BRIDGE REPORT
(2157)

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Koshidaka HOLDINGS Co., Ltd. (2157)
President Hiroshi Koshidaka
President
Hiroshi Koshidaka
Corporate Profile
Company
Koshidaka HOLDINGS Co., Ltd.
Code No.
2157
Exchange
JASDAQ
Industry
Service
President
Hiroshi Koshidaka
HQ Address
1-5-1, Odomo-Machi, Maebashi-Shi, Gunma, Japan
Year-end
August
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥3,800 9,477,401 shares ¥36.014 billion 31.9% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥50.00 1.3% ¥351.16 10.8x ¥844.56 4.5x
* Stock price as of closing on 2013/4/19. Outstanding shares as of most recent quarter end, shares issued excluding treasury stock.
ROE and BPS are based on previous full year's results.
 
Consolidated Earnings Trends
Fiscal Year Sales Operating Profit Ordinary Profit Net Profit EPS (¥) Dividend (¥)
August 2009 18,955 1,496 1,427 549 22,909.84 3,800.00
August 2010 21,932 2,503 2,579 1,125 46,887.82 8,700.00
August 2011 29,093 3,356 3,336 2,877 119,896.45 10,000.00
August 2012 33,746 4,077 4,096 2,279 238.60 35.00
August 2013 Est. 35,954 4,950 4,985 3,400 351.16 Ex 50.00
* Estimates are those of the Company. A 400 for 1 stock split was performed in September 2011. Dividend in FY8/13 includes extra dividend of ¥10 per share

This Bridge Report presents Koshidaka HOLDINGS' earnings results for the first half of fiscal year August 2013.
 
Key Points
 
 
 
Company Overview
 
Koshidaka HOLDINGS Co., Ltd. is a "comprehensive entertainment and leisure services provider" and it promotes a strategy of "creating new businesses in existing industries" in the four realms of "amusement," "sports and fitness," "tourism and travel," and "hobbies and cultural activities." The Koshidaka Group is comprised of eight consolidated subsidiaries. Currently the two main businesses include the operation of a nationwide chain of karaoke clubs, which are continuing to grow, and the newer businesses of fitness clubs called "Curves." In addition, Koshidaka has been able to continue to grow sales and profits since its listing, and is now cultivating new businesses including the hot spring bathing facility business.
 
<Corporate History>
Koshidaka HOLDINGS was founded in 1954 as a restaurant operating in Tokyo. Later in 1964, the Company moved to its headquarters to its current location in Maebashi City, Gunma Prefecture. In 1967 the Company was officially registered as a corporate entity called "Shinseiken" . The Company first took its current shape after President Hiroshi Koshidaka assumed his position as President. Under Hiroshi's leadership, Koshidaka HOLDINGS successfully captured the shift in the karaoke industry from pubs and bars to specialized "karaoke box" type clubs (clubs with individual rooms for customers to sing with their friends) using laserdisc karaoke equipment and began its growth phase by entering the karaoke box business during the 1990s. Hiroshi Koshidaka was able to take advantage of the consolidation within the karaoke industry by taking over bankrupt karaoke clubs after becoming President in August 1995. In March 2000, the company was reorganized and its name was changed to Koshidaka Co., Ltd.

In March 2006, Koshidaka opened its first Curves fitness club franchise. In June 2007, Koshidaka listed on the JASDAQ stock exchange and took over Curves Japan Co., Ltd. as a 100% owned subsidiary. Currently Koshidaka is responsible for the headquarter function, directly operated clubs and franchise operations for Curves fitness clubs.

Koshidaka adopted a pure holding company structure and its name was changed to Koshidaka HOLDINGS Co., Ltd. in September 2010. At the same time, Sport Co., Ltd., which is responsible for the bowling alley operations, was turned into a subsidiary. Due to difficulties in deriving synergies from this business over the medium to long term and the need to focus resources in other areas, Sport Co., Ltd. was sold in October 2012 after the outlook for a return to profitability of its business was achieved. Currently, Koshidaka is focusing its efforts upon cultivating hot spring bathing facilities, which are expected to yield synergies within the group, and facilitating its operating foundation so that it can effectively expand its businesses to overseas markets.
 
