（3299） | Publish:Tue, Oct 02, 2018 IR「BRIDGE REPORT」

BRIDGE REPORT
（3299）

スタンダード

mugen estate co., ltd. (3299)

shinichi fujita, president

company	mugen estate co., ltd.
code no.	3299
exchange	tse 1st section
industry	real estate
president	shinichi fujita
hq address	nihonbashi hama-cho 3-19-3, chuo-ku, tokyo
year-end	december
homepage	https://www.mugen-estate.co.jp/en/

share price	shares outstanding		market cap.	roe (actual)	trading unit
¥727	24,361,000 shares		¥17,710 million	24.7%	100 shares
dps (est.)	dividend yield (est.)	eps (est.)	per (est.)	bps (actual)	pbr (actual)
¥30.00	4.1%	¥97.75	7.4x	¥789.59	0.9x

*stock price as of close on august 24, 2018. shares outstanding is taken from the most recent earnings announcement documents.
roe and bps are on actual data taken from the most recently ended fiscal year.

fiscal year	sales	operating profit	current profit	net profit	eps	dps
december 2010	11,317	659	526	263	15.94	1.00
december 2011	11,423	308	109	45	2.76	1.00
december 2012	12,877	605	382	225	13.62	1.00
december 2013	20,830	2,254	1,974	1,127	68.27	2.00
december 2014	30,175	3,465	3,076	1,759	90.88	8.50
december 2015	45,706	6,123	5,573	3,382	154.15	16.00
december 2016	57,488	6,310	5,696	2,925	121.35	21.00
december 2017	63,568	7,122	6,478	4,276	175.61	25.00
december 2018 (est.)	53,284	4,562	3,760	2,381	97.75	30.00

*estimates are those of the company. earnings until fiscal year december 2011 are non-consolidated, and those thereafter are consolidated.
*a 500 for 1 stock split was performed on march 26, 2014. a 2 for 1 stock split became effective on july 1, 2016.
eps and dividends have been adjusted to reflect this stock split.
from fiscal year december 2016, the definition for net profit has been changed to net profit attributable to parent company shareholders (abbreviated as parent company net profit).

we present this bridge report reviewing the first half of fiscal year december 2018 earnings results of mugen estate co., ltd.

key points

company overview

1.company overview

mugen estate is a pioneer in the resale business of used real estate, where used condominiums and other properties are purchased and then their exteriors and interiors are refurbished as a means of raising their value prior to resale. a characteristic of the company is to have a single employee in charge of the entire business process including purchase, refurbishment, and sale. mugen estate also boasts of a unique position within the industry, based upon its wide range of product offers that accurately match the needs of its customers.

susumu fujita, currently the chairman of mugen estate, founded the company in 1990 for the acquisition of used condominiums to be refurbished for resale to first time purchasers. this marked the start of the used condominium refurbishment business. amidst the expansion of the used condominium market, mugen estate has been able to carry on without outside capital by cultivating staff on its own to achieve steady growth. the subsidiary fuji home co., ltd. was established in 1997 to provide refurbishment services. the company has been able to overcome various difficulties including the lehman shock and the great east japan earthquake, and listed its shares on the mothers market of the tokyo stock exchange in june 2014, and on the first section of the tokyo stock exchange in february 2016.

the corporate philosophy is reflected in its name "mugen" ("dream comes true"; japanese word) and calls for "the pursuit of ideals, realization of dreams." mugen estate's goal is to help customers realize their own dreams by owning a house of their own, while also striving to realize dream through ongoing growth of the company and of its employees.

expanding market for refurbished and used residential properties

the ministry of land, infrastructure and transport announced the "total plan for renovating existing homes" in march 2012 with a view to double the size of the refurbished and used residential property market. based upon the goal of achieving a shift in the focus from the newly constructed residential property market to the used residential property market where used residential properties are refurbished to improve their quality and functions, the used residential property refurbishment market is expected to double its current size to \20 trillion by 2020.
as part of such measures, "efforts will be made to quickly structure the market from the consumers' point of view so that consumers can safely purchase used residential properties and carry out refurbishment. at the same time, mlit will also promote comprehensive efforts to cultivate companies and people who shall be responsible for providing attractive refurbished and used residential properties that respond to the diverse needs of consumers, and with the goal of promoting improvements in quality and increasing liquidity of used residential properties."

