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(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
World Trade Center Building Hamamatsucho 2-4-1, Minato-ku, Tokyo
Year-end
August
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥1,929 18,954,802 shares ¥36.564 billion 20.9% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥30.00 1.6% ¥138.95 13.9x ¥663.39 2.9x
* Share price as of close on October 17, 2014. Outstanding shares as of most recent quarter end, 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 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 34,515 4,151 4,237 3,072 162.09 50.00
August 2014 37,720 4,276 4,370 2,423 127.87 55.00
August 2015 Est. 43,685 4,946 5,066 2,668 138.95 30.00
* Estimates are those of the Company. A 400 for 1 stock split was conducted on September 2011, and a 2 for 1 stock split in September 2014.
* EPS and dividends for fiscal year August 2013 and 2012 have been adjusted to reflect the stock split at end-September 2011.

This Bridge Report presents Koshidaka Holding's earnings results for the fiscal year August 2014 and other details.
 
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." Based upon its two main cornerstones of business of the karaoke clubs, which boasts of stable growth, and Curves Fitness Clubs, which boasts of high growth, Koshidaka has been able to continue to grow both sales and profits since its listing and is cultivating new businesses such as its hot spring bathing facilities. Moreover, the Company will take on a new perspective to target new customers by creating new services and operational methods to establish unique business models as part of its strategy of creating "new businesses in existing industries" based upon the Company's expertise in these industries.
 
<Business Segments and Group Structure>
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 Fitness Club business, 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. The other business segments include real estate management services. Sales of the karaoke club, Curves Fitness Club, hot spring bathing and other business segments during fiscal year August 2014 accounted for 52.6%, 42.5%, 4.1%, and 0.8% of total sales respectively. With regards to profits, the karaoke club, Curves Fitness Club, hot spring bathing and other business segments during fiscal year August 2014 accounted for 33.2%, 69.0%, -¥5.0%, and 2.8% of total profits respectively.

According to the "Karaoke White Paper 2013," the karaoke market within Japan in 2012 grew by 1.6% year-on-year to ¥391.2 billion. Since 2009, the market has trended between ¥380.0 to ¥390.0 billion. According to newspaper reports, the fitness club market has continued to trend sideways during the past several years at around ¥410.0 billion.
 
 
 
According to the "Earnings Data Review" reported by the Tokyo Stock Exchange, the return on equity (ROE) during fiscal year March 2014 for companies listed on the First Section, Second Section and Mothers markets of the Tokyo Stock Exchange was 8.65% (Compared with 4.99% in the previous term), and 8.55% and 8.79% for manufacturing and non-manufacturing companies respectively (Compared with 4.99% and 4.53% in the previous fiscal year). Koshidaka Holdings has been successful in achieving significantly higher ROE than the averages for other listed companies by pursuing a high profitability business strategy that allows for high assets turnover. Moreover, Koshidaka's ROE is significantly higher than other listed companies that operate karaoke and fitness club businesses. The strength of their karaoke club business lies in their ability to realize low cost openings by adopting a "existing facility take over" strategy, while at the same time providing customers with highly satisfying services. Furthermore, the secret behind the success of their Curves Fitness Club business is the provision of a short but functional 30 minute workout called Curves Program that is easy to follow and offers the ability for members to create communities amongst themselves. These strengths have contributed to Koshidaka's high ROE.

Looking at the long term trend over the past five years, Koshidaka's ROE has been on the decline (The reason for the especially high ROE during FY8/11 was the booking of extraordinary profit) due to drops in efficiency arising from anticipatory investments and a decline in leverage. A closer look at the details of the Company's ROE reveals that of the three main factors influencing ROE including net profit margin, asset turnover ratio and leverage, operating profit margin has remained relatively stable, ranging between 11% to 12%, despite the large fluctuations in net profit margin due to the booking of extraordinary profit. The decline in asset turnover ratio is attributed to the sale of the bowling business (Subsidiary operating bowling alleys was sold during FY8/13), cultivation of new businesses including the hot spring bathing business, expansion of the karaoke club business into overseas markets, and restructuring of the karaoke club business in Japan during fiscal year August 2014. With regards to the karaoke club business in Japan, various efforts are being implemented including the introduction of new services like the "Sukitto" system (Smart Karaoke Internet Terminal) for karaoke box clubs (Implementation of this system at existing clubs has been completed in FY8/14 and it will be introduced at newly opened clubs from FY8/15 onwards) and the pursuit of a scrap and build strategy for karaoke clubs with the goal of fortifying the Company's competitive positioning. The decline in leverage is attributed to reductions in interest bearing liabilities, which had increased on the back of the acquisition of the Curves Fitness Club business, and fortification in shareholders' equity. While interest bearing liabilities increased significantly at the end of fiscal year August 2014, Koshidaka expects to implement efforts to reduce these from fiscal year August 2015 onwards.

