（7590） | Publish:Wed, Jun 07, 2017 IR「BRIDGE REPORT」

BRIDGE REPORT
（7590）

スタンダード

Takasho Corporation (7590)

President
Nobuo Takaoka

Company	Takasho Corporation
Code No.	7590
Exchange	JASDAQ
Industry	Retail (Commerce)
President	Nobuo Takaoka
HQ Address	Minami Akasaka 20-1, Kainan-shi, Wakayama-ken
Year-end	January 20
URL	http://takasho.co.jp/

Share Price	Share Outstanding (exc. Treasury Stock)		Market Cap.	ROE (Act.)	Trading Unit
¥416	12,278,452 shares		¥5.108 billion	2.1%	100 shares
DPS (Est.)	Dividend Yield (Est.)	EPS (Est.)	PER (Est.)	BPS (Act.)	PBR (Act.)
¥10.00	2.4%	¥21.99	18.9x	¥589.65	0.7x

* Stock price as of closing on 2017/4/3. Number of shares isuued at the end of the most recent quarter excluding treasury shares.

Fiscal Year	Sales	Operating Profit	Current Profit	Net Profit	EPS (¥)	DPS (¥)
January 2010	12,756	580	584	296	35.00	14.00
January 2011	13,019	687	657	339	40.34	14.00
January 2012	14,969	708	690	315	37.86	14.00
January 2013	16,751	881	956	422	43.80	15.00
January 2014	18,069	1,006	973	508	43.04	19.00
January 2015	18,484	603	679	323	26.31	17.00
January 2016	17,853	722	597	240	19.63	17.00
January 2017	17,223	503	322	152	12.39	6.00
January 2018 Est.	18,010	582	527	270	21.99	10.00

* Estimates are those of the Company.

We present this Bridge Report along with the earnings results for the fiscal year January 2017 and other information regarding Takasho Corporation.

Key Points

Company Overview

Takasho Corporation maintains a basic business concept of contributing to the "Creation of comfortable spaces" and manufactures and sells artificial and natural wooden fences, garden furniture, greenery materials, and other gardening related products and materials. Takasho also provides customers with solutions in LED and other lighting fixtures, ponds, waterfalls and water fountain related materials, and spot gardening. The Takasho Group manufactures products in Japan and China for sale in Japan, Europe, Asia, and Oceania. The Group's integrated structure with the ability to plan, manufacture and sell products has allowed it to become the leading company within the "gardening market," which is growing to become a firmly established market in Japan. As of the end of January 2017, the Takasho Group was comprised of 16 consolidated subsidiaries and 3 affiliated companies.

Takasho's marketing division can be divided into sales routes of "professional use" products used by home builders and midsized construction companies, "home use" products sold to home improvement centers on a wholesale basis for use by general consumers, "GARDENER'S," and "exports." Each of these routes accounted for 60%, 31%, 3%, and 6% of sales respectively in fiscal year January 2017.

"Professional use" products are products sold primarily through Takasho's "PROEX" catalog, which is the industry's largest catalog with approximately 250,000 copies printed and distributed by direct mail to gardening and landscaping companies, architects and designers, construction companies specializing in exterior construction, commercial facilities and other users. Pictures of actual gardens using Takasho's products are included in the catalogs, and customers can fill in diagrams provided within the catalogs to order products they want to use in actual landscapes and facilities they are creating. Customers send these diagrams by fax or email to Takasho. In turn, Takasho will then create image diagrams using CAD and CG technologies to be returned to customers along with estimates within the same day to show what the gardens and landscapes they are creating look like using Takasho products and how much they will cost. The Company also boasts of the ability to supply ordered products in a very short period of time.

Business Strategy

Takasho's basic business concept is to contribute to the "creation of comforting spaces." The Company is expanding its business realm as a lifestyle maker that provides various solutions responding to a wide range of gardening needs. Takasho has always forecast changes to come in the future to accurately create new value addition that matches the market's needs and pursued the goal of becoming the "only global company" contributing broadly to gardening culture in urban environments. Takasho's vision is to "create happy family lifestyles and healthy environments that put smiles on the people that live within them".

The Company has established long term targets for sales and operating profit of ¥50.0 and ¥5.0 billion to be achieved in fiscal year January 2025 and is implementing a vertically integrated business expansion which ranges from planning to customer services. At the same time, Takasho has identified four key areas within its business strategy to be achieved, including vertically integrated business expansion ranging from planning to customer services, global business deployment that leverages manufacturing facilities in China and a worldwide sales network, total business solutions where collaboration with house builders and development of non-house application use siding and building materials is conducted, and modernization business where LED illumination, solar lighting, and low voltage lighting is sold. Business segments are divided into the professional use, home use, and global businesses.

