BRIDGE REPORT
MUGEN ESTATE Co., Ltd. (3299)
Shinichi Fujita, President
Shinichi Fujita, President
Corporate Profile
Company
MUGEN ESTATE Co., Ltd.
Code No.
3299
Exchange
Mothers Market, TSE
Industry
Real Estate
President
Shinichi Fujita
HQ Address
Nihonbashi Hama-cho 3-19-3, Chuo-ku, Tokyo
Business Description
MUGEN ESTATE conducts refurbishment of used real estate for resale in the Tokyo and surrounding metropolitan regions (Tokyo, Kanagawa, Saitama, and Chiba). In addition to real estate for residence, the Company also conducts refurbishment of real estate for investment in recent years.
Year-end
December
Homepage
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥2,107 10,968,000 shares ¥23,109 million 32.5% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual)
¥22.00 1.0% ¥211.51 10.0x ¥707.99 3.0x
*Stock price as of closing on February 24, 2015. Share outstanding is taken from the most recent earnings announcement documents. ROE and BPS are from the end of last fiscal year.
 
Non-consolidated Earnings Trends
Fiscal Year Sales Operating Profit Current Profit Net Profit EPS Dividend (¥)
December 2010 11,317 659 526 263 31,88 2.00
December 2011 11,423 308 109 45 5.53 2.00
December 2012 12,877 605 382 225 27.25 2.00
December 2013 20,830 2,254 1,974 1,127 136,55 4.00
December 2014 30,175 3,465 3,076 1,759 181.76 17.00
December 2015 Est. 38,546 4,368 3,864 2,319 211,51 22.00
* Estimates are those of the Company. Earnings until fiscal year ended December 2011 are non-consolidated, and those thereafter are consolidated.
* A 500 for 1 stock split was performed on March 26, 2014. EPS and dividends have been adjusted to reflect this stock split.
 
We present this Bridge Report reviewing the fiscal year December 2014 earnings results and business outlook of MUGEN ESTATE Co., Ltd.
 
Key Points
 
 
Company Overview
 
MUGEN ESTATE is a pioneer in the resale business of used real estates, where used condominiums are purchased and their exteriors and interiors refurbished as a means of raising their value addition prior to resale. A characteristic of the Company is its assignment of a single employee in charge of the entire course of process including purchase, refurbishment, and sale. MUGEN also boasts of a unique position within the industry based upon its wide range of product offers that accurately match the needs of its customers.
 
<Corporate Profile>
Susumu Fujita, currently the Chairman of MUGEN ESTATE, founded the Company in 1990 for the acquisition of used condominiums to be refurbished for resale to first time purchasers. This marked the start of the used condominium refurbishment business. Amid the expansion of the used condominium market, MUGEN ESTATE has been able to carry on without outside capital by cultivating staff on its own to achieve steady growth. The subsidiary Fuji Home Co., Ltd. was established in 1997 to provide refurbishment services. The Company has been able to overcome various difficulties including the Lehman Shock and the Great East Japan Earthquake, and listed its shares on the Mothers Market of the Tokyo Stock Exchange in June 2014.
 
 
<Corporate Philosophy>
The corporate motto is reflected in its name "MUGEN" ("Dream comes true"; Japanese word) and calls for "the pursuit of ideals, realization of dreams." MUGEN ESTATE's goal is to help customers realize their own dreams by owning a house of their own, while also striving to realize dreams through ongoing growth of the company and of its employees.
 
 
<Market Environment>
◎Expanding Market for Refurbished and Used Residential Properties
The Ministry of Land, Infrastructure, Transport and Tourism announced the "Total Plan for Renovating Existing Homes" in March 2012 with a view to double the size of the refurbished and used residential property market. Based upon the goal of achieving a shift in the focus from the newly constructed residential property market to the stock based market of existing homes circulation where used residential properties are refurbished to improve their quality and functions, the refurbished property market and used residential property circulation are expected to double its current size to ¥20 trillion by 2020.

As part of such measures, "efforts will be made to quickly structure the market from the consumers' point of view so that consumers can safely purchase used residential properties and carry out refurbishment. At the same time, MLIT will promote comprehensive efforts to cultivate employees who are responsible for providing attractive refurbished used residential properties that respond to the diverse needs of customers, and with the goal of promoting improvements in quality and increases in liquidity of used residential properties."
 