 
<Business Segments and Group>
(1) Business Segments
The Koshidaka HOLDINGS Group currently divides its business into four main segments. In the karaoke business segment, the Company operates both the "Karaoke Honpo Manekineko" clubs (Suburban regions) and the "One Kara" individual use Karaoke clubs (Urban regions). In the Curves business segment, fitness clubs providing specialized 30 minute workout programs targeting middle to older aged female customers called "Curves" are operated. And as a new business segment, hot spring bathing facilities and other new businesses are undertaken. In the other business segment, real estate management services are provided. The sales breakdown between the karaoke club, Curves fitness club, hot spring bathing facilities, bowling alley, and other businesses segments during fiscal year August 2012 were 54.9%, 33.5%, 2.1%, 8.8% (This business was sold in October 2012) and 0.7% respectively.
 
 
In the aftermath of the Lehman Shock, the Japanese karaoke market contracted to ¥380.0 from ¥420.0 billion and has trended sideways thereafter. However Koshidaka has been successful in increasing its sales through the expansion of its network of karaoke clubs by offering localized services highlighting friendly hospitability and reasonable pricing.
 
 
While the Japanese fitness club market has trended sideways in the wake of the Lehman Shock at slightly under ¥300.0 billion, the Curves fitness club chain has grown to become the largest operator of clubs within Japan. A key to the success of Curves is its ability to allow female members to form their own communities with women over 50 years of age accounting for 79.3% of total members.
 
 
 
(2) Group
The Koshidaka HOLDINGS Group is comprised of the holding company Koshidaka HOLDINGS Co., Ltd., and eight consolidated subsidiaries that perform the karaoke club, Curves fitness club, hot springs bathing facilities, and real estate and intellectual property rights management businesses. Within the karaoke business, Koshidaka operates 326 clubs within Japan, and Koshidaka Korea Co., Ltd. operates two clubs in Seoul, Korea. In the Curves fitness club business, the intermediary holding company Curves HOLDINGS Co., Ltd. and Curves Japan Co., Ltd. provide both directly operated and franchise headquarter operations for Curves fitness clubs specialized female users. Also the consolidated subsidiaries Hokkaido Koshidaka Co., Ltd. and Shukran Co., Ltd. operate Curves fitness clubs on a franchise basis (The total number of directly operated and franchised clubs is 1,248). Koshidaka is currently cultivating a new business of hot springs bathing facilities, which was launched in November 2011 and currently operates seven facilities (Number of facilities at the end February 2013).
 
 
<Strengths of Koshidaka>
(1) Growth Business Development Capability, Track Record in Services Targeting the Active Senior Citizens Market
Koshidaka's strengths include its ability to develop businesses that can grow in mature domestic markets, in addition to its track record in services targeting the active senior aged Japanese segment that is expected to grow in the future. While the main karaoke club and fitness club businesses are already widely recognized by the Japanese public, Koshidaka has been able to establish its own highly unique karaoke and fitness clubs that target new categories of clients by changing the focus of and efforts in these businesses. Furthermore, Koshidaka's focus upon the local communities in its businesses has enabled it to develop not only the active senior aged Japanese but also the family segment of the market. Therefore Koshidaka's knowhow in these areas is an invaluable asset.
 
(2) Track Record in Facility and Corporate Revitalization
Koshidaka is building up its track record and knowhow in revitalization of both facilities and corporations on the back of its experiences of successfully "taking over existing facilities." At the same time, the Company leverages its "revitalization" knowhow to develop customers in local communities and its hot spring bathing facilities. Furthermore, the sale of the bowling alley business (October 2012) was made possible because of the outlook for its return to profitability based on the leveraging of Kohidaka's "revitalization" knowhow in developing clients in regional markets.
 
