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
¥263 40,567,200 shares ¥10.669 billion 2.0% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥2.00 0.8% ¥2.59 101.5x ¥122.14 2.2x
* Share price as of close on July 20, 2017.
 
Consolidated Earnings Trends
Fiscal Year Sales   Operating Income Ordinary Income Net Income EPS (¥) DPS (¥)
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 4,838 192 229 99 2.45 2.00
May 2018 Est. 4,770 250 255 105 2.59 2.00
* 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).

This Bridge Report provides details of Nihon Enterprise Co., Ltd. and information pertaining to earnings results for the fiscal year May 2017.
 
Key Points
 
 
 
Company Overview
 
Nihon Enterprise is a "mobile solutions company" with two main business segments including the contents services business, where various contents including traffic information, entertainment and lifestyle services are created and distributed to smartphones and other mobile devices, and the solutions business, where contents creation, operations, systems creation, affiliate advertising, reverse auctions, IP phones and other business support solutions (Cost reduction) are provided. 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" in the long run, thus "enables to make effective use of capital and maximize it by not wasting a single yen" below its appropriate belief and action. In the first place, 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 development of culture.
 
Philosophy
Nihon Enterprise vows to achieve the five commitments listed below in its pursuit of improving employment conditions.
 
 
<Corporate Group: 10 Consolidated Subsidiaries, 2 Non-Consolidated Subsidiaries>
Nihon Enterprise is comprised of a total of ten consolidated subsidiaries with eight within Japan including the company Dive Co., Ltd., which provides advertising 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, One Inc., which provides voice communications related solutions, Yamaguchi Regenerative Energy Factory Co., Ltd., which participates in the "Smart Community" business, Aizu Laboratory, Inc., which conducts smartphone application planning and development, Promote Inc., which provides smartphone kitting support tools, and Inaseri Co., Ltd., which conducts planning, development and operations of the electronic commerce service called "Inaseri". 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. (Effective as of October 1, 2016, 4QUALIA Co., Ltd. absorbed At The LOUNGE Co., Ltd., and as of May 2, 2017 Nihon Enterprise Co., Ltd. absorbed HigLab Co., Ltd.).

The Nihon Enterprise Group also maintains two non-consolidated subsidiaries NE Yinrun Co., Ltd., which provides wholesale services in China andRise MC (Beijing) Digital Information Technology Co.,, which provides mobile contents distribution and character licensing services in China.
 
<Change in Reported Business Segments Effective from Fiscal Year May 2018>
Nihon Enterprise seeks to modify its Group business model to expand the breadth and range of is businesses and to adopt various developments within the information technology industry including the key themes of "IoT", "EC", "VR", "AR", "renewable energy", "HEMS", "robots", "drones" and others. In light of this changing environment, the Company has decided to change its reported business segments to be able to disclose more appropriate business information.

Effective from fiscal year May 2018, Nihon Enterprise will report the two business segments of "creation business" and "solutions business". The creation business will be responsible primarily for smartphone application services that had previously been included within the contents solution services business segment, escrow services (Fresh seafood electronic commerce site "Inaseri" service), corporate business support packaged services, in-house application advertising services, and previously included within the solutions business segment the audio and voice technology services, information licensing services, solar power generation, services leveraging in-house intellectual properties and assets, and new lifestyle and business services. At the same time, the solutions business will provide new value added services including information technology solutions development, advertising agency services including "storefront affiliate" services, and consigned system development and operational services.
 
Creation Business
The creation business will be divided between contents services, business support services and other services. Within contents services, the flea market service called "Flea-Ma jp" (Formerly called "Dealing"), " Women's Diary" health care service, "ATIS traffic information" service, comprehensive digital publications "Booksmart" service, game portal "Chokotto Game", and other services will be provided. Within business support services, fresh seafood electronic commerce "Inaseri" service, educational cloud "e Manabi-" service, information license "ATIS Traffic Information Service", car location management cloud "iGPS on NET", tourism cloud "Yubi Sashi Navigation", business messaging "BizTalk" service, internet provider telephone "A plosOne" service, chat engine "Fivetalk", internet voice and audio series "Primus", kitting tool "Certino", reverse auction "Profair" service and IoT block chain validation service will be provided. Within other services, operations of the Shizen Energy Group solar power generating facilities, and energy business of Yamaguchi Regenerative Energy Factory Co., Ltd. are included.
 
