| 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 December 4, 2015. Number of shares issued at the end of the most recent quarter excluding treasury shares.
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* DPS of March 2013 included commemorative dividend of ¥3.
* Estimates are those of the Company. 2 for 1 stock splits were conducted in April 1, 2015. From the current fiscal year, the definition for net income has been changed to net income attributable to parent company shareholders (Abbreviated as parent net income). |
| Key Points |
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| Company Overview |
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The Sangetsu Group includes the following two companies: Sungreen Co., Ltd., a dedicated distributor of exterior products, and Yamada Shomei Lighting Co., Ltd., a planner, designer, manufacturer, and distributor of lighting equipment. <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. Sangetsu Co., Ltd. was incorporated in 1953 by the founding family. 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.Shosuke 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, upholstery 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"
(FY3/15: Sales and Operating Income of ¥113.364 and ¥7.550 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 Fukuoka, 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 its 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.
(FY3/15 Sales and Operating Income of ¥14.698 Billion and ¥455 Million) ③ "Lighting Business"
Yamada Shomei Lighting Co., Ltd., which was turned into a subsidiary in 2008, sells down lights, z-lights and other general lighting fixtures within Japan.
(FY3/15 Sales and Operating Income of ¥3.988 Billion and ¥30 Million) <ROE Analysis>
 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>
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.
① Business Model Capable of Yielding Stable Earnings ② "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 more than 20 types of 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 Fiscal Year March 2016 Earnings Overview |
 Sales, Profits Rise and Record High in First Half.
Sales rose by 0.4% year-on-year to ¥64.2 billion to a new record high for the first half. While sales of curtains declined, sales of wallcoverings and flooring materials trended favorably due in part to the sales pricing revisions conducted from the second half of the previous fiscal year. Reviews of costs were conducted from June along with the decline in crude oil prices and allowed gross margin to improve by 1.2% points and gross income to increase by 4.8% from the previous term. While distribution expenses rose due to increases in the number dispatch routes and the move of Tokyo showroom, successful control of selling, general, and administrative expenses allowed operating income to rise by 16.2% year-on-year to ¥4.5 billion. While profits exceeded initial estimates, sales fell slightly shy of estimates.
 ① Interior Business
Sangetsu adopted a pricing focused marketing strategy in light of the difficulties faced in the volume, share and sales of wallcoverings and curtains. Gross income rose on the back of the successful diffusion of price hikes and reductions in cost of sales. At the same time, Sangetsu recognizes the need to strengthen its non-pricing competitive strengths (Products, branding, and marketing strengths).<Wallcoverings> While demand for interior related products from newly constructed homes stagnated, Sangetsu endeavored to cultivate demand from non-residential realms including offices, retail stores, and accommodation facilities. Furthermore, Sangetsu's efforts to expand sales of high value added and high functionality products including rigid chloride self-adhesive sheets "Reatec" have been successful in cultivation strong latent demand from offices. <Floorings> Cushion vinyl sheet "H Floor", heterogeneous vinyl sheets "S Floor" and other fortified products used by medical and welfare institutions trended favorably. The range of applications for multiple layered vinyl floor tile "Floor Tile" was expanded from its existing market of commercial facilities to rental housing. <Curtains> Conditions within the custom made curtain market segment remained severe due the continued progression of deflationary trends in interior products. Sangetsu fortified products showcased in its product catalog "Sanwinc", including shades and vertical blinds as part of its efforts to propose curtain and other improvements in window applications. ② Exterior Business
As a part of marketing function fortification plan, Sungreen focused upon sales promotions including campaigns and fortification of sales in the Kanto region, allowing it to achieve higher sales in the current term over the previous year in the Kanto region where a branch was newly established in Yokohama last year. At the same time, training programs have been provided to construction engineers to fortify Sangetsu's construction capabilities. However, disappearance of special demand created by snow related disasters in previous term contributed to difficult operating conditions.
③ Lighting Business
Yamada Shomei Lighting leveraged its technological and product development capabilities that embody its customer needs to publish its "Z-Light Catalog" and "General Catalog", which propose various high value added products to its audience of inerior and lighting designers. Investments in infrastructure for the upcoming Tokyo Olympics are expected to act as a tailwind and allow for favorable deliveries of order for products in non-residential applications. Whiles sales grew, booking of evaluation losses on product inventories and increases in costs to strengthen the business foundation contributed operating loss.
