BRIDGE REPORT
(4829)

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, First 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
¥274 40,563,200 shares ¥11.114 billion 6.4% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥3.00 1.1% ¥3.33 82.3x ¥121.86 2.2x
* Share price as of close on January 18, 2017.
 
Consolidated Earnings Trends
Fiscal Year Sales   Operating Income Ordinary Income Net Income EPS (¥) DPS (¥)
May 2013 4,134 372 391 354 941.63 180.00
May 2014 4,508 335 340 437 11.59 3.00
May 2015 5,116 189 204 177 4.57 3.00
May 2016 5,530 219 252 327 8.07 3.00
May 2017 Est. 5,300 330 350 135 3.33 3.00
* Estimates are those of the Company. Effective from fiscal year May 2016, the definition for net income has been changed to net income attributable to parent company shareholders (Abbreviated hereafter as parent net income).
* A 100 for 1 stock split was conducted on December 1, 2013.

This Bridge Report provides the first half of fiscal year May 2017 earnings results and earnings estimates for the fiscal year May 2017 of Nihon Enterprise Co., Ltd.
 
Key Points
 
 
 
Company Overview
 
Nihon Enterprise is a "mobile solutions company" with two main business segments including the Contents Service Segment, where various contents including traffic information, entertainment and lifestyle services are created and distributed to smartphones and other mobile devices, and the Solutions Segment, where contents creation, operations, systems creation, advertising(In-store affiliate), reverse auctions, IP phones and other business support solutions (Cost reduction) are provided. Furthermore, Nihon Enterprise is also promoting efforts to expand its contents business from Japan into overseas markets and has established a business platform for the provision of Japanese contents in China and India.

Nihon Enterprise listed its shares on the NASDAQ Japan Market (Currently called the JASDAQ Market) of the Osaka Securities Exchange on February 16, 2001. On July 10, 2007, it moved its listing to the Second Section Market of the Tokyo Stock Exchange, and then to the First Section Market on February 28, 2014.
 
<Corporate Philosophy>
Nihon Enterprise's employees are committed to maintaining the basic corporate philosophy by repeatedly learning from the philosophy reflected in its "Mission Statement, Doctrine, and Five Spirits" and "Nihon Enterprise Management Principles." President Katsunori Ueda believes that it is Nihon Enterprise's obligation to maximize "shareholder value" and "make effective use of capital by not wasting a single yen".

President Katsunori Ueda founded Nihon Enterprise with the strong motivation of "contributing to society through its businesses" and the Company pursues the achievement of this goal. Consequently, the Company seeks to contribute to society by increasing the satisfaction of its users through the provision of convenient information technology equipment and interesting and diverse contents and services.

Based upon the management philosophy of President Katsunori Ueda, the bulk of the ordinary income earned in the founding year of the Company was donated to the Japan Red Cross Society, the Japan National Council of Social Welfare and various children's institutions. Also, donations were made to the Japan Red Cross Society at the time of the Great East Japan Earthquake to support the victims and the reconstruction efforts in North Eastern Japan.
 
Mission Statement
Nihon Enterprise's main mission is to contribute to society through its activities as a merchant, and to contribute to the development of culture.
 
Philosophy
Nihon Enterprise vows to achieve the five commitments listed below in its pursuit of improving employment conditions.
 
 
<Overview of Business Segments>
The Contents Service Segment and the Solutions Segment accounted for 39.7% and 60.3% of total sales respectively in fiscal year May 2016.
 
 
 
 
 
<Corporate Group: 10 Consolidated Subsidiaries, 4 Non-Consolidated Subsidiaries>
The Nihon Enterprise Group is comprised of a total of ten consolidated subsidiaries with eight domestic companies including Dive Co., Ltd., which provides advertising business, ATIS CORPORATION, which provides traffic and other information services, 4QUALIA Co., Ltd., which provides web and mobile site development and maintenance services and contents development, HighLab Co., Ltd., which conducts native application development as part of the mobile contents business, and One Inc., which provides voice communications related solutions, Aizu Laboratory, Inc., which conducts smartphone application planning and development, Promote, Inc., which develops kitting support tools for smartphones, and Yamaguchi renewable energy factory Co.,Ltd., which conducts smart community business.
The two overseas subsidiaries include Enterprise (Beijing) Information Technology Co., Ltd., which oversees the operations in China and operates cellular telephone retail shops, and Rice CZ (Beijing) New media technology Co., Ltd., which provides IT related educational services in China. (4QUALIA Co., Ltd. merged At The LOUNGE Co., Ltd. on October 1, 2016.)