◎ Attractive Real Estate Market in Tokyo Metropolitan Region
Continued Favorable Conditions for the Used Condominium Market:
The used condominium market in the Tokyo and surrounding metropolitan region grew by 81% over the 10 year period from 2003 to 2013 for an annual growth rate of about 6%. This growth owed to overall lessened resistance to purchasing used condominiums due to the sense of security gained through the fact that consumers could see the actual used condominium prior to purchase, whereby they could better picture the type of life that would await. Expansion of loans offered by financial institutions and the comparatively low pricing of refurbished used condominiums relative to new condominiums were other factors that contributed to the growth. However, stagnant conditions are continuing after the wake of the rush to buy in advance of the consumption tax hike from April 2014.

At the same time, the market of rental residential properties and office buildings by block as investment real estate is expected to remain highly active given the growing interest in real estate investment by affluent people and individual investors within Japan, as well as overseas investors in view of the Tokyo Olympics and Paralympics to be held in 2020.
 
 
Huge Latent Market:
According to the "2008 House and Land Statistics Survey" published by the Ministry of Internal Affairs and Communications, the number of "non-wooden residential properties" in the Tokyo and greater metropolitan region (Tokyo, Kanagawa, Saitama, and Chiba) stood at 7.00 million units. MUGEN ESTATE maintains a basic policy of handling only condominiums that pass the new earthquake standards implemented in 1981, which account for 63% of overall, or 4.40 million units of the total number of non-wooden structure residence buildings constructed between 1981 and 2005. Given that the Company sold 546 units of used residential properties for investments and for residence during fiscal year ended December 2014, the latent market potential for MUGEN ESTATE remains huge.
 
Household Numbers in The Tokyo Metropolitan Region On The Rise:
While a contraction in the total population of Japan due to declining birth rates appears to be unavoidable at present, the National Institute of Population and Social Security Research estimates that the number of households in the Tokyo metropolitan region will continue to grow until peaking in 2025.
 
 
Growing Interest from Overseas Investors:
The interest from foreign investors in real estate investments in the Tokyo metropolitan region is rapidly increasing as the price of residential real estate in Tokyo remains low compared to other major cities in Asia and around the world, and also because the capitalization rates are also highly attractive.
 
 
 
A comparison with peer companies reveals that MUGEN ESTATE is the second largest company in terms of sales, third largest by market capitalization, and fourth highest by PER. Consequently, there appears to be room for the Company to improve its standing by increasing its brand recognition (ROE is calculated on the average shareholder equity during the term, including the amount before listing, Therefore it is not suitable for simple comparison.)
 
<Business Description>
MUGEN ESTATE's business is divided between the two segments of "real estate transactions" and "rental and other" businesses, with the real estate transactions segment business accounting for about 97% of total sales during fiscal year ended December 2014. The Company plans to promote efforts to expand its earnings deriving from the rental and other business segment.
 
 
<Real Estate Transaction Business>
Sales and Operating Profit of ¥29.248 and ¥3.742 Billion in FY12/14
The real estate transaction business segment includes the following three services: real estate resale, exterior and interior refurbishment and construction, and real estate distribution. The main service of the three is the resale of real estates.
 
◎ Real Estate Resale
The Company purchases real estate for residenceand real estate for investment in the Tokyo Metropolitan areas, including Tokyo, Kanagawa, Saitama, and Chiba. To increase their value, the Company then has the subsidiary Fuji Home or others refurbish them in accordance with their age, space, layout, location and management condition.
 
Main Value Addition Activities:
Refurbishment of exteriors and interiors
Improve management conditions of buildings
Restoration of wear and tear caused by age
Leasing of vacant rooms
Collection of unpaid rent
 
After having increased real estate values as "real estate for resale" through any of the activities, the Company then sells to first time purchasers, individual investors, and small to medium sized companies.
 
