BRIDGE REPORT
(2437)

JASDAQ

Shinwa Art Auction Co., Ltd. (2437)
President Yoichiro Kurata
President
Yoichiro Kurata
Corporate Profile
Company Name
Shinwa Art Auction Co., Ltd.
Stock Code
2437
Exchange
JASDAQ
Industry
Services
President
Yoichiro Kurata
Headquarters
2F Ginza Medical Bldg., 7-4-12 Ginza, Chuo-ku, Tokyo, Japan
Fiscal Year End
End of May
Home Page
Stock Information
Share Price Shares Outstanding Market Cap. ROE (Act.) Trading Unit
¥446 6,064,100 shares ¥2.704 billion 8.8% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Act.) PBR (Act.)
¥7.20 1.6% ¥37.58 11.9x ¥330.56 1.3x
* Stock price as of closing on September 19, 2017. Number of shares at the end of the most recent quarter excluding treasury shares. ROE and BPS are from the end of FY5/16.
 
Consolidated Earnings Trends
Fiscal Year Sales    Operating Profit Current Profit Net Profit EPS (¥) DPS (¥)
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
FY 5/16 3,898 356 332 164 28.69 7.00
FY 5/17 5,348 364 303 166 28.13 7.20
FY 5/18 Est. 5,960 432 374 227 37.58 7.20
* 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. The definition for net profit has changed to net profit attributable to shareholders of the parent company (Abbreviated as parent net profit).
 
This Bridge Report presents an overview of fiscal year May 2017 earnings results, new business concepts and strategy of Shinwa Art Auction Co., Ltd.
 
Key Points
 
 
 
Company Overview
 
Shinwa Art Auction is Japan's largest and only listed auction company. In 2015, the Company boasted of a 51% share of the high-end Japanese artworks auction market. Over the 28 years of its operations, the Company has cultivated a client list of over 20,000 high net worth individuals and it is in a unique position to be able to leverage this network to expand into various other businesses. As of the end of May 2017, the Shinwa Art Auction Group (total: 10 companies) comprised the Company operating the auction related business, Apec Co., Ltd. operating the energy related business, J Auction Co., Ltd. operating auctions that specialize in watches and jewelry; three subsidiaries of Apec Co., Ltd., namely Shinwa Medico Co., Ltd., Shinwa Medico Hong Kong Limited and Shinwa Myanmar Company Limited, which are in the process of establishing a medical institution support business; two non-consolidated subsidiaries of Shinwa Medico Linking System Co., Ltd. and Shinwa APEC Malaysia SDN. BHD.; an equity method affiliate conducting auctions and transactions of artworks in Hong Kong called Asian Art Auction Alliance Company Limited; and lastly an affiliate not accounted for under equity method called CHINA ART INVESTMENT MANAGEMENT LIMITED.
 
<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 Art Auction" was held in September 1990. In June 1991, the Company adopted the name of Shinwa Art Auction Co., Ltd. Subsequently, it held the "First Modern Ceramic Auction" in 1996, the "First Japanese Tea Utensils Auction" in 1997, and the "First Modern Painting, Prints and Crafts Auction" in 1999. Shinwa Art Auction listed its shares on the Hercules Market of the Osaka Securities Exchange (Currently known as the JASDAQ Market of the Tokyo Stock Exchange) in April 2005. It acquired the shares of Apec Co., Ltd. and turned it into a subsidiary in April 2013. Shinwa Medical Co., Ltd. (currently known as Shinwa Medico Co., Ltd.) was also established in April 2013. Through these initiatives, the Company has worked to diversify its revenue base leveraging its high net worth customers, while keeping the auction business at the core of its businesses.
 
<Market Environment>
The market for artworks within Japan (total bids for items sold through auctions) had shrunk 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 2008-09 financial crisis, the artwork auction market once again shrank to less than ¥10 billion in 2011, but recovered to ¥15 billion in 2016. However, it remains well below the recent peak achieved in 2007.

As is explained later in this report, Shinwa Art Auction believes that Japanese artworks are extremely undervalued. Therefore, the "Regeneration Project of Japanese Modern Art" has been established to remedy this situation and expand the market to a minimum of ¥100 billion.
 
<Business Description>
Shinwa Art Auction's businesses can be divided into three divisions: Auction Related, Energy Related and Other businesses (Medical institution support business).
 