The Group also maintains four non-consolidated subsidiaries of which two operate domestically including NE Yin Run Co., Ltd., which provides wholesale services in China, and Inaseri Co., Ltd. which conducts planning, development and operation of an E-commerce service "Inaseri. In addition, two non-consolidated subsidiaries are operated in overseas markets including Rise MC (Beijing) Digital Information Technology Co., Ltd., which provides mobile contents distribution and character licensing services in China, and NE Mobile Services (India) Private Limited, which is a company operating in India.
 
 
 
First Half of Fiscal Year May 2017 Earnings Results
 
 
Sales Fall 2.1%, Operating Income Grow 279.7% Year-On-Year
Sales fell by 2.1% year-on-year to ¥2.494 billion during the current first half. Changes in carrier measures about "carrier fixed rate services" and a shift in advertising strategy for "monthly subscription services" (Shift from affiliate sales to direct sales) caused sales of the Contents Service Segment to decline by 17.7% year-on-year. However, favorable trends in solutions (Consigned development and others) and advertising (Ad agency services) contributed to a 10.8% year-on-year increase in Solutions Segment sales.
With regard to profits, changes in the sales composition contributed to a 4.7% point increase in cost of sales margins to 59.1%, but restraint in sales promotions for contents for carrier applications and a subsequent decline in advertising spending from ¥342 million in the previous first half to ¥134 million in the current first half contributed to a 23.6% year-on-year decline in sales, general and administrative expenses and allowed operating income ratio to improve by a large margin. Increases in non-operating income due to subsidy income and reduced booking of expenses allowed ordinary income to grow by 250.1% year-on-year to ¥185 million. Growth in net income attributable to shareholders of the parent company was withheld to 2.0% year-on-year due to increases in tax expenses and increases in profits owed to minority interests.
 
 
 
Bottoming in Earnings during Second Quarter (quarterly), both Sales and Operating Income Rose by both Year-On-Year and Quarter-on-Quarter terms.
Sales of solutions (Consigned development and others) reached a new quarterly record high during the second quarter, and sales of the Solutions Segment rose by both year-on-year and quarter-on-quarter terms. At the same time, favorable sales of the "Chokotto Game" and "BOOKSMART" E-Book allowed entertainment sales of the Contents Service Segment to grow.
With regards to profits, an increase in the sales composition of solutions contributed to increases in cost of sales margins relative to the same term in the previous year and to the previous quarter. However, reviews of the advertising strategy including cost reductions in the Contents Service Segment allowed operating income margin to rise above both the same term of the previous fiscal year and the previous quarter.
 
 
Both "carrier fixed rate services" and "monthly subscription services" continued to undergo a downward trend. However, favorable trends in"Chokotto Game" and E-Book "BOOKSMART" allowed entertainment sales to bottom out. At the same time, existing hit contents continued to contribute to profits while efforts were made to introduce new hit titles.
 
 
Strength in smartphone related applications and business system consigned development and operations allowed sales of solutions (Consigned development and others) to rise to a record high during the second quarter. At the same time, sales of advertising (Ad agency services) trended at high levels on the back of expansion in market share at cellular telephone sales shops and development of new clients (Second tier agent stores). While sales volumes of cellular telephones rose, a decline in sales pricing contributed to a decline in overseas sales on both year-on-year and quarter-on-quarter basis. In addition, Nihon Enterprise decided to withdraw from the India market in November 2016 because of profitability issues.
 
 
Total assets rose by ¥129 million from the end of the previous fiscal year to ¥6.146 billion at the end of the current first half. Tangible assets rose due to capital investments of the consolidated subsidiary Yamaguchi Regenerative Energy Factory Co., Ltd. for its smart community solar power generation business. Also, noncurrent liabilities rose due to the assumption of long term loans. Capital adequacy ratio declined to 80.4% at the end of the current first half from 83.5% at the end of the previous fiscal year.
 
