BRIDGE REPORT
SHOEI Co., Ltd. (7839)
Masaru Yamada Chairman
Masaru Yamada
Chairman
Hironori Yasukochi President
Hironori Yasukochi
President
 
Corporate Profile
Company
SHOEI Co., Ltd.
Code No.
7839
Exchange
Second Section, TSE
Chairman
Masaru Yamada
President
Hironori Yasukochi
Headquarters
Ueno 5-8-5, Taito-ku, Tokyo
Business Description
Manufacture and sale of premium helmets, with high ratio of overseas sales in Europe and other overseas markets.
Year End
September
Website
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥1,994 13,771,990 shares ¥27.461 billion 20.3% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥60.00 3.0% ¥121.26 16.4x ¥648.65 3.1x
* Share price as of close on December 12, 2014. Number of shares outstanding at end of the most recent quarter excluding treasury shares.
 
Consolidated Earnings Trends
Fiscal Year Sales Operating Income Ordinary Income Net Income EPS(¥) DPS(¥)
September 2011 9,047 395 371 217 15.80 8.00
September 2012 8,606 97 143 65 4.78 2.00
September 2013 11,158 1,340 1,299 799 58.04 29.00
September 2014 13,406 2,765 2,646 1,669 121.20 60.00
September 2015 Est. 13,680 2,550 2,550 1,670 121.26 60.00
* Estimates are those of the Company.
This Bridge Report discusses the fiscal year September 2014 earnings results and fiscal year September 2015 earnings estimates for SHOEI Co., Ltd.
 
Key Points
 
 
Company Overview
 
SHOEI is the world's number one helmet manufacturer. While motorcycle use helmets are its primary product, the Company also manufactures aircraft and military use helmets supplied to private industry and the government. At the same time, SHOEI boasts of an extensive sales network not only within Japan, but also in about 60 countries throughout various regions around the world including Europe and North America. The "SHOEI" brand is recognized around the world for its high levels of safety and functionality, beautiful appearance, and it is now synonymous with the term premium grade helmets. Original technology, know-how and superior design are key strengths of SHOEI. Furthermore, SHOEI endeavors to raise the satisfaction levels of its customers, shareholders and staff through the implementation of a comprehensive three pronged strategy that covers "product strategy," "manufacturing strategy" and "market strategy."
 
Management Policy:    Achieve World's Top Levels in Three Realms
"World's Top Product Quality":   Global brand that is made in Japan
"World's Top Competitiveness in Cost"    World's only helmet maker to utilize the Toyota Production System for cost management
"World's Top Delightful Company"   Achieve highest levels of satisfaction of customers, shareholders and employees
 
<Business Description>
Motorcycle use helmets account for about 90% of total sales. SHOEI focuses upon high value added "premium helmets" that are manufactured at its two plants in Ibaraki (Inashiki City) and Iwate (Ichinoseki City) Prefectures in Japan. The Company is able to maintain high quality levels and prevent the leakage of its technology by maintaining manufacturing facilities within Japan. In addition, SHOEI is the only helmet company in the world utilizing the "Toyota Production System" to achieve high levels of profitability, inventory turnover and asset efficiency.
 
<Overseas Sales Account for 75% of Total mainly in Europe>
By geographic region, sales in fiscal year September 2014 were divided between Japan, Europe, North America and others, accounting for 25%, 48%, 19%, and 8% respectively. Sales in Europe are conducted by 3 subsidiaries operated in Germany, France, and Italy and local a network of sales agents. Sales in North America and other regions are conducted through sales agents. Currencies used for settlement are yen based in Europe, including sales to subsidiaries, dollar base in North America, and yen based in others regions.
SD (German Subsidiary) Sales Area (FY9/14, Denmark became direct sales region)
SED (French Subsidiary) Sales Area
SI (Italian Subsidiary) Sales Area
(As of September 2014, Source: SHOEI)
 