 
 
Growth Strategy
 
Koshidaka is a "comprehensive entertainment and leisure services provider" that promotes businesses in the four key areas of "amusement (karaoke)," "sports and fitness (Curves)," "tourism and travel (hot spring bathing facilities)," and "hobbies and cultural activities." For the foreseeable future, the Group maintains a "sales target of ¥100.0 billion" and will flexibly implement M&A and fortify its overseas business deployment capabilities primarily in East Asia to achieve this target.
 
(1) "Creating New Businesses In Existing Industries"
With regards to already established businesses that are widely recognized by the public, Koshidaka has been able to establish unique business models by creating new services and operational methods targeting new customer segments, and by changing the focus of these businesses.
 
Curves Fitness Club Business: 30 Minute Fitness Course Targeting Women
The Curves fitness club business, which "offers women a 30 minute health promoting exercise class" is steadily expanding and in keeping with Koshidaka's strategy of "creating new businesses in existing industries." And while the fitness related business is no longer unique to Japan, the Company differentiates this business by targeting unique customer segments and creating unique facilities based on the themes of "active senior aged customers" and "community based." Consequently the Curves business has blossomed after its purchase by Koshidaka (Women over 50 years of age account for 79.3% of total membership).
 
"One Kara" Individual Use Karaoke Clubs
Koshidaka is currently conducting efforts to develop "One Kara" individual use karaoke clubs within the karaoke club business as "a new businesses in existing industries." Traditional karaoke clubs offer rooms that are designed for use by multiple customers, but the "One Kara" individual use karaoke clubs provide rooms for individual users who enjoy singing by themselves (These rooms are also commonly used by musicians to practice various musical instruments). A key to this business is the ability to "hold down costs" and as part of ongoing efforts to validate this business, the club opened in Akihabara on December 22, 2012 was able to reduce initial investment for over previously built One Kara clubs by 30%. Furthermore this Akihabara club was able to achieve profits after its third month of operation in March 2013 and profitability of this new format is now within sight. In the future, multiple clubs are expected to be opened, including franchises.
 
(2) Numerical Targets
While the business environment for companies operating within the realm of domestic demand related industries is extremely difficult, the possibilities within the Japanese leisure related market may be considered to be unlimited given its massive size of ¥65 trillion. Moreover, the increase in baby boomers approaching the age of 75 (Peak number being born between 1947 to 1949) are expected to increase and contribute to growth in this market over the next ten years.

Koshidaka leverages its bountiful knowhow in the revitalization of facilities and companies targeting the "active senior aged Japanese" segment to extend its roots in the Japanese leisure market. The Company will extract synergies from within its group and develop "new businesses in existing industries" in order to achieve its longer term sales target of ¥100.0 billion and the nearer term target of ¥65.0 billion in fiscal year August 2018.

By business segment, the karaoke club business avoided focusing upon only traditional customers and considered the "active senior aged Japanese" segment of the market in its club development strategy. Koshidaka also expects to promote a two pronged strategy with openings through existing facility take over and new facility construction, with a particular focus upon One Kara club openings in metropolitan areas. For the foreseeable future, Koshidaka endeavors to achieve a network 500 franchised clubs and sales of between ¥25.0 and ¥30.0 billion. In the Curves fitness club business, the Company has adopted the slogan "turning physical training into a habit like brushing teeth" to establish a culture where physical exercise is done on a regular and nationwide basis. By responding to the strong demand from existing franchisees to open more facilities with clubs designed to be opened in buildings and shopping malls, and along roadsides, (In recent years about 80% of newly opened clubs have been opened by existing franchisees), the Company endeavors to achieve a nationwide network of 1,500 Curves fitness clubs and sales of between ¥20.0 to ¥25.0 billion. At the same time, Koshidaka seeks to become the leading operator of hot springs bathing facilities, a business which was recently launched, by leveraging its ability to take over existing facilities and to create a network of 50 facilities with sales of ¥10.0 billion.

