（8860） | Publish:Fri, Jan 29, 2016 IR「BRIDGE REPORT」

BRIDGE REPORT
（8860）

プライム

Fuji Corporation Ltd. (8860)

Nobutsuna Miyawaki, President

Company	Fuji Corporation Ltd.
Code No.	8860
Exchange	Tokyo Stock Exchange, 1st Section
Industry	Real Estate
President	Nobutsuna Miyawaki
HQ	1-4-23 Habucho, Kishiwada-shi, Osaka
Year End	March
Website	http://www.fuji-jutaku.co.jp/english/

Share Price	Shares Outstanding		Market Cap.	ROE (actual)	Trading Unit
¥780	36,148,184 shares		¥28.196 billion	10.9%	100 shares
DPS (Est.)	Dividend Yield (Est.)	EPS (Est.)	PER (Est.)	BPS (actual)	PBR (actual)
¥26.00	3.3%	¥82.99	9.4x	¥729.26	1.1x

*Stock prices as of the close on November 19, 2015. Number of shares issued at the end of the most recent quarter excluding treasury shares.

Fiscal Year	Sales	Operating Income	Ordinary Income	Net Income	EPS(¥)	DPS(¥)
March 2012	71,594	4,928	4,903	2,767	78.29	20.00
March 2013	66,047	3,809	3,761	2,268	64.07	20.00
March 2014	86,363	5,806	5,660	3,261	91.13	26.00
March 2015	79,594	4,361	4,322	2,756	76.46	26.00
March 2016 Est.	88,000	4,800	4,600	3,000	82.99	26.00

* Estimates are those of the Company.

This Bridge Report provides information about the first half of fiscal year March 2016 earnings results and other details of Fuji Corporation Ltd.

Key Points

Company Overview

Fuji Corporation Ltd. provides various real estate related services including sales of new and used condominiums and detached homes primarily in the entirety of Osaka Prefecture (where the Company is based), part of Hyogo Prefecture between Osaka and Kobe, and the northern part of Wakayama Prefecture. Their main business is the sale of detached homes, albeit a built-for-sale type, that would maximize customer satisfaction by allowing for the "free-design home system" regarding layout, specifications, etc. within the boundaries of Japan's Building Standards Act. Fuji also boasts of strengths in the development of properties where 50 to 200 homes are constructed in coordination with the surrounding environment and each other to provide uniformity in neighborhoods. The other main pillars of the Company's business include renovation and sale of used residential properties, collaboration with financial institutions for effective utilization of land, sales of rental apartments for sale to investors, property leasing and management services, and custom made homes.

Fuji boasts of unique knowhow developed in various businesses realms derived from its sales agency and detached home services. Furthermore, the complementary and synergistic effects that occur between its various business divisions allow the Company as a complete home provider to respond with solutions that match the needs of home owners and residents in various geographic regions and times. Another strength of Fuji is local community-based management to match the time and place of the markets, and to maintain high levels of customer satisfaction by upholding the principles of "never ignoring customers after the sale" and "never ignoring customers after the completion of construction."

(1) Business Description

Residential Property for Sale (37.7% of Fiscal Year March 2015 Total Sales)

Sales of detached homes and condominiums are conducted in this business. A characteristic of this business is Fuji's ability to develop neighborhoods of detached homes in 50 to 200 units that match the local neighborhoods, and to allow its customers to participate in the designing of the property. More specifically, these homes respond to the needs of individual customers by allowing them to customize the layout and specification of the homes to suit their tastes and needs. Furthermore, new condominiums for sale are also included in the residential properties for sale business segment. Fuji halted the condominium for sale business in spring of 2005, based upon the outlook for a weakening in pricing due to declines in demand and increases in supplies. However, in the aftermath of the Lehman Shock, declines in land prices and improvements in supply and demand conditions in the condominiums for sale market led Fuji to restart the condominiums for sale business in February 2012. Another feature of Fuji is its focus upon condominiums and residential properties that are carefully selected (such as their convenient proximity to stations) and that are attractively priced for first-time buyers.

