（7839） | Publish:Thu, Feb 09, 2017 IR「BRIDGE REPORT」

BRIDGE REPORT
（7839）

プライム

SHOEI Co., Ltd. (7839)

Kenichiro Ishida,
President

Company	SHOEI Co., Ltd.
Code No.	7839
Exchange	First Section, TSE
Industry	Other Products (Manufacturing)
President	Kenichiro Ishida
Headquarters	Ueno 5-8-5, Taito-ku, Tokyo
Year End	September
Website	http://www.shoei.com/

Share Price	Shares Outstanding		Market Cap.	ROE (actual)	Trading Unit
¥2,218	13,771,850 shares		¥30.546 billion	21.3%	100 shares
DPS (Est.)	Dividend Yield (Est.)	EPS (Est.)	PER (Est.)	BPS (actual)	PBR (actual)
¥60.00	2.7%	¥120.53	18.4x	¥761.63	2.9x

*Share price as of close on December 9, 2016. Number of shares outstanding at end of the most recent quarter excluding treasury shares.

Fiscal Year	Sales	Operating Income	Ordinary Income	Net Income	EPS(¥)	DPS(¥)
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	14,244	3,210	3,092	1,996	145.00	72.00
September 2016	14,138	3,145	3,244	2,192	159.22	79.00
September 2017 Est.	14,400	2,420	2,420	1,660	120.53	60.00

* Estimates are those of the Company. From the current fiscal year, the definition for net income has been changed to net income attributable to parent company shareholders (Abbreviated as Parent Company Net Income)

This Bridge Report discusses the earnings results for fiscal year September 2016 and estimates for fiscal year September 2017 for SHOEI Co., Ltd.

Key Points

Company Overview

SHOEI is the world's number one helmet manufacturer. While motorcycle 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 70 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 premium grade helmets. Superior design is a key strength of SHOEI. Furthermore, SHOEI endeavors to raise the satisfaction levels of its customers, shareholders and employees through the implementation of a comprehensive three-pronged strategy that covers "product strategy," "manufacturing strategy" and "market strategy." The group consists of SHOEI and five consolidated subsidiaries in the United States, Germany (2 subsidiaries), France and Italy.

Management Policy: Achieve World Top in Three Realms

"World's Top Product Quality":	Global brand that is made in Japan
"World Top Competitiveness in Cost"	World's only helmet maker to utilize the Toyota Production System for cost management
"World Top Delightful Company"	Achieve highest levels of satisfaction of customers, shareholders and employees

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.

(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 Investment (Development of new products, Cost saving, Improvement 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))

At the end of fiscal year September 2016, current ratio, which reflects the Company's ability to meet its short-term payment commitments, stood at 533.5%,; fixed ratio, which reflects the Company's long-term financial safety, stood at 21.3%; and capital adequacy ratio stood at 78.0% with no outstanding debt. SHOEI's balance sheet proves that its management philosophy is successful in achieving its goals of (1) defending our own Company and (3) maintaining healthy financial conditions.

With the manufacture of all its products at two domestic plants, one each located in Ibaraki and Iwate Prefectures, SHOEI (5) strives to achieve the number one position in the global premium helmet market by (2) maintaining manufacturing functions and high levels of employment in Japan (Carrying on the craftsmanship tradition), (4) conducting ongoing investments (New product development, cost reductions, product quality improvements, higher levels of safety), and (6) developing new markets and strengthening its positioning in existing markets' through the coordinated effort with its overseas subsidiaries.

SHOEI produces premium brand helmets that are recognized as the highest quality products by motorcycle riders around the world. Their helmets boast of extremely intricate designs that provide not only superb functionality with superior wind resistance characteristics, but are also very fashionable looks. SHOEI's persistence in its pursuit of helmet designs that are "comfortable to their users" is the driving force behind its top market share.

SHOEI has two manufacturing bases in Japan, namely the Ibaraki Plant and the Iwate Plant. Safety regulations for life-saving helmets vary in each market, whether it is Japan, Europe or North America. Therefore, the Ibaraki Plant chiefly produces helmets for Japan, while the Iwate Plant mostly for overseas markets. The Company, in principle, maintains consistency between each of the plants and its targeted market, and thus has been successful in keeping each plant's productivity high.

Fiscal Year September 2016 Earnings Results

Sales Decline 0.7%, Ordinary Income Rise 4.9%

Sales declined by 0.7% year-on-year to ¥14.138 billion. The strengthening of the yen caused sales in Europe and North America to decline, but sales within Japan remained strong (Up 14.2% year-on-year) and growth derived from efforts to fortify sales channels in China absorbed most of the decline. In addition to 6.2% year-on-year growth in sales volumes of premium helmets, sustained introduction of new products with higher value addition contributed to an increase in average product pricing.

