BRIDGE REPORT
(2437)

JASDAQ

Shinwa Art Auction Co., Ltd. (2437)
President Yoichiro Kurata
President
Yoichiro Kurata
Corporate Profile
Company
Shinwa Art Auction Co., Ltd.
Code No.
2437
Exchange
JASDAQ
Industry
Service
President
Yoichiro Kurata
Headquarters
Ariake Frontier Bldg., 3-7-26 Ariake, Koto-ku, Tokyo 135-0063 JAPAN
Fiscal Year End
End May
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥292 5,700,100 shares ¥1.664 billion 1.0% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥6.00 2.1% ¥17.67 16.5x ¥285.56 1.0x
* Stock price as of closing on October 6, 2015. Number of shares at the end of the most recent quarter excluding treasury shares.
 
Consolidated Earnings Trends
Fiscal Year Sales Operating Profit Current Profit Net Profit EPS (¥) Dividend (¥)
FY5/12 1,213 89 85 131 2,389.34 450.00
FY5/13 1,359 45 57 76 1,393.79 450.00
FY5/14 1,385 135 122 108 20.39 6.00
FY5/15 2,948 77 52 16 2.89 6.00
FY5/16 Est. 3,113 182 158 100 17.67 6.00
* Estimates are those of the Company. Consolidated accounts began being released from FY5/14.
A 100 for 1 stock split was performed on December 1, 2013.
 
This Bridge Report provides an overview of Shinwa Art Auction's business, its medium-term business plan, and an interview with President Yoichiro Kurata.
 
Highlights
 
 
 
Company Overview
 
Shinwa Art Auction is Japan's largest high-end art auction company. In 2014, the Company boasted of a 45% share of the market for over-JPY 20 mil-artworks sold through auctions. Shinwa Art Auction is also unique for its business which leverages high net worth customers' assets. The Group includes Shinwa Art Auction which conducts auctions, Apec Co., Ltd., which provides energy related services, Shinwa Medico Co., Ltd., which provides business support for medical institutions, and J Auction Co., Ltd., which has adopted the jewelry and other auctions function from the parent company.
 
<Company History>
Shinwa Art Auction was founded in August 1987 as an organization called "Shinwa-kai" for the exchange of artworks by art dealers. The Company's first auction called "Shinwa Art Auction's First Modern Japanese Art Auction" was held in September 1990. In June 1991, the Company adopted the name of Shinwa Art Auction Co., Ltd.
Thereafter, the "First Modern Japanese Ceramic Art Auction" was held in 1996, the "First Tea Ceremony Art Utensils Auction" in 1997, and the "First Paintings, Prints and Crafts Auction" in 1999. Shinwa Art Auction listed its shares on the Hercules Market of the Osaka Securities Exchange (the present JASDAQ Market of the Tokyo Stock Exchange) in April 2005.
Apec Co., Ltd. was turned into a subsidiary along with the acquisition of its shares in April 2013. Shinwa Medical Co., Ltd. (Currently known as Shinwa Medico Co., Ltd.) was also established in April 2013 as part of the efforts to diversify the Company's business model, which had been focused upon auctions, by leveraging the highly important assets of its high net worth individual clients.
 
<Market Environment>
As shown in the graph below, the market for artworks within Japan (Value of items sold through auctions) had contracted to ¥1.4 billion in the wake of the bursting of the bubble economy in 1992. But after the start of public auctions in 1999, the auction market recovered to exceed the previous peak in 1990 and expanded to ¥21.8 billion. After the occurrence of the "Lehman Shock", the artwork auction market once again contracted to less than ¥10.0 billion in 2011, but recovered to ¥14.2 billion in 2014. However it remains well below the recent peak achieved in 2007.
As will be described later in this report, Shinwa Art Auction believes that Japanese artworks are extremely undervalued. Therefore, the "Japanese Modern Art Rejuvenation Project" has been established to remedy this situation and aim to expand the market to at least ¥100.0 billion.
 
 
<Business Description>
Shinwa Art Auction's businesses can be divided into three divisions: 1) auction related, 2) energy related and 3) other businesses (Medical institution support business).
 
① Auction Related Business
The auction related business is comprised of auction business and other auction related business.
 
(1) Auction Business
In addition to the holding of auctions based upon product and price categories including modern art, modern ceramic art, and other modern artworks on a regularly scheduled basis, Shinwa Art Auction also conducts auctions for wine, western art, and other products on an ad hoc basis.

J Auction Co., Ltd. was established as a subsidiary in October 2013 to provide auction services for high-end branded goods, jewelry, and other products.

