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(4829) 日本エンタープライズ株式会社

東証1部

Nihon Enterprise Co., Ltd. (4829)
Katsunori Ueda, President
Katsunori Ueda,
President
Corporate Profile
Company
Nihon Enterprise Co., Ltd.
Code No.
4829
Exchange
Tokyo Stock Exchange, Second Section
Industry
Information, Communications
President
Katsunori Ueda
HQ Address
Shibuya 1-17-8, Shibuya-ku, Tokyo, Japan
Year-end
May
Home Page
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥17,170 377,000 shares ¥6.473 billion 10.3% 1 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥200.00 1.2% ¥835.54 20.5x ¥10,125.77 1.7x
* Share price as of close on July 12, 2013
 
Consolidated Earnings Trends
Fiscal Year Sales   Operating Income Ordinary Income Net Income EPS Dividend
May 2010 2,147 150 173 77 206.59 80.00
May 2011 2,370 266 283 168 448.23 130.00
May 2012 2,790 304 318 170 451.18 130.00
May 2013 4,134 372 391 354 941.63 180.00
May 2014 Est. 5,000 520 500 315 835.54 200.00
* Estimates are those of the Company.

This Bridge Report provides details of Nihon Enterprise Co., Ltd. and its fiscal year May 2013 earnings results.
 
Key Points
 
 
 
Company Overview
 
Nihon Enterprise is a "mobile solutions company," with two main business segments including the Mobile Content Segment, where various contents including music, games, decorative mail pictograms and others are created and distributed to cellular telephones, and the Solutions Segment, where contents creation, operations, system creation, affiliate advertising and CD creation and sales services are conducted on behalf of corporate clients.
 
Focus Upon In-House Contents Creation
Nihon Enterprise maintains a unique strategy focused upon the development and ownership of its own contents created in-house as a means of achieving high profitability. This strategy has also enabled the Company to successfully expand sales of its contents through cooperation with cellular telephone retailing companies to conduct affiliate program contents sales (real affiliates developed independently).
 
Corporate Group
The Nihon Enterprise Group is comprised of seven consolidated subsidiaries including Dive Co., Ltd., which provides advertising services, at the LOUNGE Co., Ltd., which provides music related services, Advanced Traffic Information Services, Corporation (ATIS Corp.), which provides traffic and other information services, 4QUALIA Co., Ltd., which provides web and mobile site development and maintenance services and contents development, Enterise (Beijing) Information Technology Co., Ltd., which operates cellular telephone retail shops in China, Beijing YZH Wireless Net Technology Co., Ltd., which provides mobile contents planning, development and solutions, Rice CZ (Beijing) New media technology Co., Ltd., which provides IT related educational services. The Group also boasts of another three non-consolidated subsidiaries including and One, Inc., which provides voice communications related solution services, Rise MC (Beijing) Digital Information Technology Co., Ltd., which provides mobile contents distribution and character licensing services, and NE Mobile Services (India) Private Limited, a local company operating in India.
 
Overseas Business
Nihon Enterprise is implementing measures to spread Japanese contents into overseas markets throughout the world, and is among the first Japanese contents providers to enter the Chinese and Indian markets. With an eye to the growth of smartphones in China, Nihon Enterprise's local subsidiary is collaborating with Chinese writers, contents creators, and publishers to distribute digital comics and other publications to cellular telephones. Currently the local subsidiary in India is implementing measures to capture demand from the rapidly growing smartphone market and an alliance with MAGNA, the major publisher of a lifestyle magazine in India, was formed for contents distribution in December 2011.
 
<Business Details>
(1) Business Details
Nihon Enterprise's business can be divided into the Mobile Content Segment and the Solutions Segment, with each segment accounting for 51.8% and 48.2% of fiscal year May 2013 sales respectively.
 
Mobile Content Segment
In Japan, this segment deals with the creation and the sale of lifestyle information (Discounted Courtesy contents, health related, audio contents sales), digital publications, games, mail, music and other contents. In China, Beijing YZH Wireless Net Technology Co., Ltd. provides digital comic distribution services (to China Mobile, which is the top mobile communications company in the country).
 
Solutions Segment
This segment developed as an offshoot of the contents services business. Mobile site creation, operational tasks, user support services, debugging services, server network operation, surveillance and maintenance, secondary use of in-house contents, contents creation, operation and other solutions for corporate customers, and original music CD creation and sales (Label business), advertisement for sales of contents on a performance based compensation system in collaboration with cellular telephone retailing agents(shop affiliations), and cellular telephone retail shops in Shanghai, China are conducted in this business segment.
 