Profits were significantly affected by the stronger yen (a factor contributing for a ¥521 million decline in profit), but economies of scale, increases in pricing, and improvements in productivity kept the decline of gross profit at a relatively small margin of 2.9% down year-on-year. The overall reductions in expenses caused sales, general and administrative expenses to decline by 3.9% year-on-year, and exceeded the estimate at the beginning of the term by slightly less than 26%. Non-operating income improved due to the booking of profit from foreign exchange gains of ¥89 million (Compared with a loss of ¥117 million in the previous term) and allowed ordinary income to rise by 4.9% year-on-year to ¥3.244 billion. Declines in extraordinary loss and tax burden allowed net income to rise by 9.8% year-on-year to ¥2.192 billion.

SHOEI's average exchange rate assumptions for sales were ¥109.57 per United States dollar (¥120.04 in the previous term) and ¥125.15 per euro (¥137.48 in the previous term). Foreign exchange rate assumptions for overseas subsidiaries were ¥102.91 per United States dollar (¥122.45 in the previous term) and ¥114.39 per euro (¥137.23 in the previous term). Moreover, SHOEI was able to beat its profit estimates by a large margin despite its upward revision to full year earnings estimates upon the announcement of its third quarter earnings results (Sales, and operating, ordinary and net incomes of ¥14.1, ¥2.860, ¥2.970 and ¥2.0 billion respectively). SHOEI is expected to raise dividend by ¥7 to ¥79 per share, which is in keeping with the Company's target of maintaining a consolidated dividend payout ratio of 50%.

While sales of new motorcycles within Japan are on a downward trend, the return of motorcycle riders who once quit riding motorcycles contributed to an 11.6% year-on-year increase in sales volumes. Consequently, output capacity cannot keep pace with demand currently. Sales of helmets in Europe are growing due to strong sales of motorcycles in Germany, the United Kingdom, France, Italy and Spain. And while SHOEI saw a 6.0% decline in sales due to the stronger yen, sales volumes actually rose by 8.6% year-on-year on the back of strong demand in France and other countries. At the same time, the helmet market in North America trended sideways and inventory adjustments by local distributors (Sales dealers) caused sales volumes to decline by 17.8% year-on-year. The effect of foreign exchange caused sales to fall by 24.0% year-on-year.

Markets for helmets in other regions expanded overall. With regards to SHOEI, an expansion in both the medium to large sized motorcycle sales and the helmet market in China contributed to strong growth in sales volume and value of 52.9% and 62.5% year-on-year respectively. While SHOEI had relied solely upon a single distributor in Beijing, China, aggressive marketing conducted by a new distributor in Xiamen, China, with which a sales agreement has been newly formed, contributed to invigorated activities by the Beijing distributor and favorable sales growth. In addition, SHOEI's sponsorship of sales campaigns held by major Japanese motorcycle manufacturers, which are seeing strong growth in medium to large sized motorcycles, is also acting as a tailwind for sales in China.

Total assets rose by ¥585 million from the end of the previous fiscal year to ¥13.453 billion at the end of the current fiscal year. An increase in free cash flow contributed to growth in cash and deposits, and higher capital investments contributed to a rise in tangible assets. At the same time the expansion in negative value of foreign exchange translation provisional account from ¥21 to ¥761 million was absorbed to allow net assets rise. Capital adequacy and return on invested capital ratios declined from 78.5% to 78.0%, and from 22.6% to 19.4% respectively from the ends of the previous and current fiscal years.

The net inflow of operating cash flow rose by 58.3% year-on-year to ¥3.174 billion due to the decline in working capital arising from reductions in inventories, recovery of accounts receivables and an increase in income before taxes. The margin of net outflow of investing cash flow contracted due to declines in acquisition of tangible assets. The net outflow of financing cash flow is attributed to the payment of dividends.

Total capital investments amounted to ¥848 million (¥923 million in the previous term) including ¥171, ¥89 and ¥57 million spent on molds, laser processing equipment and open pre-forming equipment respectively. Depreciation amounted to ¥614 million (Compared with ¥509 million in the previous term).

