Shinwa Art Auction Co., Ltd. (2437)
President Yoichiro Kurata
Yoichiro Kurata
Corporate Profile
Shinwa Art Auction Co., Ltd.
Code No.
Yoichiro Kurata
Ariake Frontier Bldg., 3-7-26 Ariake, Koto-ku, Tokyo 135-0063 JAPAN
Fiscal Year End
End May
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥329 5,732,100 shares ¥1.885 billion 1.0% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥6.00 1.8% ¥27.95 11.8x ¥296.20 1.1x
* Stock price as of closing on January 20, 2016. Number of shares at the end of the most recent quarter excluding treasury shares.
* ROE is from FY5/15, and BPS is from the end of the first half of FY5/16.
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. 3,297 263 247 160 27.95 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 the first half of fiscal year May 2016 earnings results.
Key Points
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 segment 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 conduct auctions 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 sales 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>
① Largest 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.
② Business 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.
First Half of Fiscal Year May 2016 Earnings Overview
Estimates Revised Up on Strong Growth in Energy Related Business, Auction Related Business Trended Sideways
Sales rose by 111.5% year-on-year to ¥1.726 billion on the back of a strong fivefold increase in energy related sales despite a decline in sales of the auction related business.
Operating profit recovered from a loss of ¥12 million in the previous first half to a profit of ¥169 million in the current first half. This dramatic improvement in profits is attributed to contributions from both the auction related and energy related businesses.

Due to the strong trends seen during the first half, earnings estimates for both the first half and full year were revised upwards on December 21, 2015.

The factors behind this upward revision are described as follows.

Shinwa Art Auction sold the solar power generating plant (Saito City, Miyazaki Prefecture, electric power generating capacity of 993.6kW) owned by its subsidiary Apec Company within the energy related business. And while results of the electric power sales service fell below expectations, the sale of the plant was not included in estimates and allowed both sales and profits to exceed estimates.
In addition, the modern ceramic art auction normally held in December was moved forward to November and subsequently earnings from this auction were also booked earlier than had been expected in the auction related business.
In the full year, earnings were revised upwards despite the lower than expected sales of the electric power sales, weak trends in pricing and sales per unit of low voltage solar power generating facilities, and lower attainment rates of sales and profits estimates during the second quarter.
① Auction Related Business
1) Auction Business
A total number of 16 auctions were held, compared with 14 in the previous term.
The number of items put up for sale and successfully sold through bidding at modern art auctions declined by 22.9% and 15.7% year-on-year respectively, but the average successful bid price rose by 2.2% year-on-year. Also, the successful bid price trended at high levels and exceeded the minimum estimate price (Pre-auction estimate) by 142.2%.
The number of items put up for sale and successfully sold through bidding at modern ceramic art auctions rose by large margins of 44.6% and 44.3% year-on-year respectively. The main reason for this increase was the fact that the ceramic art auction normally held during the first half of December was moved forward to the latter half of November.
The number of items put up for sale and successfully sold through bidding at modern art auction part II rose by 23.8% and 25.8% year-on-year respectively, and the average successful bid price rose by 21.6% year-on-year. Also, the successful bid price trended at high levels and exceeded the minimum estimate price (Pre-auction estimate) by 148.7%.
The results of wine auctions also exceeded the previous year by a large margin in the other auctions division. While post war and contemporary art auctions have been the driving force behind earnings, both sales and items transacted declined after the auction for the art work of "Munakata Shiko-dark universe, life in rainbow colors" which was held in the previous year is included.
II) Auction Related Business, Others
Aggressive efforts were made to secure items for sale within the private sale division. Despite these efforts and Shinwa Art Auction's aggressive endeavors to deploy precious metals purchasing services, transaction values and sales both declined.
② Energy Related Business
Shinwa Art Auciton sold 34 50kW low voltage solar power generation units.
Along with the surfacing of demand due to tax incentives designed to promote capital investments to raise productivity from the latter half of June 2015, the start of approval for solar power generation facilities by the Ministry of Economy, Trade and Industry from July has sparked sales. And while the price per unit and cost of each unit fell below expectations, the impact of these trends upon profits has been marginal.
Thanks to the sale of the Hogita solar power generating plant, sales and profits exceeded initial estimates.
In addition, sales and profits rose by a large margin on the back of strength in the electric power sales and joint acquisition services as part of the Company's in-house owned solar power generating facilities.
③ Others
The medical examination payment collectables factoring business has been temporarily halted to reconsider business strategy in this realm. The Company is now expected to develop medical tourism to become a cornerstone of its earnings by introducing high quality medical services to wealthy individuals in Japan and other parts of Asia. Currently, negotiations with medical institutions providing high levels of medical services and treatments are being conducted.
Also, medical coordinator and medical translator cultivation classes have been started.
Increases in cash and equivalents, receivables and inventories contributed to a ¥585 million increase in current assets from the end of the previous term to the end of the current first half. Noncurrent assets declined by ¥260 million on the back of a decline in tangible assets (Machinery, equipment and transportation equipment). Total assets rose by ¥327 million to ¥3.687 billion.
Increases in outstanding auction payments and bonus reserves contributed to a ¥288 million increase in current liabilities. Total liabilities also rose by ¥265 million from the end of the previous fiscal year to ¥1.985 billion at the end of the current first half.
An increase in retained earnings contributed to a ¥61 million rise in net assets to ¥1.702 billon.
As a result of these developments, capital adequacy ratio declined by 2.5% points from the end of the previous fiscal year to 46.0% at the end of the first half.
Operating cash flow turned from a net outflow in the previous term to a net inflow in the current term on the back of the turn to profitability and reductions in outstanding auction payments.
Increases in cash resulting from recovery of debts receivables, and reimbursement of time deposits contributed to a reduction in the net outflow in investing cash flow and allowed free cash flow to turn from a net outflow in the previous term to a net inflow in the current term.
Repayment of long term debt caused financing cash flow to turn to a net outflow from a net inflow in the previous term.
As a result of these developments, cash position rose.
(4) Topics
◎ Reinsurance Business Started
The subsidiary Apec Co., Ltd. Announced the start of the reinsurance business from January 2016.
<Business Overview>
Apec has acted as a property and casualty insurance agent providing policies for solar power generation facilities within the energy related business. And now Apec has established an overseas reinsurance company (Cell Captive) to begin providing insurance products to its client companies as part of its efforts to provide services to ensure efficient operations of its clients operating overseas. In addition, Apec will also serve as an agent providing various insurance products within Japan.
<What is Captive, Cell Captive?>
Captive is the term used to describe specialized reinsurance companies established by business operators as a means of reducing risks by transferring the responsibility for them to these specialized reinsurance companies.

