| Sangetsu Co., Ltd. (8130) |
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Company |
Sangetsu Co., Ltd. |
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Code No. |
8130 |
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Exchange |
First Section, Tokyo and Nagoya Stock Exchanges |
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Industry |
Wholesale (Commerce) |
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President |
Shousuke Yasuda |
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HQ |
1-4-1 Habashita, Nishi-ku, Nagoya-shi |
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Year-end |
March end |
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URL |
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* Stock price as of closing on November 21, 2014. Number of shares issued at the end of the most recent quarter excluding treasury shares.
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* Estimates are those of the Company.
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| Key Points |
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| Company Overview |
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<Corporate History>
Sangetsu was founded in 1849 under the original name of "Sangetsudo" to sell various traditional Japanese interior decorating products including scrolls, wall scrolls, folding screens, sliding doors, partitions, and other products made of cloth and paper. The founding family changed the name to Sangetsu Co., Ltd. in 1953 along with its conversion to a corporation. From the latter half of the 1970s onwards, the business was expanded into Tokyo, Fukuoka, Osaka and other parts of Japan. In 1980, Sangetsu was listed on the Second Section of the Nagoya Stock Exchange, and later in 1996 its shares were also listed on the First Section of the Tokyo Stock Exchange. Currently, Sangetsu is expanding its operations into overseas markets and has established itself as the largest total interior decorating product provider within Japan, with a widely recognized brand of interior products.Shousuke Yasuda was appointed as the first President who is not from the founding family of Sangetsu in April 2014. He will direct the Company during its third stage of growth entitled "Our Third Founding Phase," following on the heels of the original first phase of founding and the second phase when the company became a publicly listed corporation. <Corporate Philosophy>
Sangetsu maintains a corporate motto of "integrity," and endeavors to uphold the "Three Principles of Sangetsu," which are described below, in all of its business activities. In addition, Sangetsu seeks to contribute to society through the provision of products with high value addition that enriches customers' home environments and lives.
 <Market Environment>
The market environment for the main wallcovering and flooring products is strongly influenced by trends in the Japanese construction market. Declines in new housing start arising from declining population and changing family structures within Japan, and deflationary trends have depressed sales of the interior products market as shown in the graph below.
◎ Overview    Moreover, the Research Institute of Construction and Economy issued a report entitled "Outlook for Construction Investment Based upon a Construction Economy Model" (October 22, 2014) that calls for continued growth of 7.6% and 2.4% year-on-year growth in private sector non-residential investments during fiscal years 2014 and 2015 respectively, following on the heels of 11.1% year-on-year growth recorded during fiscal year 2013. Aging of the population due to declining birthrates is contributing to a long-term decline in new housing starts and overall difficult conditions. However, the approach of the 2020 Tokyo Olympics is expected to contribute to favorable conditions to continue in the private sector non-residential construction market for the foreseeable future. ◎ Competitors
In addition to Sangetsu, there are three publicly traded competitors that operate in the interior decorating market.
 <Business Description>
The main businesses include planning, development and sales of wallcovering, curtains, fabric chairs and other interior products. Sangetsu boasts of a "fabless operation" and does not maintain any manufacturing facilities, but its capabilities exceed that of typical trading firms and all of the products it sells are planned, designed and developed in-house. In addition, Sangetsu provides exterior products and lighting fixtures through its subsidiary.
 ① "Interior Business"
(FY3/14: Sales and Operating Income of ¥113.181 and ¥8.842 Billion)  Replacement of existing products is not a simple task. Disposal of products leads to wastes, but the disposal of existing products due to replacement with newly designed products is necessary to maintain the attractiveness of the product catalog and to satisfy customers. Therefore, the ability to maintain a balance between attractiveness and efficiency is highly important and is one of the strengths of Sangetsu. ◎Marketing Structure
In addition to the headquarters located in Nagoya, Sangetsu maintains 8 regional offices and 55 marketing offices throughout Japan, with 6 of these marketing offices also hosting showrooms.