Shinwa Art Auction conducts auctions of artworks that have been consigned for sales to it by their owners. In the event that these artworks are bid for, a contract is formed with the bidder and the bidder is charged the bidding price of the artwork plus bidding commissions. The artwork owner receives the bidding price minus various costs including commissions. Shinwa Art Auction books the bidding commissions as its sales.
 
(2) Other Auction Related Business
Private sales services are primarily conducted in this service.
Private sale is the name used to describe sales through negotiated transactions. But as in auction transactions, sales commissions are charged to both sellers and purchasers of items based upon the price of the item sold. In addition, some items are actually purchased by Shinwa Art Auction and kept as inventory for sale to customers.
Shinwa Art Auction also provides retail sales of high-end brand bags, jewelry and watches. At the same time, it purchases precious metals.
 
 
② Energy Related Business
Apec Co., Ltd. conducts sales of 50kW low-voltage solar photovoltaic power plant to high net worth individuals and corporate clients.
In addition, high voltage solar photovoltaic power plant power generation system sales are also conducted, with some of these units being used in Shinwa Art Auction's own electric power sales service.
The Company began joint electric power purchases with Chubu Electric Power Co., Inc. from August 2015.
 
③ Other Business: Medical Institution Support Business
Shinwa Medico Co., Ltd. is in the course of preparing for sales of medical tourism services to high net worth individuals who are clients of Shinwa Art Auction, with marketing of these services expected to begin in May 2016.
Cooperation with medical institutions providing sophisticated medical services, advanced regenerative medical services and advanced medical diagnosis will be pursued for provision to high net worth individuals in Japan and other parts of Asia.
In addition, medical coordinator services and medical translator training courses are also being developed.
 
<Characteristics and Strengths>
①Largest Auction Company within Japan
Shinwa Art Auction's share of the high-end art auction market for artworks over ¥20 million in price stood at 44.9% in 2014 and it boasted of a large lead over the second place competitor.
Furthermore, Shinwa Art Auction's position as the pioneer within the high-end art auction market is unwavering.
 
 
②Business Leveraging Strong Network of High Net Worth Individuals
Many of both the sellers and buyers of artworks in auctions held by Shinwa Art Auction are high net worth individuals.
The need of these high net worth individuals for strategies dealing with asset management, tax savings, inheritance and other issues also represent potential business opportunities for Shinwa Art Auction outside of its core auction business.
Therefore the energy related and medical institution support businesses are conducted to leverage these opportunities. Furthermore, other various businesses are expected to be promoted to leverage its core businesses.
 
 
The low return on equity ratio recorded during the term just ended is attributed to the weak earnings results. Based upon the estimates for a recovery in net profit to sales ratio to 3.21% and no major changes in asset turnover or leverage ratios in the coming term, return on equity can be expected o recover to around 5.8%. Therefore, further improvements in earnings are welcomed from the perspective of improving return on equity.
 
 
Fiscal Year May 2015 Earnings Results
 
 
Strength in Energy Related Business Allows Large Rise in Sales, Higher Cost of Sales Cause Profits to Decline Significantly
Sales rose by 112.8% year-on-year to ¥2.948 billion on the back of a large increase in sales of the energy related business and despite a decline in sales of the auction related business.
The stockpiling of cost of sales by ¥100 million the adoption of a conservative approach of reevaluating art inventories which negatively impacted the auction business' profits and contributed to a 42.6% year-on-year decline in operating profits to ¥77 million. Furthermore, the booking of ¥12 million in evaluation loss on derivative evaluation for a bank loan transactions also caused current profits to decline by 56.8% year-on-year to ¥52 million.
 
 
①Auction Related Business
During the modern art auction held in January 2015, transaction value and sales both fell short of forecasts by large margins. And while the share of bidding commissions income relative to overall sales rose within the auction related business including that of the subsidiary, a decline in transaction of high profit margin artwork inventories was recorded.
In addition, the book value of inventories which have been held for more than a predetermined period of time is regularly written down and evaluation loss is incurred in order to protect the Company from the potential for future losses arising from inventory products as part of the risk management strategy and based upon a conservative outlook.
The strategy of aggressive acquisition of artwork inventories pursued from May 2011 has contributed largely to profits and no significant losses have yet to be incurred. In addition, the evaluation loss is merely a reflection of Shinwa Art Auction's adherence to its internal rule and does not necessarily represent an actual decline in the valuation of the artwork inventories held, nor does it immediately necessitate an outflow of capital. Therefore, the adherence to this internal rule necessitated the booking of an evaluation loss of ¥100 million and largely impacted profits during the current term.
 