Dividend payout ratio is expected to rise to 21.3% during fiscal year August 2015 from 14.7% in fiscal year August 2014. However, fortification of capital is expected to be a factor contributing to a decline in ROE, in addition to the securing of a stable level of operating cash flow of over ¥4.0 billion in every term. Consequently, Koshidaka is expected to consider raising its dividend payout ratio not only to improve shareholder returns, but also as a means of improving ROE as well.
 
 
Aside from the above mentioned companies, other competitors include Shidax Corporation (4837) in the karaoke business and Central Sports Co., Ltd. (4801) in the fitness club business, which had ROE of 2.08% and 11.67% in FY3/14 and FY3/13 and 7.86% and 8.91% over the same period respectively.
 
 
Fiscal Year August 2014 Earnings Results
 
 
Sales, Operating Profit Rose 9.3%, 3.0%
Sales rose by 9.3% year-on-year to ¥37.720 billion. Favorable new facility openings and membership acquisitions allowed sales of the Curves Fitness Club business to rise by 15.6% year-on-year. The karaoke club business sales rose on the back of the ability to overcome the negative influence of snow with the contribution from new club openings, and as a recovery in demand at existing clubs was recorded from the second quarter onwards. With regards to profits, karaoke club business profits declined on the back of new facility openings and renewal of clubs within Japan, and facilitation of clubs in overseas markets. At the same time, this decline in profits was offset by the contraction in the losses of the hot spring bathing business and an increase in profits of the Curves Fitness Club business. Consequently, operating profit rose by 3.0% year-on-year to ¥4.276 billion. The large fall in net profit is attributed to the booking of extraordinary profit in of ¥1.539 billion due to the sale of noncurrent assets.

Compared with estimates, the shortfall in sales of the karaoke and hot spring bathing businesses were covered by the stronger than expected sales of the Curves Fitness Club business. However, the lower profits resulting from the weaker than expected sales of these two divisions could not be offset by the better than expected profits of the Curves Fitness Club business. In the karaoke club business, weaker than expected new club openings of 38 compared with estimates of 45 new facilities, weaker sales during the first quarter (Sept-Nov), and weaker participation at its clubs due to snow seen during the second quarter (Dec-Feb) contributed to this weak performance. At the same time, the losses seen in the hot spring bathing business improved, and the Company now expects this division to see a turn to profits in fiscal year August 2015.
 
 
 
Sales rose by 6.0% year-on-year to ¥19.854 billion but operating profit fell by 28.4% year-on-year to ¥1.580 billion. Snow that fell during the second quarter contributed to weaker than expected sales, but the impact of the pricing revisions in response to the hike in the consumption tax had little impact upon customer participation. While profits were negative impacted by anticipatory investments for new club openings, these investments had been factored into estimates and both sales and profits were basically in line with plans. In value terms, labor expenses, rent, and facility opening expenses increased by ¥340, ¥215, and ¥232 million respectively, collectively contributing to a ¥1.755 billion rise in operating expenses (Cost of sales rose by ¥1.172 to ¥15.6 billion) and exceeding the increase in sales of ¥1.129 billion.

