| Sangetsu Corporation (8130) |
 |
|
||||||||
|
 |
|
Company |
Sangetsu Corporation |
||
Code No. |
8130 |
||
Exchange |
First Section, Tokyo and Nagoya Stock Exchanges |
||
Industry |
Wholesale (Commerce) |
||
President |
Shousuke Yasuda |
||
HQ Address |
1-4-1 Habashita, Nishi-ku, Nagoya-shi |
||
Year-end |
March end |
||
URL |
|||
|
 |
|
* Stock price as of closing on November 21, 2016. Number of shares issued at the end of the most recent quarter excluding treasury shares.
ROE and BPS are based on the previous year. |
||||||||||||||||||||||||
|
 |
|
|
|
* 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 |
 |
| Company Overview |
|
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 Corporation 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 established a new corporate philosophy including a new brand philosophy in April 2016 that will enable it to take on the challenge of implementing reforms necessary to take it to its next stage of growth. A new "brand philosophy" has been added to the "corporate creed," "corporate mission," and "Three Principles of Sangetsu" to create an expanded corporate philosophy. <Corporate Creed> Integrity <Corporate Mission> To contribute to society through interior design and strive to create daily culture of enrichment <Three Principles of Sangetsu> Creative Designs, High Reliable Quality, Fair Price <Brand Philosophy>  Brand statement "Joy of Design"Brand purpose "We provide the joy of design to those who create new spaces."Sangetsu endeavors to share the joy of creating new value through interior business with all of its stakeholders. <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 27, 2016) that calls for growth of 0.8% and 0.0% year-on-year in private sector non-residential investments during fiscal years 2016 and 2017 respectively, following on the heels of 5.6% year-on-year growth recorded during fiscal year 2015. However, new construction starts on a floor space basis are expected to rise by 5.7% and 3.5% year-on-year for offices and retail stores respectively. Aging of the population due to declining birthrates is having an effect to a long term decline in new housing starts and overall difficult operating conditions. However, the approach of the 2020 Tokyo Olympics is expected to contribute to relatively favorable market conditions in the private sector non-residential construction market for the foreseeable future despite a trend for the price decrease. ◎ Competitors
In addition to Sangetsu, there are three publicly traded competitors that operate in the interior decorating market.
 In such situation, only Sangetsu's PBR is over one time. <Business Description>
The main businesses include planning, development, and sales of wallcovering, floor covering, 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"
(FY3/16: Sales and Operating Income of ¥115.140 and ¥8.873Billion)  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 53 marketing offices throughout Japan, with 9 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 customer 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 seldom asks their clients for backordering because the out-stocks are covered by surrounding distribution centers immediately. 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.
(FY3/16 Sales and Operating Income of ¥14.712Billion and ¥367 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.
(FY3/16 Sales and Operating Income of ¥4.119 Billion and ¥ -128Million)  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 the 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 do not have to carry facilities for the manufacturing process. Besides, 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. Moreover, 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. 25 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 30 types of catalogs, which far surpass those of its competitors.
"Creating"  "Proposal based sales"
Nearly one third of all employees or some 450 work in marketing functions at Sangetsu, the largest marketing function within the industry. These marketing staffs are assigned to 63 offices located throughout Japan and conduct proposal- based marketing to clients. Sangetsu also staffs its nine showrooms with 45 employees. In addition, about 40 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.
 "Distribution system"
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. Generally, 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.
 |
| First Half of Fiscal Year March 2017 Earnings Overview |
 Slight Rise in Sales, Profits Decline, Fall Below Estimates
Sales rose by 1.1% year-on-year to ¥64.9 billion on the back of growth in all three business segments, along with strong growth in various materials in the interior business. Gross income margin improved by 0.5% year-on-year due to efforts to reduce cost of sales, and gross income rose by 2.9% year-on-year due to the higher sales. However operating income declined by 22.0% year-on-year to ¥3.5 billion due to Sangetsu's inability to absorb expenses associated with the transition of business process outsourcing and M&A activities. The booking of ¥160 million in equity accounting method profit from Wavelock Holdings Co., Ltd. allowed ordinary income to see a smaller margin of decline of 16.7% year-on-year to ¥3.9 billion. While the relocation of distribution facilities led to the booking of an extraordinary loss of ¥60 million, the switch from a defined benefit to defined contribution type retirement plan and the termination of the retirement benefit scheme contributed to a ¥100 million extraordinary profit to be booked and allowed net income to fall by an even smaller margin of 11.0% year-on-year to ¥2.8 billion.