 Therefore, Sangetsu conducts public relations and advertising for its products in its product catalog, television commercials and at its showrooms. In addition to these "passive" marketing activities, Sangetsu also conducts "proactive" marketing of its products through its corporate marketing division and its 400 marketing staff to provide and gather information and propose products to clients. While the main marketing efforts are conducted through dealers, Sangetsu also conducts direct marketing to customers in the Nagoya and surrounding Chubu area, and the number of its directly accessed customers totals 6,000 in these regions alone. While the number of customers dealt with through dealers is not known, the total number of customers is estimated to amount to several tens of thousands nationwide. ◎Distribution Structure
Sangetsu maintains a network of 13 distribution centers nationwide. Most all products are normally stocked at the Company's distribution centers in Tokyo, Nagoya, Osaka and Kyushu, with the number of products shipped from these centers surpassing 60,000 per day and the out-of-stock ratio amounting to a low 0.13% (About 70 products) per day. Sangetsu's nationwide distribution network makes "Just-in-Time" provision of products to match the interior construction schedules of our clients possible. Products are sourced from a wide range of over 100 supplier companies.
② "Exterior Business"
Sungreen Co., Ltd., which was turned into a subsidiary in 2005, sells doors, fences, terraces and other exterior products within Japan.
(FY3/14 Sales and Operating Income of ¥15.018 Billion and ¥556 Million) ③ "Lighting Business"
Yasuda Shomei Lighting Co., Ltd., which was turned into a subsidiary in 2008, sells down lights, z-lights and other general lighting fixtures within Japan.
(FY3/14 Sales and Operating Income of ¥3.820 Billion and ¥435 Million)  Specifically, Sangetsu "seeks to reduce its capital from the end of March 2014 by ¥10.0 to ¥20.0 billion within three to five years" as part of its efforts to achieve a ROE ratio of 8% to 10% by fiscal year 2017 to 2019. Consequently, the Company will implement efforts to raise profitability in addition to this capital strategy. |
| Characteristics and Strengths |
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① Business Model Capable of Yielding Stable Earnings
Sangetsu is a pioneer in the realm of "fabless companies" that do not maintain their own manufacturing functions and therefore have lower fixed expense burdens because they don't have to carry facilities for the manufacturing process. In addition, the Company boasts of over 13,000 products, sourced from over 100 suppliers, supplied to several tens of thousands of customers, which diversifies risk in many ways. And while Sangetsu's may be considered as an economically sensitive company as its business and earnings performances are closely linked to trends in the construction market, the Company has never seen losses since its founding.
② High Market Share of Various Products
As the industry's largest company, Sangetsu boasts of high market shares in its various products as listed below.
 ③ "Creating," "Proposing," "Providing"
While the actual manufacturing of products is not conducted in-house, Sangetsu performs the planning, design and development functions internally. The previous generation of Sangetsu management made aggressive investments for "unique designs," one of the three principles of the Company. 20 in-house designers develop new and original versions of products based upon numerous basic designs. The cultivation of designers responsible for various products is done through participation in oversea exhibitions, communication with marketing staff, and discussions with outside design consultants as part of their on-the-job training. Furthermore, Sangetsu maintains a policy of aggressively taking the perceptions and opinions of younger designers and staff into consideration. Sangetsu also boasts of an overwhelming number of products of about 13,000 that far exceeds the number of products of its competitors. In addition, the Company conducts revisions of its products on a regular basis every 2 to 3 years with 28 categories of product catalogs, which far surpass those of its competitors.
"Creating"  "Provide"
As mentioned earlier in this report, Sangetsu normally maintains inventories of all of its products so that they can be provided on a "Just-in-Time" basis using their nationwide distribution network. However, the Company is required to conduct speedy processing techniques as product orders are placed so that loss rates can be limited to avoid the maintenance of excess inventories and reduced efficiencies. Some wallcoverings are produced in rolls as long as 50 meters, and Sangetsu cuts these rolls into shorter segments when orders are placed for shipment. The remaining segments of wallcovering are then cut to match other orders to eliminate losses. This type of custom-made cutting technology has been cultivated over the long years of experience in the interior decorating business and is an important factor that differentiates Sangetsu from its competitors.