<Corporate History>
SHOEI was established as polyester processing manufacturer in 1954. In March 1959, Shoei Kako Co., Ltd. was established as a corporation and the Company used its polyester processing technologies to enter the helmet market. In the following year of January 1960, production of helmets for motorcycle riders was started, and in July 1968 a subsidiary was established in the United States. In July 1987, entry to the French market was launched along with the establishment of a local subsidiary. However, the bursting of the economic bubble within Japan forced SHOEI to file for corporate reorganization in May 1992. In September 1992, the current Chairman Masaru Yamada, who was working at Mitsubishi Corporation, took on the task of administrator of the corporate reorganization. The reorganization plan was approved in Decmber 1993. During the reorganization process, SHOEI also entered the German market with the establishment of a German subsidiary in March 1994 made possible by the successful reorganization efforts. The reorganization efforts were successfully completed in a relatively short period of time of four years and three months in March 1998 and along with the completion of the reorganization, the Company name was changed to SHOEI Co., Ltd. in December 1998. In July 2004, SHOEI listed its shares on the JASDAQ Market, and then moved its listing to the Second Section of the Tokyo Stock Exchange in September 2007 (JASDAQ listing was eliminated at the same time). Currently, SHOEI has become recognized globally as one of the top manufacturers of premium helmets.
 
 
<Maintaining Basic Policy for Medium and Long Term Stable Growth and Stable Profit>
(1) Protect Own Company by Ourselves
(2) Made in Japan and maintaining constant employment (Transmission of Manufacturing)
(3) Maintain healthy financial positions
(4) Continuation of Investments (Development of new products, Cost saving, Improvemnet of quality, Firm safety)
(5) Targeting #1 in All Premium Helmet Markets in the World
(6) Development of New Markets and Deepening of Existing Markets
(7) Fair distribution of retained earnings (50% dividend of profit after tax, distribution to employees and distribution to company (proper retained earnings kept)
 
 
According to the "Earnings Data Review" taken from the Tokyo Stock Exchange Homepage, the average ROE for companies listed on the Tokyo Stock Exchange First and Second Sections, and Mothers Market excluding financial companies was 8.65% during fiscal year March 2014 (4.99% in the previous term), 8.55% for manufacturing companies (4.53% in the previous term) and 8.79% for non-manufacturing companies (5.67% in the previous term). Despite the six month time difference because of SHOEI's year end in September, its ROE exceeded that of the overall averages for the market by large margins. SHOEI's levels of leverage are low due to its strong financial foundations, and profitability is improving rapidly based upon the high margin of profitability of its high value added premium helmets. The strong sales growth and weaker yen in fiscal year September 2014 allowed net income margin to improve by a large margin. Furthermore, total asset turnover remained high relative to other manufacturing companies.
 
<New Product in 2014 - NXR (Europe)/RF-1200 (North America) / Z-7 (Japan) ->
During the past three years to 2013, SHOEI introduced new products including "GT-Air," "J-Cruise," and "NEOTEC"(they are all Japanese name), which have visors for touring use applications, to respond to the various needs of riders from sports riding to touring applications. Responding to requests from sports bike riding fans, lightweight, compact and sporty full-face helmet "NXR/RF-1200/Z-7" was introduced in 2014.
 
Europe(Product name:NXR)
Sales Launch  : March 2014(Shipping January 2014)
Suggested retail price (Germany, France)  : EUR429.00~529.00(including tax)
North America(Product name:RF-1200)
Sales Launch  : October 2013(Shipping August 2013)
Suggested retail price  : US$485.99~589.99(excluding tax)
Japan (Product name:Z-7)
Sales Launch  : April 2014(Shipping April 2014)
Suggested retail price  : ¥45,000~53,000(excluding tax)
(Source: SHOEI)
 
"NXR" was widely recognized for its lightweight, compactness, superior fit, EQRS (Emergency Quick Release System: unique development of emergency removable system,) super wide-view shield, high anti-fog properties, and quietness, and it was chosen for the "2014 MCN Special Award" of the British bike magazine "Motor Cycle News (MCN)". Also, the American motorcycle industry newspaper "Power Sorts Business" chose "NXR" as one of the "NIFTY50" (Top 50 products that make a contribution to retail sales.). Not only were sales strong in Japan, but "NXR" received high recognition in Europe and North America as well.
 