 
I) Auction Business
Auctions were held 28 times during the current term.
In the core Modern Art Division, transaction values grew by 49.8% year-on-year to ¥2.577 billion and the bidding success rate rose by 3.7% points year-on-year to 84.5%.
The large increase in the transaction value is attributed to the fact that one less auction was held in the previous fiscal year. However, even when the Iwashita Memorial Museum Collection of Modern Artworks are considered, transaction value rose by 17.1% year-on-year and the number of items put up for auction grew by 24.5% year-on-year to 853. As you can see, the both figures (transaction value and the number of items put up for auction) grew significantly.

Four auctions of bags, jewelry and watches (Including two jewelry and watch auctions held in Hong Kong) were held within the other auctions business, along with one bags auction, three wine auctions, and two western artwork auctions. In addition, special auctions including the "Shiko Munakata: The Universe in Pitch Black and Life in Scarlet" and "The Nakagawa Kazumasa Collection."
In particular, "Shiko Munakata: The Universe in Pitch Black and Life in Scarlet" auction contributed largely to both transaction value and sales due to the high average successful bid price of over ¥13.00 million despite only having 22 items put up for sale.
However, the decline in the number of special auctions compared with the seven large and small special auctions held in the previous year led to the decline in both transaction values and sales. Moreover, low bid prices and the decline in the transaction value of the gem and jewelry division due to its transfer to a subsidiary were factors influencing the low growth in transaction value of 0.5% year-on-year to ¥3.958 billion of the auction services.
 
II) Other Auction Related Business
In order to supplement the weaker earnings of the auction business and the evaluation loss incurred on inventories, Shinwa Art Auction aggressively pursued acquisition of items for its auctions which led to a large increase in transaction value and sales compared with the previous term. However, the Company was not able to realize two potential large private sale that it had sought to realize.
Transaction value and sales of the other auction related business rose by 34.6% and 13.7% year-on-year to ¥482 and ¥332 million respectively.
 
②Energy Related Business
50kW low voltage solar photovoltaic power plant sales had been expected to benefit from the introduction of green investment tax reductions in December 2014 and the number of installations as of end March 2015 were expected to rise above initial estimates by a large margin. However, sales of 17 units, despite their buyers already being decided and their only remaining work being system connection, were delayed due to the reasons attributed to the electric power company.
These delays necessitated large revisions in sales plans. Consequently, marketing activities have been stepped up to help offset this shortfall and to achieve initial targets.
At the same time, demand from corporations which had been expected to take advantage of the green investment tax incentive that allows for 100% immediate amortization of investments from March 2015 was weaker than expected. Consequently, both the sales pricing and the number of units purchased through bulk buying were weaker than expected.
While marketing efforts to leverage the tax incentives designed to promote capital investments to raise productivity from April 2015 onwards were promoted, weak demand resulting from low recognition of this tax incentive system led to weak pricing and low profit margins on product sales from April.
As a result of these conditions, modest sales of 64 units of the 50kW low voltage solar photovoltaic power plant power generation systems were recorded.

Although two high voltage solar photovoltaic power plants, one 500kW and one 800kW, had been expected to be sold, the sale of the 800kW unit didn't reach contract signing.
Placing importance on follow-up observation and exploration of the potential of wholesale of electric power and wind power generation, Apec ( a subsidiary of Shinwa Art Auction) finally decided to own the solar photovoltaic power plants as part of its continued efforts in the energy related business.
Consequently, the Company had decided to sell its 1MW solar photovoltaic power plant operating in Saito City, Miyazaki Prefecture in order to supplement the shortfall in income caused by the inability to sell the 800kW solar photovoltaic power plant. However the Company was unable to conclude a contract for this facility by the end of the term.

Sales of electric power fell below expectations during the first half, but favorable weather conditions enabled the Company to see improved sales during the second half. Furthermore, the addition of solar photovoltaic power plants allowed Shinwa Art Auction to exceed its sales targets by 30.7%.
Consequently, sales rose by 849.6% year-on-year to ¥1.807 billion and an operating profit of ¥75 million was realized (Compared with an operating loss of ¥563,000 for this segment in the previous term).
 
③Other Business
Negotiations with medical institutions for the medical examination payment collectables factoring business, which had been started in June 2013 as part of the medical institution support business, had been promoted. However, delays in capital sourcing from the 7th stock option issuance and a temporary extension of loans for the energy related services led to a postponing of investments for this business.
 