 
An increase in net income before taxes and other adjustments and a decline in working capital allowed operating cash flow to turn from a net outflow in the previous first half of ¥159 million to a net inflow in the current first half of ¥152 million. The margin of net outflow of investing cash flow expanded due to the redemption of time deposits, but basically remained balanced with operating cash flow when the influence of this redemption is considered. The net outflow of financing cash flow is attributed to dividend payment.
 
 
Progress in Various Measures during Fiscal Year May 2017
 
Nihon Enterprise is implementing a strategy of "expanding the Contents Service Segment in line with the evolution of devices, and deploying the Solutions Segment based upon the strong knowhow in contents operations". During the first half of fiscal year May 2017, the Company achieved results of enhancing advertising efficiency and usage for its long selling hit contents "Chokotto Game" and "ATIS Traffic Information", and was able to achieve results in its platform strategy based upon main contents including "Woman's DIARY". In addition, distribution of a virtual reality horror game was started as part of efforts to develop virtual reality related applications. A new division called "Services Development Dept." was established in December 2016 with a goal of creating new hit contents. At the same time, the Company achieved results of sales expansion of applications and system consigned development and operations (For both corporate and government body clients) by taking advantage of expertise in the Contents Service Segment, and advertising (Ad agency services), and EC and IoT realm services are being developed and commercialized in the Solutions Segment.
 
<Contents Service Segment>
(1) Enhance Advertising Efficiency and Usage for Long Selling Contents "Chokotto Game", "ATIS traffic information"
Changes in carrier policies and new advertising regulations contributed to a downward trend in overall contents for carrier platforms (Both fixed rate and monthly subscription based). However, efforts to enhance advertising efficiency and usage for long selling hit contents including "Chokotto Game" and "ATIS traffic information" have led to reductions in advertising expenses. Consequently, "Chokotto Game" is trending strongly and new sales channels through "Michino Eki" and "Service Area" (rest areas along major roads and highways) are being developed for "ATIS Traffic Information".
 
(2) Platforms Leveraging "Woman's DIARY" and Other Major Contents Being Developed
Nihon Enterprise has strengthened its alliances and fortified its service to leverage its "Woman's DIARY", flea market application "Dealing", and messenger application "Fivetalk" within its lifestyle category of contents, comprehensive E-Book service "BOOKSMART" and casual game "Chokotto Game" within its entertainment category, and traffic information "ATIS".

In December 2016, "Woman's DIARY", which boasts of 3.40 million downloads, began offering a community service that allows members confronted by various issues including health, romance, child bearing and education to consult with each other in collaboration with "Oshiete! goo" of NTT Resonant Incorporated, which boasts of 1.20 million registered members. In addition, a monthly subscription service was launched in October 2016 and in-site advertising trended strongly due to synergies derived from cooperation with Excite Japan Co., Ltd. Moreover, various payment methods and security functions have been added to improve the safety and profitability of the flea market application "Dealing". In addition to Android, iOS and vehicle applications for the messaging application "Fivetalk" provision across "au Smartpass" was started in November 2016.

Rental and all-you-can-read services have been successfully launched beginning in June 2016 with collaboration with Shueisha Inc., as part of the comprehensive E-Book service "BOOKSMART". The lineup 1,500 titles focusing on girls comic including "Hana To Yume", "LaLa" and others have been created through an alliance with Hakusensha Co., Ltd. In addition to carrier platforms for Traffic Information Services, distribution across "iOS" (August 2016) and "Pepper Robo" (September 2016) applications have also begun, and its menu was fortified by combining with "leisure and parking lot information" contents. Moreover, "Futte Coupon" coupon application is being developed for renewed opening from this spring.
 
(3) Progress in Efforts to Release a Diverse Range of Contents such as Virtual Reality Game
Distribution of a virtual reality game entitled "Revised horror! Escape from the ruined Hospital:Mueito" across Google Play and App Store began from November 2016. This title is a 3-D virtual reality version of the horror escape game entitled "Horror! Escape from the ruined Hospital" created by zzyzx Inc. (Shibuya-ku, Tokyo, President Masahiro Yamashita). The virtual reality version of this game boasts of an intense sense of reality that multiplies the fear factor of the game unlike any others. Nihon Enterprise seeks to utilize the virtual reality technologies that it is accumulating not only in the Contents Service Segment but also in the Solutions Segment as well.
 
