BRIDGE REPORT
(2157)

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Koshidaka HOLDINGS Co., Ltd. (2157)
Hiroshi Koshidaka, President
Hiroshi Koshidaka,
President
Corporate Profile
Company
Koshidaka HOLDINGS Co., Ltd.
Code No.
2157
Exchange
First Section, Tokyo Stock Exchange
Industry
Service
President
Hiroshi Koshidaka
HQ Address
World Trade Center Building 23rd Floor, 2-4-1 Hamamatsucho, Minato-ku, Tokyo
Year-end
August
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (Act.) Trading Unit
¥6,600 20,329,591 shares ¥134.175 billion 18.5% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Act.) PBR (Act.)
¥5.00 - ¥49.63 - ¥1,065.46 6.2x
* Share price as of close on April 24, 2018. Outstanding shares as of most recent quarter end, excluding treasury stock. ROE and BPS are actual results from the previous term.
 
Consolidated Earnings Trends
Fiscal Year Sales Operating
Profit
Ordinary
Profit
Net
Profit
EPS (¥) Dividend (¥)
August 2014 37,720 4,276 4,370 2,423 31.97 55.00
August 2015 44,257 4,394 4,492 2,098 28.20 30.00
August 2016 51,170 4,810 4,699 1,900 26.18 32.00
August 2017 55,283 6,146 6,354 3,255 43.63 36.00
August 2018 (Est.) 59,612 7,313 7,306 4,036 49.63 25.00
* Estimates are those of the company. From fiscal year August 2016, the definition of net profit has been changed to net profit attributable to parent company shareholders. (The same shall apply hereinafter.)
* A 4-for-1 stock split was conducted in June 2018. (EPS has been adjusted retroactively.)

This Bridge Report presents an overview of Koshidaka HOLDINGS's first half of earnings results for fiscal year August 2018 and earnings estimates for full fiscal year August 2018.
 
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 the karaoke club business and Curves Fitness Club business, 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 facilities, which is becoming a steadfast contributor to earnings. Moreover, Koshidaka seeks to create new value addition through its strategy of "creating new businesses in existing industries" based upon the theme of "leisure." <Corporate Philosophy - Contribute to the Creation of a Peaceful World by Providing Bountiful Hope and Lifestyles Rich with Entertainment> Koshidaka maintains a corporate philosophy of "contributing to the creation of a peaceful world by providing bountiful hope and lifestyles rich with entertainment, while continuing to provide evolutionary and significant services and products to people worldwide." Based upon this corporate philosophy, Koshidaka has also established five visions: 1) cultivating new businesses in existing industries to provide easily accessible entertainment that only requires a short amount of time, and is close and reasonable, 2) developing optimized businesses and structures based upon conditions in each country, area, and industry, 3) continuing to offer surprising and highly satisfying services and products with customers' needs in mind, 4) fostering inspired and entrepreneurial human resources, and 5) seeking to cultivate and maximize synergies between the various businesses of the group. <Business Segments> The Koshidaka HOLDINGS Group currently divides its business into four main segments: karaoke club, Curves Fitness Club, hot spring and real estate management businesses. In the karaoke business segment, the company operates both the "Karaoke Honpo Manekineko" clubs and "One Kara" individual use karaoke clubs. In the Curves Fitness Club business, fitness clubs providing 30 minute workout programs specialized for middle to older aged female users called "Curves" are operated. Furthermore, the hot spring business (leveraging various hot spring facility operation knowhow), and real estate management businesses are also being undertaken. Sales ratio for each segment in FY8/17 is 53.6%, 42.9%, 3.0% and 0.6%, respectively, and operating profit ratio before consolidation adjustments is 29.4%, 67.0%, 1.8% and 1.8%, respectively. Koshidaka Group The Group is constituted by a holding company Koshidaka HOLDINGS, Co. Ltd., its 10 consolidated subsidiaries that operate each business, and 3 non-consolidated subsidiaries. The non-consolidated subsidiaries include English Island Co., Ltd., which uses the television conference software application "Skype" to provide English lessons with native English speaking teachers living overseas, EEIKAIWA, Inc., and Koshidaka R&C Co., Ltd. <Growth Strategy> The possibilities within the Japanese leisure related market are considered to be limitless, given the massive market size of about ¥72.3 trillion (Source: Japan Productivity Center, Leisure White Paper 2016). Moreover, an increase in the number of baby boomers approaching the age of 75 (Peak number being born between 1947 to 1949) is expected to contribute to strong growth in the market. Based upon the business concept of becoming a "comprehensive leisure services company," Koshidaka seeks to cultivate synergies between the four realms of "amusement (karaoke)," "sports and fitness (Curves)," "tourism and travel (hot springs)," and "hobbies and cultural activities" to promote a strategy of "creating new businesses in existing industries." Koshidaka also maintains a goal of achieving group sales of ¥100.0 billion at an early stage.
 