Takasho imports products with high cultural value from overseas markets, while at the same time manufacturing products including wood products, solar lighting, wire products and others at its plant in Jiangxi, China to be exported to various parts of the world. Products for the United Kingdom gardening market, which is estimated to amount to ¥4 trillion and compares with the Japanese market at only ¥600.0 billion, are exported from Japan. Efforts will be made to fortify sales within the United States market along with the establishment of "VegTrug USA" on February 3, 2015, which has been fully funded by the United Kingdom sales subsidiary (VegTrug).

In addition to these regions, the Company also conducts business in Germany, Australia, and Korea. In order to pursue its worldwide business expansion, Takasho needs to establish sales subsidiaries in large markets like the United Kingdom. As part of new business development, a showroom was established in Vietnam in May 2016.

Takasho focuses upon exterior (New construction exterior siding), gardening (Garden lifestyle solutions), and contracting (Non-residential building materials, exterior siding) products. It develops highly unique products based upon the unique concept that "gardens are a paradise that exists in harmony with homes they surround."

In its collaborative endeavors with house builders, Takasho's "Ever Art Wood" has come to be highly regarded and the number of its products listed in major manufacturers' exterior and gardening catalogs is increasing. In addition, the "5th ROOM" concept (Proposal of the garden to play the role as the fifth room in homes in addition to living rooms, dining rooms and bedrooms) and "Smart Living Gardens" concept (To be described later) are also growing in popularity.

The contract (Non-residential building materials and exterior siding) realm focuses upon the landscape construction materials business. Takasho is also expected to implement efforts to fortify its "Ever Art Wood" and "Ever Bamboo" product lineup ("Ever Art Wood" has received certification from the Ministry of Land, Infrastructure, Transportation and Tourism as a fire proof material, and can be used in both exterior and interior applications). The Company provides total packages comprised of extensive product combinations that appropriately match various garden environments for exteriors and interiors of various facilities, and it boasts of experiences in delivering a multitude of packages across the country.

As a group of professionals in the realm of gardens, the "Reform Gardening Club" seeks to increase communication between distributors and construction services providers. Furthermore, the "Exterior and Gardening Meister System" and "Water Garden Meister System" certification systems were established in February 2010, and "Exterior and Garden Meister System" was also established in May 2014 with the goal of rejuvenating the industry. Visitors to Takasho's Garden and Exterior Fair held in July 2016 rose by 5% from previous year to 3,716 people. The Company has also actively supports its network of construction companies. The number of the Takasho Reform Garden Club member companies is approximately 700. The Company also held over 200 networking and regional training events throughout Japan based upon their corporate theme of "learn together, grow together".

In addition, Takasho will continue to conduct activities to educate the market. Showrooms were newly constructed in Hiroshima and the Tokyo metropolitan region in June 2014 and September 2015 respectively. The Tokyo showroom has been opened with the goal of improving services and strengthening sales in the Kanto region market, where its growth is anticipated, by enabling customers to see and feel the colors and texture qualities of various products. Also, the new Tokyo sample room has been established to allow customers to see and experience any kinds of materials and collaborative products, and various designs, layouts and constructions in a relatively intensive space. The sample room in Osaka moved for opening to Mino City in Osaka in April 1.

Takasho has updated its website to make it easier for customers to use and see. The online construction materials catalog platform called "Catalabo" function has also been included in the updated website.

As part of the "Smart Living Garden" concept, Takasho is promoting development and sales of LED illumination, solar lighting, low voltage lighting and other products using natural energy and energy saving technologies to propose energy conserving themes in the garden. Takasho also proposes garden creation through the "Smart Living Garden" concept, which was born from the "Smart House" concept and fuses the GEMS energy management system starting in gardens, to realize "energy conserving", "energy creation", and "energy storage" in both the home and gardens. Moreover, 100% use of LED for outdoor lighting was achieved in October last year. Furthermore, the awarding of "Takasho Low Voltage Light System" with the "Best Selection Award" in the fourth award event hosted by the HEAD (Study Group on Home Environment and Advanced Design) contributed to an increase in consumer awareness of these products.