Housing Distribution (31.9% of Fiscal Year March 2015 Total Sales)

Sales of refurbished used residential property called "Kaizo Kun" and the new detached homes (spec new homes) are conducted in this business segment. "Kaizo Kun" refurbished used residential properties are used residential properties purchased for refurbishment and sales. Fuji's unique knowhow is leveraged in local community-based management and manualized procedure for renovation. In addition, sales of small-scale newly constructed detached homes (spec new homes) allows the Company to satisfy a wide range of customer needs that cannot be completely met with customized homes and large-scale development projects. In the southern part of the Osaka Prefecture (Izumi Sano, Kumatori, Kaizuka, Kishiwada) small-scale development projects have been conducted with homes being sold at reasonable prices. This business is also able to provide spec new homes at the lower end of the price zone that cannot be offered in the residential properties for sale business.

Effective Land Utilization (16.3% of Fiscal Year March 2015 Total Sales)

Contract construction for leased properties and sales of rental apartment for sale to investors are conducted in this business. Construction work is performed for construction of rental residential properties sold on a proposal basis and leverages Fuji's knowhow developed in its property leasing and management business. In addition, Fuji purchases lands and then constructs rental apartment for sale to investor in this business. The highly price competitive wooden structure apartments called "Fuji Palace" were launched in November 2008, subsequently affordable rental apartments for seniors with nursing-care service, which are called "Fuji Palace Senior" as a means of differentiation. With regards to rental apartments for sales to investors, the price for apartments is roughly ¥100 million, and the demand for these types of rental properties remains strong as a fund management method.

Property Leasing and Management (13.4% of Fiscal Year March 2015 Total Sales)

The fully owned subsidiary Fuji Amenity Services Co., Ltd. provides rental apartment structure management, tenant solicitation, rent collection and other management services, in addition to consigned management of condominiums. Superior rental and management related services not only act as stable source of earnings, but also provide opportunities to achieve high synergy with contract construction of rental income properties, sales of rental apartments for sale to investors, and sales of condominiums.

Custom Housing (0.7% of Fiscal Year March 2015 Total Sales)

By leveraging the knowhow cultivated in the detached homes business, Fuji has successfully grown and marketed its services of reconstruction of existing detached homes and construction of new detached homes to land owning clients. This business has also grown to become the fifth cornerstone of its overall business.

(2) Strengths of Fuji Corporation

Strength as a Complete Home Provider

Knowhow in the realms of acquisition of land and building permits, design, construction and sales cultivated in the detached home services has allowed Fuji to develop a wide range of businesses including its used residential property sales, effective land utilization, rental apartment buildings for sale to investors, and property leasing and management, as well as to cultivate synergies between these businesses. Furthermore, its local community-based management has also contributed to cultivate synergies among these wide ranging businesses and achieve high levels of customer satisfaction in its real estate and related services.

Capabilities of the Renovation Business of Used Residential Properties

The "Kaizo-kun", renovation business of used residential properties, was born from the fusion of knowhow cultivated in the residential property agency sales and renovation businesses, which were launched along with the start of the Company. Fuji maintains a unique business model that enables it to conduct the three main functions of the residential property sales process, namely "acquisition," "renovation," and "sales" of used residential properties. The Company boasts not only of its ability to gather information by local community-based management, but also of its ability to renovate used residential properties into extremely marketable ones by its manualized procedures for renovation. In addition, a service called "Fuji Home Bank" has been created where coordination with judicial scriveners is conducted to purchase properties in cases the inheritance registration is yet to be completed. This service also offers the convenience of paying the inheritance registration fees from the sale proceeds of properties.

Ability to Increase Returns by Proposing Effective Land Utilization

Fuji does not only provides the ability to propose effective land utilization, but also offers market surveys, planning, design, construction, and rental property management services to maximize its capability as a comprehensive real estate developer. Land purchases and sales, apartment and condominium reconstruction, legal and tax related services, and other various expert opinions and services are available as precise solutions to suit the needs of customers. As to its rental property management business, strict selection of land from the vast amount of real estate information is based upon meticulous market surveys conducted by its full-time marketing staff, and planning is carried out only when long-term and stable management is feasible. In addition, Fuji only purchases properties that boast of highly superior locations and other conditions to be turned into high yielding used real estate products. Moreover, Fuji proposes a bundled leasing system to property owners as a means of providing them with full "security, safety, and stability" in the rental property management service.

