（7839） | Publish:Mon, Feb 01, 2016 IR「BRIDGE REPORT」

BRIDGE REPORT
（7839）

プライム

SHOEI Co., Ltd. (7839)

Masaru Yamada
Chairman

Hironori Yasukochi
President

Company	SHOEI Co., Ltd.
Code No.	7839
Exchange	First Section, TSE
Chairman	Masaru Yamada
President	Hironori Yasukochi
Headquarters	Ueno 5-8-5, Taito-ku, Tokyo
Year End	September
Website	http://www.shoei.com/

Share Price	Shares Outstanding		Market Cap.	ROE (actual)	Trading Unit
¥2,569	13,771,911 shares		¥35.380 billion	21.0%	100 shares
DPS (Est.)	Dividend Yield (Est.)	EPS (Est.)	PER (Est.)	BPS (actual)	PBR (actual)
¥62.00	2.4%	¥124.89	20.6x	¥733.47	3.5x

*Share price as of close on December 4, 2015. Number of shares outstanding at end of the most recent quarter excluding treasury shares.

Fiscal Year	Sales	Operating Income	Ordinary Income	Net Income	EPS(¥)	DPS(¥)
September 2012	8,606	97	143	65	4.78	2.00
September 2013	11,158	1,340	1,299	799	58.04	29.00
September 2014	13,406	2,765	2,646	1,669	121.20	60.00
September 2015	14,244	3,210	3,092	1,996	145.00	72.00
September 2016 Est.	14,420	2,500	2,550	1,720	124.89	62.00

* Estimates are those of the Company. From the current fiscal year, the definition for net income has been changed to net income attributable to parent company shareholders (Abbreviated as Parent Company Net Income)

This Bridge Report discusses the fiscal year September 2015 earnings results for SHOEI Co., Ltd.

Key Points

Company Overview

SHOEI is the world's number one helmet manufacturer. While motorcycle helmets are its primary product, the Company also manufactures aircraft and military use helmets supplied to private industry and the government. At the same time, SHOEI boasts of an extensive sales network not only within Japan, but also in about 60 countries throughout various regions around the world including Europe and North America. The "SHOEI" brand is recognized around the world for its high levels of safety and functionality, beautiful appearance, and it is now synonymous with premium grade helmets. Superior design is a key strength of SHOEI. Furthermore, SHOEI endeavors to raise the satisfaction levels of its customers, shareholders and employees through the implementation of a comprehensive three-pronged strategy that covers "product strategy," "manufacturing strategy" and "market strategy." The group consists of the SHOEI and five other consolidated subsidiaries in the United States, Germany (two), Italy and France.

Management Policy: Achieve World's Top Levels in Three Realms

"World's Top Product Quality":	Global brand that is made in Japan
"World's Top Cost Competitiveness"	World's only helmet maker to utilize the Toyota Production System for cost management
"World's Most Fun Company"	Achieve highest levels of satisfaction of customers, shareholders and employees

Motorcycle use helmets account for about 90% of total sales. SHOEI focuses upon high value-added "premium helmets" that are manufactured at its two plants in Ibaraki (Inashiki City) and Iwate (Ichinoseki City) Prefectures in Japan. The Company is able to maintain high quality levels and prevent the leakage of its technology by maintaining manufacturing facilities within Japan.

SHOEI produces premium brand helmets that are recognized as the highest quality products by motorcycle riders around the world. Their helmets boast of extremely intricate designs that provide not only superb functionality with superior wind resistance characteristics, but also very fashionable looks. With their helmets, safety comes with comfortability. SHOEI's persistence in its pursuit of helmet designs that are comfortable to their users is the driving force behind its top market share.

Different safety regulations designed to protect the lives of helmet users exist in the respective markets of Japan, Europe and North America. Therefore, the Ibaraki plant chiefly produces helmets for Japan, while the Iwate plant mostly for overseas markets. In the pursuit of this specialization strategy, SHOEI is able to achieve high levels of manufacturing efficiencies.

