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
¥2,383 10,969,000 shares ¥26.139 billion 32.5% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual)
¥22.00 0.9% ¥211.50 11.2x ¥744.28 3.2x
*Stock price as of close on August 24, 2015. Shares outstanding is taken from the most recent earnings announcement documents.
ROE and BPS are actual data taken from the most recently ended fiscal year.
 
Earnings Trends
Fiscal Year Sales Operating Profit Current Profit Net Profit EPS DPS
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 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 first half of fiscal year December 2015 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 estate, where used condominiums and other properties are purchased and then their exteriors and interiors are refurbished as a means of raising their value prior to resale. A characteristic of the Company is to have a single employee in charge of the entire business process including purchase, refurbishment, and sale. MUGEN ESTATE 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. Amidst 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 philosophy 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 dream 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 and Transport 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 used residential property market where used residential properties are refurbished to improve their quality and functions, the used residential property refurbishment market is 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 also promote comprehensive efforts to cultivate companies and people who shall be responsible for providing attractive refurbished and used residential properties that respond to the diverse needs of consumers, and with the goal of promoting improvements in quality and increasing 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 approximately 6%. This growth owed to overall lessened hesitation among consumers for purchasing a used condominium resulting from the sense of security gained through the fact that consumers could see the actual used condominium prior to purchase, through which they could picture better how their life would be at home. Expansion of loans offered by financial institutions, and the comparatively low pricing of refurbished used condominiums relative to new condominiums were other factors contributing to the growth. However, stagnant conditions are continuing in the aftermath of the rush to buy in advance to the consumption tax hike in April 2014.

At the same time, the market of whole rental residential properties and office buildings as real estate for investment is expected to remain highly active given the growing interest in real estate investment by affluent people and individual investors within Japan, and from overseas 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 purchasing 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 multiple unit residence buildings constructed between 1981 and 2005. Given that the Company purchased 546 units of properties for investments and for residence during fiscal year 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 arising from 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 of Overseas Investors:
The interest of 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 relative other major cities in Asia and around the world, and also because the capitalization rates are also highly attractive.
 
 
 
* Sales and operating profit are estimates taken from each of the respective companies. ROE and BPS are actual data taken from the most recently ended fiscal year. Market capitalization is based upon the closing share price on August 19, 2015. A. D. Works Corp. does not disclose operating and net profits estimates for this fiscal year.
 
A comparison with peer companies reveals that MUGEN ESTATE is the second largest company in terms of sales, third largest by market capitalization, and the highest by PER.
 
<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 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 three services of real estate resale, exterior and interior refurbishment and construction, and real estate distribution with the main service being the resale of real estate.
 
◎ Real Estate Resale
The Company purchases used condominiums for sectional ownership, real estate for investment, and detached housing properties in the Tokyo Metropolitan Areas, including Tokyo, Kanagawa, Saitama and Chiba. To increase their value, the Company then has the subsidiary FUJI HOME, and some 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 sell 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 whole rental condominium complexes, offices and apartment buildings, as well as 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 consumers for the purpose of living in them, which include 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 December 2014 137 units of real estate for investment and 409 units 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. Furthermore, 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 companies, sales staff are able to obtain real estate information on superior properties that have yet to be released through public channels.

After obtaining information on real estate for sale, analysis is conducted regarding the properties' potential for increased value and resale at higher prices after renovation and refurbishment. If MUGEN ESTATE finds that there is that potential, then they acquire the properties and then outsource the task of refurbishment to a subcontracting company 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 maybe 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 standards established by the Company. These internal standards are comprised of various factors including specific balance between acquisition price and management fees, proximity to train stations and no properties requiring bus rides, 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 purchase of real estate. In addition, sales staff consult with their managers and superiors to obtain appropriate advice on how to carry on their business process. And while high commission involved in sales activities for condominiums tends to lead sales staff to act discretionally in general in the industry, MUGEN ESTATE maintains a culture of team work, where sales staff consult each other for advice and superiors lead their 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 rose from 2.2% in fiscal year December 2013 to 22.0% in fiscal year 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 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 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 puts it up on other portal sites for used real estate information operated by other companies. Furthermore, 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 Recorded in Fiscal Year 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 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.
 