attractive real estate market in tokyo metropolitan region

continued favorable conditions for the used condominium market:

the used condominium market in the metropolitan area continued to trend favorably.
in 2017, the number of contracts of used condominium in the tokyo metropolitan area was 37,329, up 0.4% from the previous year, hitting a record high for the third consecutive year. furthermore, the annual contract value of used condominiums in 2017 was 1,192.7 billion yen, an increase of 5.2% from the previous year.

huge latent market:

according to the "2013 house and land statistics survey" published by the ministry of internal affairs and communications, the number of "non-wooden residential properties" in the tokyo and greater metropolitan region (tokyo, kanagawa, saitama and chiba) stood at 7.70 million units. mugen estate maintains a basic policy of purchasing only condominiums that pass the new earthquake standards implemented in 1981, which account for 63% of overall, or 4.40 million units of the total number of non-wooden structure multiple unit residence buildings constructed between 1981 and 2005. given that the company purchased 676 units of properties for investments and for residence during fiscal year december 2017, the latent market potential for mugen estate remains huge.

household numbers in the tokyo metropolitan region on the rise:

while a contraction in the total population of japan arising from declining birth rates appears to be unavoidable at present, the national institute of population and social security research estimates that the number of households in the tokyo metropolitan region will continue to grow until peaking in 2025.

after the downward revision, mugen estate is the only company in the list above to decrease sales and profit year on year, and the per and pbr are also on the lowest level.

mugen estate's business is divided between the two segments of "real estate trading" and "real estate leasing and other" businesses, with the real estate trading segment business accounting for about 96% of total sales during fiscal year december 2017. the company plans to promote efforts to expand its earnings deriving from the real estate leasing and other business segment.

the real estate trading business segment includes the three services of real estate resale, interior and exterior refurbishment and construction, and real estate distribution with the main service being the resale of real estate.

◎ purchases and resale business

the company purchases used condominiums for sectional ownership, real estate for investment, and detached housing properties in the tokyo metropolitan areas, including tokyo, kanagawa, saitama and chiba. to increase their value, the company then has the subsidiary fuji home, and some others, refurbish them in accordance with their age, space, layout, location and management condition.

main value addition activities

refurbishment of exteriors and interiors

improve management conditions of buildings

restoration of wear and tear caused by age

leasing of vacant rooms

collection of unpaid rent

after having increased real estate values as "real estate for resale" through any of the activities, the company then sells to first time purchasers, individual investors, and small to medium sized companies.

the purchase and sale of real estate is performed by real estate brokers, but some of the transactions are undertaken by fuji home in order to obtain a feel for the diversifying needs of customers and market trends. in order to respond quickly and accurately to the needs of customers, mugen estate maintains a diverse lineup of condominiums for sectional ownership, real estate for investment (rental condominiums, apartments and office buildings) and detached housing. properties are divided into two categories of real estate for investment and real estate for residence. real estate for investment are properties purchased by investors for the purpose of deriving returns, which include whole rental condominium complexes, offices and apartment buildings, as well as condominiums for sectional ownership and others. the average price for real estate for investment is between \0.1 to \0.2 billion.

the residential-type properties are those which purchased by consumers for the purpose of living in them, which include detached housing in addition to its main item of condominiums for sectional ownership. these properties are bought primarily by first time purchasers and their prices are mostly in the \0.02 to \0.03 billion range. mugen estate sold over the course of fiscal year december 2017, 318 units of real estate for investment and 358 units for residence, 676 in total.