 
(2) Current Conditions: Fortifying Business through Effective M&A and Responding to Smartphones
In October 2011 4QUALIA Co., Ltd.,, which provides contents management systems (CMS) and web mobile site development and maintenance services, and in December 2011 ATIS Corporation, which provides traffic information distribution services, were turned into consolidated subsidiaries. Both these companies contributed significantly to Nihon Enterprise's earnings through the ability to fortify contents and improve and accelerate the speed of the solutions development capabilities, and have transformed the company's earnings trend since the second quarter of fiscal year May 2012.

4QUALIA boasts of a track record of development of over 200 cellular websites, in addition to a CMS package that simplifies website creation, highly skilled in-house designers who develop highly sophisticated websites and mobile contents, and the ability to provide high quality contents for smartphones in large volumes and quickly. Along turning of 4QUALIA into a consolidated subsidiary from the first quarter of fiscal year May 2013, it has contributed to consolidated earnings through its ability for fortify contents provided to consumers and the development of corporate contents.

ATIS Corporation was formed in July 1993 through collaboration between the Tokyo Metropolitan Government and 58 private sector companies for the provision of traffic information. Traffic, lifestyle, entertainment, culture, leisure, and other information is provided to both individuals and corporations. Furthermore, ATIS has contributed to the expansion of Mobile Content Segment since the third quarter of fiscal year May 2012, when it became a consolidated company, and is expected to yield synergies with Solutions Segment.

Furthermore, and One Inc., which provides voice communications related solutions based upon the Internet Protocol Private Branch Exchange (IP-PBX) software "Primus," became a consolidated subsidiary in March 2013. and One Inc., is one of the few Japanese companies with IP-PBX related development technologies, and implementation and maintenance track records, and its "Primus" software boasts of superior functionality, operability, flexibility, and value. Nihon Enterprise leverages the voice communications technologies of and One Inc. in its lifestyle related mobile contents and its corporate solutions related businesses.
 
 
 
Fortification of Domestic and Overseas Smartphone Businesses
 
Nihon Enterprise is promoting various measures designed to respond to changes brought on by the rapid shift from feature phones to smartphones both in Japan and in overseas markets. With regards to Japan, the Company is promoting measures in both its Mobile Content Segment and Solutions Segment to expand the realm of its businesses in response to the new era of smart devices. In particular, Nihon Enterprise is implementing a business strategy of establishing their position in the China market by focusing upon digital comics and cellular telephone sales.
 
(1) Japanese Business
 
With regards to the Japanese cellular telephone market, the shift from feature phones to high functionality smartphones is progressing and the MM Research Institute, Ltd. estimates that one out of every two Japanese mobile device users will own smartphones by the end of March 2014. Along with the diffusion of smartphones, the diffusion of Long Term Evolution (LTE) high speed and functionality data transmission services and fixed rate communication fee schedules are also progressing. In addition, Nihon Enterprise realizes the need to promote businesses that respond to structural changes within the mobile contents industry including provision of high value added contents that respond to rich contents, customer cultivation methods, and site operation procedures.
 
Contents Development, Sales, and Business Realm Expansion that Respond to the New Era of Smart Devices
Nihon Enterprise expects to expand its business realms with the ability to propose diversified usages in response to the arrival of the new era of smart devices, with a particular focus upon messenger applications, BYOD, operational solutions, alliances, shop affiliations, EC, lifestyles, and cost reduction solutions. Furthermore, the Company is also focusing its efforts upon contents sales, development of contents for use in-house and use by other corporations provided on a monthly payment schedule sold at cellular telephone shops (in alliance with cellular telephone sales companies), and provision of in-house developed contents on an fixed fee unlimited usage basis.
 
Alliances with Cellular Telephone Sales Companies
Sales of in-house developed and jointly developed contents based on monthly payment schedules and contents developed for other companies based on monthly payment schedules is consigned to cellular telephone sales companies at their storefront. Sales through this channel are derived from the customers cultivated by shops who pay though monthly payments schedules, with a portion of the sales being paid as commission and success fees to the shops at the time of sale and on a monthly basis thereafter. In addition, website creation service is also provided within the Solutions Segment for partnering companies when sales of jointly developed contents and contents developed by other companies based on a monthly payment schedule are made.

Moreover, sales of in-house and jointly developed contents provided on a monthly payment schedule is accounted for in the contents service business, with sales of contents developed by other companies being accounted for in the solutions business as advertising (shop affiliations) sales (¥803 million in advertising sales recorded during fiscal year May 2013). The flow of the shop affiliations business is shown in the diagram provided below and applies not only to cellular telephone retail shops but also to a wide range of other businesses as well.
 