◎ Real Estate Management Business
Management services for leased real estate that have been acquired as investment properties and fixed asset properties are conducted. Improvement in the management of structures, 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 purchasers.
 
<Management Strategy>
The "Three S's" designed to collateralize sustained 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 estate including not only condominiums and detached housing units, but also office buildings to become the company with the largest sales in the resale real estate business in the region. As a means of differentiating its business from its competitors, MUGEN ESTATE has chosen not to open offices in regions outside of Tokyo and the surrounding regions, and in principle will not deal in used real estate 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 businesses 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 (whole rental condominium complexes, offices and apartment buildings) 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.
 
 
Second Quarter of Fiscal Year December 2015 Earnings Overview
 
 
Continued Favorable Trends in Real Estate for Investment Sales Allow Sales, Profits to Rise to Record Highs
Sales rose by 44.7% year-on-year to ¥20.4 billion. The sales of real estate properties for investment such as whole rental condominium complexes and office buildings continued to trend strongly, and its shift to larger properties also contributed. Success in the marketing strategy based upon flexible sales price setting and control of sales, general and administrative expenses allowed operating profit and margin to rise by large margins.
 
 
Sales of the real estate rental business, which underpins MUGEN ESTATE's overall earnings by providing stable revenue, expanded by 101.0% year-on-year on the back of an increase in the number of rental properties resulting from expansion in purchases of real estate for investment.
 
 
Both sales value and unit volume of real estate for investment increased favorably. The number of properties exceeding ¥500 million increased by three from the previous year to five properties in reflection of the shift towards larger properties. The skills of MUGEN's marketing staff show a steady improvement.

At the same time, though, sales of real estate for residence declined from the corresponding term in the previous year due to increases in resale marketing activities for real estate for investment, the sales still trended mostly in line with the plans.
 
 
MUGEN ESTATE adopts a strategy of dispersed purchases of real estate in a wide range of locations as a means of reducing the sales risk. The share of real estate for investment grew, with which the number of properties in the highly liquid Tokyo metropolitan region increased.
 
 
Taiwanese and other overseas investors' inbound demand trends were well responded. With cases of overseas investors establishing corporations for investments within Japan seen more frequently, sales to these corporations are on the rise.
 
 
Because the used real estate business is vulnerable by nature to trends in the economy, tailored inventory control is implemented to be able to make adjustment to match environmental changes. 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." The average business cycle for real estate for investment and residence were 160 and 165 days respectively during the full fiscal year December 2014. The average business cycle is now trending around 180 to 200 days for both types of real estate as the average size of real estate properties is now on the upward shift.
 
 
MUGEN ESTATE is taking advantage of the favorable business environment to promote aggressive acquisition of real estate for investment. At the same time, the share of real estate for residence of total inventories has declined for three consecutive quarters due to promoting purchase resale cycle of real estate. Real estate for sale rose by 32.6% from the end of the previous fiscal year to ¥28.4 billion at the end of the second quarter of fiscal year December 2015.
 
 
Aggressive acquisition of real estate caused real estate for sale and current assets to rise by ¥7.1 and ¥7.9 billion, respectively from the previous term. Also increases in land and buildings allowed noncurrent assets to rise by ¥700 million, and total assets rose by ¥8.6 billion from the previous term to ¥36.2 billion.
Interest bearing liabilities grew by ¥6.7 billion on the back of acquisition of real estate, and total liabilities grew by ¥7.3 billion over the same period to ¥27.1 billion. At the same time, net assets rose by ¥1.3 to ¥9.0 billion due to an increase in retained earnings. Consequently, equity ratio declined by 3.2% points from 28.2% at the end of the previous term to 25.0% at the end of the current term.
 
 
Despite the increase in profits, an increase in inventories (real estate for sale) contributed to a large increase in the net outflow in operating cash flow. Investing cash flow turned to a small net outflow due to increases in acquisition of tangible noncurrent assets. Subsequent to these changes, the margin of net outflow of free cash flow expanded. Financing cash flow saw a large increase in its net inflow due to increases in long term debt despite a decline in short term debt. Consequent to these changes, cash position grew.
 