Solutions Business
The solutions business is divided between system development and operation services, storefront affiliate advertising agency service, and overseas business services. Application development, website creation, server design and creation, debugging, operational supervision, customer support, consulting and other services are conducted within the system development and operation services.
 
 
 
Fiscal Year May 2017 Earnings Results
 
 
Sales, Ordinary Income Fall 12.5%, 8.9% Year-On-Year
Sales fell by 12.5% year-on-year to ¥4.838 billion. Sales of both the contents service and solutions businesses fell. Sales of "monthly subscription carrier services" fell on the back of a decline in membership numbers arising from restraint in advertising, and sales of "fixed rate carrier services" declined in response to deterioration in pricing for unique users in the contents services. In the solutions business, sales of solutions (Aside from consigned development) reached a record high, but advertising (Advertising agency services) sales fell on the back of a contraction in the market, and cellular telephone sales in China also fell.

With regard to profits, lower overall sales and an increase in the sales composition of the solutions business contributed to a worsening in the cost of sales margin and caused gross income to decline by 15.5% year-on-year. While reductions in advertising and other sales, general and administrative expenses were achieved, booking of doubtful account reserves contributed to a 12.6% year-on-year fall in operating income. An increase in subsidy income and disappearance of foreign exchange translation loss (-¥328 million in FY5/16) allowed non-operating income to improve. However, the negative influence of extraordinary income caused net income attributable to the parent to fall by 69.6% year-on-year to ¥99 million. Moreover, extraordinary loss rose on the back of increases in asset retirement and impairment losses, loss on sales and evaluation of shares of affiliated company shares, and declines in profits on sale of investment securities
 
 
 
 
 
Booking of Doubtful Account Reserves Contributes to Operating Loss
Sales on a quarter-on-quarter basis rose during the fourth quarter (March to May), as higher sales of the solutions business offset a decline in contents service business sales. However, lower gross income resulting from an increase in cost of sales margin arising from a change in sales mix and higher sales, general and administrative expenses due to booking of ¥95 million in doubtful account reserves caused an operating loss to be incurred. On a year-on-year basis, sales of both the contents services and solutions businesses declined. However, lower sales of advertising and overseas related services within the solutions business contributed to an improvement in cost of sales margin.
 
 
Sales fell 18.4% year-on-year and 7.8% quarter-on-quarter. Termination of contents provided to au's Smartpass platform contributed to a gradual decline in sales. Therefore, Nihon Enterprise is accelerating its multiple platform strategy, in-house service development and other services to become new earnings drivers.
 
 
While sales fell by 24.0% on a year-on-year basis, solutions (Aside from consigned development) helped to drive sales on a quarter-on-quarter basis up 5.6%. Acquisition of projects and proposal based marketing to new clients for CRM, application development and other solutions (Aside from consigned development) progressed. At the same time, sales of advertising fell due to changes in business policies of major clients, and sales of cellular handsets in Shanghai fell due to a slowing in the China market within overseas services.
 
(3) Financial Conditions and Cash Flow
Total assets rose by ¥161 million from the end of the previous fiscal year to ¥6.178 billion at the end of the current fiscal year. Tangible noncurrent assets increased on the back of capital investments by the consolidated subsidiary Yamaguchi Regenerative Energy Factory Co., Ltd., which participates in the solar electric power generation "Smart Community" project. At the same time, booking of long term debt led to an increase in noncurrent liabilities. Capital adequacy ratio declined from 83.5% at the end of the previous term to 80.2% at the end of the current term.

With regard to cash flow, declines in working capital arising from lower sales of advertising and overseas services contributed to a ¥178 million increase in the net inflow of operating cash flow to ¥429 million. Redemption of long term deposits contributed to a contraction in the net outflow of investing cash flow and allowed a net inflow of free cash flow of ¥264 million to be secured (Compared with a net outflow of ¥271 million in the previous term).
 
 
Fiscal Year May 2018 Earnings Estimates
 
 
Estimates Call for Sales to Fall 1.4%, Ordinary Income to Rise 10.9%
Sales are expected to fall 1.4% year-on-year to ¥4.770 billion due to declines in advertising agency services resulting from a contraction in the market and lower sales of cellular telephones in China, and despite higher sales of consigned system development, operational services and other services within the solutions business. However, operating income is expected to rise by 30.2% year-on-year to ¥250 million on the back of declines in sales, general and administrative expenses derived from reversals of doubtful account reserves and despite a slight rise in cost of sales margin. However, ordinary income is expected to grow by a lower margin of 10.9% year-on-year due to a reduction in non-operating income. Consequently, net income attributable to the parent company is also expected to grow by a lower margin of 5.5% year-on-year to ¥105 million. Nihon Enterprise is expected to pay a yearend dividend of ¥2 per share.
 
