BRIDGE REPORT
(3299)

東証1部

MUGEN ESTATE Co., Ltd. (3299)
Shinichi Fujita, President
Shinichi Fujita, President
Corporate Profile
Company
MUGEN ESTATE Co., Ltd.
Code No.
3299
Exchange
TSE 1st Section
Industry
Real Estate
President
Shinichi Fujita
HQ Address
Nihonbashi Hama-cho 3-19-3, Chuo-ku, Tokyo
Year-end
December
Homepage
Stock Information
Share Price Shares Outstanding Market Cap. ROE (Actual) Trading Unit
¥1,272 24,355,000 shares ¥30.979 billion 24.7% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual)
¥30.00 2.4% ¥190.48 6.7x ¥789.59 1.6x
*Stock price as of close on March 6, 2018. Shares outstanding is taken from the most recent earnings announcement documents.
ROE and BPS are on actual data taken from the most recently ended fiscal year
 
Earnings Trends
Fiscal Year Sales Operating
             Profit
Current
         Profit
Net Profit EPS DPS
December 2010 11,317 659 526 263 15.94 1.00
December 2011 11,423 308 109 45 2.76 1.00
December 2012 12,877 605 382 225 13.62 1.00
December 2013 20,830 2,254 1,974 1,127 68.27 2.00
December 2014 30,175 3,465 3,076 1,759 90.88 8.50
December 2015 45,706 6,123 5,573 3,382 154.15 16.00
December 2016 57,488 6,310 5,696 2,925 121.35 21.00
December 2017 63,568 7,122 6,478 4,276 175.61 25.00
December 2018 (Est.) 76,284 7,959 7,222 4,639 190.48 30.00
*Estimates are those of the Company. Earnings until fiscal year December 2011 are non-consolidated, and those thereafter are consolidated.
*A 500 for 1 stock split was performed on March 26, 2014. A 2 for 1 stock split became effective on July 1, 2016.
EPS and dividends have been adjusted to reflect this stock split.
From fiscal year December 2016, the definition for net profit has been changed to net profit attributable to parent company shareholders (Abbreviated as Parent Company Net Profit).
 
We present this Bridge Report reviewing the fiscal year December 2017 earnings results of MUGEN ESTATE Co., Ltd.
 
Key Points
 
 
Company Overview
 
MUGEN ESTATE is a pioneer in the resale business of used real estate, where used condominiums and other properties are purchased and then their exteriors and interiors are refurbished as a means of raising their value prior to resale. A characteristic of the Company is to have a single employee in charge of the entire business process including purchase, refurbishment, and sale. MUGEN ESTATE also boasts of a unique position within the industry, based upon its wide range of product offers that accurately match the needs of its customers.
 
<Corporate Profile>
Susumu Fujita, currently the Chairman of MUGEN ESTATE, founded the Company in 1990 for the acquisition of used condominiums to be refurbished for resale to first time purchasers. This marked the start of the used condominium refurbishment business. Amidst the expansion of the used condominium market, MUGEN ESTATE has been able to carry on without outside capital by cultivating staff on its own to achieve steady growth. The subsidiary FUJI HOME Co., Ltd. was established in 1997 to provide refurbishment services. The Company has been able to overcome various difficulties including the Lehman Shock and the Great East Japan Earthquake, and listed its shares on the Mothers Market of the Tokyo Stock Exchange in June 2014, and on the first section of the Tokyo Stock Exchange in February 2016.
 
 
<Corporate Philosophy>
The corporate philosophy is reflected in its name "MUGEN" ("Dream comes true"; Japanese word) and calls for "the pursuit of ideals, realization of dreams." MUGEN ESTATE's goal is to help customers realize their own dreams by owning a house of their own, while also striving to realize dream through ongoing growth of the Company and of its employees.
 