① Auction Related Business
The Auction Related business is composed of auction business as well as auction related and other businesses.
 
(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, European decorative 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 brand items, watches, jewelry, and other products.

Bidding commissions are the main component of sales (Consisting of both bidding and exhibition commissions). Bidding commissions are 15.0% of a bidding price for items with a bidding price of under ¥2 million, 12.0% with a bidding price of over ¥2 million and under ¥50 million, and 10.0% with a bidding price over ¥50 million. Also, an exhibition fee is charged for all products put up for sale at a rate of 10.0% of a bidding price (consumption tax is separately charged).

Furthermore, Shinwa Art Auction also purchases items for sale at auctions and through private channels. The prices of directly purchased artworks sold at auctions and through private sales will be booked as sales. Therefore, changes in these inventory product sales will lead to fluctuations in sales.

In addition, other revenues include catalog sales and listing fees on those catalogs collected from the consignors, and membership fees collected from fee-based memberships.
 
(2) Other Auction Related Business
Private sales are the primary service conducted within this business. Private sale is the name used to describe artworks sold through negotiated transactions. As in auction transactions, sales commissions are charged to both sellers and purchasers of artworks based upon the prices of the artworks sold. In addition, some artworks are 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. It purchases precious metals as well.
 
 
In the fiscal year May 2017, 7,583 items were exhibited for sale in 28 auctions.
 
② Energy Related Business
Apec Co., Ltd. conducts sales of low voltage 50kW solar power generating facilities to high net worth individual customers and corporations. Furthermore, the company sells high voltage solar power generating facilities, some of which Apec itself owns to generate electric power for sale. In addition, Shinwa Art Auction, endeavoring to develop new earnings drivers, has started the PKS business (natural biomass energy business derived from coconut shell that is a byproduct of palm oil manufacturing) in Malaysia by acquiring Shinwa APEC Malaysia SDN BHD.
 
③ Medical Institution Support Business
Apec's subsidiary Shinwa Medico Co., Ltd. is commercializing medical tourism for Shinwa Art Auction's high net worth customers. Shinwa Medico introduces medical services to the wealthy individuals both in Japan and other parts of Asia, through cooperation with medical institutions that provide advanced medical services, advanced regenerative medicine services, and advanced medical examinations. At the same time, the insurance business was established in fiscal year May 2016, along with the start of medical coordinator services and medical interpreter training courses.
 
④ Other Business
Apec Co., Ltd. operates an insurance business, and has also started a referral business targeting overseas real estate in July 2017.
The development of solar power facilities involves some level of deforestation. The mission of Shinwa Myanmar Co., Ltd. (another subsidiary of Apec Co., Ltd.) is to have a global perspective and provide support to the people of Myanmar engaged in agriculture and forestry.
 
<Characteristics and Strengths>
① Largest Auction Company within Japan
Shinwa Art Auction boasted of a dominant share in the high-end Japanese art auction market of 51.4% in 2015 for artworks over ¥20 million in price. Since experts very well-versed with modern art are employed by the Company, auction items, especially high-end luxury items, can be accurately evaluated. Therefore, a strong brand reputation linking Shinwa Art Auction to luxury goods has been established amongst customers. In addition, being the only publicly traded auctioneer, Shinwa Art Auction's position is all the more preeminent.
 
 
② Business Leveraging Strong Network of High Net Worth Individuals
Many of both sellers and buyers of artworks in auctions held by Shinwa Art Auction are high net worth individuals.
Over the 28 years of its operations, the Company has cultivated a customer list of over 20,000 high net worth individuals who require strategies for wealth management, tax savings, inheritance and other issues. Consequently, the Company can take advantage of this customer list and provide a variety of other businesses in addition to the auction business. Therefore, the energy related and medical institution support businesses are conducted to exploit these opportunities. The Company intends to pursue various other services going forward.
 
 
While leverage has increased, ROE fell slightly below the previous fiscal year due to a decline in net profit to sales ratio. Shinwa Art Auction endeavors to maintain a high and stable level of ROE by achieving improvements in profitability.
 