 
First Half of Fiscal Year August 2018 Earnings Results
Sales and Operating Profit Rose 13.2% and 17.1% Year-On-Year, Respectively Sales rose 13.2% year-on-year to ¥30.394 billion. In addition to the rise in sales of the Curves Fitness Club business by 22.5% year-on-year with an increase in shopping sales due to the launch of a new protein product and strengthened sales, sales of the karaoke club business grew 6.9% year-on-year with new club openings. Operating profit rose 17.1% year-on-year to ¥3.687 billion. Although the profit of the Curves Fitness Club business rose only 2.6% year-on-year due to a temporary expenditure incurred from the acquisition of the global headquarters of Curves, the profit of the karaoke club business rose 45.4% year-on-year as the clubs in the Metropolitan Area (Tokyo and 3 surrounding prefectures) performed well and improved efficiency. The decline in tax burden ratio (38.5% → 34.0%) allowed net profit to rise 28.5% year-on-year to ¥2.320 billion. The sales of the existing clubs stood at 99.7% of the previous year. Sales of the clubs in regional areas fell short of the plan due to their poor performance while those increased for the clubs in the Metropolitan Area. Sales increased due to new club openings (this boosted sales by ¥1.166 billion). Koshidaka continues to expand its club network in the Metropolitan Area, and 9 out of 15 new clubs were opened in the Metropolitan Area in the first half of the current year. As of the end of the first half, the number of clubs was 506 (477 at the end of the first half of the previous term and 499 at the end of the previous term), of which 497 were Manekineko karaoke clubs (467 at the end of the first half of the previous term and 488 at the end of the previous term) and 9 were One Kara karaoke clubs (10 at the end of the first half of the previous term and 10 at the end of the previous term). As for profit, the full-scale profit contribution has become visible from the clubs that have been opened concentratedly in the Metropolitan Area since 2014, due to improvement in club operation efficiency by adjusting personnel allocation and operation hours as well as business operation being on track. While cost of labor and rent increased with an increase in the number of clubs, depreciation, advertising expenses, charges on closing down the clubs, etc. declined. In overseas markets, sales in both Singapore and South Korea rose. Opening new clubs with food services available allowed sales to rise in South Korea, while sales in Singapore, in which 1 club was closed down also showed a rise. As for profit and loss, increased sales and subsiding of depreciation burden allowed operating loss to decline from ¥53 million to ¥30 million in South Korea. On the other hand, the business in Singapore has remained profitable despite a slight fall in profit. As a result of 38 new club openings likewise the same period of the previous year (1 club closed), the number of Curves Fitness Clubs in Japan rose 100 or 5.7% year-on-year from 1,760 to 1,860 (1,823 at the end of the previous term). The number of members rose 22,000 or 2.8% year-on-year from 784,000 to 806,000 (821,000 at the end of the previous term). By age distribution, the number of members in their 40s, 50s, 60s, and 70s and above stood at 8.0%, 22.5%, 39.9% and 26.1%, respectively, with the total number of members over 50 years of age accounting for 88.5% of total memberships. Spot sales declined by ¥224 million in reaction to increased replacement of equipment in its 10th year in the first half of the previous term, but shopping sales rose ¥2.489 billion as the membership rate increased from 30% to 40% due to the launch of a new protein product, etc. As for profit, segment profit rose only 2.6% year-on-year as there was a temporary expenditure of ¥328 million incurred from the acquisition of the global headquarters of Curves in the second quarter. Curves Holdings Co. Ltd., (hereinafter referred to as "CVH"), which is a consolidated subsidiary, acquired all of the issued shares of a total of 6 companies: Curves International, Inc. (hereinafter referred to as "CVI"), the global franchiser of the Curves Fitness Club business; Curves International Holdings, Inc. (hereinafter referred to as CVIH"), the 100% parent company; Curves For Women II, L.C. (hereinafter referred to as "CFW), which sells equipment of the Curves Fitness Club business to franchisees; Curves International Japan, LLC (hereinafter referred to as "CVIJ), a subsidiary of CVI, a Hong Kong subsidiary and a Chinese subsidiary for ¥18.4 billion through a Special Purpose Company (hereinafter referred to as SPC) on March 31. After the stock acquisition, "CVI" effected an absorption-type merger of "SPC," "CVIH," "CFW" and "CVIJ." Despite the decline in segment profit due to expenses (¥15 million yen) incurred outside the budget from refurbishment of facilities, etc. in addition to the fall in sales (¥8 million), surplus was maintained. Energy expenses (up ¥11 million), labor cost (up ¥5 million), consumable goods expenses (up ¥12 million), etc. rose. Total assets at the end of the first half of the current year were ¥43.664 billion, which is almost at the same level as the end of the previous term. On the debit side, cash and deposits were on decline on one hand as interest bearing liabilities were cut down, working capital increased and new club openings, and fixed assets increased on the other hand. On the credit side, net asset increased on one hand, and interest bearing liabilities decreased on the other hand. As a result, capital adequacy ratio improved by 4.5 points to 54.1% from the end of the previous term.
 