Fiscal Year September 2017 Earnings Estimates

Kenichiro Ishida assumed the position of President of SHOEI effective from October 1, 2016. Mr. Ishida originally joined Mitsubishi Corporation in April 1983. He then became Senior Advisor to SHOEI in May 2013. Mr. Ishida was appointed as the managing director of overseas sales in December of the same year. He was responsible for directing overseas sales in various regions including Europe. Masaru Yamada resigned from his position as Chairman on December 21, 2016 to become an advisor to SHOEI.

Estimates Call for Sales to Rise 1.9%, Ordinary Income to Fall by 25.4% Year-On-Year

Despite the influence of the stronger yen, sales volumes are expected to rise in all geographic regions except North America. At the same time, introduction of new high value added products are expected to contribute to a rise in the average unit price of products. In addition, SHOEI will endeavor to raise its output capacity through further increases in productivity and improvements in the work environment. As part of these measures, the renewal of molding equipment will be conducted ahead of schedule. Consequently, capital investment is expected to rise from ¥848 million in the previous term to ¥1.157 billion in the coming term (Depreciation is also expected to rise from ¥614 to ¥658 million over the same period).

The main factors contributing to the anticipated decline in operating income include foreign exchange and higher cost of sales, and sales, general and administrative expenses amounting to ¥375, ¥100 (Including ¥30 million for labor expenses) and ¥120 million respectively. SHOEI bases its estimates on assumptions for foreign exchange of ¥105.00 per United States dollar (¥109.57 in the term just ended), and ¥116.00 per euro (¥125.15 in the term just ended). Overseas subsidiaries base their earnings estimates (June 30, 2017) upon foreign exchange assumptions of ¥105.00 and ¥116.00 for the United States dollar and euro respectively (¥102.91 and ¥114.39 respectively). While SHOEI had booked euro foreign exchange reservations at the start of the term, the Company is considering using reservations on a shorter term monthly basis in light of the large fluctuations in the foreign exchange rates recently (Because much of the dollar based business is paid in dollars, the use of reservations will be limited to a minimum amount). A ¥60 per share dividend is expected to be paid at the end of the term.

SHOEI assumes only a small margin of growth in sales volumes due to the current full capacity operations. By geographic region, sales to North America are expected to decline by 17.0% year-on-year, but sales within Japan, Europe, and other regions are expected to grow by 4.0%, 3.7% and 5.8% year-on-year respectively. Restructuring of the sales network in the United States and expansion of sales in China and other parts of Asia are considered to be critical issues for SHOEI.

(3) New Products Introduced in 2016 and 2017

New Products Introduced in 2016

The most premium grade on-road full-face type helmet (Flagship racing model) "X-Spirit III (Europe)" and "X-14 (North America and Japan) models were newly introduced to the three geographic regions of Japan, North America and Europe. The "J･O" products were introduced in Japan and Europe to help create a new product category for SHOEI, as the "J・O" model helmet introduced in Europe and Japan represents a new product category that is an open face type helmet with an inner compartment shield that targets riders of custom and classic motorcycles (The introduction of this product has been limited to Europe and Japan because of differing regulations in other markets).

X-14 (North America, Japan), X-Spirit III (Europe)

Sales Region :	Europe (X-Spirit III)
Sales Start :	March 2016 (Shipments from January 2016)
Suggested Retail Price :	EUR699.00 - 869.00 in Germany and France (Including tax)
Sales Region :	North America (X-14)
Sales Start :	February 2016 (Shipments from January 2016)
Suggested Retail Price :	US$681.99-839.99 (Excluding tax)
Sales Region :	Japan (X-14)
Sales Start :	April 2016
Suggested Retail Price :	¥60,000-76,000 (Excluding tax)
(Source: SHOEI)

J･O

Sales Region :	Europe (J･O)
Sales Start :	March 2016 (Shipments from January 2016)
Suggested Retail Price :	EUR329.00-379.00 (Including tax)
Sales Region :	Japan (J･O)
Sales Start :	April 2016
Suggested Retail Price :	¥32,000-40,000 (Excluding tax)
(Source: SHOEI)

The release of the new category helmet model "J･O" received considerable attention, and actual sales reportedly reached 30,000 units, well beyond the target sales volume of 10, 000 units. In addition to "J･O", the other new products including "X-Spirit III" (Europe) and "X-14" (Europe and Japan) have all become hit products.