Japan's first authentic garden center called "GARDENER'S JAPAN" was opened adjacent to the Takasho headquarter in April 2012. Half of the "GARDENER'S JAPAN" facility is surrounded by greenery, and it boasts of open gardens that allow customers to thoroughly enjoy their visit to the facilities. Takasho is expected to strengthen the connection between the mail order site "Aoyama Garden"
(http://www.aoyama-g.co.jp/)

Takasho has used funds raised from financings undertaken in 2012 and 2013 to fortify its global manufacturing structure. Thanks to these investments, the Company is now better able to respond to future increases in demand.

Fiscal Year January 2017 Earnings Results

Sales, Current Profit Decline 3.5%, 46.0% Year-On-Year Respectively

Sales declined by 3.5% year-on-year to ¥17.223 billion during fiscal year January 2017. Sales of the professional use segment individually rose by 2.4% year-on-year to ¥9.087 billion. In fiscal year 2015, sales of "Ever Art Wood" artificial wood made from aluminum and other art exterior series of products and "Ever Art Wood" used in garden exterior applications trended strongly on the back of a 4.6% year-on-year rise in new housing starts. Sales of Art Board Wood used as exterior entry products (Car port, fence and other applications) rose by 8% year-on-year to ¥3.512 billion. Furthermore, reproduction of various natural products such as wood, stones, painted stone walls, and Japanese type natural products used in dry method applications including "Ever Art Board" and related product sales also trended favorably. In addition, distribution of "Light", lightning equipments which produce night garden including low voltage (12 and 24 volt) LED lighting products trended favorably due to the increased recognition received from the "Exterior and Gardening Meister System". Sales of garden lighting and garden furniture related new products rose by 29% year-on-year to ¥641 million. However, strengthened artificial bamboo and other Japanese type products suffered a decline due to the change of market such as a decline in Japanese style construction and despite revised pricing for some products in an effort to strengthen sales.

Sales of the home use segment individually declined by 10.9% year-on-year to ¥4.771 billion. Sales of deck related products rose due to the introduction of new products, but inventory adjustments by mass retail stores led to declines in sales of wooden products. Additional orders declined due to inventory adjustments conducted throughout the full year by home centers. Furthermore, foreign exchange fluctuations and inclement weather also contributed to weaker sales. Sun shade sales rose strongly by 3.4%. The strengthening of the yen relative to various currencies contributed to a ¥100 million decline in sales.

With regard to overseas expansion, Takasho has focused upon fortifying its global standard product lineup, and its branding and delivery structures with a goal of expanding sales. Consequently, the Company has been able to cultivate new business and sales withlarge home centers and new online sales. However, the influence of inclement weather in Europe and elimination of unprofitable business transactions led to a decline in sales and caused the share of overseas sales to fall from 10.7% to 9.0%.

With regard to profits, a deterioration in foreign exchange rate for a foreign-currency sales led to a ¥120 million decline in gross profits of home use segment, but the gross profit margin actually improved by 0.4% points. The lower sales and subsequent increase in sales, general and administrative expense margin led to a 30.4% year-on-year decline in operating profit to ¥503 million. A valuation loss arising from foreign exchange fluctuation with valuation of ¥205 million (Influence of foreign denominated liabilities, cash and deposits amounted to ¥164 and ¥3 million respectively, and other transactions between consolidated subsidiaries amounted to rate differences with ¥38 million) within non-operating income and caused current profit to fall by 46.0% year-on-year to ¥322 million. Net profit attributable to shareholders of parent company also declined by 36.9% year-on-year to ¥152 million.

Business of subsidiaries within Japan trended favorably. Garden Create and Garden Create Kanto benefitted from favorable trends in Ever Art Wood related products, and from declines in aluminum raw materials pricing, which combined to boost gross profit margin by 2.7% points. Gross profit margin improved by 6.7% points due to increases in sales of Takasho Digitec's professional use lighting division of 2% year-on-year, and in the contract business of 12% year-on-year. The dissolution of the subsidiary Japan Integrate and elimination of unprofitable businesses allowed the parent company to leverage its operating resources and improve efficiency.

Overseas subsidiaries are seeing favorable exports and sales of Jiangxi Takasho, Jiujiang Takashoand capital investments has enabled manufacture of new products to start. VegTrug USA has started transactions with large home centers and subsequently sales have tripled. VegTrug UK is also seeing favorable trends within the United Kingdom. Takasho Europe saw a decline in sales due to the elimination of unprofitable business transactions, but its focus upon fixing profitable business allowed gross profit margin to improve by 8.4% points year-on-year, and efforts to reduce expenses have allowed the margin of loss to be reduced. Moreover, Takasho Europe is implementing efforts to strengthen its sales subsidiary which became 100% owned in August 2016.