 
Fiscal Year August 2018 Earnings Estimates
Sales and Operating Profit Estimated to Rise 7.8% and 19.0% Year-On-Year, Respectively Progress rates against the forecast for the year are going smooth with 51.0% for sales, 50.4% for operating profit, 52.8% for ordinary profit and 57.5% for net profit. Koshidaka anticipates both sales and profits of all three business segments to grow, and its total sales and profits to mark record highs. Continuous increase in sales and improvement in profitability of the karaoke club business are expected to allow operating profit to grow 32.9% year-on-year. The company is planning to open 45 clubs (25 buildings, 20 furnished) in the downtown area in the vicinity of the stations in Tokyo and 3 surrounding prefectures. While sales of the hot spring business, which has recently become profitable, are expected to grow slightly as it has existing stores only, operating profit rate is estimated to exceed the present target of 10%. The Curves Fitness business is planning to open 85 new clubs and Koshidaka will fortify its services and club network with a goal of boosting the number of members to 1.0 million. (2) Effects of the Acquisition of the Global Headquarters of Curves Koshidaka HOLDINGS Co., Ltd. acquired the shares of Curves International Holdings, Inc., which is a global franchiser (global headquarters) of the Curves Fitness Club business, and other companies on March 31, whose effects will be reflected in balance sheets from the end of the third quarter and in profit-and-loss statements from the fourth quarter, respectively, with May 31 as a deemed acquisition date. On balance sheets, while intangible noncurrent assets of 18.4 billion yen, including goodwill and trademark rights, will be posted on the debit side, long-term loans of 18.4 billion yen will be recorded on the credit side. It is likely that the amortization period for goodwill will be approximately 15 years. The value (assessed value) of the trademark rights is currently under examination, on which the assessed value of goodwill depends; therefore, the amount of goodwill amortization for the full year has not yet been determined. It is projected that goodwill amortization will fall below a total of about 2.0 billion yen, consisting of around 1.5 billion yen's worth of royalty payments that have been posted each term as cost of goods sold and the amount of about 400 million yen spent in purchasing machines (it is estimated that goodwill amortization will stand at about 1.2 billion yen to 1.3 billion yen each year). (3) Future Strategies In the karaoke club business, the company will further strengthen its store network by opening new karaoke clubs on a continuous basis. In the fiscal year August 2018, Koshidaka plans to open 45 new clubs (25 newly constructed clubs and 20 clubs acquired from other operators) in downtown areas in the vicinity of stations in Tokyo and 3 surrounding prefectures. Furthermore, the company will engage in automating and streamlining of its operations by utilizing tablet terminals "Maneki Pad" and introducing automated cash registers. In an effort to differentiate itself from other chain stores, Koshidaka will strive to create new services involving development, such as introduction of artificial intelligence (AI) and Internet of Things (IoT). As for overseas markets, based on the steady progress with enhancement of its earnings structure in Singapore and South Korea, the company is seeking business opportunities in Southeast Asia (Thailand, Malaysia, Indonesia, and the Philippines) and plans to establish business bases in Thailand and Malaysia by the end of this term. Regarding the Curves Fitness Club business, the acquisition of the global franchiser as a subsidiary enables the Koshidaka Group not only to take in royalty payments of about 1.5 billion yen but also to hold relevant intellectual property permanently. In addition, strategic flexibility will be increased in the businesses in Japan. In the long term, there is a possibility of business expansion to global markets. While keeping the plan to open 85 new clubs unchanged from a full-year perspective, Koshidaka will be devoted to enriching its services and constructing store networks, aiming to have one million members. The company will also embark on developing new business lines within the category of fitness, mainly focusing on the community development, which is one of the company's strengths. In the hot spring business, the company will continuously enrich its facilities and contents in an effort to improve the earning capacity. Specifically, it will establish facilities that allow customers to spend good time, such as Manekitown, and enhance its food and beverage service section, as well as continue to conduct multifarious campaigns, including the free-of-charge admission campaign targeted at elementary school children and younger. Furthermore, the company will focus on evolving energy-saving equipment through a multitude of new policies, such as the more extensive introduction of heat exchangers. The company will consider opening new hot spring facilities by taking over facilities that are afflicted by various problems, including an issue of business succession caused by the lack of successors. (4) Shareholder Return The dividend amount at the end of the term is to be 5 yen per share; it will stand substantially at 20 yen per share when a stock split is taken into account, which, together with the dividend of 20 yen per share at the end of the first half of the term, virtually makes a total dividend of 40 yen per share, up 4 yen from the previous term. Dividends have risen for 11 consecutive terms since the company was listed. Koshidaka HOLDINGS will make changes in its shareholder benefit program as follows on the basis of the stock split scheduled in June. The company is giving thoughtful consideration so that shareholders who have continuously held its shares will be treated in a cordial manner. *Shareholder's complimentary tickets can be used at Manekineko karaoke clubs, One-Kara individual use karaoke clubs, and hot spring facilities operated by the company throughout Japan.
 