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| Fiscal Year March 2016 Earnings Estimates |
 Sangetsu Maintains Outstanding Earnings Estimates, Small Increases in Sales, Profits Expected
Sangetsu made no revisions to its outstanding earnings estimates, which call for sales to rise by 2.6% year-on-year to ¥135.5 billion. During the full year, refurbishments are expected to rise by a small margin on the back of marginal growth in new housing starts, and the non-residential realm business is expected to remain in line with the previous fiscal year. Corrections in sales pricing and reductions in inventories of products which saw evaluation losses are expected to allow gross income margin to improve by 0.2% points. Higher labor costs arising from increases in pay due to promotions as part of reforms in the human resources system, efforts to strengthen design capabilities and business foundation fortification efforts are expected to contribute to increases in SG&A expenses. However, the increase in sales is expected to absorb these costs and allow operating income to rise by 2.7% year-on-year to ¥8.2 billion. Due to the disappearance of impairment and asset retirement losses that occurred in the previous term, net income is expected to rise by double digits year-on-year. A dividend of ¥45.00 per share is expected to be paid for an anticipated dividend payout ratio is 59.8%.
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| Progress in the Medium Term Business Plan |
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①Business Reforms, Information and Distribution System Restructuring
Sangetsu seeks to achieve strong and effective marketing through its marketing support services offered to its sales force from February 2015. Sangetsu has selected a next generation backbone system sold by Accenture to begin operation from 2016, and will also receive associated consulting services from Accenture. In addition, external consultants will be employed to conduct reviews of Sangetsu's distribution system including both external and internal systems.
②Strengthening Alliances with Procurement Partners
Sangetsu seeks to maintain its negotiating power based upon its position as the largest interior products trading company by avoiding increases in reliance upon single companies from which products are procured. However, the environment for procurement partners is changing with some competitors concentrating their product purchases and increases in publishing costs for product catalogs arising from higher product elimination rates. Furthermore, customers are also calling for fundamental revisions in product procurement strategies due to their difficulty to use.Amidst these trends, Sangetsu acquired 22.2% of Wavelock Holdings Co., Ltd. shares turning it into an equity accounting method held affiliate. Wavelock Interior Co., Ltd., a subsidiary of Wavelock Holdings Co., Ltd., is the leading manufacturing company within the vinyl wallcovering industry within Japan and is one of main product procurement companies. In addition to efforts to fortify and long-term stabilize the procurement structure, efforts will also be made to increase the value addition of Wavelock Holdings. ③Strengthening of Product Capability, Branding Restructuring
In addition to strengthening its position in the residential market, Sangetsu will also promote efforts to strengthen its product capability and restructure its branding as part of its strategy to fortify its position within the non-residential market. Along with these goals, the Company will change the front page of its product catalog to bring about a sense of unity that embodies the full range of the "Sangetsu" brand. Various aspects of concern to general users and consumers will be considered including the ease of use, sense of enjoyment, design, and function of the catalog and products listed within it. Other aspects such as budget, inventories and distribution will be considered in addition to design and function for interior design offices, construction companies and producers. Furthermore, a new catalog containing products including imported carpet tiles which do not have the Sangetsu logo will be launched with professional designers in mind. The products listed in this catalog entitled "LW" are also designed with the goal of raising the value addition the buildings in which they are used.
  ④Showroom Strategy
The Shinagawa Showroom opened on July 31, 2015 has been favorably received. The success of this showroom is reflected by the facts that the number of visitors to this showroom during the months of August, September and October have risen from the previous year and that the ratio of professional users amongst all visitors has also risen above expectations. In addition, various events such as seminars held by design offices and studios for their customers at the expanded seminar facilities of the new Shinagawa showroom have been held and the range of activities held at the showroom is growing.