 
 
The purchase and sale of real estate is performed by real estate brokers, but some of the transactions are undertaken by Fuji Home in order to obtain a feel for the diversifying needs of customers and market trends. In order to respond quickly and accurately to the needs of customers, MUGEN ESTATE maintains a diverse lineup of condominiums for sectional ownership, real estate for investment (Rental condominiums, apartments and office buildings) and detached housing. Properties are divided into two categories of real estate for investment and real estate for residence. Real estate for investment are properties purchased by investors for the purpose of deriving returns, which include rental condominiums by block, office and apartment buildings by block , condominiums for sectional ownership and others. The average price for real estate for investment is between ¥100 to ¥200 million.
Real estate for residence are properties purchased by individuals for the purpose of living in them, including detached housing in addition to its main item of condominiums for sectional ownership. They are bought primarily by first time purchasers and their prices are mostly in the ¥20 to ¥30 million range. MUGEN ESTATE sold over the course of fiscal year ended December 2014, 137 units of real estates for investment and 409 for residence.

MUGEN ESTATE boasts of a unique business process where one sales person is responsible for the acquisition, refurbishment and sale of real estate. The Company's sales staff visit real estate brokers such as Mitsui No Rehouse, Nomura Real Estate Urban Net Co., Ltd., Sumitomo Real Estate Sales Co., Ltd., Tokyu Livable Co., Ltd. and others in the Tokyo metropolitan region to obtain information about real estate for sale by both individuals and corporations. By visiting these real estate brokers, sales staff are able to obtain real estate information on superior properties that have yet to be released.

After obtaining information on real estate for sale, analysis of the property's potential for increased value and resale at higher prices after renovation and refurbishment is conducted. If MUGEN ESTATE finds that there is that potential, then they acquire the properties and then outsource the task of refurbishment to a subcontractor under the supervision of its subsidiary Fuji Home.

An analysis of the potential customer base specific to the location of the property is conducted by sales staff to determine the price and other needs of the customers, and in some instances a three bedroom used condominium may be converted into a two bedroom condominium and other refurbishments are undertaken to raise the attractiveness of the property (Refurbishments are conducted with a view to the end sale price and ensuring profitability on the sale).

Sales staff responsible for purchasing the real estate adhere to a standard established by the Company. This internal standard is comprised of various factors including specific balance of acquisition price and property management fees, proximity to train stations, no bus-distant properties and other specific information known internally as the "12 purchase conditions," which have been developed over the history of the Company's operations and are effective as a context for the conduct of its business. At the same time, this standard developed on MUGEN ESTATE's own unique knowhow also serves to support less experienced sales staff in making the correct analysis and judgment of real estate. In addition, sales staff consult with their managers and superiors to obtain appropriate advice on how to promote their business process. And while high commission involved in sales activities for condominiums tends to lead sales staff to act on their own in general, MUGEN ESTATE maintains a culture of team work, where sales staff consult each other for advice and superiors lead subordinates in the right direction on the business process. Furthermore, MUGEN ESTATE pays its sales staff commissions not based upon the resale value but upon the profit derived from the resale as a means of reducing the risk of excessive purchases and leftover inventories that many of its competitors suffer.

In recent years, the interest of overseas investors, especially those in Taiwan, in acquiring Japanese real estate has increased, and the number of real estate brokers specialized in dealing with overseas investors is growing. Against this backdrop, sales to overseas investors is on the rise. The share of real estate for investment sales derived from overseas investors jumped from 2.2% in fiscal year ended December 2013 to 22.0% in fiscal year ended December 2014.
 
◎ Exterior and Interior Refurbishment
The subsidiary Fuji Home conducts refurbishment of both the exteriors and interiors of purchased used real estate. Fuji Home boasts of bountiful knowhow in refurbishment services based upon over 500 refurbishment projects conducted annually through accurate surveys and analysis of real estate properties by its highly skilled staff, including first-class registered architects. Orders from MUGEN ESTATE currently account for over 90% of Fuji Home's total orders, but it is endeavoring to expand orders deriving from external clients.
 
◎ Real Estate Distribution
Information about real estate purchased for resale by MUGEN ESTATE is handled by Fuji Home. In addition to the company website, they also put it up on other portal sites for used real estate information operated by other companies. In addition, they also provide mediation services for MUGEN ESTATE in their acquisition of real estate properties. Also, synergies with the Company's real estate resale business can be realized by gathering accurate information about the needs of used real estate purchasers.
 
<Rental and Other Business>
Sales and Operating Profit of ¥926 and ¥413 Million in Fiscal Year Ended December 2014
Optimization of the sales function of the real estate resale business is being pursued.
 