The number of karaoke clubs operating within Japan at the end of the term rose by 28 from the end of the previous term to 366. By type of club, Koshidaka opened 31 "Manekineko" and 7 "One Kara" clubs respectively for a total of 38 new clubs (22 in the previous term). 33 clubs were refurbished (30 in the previous term). At the same time, 9 clubs (7 in the previous term) were closed. In order to realize "store operations that provide highly detailed services that match the customers' needs" that is the reason for success at the Company's better clubs, 8 clubs were spun off from direct operations under the "Be Ambitious" franchise system, where club managers at existing directly operated facilities are given training and motivated to become franchise club owners. Sales at existing facilities were 99.2% of the previous year's level, due in part to the weakness seen during the first quarter (94.9% of the previous year's levels) and to the snow which hindered customers from visiting karaoke clubs, causing sales during the first half to remain at a low 96.5% level compared with the previous first half. However, a recovery in customers and the positive impact of price revisions allowed sales during the second half to recover to 101.8% of the previous year's level.
 
 
Sales and operating profit rose by 15.6% and 28.4% year-on-year to ¥16.028 and ¥3.282 billion respectively. Sales increased in value terms by ¥2.168 billion from the previous term. The base of ongoing income royalty fees is ¥735 million, with another ¥1.358 billion in sales contributions from shopping, with both increasing from the previous year's levels. At the same time, the spot income derived from joining fees and new facility openings decreased by ¥91 million from the previous term. The increase in shopping sales was derived primarily from the sales of proteins on a subscription basis and was bolstered by the growing recognition of the effectiveness of taking protein along with circuit training (Protein sales amounted to ¥4.9 billion).

The number of clubs rose by 10.1% or 136 from the end of the previous term to 1,475 at the end of the current term (Including 50 clubs directly operated within the Koshidaka Group), with 137 new stores being opened on the back of the strong demand from franchisee club operators, and only 1 club being closed. Efforts to maintain high membership contract renewal rates was successful in maintaining low withdrawal rates of members of less than 3%, and the total number of members rose by 9.4% or 55,000 year-on-year to 641,000. By age group, club members in their 30s, 40s, 50s, 60s and over 70 accounted for 5.4%, 11.1%, 26.0%, 37.2% and 20.3% of total members respectively (Members over 40 accounted for 94.6%).
 
 
Sales declined by 0.1% year-on-year to ¥1.538 billion, and operating loss contracted to ¥239 million from ¥317 million in the previous fiscal year. Campaigns to promote increases in customers and measures to promote energy savings were implemented effectively during the year. A marginal decline in existing facility sales of ¥17 million was mostly offset by the contribution from higher sales of newly opened facilities of ¥16 million. With regards to profits, an operating loss was recorded but success in reducing labor, utilities and other fixed costs allowed the margin of loss to contract (Cost of sales declined from ¥1.817 to ¥1.757 billion, down 3.3%). Increases in operating expenses including advertising and consumables of ¥6 and ¥15 million were offset by declines in labor and utility expenses of ¥37 and ¥7 million respectively. In addition, new facility opening expenses and rent declined by ¥26 and ¥8 million respectively.
 
 
Aggressive investments and increases in capital sourcing including long term debt contributed to a ¥5.278 billion rise in total assets from the end of the previous fiscal year to ¥25.926 billion at the end of the current fiscal year. Investments included spending of ¥4.0 billion for new club openings and refurbishment of existing clubs in the karaoke club business, and ¥1.7 billion for the establishment of the subsidiary in Singapore, M&A, and acquisition of real estate in Atsugi City, Kanagawa Prefecture. The decision to source capital was taken in response to the favorable terms of debt that was available during the term. Consequently Koshidaka's funding needs for foreseeable future have now been covered. Consequent to this aggressive funding, equity ratio declined by 3.0% points to 48.5%.
 
 
 
Fiscal Year August 2015 Earnings Estimates and Business Strategies
 
 
Sales, Operating Profit Expected to Rise by 15.8%, 15.7%
Koshidaka Holdings earnings estimates call for sales to rise by 15.8% year-on-year to ¥43.685 billion. In addition to aggressive new facility openings and existing facilities refurbishments carried out within Japan until now, the contribution from the full year operation of the subsidiary in Singapore is expected to boost sales of the karaoke club business. Furthermore, sales of the Curves Fitness Club business are expected to continue to grow strongly on the back of increase in the number of members per facility and in sales of protein. And while two facilities will be closed, the hot spring bathing business is expected to see higher sales on the back of successful marketing events and the contribution from the"Tokyo Health Land Manekino Yu Natural Hot Spring".