 
Fiscal Year May 2017 Earning Results
 
 
Sales Rise, Profits Decline
Sales rose 37.2% year-on-year to ¥5,348 million, due in part to a large increase in sales of the energy related business. Operating profit rose by a much smaller margin of 2.3% year-on-year to ¥364 million, due to losses arising from the auction related business which were only partially covered by the profits of the energy related business. Compared with plans, the energy related business saw favorable sales volumes of low voltage 50kW solar power generating facilities from demand created by special tax incentives, with a much higher than expected number of units sold of 193 units amounting to ¥4,421 million in sales. At the same time, the auction related business suffered from a dramatic decline in the number of art objects in circulation within the overall market, which caused both the transaction volumes and sales values to fall well below initial estimates. Therefore, while the stronger than expected sales of the energy related business boosted sales overall, profits from this business was not enough to offset the losses of the auction related business and caused operating profits to fall shy of estimates. In light of the expansion in business and recent financial position, Shinwa Art Auction has decided to promote returns of profits to shareholders by increasing its dividend by ¥0.2 above initial projections of ¥7.00 to ¥7.20 per share.
 
 
① Auction Related Business
1) Auction Business
The number of auctions held fell from 30 in the previous term to 28 in the current term. Along with this decline, the number of artworks put up for auction also fell from 8,150 in the previous term to 7,583 in the current term. Furthermore, the average successful bid price for artworks in the Modern Art Auction and Modern Art Part II Auction fell by 21.9% and 24.4% year-on-year respectively. At the same time, the average successful bid price for artworks in the Modern Ceramic Art Auction rose by 7.3% year-on-year.
 
 
II) Auction Related Business, Others
While aggressive efforts were made to expand the number of transactions of private sales, sales fell year-on-year due to the absence of high priced transactions seen in the previous year.
 
② Energy Related Business
A total of 193 units of low voltage 50kW solar generating facilities were sold (compared with 101 during the previous term). The total number of units sold until now is 358. 114 units were sold by the end of March 2017 when the preferential tax incentives to promote investments that boost productivity were terminated. And while sales thereafter were expected to stagnate, sales have trended favorably due to strong needs for high yields. Aside from external sales, electric power sales utilizing solar power generating facilities owned by the Company also contributed to overall sales. With the goal of developing new earnings drivers within the energy related business, the Company acquired Shinwa APEC Malaysia SDN. BHD and started the PKS business
 
③ Others
With regard to the medical institution support business, the Company has strengthened its relationships with collaborative medical institutions in order to develop the service of providing high quality medical treatments and medical technologies to high net worth customers as a new driver of earnings.
 
 
Increases in receivables contributed to an increase in current assets of ¥1,460 million from the end of the previous term to the end of the current term. Noncurrent assets also rose by ¥1,012 million over the same period due to increases in tangible assets including plant and transportation equipment. Total assets rose by ¥2,473 million from the end of the previous term to ¥6,432 million at the end of the current term. Increases in short term debt and the booking of unpaid long term installments of outstanding payments caused liabilities to rise by ¥2,235 to ¥4,421 million. Net assets rose by ¥237 million to ¥2,010 million due to an increase in retained earnings. As a result, capital adequacy ratio fell by 13.4% points from the end of the previous term to 31.2% at the end of the current term.
 
 
The increase in receivables caused operating cash flow to turn to a net outflow in the current term from a net inflow in the previous term. Increases in payment for acquisition of tangible assets caused the net outflows of both investing and free cash flows to expand. A rise in short term debt caused the net inflow of financing cash flow to expand.
Cash position declined.
 
(4) Topics
◎ Participation in Wealth Management Realm
Shinwa Art Auction will conduct efforts to further strengthen its network of high net worth customers as part of its strategy of further expanding the size of its businesses, and will enter the new realm of wealth management introducing overseas real estate opportunities to its high net worth customers.
 
(Background to Participation and Business Overview)
Within the Japanese used residential real estate market, a large number of properties tend to decline in price as they grow in age. Therefore, the bulk of the returns on residential real estate are derived primarily in the form of rental income.

At the same time, the used residential real estate market in the United States for example is full of high quality properties because of the tradition of conducting maintenance and renovation on a regular basis. Consequently, used properties offer not only returns in the form of rental income, but potential capital gains derived from increases in prices of the property itself. Therefore, overseas real estate markets have garnered attention as attractive investments in recent years.

Consequently, the Shinwa Art Auction will cultivate high net worth investors within Japan as potential investors with an interest in purchasing promising used real estate properties in Texas, United States.

