BRIDGE REPORT
MUGEN ESTATE Co., Ltd. (3299)
Shinichi Fujita, President
Shinichi Fujita, President
Corporate Profile
Company
MUGEN ESTATE Co., Ltd.
Code No.
3299
Exchange
TSE 1st Section
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
¥749 24,355,000 shares ¥18.241 billion 22.1% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual)
¥23.00 3.1% ¥167.75 4.5x ¥634.98 1.2x
*Stock price as of close on March 7, 2017. Shares outstanding is taken from the most recent earnings announcement documents.
ROE is on actual data taken from the most recently ended fiscal year.
*A 2 for 1 stock split became effective on July 1, 2016. BPS has been adjusted for the effect of the stock split.
 
Earnings Trends
Fiscal Year Sales Operating Profit Current Profit Net Profit EPS DPS
December 2010 11,317 659 526 263 15,94 1.00
December 2011 11,423 308 109 45 2.76 1.00
December 2012 12,877 605 382 225 13.62 1.00
December 2013 20,830 2,254 1,974 1,127 68.27 2.00
December 2014 30,175 3,465 3,076 1,759 90.88 8.50
December 2015 45,706 6,123 5,573 3,382 154,15 16.00
December 2016 57,488 6,310 5,696 2,925 121.35 21.00
December 2017 (Est.) 72,175 7,191 6,370 4,085 167.75 23.00
* 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. A 2 for 1 stock split became effective on July 1, 2016.
EPS and dividends have been adjusted to reflect this stock split.
From fiscal year December 2016, the definition for net Profit has been changed to net profit attributable to parent company shareholders (Abbreviated as Parent Company Net Profit).
 
We present this Bridge Report reviewing the fiscal year December 2016 earnings results 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, and on the first section of the Tokyo Stock Exchange in February 2016.
 
 
<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:
Used Condominium market in the metropolitan area continued to trend favorably. In 2016, the number of used condominiums supplied in the Tokyo metropolitan area reached a record high, exceeding the previous year for two consecutive years and surpassing the number of new condominium units supplied on an annual basis, which decreased by 11.6% year-on-year. In addition, the contract price of used condominiums in the Tokyo metropolitan area in December 2016 rose 9.0% year-on-year, which marks the 48th consecutive month for rise in contract prices from January 2013. Moreover, the annual contract value of used condominiums in 2016 was 1,133.9 billion yen, an increase of 12.7% from the previous year.
 
 
Huge Latent Market:
According to the "2013 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 7.70 million units. MUGEN ESTATE maintains a basic policy of purchasing only condominiums that pass the new earthquake standards implemented in 1981, which account for 73% of overall, or 5.61million units of the total number of non-wooden structure multiple unit residence buildings constructed between 1981 and 2005. Given that the Company purchased 617units of properties for investments and for residence during fiscal year December 2016, 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.
 
 
 
Even though, MUGEN ESTATE's latest business performance, which shows double digits growth in sales and income, is not inferior to peer companies, PER is still in low level. Improvement of its awareness and promotion of understanding on its growth strategy are desired
 
<Business Description>
MUGEN ESTATE's business is divided between the two segments of "real estate trading" and "real estate leasing and other" businesses, with the real estate trading segment business accounting for about 96% of total sales during fiscal year December 2016. The Company plans to promote efforts to expand its earnings deriving from the real estate leasing and other business segment.
 
 
<Real Estate Trading Business>
Sales and Operating Profit of ¥55.147 and ¥6.989 Billion in FY12/16
The real estate trading business segment includes the three services of real estate resale, interior and exterior refurbishment and construction, and real estate distribution with the main service being the resale of real estate.
 
◎ Purchases and Resale Business
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 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 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.

The residential-type properties are those which 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. These properties 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 2016, 249 units of real estate for investment and 368 units for residence, 617 in total.

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 11.7% in fiscal year December 2013 to 20.6% in fiscal year December 2015.
 
◎ Interior and Exterior Refurbishment Business
The subsidiary FUJI HOME conducts refurbishment of both the interiors and exteriors 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.
 