Normally, insurance policies are purchased and fees paid in exchange for the transfer of risks to the insurance companies.
In comparison, "captive insurance" is the process where fire, movables comprehensive and liability insurance policies are purchased from Japanese casualty insurance companies in the form of reinsurance, necessitating the self-possession of insurance and possibly seeking reinsurance of the policies in the market.

By self-possession through the establishment of captive insurance, the business operator can reduce the risks of accidents through risk management which leads to "reduction of loss ratio and insurance costs". Also, many companies in Japan are establishing captive insurance schemes due to the benefits in terms of investment income.
However, a high level of specialized knowledge and a large amount of capital are required of general business operators seeking to take advantage of this captive insurance scheme effectively.

In order to resolve these issues, the "cell captive" scheme has been introduced.
In this scheme, the business operator is not required to establish their own captive insurance company by borrowing a captive insurance company operated by a third party called a "cell" to effectively acquire the function of captive insurance.

"Cell captive" reinsurance schemes that require less money and shorter establishment times in overseas markets are introduced to customers. Moreover, Apec acts as an insurance agent selling various insurance products of the insurance companies that provide these "cell captive" insurance schemes within Japan.
In addition, "APEC Reinsurance Co., Ltd." has been established in Hawaii, United States to act as a provider of cell captive insurance schemes. (Establishment of this company and approval to begin business from the state of Hawaii is currently pending.)
◎ Marketing for Medical Tourism Started from a Hong Kong Office
The shares of LYS BLANC, H.K. CO., LIMITED of Hong Kong have been acquired and it has become a subsidiary. At the same time, the company name has been changed to Shinwa Medico Hong Kong Limited and a collaborative business agreement has been signed along with the formation of a joint venture company with Corporate Business Network Limited. (Announced on January 18, 2016)
<Share Acquisition Purpose, Process>
The Shinwa Art Auction Group will develop medical tourism to become a cornerstone of its earnings by introducing high level medical services to wealthy individuals in Japan and other parts of Asia. Currently, negotiations with medical institutions providing high levels of medical services and treatments are being conducted.

