BRIDGE REPORT
Fuji Corporation (8860)
Nobutsuna Miyawaki, President
Nobutsuna Miyawaki, President
Corporate Profile
Company
Fuji Corporation Ltd.
Code No.
8860
Exchange
Tokyo Stock Exchange, 1st Section
Industry
Real Estate
President
Nobutsuna Miyawaki
HQ
1-4-23 Habucho, Kishiwada-shi, Osaka
Business
Description
Fuji Corporation provides a diversified range of real estate related services, including residential properties for sales, housing distribution, effective land utilization, property leasing and management and custom housing in Osaka and Kobe regions, and in northern Wakayama.
Year End
March
Website
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥703 35,724,054 shares ¥25.114 billion 12.5% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥26.00 3.7% ¥100.77 6.98x ¥796.64 0.88x
*Stock prices as of the close on May 13, 2016. Number of shares issued at the end of the most recent quarter excluding treasury shares.
 
Consolidated Earnings Trends
Fiscal Year Sales      Operating Income Ordinary Income Net Income EPS(¥) DPS(¥)
March 2013 66,047 3,809 3,761 2,268 64.07 20.00
March 2014 86,363 5,806 5,660 3,261 91.13 26.00
March 2015 79,594 4,361 4,322 2,756 76.46 26.00
March 2016 90,726 5,441 5,298 3,430 95.18 26.00
March 2017 Est. 96,300 5,600 5,400 3,600 100.77 26.00
* Estimates are those of the Company.
 
This Bridge Report provides information about the fiscal year March 2016 earnings results and other details of Fuji Corporation Ltd.
 
Key Points
 
 
 
Company Overview
 
Fuji Corporation Ltd. provides various real estate related services including sales of new and used condominiums and detached homes primarily in the entirety of Osaka Prefecture (where the Company is based), part of Hyogo Prefecture between Osaka and Kobe, and the northern part of Wakayama Prefecture. Their main business is the sale of detached homes, albeit a built-for-sale type, that would maximize customer satisfaction by allowing for the "free-design home system" regarding layout, specifications, etc. within the boundaries of Japan's Building Standards Act. Fuji also boasts of strengths in the development of properties where 50 to 200 homes are constructed in coordination with the surrounding environment and each other to provide uniformity in neighborhoods. The other main pillars of the Company's business include renovation and sale of used residential properties, collaboration with financial institutions for effective utilization of land, sales of rental apartments for sale to investors, property leasing and management services, and custom made homes.

Fuji boasts of unique knowhow developed in various businesses realms derived from its sales agency and detached home services. Furthermore, the complementary and synergistic effects that occur between its various business divisions allow the Company as a complete home provider to respond with solutions that match the needs of home owners and residents in various geographic regions and times. Another strength of Fuji is local community-based management to match the time and place of the markets, and to maintain high levels of customer satisfaction by upholding the principles of "never ignoring customers after the sale" and "never ignoring customers after the completion of construction."
 
(1) Business Description
Residential Property for Sale (34.1% of Fiscal Year March 2016 Total Sales)
Sales of detached homes and condominiums are conducted in this business. A characteristic of this business is Fuji's ability to develop neighborhoods of detached homes in 50 to 200 units that match the local neighborhoods, and to allow its customers to participate in the designing of the property. More specifically, these homes respond to the needs of individual customers by allowing them to customize the layout and specification of the homes to suit their tastes and needs. Furthermore, new condominiums for sale are also included in the residential properties for sale business segment. Fuji halted the condominium for sale business in spring of 2005, based upon the outlook for a weakening in pricing due to declines in demand and increases in supplies. However, in the aftermath of the Lehman Shock, declines in land prices and improvements in supply and demand conditions in the condominiums for sale market led Fuji to restart the condominiums for sale business in February 2012. Another feature of Fuji is its focus upon condominiums and residential properties that are carefully selected (such as their convenient proximity to stations) and that are attractively priced for first-time buyers.
 