SHOEI was established as polyester processing manufacturer in 1954. In March 1959, SHOEI Kako Co., Ltd. was turned into a corporation and it used its polyester processing technologies to enter the helmet market. In January 1960, production of helmets for motorcycle riders was started, and in July 1968 a subsidiary was established in the United States, entering an overseas market. In July 1987, entry to the French market was launched along with the establishment of a local subsidiary. However, the bursting of the bubble economy within Japan forced SHOEI to file for corporate reorganization in May 1992. In September 1992, the current Chairman Masaru Yamada, who was working at Mitsubishi Corporation, took on the administrator task of the corporate reorganization. During the reorganization process, SHOEI also entered the German market with the establishment of a German subsidiary in March 1994 made possible by the smooth reorganization efforts. The reorganization was successfully completed in a relatively short period of time of four years and three months in March 1998 and along with the completion of the reorganization, the Company name was changed to SHOEI Co., Ltd. in December 1998. In July 2004, SHOEI listed its shares on the JASDAQ Market. Then SHOEI moved its listing to the Second Section of the Tokyo Stock Exchange in September 2007 (JASDAQ listing was eliminated at the same time), and moved to the First Section of the Tokyo Stock Exchange in October 2015. Currently, SHOEI's name is recognized globally as the top manufacturer of premium helmets.

(1) Defend our own Company

(2) Maintain manufacturing functions in Japan and high levels of employment (Carrying on the tradition of craftsmanship)

(3) Maintain healthy financial conditions

(4) Ongoing investments (New product development, cost reductions, product quality improvements, higher levels of safety)

(5) Become the world's number one manufacturer of premium helmets

(6) Develop new markets, strengthen positioning in existing markets

(7) Impartial and fair distribution of profits (50% dividend payout ratio, distribution to employees and company as retained earnings)

At the end of fiscal year September 2015, current ratio, which reflects the Company's ability to meet its short-term payment commitments, stood at 533.5%; fixed ratio, which reflects the Company's long-term financial safety, stood at 21.3%; and capital adequacy ratio stood at 78.5% with no outstanding debt. SHOEI's balance sheet proves that its management philosophy is successful in achieving its goals of (1) defending our own Company and (3) maintaining healthy financial conditions.

With the manufacture of all its products at two domestic plants in Ibaraki and Iwate, SHOEI strives to achieve the number one position in the global premium helmet market by (2) maintaining manufacturing functions and high levels of employment in Japan (Carrying on the craftsmanship tradition), (4) conducting ongoing investments (New product development, cost reductions, product quality improvements, higher levels of safety), and (6) developing new markets and strengthening its positioning in existing markets through the coordinated effort with its overseas subsidiaries.

With regards to (4) ongoing investments (New product development, cost reductions, product quality improvements, higher levels of safety), the second round of large capital investments was started in fiscal year September 2015 for the purpose of achieving stable operations over the long term. Following the first round of large capital investments for growth between fiscal years September 2006 to 2009, which centered on the large wind tunnel testing facility, the total investment is expected to be ¥4 billion over 5 years. Capital investments in fiscal year September 2016 are expected to amount to ¥1.113 billion, and the estimate of ¥2.456 billion in operating cash flow is expected to absorb this large investment and enable SHOEI to secure free cash flow of ¥1.306 billion.

ROE (Return on Equity) is calculated by multiplying three factors of "net profit to sales margin (net profit/sales)," times "total assets turnover (sales/total assets)" times "leverage (total assets/equity capital, inverse of equity capital ration.)" ROE = net profit to sales x total assets turnover x leverage.

The figures above are calculated using earnings results and assets data from official financial reports (i.e. earnings digest and securities report). Total assets and equity are averages of the balance during the term (average of balance at the end of previous term and current term). Capital ratio on earnings results and assets security reports is calculated based on balance at the end of term. Therefore, its reverse and above leverage may vary.