 
Fiscal Year December 2015 Earnings Estimates
 
 
Earnings Estimates Maintained, Seek to Achieve 4th Consecutive Term of Increases to Record High Sales, Profits
MUGEN ESTATE maintained its outstanding earnings estimates, which call for sales to rise by 27.7% year-on-year to ¥38.5 billion. A continuation of the favorable business environment is expected to allow resale business for real estate for investment to act as a growth driver and to boost sales to another record high. Transactions of whole rental condominium complexes and office buildings are expected to expand, along with an increase in pricing. Sales prices and volumes of real estate for residence are expected to remain in line with the previous term. Revenues from rental properties are also expected to expand. The higher sales are expected to offset a 30% increase in sales, general and administrative expenses and allow operating profit to grow by 26.1% year-on-year to ¥4.3 billion. Dividends are expected to be raised by ¥5.00 to ¥22.00 per share, for an anticipated dividend payout ratio of 10.4%.
 
 
(3) Interview with President Shinichi Fujita
We asked President Fujita to discuss the near-term business conditions for MUGEN ESTATE and strategies designed to differentiate its services from its competitors.
 
<Near-term Conditions>
As a result of the adoption of a more flexible sales pricing strategy than initially planned, sales volume of real estate for investment steadily increased. Furthermore, we were able to achieve the target of 20% gross margins.
A strong reputation for credibility was gained by MUGEN's listing of its shares and its favorable performance in large real estate properties, contributing to an increase in the number of direct property transactions with financial institutions.
Sustained strong supply of loans by financial institutions contributed to a continuation of the favorable business environment. However, we expect to see a temporary leveling off of business conditions in the coming year.
 
<Differentiating Factors from Competitor>
MUGEN boasts of a unique position based upon its wide range of products and services.
Against this backdrop, we are often asked if our competitors can also expand their product and service lineup just as we have, but I believe that they will encounter difficulties in repeating our successes.
For example, financial institutions are not like to provide loans easily to companies mainly focused upon condominiums that extend their business to include real estate for investment. Though MUGEN ESTATE also started from residential property, it is now easily able to raise funds for investment properties from financial institutes because of the results of its numerous years of successful operations.
Companies focusing upon whole condominium complexes and office buildings are unlikely to enter the market segment where prices of each unit ranges from ¥10 to ¥20 million.
I believe that MUGEN ESTATE's strong competitive position within the industry will be further strengthened due in part to its credibility and fortified fund raising capability gained by its listing.
 
<Current Strategy Focus>
Because MUGEN ESTATE is all about "people," cultivation of human resources and creation of successful team of staff are the most important matters for our Company.
In order to expand sales, we need to strengthen our sales force and more importantly increase the number of transactions per staff and the pricing of properties sold.
Towards that end, our staff to acquire various knowledge regarding real estate transactions is critical. Therefore, all of our sales staff take the "Real Estate Transaction Business?? Examination," which measures comprehensive real estate sales practices fairly based upon specific evaluation criteria. Our Company makes a strong effort to cultivate sales staff with substantial knowledge necessary to build relations of trust with major real estate brokers.
Despite the abundance of "lone wolf" sales staff within the real estate industry, MUGEN ESTATE seeks to establish an even stronger organization with an emphasis on cooperation to sustain growth. Our Company operates a system where managers take the lead role in earning profits so that it can function even without the presence of our Chairman or President.
 
 
Conclusions
 
We stated that "close attention should be paid to the future trend in average pricing in real estate for investment" in the previous report, and the 40% year-on-year rise in the average price of real estate for investment appears to be a reflection of the success of MUGEN ESTATE's business strategy. Furthermore, both sales and profits trended favorably relative to estimates in the current term and the potential for an upward revision to earnings in the third and fourth quarters of fiscal year December 2015 appears to be a possibility. Close attention should be paid to earnings during the third quarter in relation to the potential influence of the devaluation in the Chinese Yuan and downturn in the Chinese economy, in addition to other factors.
Disclaimer
This report is intended solely for information purposes, 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.
Copyright(C) 2015, Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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