<New Products in Introduced in 2015 - HORNET ADV (Europe, Japan) /
  HORNET X2 (North America,) J-Force IV (Japan)>
HORNET ADV (Europe, Japan) / HORNET X2 (North America)
HORNET is a premium sports utility helmet that pursues safety and comfort and is designed with adventure biking needs in mind.
 
Europe(HORNET ADV)
Sales launch schedule  :March 2015(Shipping in January 2015)
Suggested retail price(Germany, France)  :EUR519.00~619.00(including tax)
North America(HORNET X2)
Sales launch schedule  :March 2015(Shipping in January 2015)
Suggested retail price  :US$594.99~715.99(excluding tax)
Japan(HORNET ADV)
Sales launch schedule  :Spring 2015
Suggested retail price  :TBA
(Source: SHOEI)
 
J-Force IV (Japan)
"J-Force IV" represents a comprehensive evolution of the J-Force III product and is the newest addition to this lineup of premium open face "J-Force" helmets. It offers improvements from the base concept of "lightweight, compact and effective ventilation," having PINLOCK® EVO lens ensures clear vision and pursues sporty form and anti-fog capability to enhance driving safety.
 
Japan(J-Force IV)
Sales launch schedule  :January 2015
(scheduled shipment)  :January 2015
Suggested retail price  :¥45,000(excluding tax)

(Source: SHOEI)
 
 
Fiscal Year September 2014 Earnings Results
 
 
Premium Helmets Sales Volume Rose in All Regions Excluding North America, Market Share Also Rose
The premium helmet market (High quality and value addition motorcycle use helmets) is closely linked to motorcycle sales. Motorcycle sales within Japan have continued to increase during the past three consecutive terms, and a recovery from previously stagnant European market has also been noted. The markets in the United States and Canada appear to have bottomed. Amidst these trends, SHOEI's existing top selling models "GT-Air," "J-Cruise," and "NEOTEC" recorded strong sales, and new products introduced during the current term including "Z-7" (Also called "NXR" and "RF-1200" in overseas markets) has been well received and sales volumes increased in both Japan and overseas. SHOEI's share of the premium helmets market increased.

Consequently, sales rose by 20.1% year-over-year to ¥13.406 billion. Higher capacity utilization rates arising from increases in production volumes and the effect of the weaker yen contributed (deduction in ordinary income base ¥429 million leverage effect) to a 7.0% point improvement in cost of sales ratio to 59.6% and a 45.4% year-over-year increase in gross income. Operating income also rose by 106.3% year-over-year to ¥2.765 billion due to the ability to absorb increases in sales, general and administrative expenses. While non-operating expenses increased due a rise in foreign exchange translation loss on reservations (Rose from ¥35 million to ¥117 million), net income rose by 108.8% year-over-year to ¥1.669 billion due to decreases in tax rates. During the term, the average foreign exchange rates were ¥102.96 to US dollar (¥8.43 weakening) and ¥139.34 to euro (¥17.12 weakening).
 
 
Sales within Japan rose by 16.2% year-over-year to ¥3.387 billion due to ad hoc demand to purchase ahead of the hike in the consumption tax and increases in sales volumes of new products including "Z-7", which were launched during the spring biking season. Sales within Europe also rose by 26.9% year-over-year to ¥6.391 billion due to an increase in sales volumes of affiliated companies in Germany, France and Italy, and also higher sales of agents in the United Kingdom and Spain. In North America, sales rose by 6.7% year-over-year to ¥2.568 billion due in part to the positive influence of the weaker yen, which helped to offset slight declines in sales volumes. Sales volumes in other regions, including Australia also rose, allowing sales value to rise by 32.7% year-over-year to ¥1.059 billion.
 
 
Cash and deposits increased due to SHOEI's securing of ¥2.2 billion of free cash flow, and total assets rose by ¥2.071 billion from the end of the previous fiscal year to ¥11.478 billion at the end of the current term. Declining accounts receivables despite higher sales is attributed to declines in receivables to European subsidiaries. In Europe, the number of clients taking advantage of the system of discounts on products purchased within a set amount of time made possible by low interest rates rose. Inventories rose due to a strong and healthy increase in work-in-progress for next term while finished product inventories decreased.