mugen estate boasts of a unique business process where one sales person is responsible for the acquisition, refurbishment and sale of real estate. furthermore, the company's sales staff visit real estate brokers such as mitsui no rehouse, nomura real estate urban net co., ltd., sumitomo real estate sales co., ltd., tokyu livable co., ltd. and others in the tokyo metropolitan region to obtain information about real estate for sale by both individuals and corporations. by visiting these real estate companies, sales staff are able to obtain real estate information on superior properties that have yet to be released through public channels.

after obtaining information on real estate for sale, analysis is conducted regarding the properties' potential for increased value and resale at higher prices after renovation and refurbishment. if mugen estate finds that there is that potential, then they acquire the properties and then outsource the task of refurbishment to a subcontracting company under the supervision of its subsidiary, fuji home.
an analysis of the potential customer base specific to the location of the property is conducted by sales staff to determine the price and other needs of the customers, and in some instances a three bedroom used condominium maybe converted into a two bedroom condominium and other refurbishments are undertaken to raise the attractiveness of the property (refurbishments are conducted with a view to the end sale price and ensuring profitability on the sale).

sales staff responsible for purchasing the real estate adhere to standards established by the company. these internal standards are comprised of various factors including specific balance between acquisition price and management fees, proximity to train stations and no properties requiring bus rides, and other specific information known internally as the "12 purchase conditions," which have been developed over the history of the company's operations and are effective as a context for the conduct of its business. at the same time, this standard developed on mugen estate's own unique knowhow also serves to support less experienced sales staff in making the correct analysis and purchase of real estate. in addition, sales staff consult with their managers and superiors to obtain appropriate advice on how to carry on their business process. and while high commission involved in sales activities for condominiums tends to lead sales staff to act discretionally in general in the industry, mugen estate maintains a culture of team work, where sales staff consult each other for advice and superiors lead their subordinates in the right direction on the business process. also, the company pays commission for sales representatives based on profit gained at the time of resale rather than the resale price itself, so the risk of being stuck with unsold merchandise is relatively low when compared with other companies.

◎ interior and exterior refurbishment business

the subsidiary fuji home conducts refurbishment of both the interiors and exteriors of purchased used real estate. fuji home boasts of bountiful knowhow in refurbishment services based upon over 500 refurbishment projects conducted through accurate surveys and analysis of real estate properties by its highly skilled staff, including first class registered architects. orders from mugen estate currently account for over 90% of fuji home's total orders, but it is endeavoring to expand orders from external clients.

◎ brokerage business

information about real estate purchased for resale by mugen estate is handled by fuji home. in addition to the company website, they have also put it up on other portal sites for used real estate information operated by other companies. furthermore, they also provide mediation services for mugen estate in their acquisition of real estate properties. also, synergies with the company's real estate resale business can be realized by gathering accurate information about the needs of used real estate purchasers.

optimization of the sales function of the real estate resale business is being pursued.

◎ leasing business

real estate purchased as investment-type properties and as fixed asset properties are leased to end users. in principle, real estate is purchased with the objective of sales. however, renting and leasing is used as a means of deriving income until the properties are sold.

◎ property management business

management services for leased real estate that have been acquired as investment-type properties and fixed asset properties are conducted. improvement in the management of structures, restoration of wear and tear caused by age, leasing of vacant rooms, collection of outstanding rent, and other measures are implemented as part of a strategy of increasing the value of properties and improving the return on investment-type properties. in some cases, property management services are maintained even after investment-type properties is sold at the request of purchasers.

the "three s's" designed to collateralize sustained growth and establish a sound earnings foundation.

mugen estate promotes a growth strategy to become a "dominant player in the tokyo and surrounding metropolitan region" and is focused upon used real estate including not only condominiums and detached housing units, but also office buildings to become the company with the largest sales in the resale real estate business in the region. as a means of differentiating its business from its competitors, mugen estate has chosen not to open offices in regions outside of tokyo and the surrounding regions, and in principle will not deal in used real estate in regions outside of tokyo metropolitan area.