 
Provision of In-house Developed Contents as a Fixed Fee Service
Within the Mobile Content Segment, Nihon Enterprise also focuses its efforts upon contents provision on an unlimited usage for fixed fees service targeting smartphones. Contents have been provided to au's "au Smart Pass" and Softbank Mobile's "Yahoo! Premium" services until now, but from May 16, 2013 provision to NTT Docomo's "Sugo Toku Contents" started. These services provide smartphone users with an economical way to access multiple contents through a fixed fee payment schedule that is similar to the safe and secure payment systems offered in contents provision services to feature phone users.
 
 
Nippon Open Market (Reverse Auction) Newly Established, Operational Solutions Fortified
On June 21, 2013, the "Nippon Open Market" reverse auction portal website (http://www.open-markets.jp) was officially opened. This website is the only portal website specializing in reverse auctions, and enables transactions with superior Japanese suppliers (merchants) to be conducted through the site by openly recruiting product suppliers.
 
 
"Nippon Open Market" allows companies, educational institutions, and other suppliers to browse the product supply conditions freely. At the same time, buyers can freely browse new suppliers and the rankings of companies supplying products. This ability enables transactions to be easily cultivated by new suppliers.
 
Buyers in the reverse auction (Profair) pay a usage fee, and suppliers using Nippon Open Market pay a monthly membership fee (¥3,000 per month). Nihon Enterprise expects to cultivate 8,000 suppliers in the near term. At the same time, efforts to cultivate superior users are being promoted and Kansai Electric Power Co., Ltd., Metropolitan Expressway Public Corporation, New Kansai International Airport Co., Ltd., Tohoku University, The Kitasato Institute, and other corporations and educational institutions have already adopted the system.

Moreover the "reverse auction" is designed to have numerous suppliers compete with each other within a limited amount of time to offer low prices. This system allows the four processes of "estimate requests," "estimate submission," "estimate assessment" and "price negotiations" to be eliminated, and maximizes cost reduction effect as suppliers provide their minimum pricing, thereby increasing the transparency and fairness of transactions. In most reverse auctions, the system operations are conducted by the auction operator in place of the product buyers but in Nihon Enterprise's system the operations are actually conducted by the buyers themselves, thereby eliminating system operational support service related costs (the optional service is offered for a fee for Nihon Enterprise to act on behalf of the buyer to maximize profits in the operation of the system.).
 
(2) Overseas Business
Overseas markets have already entered the era of smartphones. According to a survey performed by the United States research company IDC, China is expected to record the highest number of smartphone shipments at over 300 million, with the United States ranking second with 137 million, and the United Kingdom in third place with 35 million in 2013. In 2018, China is expected to see the largest number of smartphone shipments of 457 million, with the United States ranking second at 183 million and India third at 155 million. Nihon Enterprise is implementing efforts to lay the foundations for its businesses in both China and India, and digital comics and other publications distribution and cellular telephone retail sales businesses have already been launched in China.
 
Digital Comics
Nihon Enterprise's collaboration with writers and publishing companies to digitalize popular novels to become digital comics that can be distributed to cellular telephones in China is taking root. While digitalized comics were not popular in China because of quality issues, the digitalized version of the highly popular Chinese novel "JiuDingJi" became a hit (distributed to the leading mobile communications company in China, China Mobile.). Against this backdrop, Nihon Enterprise is conducting efforts to fortify and expand this business model and is preparing to launch two new titles (one of these two titles is expected to be launched this summer). In turning novels into digitalized comics, the most important factor is the "ability to reflect the writer's view of the world," which is a time-consuming process. The Company expects to expand its distribution service provision to two of the other three major mobile communications companies including China Telecom and China Unicom (Nihon Enterprise has an ICP license necessary to distribute contents to carriers in China).
 
Cellular Telephone Retailing Shops
Nihon Enterprise launched its cellular telephone retail shops in China through its local subsidiary Enterise (Beijing) Information Technology Co., Ltd. and its first two stores "Dongfang Road Shop" and "Huangjincheng Avenue Shop" were opened in Shanghai City in December (the existing store was refurbished and newly reopened) and April respectively. The opening of bricks and mortar stores in China represents a new endeavor for the Company, with a view to the shop affiliations business (contents sales) development through the formation of alliances with mobile communications companies over the intermediate to long term. Furthermore, the Chinese mobile communication carriers also have high expectations for Nihon Enterprise's shops to capture business through the provision of detailed sales knowhow (Japanese style service with full service and advanced Japanese designs) cultivated in Japan. Currently, the "Dongfang Road Shop" and the "Huangjincheng Avenue Shop" stores have achieved their monthly sales targets of 1,000 and 250 units per month, respectively, and preparations to open the third store on a scale to match "Dongfang Road Shop," which is supposed to be a large scale store, are being conducted.
 
