BRIDGE REPORT
Shinwa Art Auction Co., Ltd. (2437)
President Yoichiro Kurata
President
Yoichiro Kurata
Corporate Profile
Company Name
Shinwa Art Auction Co., Ltd.
Stock Code
2437
Exchange
JASDAQ
Industry
Services
President
Yoichiro Kurata
Headquarters
Ariake Frontier Bldg., 3-7-26 Ariake, Koto-ku, Tokyo, Japan
Business Description
The industry`s largest high-end artworks public auction company. Shinwa Art Auction boasts of over 50% of the high-end Japanese art auction market share.
Fiscal Year End
End of May
Home Page
Stock Information
Share Price Shares Outstanding Market Cap. ROE (Act.) Trading Unit
¥323 6,064,100 shares ¥1.958 billion 9.7% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Act.) PBR (Act.)
¥7.00 2.2% ¥39.29 8.2x ¥296.72 1.1x
* Stock price as of closing on March 9, 2017. Number of shares at the end of the most recent quarter excluding treasury shares. ROE and BPS are from the end of FY5/16
 
Consolidated Earnings Trends
Fiscal Year Sales    Operating Profit Current Profit Net Profit EPS (¥) DPS (¥)
FY5/12 1,213 89 85 131 2,389.34 450.00
FY5/13 1,359 45 57 76 1,393.79 450.00
FY5/14 1,385 135 122 108 20.39 6.00
FY5/15 2,948 77 52 16 2.89 6.00
FY 5/16 3,898 356 332 164 28.69 7.00
FY 5/17 Est. 4,299 417 382 225 39.29 7.00
* Estimates are those of the Company. Consolidated accounts began being released from FY5/14. A 100 for 1 stock split was performed on December 1, 2013.
* The definition for net profit has changed to net profit attributable to shareholders of the parent company (Abbreviated as parent net profit).
 
This Bridge Report presents an overview of the first half of fiscal year May 2017 earnings results and forward looking business strategies of Shinwa Art Auction Co., Ltd.
 
Key Points
 
 
 
Company Overview
 
Shinwa Art Auction is Japan`s largest and only listed auction company. In 2015, the Company boasted of a 51% share of the high-end Japanese artworks auction market. Over the 27 years of its operations, the Company has cultivated a client list of over 20,000 high net worth individuals and it is in a unique position to be able to leverage this network to expand into various other businesses. The Group is composed of 8 companies including the parent company, which conducts the auction business, the two subsidiaries of Apec Co., Ltd., which provides energy related services, and J Auction Co., Ltd., which has adopted the auction segment that deals with watch, jewelry and other products from Shinwa Art, and three second-tier subsidiaries of Shinwa Medico Co., Ltd., which provides support for medical institutions, Shinwa Medico Hong Kong, and Shinwa Myanmar, as well as a joint venture equity-method affiliate formed with Shinwa Medico Hong Kong called Shinwa Medico Linking System, and an equity-method affiliate, Art Auction Alliance Co., Ltd., which is the art auction planning and operating company in Hong Kong. Since the investment in Shinwa Medico Linking System is expected to be made in fiscal year May 2017, it is not included in the scope of consolidation in the previous year.
 
<Company History>
Shinwa Art Auction was founded in August 1987 as an organization called "Shinwa-kai" for the exchange of artworks by art dealers. The Company's first auction called "Shinwa Art Auction's First Modern Japanese Art Auction" was held in September 1990. In June 1991, the Company adopted the name of Shinwa Art Auction Co., Ltd. Subsequently, the "First Modern Japanese Ceramic Art Auction" was held in 1996, the "First Tea Ceremony Art Utensils Auction" in 1997, and the "First Painting, Prints and Crafts Auction" in 1999. Shinwa Art Auction listed its shares on the Hercules Market of the Osaka Securities Exchange (Currently known as the JASDAQ Market of the Tokyo Stock Exchange) in April 2005. Apec Co., Ltd. was turned into a subsidiary along with the acquisition of its shares in April 2013. Shinwa Medical Co., Ltd. (Currently known as Shinwa Medico Co., Ltd.) was also established in April 2013 as part of the efforts to diversify the Company's business model, which had been focused upon auctions, by leveraging the highly important assets of its high net worth individual clients.
 
<Market Environment>
As shown in the graph below, the market for artworks within Japan (Total bids for items sold through auctions) had contracted to ¥1.4 billion in the wake of the bursting of the bubble economy in 1992. But after the start of public auctions in 1999, the auction market recovered to exceed the previous peak in 1990, and expanded to ¥21.8 billion. After the occurrence of the 2008-09 financial crisis, the artwork auction market once again contracted to less than ¥10.0 billion in 2011, but recovered to ¥14.8 billion in 2015. However, it remains well below the recent peak achieved in 2007.