 
<Market Environment>
Expanding Market for Refurbished and Used Residential Properties
The Ministry of Land, Infrastructure and Transport announced the "Total Plan for Renovating Existing Homes" in March 2012 with a view to double the size of the refurbished and used residential property market. Based upon the goal of achieving a shift in the focus from the newly constructed residential property market to the used residential property market where used residential properties are refurbished to improve their quality and functions, the used residential property refurbishment market is expected to double its current size to ¥20 trillion by 2020.
As part of such measures, "efforts will be made to quickly structure the market from the consumers' point of view so that consumers can safely purchase used residential properties and carry out refurbishment. At the same time, MLIT will also promote comprehensive efforts to cultivate companies and people who shall be responsible for providing attractive refurbished and used residential properties that respond to the diverse needs of consumers, and with the goal of promoting improvements in quality and increasing liquidity of used residential properties."
 
Attractive Real Estate Market in Tokyo Metropolitan Region
Continued Favorable Conditions for the Used Condominium Market:
 
The used condominium market in the metropolitan area continued to trend favorably. In 2017, the number of contracts of used condominium in the Tokyo metropolitan area was 37,329, up 0.4% from the previous year, hitting a record high for the third consecutive year. Furthermore, the annual contract value of used condominiums in 2017 was 1,192.7 billion yen, an increase of 5.2% from the previous year.
 
 
Huge Latent Market:
According to the "2013 House and Land Statistics Survey" published by the Ministry of Internal Affairs and Communications, the number of "non-wooden residential properties" in the Tokyo and greater metropolitan region (Tokyo, Kanagawa, Saitama and Chiba) stood at 7.70 million units. MUGEN ESTATE maintains a basic policy of purchasing only condominiums that pass the new earthquake standards implemented in 1981, which account for 63% of overall, or 4.40 million units of the total number of non-wooden structure multiple unit residence buildings constructed between 1981 and 2005. Given that the Company purchased 676 units of properties for investments and for residence during fiscal year December 2017, the latent market potential for MUGEN ESTATE remains huge.
 
Household Numbers in The Tokyo Metropolitan Region On The Rise:
While a contraction in the total population of Japan arising from declining birth rates appears to be unavoidable at present, the National Institute of Population and Social Security Research estimates that the number of households in the Tokyo metropolitan region will continue to grow until peaking in 2025.
 
 
 
Even though, MUGEN ESTATE's latest business performance, which shows double digits growth in sales and profit, is not inferior to peer companies, plus ROE is high, PER is still in low level. Improvement of its awareness and, development of a more specific growth scenario, and a medium-term increase of sales and profit levels are desired.
 
<Business Description>
MUGEN ESTATE's business is divided between the two segments of "real estate trading" and "real estate leasing and other" businesses, with the real estate trading segment business accounting for about 96% of total sales during fiscal year December 2017. The Company plans to promote efforts to expand its earnings deriving from the real estate leasing and other business segment.
 
 
<Real Estate Trading Business>
The real estate trading business segment includes the three services of real estate resale, interior and exterior refurbishment and construction, and real estate distribution with the main service being the resale of real estate.
 
◎ Purchases and Resale Business
The Company purchases used condominiums for sectional ownership, real estate for investment, and detached housing properties in the Tokyo Metropolitan Areas, including Tokyo, Kanagawa, Saitama and Chiba. To increase their value, the Company then has the subsidiary FUJI HOME, and some others, refurbish them in accordance with their age, space, layout, location and management condition.

Main Value Addition Activities
Refurbishment of exteriors and interiors
Improve management conditions of buildings
Restoration of wear and tear caused by age
Leasing of vacant rooms
Collection of unpaid rent
After having increased real estate values as "real estate for resale" through any of the activities, the Company then sells to first time purchasers, individual investors, and small to medium sized companies.
 
 
The purchase and sale of real estate is performed by real estate brokers, but some of the transactions are undertaken by FUJI HOME in order to obtain a feel for the diversifying needs of customers and market trends. In order to respond quickly and accurately to the needs of customers, MUGEN ESTATE maintains a diverse lineup of condominiums for sectional ownership, real estate for investment (rental condominiums, apartments and office buildings) and detached housing. Properties are divided into two categories of real estate for investment and real estate for residence. Real estate for investment are properties purchased by investors for the purpose of deriving returns, which include whole rental condominium complexes, offices and apartment buildings, as well as condominiums for sectional ownership and others. The average price for real estate for investment is between ¥0.1 to ¥0.2 billion.

