TOKAI Holdings / 3167 COVERAGE INITIATED ON: 2013.05.31 LAST UPDATE: 2020.11.12 Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg. Research Coverage Report by Shared Research Inc. TOKAI Holdings / 3167 RCoverage LAST UPDATE: 2020.11.12 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 ------------------------------------------------------------------------------------------------------------------------------------- 5 Recent updates ---------------------------------------------------------------------------------------------------------------------------------------- 7 Highlights ------------------------------------------------------------------------------------------------------------------------------------------------------------ 7 Trends and outlook ----------------------------------------------------------------------------------------------------------------------------------- 9 Quarterly trends and results ----------------------------------------------------------------------------------------------------------------------------------- 9 Full-year company forecast for FY03/21 ------------------------------------------------------------------------------------------------------------------ 14 Outlook ------------------------------------------------------------------------------------------------------------------------------------------------ 17 Medium and long-term plans ------------------------------------------------------------------------------------------------------------------------------- 17 Strategy ------------------------------------------------------------------------------------------------------------------------------------------------------------- 21 Business ------------------------------------------------------------------------------------------------------------------------------------------------ 22 Business description -------------------------------------------------------------------------------------------------------------------------------------------- 22 Profitability snapshot, financial ratios --------------------------------------------------------------------------------------------------------------------- 34 Market and value chain ---------------------------------------------------------------------------------------------------------------------------------------- 37 Strengths and weaknesses ------------------------------------------------------------------------------------------------------------------------------------ 42 Historical performance and financial statements ------------------------------------------------------------------------------------------ 43 Historical performance ---------------------------------------------------------------------------------------------------------------------------------------- 43 Income statement ----------------------------------------------------------------------------------------------------------------------------------------------- 64 Balance sheet ----------------------------------------------------------------------------------------------------------------------------------------------------- 66 Statement of cash flows --------------------------------------------------------------------------------------------------------------------------------------- 68 News and topics ------------------------------------------------------------------------------------------------------------------------------------- 69 Other information ---------------------------------------------------------------------------------------------------------------------------------- 76 History -------------------------------------------------------------------------------------------------------------------------------------------------------------- 76 Major shareholders --------------------------------------------------------------------------------------------------------------------------------------------- 77 Top management ----------------------------------------------------------------------------------------------------------------------------------------------- 77 Employees --------------------------------------------------------------------------------------------------------------------------------------------------------- 77 Dividends and shareholder benefits ---------------------------------------------------------------------------------------------------------------------- 77 Investor relations ------------------------------------------------------------------------------------------------------------------------------------------------ 78 Company profile ------------------------------------------------------------------------------------------------------------------------------------------------- 79 02/80 TOKAI Holdings / 3167 RCoverage LAST UPDATE: 2020.11.12 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Executive summary ◤ TOKAI Holdings is a unique company with two main business areas, its legacy gas business (LP gas and city gas) and its information and communications businesses (CATV and business-oriented services). Although it may change somewhat from year to year, these two business areas each account for about 50% of earnings, making energy and communications its two earnings pillars. At the same time, the company is also pushing ahead with its Total Life Concierge (TLC) concept, under which it aims to create a one-stop shop for the goods and services desired by its customers. As of the end of FY03/20, TOKAI Holdings had roughly 3.0mn customers within its service areas, including Shizuoka Prefecture and the Kanto area. 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 energy and information and communications businesses are synergistic and are the sources of the company’s competitive advantage and its growth. The first area where synergies are realized is in the area of personnel. At its B2C businesses, the company has a total of 1,600 local sales representatives that are engaged in door-to-door sales and are thus in a position to offer a range of services to meet the needs of individual customers. Unlike other companies in the industry, TOKAI Holdings uses its own people for new customer development and does not farm out this task to outside contractors. Its sales force also differs from competitors in its ability to offer a wide range of services. Offering everything from energy to information and communications, TOKAI Holdings’ sales representatives are productive, and the company has taken advantage of this productivity to continue adding new customers, make effective acquisitions, and expand its business territory. ◤ The second area where synergies are realized is on the capital side. During the past ten years TOKAI Holdings has generated some JPY20–25bn in operating cash flow every year, well more than the roughly JPY15.0bn in operating cash flow generated by an industry peer NIPPON GAS CO., LTD. (TSE1: 8174), the JPY5–10bn in operating cash flow generated by Mitsuuroko Group Holdings Co., Ltd. (TSE1: 8131), or the roughly JPY5bn in operating cash flow generated annually by SINANEN Holdings Co., Ltd. (TSE1: 8132). The much greater operating cash flow generated TOKAI Holdings has given it a clear competitive edge over its peers by providing it the wherewithal in terms of capital to finance acquisitions of more gas businesses and commercial rights. ◤ Aided by its strong competitive position, TOKAI Holdings has been able to expand its sales territory by actively pursuing M&A and alliances. The versatility of its sales representatives, discussed above, means it does not need to worry about limiting its acquisition targets to just one particular industry. This is because its Total Life Concierge service package brings the gas companies and CATV service providers it acquires together so that multiple products can be efficiently sold through the same sales channel. ◤ Business acquisitions in recent years include Sendai CATV Co., Ltd. (in March 2020), Shioya Ltd. (a CATV service provider in eastern Shizuoka Prefecture, acquired in October 2019), TV Tsuyama Inc. (a CATV service provider in Okayama Prefecture, acquired in February 2018), Tokyo Bay Network Co., Ltd. (a CATV service provider in the Tokyo Metropolitan Area, acquired in July 2017), Shimonita’s city gas business