was 14.1 years, with an average annual salary of JPY6.3mn. The number of employees in each business segment is presented below (part-time workers in parentheses).
▷ Gas & Petroleum: 1,442 (409) ▷ Building and Real Estate: 244 (33) ▷ CATV: 593 (69) ▷ Information and Communications: 1,187 (81) ▷ Aqua: 139 (68) ▷ Others: 245 (121) ▷ Corporate: 151 (23)
The company’s employees belong to two labor unions, the TOKAI Labor union, which is a member of the Federation of Gas Workers’ Union of Japan, and the All Japan Shipbuilding and Engineering Union (Yaizu Branch). Union members totaled 2,357 employees as of the end of March 2019.
Dividends and shareholder benefits
Dividends The company adheres to a policy of “maintaining stable and continuous dividend payments, while strengthening its corporate structure and developing future businesses”.
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Shareholder Benefits The company offers gifts and benefits to shareholders of record holding at least one trading unit (100 shares) at the end of the first half (September) and fiscal year (March). Based on the number of shares owned, shareholders can select one of the following gifts:
◤ A. “Oishii Mizu no Takuhaibin” (“Delicious Water Home Delivery”) and “Oishii Mizu no Okurimono ulunom” (“The Gift of Delicious Water - ulunom”) products
◤ B. Gift certificates (prepaid QUO Card)
◤ C. Meal vouchers for the company’s French restaurants “Beau Ciel” and “Aoi”
◤ D. Points for the company’s membership service, “TLC Membership Service”
◤ E. LIBMO, a low-cost SIM service
The company also offers shareholders a 10% discount and JPY100,000 coupon (discount limited to JPY200,000) on wedding ceremonies held at its wedding halls and a 20% discount at its French restaurants, “Beau Ciel” and “Aoi.”
Source: Shared Research based on company data
Investor relations
The company holds earnings briefings following release of first half and full-year business results. Additionally, the company holds overseas investor relations events twice per year.
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Company profile
Company Name Head Office 2-6-8 Tokiwa-cho Aoi-ku TOKAI Holdings Corporation Shizuoka, Japan 420-0034 Phone Listed On +81-54-275-0007 Tokyo Stock Exchange 1st Section Established Exchange Listing April 1, 2011 April 1, 2011 Website Fiscal Year-End http://tokaiholdings.co.jp/english/ March IR Contact IR Web - http://tokaiholdings.co.jp/english/ir/
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