Housing Distribution (32.6% of Fiscal Year March 2016 Total Sales)
Sales of refurbished used residential property called "Kaizo Kun" and the new detached homes (spec new homes) are conducted in this business segment. "Kaizo Kun" refurbished used residential properties are used residential properties purchased for refurbishment and sales. Fuji's unique knowhow is leveraged in local community-based management and manualized procedure for renovation. In addition, sales of small-scale newly constructed detached homes (spec new homes) allows the Company to satisfy a wide range of customer needs that cannot be completely met with customized homes and large-scale development projects. In the southern part of the Osaka Prefecture (Izumi Sano, Kumatori, Kaizuka, Kishiwada) small-scale development projects have been conducted with homes being sold at reasonable prices. This business is also able to provide spec new homes at the lower end of the price zone that cannot be offered in the residential properties for sale business.
 
Effective Land Utilization (19.6% of Fiscal Year March 2016 Total Sales)
Contract construction for leased properties and sales of rental apartment for sale to investors are conducted in this business. Construction work is performed for construction of rental residential properties sold on a proposal basis and leverages Fuji's knowhow developed in its property leasing and management business. In addition, Fuji purchases lands and then constructs rental apartment for sale to investor in this business. The highly price competitive wooden structure apartments called "Fuji Palace" were launched in November 2008, subsequently affordable rental apartments for seniors with nursing-care service, which are called "Fuji Palace Senior" as a means of differentiation. With regards to rental apartments for sales to investors, the price for apartments is roughly ¥100 million, and the demand for these types of rental properties remains strong as a fund management method.
 
Property Leasing and Management (13.2% of Fiscal Year March 2016 Total Sales)
The fully owned subsidiary Fuji Amenity Services Co., Ltd. provides rental apartment structure management, tenant solicitation, rent collection and other management services, in addition to consigned management of condominiums. Superior rental and management related services not only act as stable source of earnings, but also provide opportunities to achieve high synergy with contract construction of rental income properties, sales of rental apartments for sale to investors, and sales of condominiums.
 
Custom Housing (0.5% of Fiscal Year March 2016 Total Sales)
By leveraging the knowhow cultivated in the detached homes business, Fuji has successfully grown and marketed its services of reconstruction of existing detached homes and construction of new detached homes to land owning clients. This business has also grown to become the fifth cornerstone of its overall business.
 
(2) Strengths of Fuji Corporation
Strength as a Complete Home Provider
Knowhow in the realms of acquisition of land and building permits, design, construction and sales cultivated in the detached home services has allowed Fuji to develop a wide range of businesses including its used residential property sales, effective land utilization, rental apartment buildings for sale to investors, and property leasing and management, as well as to cultivate synergies between these businesses. Furthermore, its local community-based management has also contributed to cultivate synergies among these wide ranging businesses and achieve high levels of customer satisfaction in its real estate and related services.
 
 
Capabilities of the Renovation Business of Used Residential Properties
The "Kaizo-kun", renovation business of used residential properties, was born from the fusion of knowhow cultivated in the residential property agency sales and renovation businesses, which were launched along with the start of the Company. Fuji maintains a unique business model that enables it to conduct the three main functions of the residential property sales process, namely "acquisition," "renovation," and "sales" of used residential properties. The Company boasts not only of its ability to gather information by local community-based management, but also of its ability to renovate used residential properties into extremely marketable ones by its manualized procedures for renovation. In addition, a service called "Fuji Home Bank" has been created where coordination with judicial scriveners is conducted to purchase properties in cases the inheritance registration is yet to be completed. This service also offers the convenience of paying the inheritance registration fees from the sale proceeds of properties.
 
