Bridge Report:（7199）Premium Group Second quarter of fiscal year ending March 2022

President and CEO Yohichi Shibata	Premium Group Co., Ltd. (7199)

Company Information

Stock Information

*The share price is the closing price on December 15, 2021. The number of shares outstanding, DPS and EPS are from the financial results for second quarter of fiscal year ending March 2022. ROE and EPS are from the previous results.

Consolidated Earnings Trends (IFRS)

*The forecast is from the company. Unit: million yen, yen. In August 2017, a 100-for-1 stock split was conducted. In April 2019, a 2-for-1 stock split was conducted. (EPS is revised retroactively.)

This Bridge Report reviews the overview of Premium’s earnings results of second quarter of fiscal year ending March 2022 and so on.

Table of Contents

Key Points
1.Company Overview
2.Second Quarter of Fiscal Year ending March 2022 Earnings Results
3.Fiscal Year ending March 2022 Earnings Forecasts
4. Conclusions
<Reference1: >
<Reference2: Corporate Governance>

Key Points

• The operating income for the second quarter of the term ending March 2022 was 10,104 million yen, up 20.5% year on year, and pretax quarterly profit was 1,915 million yen, down 4.3% year on year. Profit increased 31.5% year on year after adjustment for 545 million yen in one-time gains (negative goodwill, etc.) in the same period of the previous term. Due to the stagnant production of new cars, used cars are in short supply and their prices are skyrocketing, but both credit transactions and automobile warranty trading have exceeded the market averages.

   

• There is no change in the earnings forecasts. Operating income is expected to rise 20.3% year on year to 21,446 million yen, while pretax profit is projected to rise 1.1% year on year to 3.5 billion yen. Pretax profit excluding one-time profit or loss is forecast to increase 16.4% year on year. The progress of revenue and profit have been higher than the forecasts for the current term, but the full-year forecasts remain unchanged because of the uncertain future outlook due to the shortage of semiconductors in the automobile market and the resultant delay in new car production. Dividends will be 25 yen per share for both the interim period and the end of the term and the annual total is expected to be 50 yen per share, up 4 yen per share year on year. The projected payout ratio is 26.9%.

   

• The progress rate in the first half was 47.1% for operating income and 54.7% for pretax profit. However, regarding pretax profit, the ratio of the actual profit for the core business, excluding one-time profit in the term ended March 2021, was 42.1% and the progress rate for this term was significantly high compared to those in the past several years. The company's operating income is almost the same as that in a typical year and appears to be making good progress at this point. Although the full-year forecasts remain unchanged due to the uncertain impact of reduced production by automobile manufacturers on the used automobile market due to the shortage of semiconductors, we will closely monitor market trends and the company's business performance from the third quarter onward.

   

• Regarding the mid-term management plan VALUE UP 2023, the DX (Digital Transformation) strategy, one of the priority measures, appears to be making steady progress. We would like to expect their progress and outcomes.

1. Company Overview 

【1-1. Corporate history】 

【1-2. Corporate ethos】 

(Missions) 

The management policy is to improve corporate value in the medium/long term, by fulfilling the above missions and developing human resources who can take over these missions. 

【1-3. Business description】 

(1) Finance Business
As a business segment run by one of the company’s major subsidiaries, Premium Co., Ltd., the Finance Business provides services related not only to loans for purchasing automobiles (auto credit), but also to loans for purchasing photovoltaic power generation systems (ecology credit), shopping credit and such. The business also offers auto lease services targeting individual customers and debt recovery services on consignment.

(Taken from the reference material of the company) 

The company is also focusing on increasing members for its PFS Premium Club, a paid subscription service that provides services with higher added value to car dealers.

(2) Automobile Warranty Business
In a case where a credit user pays a warranty fee for this service when purchasing an automobile from an affiliated dealer (such as a used car dealer) of the Premium Group, he/she will be able to receive repair services free of charge within the predetermined coverage of the warranty if the purchased automobile breaks down.
(Taken from the reference material of the company) 

Via affiliated dealers, the automobile warranty of Premium Warranty Services Co., Ltd. of the Premium Group is offered to those who have purchased an automobile. By accumulating and analyzing data on the broken-down cars’ travel distances, age, and detail of repairs, it is possible to design more appropriate warranties and prices. The Premium Group has designed products and set prices based on the accumulated big data on repairs, including about one million automobile warranty contracts held by Premium Warranty Services Co., Ltd. 
The insurance provided by non-life insurance companies is designed to cover accidents, etc., but the automobile warranty only covers natural breakdowns, and these do not compete against each other. The automobile warranty covers a maximum of 397 parts, and the company offers about 1,000 different warranty products with different coverages and warranty periods. The automobile warranty dispels the anxiety over the purchase of a used car and is an indispensable product when purchasing a used car. In addition, the premiums (automobile warranty fee) based on the warranty period is received in a lump sum through advance payment, and the revenues are calculated by dividing it proportionally over the period.