In the other business segment, M&A related activities and overseas expansion of its businesses will be used to expand earnings. The knowhow and experiences cultivated in the operation of two karaoke clubs in Korea (The third club is expected to be opened in April) will be used to expand operations to other high economic growth regions of East Asia.
 
 
 
First Half of Fiscal Year August 2013 Earnings Results
 
 
Sales Rise 3.3%, Ordinary Profit Fall 0.1% Year-Over-Year
Sales rose by 3.3% year-over-year to ¥16.370 billion during the first half of the fiscal year August 2013. The sale of the bowling alley business contributed to a ¥1.474 billion decline in sales and the abating of the trend to frequent "cheap, close, and short-term" forms of entertainment sparked by the Great East Japan Earthquake led to weak sales growth in the karaoke club business. However, increases in fitness club openings and favorable mail order sales of protein to members allowed the Curves fitness club business sales to grow strongly. At the same time, sales of the hot springs bathing facility business rose to ¥778 million from ¥227 million.

With regards to profits, gross profit margin declined due to new facility openings in the newly launched hot spring bathing facility business, in addition to the newly launched "One Kara individual use karaoke clubs" business. Furthermore, sales, general and administrative costs grew on the back of the expansion in Koshidaka's overall businesses causing operating profit to fall by 2.5% year-over-year. However, improvements in financial balance allowed ordinary profit to remain nearly in line with the previous term. The sale of a commercial facility (Toshima Ward, Tokyo) led to an extraordinary profit of ¥1.535 billion and allowed net profit to grow by 69.3% year-over-year to ¥2.054 billion.
 
 
Abating of the Trend to Frequent "Cheap, Close, and Short Term" Entertainment due to the Great East Japan Earthquake Led to Weak Sales Growth, "One Kara" Business Development and Anticipatory Investments Compressed Profits
Sales rose by 0.5% year-over-year to ¥9.281 billion but operating profit declined by 17.9% year-over-year to ¥1.256 billion. Six clubs were newly opened and three closed, bringing the total number of clubs in operation at the end of the first half to 326, up nine from the end of the previous first half (317) and three from the end of the previous fiscal year.

With regards to sales, newly opened "Maneki Neko" and "One Kara" clubs contributed ¥223 and ¥104 million in sales respectively. However the abating of the trend to frequent "cheap, close and short term" entertainment due to the Great East Japan Earthquake caused sales to fall by 2% or ¥279 year-over-year.

Reductions in purchases, distribution fees, and labor costs were offset by "One Kara" business development expenses (A ¥242 million increase in cost of sales) and caused cost of sales to rise by 0.6% points to 75.0% (Cost of sales rose by 1.4% year-over-year to ¥6.966 billion). In addition to increases in facility development costs (¥27 million rise) and rent (¥24 million increase) of "Maneki Neko" clubs, rises in utility fees and advertising expenses also caused sales, general and administrative expenses to rise by 27.0% year-over-year to ¥1.058 billion.
 
 
Facilities and Members Grow by Strong 13.5% and 22.4%, Mail Order Sales Also Grow Favorably
Sales and operating profit rose by 25.1% and 44.7% year-over-year to ¥6.015 and ¥1.176 billion respectively. 58 clubs were newly opened and brought the total number of clubs in operation to 1,248 (44 clubs operated directly within the Koshidaka Group) at the end of the first half, up 148 clubs from the end of the previous first half (1,100 clubs) and 51 from the end of the previous term. The number of members rose by 95,000 and 15,000 members from the end of the previous first half (424,000) and previous fiscal year respectively to 519,000 at the end of the current first half.

Sales benefitted from favorable and continued regular purchases of protein made by mail order, and increases in stores and memberships due to opening of new facilities by existing franchisees. Royalty income received as continuous income from franchise stores and mail order sales grew by ¥496 and ¥615 million respectively (Directly operated store sales rose by ¥112, while spot sales declined).