 
Conclusions
Koshidaka HOLDINGS acquired the shares of Curves International Holdings, Inc., which is a global franchiser, and those of others for a total of ¥18.4 billion. "Curves" is a circuit training gym for women originated in America and based on a concept "30 minutes-fitness for women." It expanded its business with about 10,000 clubs running in 60 countries during its peak period, however, the business is struggling in overseas markets at present. Meanwhile, Koshidaka Group, as a franchisee, has evolved and developed the business in its own way in the domestic market of Japan. While Koshidaka has promoted domestic expansion of the Curves Fitness Club business as the "Fitness version" of Seven-Eleven-style expansion from a corporate viewpoint, by taking advantage of the strength of community development that it acquired in the karaoke club business, it is said that Curves failed to break the mindset of each store's franchisee as a sole proprietor outside Japan. Even in Japan, no investor could have imagined the Curves Fitness Club business to be a core business like the karaoke club business for Koshidaka HOLDINGS in later years, when Curves Japan Co., Ltd., which possessed a master franchise in Japan, was made into a subsidiary company in October 2018. As the payment of ¥18.4 billion was for intangible noncurrent assets such as goodwill and trademark rights and the whole amount is to be paid from loans, capital adequacy ratio of over 54% for the first half-year will temporarily be going down to around 38%. However, goodwill amortization is estimated to fall below the amount of royalty payments and, although it might be a little, profit from sales of machines can be taken in, therefore, influence on profit and loss is expected to be slightly positive. As for CF, annual royalty payments of approximately ¥1.5 billion will no longer be required and even cash from the profit accompanying the sales of machines can be brought in. While these support the calculation of a payback period of about 12 years, Koshidaka estimates that recoupment of investment is possible in 8-9 years if the new development of the Curves Fitness Club business is taken into account. As for overseas expansion, the company will handle the matter from long-term perspectives as it requires an organizational reconstruction. As a first step, it plans to take full advantage of the acquisition of a global franchiser, within Japan.
 