4 Main Strategies for Business Expansion
①  Dongfang road shop (flagship shop) Target sale volume: 1,000 units/month

②  Huangjincheng avenue shop (new shop) Target sales volume: 250 units/month

③  Further expansion of existing shops

④  Expand sales at each store, take on the first shop affiliations in China
 
 
Fiscal Year May 2013 Earnings Results
 
 
Expansion of Mobile Content and Solutions Segments for Smartphones Allow Earnings to Grow for Third Consecutive Term
Traffic information, lifestyle information, digital publications, and other contents for smartphones acted as a driver of growth and sales of the Mobile Content Segment rose by 39.8% year-over-year. Along with the diffusion of smartphones, fortification of marketing functions, improvements in purchases, and efforts to improve continued utilization rates of contents sold allowed "shop affiliations" and other services in the Solutions Segment to grow and contributed to growth in sales of this segment of 58.3% year-over-year.

With regards to profits, the expansion of the advertising service in the Solutions Segment and the launch of cellular telephone sales shop operations in China contributed to a 10.2% year-over-year rise in cost of sales. Advertising expenses also rose from ¥209 in the previous term to ¥292 million in the current term and labor costs increased from ¥584 to ¥718 million over the same period due in part to M&A activities (ATIS Corporation, 4QUALIA Co., Ltd.), but higher sales absorbed these increased costs. Consequently operating income rose by 22.4% year-over-year to ¥372 million. The sale of listed company shares held by Nihon Enterprise allowed an extraordinary income of ¥352 million to be realized and net income to rise by 108.7% year-over-year to ¥354 million.
 
 
Seasonal factors and a temporary decline in booking of sales in the solutions business (development, creation, support, validation services) caused the sales of Solutions Segment to decline during the fourth quarter (March to May). However, strong sales of digital publications and overseas business allowed sales of Mobile Content Segment to grow. On a full year basis, changes in sales mix contributed to an increase in the cost of sales margin. However during the fourth quarter alone, strong sales of highly profitable contents services business and overall cost reductions allowed cost of sales margin to decline.
 
 
Mobile Content Segment
Sales and operating income rose by 39.8% and 25.8% year-over-year to ¥2.142 billion and ¥621 million respectively. While sales of games, mail, and music failed to absorb the decline in sales of contents to feature phones, the contribution from traffic and other information distributed through cellular telephone companies on alliance based monthly contents fee schedule allowed sales to smartphones of lifestyle information, digital publications, and other contents to rise (sales on a monthly fee schedule is expected to contribute to continued income from contents sales and to earnings from the next term onwards). Furthermore while sales of games, mail, music and other contents declined, sales to smartphones via unlimited use fixed fee payment schedules through au Smart Pass and Yahoo Premium services grew.
 
 
Solutions Segment
Sales rose by 58.3% year-over-year to ¥1.991 billion but operating income declined by 4.0% year-over-year to ¥304 million. Along with the diffusion in smartphones, successful efforts to fortify marketing capabilities (through alliances with cellular telephone sales companies), improve the ability to acquire contents (superior contents provider acquisition), and increase the continued utilization rates of contents sold (give an instruction to retail stores on sales methodologies) allowed advertising (shop affliations) sales to rise by 2.2 times year-over-year. At the same time, smartphone related development (website and smartphone applications developed for corporation) solution sales rose by 29.6% year-over-year. Another factor behind the higher sales was the contribution of sales from the two cellular telephone shops in Shanghai, China. In addition, the "reverse auction" was launched as a corporate cost reduction solution and the voice communication related solutions provider and One Inc. was turned into a consolidated subsidiary in March. However, the up-front investment for the launch of "reverse auction" and cellular telephone sales shops became a big burden and depressed the segment profit.
 
 
and One Inc. Turned Into a Consolidated Subsidiary
The company and One Inc. (Headquarters: Chiyoda Ward, Tokyo, President: Hisao Nakamura) was turned into a consolidated subsidiary on March 29, 2013, with Nihon Enterprise's acquisition of 70.0% of the total shares issued. and One Inc. has an IP-PBX software called "Primus," which it developed in-house based on the open source IP-BPX software "Asterisk," and develops other voice related software. "Primus" boasts of superior functionality, usability, flexibility and value. In addition, and One is one of the few companies within Japan that has development, implementation, and maintenance experience in Asterisk based IP-PBX software. Specifically, the company provides a wide range of services ranging from appliances (computers and terminals that specializing in specific functions) to cloud, and can respond to applications and SIP (standard protocol for communications used by IP telephones) linked to hardware.