As is explained later in this report, Shinwa Art Auction believes that Japanese artworks are extremely undervalued. Therefore, the "Japanese Modern Art Rejuvenation Project" has been established to remedy this situation and expand the market to a minimum of ¥100.0 billion.
 
 
<Business Description>
Shinwa Art Auction's businesses can be divided into three divisions: Auction Related, Energy Related and Others businesses (Medical institution support business).
 
① Auction Related Business
The Auction Related business is composed of auction business as well as auction related and other businesses.
 
(1) Auction Business
In addition to the holding of auctions based upon product and price categories including modern art, modern ceramic art, and other modern artworks on a regularly scheduled basis, Shinwa Art Auction also conducts auctions for wine, western art, and other products on an ad hoc basis. J Auction Co., Ltd. was established as a subsidiary in October 2013 to provide auction services for high-end branded goods, watches, jewelry, and other products.

Bidding commissions are the main component of sales (Consisting of both bidding and exhibition commissions). Bidding commissions are 15.0% of a bidding price for items with a bidding price of under ¥2 million, 12.0% with a bidding price of over ¥2 million and under ¥50 million, and 10.0% with a bidding price over ¥50 million. Also, an exhibition fee is charged for all products put up for sale at a rate of 10.0% of a bidding price (consumption tax is separately charged).

Furthermore, Shinwa Art Auction also purchases items for sale at auctions and through private channels. The prices of directly purchased items sold at auctions and through private sales will be booked as sales. Therefore, changes in these inventory product sales will lead to fluctuations in sales.

In addition, other revenues include catalog sales and listing fees on those catalogs collected from the exhibitors, and membership fees collected from fee-based memberships.
 
(2) Other Auction Related Business
Private sales are the primary service conducted within this business. Private sale is the name used to describe items sold through negotiated transactions. As in auction transactions, sales commissions are charged to both sellers and purchasers of items based upon the prices of the items sold. In addition, some items are purchased by Shinwa Art Auction and kept as inventory for sale to customers. Shinwa Art Auction also provides retail sales of high-end brand bags, jewelry and watches. It purchases precious metals as well.
 
 
In the fiscal year May 2016, approximately 5,000 people participated in 30 auctions where 8,000 items were exhibited for sale.
 
② Energy Related Business
Apec Co., Ltd. conducts sales of 50kW low voltage solar power generation systems to high net worth individuals and corporate clients. In addition, high voltage solar power generation system sales are also conducted, with some of these units being used in Shinwa Art Auction`s own electric power sales service.
 
③ Medical Institution Support Business
Apec's subsidiary Shinwa Medico Co., Ltd. is commercializing the medical tourism for Shinwa Art Auction's high net worth customers. Shinwa Medico introduces medical services to the wealthy individuals both in Japan and other parts of Asia, through cooperation with medical institutions that provide advanced medical services, advanced regenerative medicine services, and advanced medical examinations. At the same time, the insurance business was established in fiscal year May 2016, along with the start of medical coordinator services and medical interpreter training courses.
 
④ Other Business
Apec Co., Ltd. started insurance business in FY May 2016.
Because the development of solar power facilities requires some tree clearing, Shinwa Myanmar Co., Ltd. (Another subsidiary of Apec Co., Ltd.) provides support from a global perspective to the people of Myanmar engaged in agriculture and forestry.
 
<Characteristics and Strengths>
① Largest Auction Company within Japan
Shinwa Art Auction boasted of a dominant share in the high-end Japanese art auction market of 51.4% in 2015 for artworks over ¥20 million in price and a large lead over the second-place competitor. Since experts very well-versed with modern art are employed by the Company, auction items, especially high-end luxury items, can be accurately evaluated. Therefore, a strong brand reputation linking Shinwa Art Auction to luxury goods has been established amongst customers. In addition, Shinwa Art Auction being the only publicly traded auctioneer, its position is all the more preeminent.
 
 
② Business Leveraging Strong Network of High Net Worth Individuals
Many of both the sellers and buyers of artworks in auctions held by Shinwa Art Auction are high net worth individuals.
Over the 27 years of its operations, the Company has cultivated a client list of over 20,000 high net worth individuals who require strategies for wealth management, tax savings, inheritance and other issues. Consequently, this client list can be leveraged to provide a variety of other businesses in addition to the auction business. Therefore the energy related and medical institution support businesses are conducted to exploit these opportunities. The Company intends to pursue various other services going forward.
 