The residential-type properties are those which purchased by consumers for the purpose of living in them, which include detached housing in addition to its main item of condominiums for sectional ownership. These properties are bought primarily by first time purchasers and their prices are mostly in the ¥0.02 to ¥0.03 billion range. MUGEN ESTATE sold over the course of fiscal year December 2017, 318 units of real estate for investment and 358 units for residence, 676 in total.

MUGEN ESTATE boasts of a unique business process where one sales person is responsible for the acquisition, refurbishment and sale of real estate. Furthermore, the Company's sales staff visit real estate brokers such as Mitsui No Rehouse, Nomura Real Estate Urban Net Co., Ltd., Sumitomo Real Estate Sales Co., Ltd., Tokyu Livable Co., Ltd. and others in the Tokyo metropolitan region to obtain information about real estate for sale by both individuals and corporations. By visiting these real estate companies, sales staff are able to obtain real estate information on superior properties that have yet to be released through public channels.

After obtaining information on real estate for sale, analysis is conducted regarding the properties' potential for increased value and resale at higher prices after renovation and refurbishment. If MUGEN ESTATE finds that there is that potential, then they acquire the properties and then outsource the task of refurbishment to a subcontracting company under the supervision of its subsidiary, FUJI HOME.
An analysis of the potential customer base specific to the location of the property is conducted by sales staff to determine the price and other needs of the customers, and in some instances a three bedroom used condominium maybe converted into a two bedroom condominium and other refurbishments are undertaken to raise the attractiveness of the property (Refurbishments are conducted with a view to the end sale price and ensuring profitability on the sale).

Sales staff responsible for purchasing the real estate adhere to standards established by the Company. These internal standards are comprised of various factors including specific balance between acquisition price and management fees, proximity to train stations and no properties requiring bus rides, and other specific information known internally as the "12 purchase conditions," which have been developed over the history of the Company's operations and are effective as a context for the conduct of its business. At the same time, this standard developed on MUGEN ESTATE's own unique knowhow also serves to support less experienced sales staff in making the correct analysis and purchase of real estate. In addition, sales staff consult with their managers and superiors to obtain appropriate advice on how to carry on their business process. And while high commission involved in sales activities for condominiums tends to lead sales staff to act discretionally in general in the industry, MUGEN ESTATE maintains a culture of team work, where sales staff consult each other for advice and superiors lead their subordinates in the right direction on the business process. Furthermore, MUGEN ESTATE pays its sales staff commissions, not based upon the resale value but upon the profit derived from the resale as a means of reducing the risk of excessive purchases and leftover inventories that many of its competitors suffer.

In recent years, the interest of overseas investors, especially those in Taiwan, in acquiring Japanese real estate has increased, and the number of real estate brokers specialized in dealing with overseas investors is growing. Against this backdrop, sales to overseas investors is on the rise. The share of real estate for investment sales derived from overseas investors rose from 11.7% in fiscal year December 2013 to 20.6% in fiscal year December 2015.
 
◎ Interior and Exterior Refurbishment Business
The subsidiary FUJI HOME conducts refurbishment of both the interiors and exteriors of purchased used real estate. FUJI HOME boasts of bountiful knowhow in refurbishment services based upon over 500 refurbishment projects conducted through accurate surveys and analysis of real estate properties by its highly skilled staff, including first class registered architects. Orders from MUGEN ESTATE currently account for over 90% of FUJI HOME's total orders, but it is endeavoring to expand orders from external clients.
 
◎ Brokerage Business
Information about real estate purchased for resale by MUGEN ESTATE is handled by FUJI HOME. In addition to the company website, they have also put it up on other portal sites for used real estate information operated by other companies. Furthermore, they also provide mediation services for MUGEN ESTATE in their acquisition of real estate properties. Also, synergies with the Company's real estate resale business can be realized by gathering accurate information about the needs of used real estate purchasers.
 
<Real Estate Leasing and Other Business>
Optimization of the sales function of the real estate resale business is being pursued.
 