With regards to profits, the higher mail order sales caused costs of sales to rise by 1.4% points year-over-year to 60.2% (Cost of sales rose by 28.2% year-over-year to ¥3.623 billion). At the same time, the higher sales were able to offset a small margin of increase in general and administrative expenses. Consequently operating profit margin rose by 2.7% points from the same term in the previous year to 19.6%.
 
 
"AEON Shima YuDokoro Maneki No Yu" (Fukuoka Prefecture) Opened, Success in Cost Reductions in Sight
Sales rose by 242.7% year-over-year to ¥778 million while operating loss rose from ¥42 million in the previous first half to ¥200 million in the current first half. "AEON Shima YuDokoro Maneki No Yu" (Fukuoka Prefecture) was opened in November, bringing the total number of facilities in operation at the end of the first half to seven. While newly opened facilities from the previous term and those during the current first half contributed to sales, they also contributed to higher expenses including utilities fees (Up ¥171 million), labor expenses (Up ¥182 million), rent (Up ¥95 million), and purchases (Up ¥79 million), which in turn left cost of sales uncovered despite the rise in sales. However, profitability of this business is now within sight due to successful efforts to reduce utility fees through implementation of cogeneration and other energy conserving facilities.
 
(3) Financial Conditions and Cash Flow
At the end of the first half, total assets rose by ¥1.777 billion from the end of the previous term to ¥21.821 billion. Operating cash flow rose on the back of the sale of tangible fixed assets and allowed free cash flow to rise from ¥495 million in the previous term to ¥4.919 billion, which in turn contributed to a large increase in cash and equivalents. In addition, software provisional accounts and long term loans extended rose by ¥504 and ¥433 million respectively. While interest bearing liabilities and other liabilities declined, net assets rose by a large margin and allowed equity ratio to rise by 5.4% points to 45.3%.
 
 
 
Fiscal Year August 2013 Earnings Estimates
 
 
Sales and Ordinary Profit Expected to Rise by 6.5% and 21.7% Year-Over-Year
Estimates for sales, and operating and ordinary profit remain unchanged, but net profit was revised upwards to reflect the higher first half results. During the second half, sales and profits of the Curves fitness club business are expected to continue to rise, along with increases in sales of the karaoke club and hot spring bathing businesses due to new facility openings. The higher sales are expected to boost marginal profitability and allow operating profit to rise by 21.4% year-over-year to ¥4.950 billion. A dividend of ¥25 per share is expected to be paid at the term end. And as a means of returning the extraordinary profit on the sale of tangible fixed assets to shareholders, an additional special dividend of ¥5 per share is also anticipated (The ¥25 per share dividend paid at the end of the first half is inclusive of the ¥5 special dividend, and a ¥10 special dividend in the full year for a total full year dividend of ¥50 per share).
 
(2) Measures by Business Segment During the Second Half
Karaoke Club Business
During the second half, Koshidaka earnings are based on the assumption of 10 new facilities to be opened, and existing facility sales of 98% year-over-year. Also, the Company will fortify new facility openings through both existing facility take over and new construction, aggressively conduct renovation of its existing facilities, improve earnings and cultivate franchisees of the "One Kara" individual use karaoke clubs, and open the third karaoke facility in Korea during the second half. Koshidaka will take advantage of the weak operating conditions of its competitors to add new clubs by taking over existing facilities of competitors for the first time in two years as part of its strategy of maintaining its position as the Karaoke club operator with the largest number of facilities. Furthermore, the Company will implement measures to raise sales at its existing facilities including the renovation of between 30 to 40 facilities per year (13 facilities had been renovated as of end March). At the same time, the fact that the Akihabara "One Kara" karaoke club turned profitable by its third month of operations on the back of its 30% reduction in initial investment is proof that the profitability of One Kara individual use karaoke clubs is now within sight. Consequently, full scale expansion of this new format through directly operated and franchise club openings is expected to begin. In addition, Koshidaka's third club in Korea is expected to be opened at reduced initial investment cost during the fourth week of April. Because Korea prohibits the provision of food and drink services within karaoke clubs, the Company will also focus upon other overseas markets within Asia.
 