In the aftermath of the Lehman Shock, a sudden decline in the mainstay European market and the rapid strengthening of the yen relative to the euro contributed to a deterioration in earnings, but a "V" shaped recovery in earnings recorded in fiscal year September 2012 is also reflected in the rise in ROE from that period onwards.

According to a large United States information services company, the average ROE for Tokyo Stock Exchange First Section listed companies stood at 8.15% at the end of fiscal year March 2015, compared with 8.56% at end of fiscal year March 2014. While SHOEI has a fiscal year that lags the companies listed in this survey by six months, it has been able to achieve much higher ROE than the average for the First Section companies in fiscal year September 2015.

SHOEI's levels of leverage are low due to its strong financial foundations, and profitability has a room for rapid improvement when higher sales is achieved based upon the high margin of profitability of its high value-added premium helmets. Total asset turnover ratio may decline over the near term due to the start of "the second round of large investments to achieve stable management over the long term" during fiscal year September 2015.

Fiscal Year September 2016 Earnings Results

Sales, Ordinary Income Rise by 6.2% and 16.9% Year-On-Year

Sales rose by 6.2% year-on-year to ¥14.244 billion. A 27.3% year-on-year rise in sales to North America due to aggressive purchases by local sales agents and a 5.9% year-on-year increase in sales within Japan due to inbound demand and despite the abating of the special demand created by the rush to beat the consumption tax hike were recorded. At the same time, favorable sales of the German, French and Italian subsidiaries contributed to a 1.6% increase in sales in Europe despite the strengthening of the yen relative to the euro. Sales to other geographic regions fell by 15.9% year-on-year due to inventory adjustments in Australia.

With regards to profits, increases in pay, bonuses, depreciation, marketing expenses in Canada, and racer sponsor contracts fees boosted operating expenses by a large margin. However, the higher sales and weaker yen against US dollar allowed gross income to rise by 11.7% year-on-year, and operating income to rise by 16.1% year-on-year to ¥3.210 billion. Litigation settlement with an Italian sales agent (¥49 million) and fixed asset disposal loss (¥21 million) contributed to the booking of an extraordinary loss, but lower corporate and strategic reductions in tax rates allowed parent company net income to rise by 19.6% year-on-year to ¥1.996 billion.

During the term, the average foreign exchange rates were ¥120.04 to the US dollar (¥102.96 in the previous term) and ¥137.48 to the euro (¥139.34 in the previous term). Also, the non-operating loss arising from foreign exchange translation loss amounted to ¥117 million. Dividend is expected to be raised by ¥12 from the previous term-end to ¥72 per share. SHOEI maintains a consolidated dividend payout ratio target of 50%.

New Products Introduced in 2015 HORNET ADV (Europe, Japan) / HORNET X2 (North America), J-FORCE IV

The new products introduced in 2015 included the sports utility helmets "HORNET ADV" and "HORNET X2" introduced to three geographic regions (Europe, North America, and Japan) and the premium open-faced "J-FORCE IV" as a new product focusing on Japanese market in the "J-FORCE" series in Japan.

"HORNET ADV/HORNET X2" belongs to a new category of helmets. It provides both strength and performance for cross-country riding while at the same time offering the beauty and comfort of on-road helmets. SHOEI defines helmets in this category as sport utility helmets (SUH), which pursue sporty riding for all kind of situations.

Sales Area	:Europe (HORNET ADV)
Suggested retail price	:Germany, France EUR519.00 ~ 619.00(including tax)
Sales Area	:North America (HORNET X2)
Suggested retail price	:US$594.99 ~ $715.99(excluding tax)
Sales Area	:Japan (HORNET ADV)
Suggested retail price	:¥48,000 ~ ¥58,000 (excluding tax)
Being highly evaluated for its design, comfort, ease on your neck and detachable visor, HORNET ADV has achieved its sales target for the first year.
(Source: SHOEI)

Exclusively for sales in Japan, J-FORCE IV is a new product from the premium open face J-FORCE series. This helmet offers the characteristics of advanced aerodynamic function for stability at high speeds, a cooling ventilation system, and cutting edge styling blended with SHOEI's safety, comfort and detailed design.