<Solutions Segment>
(1) Strengthen Applications and System Consigned Development and Operations (Corporate and Regional Government Clients)
Within the Contents Service Segment, Nihon Enterprise is cultivating new projects and clients to handle the consigned development & operation of applications/system such as quality control system for KDDI and smartphone applications for Denso. In addition, the IP phone service "AplosOne" and educational support "e Manabi" ( orders received from chain store companies for their staff's educational purpose) are being introduced as packaged solutions.
 
 
System development that utilizes expertise of the Contents Service Segment is also being promoted. Specifically, a bus locating system that leverages traffic information was introduced to Keihin Kyuko Bus, and a transportation logistics system that leverages traffic information is being developed for an another customer. Efforts are being made to acquire new customers in the field of cable television, terrestrial wave broadcasting, public entities, newspapers, shopping malls and others as information providers. Moreover, the messaging application "Fivetalk" is currently being validated for use as a conversation interface, linking "persons to goods" and "persons to cars" in the IoT and Connected Car related applications.
Also, the development and operation of applications & systems for local government to support the regional revitalization is steadily progressing, both in new and existing projects.
 
 
(2) Advertising (Ad Agency Services) Expansion
Success has been achieved in fortifying the contents lineup and cultivating new sales channels. With regards to contents lineup, provision of the number one rated security software has been started along with the traditional entertainment and information related contents. In addition, efforts are being made to acquire corporate customers operating in the food service industry (Traditionally, the bulk of clients have been cellular telephone sales shops) as part of the strategy to cultivate new sales channels.
 
Metropolitan Central Wholesale Market Cooperative Association's First E-Commerce Service "Inaseri"
Inaseri Co., Ltd. began operations (Pre-Open) on December 5, 2016. "Inaseri" is an E-commerce service that allows restaurant operators and other stores to make purchases of fresh fish and other marine products for daily delivery directly from fish and seafood wholesalers. It is the first time IT was introduced to the Metropolitan Central Wholesales Market Cooperative Association with over 600 wholesalers, to be utilized for fish/seafood distribution. "Inaseri", a 100% owned subsidiary of Nihon Enterprise, exclusively plans, develops and operates this E-commerce service.
While this service had been scheduled to start from the beginning of November 2016 along with the relocation of the Tsukiji Fish Market of the Metropolitan Central Wholesale Market Cooperative Association from Tsukiji to Toyosu in Tokyo, the service was launched ahead of the move due to continued delays in the move and uncertainties regarding when it would occur. The service was launched on a pre-open basis and limited to deliveries to restaurants within Kanto area (the 23 wards of central Tokyo, Tama area and Utsunomiya city) to ensure the quality of the service. However, this service is expected to gradually expand as the number of participating fish wholesaler increases.
 
 
 
Fiscal Year May 2017 Earnings Estimates
 
 
Full Year Estimates Remain Unchanged, Sales Expected to Fall 4.2%, Operating Income to Grow 50.2%
Sales are expected to decline by 4.2% year-on-year to ¥5.3 billion. While the Contents Service Segment is expected to see continued difficult operating conditions during the second half, the Solutions Segment is expected to continue to trend favorably. At the same time, special procurements from the previous term in sales of advertising (Ad agency services) has already been factored into the estimates. With regard to profits, improvements in profitability of the Solutions Segment arising from favorable trends in solutions (Consigned development and others) and reductions in sales, general and administrative expenses due to optimization of advertising spending is expected to allow operating income to grow by 50.2% year-on-year to ¥330 million. The estimate of a decline in net income attributable to shareholders of the parent company is attributed to the disappearance of extraordinary profits on the sale of investment securities booked during the previous fiscal year.

The same amount of dividend as the previous fiscal year of ¥3 per share is expected to be paid at the end of the year.
 