 
Increases in cash and equivalents, receivables, and outstanding auction income contributed to a ¥467 million rise in current assets from the end of the previous term. Noncurrent assets rose by ¥33 million from the end of the previous term on the back of increases in tangible assets (Machinery and transportation equipment). Total assets rose by ¥500 million from the end of the previous term to ¥3.360 billion at the end of the current term.
Increases in outstanding auction payments contributed to a ¥405 million rise in current liabilities. An increase in long term debt caused total liabilities to rise by ¥504 million from the end of the previous term to ¥1.719 billion at the end of the current term.
Declines in retained earnings caused net assets to decline by ¥3 million to ¥1.640 billion.
Consequently, equity ratio declined by 8.6% points from the end of the previous term to 48.5% at the end of the current term.
 
 
Increases in outstanding auction payments and joint investments in products allowed operating cash flow to turn from a net outflow in the previous term to a net inflow during the current term.
Increases in time deposits and acquisition of investment securities caused the margin of net outflow of investing cash flow to increase. However, free cash flow went from a net outflow in the previous term to a net inflow in the current term.
Declines in short-term debt caused the net inflow of financing cash flow to turn to a net outflow.
Consequent to these changes, cash position rose by a small margin.
 
 
Fiscal Year May 2016 Earnings Estimates
 
 
Brisk Sales Growth Expected to Allow Strong Growth in Profits
Efforts will be made to expand the auction platform during the current term as part of the long-term strategy of expanding consolidated earnings.
Consequently, Shinwa Art Auction calls for sales to rise by 5.6% year-on-year to ¥3.113 billion during the fiscal year May 2016 on the back of a gradual expansion in the auction related business. At the same time, the Company expects to sell a similar number of solar photovoltaic power plants as in the previous term of 14 units in the energy related business. Furthermore, the complete deregulation of electric power retail sales from April 2016 is expected to act as a tailwind for this business going forward.
Operating profit is expected to more than double from the term just ended to ¥182 million in the coming term, due in part to the outlook for a large decline in the evaluation loss on inventories and a rapid expansion in profitability of the energy related business.
 
(2) Various Endeavors by Business Segment
◎ Auction Related Business
The domestic auction business will be fortified through the following efforts.
 
 
Fortify marketing and alliances throughout Asia through collaboration with Asian Art Auction Alliance Co., Ltd., which Shinwa Art Auction owns 21.1% of its shares. In addition, Shinwa will fortify its presence in Asia while ensuring that its human and management resources are not diluted.
In the future, Shinwa Art Auction will aggressively promote sales of modern Japanese art to secure its place in the art history of Asia.
 
②Apec Co., Ltd.
Apec Co., Ltd. is in charge of non-auction criteria in Shinwa Art Auction Group and has been developing different kinds of high net worth related businesses. Now its solar business became lucrative and this fiscal year Apec is expected to develop and sell 74 units of 50kW low voltage photovoltaic power plants.
While FIT(Feed-In Tariff, 20-Years Fixed Price Power Purchase System) price has been declining under the government initiative and market participants are withdrawing due to the lack of funds to complete power units, Apec totally enjoys the fruits as one of the winners in terms of its niche-market-focus and its abundant capital in this field under the strong tax-saving demand. Sales and profit of Apec are expected to exceed those of its parent company this fiscal year.
Since Apec has been developing various business opportunities in high net worth fields, Apec will launch some new businesses but solar related business.
 
③Shinwa Medico Co., Ltd.
As stated earlier, the medical examination outstanding fee collection factoring business has been frozen but marketing for the medical tourism service will begin in full scale during the coming term.
Shinwa Medico seeks to achieve profitability by securing 60 orders for medical examination introductions and 2 regenerative medicine introductions.
 
④J Auction Co., Ltd.
jewelry and watches auctions are expected to be held four times within Japan. Collaboration with the parent Shinwa Art Auction is expected to be strengthened to achieve profitability through low cost operations.
 
 
 
New Medium-Term Business Plan
 
Shinwa Art Auction announced its New Medium Term Business Plan on January 20, 2015.
Highlights of this Plan are provided below.
 
 
One of Shinwa Art Auction's main focuses amongst all of its businesses is its "Japan Modern Art Rejuvenation Project."

This Project is based upon the outlook that "Japanese modern artworks are extremely undervalued" and it is pursued with the goal of rejuvenating the market and valuations for Japanese modern art by leveraging Shinwa Art Auction's position as the industry leader and its strengths of capital, experience and networks.
The modern artwork market is currently estimated to average between ¥10.0 to ¥15.0 billion and Shinwa Art Auction seeks to grow the market to at least ¥100.0 to ¥200.0 billion.