(mid-term management plan)
the company will achieve sustained growth and improve corporate value over the mid- to long-term through improvements (evolving, deepening and renewing) in its business model. the evolving, deepening, and renewing in the fiscal year december 2017 were as follows:

evolving: net sales of office buildings increased 92.9% year on year, to 22.8 billion yen, showing a significant increase.

deepening: secured a profitability level on par with the level of a year ago with the profit-control system implemented in earnest.

renewing: the recruitment of foreigners, which was undertaken as part of diversity, contributed to sales of properties.

toward further success in its effort at "evolving, deepening and renewing" from this term onward, the company will strengthen its "organization's power" while cherishing the "power of individuals" which has been cultivated in its existing businesses, endeavoring proactively to try new approaches not only in the leaseback business that was launched in february 2018 but also in new businesses. under the policy, the company aims to achieve sales of 96.0 billion yen (up 51% from the fiscal year ended dec. 2017), an ordinary profit of 8.0 billion yen (up 23% from the same fiscal year), and net profit of 5.0 billion yen (up 17% from the same fiscal year) in the fiscal year dec. 2020.

①management leveraging synergies

in addition to the above mentioned real estate resale service, mugen estate also performs real estate rental, real estate refurbishment, real estate distribution, and real estate management services. the knowhow developed in its various businesses based on the results of the many years of operation is leverage to be able to respond flexibly to changes in the market and derive various synergies between its various businesses.

②diverse product lineup and unique positioning

with regards to the core real estate resale business, mugen estate boasts of a strong information gathering capability based upon its network in the used real estate market in the tokyo and the surrounding metropolitan region, which has enabled the company to develop a diverse lineup including condominiums for sectional ownership, real estate for investment (whole rental condominium complexes, offices and apartment buildings) and detached housing, and to respond quickly and accurately to customers' needs. in addition, mugen estate has developed a strong reputation amongst real estate brokers for its ability to respond to all of the information gathered from them. returning to those real estate brokers upon completion of rendering resale properties creates a benevolent cycle where the company gains preferential treatment in the gathering of information on superior real estate.

as illustrated in the above diagram, mugen estate has carved out a unique position within the real estate refurbishment industry through the creation of a diverse product lineup.

③strength of high levels of professional skills

the information gathering, investment decision making, property management, technological response and other capabilities are all part of mugen estate's high levels of professional skills and allow the company to provide superior properties to the market.

additionally, the stable constructing and management system, the business know-how that has been developed over many years and the strong financing ability based on contracts with about fifty financial institutions are mugen's strengths.

first half of fiscal year december 2018 earnings overview

sales and profits decreased.

sales in the first half of fy 12/18 were 24.6 billion yen, down 22% year on year. sales were sluggish because financial institutions were taking a stricter stance towards lending and buyers were wary due to the perceived high price of real estate.
under these circumstances, the company expanded inventory and focused on securing profit margins by thoroughly managing profit for each property. consequently, gross margin rose 1.0 point. sg&a expenses only increased 3.3% year on year due to a decline in personnel expenses and sales commissions, but operating profit fell 30.1% to 2.5 billion yen as a result of decreased sales.

both sales and the number of units decreased year on year. the average unit selling price decreased due to an increase in the number of investment property units sold.

excluding the sectional real estate for investment, the average unit selling price of buildings was 266.9 million yen, (up 7.4% year on year).

there were 18 sales of investment-type properties that exceeded 300 million yen, including the two sold for over 1 billion yen. the previous year had 23 such sales.

for residential-type properties, barriers to entry are low and competition is increasing. both sales and number of units sold declined, but unit sales prices were up year on year.

broken down by area, tokyo's share of sales for investment and residential properties continues to grow.

sales to overseas investors saw a decline in both sales and average unit price due to an increase in the sale of real estate for investment with low average unit prices. sales to investors in asian countries such as china, taiwan, and hong kong are steadily increasing.

the company has intensified its purchase activities for continuous growth, resulting in the most inventories compared with the previous years.