 
<Reference: Regarding Corporate Governance>
◎ Corporate Governance Report Updated on December 4, 2017 Basic Policy The basic policy for corporate governance of our corporate group is to achieve swift decision making and flexible organizational operation for strengthening our corporate competitiveness amid the rapidly changing business environment, while keeping the transparency and soundness of business administration for maximizing the corporate value with respect to shareholders, and we have developed systems and implemented some measures for it. The important mission in our business administration is to achieve sustainable growth and improve our medium and long-term corporate value. In order to fulfill this mission, our corporate group has fostered good relationships with all stakeholders, including shareholders and customers, while respecting their respective standpoints, and set our group's "management philosophy" and "behavioral standards" for following the philosophy. Corporate Mission Our mission is to contribute to the realization of lifestyles full of leisure and to the establishment of a peaceful world filled with hope by continuing to create, offer and provide the world with new and meaningful products and services. <Reasons for Non-Compliance with the Principles of the Corporate Governance Code (Excerpts)> Supplementary Principle 1-2-4 Exercise of rights at a General Shareholders' Meeting The company provides the English translation of brief financial reports, but it does not allow the exercise of voting rights on a digital platform nor does it provide the English translation of convocation notices considering the aspects of operation and efficiency. The company shall consider the change of shareholder composition ratio and ensure continuous improvement in the environment as necessary. Supplementary Principal 4-1-3 Role/Responsibilities of Board of Directors (1) The Board of Directors does not supervise the plans regarding successors of CEO, etc., however, BOD and others will have much discussion on concrete management policies and strategies and will be selecting successors of CEO, etc. from a comprehensive perspective. <Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)> Principle 1-4 The so-called strategically held shares The basic policy of our company is not to hold shares strategically. Principle 1-7 Transactions among parties concerned In our company, important transactions with executives and major shareholders (transactions among parties concerned) are determined by the board of directors. For each account settlement, directors and major shareholders are obligated to submit a written confirmation about whether they have conducted any transactions among parties concerned. Principle 5-1 Policy for developing systems and implementing measures for promoting constructive dialogue with shareholders (Basic policy) Through constructive dialogue with shareholders, we will deepen their understanding of our company, achieve sustainable growth, and improve our medium and long-term corporate value. (Division in charge) If a shareholder requests a dialogue (meeting), the division in charge of IR will deal with the request. After confirming the purpose, etc. of the dialogue (meeting) of the shareholder, the management, including the executive in charge of the IR division, will hold a meeting, if necessary. (Means for dialogue other than individual meetings) In our company, directors disclose information regularly through results briefing sessions, etc. (Prevention of the leakage of insider information) As for the management of insider information, our company prevents the leakage of insider information by managing information rigorously in accordance with the in-company regulations for inside information management and the prevention of insider trading.
 
Disclaimer
This report is intended solely for informational 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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