New Products To Be Launched in 2017

RYD (Europe, Japan),
RF-SR (North America)

Sales Region :	Europe (RYD)
Sales Start :	April 2017 (Shipments from February 2017)
Suggested Retail Price :	EUR399.00 in Germany, France (Including tax)
Sales Region :	North America (RF-SR)
Sales Start :	April 2017 (Shipments from February 2017)
Suggested Retail Price :	US$399.00 (Excluding tax)
Sales Region :	Japan (RYD)
Sales Start :	Fiscal Year September 2018
Suggested Retail Price :	To be announced
(Source: SHOEI)

The on-road full-face type helmet "RYD" (Europe and Japan) and "RF-SR" (North America) models are successors to the "QWEST" model which won the "webBikeWorld" 2010 "Helmet of the Year" award. These products debuted at the American International Motorcycle Expo held in Orlando, Florida in the United States in October 2016, and INTERMOT Show held in Cologne (Köln), Germany in November 2016. In response to the debut, SHOEI was flooded with orders in the United States and the reception at the "INETERMOT Show" was positive.

Conclusions

SHOEI estimates call for sales of premium helmets to rise by a small margin on a volume basis in fiscal year September 2017. SHOEI's manufacturing plants are operating at full capacity due to the order backlog from the term just ended and increased work on weekends is being implemented. However, demand continues to outpace supplies, and sales will be determined by output capacity. And while 20 new graduates and mid-career hires were employed, one to two years will be required before they become fully contributing employees. Rapid expansion of output capacity is difficult because of the numerous manual manufacturing processes that are difficult to mechanize. Furthermore, SHOEI must consider the potential for overcapacity conditions that arose in the aftermath of the Lehman Brothers bankruptcy and has chosen to expand capacity through increases in efficiency. As part of this strategy, renewal of fiberglass glass reinforced plastic molding machinery is being implemented ahead of schedule to eliminate variations in product quality, raise productivity and reduce costs.

At the same time, SHOEI is implementing efforts to address the issue of restructuring its sales network in the United States. The SHOEI brand is strong and its share of the United States premium helmet market is high, but its sales have thus far been affected more largely by the intention of the local sales distributor than by market conditions due to its reliance upon this single sales distributor in the United States. Along with that the current contract with this distributor will end in September 2017, the Company is considering rebuilding the sales network. Consequently, results of new potential opportunities in North America and continued growth in China and other Asian markets should be watched closely from fiscal year September 2018 onwards.

<Reference: Regarding Corporate Governance>

◎ Corporate Governance Report Updated on Jun. 17, 2016

Basic Views

Our company considers it as the most important issue in corporate management to increase shareholder value not only by recognizing the importance of corporate ethics based on compliance with laws and regulations but through expeditious management decision-making in response to the changing society and economic environment as well as improvement of management soundness.

Principle 4-2

Roles and responsibilities of the board (2): Support for decision-making by the management and incentive
In our company, the executives are all put on a level playing field, resulting in a circumstance that does not interfere with any proposal. The management (in our company, "counselors and general managers") builds an awareness of issues in executing duties they are in charge of and proposes problems and solutions for them at meetings such as management meetings. Freewheeling and fair discussion is held among a proposer, the directors and the management. In addition, considering various factors including subsistence wages, the management is paid a fixed remuneration determined based on the gradational salaries assessed according to their competence, their contribution to business performance in the previous year, and the like.

Principle 4-11

Preconditions for effectiveness of the board

The external auditors in our company include 1 certified public accountant, who has been engaged in accountancy for a long period of time and provides appropriate advice on finance and accounting. We will discuss analysis and assessment of the overall effectiveness of the board of directors.

Principle 1-4

Strategically held shares

Our company does not strategically hold any shares, or does not invest in any high-risk securities.

Principle 1-7

Related party transactions

Except for agent transactions, agent administration consignment transactions, and marketing consignment transactions with our subsidiaries, and any other transactions incidental or related to them, our company has no plan to make transactions with related parties and made no related party transactions in the past other than the above-mentioned transactions. Besides, as for transactions with companies that are governed by any of our executives, or any persons who have connection with the executives, we have defined, in accordance with the "Code of Conduct" stipulated in the Compliance Regulations, that the private life and public life should be strictly separated, and we do never make any transactions with related parties other than transactions with our subsidiaries.

Principle 5-1

Policy on constructive dialogue with shareholders

Our company strives to communicate with our shareholders and investors in a fair manner at all times and exerts ourselves to have proactive dialogue through various means including explanatory meetings for individual investors, financial results briefings for institutional investors, the press, and financial institutions, and one-on-one meetings hosted by the management and the department in charge of IR activities (which is our management administration department). Furthermore, taking account of the proportion of the shares held by overseas investors which is 32.3% (as of the term ended September 2015), we continue having highly transparent and honest dialogue with such overseas investors and carrying out IR activities for them.

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 Investment Bridge Co., Ltd.

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