 
Ability to Increase Returns by Proposing Effective Land Utilization
Fuji does not only provides the ability to propose effective land utilization, but also offers market surveys, planning, design, construction, and rental property management services to maximize its capability as a comprehensive real estate developer. Land purchases and sales, apartment and condominium reconstruction, legal and tax related services, and other various expert opinions and services are available as precise solutions to suit the needs of customers. As to its rental property management business, strict selection of land from the vast amount of real estate information is based upon meticulous market surveys conducted by its full-time marketing staff, and planning is carried out only when long-term and stable management is feasible. In addition, Fuji only purchases properties that boast of highly superior locations and other conditions to be turned into high yielding used real estate products. Moreover, Fuji proposes a bundled leasing system to property owners as a means of providing them with full "security, safety, and stability" in the rental property management service.
 
 
Business Portfolio Synergies
The real estate industry is hugely influenced by external factors such as the economic environment and changes in interest rates. To establish a business model that can withstand these conditions, Fuji Corporation has endeavored to build a business portfolio that can generate stable profits by providing diversified products and services. Looking at the sales composition during the last 5 years, residential properties
for sale has previously accounted for more than 40% of total sales in the past. However, Fuji Corporation has been able to achieve a more balanced business portfolio as the three business segments, 1) residential properties for sale, 2) housing distribution, and 3) effective land utilization and property leasing and management businesses, now account for over 30%.
 
 
 
Medium Term Business Plan (From Fiscal Year March 2016 to 2019)
 
With regards to the current medium term business plan, Fuji Corporation maintains targets for sales and ordinary income of ¥102.0 and ¥6.0 billion respectively to be achieved by fiscal year March 2019, the plan's final year. Furthermore, this plan calls for the turning of the large development of detached housing projects and the restarted sales of condominiums which had been curtailed into earnings drivers of the residential properties for sale business segment. Moreover, the plan also calls for growth in used residential properties through the expansion in the sales regions in the housing distribution business segment, and securing of stable profits through strengthening of property purchases in the effective land utilization business segment. In addition to these strategies, efforts to grow earnings through sustained increases in managed properties will be conducted in the property leasing and management business segment.
 
 
Midterm Business Plan Profit Assumptions
Achievements during Fiscal Year March 2016
Strong sales and profits were recorded during fiscal year March 2016 and they far exceeded the assumptions of the current medium term business plan. Fuji Corporation expected both custom designed homes sales and property leasing and management sales to expand and anticipated large increase in sales of the effective land utilization business on the back of increases in rental apartments for sale to investors. All of these business segments exceeded the Company's estimates, and the used residential properties sales also posted much better than expected sales.
 
Fiscal Year March 2017 Plan
The residential properties for sale business is expected to benefit from full scale sales of homes in large redevelopment projects started during fiscal year March 2016, and a rush to purchase ahead of another impending hike in the consumption tax. Sales volumes of used homes are expected to grow on the back of an expansion in Fuji's regional sales area. Furthermore, delivery volumes of subleased rental apartment buildings sold to investors are expected to continue to increase in the property leasing and management business. Fuji Corporation expects to achieve sales of ¥96.300 billion, ordinary income of ¥5.400 billion and net income of ¥3.600 billion in fiscal year March 2017, all of these figures exceeding assumptions of the medium term business plan.
 
Fiscal Year March 2018 Plan
In addition to the arrival of delivery of detached homes for sale as part of large development projects in the Osaka and Kobe regions, a redevelopment project for condominiums for sale, which had been deliberately curtailed, in a prime location in front of Japan Railways Wakayama Station is also expected in the residential properties for sale business. Moreover, sales and profits are expected to steadily grow on the back of deliveries of rental apartments for sale to investors in the property leasing and management business. At the same time, the rush to purchase ahead of a hike in the consumption tax is expected to contribute to a decline in sales of used residential properties from the previous term. Sales of condominium development projects in front of Japan Railway Wakayama Station have been brought forward by a year and are now expected to be launched in July 2016.
 
Fiscal Year March 2019 Plan
Deliveries of condominiums for sale in a prime location are expected to begin contributing to sales in the residential properties for sale business. The expansion of the sales territory for used residential properties services to Hyogo and Nara Prefectures is expected to contribute to growth in sales. Moreover, sales in the property leasing and management business are also expected to grow on the back of increases in subleases and rental apartments for sale to investors and expansion in used residential property assets services. The delivery of condominiums of development projects has been brought forward by a year and this may change some aspects of the plan henceforth.
 