◎ Leasing Business
Real estate purchased as investment-type properties and as fixed asset properties are leased to end users. In principle, real estate is purchased with the objective of sales. However, renting and leasing is used as a means of deriving income until the properties are sold.
 
◎ Property Management Business
Management services for leased real estate that have been acquired as investment-type properties and fixed asset properties are conducted. Improvement in the management of structures, restoration of wear and tear caused by age, leasing of vacant rooms, collection of outstanding rent, and other measures are implemented as part of a strategy of increasing the value of properties and improving the return on investment-type properties. In some cases, property management services are maintained even after investment-type properties is sold at the request of purchasers.
 
<Management Strategy>
The "Three S's" designed to collateralize sustained growth and establish a sound earnings foundation.
 
MUGEN ESTATE promotes a growth strategy to become a "dominant player in the Tokyo and surrounding metropolitan region" and is focused upon used real estate including not only condominiums and detached housing units, but also office buildings to become the company with the largest sales in the resale real estate business in the region. As a means of differentiating its business from its competitors, MUGEN ESTATE has chosen not to open offices in regions outside of Tokyo and the surrounding regions, and in principle will not deal in used real estate in regions outside of Tokyo Metropolitan area.

(Mid-term management plan)
The company will achieve sustained growth and improve corporate value over the mid- to long-term through improvements (evolving, deepening and renewing) in its business model. The evolving, deepening, and renewing in the fiscal year December 2017 were as follows:
Evolving: Net sales of office buildings increased 92.9% year on year, to 22.8 billion yen, showing a significant increase.
Deepening: Secured a profitability level on par with the level of a year ago with the profit-control system implemented in earnest.
Renewing: The recruitment of foreigners, which was undertaken as part of diversity, contributed to sales of properties.
 
Toward further success in its effort at "evolving, deepening and renewing" from this term onward, the company will strengthen its "organization's power" while cherishing the "power of individuals" which has been cultivated in its existing businesses, endeavoring proactively to try new approaches not only in the leaseback business that was launched in February 2018 but also in new businesses. Under the policy, the company aims to achieve sales of 96.0 billion yen (up 51% from the fiscal year ended Dec. 2017), an ordinary profit of 8.0 billion yen (up 23% from the same fiscal year), and net profit of 5.0 billion yen (up 17% from the same fiscal year) in the fiscal year Dec. 2020.
 
◎ Characteristics and Strengths
① Management Leveraging Synergies
In addition to the above mentioned real estate resale service, MUGEN ESTATE also performs real estate rental, real estate refurbishment, real estate distribution, and real estate management services. The knowhow developed in its various businesses based on the results of the many years of operation is leverage to be able to respond flexibly to changes in the market and derive various synergies between its various businesses.
 
② Diverse Product Lineup and Unique Positioning
With regards to the core real estate resale business, MUGEN ESTATE boasts of a strong information gathering capability based upon its network in the used real estate market in the Tokyo and the surrounding metropolitan region, which has enabled the Company to develop a diverse lineup including condominiums for sectional ownership, real estate for investment (whole rental condominium complexes, offices and apartment buildings) and detached housing, and to respond quickly and accurately to customers' needs. In addition, MUGEN ESTATE has developed a strong reputation amongst real estate brokers for its ability to respond to all of the information gathered from them. Returning to those real estate brokers upon completion of rendering resale properties creates a benevolent cycle where the Company gains preferential treatment in the gathering of information on superior real estate.
 
 
As illustrated in the above diagram, MUGEN ESTATE has carved out a unique position within the real estate refurbishment industry through the creation of a diverse product lineup.
 
③Strength of High Levels of Professional Skills
The information gathering, investment decision making, property management, technological response and other capabilities are all part of MUGEN ESTATE's high levels of professional skills and allow the Company to provide superior properties to the market.

Additionally, the stable constructing and management system, the business know-how that has been developed over many years and the strong financing ability based on contracts with about forty financial institutions are MUGEN's strengths.
 