The acquisition of shares of LYS BLANC is designed to allow smooth promotion of marketing for medical tourism business in the Asia region. Shinwa Art Auction Group will thus establish a marketing facility in Hong Kong through the acquisition of shares in LYS BLANC, which was a dormant company.
The choice to acquire a dormant company has been made to help reduce the start-up time and restrain initial investments for the local operations.
The corporate name will be changed to Shinwa Medico Hong Kong Limited (Representative Director Yoichiro Kurata) and capital in the company will be increased to strengthen the company's operating foundation.
<Purpose, Details of Collaborative Operational Contract>
Shinwa Medico Hong Kong will establish a new joint venture company called "Shinwa Medico Linking System Co., Ltd. Limited (Representative Director Yoichiro Kurata) to offer the Ginren Card (Union Pay) payment settlement platform functions of Corporate Business Network Limited to inbound travelers seeking to use Japan's medical services.

Corporate Business Network Limited is responsible for the operation of the Ginren Card (Union Pay) payment settlement platform in Hong Kong, and Shinwa Medico Hong Kong Limited will conduct marketing for inbound travelers seeking to use Japan's high level medical services as part of the medical tourism business. At the same time, the Company will cultivate medical institutions within Japan interested in participating in the medical tourism programs and enlist them to use the Ginren Card settlement platform.
Fiscal Year May 2016 Earnings Estimates
Full Year Estimates Revised Upwards, Sales and Profits to Rise by Large Margins
As described earlier in this report, Shinwa Art Auction has revised its full year earnings estimates upwards.
Sales and operating profit are expected to rise by 11.9% and 238.3% year-on-year to ¥3.297 and ¥0.263 billion respectively.
Group Business Strategy
The Shinwa Art Auction Group will create a platform that enables it to provide "comprehensive services to wealthy clients" that allows it to leverage its extensive database of wealthy clients.

As part of this strategy, the following two points are highly important.
① "Japanese Modern Art Rejuvenation Project"
Based upon the belief that the current evaluation of modern Japanese art is too low, Shinwa Art Auction will implement various efforts that leverage its experiences, networks and strong capital standing to rejuvenate the market and realize the true value of modern Japanese art.
The current value of the market is estimated to be between ¥10.0 to ¥15.0 billion, and Shinwa Art Auction seeks to expand this to between ¥100.0 to ¥200.0 billion. Therefore, the Company identifies a strong need to fortify its capital position.

In order to create a platform that can firmly support the market even in a deflationary environment, Shinwa Art Auction believes that it needs to secure capital amounting to about 10% of the total potential market value. Consequently, the Company believes that it will need to secure net assets of over ¥10.0 billion in order to help expand and maintain a market scale of between ¥100.0 to ¥200.0 billion.
Therefore, Shinwa Art Auction will implement a strategy that creates other services in addition to auctions that leverage its asset of a wealthy client database as part of its strategy of expanding its earnings and fortifying its capital position.
② Business Strategy that Enables Subsidiaries to Leverage Wealthy Client Database
Services aside from auctions that respond to the various needs of the Company's wealthy clients will also be developed.
In addition to the energy related business (Solar power generation system sales) conducted by Apec Co., Ltd., the medical tourism business conducted by Shinwa Medico will also start on a full scale from the current term.
In addition, Apec will also start the reinsurance business and is preparing for entry into the educational business realm.
Shinwa Art Auction will leverage its database of existing wealthy clients to create a strong network throughout Asia.
Due to growth in the energy related business conducted by its subsidiary, both sales and profits rose by a large margin despite the decline in sales of the auction related business. At the same time, the fact that successful bidding prices exceeded the minimum (pre-auction) price estimates in modern art auctions on average by 142.2% is a sign that market conditions are beginning to gradually improve.
Furthermore, Shinwa Art Auction's earnings environment can change dramatically should inflationary trends, where both buyers and sellers become more active participants in the market, take over from the deflationary trends, where both buyers and sellers are less active participants in the market, that have continued until now.

As explained in the previous Bridge Report, Shinwa Art Auction may seek to secure net assets of more than ¥10.0 billion as part of its strategy of contributing an expansion in the modern Japanese art market to a more appropriate value of between ¥100.0 to ¥200.0 billion. Consequently, the Company may seek a strategy that combines direct sourcing of capital along with an expansion in its earnings to help achieve this increase in net assets. Therefore, investors should keep a close watch on Shinwa Art Auction's various business strategies and conditions within the capital markets.
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) 2016, Investment Bridge Co., Ltd. All Rights Reserved.