Nihon Enterprise expects to leverage the communication technologies of and One to fortify lifestyle related contents and corporate solutions going forward. Moreover, IP-PBX is a technology that uses IP network (LAN lines) to replace normal telephone lines to create internal IP telephone networks, and "Primus" IP-PBX software is used to control personal computer telephone software and IP telephones using LAN networks. Technological validation of the ability to link directly into NTT fiber optic telephone lines without the need to connect through gateway equipment has been completed. In addition "Primus," IVR (automated voice recognition response) and call center functions have been packaged into a product to respond to the diversifying needs of IP-BPX users.
 
 
Total assets rose by ¥1.492 billion from the end of the previous term to ¥5.069 billion at the end of the current term. Free cash flow increased by a large margin due in part to increases in cash and equivalents and investments and others account due to the rise in prices of marketable securities that allowed total assets to rise. At the same time, the rise in net assets and marketable securities contributed to an increase in deferred tax liabilities. Consequently, the equity ratio stood at 75.3%.
 
 
In addition to the favorable earnings, a decline in tax expenses allowed the net cash inflow from operating activities to increase from ¥217 million in the previous term to ¥523 million in the current term. The liquidation of a portion of marketable securities also contributed to an increase in the net cash inflow from investing activities and allowed the net cash inflow of free cash flow to rise to ¥805 million. Dividend payments contributed to a net outflow of cash in financing activities, but cash and equivalents rose by ¥755 million from the end of the previous term to ¥2.271 billion at the end of the current term.
 
Fiscal Year May 2014 Earnings Estimates
 
 
Estimates Call for Sales, Ordinary Income to Rise by 20.9%, 27.7% Year-Over-Year
Sales are expected to rise by 20.9% year-over-year to ¥5.0 billion during fiscal year May 2014. Sales of contents through alliances, and the launch of unlimited usage of contents on a fixed fee basis via NTT Docomo are expected to contribute to a 17.9% year-over-year increase in the sales of Mobile Content Segment to ¥2.527 billion. At the same time, an increase in smartphone related development work, the launch of the monthly fee payment schedules for the reverse auction system, and favorable trends in advertising (sales of contents made by other companies through shop affiliations) are expected to boost sales of the Solutions Segment by 24.2% year-over-year to ¥2.473 billion.

With regards to profits, Nihon Enterprise is expected to continue its aggressive spending for advertising, but an improvement in gross income margins is expected to be derived from an improvement of sales mix with increases in sales of in-house contents based on a monthly fee schedule through alliances and monthly fees schedules for the reverse auction system. These factors are expected to complement the higher sales to allow operating income to rise by 39.7% year-over-year to ¥520 million. Dividends are expected to be raised by ¥20 to ¥200 per share (the dividend increase for two consecutive terms).
 
 
Conclusions
 
Nihon Enterprise boasts of various strengths including the ability to develop product (content creation capabilities), create unique businesses, conduct accurate M&A activities, and come up with effective responses to the shift from feature phones to smartphones. Despite the decline in sales of games, mail, and music to feature phones, sales of traffic information, lifestyle, digital publications, and other contents distributed to smartphones have been growing as reflected in the performance of the Mobile Content Segment in fiscal year May 2013. In addition, the ability to create unique businesses is reflected in the sale of contents through alliances formed with cellular telephone sales companies. Sales of contents is viewed as a stock type earnings with the outlook for strong contributions over the medium to long term, along with highly profitable in-house contents (requires the development of a profit sharing scheme with collaborating cellular telephone sales shops via a success fee based compensation schedule, which is difficult to imitate.). Moreover, the efforts of the three major mobile communications carriers to sell unlimited usage of contents for a fixed fee are contributing to effective use of existing contents and acting as a tailwind for Nihon Enterprise's business.

Investment Bridge Co., Ltd. expects that in light of the expansion in the smartphone business, it may be possible for Nihon Enterprise to surpass its record high profits recorded in fiscal May 2007 before long. At the same time, Nihon Enterprise's share price has been dragged down due to the general weakness in the market after having achieved its near-term high of ¥29,850 on May 14, and it is currently trading within the range of ¥17,000 and ¥20,500 after having dipped to a low of ¥13,400 on June 27. However the share price reached ¥30,000 when the company achieved its record high profits in fiscal year May 2007. Considering that the number of shares issued remains unchanged, it may be possible for the share price to reach the similar levels once again should the Company's earnings approach the record high levels.
 
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) 2013 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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