Operating profit is expected to rise by 15.7% year-on-year to ¥4.946 billion. This increase is based upon the outlook for continued increases in profits of the Curves Fitness Club business, and increases in profits of the karaoke business due to improvements in profitability of the Singaporean subsidiary and the contributions from newly opened clubs in the term just ended. In addition, the sale of unprofitable facilities and effective energy saving measures at the"Tokyo Health Land Manekino Yu Natural Hot Springs" are expected to contribute to a turn to profits in the hot spring bathing business.
 
(2) Business Strategies by Business Segment
Karaoke Business
While a scrap and build restructuring strategy will continue to be deployed within Japan, Koshidaka will implement a strategy of "100 clubs in operation within five years" in overseas markets, with the fifth club scheduled to be opened in Korea during the coming year supported by the Company's growing knowhow and experience in overseas operations. The Singaporean subsidiary, K BOX ENTERTAINMENT GROUP PTE. LTD., oversees the karaoke business and will leverage knowhow developed in the "Manekineko" format karaoke clubs. K BOX seeks to achieve ¥2.0 billion in sales and break even in terms of profitability before amortization of goodwill is taken into consideration (Goodwill of ¥1.0 billion is expected to be amortized evenly over five years for ¥200 million per year).
 
Total of 45 New Club Openings Planned
A total of 40 new "Manekineko" karaoke clubs, including 10 Be Ambitious franchise clubs, (15 newly constructed and 25 existing stores taken on from other operators) and 5 "One Kara" clubs are expected to be opened. Furthermore, the focus of new "Manekineko" club openings will be shifted from the traditional road side locations to locations in front of train stations in central metropolitan areas. Moreover, Koshidaka is implementing various measures to make customers feel more at home including the unique "Sukitto" karaoke systems developed by Koshidaka that will leverage contents to increase the "customers' enjoyment of their experience at karaoke clubs." With regards to the Be Ambitious karaoke club spin off franchise system, a scheme for the opening of second franchised clubs is being considered as part of the Company's strategy of increasing the number of franchised clubs to one half to two thirds of total clubs operated. At the same time, Koshidaka is working on improving its business model and finding locations as part of its strategy of expanding the number of "One Kara" karaoke clubs in operation to 100.
 
Marketing, Personnel Related Strategy
As a marketing strategy, "morning service" and "asa-kara (Morning karaoke)" services have been created with the goal of boosting utilization rates during the morning hours. Furthermore, fortified contents for the "Sukitto" system will be leveraged as part of a differentiation strategy. Nearly 17,000 units of "Sukitto" systems have been introduced at karaoke rooms, but many of the rooms still have karaoke systems manufactured by other companies, with less than 200 rooms equipped with only "Sukitto" systems. "Sukitto" systems are expected to be introduced to another 400 to 500 rooms during the coming term (Left over existing systems will be used at newly opened stores). With regards to contents, the guitar section of songs have been removed to allow for people who want to practice guitars to play the missing guitar sections in a service called "Guitar SuKI" (Preliminary launch from August 18, 2014, with full scale launch from September 20 as part of a strategy to appeal to younger customers. This service has been received well by customers thus far. As yet another new measure, integration of karaoke and animation is anticipated. In addition, a "Refresh 5 System" for personnel will be introduced, along with other measures targeting female, senior, and foreign users.
 
Curves Fitness Club Business
In addition to continued aggressive new club openings, efforts will be implemented to increase the number of members at existing clubs. Another 90 new clubs are expected to be opened, bringing the total number of clubs in operation by the end of fiscal year August 2015 to 1,565. The number of members at the term end is expected to increase by 43,000 to 684,000 on the back of increases in both the total number of clubs in operation and the number of members per club.

The milestones of 1,500 Curves Fitness Clubs and 650,000 members were reached in October 2014. Efforts will be promoted including increases in the number of clubs operated by existing franchisees to raise the number of clubs to 1,800, new member introductions from existing members to reduce the withdrawal rates, and measures to improve customer satisfaction. In addition, Koshidaka will continue to expand sales of protein (A 10% increase expected) by leveraging the positive effect of protein when administered along with a training program, offering simple dietary diagnosis testing, and proposing programs to improve dietary balance of club customers.
 