 
Conclusions
 
While Nihon Enterprise did not release the first half earnings estimates, its results during the first half appear to be trending in-line with its estimates as they represent 47.1%, 50.6%, 52.9% and 52.5% of the full year estimates for sales and operating, ordinary and parent net incomes respectively. The full year estimate of increases in profits appear to be premised upon the success in reducing advertising and other expenses, and the strong first half results suggest that there are only few uncertainties in the Company's ability to achieve its estimates. However, as the company cannot be dependent on cost reductions for a longtime, from the coming fiscal year onwards the key issue will be how successful Nihon Enterprise can be in achieving growth in sales. Therefore a close watch on the realization of their efforts will be important.
The E-commerce service "Inaseri" launched from December 5, 2016 was covered in a popular Television Tokyo program called "Gaia No Yoake" broadcast on December 20, 2016. In response to this television coverage, the number of inquiries regarding this service is rapidly increasing.
 
 
<Reference: Regarding Corporate Governance>
 
 
◎ Corporate Governance Report
Updated on Aug. 30, 2016
Basic Policy
The corporate group believes that, with respect to decision-making by the board of directors to attain its management goals, corporate governance means maximization of shareholder interests by monitoring legality by the audit and supervisory board, deterring unlawful business execution of the directors, and establishing an organizational system that realizes more expeditious company decision-making and clarifies management responsibility, while seeking to avoid or mitigate business risks.
 
<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>
Supplementary principle 4-11-3 Overview of analysis and evaluation of effectiveness of the board of directors
The company has not evaluated the effectiveness of the board of directors yet; however, it will consider making proper efforts to assess the effectiveness of the board as a whole.
 
<Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>
Principle 1-4 So-called strategically held shares
Considering the rationality of purposes of shareholdings such as the maintenance and expansion of business alliances and transactions with companies whose shares are held by the company based on trends in such companies, transaction situations, and conditions including market prices of such shares, the company holds listed shares for the purposes other than investment ones only when such shareholdings are deemed appropriate from the perspectives of necessity for the growth of the company and effectiveness of capital use. Furthermore, the company exercises its voting rights related to shares it owns after giving consideration to multiple matters such as whether a bill in question conforms to the shareholding policy of the company and whether improvement of corporate value of a company whose shares are held by the company can be expected.
 
Principle 1-7 Related party transactions
The company has observed a rule where, regarding transactions with related parties, deliberations and resolutions by the board of directors, including independent outside directors and outside auditors, on the need of such transactions and validity of transaction conditions are required, after defining directors who are involved in such transactions as special related persons and excluding them from such deliberations and resolutions.
In addition, the company discloses the policy on determination of transaction conditions and the like through notes to financial statements, securities reports, etc.
 
Notes to Financial Statements  URL:http://www.nihon-e.co.jp/ir/library/meeting.html
 
Principle 5-1 Policy on constructive dialogue with shareholders
The company has established the IR basic policy which is composed of "Basic attitude to IR activities and disclosure criteria," "Methods for disclosing information and information fairness," "Future outlook," and "IR quiet period" and publishes the policy through its website.
 
 
Currently, the company proactively takes the following action based on the above-mentioned IR basic policy from the perspective of constructive dialogue with its shareholders:

(1) The company encourages day-to-day cooperation among departments by designating the Executive Managing Director and general manager of the Administration Department as a person in charge of internal information management and having him govern departments involved in IR activities, including the Accounting Department, the General Affairs Department, the Human Resources and Public Relations Department.
(2) In the company, the person in charge of internal information management responsibly grasps and manages information on each department of the company and, based on accurate management decision, efforts are exerted to make organic cooperation and information are frequently shared with other departments related to IR activities, so that cooperation among departments can be enhanced.
(3) The division engaged in public relations and IR activities not only proactively responds to inquiries made from its shareholders and investors on the phone and through IR events such as small meetings, but also hosts financial results briefings for analysts where explanations are given by the president or the executive managing directors.
(4) The company reports to the board of directors on IR activities and feedback on such activities as well as situations of shareholder transfer at all times in order to share information with the directors and the auditors.
(5) The company pays attention to management of insider information, and therefore, in communicating with investors, it brings up topics concerning improvement of corporate value as the subject of discussion, using previously published information of the company.
 
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, All Rights Reserved by Investment Bridge Co., Ltd.
 
 
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