 
Fiscal Year December 2017 Earnings Overview
 
 
Sales and profit increased thanks to the continuous healthy sales of real estate for investment, hitting record highs.
Sales were 63.5 billion yen, up 10.6% year on year. The sales of real estate for investment continued to perform well. The average unit price declined due to a significant growth of sectional real estate for investment. While the prices of used real estate seemed to remain high and investment returns were shrinking, the company was in a harsh environment for ensuring the gross profit rate; however, because it managed to secure a high gross profit rate for part of large real estate for investment, gross profit rate for real estate for investment exceeded this year's estimates and the last year's results.
Both sales and operating profit marked record highs. The company reconsidered, whenever necessary, the timing to sell each unit of real estate for investment, and carefully forge ahead with sale of them, because the gross profit rate of the real estate sold had exceeded the initial forecast and grown healthily since the first quarter. As a result, it made a downward revision to sales and operating profit, and an upward revision to ordinary profit and net profit. Accordingly, the estimated term-end dividend amount was increased from 23.00 yen per share to 25.00 yen per share.
 
 
 
The sales of real estate for investment were 52.2 billion yen, up 15.5% year on year. The number of units sold increased by 27.7% year on year. The number of sold whole complexes for investment worth over 0.3 billion yen was 47, including 7 buildings worth over 1 billion yen, indicating favorable performance. The sales of whole office buildings increased by 92.9% year on year to 22.8 billion yen with the handling rate of whole office buildings rising to 43.8%.
 
The average sales unit price of real estate for investment decreased by 9.5% because the number of units of sectional real estate for investment sold grew by 81 year on year. The average sales unit price of whole complexes for investment was 0.248 billion yen. The company is making a steady progress in its efforts to handle larger real estate.
 
Although the rise in purchase prices of residential-type properties due to fierce competition stimulated by the low barrier to entry resulted in a decrease in sales, the number of units sold, and the average sales unit price from those of the previous term, the company has delivered results almost as estimated.
 
By areas, sales of the sectional real estate for investment showed a healthy growth in Tokyo. Out of 138 properties, 104 were in Tokyo. The number of units of residential-type properties sold declined in Tokyo, Kanagawa, Saitama, and Chiba.
 
The ratio of sales of real estate for investment targeted at overseas investors dropped by 4.2 points year on year to 15.6% due to a rise in the sales of sectional real estate for investment. The number of units sold increased to 49 from 38 of the previous term. The average sales unit price was 0.166 billion yen, which is considerably lower than the previous term (0.2359 billion yen).
 
To enhance diversity, the company began to employ foreigners. These foreign employees are expected to contribute to sales to overseas investors.
 
 
 
Because the used real estate business is noted for being vulnerable to trends in the economy and economic climate, specific inventory controls are implemented to match changes in the business environment.
The company refers to the average number of days from the acquisition to sales of a property in each period as the "business cycle." The average business cycle of real estate for investment tends to lengthen due to increase in the size of properties sold and increase in the properties with high vacancy rate and high value adding effect. Under this circumstance, the company decided, in principle, to keep the properties with high yields, which are purchased with long-time loans and to which values are added, for medium to long term. The company will sell the properties at the appropriate situation, taking into account rental income during the holding period.
For residential-type real estate, the company aims to shorten the business cycle because rental income is not generated during the holding period.
 
 
The company carefully purchased properties form the beginning of the term but, in August, started to intensify its purchase activities, resulting in an increase of inventory in the fourth quarter. It will continue proactive purchase for the time being.
The inventory trend of residential-type property was as estimated.
 
 
Although sales of real estate for sale declined by 3.8 billion yen from the end of the previous term, current assets grew by 1.1 billion yen from the end of the previous tem due to an increase in cash and equivalents. Total assets stood at 59.2 billion yen, up 1.0 billion yen from the end of the previous term.
Total liabilities were 39.8 billion yen, down by 2.7 billion yen from the end of the previous term, mainly as a result of a rise in interest-bearing debt by 2.2 billion yen from the end of the previous term. Net assets grew by 3.7 billion yen from the end of the previous term to 19.3 billion yen due to increases in retained earnings. As a result, the equity ratio increased from 26.6% at the end of the previous term to 32.5%, up 5.9%.
 