Location Test for New Fomrat Karaoke Box "Sukitto" to Begin
Koshidaka's unique karaoke system called "Sukitto" will begin undergoing tests for locations during the latter half of April. Because karaoke box systems used by various operators are dominated by Daiichikosho Co., Ltd. and the BROTHER INDUSTRIES, LTD. Group company XING INC., it is difficult to achieve differentiation. Therefore, Koshidaka seeks to differentiate its karaoke box operation by providing unique contents and services as part of its own "Sukitto" karaoke system. "Sukitto" location testing at 3 locations of "Karaoke Honpo Manekineko" and "One Kara Individual Use Karaoke" will begin in April.

"Sukitto" is an acronym derived from the phrase "Smart Karaoke Internet Terminal." New services linked with the website "Sukitto Net" will be provided to members of "Sukitto Net" including individual content upload capability for download and listening at "Sukitto" karaoke clubs (Visual contents can also be downloaded for viewing at karaoke clubs as background video). In addition, video contents uploaded to "Sukitto Net" can also be downloaded by third parties for viewing and listening. Various karaoke applications are expected to be developed to allow users to actively participate in the creation of their own unique contents.
 
Curves Fitness Club Business
During the second half, 72 new clubs are expected to be opened, bringing the total number of clubs opened during the full year to 130, as part of the strategy of aggressively opening new clubs, promoting multiple club operations by existing franchisees, and improving earnings of operations. Specifically, Koshidaka will support multiple club openings by existing franchisees with the goal of maintaining its position as the fastest growing fitness club operator. Furthermore, various strategies are being considered including new products and services development, aggressive spending upon summer season television commercials and advertisements, and fortification of services and existing clubs to raise customer satisfaction in the following term.
 
Hot Spring Bathing Facility Business
Cogeneration systems that use gas to generate electricity and heat water, inverter control systems that reduce energy consumption, and high efficiency water heaters that use night time electric power have been implemented as part of the strategy of reducing utility fees. In addition to existing measures that have been successful in increasing customers, new measures including events at each facility will be conducted to further increase the number of customers ( "Tokyo Health Land Maneki No Yu" will hold weekly and monthly events where various artificial hot spring water is used, "Gunma Prefecture Misato Onsen Maneki No Yu" will hold exercise classes and daily events. These types of events have proven to be very well received by customers.).
 
 
 
Conclusions
 
The economic reform strategy created by the new Abe Administration to eliminate deflation have been successful in bringing about a weakening of the yen, increases in share prices and an overall improvement in the economic outlook. And while the improved economic outlook is a positive factor for Koshidaka, the abating of the trend for(in/of) consumers to frequent "cheaper, closer and shorter term" leisure activities may be considered as a negative factor. With these factors in mind, the Company endeavors to fortify its position as a low cost operator while at the same time accelerating its new facility openings as a means of securing opportunities to grow earnings. Fortunately, the supply of existing facilities put up for sale by weak competitors in regions outside of Tokyo remains strong. In addition, the business model of the "One Kara" individual use karaoke format, which is a key to expanding within the Tokyo metropolitan region, is becoming firmly established. Moreover, the outlook for reductions in operating costs of the hot spring bathing facility business, for which there is strong demand, through the implementation of cogeneration, inverter, electric water heaters and other energy conserving technologies is positive. At the same time in the Curves fitness club business, which has been successful for its ability to form communities of middle to older aged Japanese women, demand from existing franchisees to open new clubs remains strong. Also, new services and mail order products are being developed as a means of increasing sales. Despite some near term uncertainties, Koshidaka continues to be supported by numerous positive factors and the overall outlook remains positive.
 
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) 2013 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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