 "Propose"
Nearly one third of all employees or some 400 work in marketing functions at Sangetsu, the largest marketing function within the industry. These marketing staff are assigned to 63 offices located throughout Japan and conduct proposal- based marketing to clients. Sangetsu also staffs its six showrooms with 64 employees. In addition, 51 interior designers create design boards that combine samples of various products for customers to use when choosing interior products. This high level of proposal-based marketing capability is unmatched within the industry and sets Sangetsu apart from its competitors.
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| First Half of Fiscal Year March 2015 Earnings Overview |
 Sales Rise, Profits Fall on Marketing Function Fortification
Sales rose by 4.4% year-on-year to ¥63.9 billion. Fortification of marketing capability to designers and other clients, and publishing of new catalogs allowed sales of both the refurbishment and non-residential realms of the interior business (Wallcovering, floorings, curtains and other products) to see higher sales. All business segments saw higher sales. The revisions in product sales pricing taken in response to a rise in materials costs due to the rise in crude oil prices contributed to a 4.7% year-on-year increase in gross income. However, expenses arising from structural reforms, facilitation of the operating structure, and revisions in compensation contributed to a 7.5% year-on-year increase in sales, general and administrative expenses and caused operating income to decline by 4.4% year-on-year. Impairment loss arising from the assumption of the sale of real estate including an employee dormitory and non-current asset retirement loss contributed to a 19.9% year-on-year decline in net income. Because of the stronger than expected growth in sales and improvement in gross income margin, profits actually surpassed estimates. Increases in labor expenses arising from organizational fortifications, distribution costs due to increases in the number of customers, publishing costs for the new product catalog, domestic travel expenses, and other costs associated with structural reforms contributed to a ¥750 million increase in costs. Special compensation, fees arising from organizational structure facilitation, repair and refurbishment expenses for office and distribution facilities, IT system restructuring expenses, impairment loss and other one-off expenses contributed to a ¥1.11 billion increase in costs. If the increased cost had been attributed to the structural reforms only, profits would have been in line with the previous year's levels.  <Wallcoverings>
Sangetsu ran television commercials as part of its strategy of promoting a shift from lower-priced, high-volume products to medium-priced medium-volume products in order to raise profitability. Also, a new catalog was published along with this strategy of promoting medium-priced products. Despite the weak operating environment brought on by the decline in new housing starts, successful price hikes allowed sales to grow and enabled Sangetsu to maintain its share of the markets. Profit margins, which had fallen due to the increase in raw materials pricing, entered a recovery phase from July onwards.
<Floorings>
Fortification of marketing efforts for flooring materials used in residences, offices, commercial facilities, educational institutions, medical institutions, nursing care facilities and other various facilities were undertaken as part of the restructuring of the marketing structure. In addition, new editions of two product catalogs were published. Reviews of product pricing strategies, including a price hike implemented from September 1, 2014, and the ability to achieve higher sales allowed profit margins to improve.
<Curtains>
Fundamental reviews of sales promotions, product development and product catalog strategies were undertaken. At the same time, the ability to conduct proposal-based sales was fortified through expanded cooperation with marketing staff. Revised pricing strategies released in the new product catalog published in October 2013 contributed to an expansion in sales. On a half-year basis, the current term was the first time that pricing has risen by a large margin since the September 2002.
<Sales, General and Administrative Expenses>
Increases in distribution expenses arising from the installation of new facilities and due to expansion in the number of clients, and implementation of reviews of offices and distribution facilities in line with the midterm business plan contributed to increases in maintenance and repair expenses. Efforts to fortify human resources caused labor and training expenses to rise.
② Exterior Business
Sales of the main realm of fences, car ports and sun rooms rose from previous first half. Sangetsu fortified its exterior product lineup with products made in-house during 2013. In the Tokyo and surrounding Kanto region, a new branch office was opened in Yokohama. Sales derived from the Tokyo and Kanto region rose by 1.4 times from the previous first half.