 
 
 
Fiscal Year March 2016 Earnings Results
 
 
Sales, Ordinary Income Rose 14.0%, 22.6% Year-On-Year
Sales rose by 14.0% year-on-year to ¥90.726 billion, posting the highest sales ever. The residential properties for sale business segment, which benefited from increases in delivery number of the custom designed homes and land sales, the housing distribution business segment, which grew on the back of increases in delivery number of used residential properties, and the effective land utilization business segment, where increases in delivery number of rental apartments for sale to investors rose, all contributed to sales growth. Orders, which are an indicator of future sales, have increased 9.8% year-on-year thanks to increase in custom designed homes and used homes. Order backlogs at end March 2016, which are a leading indicator for sales, has also increased 7.7% year-on year.

Ordinary income rose by 22.6% year-on year to ¥5.298 billion. Increases in sales of the residential properties for sale business segment and the housing distribution business segment contributed to profits. The effective land utilization business segment, where an increase in rental apartments for sale to investors offsets a decrease in delivery numbers of contract construction of rental properties, also contributed to profits. At the same time, profits of the property leasing and management business segment declined due to higher anticipatory investment expenses, including those for computers and hiring of personnel for the elderly nursing care home service. Although gross profit margin dropped by 1% point due to a decline in highly profitable contract construction of rental properties business, operating profit increased by 24.7% year-one-year to ¥5.441 billion due to reductions in selling and administration expenses. Net income attributable to parent company shareholders also rose to an all-time high.
 
 
Sales and operating income of the residential properties for sale business segment rose by 2.9% and 23.3% year-on-year to ¥30.899 and ¥3.010 billion respectively. These increases in both sales and profits are attributed to growth in custom designed homes and land sales. Orders for custom designed homes rose from 620 in the previous year to 749 in the current year, while condominiums for sale declined from 264 to 118 over the same period, contributing to an increase in total order value of 5.6% year-on-year to ¥32.328 billion. Order backlog increased by 7.0% year-on-year to ¥21.989 billion due to increase in custom designed homes.

Sales and operating income of the housing distribution business segment rose by 16.3% and 61.0% year-on-year to ¥29.567 and ¥1.091 billion respectively. These strong increases in sales and profits are attributed to contributions from higher deliveries of used residential properties and spec new homes. The number of orders for used residential properties rose from 1,391 in the previous year to 1,539 in the current year, allowing overall orders for the housing distribution business segment to rise by 13.3% year-on-year to ¥30.247 billion. The increase in used residential properties and other factors allowed order backlog to rise by 18.3% year-on-year to ¥4.395 billion.

Sales and operating income of the effective land utilization business segment rose by 37.4% and 17.3% year-on-year to ¥17.796 and ¥1.501 billion respectively. While deliveries of contract construction of rental properties declined, increases in deliveries of rental apartments for sale to investors contributed to growth in both sales and profits. Although orders for contract construction of rental properties rose by only a small margin, orders for rental apartments for sale to investors continued to trend favorably allowing orders to rise by 11.6% year-on-year to ¥18.646 billion. Order backlog also rose by 5.8% year-on-year to ¥15.606 billion on the back of favorable orders for both contract construction of rental properties and rental apartments for sale to investors.

Apart from the above, the property leasing and management business segment recorded an increase in sales of 12.4% year-on-year to ¥11.993 billion, due in part to an increase in the number of properties to be managed, including rental properties which is linked to the effective land utilization business segment, as wells as condominiums for sale. The increase in sale of this business segment is also attributable in part to the increase in used residential properties of the used residential asset services. At the same time, operating income declined by 4.0% year-on-year to ¥890 million on the back of higher expenses including those for computers and employment of personnel in elderly nursing care home services. Sales and profits of the custom housing business segment declined by 9.8% and 48.3% year-on-year to ¥469 and ¥25 million respectively due to decrease in number of deliveries in custom housing.
 