◎ Brokerage Business
Information about real estate purchased for resale by MUGEN ESTATE is handled by FUJI HOME. In addition to the company website, they have also put 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.
 
<Real Estate Leasing and Other Business>
Sales and Operating Profit of ¥2.341 and ¥0.906 Billion Recorded in Fiscal Year December 2016
Optimization of the sales function of the real estate resale business is being pursued.
 
◎ Leasing Business
Real estate purchased as investment-type 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.
 
◎ Property Management Business
Management services for leased real estate that have been acquired as investment-type 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 investment-type properties. In some cases, property management services are maintained even after investment-type properties 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.
 
③Strength of High Levels of 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.

Additionally, the stable constructing and management system and the strong financing ability based on contracts with about forty financial institutions are MUGEN's strengths.
 
 
Fiscal Year December 2016 Earnings Overview
 
 
Sales of real estate for investment continue to increase. Sales and profit grew, marking a record high.
Sales increased by 25.8% year on year to 57.4 billion yen. The sales of real estate for investment, such as whole rental residential complexes and office buildings, continued to perform well. Its capability to handle large real estate has steadily improved leading to the increase in average unit price. However, the price for used real estate has entered the correction phase and the financing policies of financial institutions have changed, causing gross profit rate to decrease by 2.3 points year on year.
As mentioned below, non-deductible consumption tax (Taxes and Dues) increased in comparison to the conventional method, and growth of operating profit was just single-digit.
The company is obligated to correct the consumption tax amounts paid for the 3 years from the term ended Dec. 2013 to the term ended Dec. 2015, after the investigation of Tokyo Regional Taxation Bureau. This is because they had a difference of understanding with regard to the calculation method of the purchase tax deduction used for the consumption tax. Since consumption taxes for the previous year (extraordinary loss) was recorded at an estimate of 791 million yen (including the additional tax and delinquent tax) in the results of the fiscal year ended Dec. 2016, net profit dropped.
MUGEN ESTATE recognizes that the appropriate taxes has been calculated and paid in accordance with the applicable law and regulations, therefore, the company plans to file a complaint against the punitive taxes upon the receipt of a formal notice. Moreover, since the arguments made by the authorities will affect the accounting and tax affairs from the fiscal year ended Dec. 2016, although the company has different opinions, the company considered the surge in additional tax and overdue tax, as well as the risks involved in the correction, and decided to conduct accounting and tax affairs in compliance with the opinions of the authorities on the matter in financial results for the fiscal year ended Dec. 2016, thus the non-deductible consumption tax (Taxes and Dues) for the fiscal year saw an increase of 368 million yen compared to the previously used method.
Sales and profit fell short of the estimated.
 
 
 
Sales of real estate for investment increased by 31.6% year on year to 45.1 billion yen. The number of units sold increased by 9.7% year on year. The number of buildings sold for investment worth over 300 million yen was 44, including 4 buildings worth over 1 billion yen, up 17 year on year. The company handled larger buildings as planned.
 
As purchase prices of residential-type properties are rising because of the low barrier to entry and fierce competition, the company has worked to extend their portfolio and secured larger sales by including detached homes in urban centers targeted at the wealthy.
 
Over half of sales is in Tokyo, but the company has not specified prioritized areas. Its portfolio consists of Tokyo and other 3 prefectures in the metropolitan area. The average unit price of real estate for investment varies considerably from area to area due to the effects of large-scale real estate. The large-scale real estate in Tokyo increased. On the other hand, the decline in quantity of residential-type properties sold in Tokyo was offset by the sales in the other areas.
 
The ratio of sales of real estate for investment targeted at overseas investors remained at around the same level as the previous term at 19.8%. Despite quantity sold falling 17.4% from the previous term, the sales of 2 buildings worth over 1 billion yen contributed, increasing average unit price by 53.4% year on year. As a result, sales had a robust year-on-year increase of 26.7%. The weak yen in the latter half of the year stirred demand from overseas investors.
 