In addition, regarding repairs corresponding to the cost of the warranty service, the company can reduce repair costs and prevent unnecessary repairs by such measures as procurement of recycled and rebuilt parts through subsidiaries, preferential warehousing of such parts through the company's network of repair shops, operation of directly managed repair shops in some areas, and the use of FAINES*.

Until now, sales have been expanded mainly by focusing on the marketing of in-house brand products. From the second half of the term ending March 2022, in order to expand sales of OEM products and other OEM products, the sales structure is being changed by assigning sales personnel specializing in these products.
In addition, cost ratio is being reduced by procuring recycled and rebuilt parts through the above subsidiaries and by utilizing the network of repair shops.

(3) Auto Mobility Business
In addition to credit finance and automobile warranty, the company operates a broad range of businesses related to the distribution of used cars. Currently, the company operates recycled parts business which distributes parts of used cars, reuse business which distributes repossessed vehicles and uses them inside the Premium Group, and repair business which offers maintenance services for inspecting and repairing automobiles and sheet-metal services for repairing scratches, dents, etc. on automobiles. All of them are environmentally friendly, and the company focuses on these businesses as “new 3Rs.”

In addition, a network for repair shops and a paid subscription system are being developed. The initial target for the network of repair shops was achieved ahead of schedule, increasing the number of companies to 3,160 and the number of paid subscription members to 104. By leveraging its auto mobility business, network of repair shops, and paid subscription system, the company is displaying the synergy between its finance and automobile warranty businesses to enhance its competitive advantage in each business. In the finance business, it is a cross-selling of finance services and auto mobility services. In the case of the automobile warranty business, as described above, automobile warranty repair is outsourced to a network of repair shops and a group of paid subscription members, and repair costs are reduced by procuring parts from group companies at low prices. The company will also create new businesses in the auto mobility business by combining big data and expertise obtained in the automobile warranty business.

The auto mobility business is the newest business among the three major businesses, but it is the fastest-growing field. Although it is still in an expansion phase, it moved into the black in the second quarter of the term ending March 2022.

(4) Regarding overseas business operation
The Premium Group applies the knowledge for credits, automobile warranty, maintenance, and sheet-metal work related to the sale of automobiles in Thailand, Indonesia, and the Philippines.
In Thailand, the company gives management and business consulting services to Eastern Commercial Leasing p.l.c., an equity-method affiliate conducting auto finance, and carries out automobile warranty and car maintenance businesses in Premium Services (Thailand) Co., Ltd., which is a joint venture with Eastern Commercial Leasing p.l.c. In Indonesia, PT Premium Garansi Indonesia, which is a joint venture with Sumitomo Corporation and the SinarMas Group, a local industrial conglomerate, offers consulting services about the development and design of automobile warranties. In the Philippines, Premium Warranty Services Philippines, Inc., which is a joint venture with Mitsui & Co., Ltd. and the GT Capital Group, a local industrial conglomerate, offers automobile warranties.
Additionally, used parts are exported to Tanzania and Russia etc. through subsidiaries.

【1-4. Characteristics and strengths】 

The competitiveness of the company is attributable to the following three points.

(1) Mixed product lineup achieved by their independency from banks
The services which the competitors under the umbrella of banks can offer are limited to auto credit, auto lease, etc. due to the restrictions of law. Meanwhile, the Premium Group, which is independent from banks, can provide various products and services, including automobile warranty, to meet a broad range of needs from dealers and users.
As a result, the company has established a competitive advantage through convenience and mutual usage discount.

(2) Expertise in auto finance 
By providing deep expertise in automobiles and finance fields, as well as products that combine automobiles and finance, the company can provide enhanced services that are unrivaled and create a competitive advantage.

(3) Firm marketing network covering the entire area of Japan 
A nationwide network of sales offices in major cities and original contact centers (outbound sales) forms a strong network with member stores reaching almost 25,000 companies nationwide, thus forming a solid customer base.