 
A decline in sales of real estate for sale, which grew in the previous term, was a major factor in turning Operating CF from a deficit to a surplus. The decrease in purchase of property, plant and equipment shrank the deficit of Investing CF. Free CF went into the black.
Financing CF has moved into a deficit because there was no income from share issuance, which was present in the previous term.
The cash position improved.
 
(4) Topics
◎Released a new service, "Rakuraku Leaseback"
(Overview of the service)
Leaseback is a service in which the company buys a residence owned by a customer and then enters into a lease contract with the customer in order to support the customer in leading a life in the same manner as before.
Leaseback is receiving attention as a way of raising funds, and a solution to capital needs, including an unexpected inheritance tax, asset disposal during one's life, reserves for uncertain life after retirement, difficulty paying a housing loan, costs of long-term care, and children's educational expenses.

A multitude of aged customers and ancestors have consulted the company over measures against inheritance tax, asset utilization, and securing of reserves for life after retirement; therefore, the company has embarked on the leaseback business as a service that satisfies the needs for "selling a residence while continuing to live there."
The company makes the most of its unique knowhow in handling a variety of used properties exclusively in Tokyo and three prefectures in the metropolitan area, offering meticulous services and support that are customized to the life plan of each customer.
 
 
 
Fiscal Year December 2018 Earnings Estimate
 
 
Sales and profit are estimated to grow over 7 straight years, hitting record highs.
The sales are estimated at 76.2 billion yen, up 20.0% year on year. Although the business environment is uncertain, the company expects constant needs for trading of used real estate for a wide range of purposes, including asset utilization, measures against inheritance tax, and residence. It will continue to handle larger real estate for investment, anticipating a rise of the average unit price. In addition, the company plans to boost house rent income by acquiring non-current assets. SG&A expenses will rise, but they will be offset by increased sales, and operating profit is projected to be 7.9 billion yen, up 11.8% year on year. The dividend amount is to stand at 30 yen per share, up 5 yen year on year. Payout ratio is estimated to be 15.7%.
 
 
 
(3) Business expansion policy
The company will continue strengthening sales of real estate for investment, taking advantage of stronger financial ground as a result of growing capital stock and stronger financial procurement capacity thanks to improved credit worthiness. While coping with enlargement of properties worth over 1 billion yen, it will make efforts to handle larger properties worth over 2 billion yen and also focus on purchase and supply of properties worth 0.1 to 0.3 billion yen in the price range with the highest unit sales.
The company expects increase in real estate for sale, which is the earnings source for income from real estate lease, in conjunction with purchase of real estate for investment in the real estate trading business, and besides, it will enhance its management structure through various approaches, such as raising the number of staff, with the aim of acquiring and expanding non-current assets.

The company will proceed with their metropolitan area domination strategy while further enriching its product lineup and providing the latest information on real estate.
Moreover, the company will continue to maintain its accountability system for operations, which is one of their strengths. It will work to refine its system for ensuring steady gross profit, for example, by tightening the internal standards and relegation rules, sharing the cases of failures swiftly, and improving the internal review system for large-scale real estate.
In addition, the company plans to optimize operations by introducing a mission-critical system as well as improving their lease management division.
Furthermore, they will discuss various means of fund procurements, including direct lending and opening more doors to banks and trust banks as well as working to expand business opportunities.
 
 
Conclusions
 
The company revised sales and operating profit downwardly in January. This reflects the company's action, which are reconsideration, whenever necessary, of the timing to sell each property, and careful sale of properties, because, as described above, the gross profit rate of the real estate sold had exceeded the initial forecast and grown healthily since the first quarter, indicating that the company's immediate business performance was satisfactory. The stock price, which had moved in line with the whole market, spiked, breaking through a recovery high at the time of production of this report. As compared with peer companies in the industry, MUGEN ESTATE cannot reach the level of Open House Co., Ltd., but has delivered a favorable performance.
The PER, however, is around 7, remaining at a low level. We would like to receive from the company a message that enables investors to have a clear view of its medium- and long-term earnings scale from the fiscal year 2020 onward.
 
 
 
<Reference: Regarding Corporate Governance>
 
 
◎ Corporate Governance Report
Updated on Mar. 28, 2017
 
 
 
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) 2018, Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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