Cash and deposits accounted for about 54% of total assets. The current ratio, which is identified as "short-term solvency safety line" of 100%, stood at 501%, and noncurrent ratio, which is identified as "safe at levels for a long term below 100%", stood at 19.2%. Rate of return on invested capital, indicating how efficiently capital is used to generate profits, increased to 30.4% in the current term from 17.1% in the previous term. Equity ratio stood at 77.8%.
 
 
Improvements arising from an increase in profits and capital efficiency (Reduction of subsidiary receivables) contributed to a large increase in the net inflow of operating cash flow. While the margin of cash outflow of investing activities increased due to the start of the second round of large capital investments, free cash flow rose to ¥2.193 billion from ¥1.074 billion in the previous term. The net cash outflow in financing activities increased due to a hike in dividend payments by ¥2 to ¥29 per share.
 
 
Fiscal Year September 2015 Earnings Estimates
 
 
Sales Expected to Rise by 2.0 %, Ordinary Income to Decline by 3.6%
SHOEI's earnings estimates call for sales to rise by 2.0% year-over-year to ¥13.680 billion. In North America, growth in sales volumes and the positive influence of a weaker yen is expected to contribute to an increase in sales of 14.5% year-over-year. In Europe, increases in sales of subsidiaries, which account for 70% of total sales in Europe (Sales volumes of agents are expected to decline), are expected to allow overall sales to grow by 3.7% year-over-year. At the same time, lower sales volumes arising from the disappearance of the rush to purchase ahead of the hike in the consumption tax are expected to contribute to a decline in sales within Japan of 7.3% year-over-year. Furthermore, adjustment of inventories in Australia is expected to contribute to a decline in sales of other regions of 8.4% year-over-year. With regards to profits, increases in depreciation due to the start of large capital investments during the coming term, higher personnel expenses due to hikes in wages, and higher advertising expenses are expected to boost overall expenses and contribute to a 7.8% year-over-year decline in operating income to ¥2.550 billion. While SHOEI's estimates do not include the influence of foreign exchange, improvements in tax rates affecting subsidiaries in Europe are expected to allow net income to remain in line with the previous year's levels at ¥1.670 billion.

Capital investment is expected to reach ¥1.038 billion (¥525 million in previous term) and depreciation ¥550 million (¥397 million in previous term). SHOEI's foreign exchange rate assumptions are ¥108.0 to the US dollar (a ¥5.04 weakening compared to previous term), and ¥138.0 per euro (a ¥1.34 strengthening). About 50% and 75% of the US dollar and euro currency needs, respectively, have been booked using foreign exchange reservations at ¥108 to the US dollar and ¥137 to the euro. The impact of fluctuations in foreign exchange rates of ¥1 result in changes in profits of ¥10 million relative to the dollar and ¥14 million relative to the euro.
 
 
 
First Round of Large Capital Investments Support the Current SHOEI
SHOEI conducted its first round of large capital investments for growth during the terms covering fiscal year September 2006 to 2009. Amongst the most notable investments made was the construction of a large wind tunnel testing facility (Wind tunnel facility and equipment). This wind tunnel enables SHOEI to make sustained introduction of new products (According to President Yasukouchi, this investment is a driver of SHOEI's current earnings), and contributes to differentiation with their competitors.

Thereafter, SHOEI has focused its investments upon new product molds in light of the deterioration in its operating environment (SHOEI has made a commitment to introducing at least one new product every term). Due to the improvement in the operating environment and the investment capability for business expansion, the Company has decided to launch the second round of large capital investments starting from fiscal year September 2014.
 