 
 
 
 
 
Total assets rose by ¥2.941 billion from the end of the previous term to ¥96.9 billion at the end of March 2016. The growth of the asset side of the balance sheet is attributed to increases in inventories and lands of tangible fixed asset while the growth on the liability and equity side is mainly due to long term debt and net income attributable to parent company shareholders. Within inventories, real estate for sale rose from ¥19.27 to ¥21.89 billion over the same period, and real estate for sale in process and real estate for development declined from ¥15.71 to ¥14.86 billion and from ¥37.08 to ¥36.22 billion respectively. At the same time, interest bearing liabilities declined by ¥148 million. Capital adequacy ratio rose slightly to 29.4%.
 
 
Large reduction in the margin of increase in inventories allowed operating cash flow to turn to a net inflow. Although acquisition of tangible fixed assets and other investments caused the margin of net outflow of investing cash flow to expand, free cash flow turned from a net outflow to a net inflow. At the same time, decline in the margin of increase in long term debt resulted in a net outflow of financing cash flow.
 
 
Fiscal Year March 2017 Earnings Estimates
 
 
Estimates Call for Sales, Ordinary Income to Rise by 6.1%, 1.9% Year-On-Year
Estimates call for sales and ordinary income to rise by 6.1% and 1.9% year-on-year to ¥96.3 and ¥5.4 billion respectively in fiscal year March 2017. Sales of all business segments are expected to increase due to an expansion in the supply of custom designed homes. However, some declines in condominiums for sale and rental apartments for sale to investors are also expected. Fuji adopted a conservative estimate of a small increase in its used condominiums for sale business based upon its outlook for declines in the number of condominiums acquired and rises in acquisition pricing. Deterioration in the product mix with declines in highly profitable condominiums for sale, increases in advertising expenses for promotion of condominium sales and a possible increase in tax burden arising from the pro forma standard taxation is expected to lead to a conservative increase in profits despite a rise in revenues. Operating margin is expected to decline by 0.2% points year-on-year to 5.8%. These estimates do not incorporate any potential sales derived from a rush to purchase ahead of a consumption tax hike, which is scheduled for April 2017. The dividend payment is expected to remain at ¥26 per share, the same as the term just ended (¥13 dividends at both the end of the first half and full year).
 
 
In the residential properties for sale business segment, the numbers of custom designed homes and condominiums for sale expected to be sold during the year are expected to rise from 601 in the term just ended to 777 in the coming term and decline from 243 to 99 respectively. In the housing distribution business segment, the number of used residential properties sold is expected to rise slightly from 1,518 to 1,543. In the effective land utilization business segment, orders for rental apartments for sale to investors are expected to decline from 112 to 104, while orders for contract construction of rental properties are expected to rise from 40 to 51.
 
(2) Main Topics
Launch of Large Scale Condominium Development Projects
Fuji Corporation has restarted sales of condominiums, which had been deliberately curtailed due to a rise in construction costs. The sales launch of the large scale condominium development project (Condominiums for sale, 256 units) in a prime location in front of Japan Railway Wakayama Station is expected in July 2016. Although deliveries of these units are not expected to begin until the next fiscal year March 2018, it expects to aggressively promote advertisements for these condominiums in the fiscal year March 2017.
 
Introduction of Performance Based Stock Option Plan that Respond to the Corporate Governance Code
Fuji Corporation has reviewed its directors' remuneration in light of its adoption of a Corporate Governance Code, and it has decided to implement a stock option plan that reflects its business result performance as a means of incentivizing and raising the awareness of earnings by its directors (To be submitted as a resolution at the General Shareholders Meeting). Upon achieving all four medium term targets for "sales", "operating income", "ordinary income" and "ROE of over 10%", stock options will be allocated. However, an additional stipulation that prevents stock options from being allocated in the event that "sales", "operating income", and "ordinary income" achieve targets but fall from the previous year has been established. This stock option plan is designed to raise Fuji's Directors' commitment to achieving its medium term objectives and continue to grow sales and profits.
 