New Midterm Business Plan (From Fiscal Year March 2016 to 2019)

Fuji Corporation has created a new midterm business plan including earnings targets and covering the coming four years. This plan calls for the turning of the large development of detached housing projects and the restarted sales of condominiums, which had been curtailed due to weak supply and demand conditions, into earnings drivers of the residential properties for sale business segment. Moreover, the plan also calls for growth in used residential properties through the expansion in the sales regions in the housing distribution business segment, and securing of stable profits through strengthening of property purchases in the effective land utilization business segment. In addition to these strategies, efforts to grow earnings through sustained increases in managed properties will be conducted in the property leasing and management business segment. Within this plan, Fuji has established sales and ordinary income targets of ¥102.0 and ¥6.0 billion to be achieved by fiscal year March 2019 based upon these various strategies.

Midterm Business Plan Profit Assumptions

Fiscal Year March 2016 Plans

Fuji received strong orders for rental apartments for sale to investors (Orders for 100 units) during fiscal year March 2015 and its effective land utilization business sales rose by a large margin. Also, the supply of custom homes increased as the impact of the consumption tax hike abated. Moreover, sales of the property leasing and management business rose on the back of higher sales of rental apartments sales to investors and condominiums for sale. At the same time, increases in used condominium prices are expected to contribute to restraint in the acquisition of properties and an overall cautious strategy.

Fiscal Year March 2017 Plan

The residential properties for sale business is expected to benefit from full scale sales of homes in large redevelopment projects started in fiscal year March 2016 and a rush to purchase ahead of another impending hike in the consumption tax. Sales volumes of used homes are expected to grow on the back of an expansion in Fuji's sales area. Furthermore, delivery volumes of subleased rental apartment buildings sold to investors are expected to continue to increase in the property leasing and management business.

Fiscal Year March 2018 Plan

In addition to the arrival of delivery of detached homes for sale as part of large development projects in the Osaka and Kobe regions, a redevelopment project for condominiums for sale, which had been deliberately curtailed due to weak demand, in a prime location in front of Japan Railways Wakayama Station are also expected in the residential properties for sale business. Moreover, sales and profits are expected to steadily grow on the back of deliveries of rental apartments for sale to investors in the property leasing and management business. At the same time, depressed demand in the wake of the rush to purchase ahead of a hike in the consumption tax is expected to contribute to a decline in sales of used residential properties from the previous term.

Fiscal Year March 2019 Plan

Deliveries of condominiums for sale in prime locations are expected to begin contributing to sales in the residential properties for sale. The expansion of the sales territory for used residential properties services to Hyogo and Nara Prefectures is expected to contribute to growth in sales. Moreover, sales are expected to grow on the back of increases in subleases and rental apartments for sale to investors, and to expansion in property leasing and management and used residential property assets services.

First Half of Fiscal Year March 2016 Earnings Results

Sales, Current Income Rise 24.1%, 61.5% Year-On-Year

Sales rose by 24.1% year-on-year to ¥43.612 billion on the back of increases in deliveries of custom designed homes and condominiums for sale in the residential properties for sale business segment, increases in deliveries of used residential properties and spec new homes in the housing distribution business segment and higher sales of all business segments. Orders rose by 19.2% year-on-year due to strong orders for custom designed homes and used residential properties. And order backlog, which are a leading indicator for sales, as of the end of September rose by 11.6% year-on-year. Ordinary income rose by 61.5% year-on-year to ¥2.388 billion. While sales of residential properties for sale business and housing distribution business segments rose, sales of contract construction of rental properties declined. Furthermore, increases in expenses related to the effective land utilization business segment, investments in computers and systems, and other ad hoc expenses caused profits of the property leasing and management business segment to decline. And while gross income margin declined by 1.1% point year-on-year due to the decline in highly profitable contract construction of rental properties service, restraint in sales, general and administrative expenses allowed operating income to rise by 62.8% year-on-year to ¥2.440 billion. Moreover, favorable deliveries of residential properties for sale (Custom designed homes and condominiums for sale) and sales of used residential property allowed Fuji to revise its first half sales and profit estimates upwards on July 31.

Sales and operating income of the residential properties for sale business segment rose by 40.5% and 223.0% year-on-year to ¥16.738 and ¥1.792 billion respectively. This strong rise in both sales and profits is attributed to increases in custom designed homes and condominiums for sale. Orders for custom designed homes rose from 298 in the previous first half to 374 in the current first half, while condominiums for sale declined from 160 to 77 over the same period, contributing to an increase in total order value of 11.6% year-on-year to ¥17.227 billion. The decline in condominiums for sale resulting from restraint in sales contributed to a decline in order backlog of 10.4% year-on-year to ¥21.048 billion.