Total assets rose by ¥715 million from the end of the previous fiscal year to ¥17.470 billion at the end of fiscal year January 2017. Current assets fell by ¥158 million to ¥11.089 billion over the same period. Despite a decline in sales, inventories rose to ¥4.394 billion, and notes and accounts receivables fell by ¥622 million to ¥2.651 billion. Noncurrent assets rose by ¥873 million to ¥6.381 billion. Plant, property and equipment and structures rose by ¥421 million to ¥3.105 billion due to the construction and acquisition of new plants and facilities by subsidiaries in both Japan and overseas. Total liabilities rose by ¥839 million to ¥10.149 billion.

Current liabilities also rose by ¥910 million to ¥9.253 billion. While notes and accounts payables declined by ¥360 million to ¥3.065 billion due to a decrease in procurements, short term debt rose by ¥1.525 billion to ¥4.272 billion due to a switch from long term to short term debt arising from the use of commitment line to source funds for working capital. Noncurrent liabilities fell by ¥71 to ¥895 million. Acquisition of structures led to an increase in asset retirement obligations of ¥44 to ¥148 million. At the same time, long term debt declined by ¥88 to ¥665 million due to the shift from long to short term debt for use as working capital. Net assets declined by ¥124 million to ¥7.321 billion. Other comprehensive income fell by ¥57 to ¥417 million. Capital adequacy ratio fell by 2.5% points to 41.4%.

Cash and equivalents fell by ¥6 million from the previous term to ¥2.129 billion during fiscal year January 2017. The net inflow of operating cash flow declined by ¥1.543 billion from the previous term to ¥179 million in the current term due to lower sales and subsequent increase in inventory assetsof ¥1 million, decline in purchase debtsof ¥316 million and other factors. The net outflow of investing cash flow declined by ¥286 million to ¥1.117 billion due to mainly in part to acquisition expenditure of tangible fixed assets of ¥613 million. Consequently, free cash flow turned from a net inflow of ¥319 million of the previous term to a net outflow of ¥937 million. Financing cash flow went from a net outflow in the previous term of ¥571 million to a net inflow of ¥910 million in the current term due to mainly in part to ¥960 million repayment of long term debt, and net revenue of ¥1.534 billion assumption of short term debt.

Fiscal Year January 2018 Earnings Estimates

Sales, Current Profits Expected to Rise 4.6%, 63.5%

Takasho's consolidated earnings estimates for fiscal year January 2018 call for sales and current profit to rise by 4.6% and 63.5% year-on-year to ¥18.010 billion and ¥527 million respectively. Within Japan, facilitation of showrooms, strengthened sales activities, and expansion of manufacturing capacity are expected to allow sales of the gardening and exterior products to grow. In the global business expansion, Takasho will conduct measures to strengthen its manufacturing function in China and its marketing activities for Europe, Oceania, and North America.

The following measures to grow sales and improve profits will be implemented.

Sales Measures

① Full operating sales force to implement more vigorous client relationship management

Increase successful order acquisition rate by 4 points

② Increase customer foot traffic by showroom expansion Newly add Osaka showroom following after Tokyo metropolitan new showroom and start full operation on new showrooms in other 5 citiesFull scale entry to housing industry (EX Package)

Full scale entry to international market

Profitability Improvement Measures

③ Reduce cost of sales by introducing mechanization to raise productivity

Newly launched facilities at subsidiaries begin full scale operation from this term add lead to 2 to 3 point improvement

④ Reduce foreign currency fluctuation risk

Recover foreign currency denominated loans extended, introduce fluidization of foreign currency denominated credit, transfer sales channels (To overseas sales companies)

⑤ Reduce costs with review on sales, general and administrative expenses

Reduce labor expense, review consulting fees other fixed costs, aggregate offices to reduce costs by 2% this term

Takasho plans to pay a year-end dividend payment of ¥10 per share.

Future Remarkable Points

While earnings of the term just ended were largely influenced by foreign exchange, the weakening of the yen during the second half allowed for a strongrecovery. Moreover, Takasho has identified and will implement measures to reduce the risk of foreign exchange fluctuations .in order to reduce its influence upon future earnings. Aggressive funds secured through financings conducted in 2012 and 2013 were used for capital investments both in Japan and overseas, and the Company has now entered a recovery phase where investments are expected to begin being recovered. Furthermore, the global measures to improve profitability could lead to large growth in profits, with Takasho anticipating a strong "V" shaped recovery during the coming term onwards. The price to book ratio remains at a low level of well below one time. Therefore, the potential for the market to reevaluate Takasho's share price given the large potential for improvement in profits is large.

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.

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