③ Lighting Business
Various measures are being implemented in order to establish a stable earnings foundation, including improvements in corporate governance, improvements in employee motivation, reductions in product numbers, and fortification of inventory management. Sangetsu will focus its efforts upon strengthening its product lineup with the clearly identified focus upon clients within the "non-residential" segment of the market in mind. This business turned to profits due in part to the expansion in gross income and to the insurance payments related to the heavy snowfall recorded in February 2014.
 Declines in accounts payables led to ¥3.3 billion decline in current liabilities and a ¥2.8 total drop in total liabilities to ¥23.186 billion over the same period. Net assets rose by ¥1.2 to ¥121.147 billion on the back of increases in retained earnings. Equity ratio also rose by 1.7% points from the end of the previous term to 83.9%.  |
| Fiscal Year March 2015 Earnings Estimates |
 Estimates Revised Upwards, Call for Sales to Rise, Profits to Decline
As described earlier in this report, sales of products to non-residential applications rose during the first half and exceeded initial estimates. And while difficult conditions are anticipated during the second half, sales during the full year are expected to exceed estimates. Both operating and ordinary incomes are also expected to exceed estimates due to the higher sales and despite increases in expenses expected to arise from impairment losses and sales, general and administrative costs due to business restructuring. Consequently, earnings have been revised upwards.During the full year, sales are expected to rise by 0.8% year-on-year to ¥133.0 billion despite the expected decline in second half sales resulting from the rush to purchase products during the previous second half ahead of the consumption tax hike. Expenses from the improvements in distribution facilities and offices conducted as part of Sangetsu's business restructuring, various consulting fees associated with the midterm business plan, and the publication of new product catalogs are expected to lead to increases in sales, general and administrative expenses and cause operating, ordinary, and net incomes to decline by 18.5%, 18.7% and 19.4% year-on-year respectively. The same level of dividend as in the previous term of ¥75.00 per share is expected to be paid, and would represent a dividend payout ratio estimate of 64.9%.  |
| Mid-term Business Plan,2014-2016: Next Stage Plan G |
    3) Improve Corporate Reputation with Stakeholders
Based upon the identification of ongoing improvements of corporate value as the basic means of returning profits to shareholders, Sangetsu has sought to implement a stable level of dividends. (The combined total dividend payout over the past five years amounts to over 70%) In addition, the Company has implemented a management strategy that places a priority upon safety of its balance sheet in addition to sales growth and profitability. However, Sangetsu recognizes the necessity of making a shift in its management strategy that favors efficiency of the balance sheet and considers cost of capital in addition to safety and expansion of earnings in light of the recent Japanese capital market conditions. Consequently, the Company announced a capital strategy as detailed below on November 7, 2014.
   ◎Targets to Be Achieved Between 2017-2019 Based upon this midterm business plan, the next midterm business plan is expected to end in fiscal year March 2020 and maintains the themes of "realizing profitability of new, overseas businesses, and consolidated subsidiaries," "steadily expand earnings of the interior business," and "introduction of new capital strategy." In addition, the next plan maintains a "target of achieving ROE of 8% to 10%." |
| Interview with President Shousuke Yasuda |
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<Background to President Yasuda's Appointment, His Mission>
 Since the establishment of Sangetsu as an official corporation in 1953, the four Presidents who have led the Company have all been members of the founding family. However, the current Chairman states that the decision to appoint a non-family member as President was taken due to the "need to change Sangetsu in order for it to continue to survive" amidst the large changes in the business environment and the aging of the members of the founding family.While leadership of the top management is crucial, the "participation of each and every employee in business management at the frontline" is also another key factor.Therefore, my mission, as indicated in the mid-term business plan "Next Stage Plan G" and by our theme of "developing as a listed company that enables its employees to actively participate in management," is to promote reforms of employee awareness and to make them conscious of the importance of taking responsibility for their activities in the development of our Company. Furthermore, Sangetsu will create a corporate environment that enables us to achieve a new phase of growth while at the same time placing a high priority on maintaining favorable relationships with all of our stakeholders, including our employees. While I was familiar to some extent with employees in my previous workplace before being appointed as President of Sangetsu, I was thoroughly impressed to find out in my communications with Sangetsu staff how "extremely diligent" they are. Their passion for their work is extremely strong.At the same time, they also lacked "aggressiveness" that might be conducive to gaining stronger business results. I believe that by taking on a more aggressive stance in the workplace that includes going the extra mile to take on challenges and tasks not called for by superiors or clients could contribute to a more effective working environment that is capable of yielding even better business results.<Regarding the Mid-term Business Plan>