Selected as the "2016 Health and Productivity Stock Selection" by Ministry of Economy, Trade, Industry, and Tokyo Stock Exchange
The "Health and Productivity Stock Selection" is a program that recognizes value in terms of corporate management concern for the health and productivity of employees and company. Companies are selected for this program jointly by the Ministry of Economy, Trade and Industry (METI) and the Tokyo Stock Exchange (TSE). Under this program, METI and the TSE select outstanding companies from those listed on the TSE that are making efforts to raise health and productivity, and introduce them as attractive investments opportunities for investors who prioritize the improvement of corporate value from a long-term perspective. This program is part of the initiatives incorporated under the Japan Revitalization Strategy since 2015, and Fuji Corporation was selected as one of the 25 of 3,500 eligible companies in 2016, the second year of this program. At the same time, Fuji became the first real estate company selected by this program.
 
 
 
Future Highlights
 
Fiscal year March 2016 results were favorable with Fuji able to record sales and ordinary income growth of 14.0% and 22.6% year-on-year respectively. New orders booked during the fiscal year March 2016 rose by 9.8% year-on-year, and order backlogs at the end of the term grew by 7.7% year-on-year, contributing to anticipation of strong sales results during fiscal year March 2017. Orders for custom designed homes used residential properties and rental apartments for sale to investors continued to trend strong, while orders for contract construction of rental properties turned positive in fiscal year March 2017 after negative sales growth in fiscal year March 2016. It is much worth noting that Fuji Corporation has acquired orders for contract construction of rental properties while responding to strong demand in rental apartments for sale to individual investors. If there are any shortcomings to be pointed out against this backdrop, the continued decline in the condominiums for sale business due to deliberate efforts to restrain supply, and the decline in property leasing and management profits due to higher expenses result from investments in computers and employment of personnel in elderly nursing care home services.

With regards to condominiums for sale, the large scale condominium development project (Condominiums for sales, 256 units) in a prime location in front of Japan Railway Wakayama Station has started, and sales launch is expected in July 2016. Because this is a large scale development project outside the Company's home base of Osaka, Fuji Corporation expects to aggressively promote advertisement in fiscal year March 2017. Delivery of completed units is expected in the next fiscal year March 2018, and its success is expected to contribute significantly to Fuji Corporation's earnings from that period onwards. Order trends of large scale condominium development projects will need to be watched closely as they will be a decisive factor in acceleration of growth in fiscal year March 2018.

The decline in the property leasing and management business profits is not a significant concern as it is the result of a temporary increase in strategic anticipatory investments. Sales of the property leasing and management business segment is steadily expanding on the back of growth in the number of management properties arising from deliveries of condominiums for sale and rental properties linked to the effective land utilization business segment, in addition to increases in the number of used rental properties in the used residential property assets business. Fuji Corporation seeks to establish a business structure that earns stable income that is not influenced by economic fluctuations, and is expected to continue to make strategic investments in the used residential property assets business and its own elderly care home projects. Therefore, the progress in the property leasing and management business, and the company's ability to absorb expenses arising from its aggressive investments and to achieve its medium term targets should be watched closely.
 
 
<Reference: Corporate Governance>
 
 
◎ Corporate Governance Report
Fuji Corporation has submitted a Corporate Governance Report on December 8, 2015 after the Corporate Governance Code came into effect (in June 2015).
 
 
 
<Others>
With regards to Fuji Corporation's fundamental philosophy, President Nobutsuna Miyawaki has expressed his perspectives on corporate governance as follows: "In order to increase investment value, it is imperative that the President himself clearly express management philosophy, business objectives and corporate code of conduct, and that all executives and managers with high level of professionalism, enthusiasm and determination work in the same direction to lead the company and improve profitability."
 
Disclaimer
This report is intended solely for informational 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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