cash and deposits were down 5.1 billion yen from the end of the previous term, but real estate for sale were up 17.3 billion yen. consequently, current assets rose 12.7 billion yen. total assets also increased 12.7 billion yen from the end of the previous term to 71.9 billion yen. total liabilities grew 11.9 billion yen to 51.7 billion yen, mainly due to a 12.2 billion yen increase in interest-bearing debt. net assets were 20.1 billion yen, up 800 million yen year on year. as a result, equity ratio fell 4.7 points to 27.8% from 32.5% at the end of the previous term.

operating cf and free cf turned negative due to an increase in inventories, etc. financing cf turned positive due to an increase in long-term debts. the cash position declined.

(4) topics

◎ established a website for selling real estate for investment

in july 2018, the company established a website for selling real estate for investment (https://www.mugen-invest.com/) for the purpose of expanding sales channels and promoting b to c sales of the company's real estate for investment located in metropolitan regions (tokyo, kanagawa, saitama and chiba).

(overview)
information is listed regarding the company's real estate for investment, and properties are sold directly to real estate investors. the website also acts as a way for real estate owners to assess their properties for sale.

(features)
* property search the property search function allows one to search efficiently across a wide range of product lineups, immediately finding the desired property.

* member registration
by registering as a member, one will be able to browse member-only properties and receive e-mail notifications when new properties are listed.

* mobile search
in addition to computers, the search function can also be used on smartphones and tablets.

the company plans to maintain and increase the number of website hits by increasing the number of listed properties, providing products that meet the various needs of investors, and updating the site regularly, improving usability and adding new functions.

fiscal year december 2018 earnings estimate

the company revised the forecasts downward. sales and profit are estimated to decrease year on year.

after observing sales trends in the first half, the full-year forecast has been revised downward.
sales are expected to decrease 16.2% year on year to 53.2 billion yen, and operating profit is expected to fall 35.9% to 4.5 billion yen.
the dividend forecast remains unchanged at 30 yen/share, a 5 yen increase from the previous term. the estimated payout ratio for this term is 30.7%.

(3) efforts in the second half

financial institutions continue to have a strict stance towards lending to real estate investors, but the company is still seeing strong demand from the wealthy class and overseas investors. while reviewing some of their strategy, they will proceed with the following initiatives.

while focusing on the tokyo metropolitan area, the company will further increase the range of products to include sectional ownership of condominiums as well as entire properties, while providing new property information.

one of the company's strengths is that they firmly adhere to business responsibilities. in order to secure gross profit, they will refine methods such as maintaining strict internal standards and transfer rules, sharing examples of mistakes early on, and strengthening the internal review system for large properties.

the company intends to improve work efficiency by introducing a core system. they will also strengthen the lease management department.

they will consider a variety of financing methods, including banking, developing routes for trust banks, and direct financing.

* real estate trading business
review the sales prices of investment-type properties, and further strengthen sales.
continue to increase the size of properties, improve the ability to handle properties costing over 1 billion yen, and strengthen purchases and sales in the 100-300 million yen price zone, which is the largest segment.
because the company obtained sufficient inventory in the first half, in the second half they will conduct purchases more carefully, taking into account the balance with sales.

* leasing and other businesses
the company will strengthen the foundation needed for business expansion.
in addition to anticipating increases in revenue from leasing real estate for sale as well as the purchase of real estate for investment in the real estate trading business, they will prepare for the acquisition and expansion of fixed assets.
revenue from leasing real estate is expected to exceed initial estimates, due to increases in real estate for sale.

conclusions

this is the first time since the company's listing that full-year estimates show a decline in sales and profit. the number of units sold for investment-type properties were steady up through this term's first quarter, but came to a halt in the second quarter. the company plans to review sales prices for investment-type properties and further strengthen sales. we would like to pay attention to just how much price incentives will affect the demand, starting with the results in the third quarter.

<reference: regarding corporate governance>

◎ corporate governance report

updated on mar. 28, 2018

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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