Improving the various skills of employees is crucial in the "creation of a corporate structure that allows employees to participate in management." Consequently, we are making preparations for the introduction of personnel systems that increase the motivation of employees.Efforts will continue to be promoted to capture business opportunities in the "non-residential market" where demand for interior decorating products and services is strong. Furthermore, marketing efforts in the "rental and reform market" realm, where relatively high value added wallcoverings are used and the frequency of wallcovering replacement is high at between once every 2 to 3 years, will be strengthened.While the positive effects of "expansion in product numbers" and "expansion of business realms" through M&A activities are appearing, we believe that there are still significant amounts of latent synergies that have yet to be realized. In the lighting business, top line sales have yet to be boosted to a level where they adequately cover fixed costs, but it is clear that the synergies that can be derived from collaboration with the interior business are large. It indeed happened that in the construction project of the new terminal of Haneda Airport, as a result of the joint proposal by Sangetsu and Yamada Shomei Lighting, Sangetsu received orders for floorings and Yamada for lighting. Consequently, Sangetsu will focus its efforts to capture orders from specially ordered custom built homes and non-residential applications for both interior and lighting products.Creation of a foundation for the deployment of business in overseas markets is a major theme in the mid-term business plan. And given that competition in the interior decorating market within Japan is high, the opportunity to achieve higher levels of profitability and expand sales in overseas markets is significant. Currently, overseas sales amount to only ¥0.4 billion, but we seek to raise this to ¥5.0 billion in the future.In order to achieve these goals, we need to firmly establish our "brand." Our current business is based on a slightly passive process of supplying products when they are ordered by customers, and we lack a strong brand presence. Based upon the establishment of an overseas business division in July, we will promote a proactive proposal based business model as part of our branding strategy. And while this strategy may take time to become effective, we will steadily promote efforts to firmly establish our brand.We are currently considering which markets to approach.In addition to our current shareholders, we seek to make changes to our capital strategy that can satisfy potential new investors, and will prioritize the sustainment of high levels of shareholder returns.<Diffusion of Our Corporate Philosophy and Principles>
As described in the mid-term business plan, the key philosophies of "integrity" and "the three principles of Sangetsu" have been handed down from Sangetsu's founding members. We will continue to promote and diffuse these philosophies.However, I believe that our top management conducted an excess level of "micro management" in the past that led employees to become overly passive in their business activities.It is my belief that these philosophies and vision can only be truly learned through both successes and failures in the process of taking on challenges by each and every one of our employees. I also believe that it is highly important for us to create an environment where employees themselves can actively participate in the management of our business.While I have only been President for about half a year, I have taken every opportunity to convey to our employees my belief in the "need for Sangetsu to change."In addition, we have newly established a "communication support system" in order to promote better communication amongst our employees. This system provides partial subsidies for meals and other events where employees meet with members of other divisions to increase their communication. Furthermore, directors responsible for the respective business divisions often join these meals and events to further strengthen their lines of communication with employees.<Message to Investors>
As the largest interior products and services company within the industry, we enjoyed a stable business which in turn stopped us from seeking out active lines of communication with external parties that are not directly involved with our business.Because the influence and voice of the interior decoration products industry is relatively weak, we need to improve and increase our influence to secure future growth and development. Therefore, we will promote communication with external stakeholders to gain their understanding of our Company and industry, and to be able to better respond to their needs.Furthermore, we need to strengthen our communication with our shareholders as part of our efforts to fortify businesses in which we maintain strong competitive positioning.We will promote measures to raise our shareholder returns while at the same time maintaining their stability for a medium- to long-term, and we ask for the continued support and understanding in our various business efforts. |
| Conclusions |
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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) 2015 Investment Bridge Co., Ltd. All Rights Reserved. |
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