(2) Fiscal Year May 2018 Business Strategy
Creation Business: Contents, Business Support, Other Services
In addition to efforts to increase customers, user numbers, and profitability, Nihon Enterprise is also endeavoring to strengthen the mutual cooperation between the various contents services including the flea market service "Flea-Ma.jp" (Formerly called "Dealing"), health care service "Women's Diary", traffic information service "ATIS Traffic Information", comprehensive digital publication service "BOOKSMART", and game portal "Chokotto Game". Moreover, efforts are being made to develop new contents.
 
 
In the business support service, the area of delivery for the fresh seafood electronic commerce "Inaseri" service has been expanded to include Tokyo and seven prefectures in February 2017, and a collaborative business arrangement was formed with the alcoholic beverage trading firm "Kawachiya" in June 2017. Also, collaboration with the Wholesale Cooperative of Tokyo Fish Market is expected to be strengthened to expand the number of products and distribution network. In addition, Nihon Enterprise is expected to provide customized versions of its educational cloud "e-MyNavi", information licensing "ATIS Traffic Information Service", car location management cloud "iGPS on NET" service, tourism cloud "Yubi Sashi Navigation" service, business messaging service "BizTalk", internet provider telephone service "AplosOne", chat engine "Fivetalk", internet provider voice service "Primus", kitting tool "Certino", reverse auction "Profair" and other in-house services for its various clients. Aside from these services, careful consideration will also be paid to the needs of local markets in the Company's solar power generation "Smart Community" project.
 
New Business Development Measures (Demonstration Experiment)
Nihon Enterprise is promoting demonstration experiments for its electric power transaction service using blockchain, wind power generation facility inspection systems using wired drones, and "mononome" visualization of emotions regarding IoT. A greater emphasis will be placed upon developing new businesses to discover various needs during these demonstration experiments rather than the early commercialization of these applications.

Demonstration experiments for "electric power transactions using blockchain" ("Renewable Energy Related Technologies Demonstration Research Project") with Eneres Co., Ltd. were started in Fukushima Prefecture in June 2017. Jointly conducted validation work has been started with Suzuyo Matai Co., Ltd. for wired drone technologies that enable prolonged flight during inspection of wind power generating systems from January 2017 and with a goal achieving commercialization from fiscal year 2018. Furthermore, Nihon Enterprise announced in February 2017 its "Kusuribako - Fukuyo (Drug box, ingestion) Support Version" and "Reizoko HEMS Coordinated Version" of "mononome" visualization of emotions for IoT.
 
Solutions Business: System Development, Operation Services, Advertising Agency Services, Other Services
Within its system development and operation services, Nihon Enterprise will implement efforts to acquire projects and cultivate new clients by leveraging the design capability strengths of its system integrators, who have bountiful knowhow in contents operations. The Company boasts of a strong track record in introduction of electronic commerce websites, flea market applications, carrier settlement systems, customer relationship management systems, quality assurance systems to clients in the distribution, retail, services, information technology industries and regional governments. Furthermore, the realm of its services is being expanded to sales development (cellular telephone shops commercial facilities) and media development (Store front digital media) based upon its core "Storefront Affiliate" advertising agency service. Sales of the industry's number one security software have also been started in the Tokyo and Osaka regions. Aside from these developments, collaboration with China Telecom for the sale of cellular telephones in China is being strengthened.
 
 
Conclusions
 
The facilitation of the business support services lineup including the fresh seafood electronic commerce "Inaseri" service, educational cloud "e-MyNavi", information license "ATIS Traffic Information Service", car location management cloud "iGPS on NET" service, tourism cloud "Yubi Sashi Navigation" service, business messaging "BizTalk" service, internet provider telephone "AplosOne" service, chat engine "Fivetalk", internet provider voice service "Primus", kitting tool "Certino", reverse auction "Profair", and others was completed in fiscal year May 2016. From fiscal year May 2017 onwards, plans had called for these services to begin contributing to earnings but their actual contribution has been delayed. Therefore, efforts to deploy the corporate client business support packaged services and other "in-house properties and asset provision services" are being accelerated from fiscal year May 2018.
 
 
<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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