◎ Real Estate Rental Business
Real estate purchased as investment properties for resale to investors and as fixed asset properties are leased to end users. In principle, real estate is purchased with the objective of sales. However, renting and leasing is used as a means of deriving income until the properties are sold.
 
◎ Property Management Business
Management services for leased real estate that have been acquired as real estate for investment and fixed asset properties are conducted. Improvement in the management of conditions, restoration of wear and tear caused by age, leasing of vacant rooms, collection of outstanding rent, and other measures are implemented as part of a strategy of increasing the value of properties and improving the return on real estate for investment. In some cases, property management services are maintained even after the real estate for investment is sold at the request of a purchaser.
 
<Management Strategy>
The "Three S's" designed to collateralize sustainable growth and establish a sound earnings foundation.
 
MUGEN ESTATE promotes a growth strategy to become a "dominant player in the Tokyo and surrounding metropolitan region" and is focused upon used real estates including not only condominiums and detached housing units, but also office buildings to become the company with the largest sales in the real estate resale business in the region. As a means of differentiating its business from its competitors, MUGEN ESTATE has chosen not to open branch offices in regions outside of Tokyo and the surrounding regions, and in principle will not deal any used real estates in regions outside of Tokyo Metropolitan area.
 
 
Characteristics and Strengths
 
① Management Leveraging Synergies
In addition to the above mentioned real estate resale service, MUGEN ESTATE also performs real estate rental, real estate refurbishment, real estate distribution, and real estate management services. The knowhow developed in its various business areas based on the results of the many years of operation is leverage to be able to respond flexibly to changes in the market and derive various synergies between its various businesses.
 
② Diverse Product Lineup and Unique Positioning
With regards to the core real estate resale business, MUGEN ESTATE boasts of a strong information gathering capability based upon its network in the used real estate market in the Tokyo and the surrounding metropolitan region, which has enabled the Company to develop a diverse lineup including condominiums for sectional ownership, real estate for investment (rental condominiums, office and apartment buildings by block) and detached housing, and to respond quickly and accurately to customers' needs. In addition, MUGEN ESTATE has developed a strong reputation amongst real estate brokers for its ability to respond to all of the information gathered from them. Returning to those real estate brokers upon completion of rendering resale properties creates a benevolent cycle where the Company gains preferential treatment in the gathering of information on superior real estate.
 
 
As illustrated in the above diagram, MUGEN ESTATE has carved out a unique position within the real estate refurbishment industry through the creation of a diverse product lineup.
 
③ Strength of Highly Professional Skills
The information gathering, investment decision making, property management, technological response and other capabilities are all part of MUGEN ESTATE's high levels of professional skills and allow the Company to provide superior properties to the market.
 
 
Fiscal Year December 2014 Earnings Results
 
 
Favorable Trends in Real Estate for Investment Sales Allow Sales, Profits to Rise to Record Highs
Sales rose by 44.9% year-on-year to ¥30.1 billion. Sales of rental residential properties and office buildings by block as real estate for investment remained strong. The higher sales allowed increases in sales, general and administrative expenses to be offset and contributed to by over 50% year-on-year increase in all levels of profits below the operating profit. Both sales and profits reached new record highs.
 
 
Sales of the real estate rental business, which underpins MUGEN ESTATE's overall earnings by providing stable revenue, exceeded ¥100 million on a monthly basis for the first time in December 2014.
 
 
Sales value and volume of both investment and residence types exceeded the Company's estimates.
 
 
MUGEN ESTATE adopts a strategy of avoiding concentrated purchases of real estate in similar locations as a means of reducing the sales risk. The Company is currently promoting handling of larger real estate for investment. Furthermore, the pricing of both real estate for investment and residence rose.
 
 
Sale of real estate for investment to overseas investors, centered on Taiwanese, is expanding rapidly. The average price of real estate sold to overseas investors of ¥262 million exceeds the overall average price of ¥139 million.
 
 
The data shown in the above table is the average number of days from the property's purchase settlement to sales settlement, known as the "business cycle." While the business cycle has trended roughly sideways, it showed a hint of inclination to shorter periods. The increase manifested in the longer business cycle during the third quarter of fiscal year ended December 2014 for real estate for investment is due to the sale of real estates that the Company owned on a long-term plan. The average business cycle for real estate for investment and residence were 160 and 165 days respectively during the full fiscal year December 2014, and reflect the ability of MUGEN ESTATE to liquidate its acquired real estate within half a year.
 