【1-5. ROE analysis】 

In the medium-term management plan, VALUE UP 2023, the target return on equity (ROE) is 31.7% for the term ending March 2023. 
The company intends to maintain a ROE of 20% or higher while pursuing an optimum business portfolio and streamlined business operations through the promotion of DX. 

2. Second quarter of Fiscal Year ending March 2022 Earnings Results 

【2-1. Consolidated Earnings (IFRS)】 

*Unit: million yen.

Income increased, pretax profit excluding transient factors increased
Operating income was 10,104 million yen, up 20.5% year-on-year. Pretax profit decreased 4.3% year-on-year to 1,915 million yen. Adjusting for one-time profit (negative goodwill, etc.) of 545 million yen in the same period of the previous year, profit increased by 31.5% year-on-year. Due to the stagnation of new car production, inventory shortages and soaring prices of used cars have become noticeable, but the transaction volume has exceeded the market in terms of both credit and failure guarantee.

Classification of operating expenses 

*Unit: million yen. 

【2-2. Business Segment Trends】 

Classification of operating income 

*Unit: million yen. 
 
（1）Finance Business
*Credit transaction volume
The amount of credit transactions in the second quarter of the term ending March 2022 was 100.4 billion yen, up 29.2% year on year.
DX measures and reorganization of the sales organization enabled the company to develop efficient sales activities. As of the end of the first half of the term, 79% of all transactions were paperless. The number of sales offices increased 9 year on year to 24.
The number of sales personnel at the end of the first half of the term was 94, up 10 from the end of the first quarter, and the goal of having 100 sales staff members was almost accomplished.
The average monthly transaction volume per auto sales staff member (in the second quarte from July to September) was also favorable at 178 million yen, up 16.7% year on year.

＊Loan receivables 
At the end of the second quarter of the term ending March 2022, the balance of credit receivables steadily rose 16.3% from the end of the same period of the previous term to 393.1 billion yen. The ratio of overdue receivables fell to 0.82% from 0.91% at the end of the same period of the previous term. The company implemented business innovations through DX measures, such as the efficient resolution of initial arrears through the adoption of IVR (Automated Calling System). In addition, the continuous collection of medium- to long-term arrears in cooperation with Central Servicer Corporation contributed to the decline in the delinquency rate.

＊Number of network stores 
At the end of September 2021, the number of affiliated companies increased 6.1% from the end of the same period of the previous term to 24,739, and new affiliated stores have increased almost as planned. In addition, the accumulated number of paid members (PFS Premium Club) has reached 757 as a result of preferentially facilitating the subscription of existing member stores. The targets for the end of the term ending March 2025 are 30,000 member companies and 3,000 paid subscription members.

（2）Automobile Warranty Business
*Transaction Volume
The number of transactions for the second quarter of the term ending March 2022 was 2,520 million yen, up 12.3% year on year. The number of transactions from in-house products rose 29.0% year on year.
The sales of in-house products grew as planned after focusing on their sales expansion, but sales growth of affiliated products slowed down due to sluggish markets.

（3）Auto mobility Business 
The operating income for the second quarter of the term ended March 2021 was 1,309 million yen, up 133.8% year on year. With the expansion of the paid subscription system, the handling of each service increased. In particular, sales of parts and wholesale of vehicles were the driving force behind the growth in earnings and helped the company make a profit. The accumulated total number of companies in the repair network rose 63.3% year on year to 3,160, exceeding the target of 3,000 ahead of schedule. There are 104 paid members (FIXMAN Club), and the company will focus on expanding its FIXMAN Club membership in the future.

【2-3. Financial Condition and Cash Flow】 

Total assets increased 2,583 million yen from the end of the previous term to 70,739 million yen, as finance receivables and other financial assets expanded due to business expansion. Total liabilities rose 1,528 million yen from the end of the previous term to 62,393 million yen, as the number of financial guarantee contracts increased in parallel with the increase of credit transactions.
Total equity attributable to the owners of parent increased 1,049 million yen from the end of the previous term to 8,260 million yen. Equity ratio (the ratio of total equity attributable to the owners of parent) increased 1.1 points from the end of the previous term to 11.7%.

◎CF 

*Unit: million yen. 

Operating and free CFs increased. The cash position declined.

【2-4 Topics】 

(1) Progress of the DX strategy
The transaction volumes of finance, automobile warranty, and auto mobility services realized through DX have been set as KGIs.
The finance business manages the volumes of auto credit transactions and auto lease transactions; the automobile warranty business manages the volume of automobile warranty transactions; and the auto mobility business manages the volume of transactions through the platform as DX strategy indicators. The system is under development except for paperless credit contracts.