 
Compared with the previous term, return on equity improved by a large margin. In addition to increases in net profit to sales and asset turnover ratios, an increase in short-term loans also contributed to a rise in leverage. However, further increases in profitability will be required to maintain high levels of return on equity.
 
 
The First Half of Fiscal Year May 2017 Earning Results
 
 
Sales Rise, Profits Decline
Sales rose by 3.9% year-on-year to ¥1.794 billion. Sales of the Energy Related Business rose by double digits, but a decline in the number of auctions held contributed to lower single digit growth in sales of the Auction Related Business. An operating loss of ¥934 million was incurred due to the lower sales of the Auction Business. Weakness in the average successful bid pricing in the Auction Related Business caused both sales and profits to fall below expectations. In the Energy Related Business, sales fell below targets due to the trend for weaker than expected sales pricing of low voltage solar power generating systems. Profits also fell below plans due to increased commissions and interest paid within non-operating income arising from the assumption of a syndicated loan contract and despite a decline in cost of sales.
 
 
① Auction Related Business
1) Auction Business
The total number of items put up for auction declined by 25.5% year-on-year to 3,305 due in part to the reduction in the number of auctions held to 13 from 16 in the previous year.
Also, the average successful bidding price fell below the previous term.
 
 
II) Auction Related Business, Others
With regard to the private sale division, aggressive marketing efforts allowed results to remain in line with the previous year, with both transaction volumes and sales value exceeding the previous term.
 
② Energy Related Business
With regard to 50kW class low voltage solar power generating systems, a total of 61 units (Compared with 34 in the previous term) were sold. The continued implementation of a preferential tax system to promote investments in facilities to raise productivity is expected to contribute to strong demand.
Aside from these developments, Shinwa Art Auction began operation of its own electric power generation facility (2MW) at the Chichibu Onohara Electric Power Plant from October 2016. While profits declined due to profits realized in the previous year from the sale of the Hohoku Solar Power Generation Plant, segment operating profit actually rose from the previous year if these profits are excluded.
 
③ Others
In the medical institution support business, a platform in Hong Kong began operation to accept payments using Union Pay credit cards from inbound travelers from China and Asia, and Japanese hospitals and clinics have joined this platform as part of efforts to make medical tourism into a cornerstone of earnings.
Aside from this, sales of a new supplement called "Plasmalogen Premimum" were started as part of the original brand "Asian Anti-Aging Alliance" (AAAA) lineup of products.
 
 
Increases in prepayments contributed to a ¥763 million increase in current assets from the previous fiscal year end. A rise in plant, property and equipment caused noncurrent assets to rise by ¥877 million. Consequently, total assets rose by ¥1.640 to ¥5.599 billion. A rise in short term debt contributed to a ¥976 million increase in current liabilities, and total liabilities rose by ¥1.608 to ¥3.795 billion over the same period. An increase in capital led to a ¥31 million rise in net assets to ¥1.804 billion. Consequently, capital adequacy ratio declined by 12.5% points from the end of the previous term to 32.1% at the end of the current term.
 
 
Operating cash flow turned to a net outflow due to declines in profit and a rise in prepayments.
An increase in acquisition of tangible assets contributed to an expansion in net outflow of investing cash flow and caused free cash flow to turn to a net outflow.
Cash position remained basically unchanged.
 
(4) Topics
◎ Announcement of Agreement with a Chinese Company involving Capital Participation
Shinwa Art Auction announced that it has issued new shares for purchase by ELITE FAME INVESTMENTS LIMITED (President: CHEUNG Chi Kwan) and at the same time has formed a collaborative alliance with a 100% subsidiary of ELITE FAME INVESTMENTS LIMITED called CHEERY FORTUNE INVESTMENTS LIMITED (Director: CHEUNG Chi Kwan, CHEERY FORTUNE).
 
<① Background, Reason for Alliance>
As described in previous Bridge Reports, Shinwa Art Auction is a leader within the Japanese modern art realm and seeks to rejuvenate the Japanese modern art industry using its capital, experience and network as part of its Group strategy entitled "Japanese Modern Art Rejuvenation Project".
Shinwa Art Auction will strengthen the earnings generating capability of its auction business in order to realize its strategy. However, dependence upon only earnings to achieve this overwhelming capital strength required to support the Japanese modern art market is difficult at the current time due to the profound influence of external factors upon the auction market.
Therefore, the Company acquired all of the shares of Apec Co., Ltd. and turned it into a subsidiary conducting the Energy Related Business and Shinwa Medical (Shinwa Medico) was established to provide support to medical institutions in April 2013 as a strategy of growing its future revenue streams.
While the Energy Related Business has now grown to exceed the scale of the Auction Related Business, the Shinwa Art Auction Group will require more time to create a stable platform for the modern art auction market and to achieve a position of overwhelming capital necessary to support the Japanese modern art market.