Sales and operating income of the housing distribution business segment rose by 19.5% and 48.4% year-on-year to ¥14.895 and ¥0.493 billion respectively. This strong rise in sales and profits is attributed to the contribution from higher deliveries of used residential properties and spec new homes. The number of orders for used residential properties rose from 659 in the previous first half to 792 in the current first half, allowing overall orders for the housing distribution business segment to rise by 20.2% year-on-year to ¥15.471 billion. The increase in used residential properties allowed order backlog to rise by 50.2% year-on-year to ¥4.290 billion.

While sales of the effective land utilization business segment rose by 10.1% year-on-year to ¥5.895 billion, operating income declined by 53.6% year-on-year to ¥273 million. Deliveries of rental apartments for sale to investors rose, but deliveries of contract construction of rental properties declined and caused the sales mix of high profitability products in this business to deteriorate and operating income to decline. Orders for contract construction of rental properties fell, but orders for rental apartments for sale to investors continued to trend favorably allowing orders to rise by 33.4% year-on-year to ¥9.607 billion. Order backlog also rose by 43.8% year-on-year to ¥18.469 billion on the back of favorable orders for rental apartments for sale to investors.

Aside from the above mentioned business segments, the property leasing and management business segment, which is linked to the effective land utilization business segment, saw an increase in the number of properties, including rental properties and condominiums for sale, to be managed. Furthermore, increases in the used residential properties of the used residential asset services also contributed to an increase in sales of 11.8% year-on-year to ¥585 million. At the same time, operating income declined by 13.3% year-on-year to ¥394 million on the back of higher expenses including those for computer investments and personnel. In addition, the newly launched custom housing service saw increases of 18.8% and 102.3% year-on-year to ¥277 and ¥35 million respectively.

New orders and order backlogs are both expanding.

At the end of September 2015, total assets rose by ¥6.046 billion from the end of the previous term to ¥100.004 billion due in part to increases in cash and equivalents, and short and long term debts. Within inventories, real estate for sale rose from ¥19.27 to ¥19.39 billion, partially completed real estate from ¥15.71 to ¥16.69 billion, and development use real estate from ¥37.08 to ¥37.22 billion. At the same time, interest bearing liabilities rose by ¥4.467 billion. Capital adequacy ratio declined slightly to 27.5%.

Compared with the previous first half, an increase in net income and decline in the margin of increase in inventories compared with the previous first half allowed operating cash flow to turn to a net inflow in the current first half from a net outflow in the previous first half. In addition, acquisition of tangible assets and other investments caused the margin of net outflow of investing cash flow to expand. However, free cash flow turned from a net outflow to a small net inflow. Moreover, increases in short and long term loans allowed the net inflow of financing cash flow to expand by a large margin.

Fiscal Year March 2016 Earnings Estimates

Estimates Call for Sales, Ordinary Income to Rise by 10.6%, 6.4% Year-On-Year

Despite the strong first half earnings, Fuji has left its outstanding full year earnings estimates unchanged. This conservative outlook for earnings was adopted due to the rise in construction materials pricing caused by the weaker yen, and despite continued strong trends in deliveries of custom designed homes and in acquisition and sales of used residential properties. Estimates call for sales and current income to rise by 10.6% and 6.4% year-on-year to ¥88.0 and ¥4.6 billion respectively. With regards to profits, expansion in the supply of custom designed homes due to the abating of the negative effect of the hike in the consumption tax and growth in deliveries of rental apartments for sale to investors based upon the favorable order backlog established during fiscal year March 2015 allowed rental income earnings to rise. Fuji adopted a conservative outlook for its used condominiums for sale business based upon its outlook for declines in the number of condominiums acquired and rises in acquisition pricing. In particular, deliveries of rental apartments for sale to investors are expected to be concentrated during the second half and to contribute to strong sales growth. With regards to profits, the expansion in sales is expected to contribute to an increase in profits of the residential properties for sale, effective land utilization business segments, and the property leasing and management segments. At the same time, a rise in the share of rental apartments for sale to investors of overall sales amidst declines in the high profitability condominiums for sale is expected to lead to a decline in profit margin. The full year dividend forecasts of ¥26 per share remains unchanged (¥13 dividend payments at end of the first half and full year).