Sales area	:Japan (J-Force IV)
Suggested retail price	:¥45,000(excluding tax)
(Source: SHOEI)

Total assets rose by ¥1.389 billion from the end of the previous fiscal year to ¥12.867 billon at the end of the current term. Increases in current assets for the expansion of business and noncurrent assets due to capital investments in tangible assets were recorded (Accounts receivables also rose by a large margin due to the difference in payment schedules for shipments to North America). Accounts payable and net assets also rose (Retirement reserves rose due to changes in the booking of retirement obligations). Current, fixed, capital adequacy, and return on invested capital ratios rose to 533.5%, 21.3%, 78.5% and 22.6% in the current term from 500.5%, 19.2%, 77.8%, and 21.2% during the previous term, respectively.

Increases in accounts receivables, particularly those from North America (Delays resulting from different payment schedules), inventories, and tax expenses resulted in an increase in working capital but the Company still secured a net inflow of ¥2.005 billion in operating cash flow to be realized. The margin of net outflow in investing cash flow expanded due to the start of the second round of large capital investments. The net inflow of free cash flow exceeded the initial estimate of ¥1.038 billion and reached ¥1.089 billion. Capital investment and depreciation of ¥923 and ¥509 million, respectively were recorded during the current term, compared with ¥525 and ¥397 million in the previous term, respectively.

This second round of large capital investments is designed to realize the stability of corporate management over the long term. Specifically, it entails investments in new products (New product mold investments), crisis management (Increase capacity of exhaust ventilation for paint booth, installment of chiller, and spending on safety and environmental improvements), product quality improvements (Renewal of molding press equipment), productivity improvement (Laser processing equipment and pre-form machine renewal, CAM cutting machine introduction), and companywide management systems for enhancement and rationalization of operations. The total capital investments over the five years from fiscal year September 2015 is expected to amount to ¥4.0 billion (Peak spending expected in FY9/16).

Capital investments in fiscal year September 2015, as is already explained, was ¥923 million. The installation of additional air handling unit (AHU) and air cooling chiller (Equipment to maintain air at a determined temperature) were mainly conducted along with investments for crisis management (Improvements in productivity from large improvements in the operating environment during the summer and increased stability of chemical product quality levels anticipated). Capital investments and depreciation are expected to amount to ¥1.113 and ¥0.630 billion (¥0.509 billion in FY9/15) in fiscal year September 2016, respectively. Free cash flow is expected to reach ¥1.306 billion.

Fiscal Year September 2016 Earnings Estimates

Sales Expected to Rise by 1.2 %, Ordinary Income to Decline by 17.5%

SHOEI's earnings estimates call for sales to rise by 1.2% year-on-year to ¥14.420 billion during fiscal year September 2016. The contribution from increased marketing facilities in China under the enhanced sales activities are expected to boost sales of other regions higher, along with a slight increase in sales of Europe (Sales volumes in Europe expected to trend sideways). Sales in North America are expected to trend weakly due to inventory adjustments resulting from the aftermath of the strong shipments recorded in the term just ended, and sales within Japan are expected to decline slightly.

Operating income is expected to fall by 22.1% year-on-year to ¥2.5 billion. Increases in labor expenses resulting from hikes in wages (A 4% year-on-year increase in wages, same as the previous year, of ¥57 million anticipated), advertising in the North American market (¥179 million), rising cost at the European subsidiaries arising from the weaker euro relative to the yen (¥100 million arising from inventory evaluation loss), and increasing depreciation (¥120 million) are anticipated, along with a decline in unrealized profits (¥70 million). Non-operating income is expected to improve due to the lack of any anticipated foreign exchange translation losses. At the same time, the reduction in tax rate and assumption of strategic tax reductions are expected to contribute to a 13.9% year-on-year decline in parent company net income to ¥1.720 billion.