⑤Others
 Preparations for the restructuring of distribution facilities are progressing smoothly. The Kuki Center (Covering the Kanto region), the Chubu Logistics Center II (Covering the Chubu region), and the Heiwajima Center (Covering the Tokyo metropolitan region) are expected to begin operating from August 2016, January 2017 and January 2018 rexpectively.A resolution was passed during the board of directors' meeting held on November 5, 2015 to allow Sangetsu to perform a share buyback, with a maximum number and value of shares of 2.5 million and ¥6.0 billion respectively, between the period of November 10, 2015 to April 28, 2016. And during the period from November 10 to 30, the Company acquired 422,300 shares worth ¥961 million. |
| Conclusions |
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| <Reference: Medium Term Business Plan "Next Stage Plan G"> |
  1) Strengthen Business Foundation
Fortification of Governance StructureAlong with the implementation of a "corporate auditor committee structure company" as of the general shareholders meeting held on June 18, the founder and chairman and senior executive director, and six new directors including President Yasuda and five corporate auditors resigned from their posts. At the same time, a new director compensation system that is linked to the earnings and share price performance of Sangetsu has been introduced. In addition, the introduction of a mandatory retirement system and the above mentioned changes reflect aggressive and large changes in the structure of Sangetsu. Employee Awareness Reforms Promoted A net income target of ¥6.3 billion has been established for the non-gratis stock option (350 employees and directors of the Sangetsu Group are eligible to receive these options) along with a 6% cost of capital trigger that links earnings to compensation. These changes are part of the Company's switch to a compensation system that provides for early promotions and compensation based upon performance. Aside from these changes, efforts will be implemented to strengthen the "brand image", IT systems, and risk management systems of Sangetsu. 2) Business Strategy Restructuring
Organizational ReviewsThe headquarter function will be fortified through the acquisition of superior human resources for the legal affairs, quality control, accounting and other divisions along with the introduction of a business division system. In addition, new market development and refurbishment business promotion offices with the goal of strengthening downstream and consumer strategies have been established. A seat covering material office responsible for films and with strengthened and specialized marketing functions has also been established. Increases in staffing of the housing divisions and corporate marketing divisions are also being undertaken. Facilitation of Distribution Facilities As the first step in creating a foundation for a new supply chain management structure, new distribution centers will be established with two in the Kanto region and one in the Chubu region. These facilities are expected to require about two years to complete and upon their completion the three existing facilities will be transferred and consolidated into two facilities. Marketing function will be fortified along with efforts to reduce labor and transportation costs. In particular, a new facility is being constructed in Kuki, Saitama Prefecture where numerous companies from which products are purchased exist. In addition to collection and distribution functions, the consolidating point function will also be fortified. Showroom Strategy In July 2015, the flagship showroom is moved from Akasaka area to Shinagawa area of Tokyo. In addition to display of products at the new showroom, it will also propose various coordinated usages of interior products and materials. Therefore, the number of model rooms and the overall floor space will be expanded by a large amount, and three dimensional and other cutting edge digital systems will be introduced. In addition, a new interior laboratory function (A service where interior materials for non-residential applications can be considered) with designers who can propose various usages of interior materials and products will also be established. And the new showroom will provide "an enjoyable experience for users to create interiors" through its ability to allow customers to "see," "select," and "combine" various interior products and materials. Moreover, spaces where seminars provided to architect and design offices and other customers will be expanded. Additional smaller showrooms will also be opened in addition to the existing showrooms in Tomeihan, Okayama, Hiroshima and Kyushu regions. 3) Improve Corporate Reputation with Stakeholders
Capital PolicySangetsu maintains a goal of achieving consolidated comprehensive payout ratio of over 100% for three years. As part of this goal, the Company acquired ¥4.78 billion worth of treasury stock and made a total dividend payment of ¥3.07 billion, for a total comprehensive payout of ¥7.85 billion and a comprehensive payout ratio of 178.6% during fiscal year March 2015. In addition, Sangetsu has established a plan of reducing its capital by ¥10.0 to ¥20.0 billion within three to five years, and has successfully reduced both its common equity and capital by ¥3.6 and ¥1.1 billion respectively during the previous term as a means of raising its level of capital efficiency. Also, a return to shareholders strategy which can be sustained over the medium to long term will be implemented. Societal Contribution Strategy In addition to the traditional societal contribution strategy, Sangetsu calls for each of its employees to take proactive steps to participate in societal contribution activities which leverage its business. As a specific example, employees participate in renovations and improvements at a children's foster home in the Nagoya region using materials and products sold by Sangetsu. Furthermore, the Company is considering the expansion of this effort to other regions. <Targets>
◎ Targets to Be Achieved Between 2014-2016
 In addition to refurbishment of existing businesses and promotion of large scale renovation of hospitals and nursing care facilities in the interior business, a shift to high value added products and efforts to achieve higher sales are expected to be promoted. Sales, general and administrative expenses are expected to increase in the absence of sales because of the startup of new business development and overseas business deployment. Based upon the assumption of limited expansion in the exterior business, Sangetsu is expected to prioritize the establishment of a stable business foundation for the lighting business. Consequently earnings are not expected to grow. ◎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%." 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) 2016 Investment Bridge Co., Ltd. All Rights Reserved. |
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