In the residential properties for sale, sales and operating income are expected to rise by 8.5% and 1.1% year-on-year respectively. The number of custom designed homes and condominiums for sale expected to be sold during the second half are expected to rise from 554 year-on-year to 663 and decline from 361 to 256 respectively. Sales and operating income are expected to rise by 1.4% and 15.1% year-on-year respectively in the housing distribution business segment. The number of used residential properties is expected to decline slightly from 1,361 year-on-year to 1,335. In the effective land utilization business segment sales and operating income are expected to rise by 33.2% and 18.7% year-on-year respectively. Orders of rental apartments for sale to investors and contract construction of rental properties are expected to decline from 100 year-on-year to 90 and from 48 year-on-year to 41 respectively. Sales and operating income of the property leasing and management business are expected to rise by 10.8% and 5.7% year-on-year respectively on the back of an increase in managed properties from 20,511 in the previous term to 22,900 in the current term.

For the first half of FY3/16, both sales and incomes exceeded the estimates that were upwardly revised on July 31. A total of 71,636 million yen (81.4% of target annual sales), which is the sum of the consolidated sales for the first half of 43,612 million yen and the estimated sales for the current term of 28,024 million yen out of the remaining contracts as of the end of September 2015, is almost certain to be included in the sales for this term. Those sales plus the stable sales from rental and management from October of 6,024 million yen will account for 88.2% of target annual sales. The difference from target annual sales: 10,340 million yen (11.8% of target annual sales) will be covered by the sales of some newly constructed and used houses and condominiums, which are to be included in the sales for this term out of the orders received from October.
Sales are steadily growing to reach target sales, but the company is paying careful attention to the effects of the skyrocketing prices of building materials due to the yen depreciation, etc.

During the first half, property deliveries in the residential properties for sale (Custom designed homes, condominiums for sale) business grew, and sales of used residential properties were strong. During the second half, focused deliveries of rental apartments for sale to investors are expected to contribute to sales.

During the first half, increases in property deliveries in the residential properties for sale (Custom designed homes, condominiums for sale) and in sales of used residential properties contributed to growth in profits. During the second half, an increase in sales of rental apartments for sale to investors is expected to contribute to profits.

Future Remarkable Points

Business conditions during the first half trended strongly, with new orders booked during the first half of fiscal year March 2016 rising by 19.2% year-on-year, and order backlogs, which are a leading indicator of sales, growing by 11.6% year-on-year. In particular, growth in orders for custom designed homes, used residential properties and rental apartments for sale to investors, which are particular strengths of Fuji, was pronounced. Despite the slowing in the Japanese economy, it's assumed that the Company was able to grow its share of the industry by leveraging its strengths, which include its superior competitive pricing and marketing capabilities. Despite the favorable first half earnings trend, Fuji decided to maintain its existing full year earnings estimates due to concerns over the rise in construction material pricing, which could become a negative factor for earnings. Sales of custom designed homes are expected to rise on the back of efforts to strengthen the marketing function for this service a step further during the second half. At the same time, favorable trends in used residential property acquisitions and sales are also expected to continue in the second half. Furthermore, concentrated delivery of rental apartments for sale to investors are expected on the back of the strong order backlogs. In light of these factors, the full year earnings estimates appear to be very conservative, and the possibility of revisions to earnings are likely to be determined by trends during the third quarter. The ability to maintain the favorable conditions seen during the first half for custom designed homes, used residential properties and rental apartments for sale to investors going into the third quarter need to be watched closely. At the same time, the decline in orders for contract construction of rental properties is also another concern, and an early recovery in this business is important because of its high levels of profitability. Therefore the order trend in contract construction of rental properties also needs to be watched closely.

Amidst the growing problem of falsification of data by Asahi Kasei Construction Materials Corporation, fears of the negative influence of this problem leading to delays in construction of condominiums within Japan due to the need to reconfirm construction data, and postponement of purchases by customers is apparent. However, Fuji Corporation has been able to confirm that Asahi Kasei Construction Materials was not involved in any of its condominiums sold. Moreover, Fuji will be able to cultivate demand for custom designed homes in light of the postponing of condominium purchases, and the impact of this problem upon Fuji's earnings is expected to be minimal.

Disclaimer

This report is intended solely for informational purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.
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