Hot Spring Bathing Business
Two facilities (Aeon Shima Yudokoro Manekinoyu and Lamp No Yu Takamatsuten) will be closed, leaving five facilities in operation and allowing the Company to focus upon boosting sales and realizing an early turn to profitability. The drilling for hot spring water at the main hot spring facility "Tokyo Health Land Manekino Yu Natural Hot Springs" has been completed. Consequently, operation of natural hot spring bathing facilities scheduled to start from November is expected to contribute to a reduction in utility costs and to attract a greater number of customers. In addition, lolyl (Finnish type of high temperature sauna for men and steam mist sauna for women) have been installed as part of the facilities at the "Koriyama Yudokoro Manekinoyu" to attract customers. In addition, gas powered cogeneration systems for both power generation and hot water heating have been introduced in conjunction with water saving showers at all facilities. Reserve tanks have been expanded to accommodate natural hot spring water, and energy conservation measures such as efficient water recirculation systems have also been installed. Also, events with comedians giving live performances and health promoting exercises coordinated with music are also conducted as a means of attracting a greater number of customers.

The five facilities that will remain in operation include"Tokyo Health Land Manekinoyu Natural Hot Springs", "Koriyama Yudokoro Manekinoyu (Fukushima Prefecture)," "Misato Onsen Manekinoyu (Gunma Prefecture)," "Oita Mori Onsen Manekinoyu" and "Oita Lamp No Yu Hanazonoten" (Both of the last two facilities are located in Oita Prefecture).
 
 
(3) Dividend Policy
Koshidaka Holdings' fundamental dividend policy calls for the buildup internal reserves as needed for the fortification of its management structure and to conduct its future businesses, while at the same time continuing to implement a stable level of dividends payments. During fiscal year August 2014, the dividend payment is expected to be increased by ¥5 to ¥30 per share, for a total full year dividend of ¥55 per share (Dividend payout ratio of 19.5%) combined with the dividend paid at the end of the first half. Dividend payments of ¥15 per share are expected to be paid at the end of the first half and full year for a total full year dividend of ¥30 per share. After considering the stock split implemented on September 1, 2014, this dividend payment forecast represents a ¥2.5 increase from the total dividend paid during fiscal year August 2014.
 
 
 
Conclusions
 
While the Curves Fitness Club acted as a driver of Koshidaka's earnings during fiscal year August 2014, the performance of Curves in its country of origin of the United States is mixed with the number of stores contracting from their peak of between 6,000 to 7,000 to their current level of about 3,000. The philosophy of "providing customers with comfortable and enjoyable environments" cultivated in the karaoke club business has been infused into the Curves Fitness Club business to bring about a unique evolution of this business in Japan and to maintain its continued growth. Consequently, the Company has been able to realize growth through cultivation of peripheral services including the sales of protein on a subscription basis. Interest bearing liabilities, which expanded rapidly at the time of the acquisition of the Curves Fitness Club business, have been steadily reduced, and the high profit margins and superior cash flow of the Curves business has contributed significantly to Koshidaka Group's operations.

The positive impact of protein consumption after exercise has been aired in a primetime show on NHK (Japan's national public broadcasting organization) and sales are expected to continue to grow. Furthermore, the potential for further growth in protein sales is large given that only one sixth of the 640,000 members currently purchase protein on a subscription basis.

While Koshidaka was able to achieve another year of record high profits on the back of the strength in the Curves Fitness Club business, fiscal year August 2014 actually represented a temporary break in the Company's earnings. The fiscal year August 2014 represented a year when the Company fortified its foundations to prepare for its next phase of expansion to achieve 500 karaoke club operations within Japan (Business restructuring) and the facilitation of its overseas clubs. In addition, energy saving cost reduction measures were also implemented and marketing knowhow was also accumulated in the hot spring bathing business during the term. The above mentioned measures are expected to be continued during fiscal year August 2015, with special emphasis placed upon increasing the number of members at each existing Curves Fitness Club. The achievement of the Company's targets for sales and operating profit of ¥43.6 and ¥4.9 billion could be viewed as confirmation of a positive outlook over the medium term for Koshidaka.
 
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) 2015 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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