Second Round of Large Capital Investments to Realize Stable Management over the Long Term
The second round of investments is designed to achieve results in the form of stable management over the long term, and includes investments for new products (molds and dies), improvements in manufacturing efficiencies (Laser processing equipment renewal, automatic materials processing machinery fortification, painting facility renewal, new forming machinery development and introduction), crisis management (Air conditioning facility renewal and fortification, electric power facility fortification, factory building renewal, safety and environmental improvement investments), and companywide management systems (IT) for societal operation improvement and rationalization. Consequently, total investments are expected to reach ¥4.0 billion over a five year period from fiscal year September 2015 (For an annual rate of ¥0.7 to ¥0.8 billion per year in capital investments). Moreover, capital investments in fiscal year September 2015 alone are expected to amount to ¥1.038 billion. However, with operating cash flow of ¥2.084 billion anticipated, free cash flow of ¥1.046 billion is expected to be achieved even after this large capital investment is conducted.
 
(3) Yearend Dividend of ¥60 Per Share Expected
SHOEI views the return of profits to shareholders as a key management issue, and maintains a basic policy of "distribution of profits in line with earnings performance" that focuses upon dividend payout ratio as a guideline. Based upon this policy, SHOEI will fortify its financial and management foundations while at the same time strengthening its shareholder equity. Furthermore, it will endeavor to pay a term end dividend that is equivalent to a dividend payout ratio of 50% (Currently, dividends are only paid at the yearend). In keeping with the above policy, yearend dividend payment in fiscal year September 2015 is expected to be ¥60 per share.
 
Conclusions
 
According to the Japan Automobile Manufacturers Association (JAMA), the market for motorcycles over 250cc in displacement within Japan bottomed in 2011 and exceeded 60,000 units manufactured in 2013. Overseas, the market for motorcycles in the United States bottomed in 2010 to 2011, and exceeded 400,000 units in 2013 according to the Motorcycle Industry Council. And while the market in Canada is only one tenth of the size of the United States, a recovery started there in 2011 and the number of motorcycles sold reached 45,000 in 2013. With regards to Europe, the German market bottomed in 2010 and exceeded 80,000 units in 2013. Despite the prolonged weakness in the French market after suffering only a minor decline in the aftermath of the Lehman Shock, a bottoming has appeared in 2013 at 82,000 to 83,000 units. The United Kingdom market continues to trend weakly from the levels seen in 2008 of 130,000 units after bottoming in 2012 at 57,000 to 58,000 units, and the Italian market has yet to see a bottom with sales of less than 50,000 units. Similar trends are apparent in Spain with the number of units continuing to decline from their peak of 90,000 units in 2008 to 20,000 most recently. Therefore, rough unit estimates for the global motorcycle markets, which are closely correlated to the premium motorcycle helmet market, are for 60,000 units in Japan, 270,000 units in the main European markets (80,000, 82,000 to 83,000, 57,000 to 58,000, less than 50,000, and 20,000 units in Germany, France, United Kingdom, Italy, and Spain), and 445,000 units in North America (400,000 and 45,000 units the United States and Canada).

While there is significant variance in the rate of growth in most of the major global motorcycle markets, sales volumes in most markets are on the rise including 2.8%, 3.5%, 10.5%, 11.0%, 3.1%, 13.0%, 3.7% and 18.9% increases in the United States (6/14), Canada (9/14), Japan (7/14), Germany (10/14), France (10/14), the United Kingdom (10/14), Italy (10/14), and Spain (10/14) respectively. Generally speaking, the market is getting stable thinking of the increase in Italy and Spain.Furthermore, sales within Japan are trending slightly ahead of SHOEI's conservative estimates for fiscal year September 2015. Given that foreign exchange reservations have not been booked for all of the Company's needs, the current weakness in the yen relative to the dollar and euro can be expected to boost profits a step further. Therefore, the potential to exceed the estimates of lower profits due to anticipatory investments exists.

Moreover, SHOEI was able to beat out its German competitors and acquire top ranking in a survey (Ranking of the most widely recognized helmet brands) conducted by a German sports helmet magazine. Also in the United States, the SHOEI brand was also able to hold off its American competitors and acquire top ranking (Which brand of helmet owned) in an off road helmet magazine survey. The fact that SHOEI was able to take top spot in an ownership ranking of off road helmets, which are generally cheaper in price than SHOEI's products, is a significant feat and reflects the strong brand reputation for quality and safety of SHOEI helmets.
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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