The adoption rate of paperless credit contracts, which started in the previous term, has been increasing.
The number of paperless applications in the second quarter was 36.9 billion yen, a significant increase from 1.3 billion yen in the same period of the previous term. Paperless adoption rate also jumped to 79% from 7% in the same period of the previous term.

The DX Strategy positions this term and the next as development phases, and the development of business DX and in-house DX are progressing smoothly.

(2) Other topics

3. Fiscal Year ending March 2022 Earnings Forecasts 

【3-1 Full-year consolidated earnings 】 

【3-2 Major strategies 】 

(1) Finance Business
*Increase of credit transactions
In addition to promoting the increase of members for the PFS Premium Club membership service, the company aims to increase royalties and transactions.

*Increase of credit receivables
The company will thoroughly reduce initial arrears and reduce medium to long-term arrears through the synergy with Central Servicer Corporation.
Further introduction of DX measures is planned for more efficient collection of receivables.

*Increase of credit card affiliated stores
While continuing to increase affiliated stores, the company will focus on promoting operations and increasing members for its PFS Premium Club subscription service.
There were 85 diamond members, up 15 from the first quarter, and 672 gold members, up 135 from the first quarter.
As described in Topics, the company opened a new contact center (outbound sales) in Osaka in August 2021. It will also promote the operation of non-operating facilities at three locations nationwide.

（2）Automobile Warranty Business
The company will increase the number of sales staff members specializing in affiliated products.
It will strengthen handling of new products (extended warranties and warranties incidental to inspection and maintenance).
To further reduce costs, the company will promote warehousing in repair networks and in-house procurement of used parts.
A new system following DX measures is scheduled to be released this term.

（3）Auto mobility Business
FIXMAN Club has added a new membership category.
The company aims to attract new members by expanding content for members such as (i) Automobile leasing (started in October 2021) and (ii) Support for driving customer traffic "Premium—the place for cars and financing": (scheduled to start next term).

4. Conclusions 

The progress rate in the first half was 47.1% for operating income and 54.7% for pretax profit. However, regarding pretax profit, the ratio of the actual profit for the core business, excluding one-time profit in the term ended March 2021, was 42.1% and the progress rate for this term was significantly high compared to those in the past several years. The company's operating income is almost the same as that in a typical year and appears to be making good progress at this point. Although the full-year forecasts remain unchanged due to the uncertain impact of reduced production by automobile manufacturers on the used automobile market due to the shortage of semiconductors, we will closely monitor market trends and the company's business performance from the third quarter onward. Regarding the medium-term management plan “VALUE UP 2023”, it seems that the DX strategy, which is a priority measure, is steadily progressing. We would like to look forward to the future progress and results.

＜Reference 1：Overview of Medium-term Management plan “VALUE UP 2023” ＞

The 3-year mid-term management plan, VALUE UP 2023, which started the term ended March 2021 and will end in the term ending March 2023, is ongoing. On May 13, 2021, the company revised and re-announced the plan due to a change in business environment caused by the spread of COVID-19. 

(1) Progress so far 

(2) Regarding the mid-term vision 

 
(Mid-term vision: ideal state)
Recognizing the business environment as mentioned above, the company considers that it is necessary to grow the existing businesses and vitalize the used car market by supporting the management of used car dealers and maintenance shops, which are their direct customers. For this, the company upholds the mid-term vision of evolving from an auto credit company, offering mainly auto credits and warranties, to an auto mobility company that develops networks with automobile dealers, maintenance shops, and customers and creating the synergy among credit finance, automobile warranty, and auto mobility.

(Taken from the reference material of the company) 

 
The company announced digital transformation (DX) strategies, recognizing that it is essential to promote DX to realize sustainable growth and enhance competitiveness. 

(3) Initiatives in each business 

To realize an ideal state, it is necessary to develop a system to offer the best finance and the best service.
Based on the mid-term vision, VALUE UP 2023, the company will implement the following measures in each field.

① Credit Finance Business
Auto credit and auto lease for individuals
The priority measures are to enhance marketing and to proceed with industrial innovation.

For enhancing marketing, the company will expand the target area with the BIZ site method* and increase the number of marketing staff members to 130.
In addition, the company will upgrade outbound contact centers, start operating affiliates that are still not in operation, cultivate uncultivated areas, promote the development of a members-only organization for affiliates, and grow the top line steeply.