 
Because the used real estate business is noted for being vulnerable to trends in the economy, specific inventory controls are implemented to enable adjustments to be made that match changes in the business environment.
The data shown in the above table is the average number of days from the acquisition to sales of used real estate known as the "business cycle."
However, the target for the current fiscal year is 200 days for investment type, and 150 days for residential type, result was 239 days(increased by 17 days from the previous fiscal year) for investment type and 181 days (increased by 8 days from the previous fiscal year) for residential type.
The average business cycle is lengthening due to the increase in the size of properties sold and the changes in business environment.
 
 
With the goal of further increasing sales, inventories are steadily being expanded. The stable rental income derived from investment-type properties while it is held as inventory has supported the overall business structure. Furthermore, the inventory of residential-type properties remained at an appropriate level due to strong sales activities.
 
 
Current assets rose 13.8 billion yen year on year due to the active acquisition of real estate for sale which increased 12.3 billion yen from the end of the previous term. The subsidiary Fuji Home acquired a whole rental residential complex, leading to noncurrent assets increasing 900 million yen year on year and total assets increasing 14.8 billion yen year on year to 58.1 billion yen.
Funds raised for acquiring real estate caused interest-bearing debt to increase by 9.8 billion yen year on year and total liabilities to rise by 10.3 billion yen year on year to 42.5 billion yen. Net assets grew 4.5 billion yen to 15.5 billion yen due to increases in shareholders' equity. As a result, equity ratio increased from 25.3% at the end of the previous term by 1.3% to 26.6%.
 
 
The deficit in operating CF grew due to increases in payments of corporate income tax, etc.
The increase in payments into time deposits caused the deficits in investing CF to expand. The deficits in free CF also grew.
Proceeds from share issuance led to the growth of the surplus in financing CF.
Their cash position improved.
 
 
Fiscal Year December 2017 Earnings Estimate
 
 
Six consecutive terms experienced increased sales and profit with record-high figures.
Sales are forecasted to increase by 25.5% year on year to 72.1 billion yen. Despite the uncertainty of the business environment, the company expects the needs for the trade of a wide range of used real estate, including asset management, inheritance and residential purposes, to continue. The company keeps handling larger real estate for investment and anticipates that average unit prices will increase. After the acquisition of noncurrent assets, the income from rents is estimated to grow. SG&A expenses will augment, but they will be offset by increased sales, and operating profit is projected to rise by 14.0% year on year to 7.1 billion yen. The dividend amount is to increase 2 yen per share year on year to 23 yen per share. Payout ratio is estimated to be 13.7%
 
 
 
MUGEN ESTATE actively buys and resells real estate by taking advantage of their fund procuring capability, which was enhanced by strengthening their financial ground and improving their credibility through a capital increase.
They proceed with their metropolitan area domination strategy while further enriching their product lineup and providing the latest information on real estate.
Moreover, the company continues to maintain their accountability system for operations, which is one of their strengths. They work to refine their system for ensuring steady gross profit, for example, by tightening their internal standards and relegation rules, sharing the cases of failures swiftly, and improving their internal review system for large-scale real estate.
In addition, they plan to optimize operations by introducing a mission-critical system, as well as upgrading their lease management division.
Furthermore, they will discuss various means of raising funds, including direct lending and opening more doors to banks and trust banks, as well as working to expand business opportunities.
 
 
Conclusions
 
Despite sales and profit increasing in the previous fiscal year ended Dec. 2016, its profit growth rate remained single-digit, and both sales and profit fell short of the estimates. Although demand for used condominiums in the metropolitan area continued to be strong, rising purchase prices due to increased competition seemed to cause profit rate to fall.
As it is obvious from the relative share price shown below, in the same business environment, the sluggishness of the share price of the company stands out.
We have great expectations in the mid- to long-term for their stable earning capacity with their vast product lineup and original positioning, and would like to draw attention to their state of progress in the current term.
 
 
 
<Reference: Regarding corporate governance>
 
 
◎ Corporate Governance Report
The company submitted a latest corporate governance report on Mar. 28, 2016.
 
 
 
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) 2017, Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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