Two activities are expected to be required to rejuvenate the valuations of Japanese modern art.
The first activity is to conduct academic research and create historical documentation in cooperation with national and private art museums and art universities.
The second activity is to create a link between the artistic and financial valuations of artworks by Shinwa Art Auction.
This link is based upon the following criteria which are deemed to be necessary to achieve the goals mentioned above:
Ongoing track record in auctions
Worldwide network of collectors
Ability to build awareness of collectors
Capital necessary to prevent a deterioration in artwork pricing
 
In particular, the need for strong capital foundations is deemed to be very important in rejuvenating the appeal and value of Japanese modern art.
In order to establish a platform that can provide a firm floor for the market against the backdrop of the deflationary cycle within Japan, Shinwa Art Auction believes that maintaining capital equivalent to 10% of the market scale is necessary. Given its outlook for the market to expand to at least ¥100.0 to ¥200.0 billion, then it believes that it needs o secure over at least ¥10.0 billion in net assets.

Therefore, the Company will endeavor to expand its earnings by conducting various businesses in addition to the auction related business that effectively meet the needs of high net worth individuals.
 
 
Interview with President Yoichiro Kurata
 
President Yoichiro Kurata enjoyed drawing art from his childhood and sought to earn a living as an artist. However, after realizing the limits of his own talent as an artist while he was a student at the University of Tokyo, Meanwhile, as a student in economics, Mr, Kurata had keen interests in using economics in his career. After graduating from University, he joined a European investment advisory company, but his passion for art continued and he befriended many art dealers in Ginza. Mr. Kurata became close to five art dealers who founded Shinwa Art Auction, Japan's first auction house that held a full-scale auction featuring Japanese artworks. Mr. Kurata felt the need of auction services in Japan that provide transparent pricing and fair valuations for artworks. Then he assumed as President of Shinwa Art Auction in 2001.

We asked President Yoichiro Kurata about his visions for the future of his Company and the Japanese art industry.
 
Japanese Modern Art Rejuvenation Project
I believe that Japanese modern art is highly undervalued compared to the strengths of Japan as a country, culture, economy and its other aspects. The market scale is about ¥14.2 billion in 2014 and growing, but it remains well below the peak achieved prior to the Lehman Shock. I believe that the market for Japanese art should be at least worth ¥100.0 billion.
In order to realize this market scale, a platform created with an adequate amount of capital and creditworthiness is needed. The auctions that we conduct can function as this platform to realize the latent potential of the market. Also, this auction platform will not only serve a role as a business, but also as an important function for society to realize fair valuations for artworks.
 
Diversified Business Deployment Strategy
The ability to expand profits and source capital from the markets is necessary to maintain adequate amounts of capital.
However, generating large amounts of profits is difficult against the backdrop of the current deflationary environment surrounding Japanese art.
We will leverage our strength of asset management for high net worth individuals to develop new businesses.
These new businesses include the energy related business of Apec and the medical institution support business of Shinwa Medico.
Apec is seeing very strong business trends and is expected to begin contributing to the Group's overall earnings by producing profits shortly. Another favorable trend at Apec is its ability to attract highly qualified staff due to its strong business performance.
In the future, Shinwa Art Auction has a vision of businesses aside from the sale of solar photovoltaic power plant that will leverage the network of high net worth individuals.
Furthermore, Shinwa Medico is developing the foundations for anti-aging and other medical services in its medical tourism business to be deployed throughout Asia.
Shinwa Art Auction seeks to rejuvenate the Japanese modern art market through the implementation of its "Japan Modern Art Rejuvenation Project" and expand the market for Japanese artworks.
Despite the inconsistencies in the economic environment, Shinwa Art Auction is firmly determined to leverage its earnings and its capital foundations to raise the Japanese art market to levels on par with other art markets around the world.
 
 
Conclusions
 
President Yoichiro Kurata conveyed his strong commitment to "rejuvenating the Japanese modern art market" during the course of our interview.
A glance at the auction catalogs of Shinwa Art Auction reveals that notable works of art by authors who have won Japan's prestigious Order of Culture can be purchased at rather low prices, accessible even to a common folk like myself.
The fact that Japanese artworks renowned around the world are sold rather cheaply is a reflection of the low recognition of Japanese art, which might endanger the status and presence of Japanese art. Therefore the Company's goal of rejuvenating the Japanese art market has significant implications for correcting the disparity in values of Japanese art.
Therefore, attention should be focused upon the speed with which Shinwa Art Auction makes its new businesses profitable and expands its earnings in the short term, and its achievements in fulfilling the goals of its "Japan Modern Art Rejuvenation Project" over the medium to long term.
 
 
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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