For promoting industrial innovation, the company will develop an automatic screening system based on AI, make back-office operations unmanned, and do away with paper to increase business efficiency and profit margin.

* BIZ site method means the marketing method of establishing footholds in major cities rather than establishing branches in respective regions and visiting the target area when necessary.
 
Servicer
The priority measures are to collect receivables jointly with other group companies and sell repossessed cars*.

For collecting receivables with other group companies, the company will collect receivables in cooperation with Central Servicer Corporation, which was acquired as a subsidiary in April 2020, and exert synergy to grow revenues further.
For selling repossessed cars*, the company will sell the vehicles repossessed at the time of collection of receivables to affiliates of the members-only organization, to create new earning opportunities.

*Repossessed cars: Vehicles repossessed when the company collects receivables for auto credits.

② Automobile Warranty Business
The company considers that it is indispensable to expand the market itself.
To do so, the company will implement the following measures and reduce the scrapping of cars by maintaining used cars.

③ Auto Mobility Business
The company will concentrate on the expansion of the “new 3Rs” businesses, which are environmentally friendly. The new 3Rs are Recycle (recycled parts) business, which distributes the parts of used cars, Reuse business, which distributes repossessed vehicles within the corporate group, and Repair business, which offers maintenance services for inspecting and repairing automobiles, sheet-metal services for repairing scratches, dents, etc. on automobiles, and so on. At present, the company offers a broad range of services, including the sale of recycled parts, repossessed vehicles, and task management software for maintenance shops, etc., via subsidiaries acquired through M&A.

The priority measures are to enrich the service lineup, to develop members-only organizations for affiliated used car dealers and maintenance shops, and to proceed with the platform scheme. The company aims to actualize the sustainable growth of the corporate group, by diversifying revenue sources.

Among the network which the company has developed so far (including over 30,000 automobile dealers and over 3,000 maintenance shops), the company will establish members-only organizations with affiliates with an increasing number of transactions: PFS Premium Club for automobile dealers and FIXMAN Club for maintenance shops.
By connecting these members-only organizations and customers, the company aims to become a platform provider for offering a wide array of services.

(Taken from the reference material of the company) 

④ Overseas strategy
As indicated in the mission, the company will target to the world and expand our know-how cultivated in Japan to overseas.
While keeping an eye on the situation of the pandemic, etc., the company will strive to exhibit its products and services in more countries, while recognizing Phase I of the mid-term vision as a planting season. The company will make inroads into foreign markets by establishing joint ventures with local capital, etc. instead of establishing a company with its own funds.
Phase II of the mid-term vision will be recognized as the reaping period, and the company will engage in overseas businesses on a full-scale basis while considering the reorganization of joint ventures into consolidated subsidiaries.

(4) Numerical goals 

*Unit: 100 million yen. Net profit means the profit attributable to owners of parent. Market cap means the closing value on March 31, 2021. CAGR is the average annual growth rate in the four years from FY 3/21 to FY 3/25. Calculated by Investment Bridge Co., Ltd. with reference to the plan of Premium Group. 

(5) Initiatives toward ESG and SDGs 

<Reference 2: Corporate Governance> 

◎Organization type, and the composition of directors and auditors 

 
◎Corporate governance report (updated on June 29, 2021) 

<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>
[Supplementary Principle 1-2 (3) Appropriate scheduling of general meetings of shareholders]
The company will ensure adequate audit periods for appropriate financial reporting and effective audits by auditors and comptrollers, and appropriately set schedules related to general meetings of shareholders so that more shareholders can participate based on its belief that general meetings of shareholders provide opportunities to have a dialogue with shareholders.
In addition, the company will secure opportunities for shareholders to participate through online distribution using the web conferencing system.

[Principle 1-4: Strategically held shares]
As a principle, the company does not hold listed shares strategically and does not currently hold such shares. In the event that strategic shareholding is required, the Board of Directors will examine the details of the proposal, including whether the purpose of holding the shares is appropriate and whether the benefits and risks associated with holding the shares are commensurate with the cost of capital and so on, and make a rational decision on the appropriateness of holding such shares and properly disclose the decision.

In addition, the Public Relations and Investor Relations Department of the company collect and organize opinions obtained through dialogue with shareholders and report them to the Board of Directors as necessary to share information and improve management.
Further, regarding the management of insider information during dialogue, the company strictly controls undisclosed information in accordance with the regulations on the prevention of insider trading.