Average foreign exchange rate assumptions during the coming term are ¥120.00 per US dollar (¥120.04 in FY9/15) and ¥132.00 per euro (¥137.48 in FY9/15). However, SHOEI has reserved half of its needs for euros of 7.00 million at ¥138.25 per euro (No currency reservations have been made for US dollar). Capital investment and depreciation are expected to amount to ¥1.113 and ¥0.630 billion, respectively.

With regards to cash flow, reductions in inventories, accounts receivable and tax expenses are expected to allow the net inflow of operating cash flow to rise above the previous year's level to ¥2.456 billion despite anticipation of a decline in pretax income. Investing cash flow is expected to see a net outflow of ¥1.150 billion due to an increase in capital investments. Consequently, a net inflow of free cash flow of ¥1.306 billion is expected to be recorded. A dividend of ¥62 per share is anticipated.

(2) Business Environment and SHOEI's Positioning

The correlation between sales trends of new motorcycles and SHOEI products during 2015 was high, and the decline in motorcycle sales resulting from the rush to purchase ahead of the hike in the consumption tax contributed to a decline in product sales within Japan. At the same time, sales in overseas markets continued to rise. Specifically, domestic sales fell by 6.5% year-on-year from January to July, while sales in Spain, United Kingdom, Italy and Germany rose by 19%, 18%, 14% and 5.6% year-on-year, respectively during the period from January to October. At the same time, contrary to the expectation, sales in France declined by 3%. Also, sales in the United States and Canada rose by 6% (January to September) and just under 3% (January to July), respectively.

A comparison of overseas trends relative to SHOEI's main Japanese rival (Ministry of Finance Trade Data, October 2014 to September 2015) shows that SHOEI maintained a high share of 74.2% of exports, excluding the Asia region. And while this reflects a slight decline from the 76.3% share of exports recorded during the period from October 2013 to September 2014 caused by the strong sales of GT-Air and NXR hit products, it compares favorably with the 70.8% and 74.8% share of exports during the October 2011 to September 2012 and October 2012 to September 2013 periods, respectively. By geographic region, the share of exports to Europe was 73.3% (77.2% in October 2013 to September 2014), 76.4% of exports to North America (74.9% during the same period), and 70.6% of exports to other regions (73.6% during the same period).

However, exports to Asia, of which statistics have been available since last year, remained at a low 33.6% share, compared with 38.0% in the previous term. This low share of exports is attributed to a lack of marketing to consumers in the local markets. Therefore, SHOEI has signed contracts with a local sales agent headquartered in Amoy, China that has eight facilities throughout China to cultivate local demand (Collaboration was conducted with only one agent in Beijing until now).

(3) Winning Models for the 2016 Season

The game winning "X-14 (North America and Japan) / X-Spirit III (Europe)" under the Company's flagship racing model will be introduced for the 2016 motorcycle riding season in Japan, North America and Europe as well as the "J･O" model in Japan and Europe to help create a new product category for SHOEI.

X-14 (North America, Japan) / X-Spirit III (Europe)

"X-14 (North America and Japan) / X-Spirit III (Europe)" model is a product which eliminates all compromises to become the most optimized product for racing applications. It is a full-face on-road type helmet and positioned to become the flagship model for SHOEI. MOTO GP motorcycle racing champion Marc Marquez and nearly all other motorcycle racers sponsored by SHOEI participated in the development of this new helmet and had nothing but praise to say about it. In particular, Marc Marquez had high words of praise about its aerodynamic performance, along with comments from other racers praising the ventilation, fit, noise resistance and wide field of vision. Participants at the American International Motorcycle Expo (AIM Ezpo) held in Florida, United States in October also expressed their strong support for the product.