Against this backdrop, a producer at a satellite television station in Hong Kong called Phoenix Satellite Television Holdings Limited (Phoenix Television), who achieved auctions for old books and literary items as a general manager of Asia Business in Shinwa Art Auction, approached Shinwa Art Auction to become the Japanese partner in its plan to establish a cultural business.
In addition, this cultural business also acted as the opportunity for Shinwa Art Auction to form a strategic alliance with HNA Capital Group Co., Ltd (HNA Capital).
Shinwa Art Auction, which expanded its business outside of Japan to other parts of Asia in 2008, views the establishment of relations with the HNA Group as an important means of expanding the breadth and depth of its businesses and began deliberations for a capital alliance in fall 2015.
"Cheery Fortune" was established in December 2015, and a subsidiary called CHINA ART INVESTMENT MANAGEMENTLIMITED was established as a joint venture between Cheery Fortune and Shinwa Art Auction to conduct cultural business. Shinwa Art Auction has agreed to issue new shares to ELITE FAME INVESTMENTS LIMITED which is a 100% subsidiary of Cheery Fortune.
 
<② Business Alliance Details>
"CHINA ART INVESTMENT MANAGEMENT LIMITED Overview (Post Formation of Joint Venture)"
 
Shinwa Art Auction will leverage its experience and track record in public art work auctions and its bountiful business experience and track record to act as an agent and to support art purchases and various business investments in Japan by Chinese corporations.
Initially, Shinwa Art Auction will be asked by Chinese corporations to act as a specialized agent to assist them in purchases of art items for museum collections.
 
<③Capital Collaboration Details>
Shinwa Art Auction issued 330,000 common stock (Accounting for a 5.44% of voting rights and 4.76% of total shares) through a third party private placement to ELITE FAME INVESTMENTS LIMITED (100% subsidiary of CHEERY FOTUNE, CHEUNG Chi Kwan acting as Representative Director and Shareholder).
 
 
Shinwa Art Auction will endeavor to firmly establish an effective business alliance with Cheery Fortune while at the same time establishing a relationship with the overall HNA Group.
Through this collaboration, the Company seeks to raise its corporate value by expanding the breadth and depth of its businesses.
Specifically, 52 million yen will be used for investment in CHINA ART INVESTMENT MANAGEMENT LIMITED and 56 million yen for operating capital to expand business in Asia.
 
 
Fiscal Year May 2017 Earnings Estimates
 
 
Earnings Estimates Remain Unchanged, Double Digit Growth in Sales and Profits Expected
Shinwa Art Auction maintained its outstanding earnings estimates, which call for a 10.3% year-on-year increase in sales to ¥4.299 billion. In addition to regularly scheduled auctions in the Auction Related Business, additional sales are expected to be derived from private sales which had not been included in initial estimates.
With regard to the Energy Related Business, sales of 74 solar power generating systems are anticipated during the second half, compared with 61 during the first half. Furthermore, the Company is promoting efforts to beat its second half target to sell a total of 150 units during the full year.
Operating profit is expected to grow by 17.1% year-on-year to ¥417 million, with profits of ¥316 and ¥101 million expected to be derived from the Energy Related and Auction Related Businesses respectively. A dividend payment of ¥7.00 per share is anticipated for an anticipated dividend payout ratio of 17.8%.
 
(2) Forward Looking Strategies
The following strategies will be implemented for each business segment.
 
<Auction Related Business>
Continue to promote the "Modern Art Restoration Project"
Focus upon cultivating stronger relationships with high net worth clients and expanding the private sales business Promote cooperation with high net worth client networks in Asia
 
<Energy Related Business>
Conduct aggressive efforts to acquire rights for development and sale of solar power generation facilities Consider new businesses to replace solar power generation facility sales business
 
<Medical Institution Support Business>
Promote Asian Anti-Aging Alliance (AAAA) activities (Supplement sales).
Aim to start full scale operations of a credit card settlement platform through the joint venture company established in Hong Kong as part of the strategy of realizing the medical tourism services.
Focus on increasing the number of participating clinics and medical institutions within Japan.
Cultivate inbound visitors particularly from China but also from other regions in Asia as customers of the medical tourism service.
 
<Other Business>
In addition to aggressive investments in China and other parts of Asia, efforts will be made to create cultural and other businesses in Myanmar.
 
 
Group Business Strategy
 
Shinwa Art Auction seeks to become a company with select services by establishing a highly effective platform to provide art auction and other services to high net worth clients. In order to achieve this goal, the Company will pursue the following two strategies.
 