(2) External Environment
The number of units and floor space of new housing starts rose by strong 6.0% and 4.1% year-on-year respectively during the period between April to September 2016.At the same time, Sangetsu estimates that large refurbishments, which are highly sensitive to fluctuations in the overall economy, trended weakly and fell by 9.0% year-on-year. And the negative influence of the decline in floor space of non-residential construction starts and subsequent declines of 10.4% and 6.5% year-on-year in fiscal years March 2014 and 2015 possibly caused continued negative growth in interior construction work in the first half of the current term, particularly in the Tokyo metropolitan region.  ① Interior Business
Sangetsu conducted aggressive efforts to appoint young designers from outside of the Company to work on product development, and to sell catalogs that respond to the diversifying needs of the market for multiple products. In addition, the Company also began sales of an upholstery catalog called "UP" and newly promoted marketing of interior products that feature highly attractive designs and functionality.
Sales Rise, Profits Decline <Wallcoverings>
In light of the lackluster demand for refurbishment, sales trended sideways. While weakness in the medium price range products contributed to a decline in pricing, sales volume rose by 3%.The high value added product catalog called "Reserve" was published in May. The proposal of "Living with Pets", "Playing with Children" and three other concepts for interior coordination that enable consumers to express their tastes has allowed this catalog to be received strongly. Furthermore, strong sales activities to companies conducting refurbishment services using the refurbishment catalog called "Reform Selection", which proposes solutions to raise the value addition of rental housing space including cloth patterns that act as accents to interiors, has contributed to sales growth. <Flooring Materials>
Sales of carpet tiles and floor tiles have trended strongly on the back of efforts to capture new construction and refurbishment demand in the realm of non-residential construction, including commercial facilities, hotels, and offices. At the same time, weak demand for flooring sheets led to a 24.3% year-on-year decline in sales from medical facility applications.Sangetsu is also putting efforts into cultivating the self-owned home, rental property and condominium applications for flooring including general residential use cushion flooring called "H-FLOOR" and condominium hall and patio use non-slip flooring sheet "Non Skid" catalogs. The "H-FLOOR" features products designed by three up-and-coming designers, and their unique designs have been favorably received. <Fabrics>
Sangetsu is implementing efforts to expand sales through exhibitions and seminars at interior shops leveraging the various coordinated interiors proposed in the curtain catalogs published in the previous term "SanWink" and "AC Curtain Fabrics". Moreover, the upholstery catalog "UP", that went on sale from September proposes materials with new designs and maintenance characteristics, is being actively promoted to furniture manufacturers and construction companies.
② Exterior Business
Sales remained in line with the previous term, but profits rose by 30%.Amidst intensifying competition with competitors, Sangetsu focused its efforts on strengthening its marketing structure. These efforts have been effective and led to strength in the Kanto region surrounding Tokyo. ③ Lighting Business
Sales rose and the margin of loss contracted.By conducting sustained specialized marketing solutions from last year, orders from lodging and public facilities expanded. In addition, the marketing structure has been fortified through synergies effect derived from sharing of information with Sangetsu's corporate customer marketing division.  Increases in accounts payables ledto a ¥1.6 billion rise in current liabilities. Declines in retirement benefit scheme related costs allowed noncurrent liabilities to contract by ¥0.4 billion from the end of the previous fiscal year, but total liabilities rose by ¥1.1 billion to ¥31.8 billion. Net assets fell by ¥1.5 billion to ¥106.9 billion due to a decline in retained earnings. Capital adequacy ratio also fell by 0.9% points to 77.0%.  (5) Topics
Sangetsu acquired 100% of the shares of the United States wallcovering manufacturing and distributor company Koroseal Interior Products Holdings, Inc. on November 14, 2016 (To become a subsidiary of the newly established Sangetsu USA).
◎ United States Wallcovering Manufacturing, Distributor Company Acquired   Market Environment  Objective of Koroseal Acquisition① Enter United States Non-Residential Market Koroseal is the United States' top wallcovering materials company with one of the largest sales forces. Similar to Sangetsu, Koroseal conducts aggressive marketing and specification activities, and maintains a large number of high quality customers and suppliers. Therefore, the M&A of Koroseal is expected to provide Sangetsu with a strong access route allowing it to gain entry to the North American market. ② Strengthen Procurement Capabilities
The addition of Koroseal, the largest non-residential wallcovering company in the United States, to the Sangetsu Group will also strengthen Sangetsu's overall procurement structure.As described in President Shosuke Yasuda's interview later in this report, the interior products is an inefficient business due to a diversity of customer and the wide variety of products that must be carried in small lots. Therefore business scale must be captured to realize efficiencies. In this regard, the M&A of Koroseal represents an opportunity to strengthen Sangetsu's negotiating power with materials manufacturers. |
| Fiscal Year March 2017 Earnings Estimates |
 Earnings Estimates Revised, Call for Sales to Rise, Profits to Decline