"X-Spirit III" will go on sale from March 2016 (Shipments started in January 2016) in Europe at a suggested retail price of between 699.00 and 869.00 euros (Germany and France, including tax). "X-14" will go on sale from February 2016 (Shipments started in January 2016) in North America at a suggested retail price of between 681.99 and 839.99 US dollars (Excluding tax). "X-14" will go on sale in Japan from spring 2016, but the suggested retail price has yet to be determined.

J･O

"J･O" is an open-face type helmet with an inner compartment shield that targets riders of custom and classic motorcycles. It has been developed in response to the trend for motorcycle manufacturers to release new models that are reminiscent of old styled motorcycle models made in the past. This model introduces a new category of products for SHOEI, advancing such characteristics as "lightweight, compact and fashionable." Concepts so unconventional to SHOEI the product was received with surprise and favorable impression at"EICMA" held in Milano, Italy in November.

Sales in Europe are expected to begin from March 2016 (Shipments started in January 2016) at a suggested retail price of between 329.00 and 379.00 euros (Germany and France, including tax). Sales in Japan are expected to begin from spring 2016 (Suggested retail price has yet to be determined).

Conclusions

A key point of the fiscal year September 2016 earnings estimates is the fact that numerous negative assumptions have been factored into them. For example, while SHOEI anticipates an adjustment of inventories in the North America due to strong shipments in the term just ended, near- term demand remains strong. At the same time, SHOEI has factored in increases in advertising expenses into its earnings estimates due to its plans to conduct large-scale marketing promotional campaigns in North America during the coming term. In addition, higher labor expenses have also been factored into its estimates. Moreover, the Company cites "impartial and fair distribution of profits (50% dividend payout ratio, distribution to employees and company as retained earnings)" as its seventh basic principle of its management strategy and in reflection of this principle raised its dividend estimate from ¥60 to ¥72 per share (¥60 in FY9/14). SHOEI also raised compensation to its employees by 4% during fiscal year September 2015 and seeks to raise pay by another 4% during fiscal year September 2016 as part of its strategy of distributing profits to employees. Subsequently, employee compensation will have been raised by 28% over the past nine years after this coming year's hike is taken into consideration. And while higher labor expenses have been factored into the coming term's earnings estimates, "impartial and fair distribution of profits" has contributed to high levels of employee loyalty and product quality based upon the "100% Made in Japan" philosophy.

At the same time, full-capacity production conditions are anticipated to continue until May or June 2016 and this near-term strength in production has not been factored into earnings estimates. Furthermore, the yen continues to strengthen relative to the euro (Assumption of ¥132.00 per euro), but half of its needs of 7.00 million euros have been reserved at ¥138.25 per euro, a rate which is more favorable than the previous-term's rate of ¥137.48 per euro.

While the product may not contribute significantly to earnings in fiscal year September 2016, the game winning helmet "X-14 (North America, Japan) and X-Spirit III (Europe)" is expected to become the status quo for the premium motorcycle helmet and will strengthen SHOEI's presence in the three markets of Japan, North America and Europe in 2016. "X-14 / X-Spirit III" is a top class premium helmet that lies outside of the high volume sales product category, but is designed to become the highest rated products at the top class of helmets. Therefore, the yen based pricing of about ¥90,000 and ¥80,000 expected in Europe (including tax) and North America (excluding tax), respectively suggest that sales volumes are not likely to be that large.

Moreover, SHOEI has recognized its limitations of relying upon only one sales agent in Beijing, China to cover the entire country as a reason for its weak positioning relative to rival manufacturers in the China market. Despite the fact that the motorcycle market is focused upon electric motorcycles and maintains restrictions upon large gasoline engine motorcycles, sales of Japanese large gasoline engine motorcycles have trended favorably in China. Therefore, the premium helmet market is also expected to expand. To rectify this weakness in China, SHOEI will form marketing contracts with a new sales agent to provide strengthened sales coverage on a nationwide basis in China. Consequently, SHOEI can be expected to see its share rise in coming years in China.

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.
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