① "Japanese Modern Art Rejuvenation Project"
Based upon the belief that the current valuation of modern Japanese art, which is viewed to be amongst the highest quality art in the world, is too low, Shinwa Art Auction will implement various efforts that leverage its experiences, networks and strong capital standing to rejuvenate the market and realize the true value of modern Japanese art.

Along with educational activities conducted to raise the artistic and economic value of artworks, the Company will also aim to grow earnings. The current value of the market is estimated to be ¥10.0 to ¥15.0 billion, and Shinwa Art Auction seeks to expand this to ¥100.0 to ¥200.0 billion in 10 years. Therefore, the Company identifies a strong need to fortify its capital position.

In order to create a platform that can firmly support the market even in a deflationary environment, Shinwa Art Auction believes that it needs to secure capital amounting to about 10% of the total potential market value. Consequently, the Company believes that it will need to secure net assets of over ¥10.0 billion in order to help expand and maintain a market scale of ¥100.0 to ¥200.0 billion.

To that end, it is critical to expand the scale of Shinwa Art Auction from its current level of ¥1.6 billion in net assets to at least ¥15.0 billion by 2023 against the backdrop of the tailwind of "Abe-nomics" (Stimulatory policies implemented by the current administration of Prime Minister Abe) and by implementing public offerings based upon a strengthened earnings generating capability of the Auction Business.

Furthermore, the Company will endeavor to initially grow current profits of the Auction Business to ¥5.0 billion, and thereafter grow consolidated current profits to ¥10.0 billion by 2023.

Shinwa Art Auction's Modern Art Index peaked at 10,000 in September 1990, and has fallen to 342 as of November 2016. The Company seeks to help boost the value of art items and the index back to 3,000 or about one third of the peak value.
 
Shinwa Art Auction Modern Art Index (*)
This index is derived by taking the average of three successful bidding prices of art items sold in "Modern Art Auctions" in the past and assigning a value of 10,000 to the highest historical value recorded in September 1990.
 
② Leveraging High Net Worth Customer Network
Shinwa Art Auction maintains a goal of rejuvenating modern Japanese art. At the same time, the Company thinks that it is necessary to expand the overall Group's earnings generating capability by leveraging its network of high net worth clients, in addition to enhancing the earnings generating capability of Auction Related Business.

Services other than auction related services will be provided to the extensive network of high net worth clients that Shinwa Art has cultivated over 27 years of its art auction operations.
In addition to Apec's Energy Related Business (Solar power generation system sales), which has become a cornerstone of Shinwa Art's businesses, Shinwa Medico will begin full scale operations of medical tourism services. In addition, Apec has also started providing reinsurance business services and other new services are being developed.
 
 
Shinwa Art Auction also aims to acquire high net worth clients throughout Asia by making use of its strong networks in the region.
 
<Energy Related Business>
Shinwa Art has sold an aggregated total of 226 low voltage solar power generating systems as of November 2016. (Number of units sold as of fiscal year May 2015, fiscal year May 2016 and the first half of fiscal year May 2017 stood at 64, 101 and 61 respectively.)

In addition, the Company will expand ownership of solar power generating systems to allow earnings to grow stably using a 20-year fixed buyback program. As mentioned earlier, the Chichibu Onohara Solar Power Generating Plant began sale of electric power from November 2016.
 
<Medical Institution Support Business>
Shinwa Medico will be responsible for conducting the following businesses.
① Asian Anti-Aging Alliance (AAAA) activities: Sales of supplements at an anti-aging select shop.
② Medical Tourism: Sophisticated and highly refined Japanese medical service introductions (Inbound activities)
③ Consider Asian Expansion: Sophisticated and highly refined Japanese medical service introductions (Outbound activities) Introduce hospitals, physicians, sophisticated medical treatments, regenerative medical treatments.
 
 
Conclusions
 
While sales grew and profits declined during the first half, they both fell shy of estimates. However, Shinwa Art Auction will conduct activities to make up for this shortfall during the second half by promoting various aggressive measures.
At the same time, the Company was able to announce a highly ambitious business alliance with a Chinese company. And while the influence of this alliance is not expected to have a large impact upon earnings during the current and coming terms, it is expected to be an important step in realizing Shinwa Art Auction Group's core strategy of realizing the "Japanese Modern Art Rejuvenation Project", and these efforts should be watched closely.
 
 
<Reference: Regarding Corporate Governance>
 
 
◎ Corporate Governance Report
Last Update ; September 2, 2016.

<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>
The Company complies all basic principles of the Corporate Governance Code as a JASDAQ listed company.
 
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.
 
 
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