In light of the first half earnings performance, Sangetsu has chosen to revise its full year earnings estimates downwards and now calls for sales growth of 2.3% year-on-year to ¥137.0 billion. While sales growth estimates have been revised down, new housing starts remain strong, large interior refurbishment projects in the Tokyo metropolitan region are trending firmly, and positive effects are anticipated from the introduction of new products and publishing of new catalogs for flooring materials for residential and non-residential applications.Operating income is expected to decline by 12.2% year-on-year to ¥8.0 billion. This decline is attributed to an expansion in the margin of decline in gross income of ¥95 million over initial estimates, and due to the lower sales and other additional sales, general and administrative expenses, including outsourcing fees associated with the business process outsourcing, logistics facilities consolidation expense, and additional M&A related fees arising from acquisitions. Dividend forecasts remain unchanged .Call for dividend payments of ¥25.00 per share at the ends of the interim and full fiscal year, representing a ¥2.5 per share increase from the previous term and total full year dividend payment of ¥50.00 per share. Dividend payout ratio is expected to be 57.3%.  |
| Progress in the Medium Term Business Plan "Next Stage Plan G" |
|
<Strengthening of Value Chain>
Sangetsu takes orders from its distributors over three main channels including "telephones", "online systems", and "facsimiles", but will begin outsourcing its facsimile orders from January 2017. The complete outsourcing of facsimile orders is expected to be completed by June 2017.◎ Orders Placement Tasks partially Shifted to Business Process Outsourcing While Sangetsu currently employs 170 employees including temporary staff to deal with facsimile orders, the complete outsourcing of this service will allow it to reallocate staff to focus on marketing activities to architect design offices, property owners, and house makers, and to conduct specification marketing activities that can contribute to earnings. <Product, Function Fortification>
The logistics and marketing facilities have been separated, and aging facilities have been renewed with latest facilities to create a supply chain management structure that optimizes logistics function and makes shipments more efficient.◎ Logistics Facilities Reorganized The logistics function has been concentrated to Chubu and Kita Kanto Logistics Centers, with the facilitation of the shipping functions and maintenance being performed at these two centers. ◎ Construction Capability Strengthened
Sangetsu acquired 100% of the shares of the construction and interior finishing businesses spun off as a new company from Toyobo Fairton Co., Ltd., a subsidiary of Toyobo Co., Ltd., in December 2016 to become a 100% owned subsidiary.Fairton operated for 33 years since its founding and boasts of strong experience and track record serving general contractors, office equipment manufacturers, office architectural design companies and other clients. In addition, Fairton has established the ability to handle construction internally by creating the "Toyobo Fairton Co., Ltd. Safety Association" in the regions of Tokyo and Osaka. Fairton boasts of employees with bountiful experiences in construction management, and their capabilities are expected to allow Sangetsu to strengthen its construction capabilities and acquire orders for construction related to hotels and other non-residential facilities. <Regional Expansion>
Regional showrooms have been newly established in three locations including Sendai, Okinawa, and Kanazawa.◎ Newly Established Showroom These showrooms lead to sales opportunities to promote high value products to its customers including local builders ,construction and refurbishment companies, and architects by showing samples and experience products. During the first half of fiscal year March 2017, the number of client visitations overall has risen by 20% year-on-year. |
| Interview with President Shosuke Yasuda |
Earnings Trends during the Current Term While full year earnings estimates have been revised downwards, Sangetsu has been able to maintain market share in each of its product areas and we have maintained healthier business conditions than our competitors despite the increasingly severe market environment.In addition, Sangetsu is focusing upon its ability to create cash flow, and we have been able to steadily improve our key management benchmark of cash conversion cycle (CCC) over the past three years. While the sales and net income targets of ¥140.0 billion and ¥6.3 billion in the fiscal year March 2017, the final year of the "Medium Term Business Plan (2014-2016) Next Stage Plan G", have been revised downwards, Sangetsu will continue to implement efforts to beat these targets. Overseas Business DeploymentThe acquisition of Koroseal will play an important role in Sangetsu's overseas business deployment.The interior business is an inefficient business due to the complexity of the market that requires a product lineup with a wide variety of products in small numbers to satisfy the diverse needs of customers. Therefore, the securing of market scale is important for this business.Therefore, we believe there is a need to secure procurement and sales functions in overseas markets in addition to Japan. The acquisition of the top company in the United States will provide strong synergies in diversifying our procurement function and strengthening our sales channels. Furthermore, the high profitability of Koroseal was yet another factor behind our decision to acquire it.The local company established in China called "Sangetsudo (Shanghai)" in April 2016 has begun aggressive marketing activities from November, starting with six marketing employees.Our efforts in China to provide high quality Japanese wallcovering materials have been welcomed by Japanese architectural design and interior construction companies operating locally. And while our China business has only just been started, we will facilitate our logistics function to steadily expand business there. |
| Conclusions |
|
|
| <Reference1: Medium Term Business Plan "Next Stage Plan G"> |
   In addition to the 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 Achieve Between 2017~2019 Based upon this midterm business plan, the next midterm business plan is expected to end in the 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%." |
| <Reference2: Regarding Corporate Governance> |
 ◎ Corporate Governance Report
The company submitted the latest corporate governance report on Nov. 21, 2016.<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)> The company implements each principle of the Corporate Governance Code.  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) 2017 Investment Bridge Co., Ltd. All Rights Reserved. |
 |