 
MUGEN ESTATE is taking advantage of the favorable business environment to promote aggressive acquisition of real estate for investment. While the share of real estate for residence in total inventories is declining slightly on the back of increases in acquisition of real estate for investment for resale, it is expected to continue to trend around ¥4.0 billion level as the Company focuses upon the volume of properties in its inventory management.
 
 
Cash and equivalents grew by ¥2.2 billion at the end of the current term from the end of the previous term due to the capital sourced from MUGEN ESTATE's public offering at the time of its listing. In addition, real estate for sale also rose by ¥8.4 billion and contributed to a ¥11.0 and ¥10.9 billion increases in current and total assets respectively over the same period. Interest bearing liabilities and total liabilities grew by ¥5.7 and ¥6.2 billion respectively. At the same time, net assets rose by ¥4.6 billion due to the inflow of capital sourced from the public offering at the time of the Company's listing. Consequently, equity ratio rose by 9.7% points from 18.5% at the end of the previous term to 28.2% at the end of the current term.
 
 
 
Fiscal Year December 2015 Earnings Estimates
 
 
Strong Business Environment Continuing, Seek to Achieve 4th Consecutive Term of Record High Sales and Profits
MUGEN ESTATE's earnings estimates call for sales to rise by 27.7% year-on-year to ¥38.5 billion. Based on the outlook for a continuation of a favorable operating environment, resale of properties in the investment real estate business is expected to continue to act as a driver of growth and boost sales to another record high. Efforts to boost unit pricing will be undertaken along with efforts to expand sales of rental residential properties and office buildings by block. A 30% year-on-year increase in sales, general and administrative expenses are expected to be offset by higher sales, allowing operating profit to rise by 26.1 % year-on-year to ¥4.3 billion. Dividends are expected to be raised by ¥5.00 to ¥22.0 per share, for an anticipated dividend payout ratio of 10.4%.
 
 
(3) Business Environment and Future Strategies
Despite the outlook for a continuation of favorable trends in the investment real estate market, a number of issues also exist, including rising prices, intensifying competition, acceleration in the decline in population in outlying regions, and chronic shortage of workers.
Against this backdrop, MUGEN ESTATE will endeavor to increase its profitability and inventory turnover ratio by focusing upon the Tokyo and surrounding metropolitan regions and maximizing its presence in the used real estate resale market. In particular, the Company will maintain its strategy of becoming the dominant player in the Tokyo metropolitan region and opened an office in Shinjuku as part of this strategy of further strengthening its market position particularly in the western part of the Tokyo and metropolitan regions.
In addition, MUGEN ESTATE will increase the number of its sales staff in order to strengthen and expand its real estate for investment resale business. At the same time, the Company will also increase the number of transactions of real estate ranging between ¥100 to ¥200 million, targeting the upper middle class consumers, and enter the high-end category of the market where properties exceed ¥1.0 billion.
MUGEN ESTATE will further fortify its product lineup with real estate properties priced to match the clearly defined sales targets of "investors for profit yielding as a measure of asset formation or complementing and alteration," "inheritance burden reduction seekers," and "overseas investors."
Furthermore, recent revisions to the inheritance tax law are expected to contribute to an expansion in the "inheritance burden reduction seeking" segment of investors. In addition, MUGEN ESTATE will increase the number of collaborating companies to strengthen its ability to access "overseas investors" not only in Taiwan and Hong Kong, but also in Beijing and Singapore in order to expand its sales value and volume.
MUGEN ESTATE will continue to acquire real estate for residence in regions that are considered to be highly attractive as part of its real estate rental business. In addition, the Company will focus upon acquisition of low-priced rental properties as a means of reducing the risk of declines in rental income and to add stability to its overall earnings.
 
 
Conclusions
 
The average price of real estate for investment rose by approximately 30% to ¥139 million. Increasing the skills of each marketing staff is an extremely important factor in expanding earnings as a single marketing staff is responsible for the entire course of process from purchase to reform to sale. From that perspective, the increase in the average pricing appears to be evidence of the improvement in the skill levels of MUGEN's marketing staff. Close attention should be paid to the future trend in average pricing based upon the outlook for success in large real estate properties to lead to other new large real estate property projects.
Disclaimer
This report is intended solely for the purpose of providing information, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However, we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.
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