With regard to taxes, a collaborative business agreement has been formed between Shinwa Art Auction, Apec and Nature International Tax Firm, which has bountiful experience in tax related consulting concerning overseas real estate. Therefore, Shinwa Art Auction will introduce the tax consulting services of Nature International Tax Firm to people considering purchase of overseas properties.
 
 
Fiscal Year May 2018 Earnings Estimates
 
 
Double Digit Growth in Sales and Profits
Shinwa Art Auction's fiscal year May 2018 earnings estimates call for sales and operating profit to rise by 11.5% and 18.6% year-on-year to ¥5,960 million and ¥432 million respectively.

While conditions within the auction related business remain difficult, reviews of the number of times catalogs are published and how art auction items are displayed on corporate websites will be conducted with a goal of restoring profitability. Furthermore, efforts will be conducted to maintain the high growth of the solar power generation business of the consolidated subsidiary Apec and of the newly started overseas real estate property introduction service provided to high net worth customers.

The same level of dividend of ¥7.20 per share is expected, for an anticipated dividend payout ratio of 19.2%.
 
 
New Business Concepts and Strategy
 
Shinwa Art Auction has entered the fifth and final year of its Five Year Medium Term Management Plan launched in June 2013.

The Company is now in the process of creating a new business concept and strategy with a view to its next Medium Term Management Plan.

(1) New SWH Group Concept
In order to realize further growth and maximize corporate value, the Shinwa Art Auction will endeavor to separate its planning and execution functions, and accelerate its decision making process. At the same time, Shinwa Art Auction will shift to a holding company structure so that all of its group companies can respond flexibly to changes in the business environment.

Shinwa Art Auction will conduct a corporate split and its auction related business will be absorbed by Shinwa Auction Co., Ltd. (established on August 1, 2017), Company's wholly-owned subsidiary set up for this purpose. The absorption type split will take effective on December 1, 2017.
 
 
Upon transition to a holding company structure, Shinwa Wise Holdings Co., Ltd. will become the holding company, with entities including the auction related business Shinwa Auction Co., Ltd., the art gallery business Shinwa Prive Co., Ltd. (established in June 2017), and solar power generation business Apec Co., Ltd. under its umbrella.

(2) Group Business Strategy
Shinwa Art Auction will establish a platform through which selected services, including art-related services, will be provided to high net worth customers.
 
① The Core of Group Business Strategy
The core of the new Group's business strategy will continue to be built on the two concepts of"Regeneration Project of Japanese Modern Art" and "Leveraging High Net Worth Customer Network."
 
<1. Regeneration Project of Japanese Modern Art>
Based upon the belief that the current valuation of modern Japanese art, which is viewed to be amongst the highest quality art in the world, is too low, Shinwa Art Auction will implement various efforts that leverage its experiences, networks and strong capital standing to regenerate the market and realize the true value of modern Japanese art.

Along with educational activities conducted to help raise the artistic and economic values of artworks, efforts will be made to grow earnings. The current value of the market is estimated to be ¥10 to ¥15 billion, and Shinwa Art Auction seeks to expand this to ¥100 to ¥200 billion within ten years. It is also keenly aware of the 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 value of the market. Consequently, it thinks it will need to secure net assets of over ¥10 billion in order to help expand and maintain a market size of ¥100 to ¥200 billion.

Accordingly, Shinwa Art Auction plans to expand its business scale through raising profitability of the auction business leveraging the tailwind of "Abe-nomics" (stimulatory policies implemented by the current administration of Prime Minister Abe). The Company also hopes to conduct a public offering at the right timing, and through these measures, intends to increase its current net assets of ¥1.6 billion to ¥15 billion by 2023.

Furthermore, the Company will endeavor to initially reach ¥5 billion in current profits from the auction business, and thereafter grow consolidated current profits to ¥10 billion by 2023.

The Shinwa Art Auction Modern Art Index that peaked at 10,000 in September 1990, and has fallen to 342 as of November 2016. The Company seeks to help boost the value of artworks and the index back to 3,000 or about one third of the peak value.
 
Shinwa Art Auction Modern Art Index (*)
This index is derived by taking the average of successful bidding prices of artworks sold in "Modern Art Auctions" in the past three times and assigning a value of 10,000 to the highest historical value recorded in September 1990.
 
<2. Leveraging High Net Worth Customer Network>
Shinwa Art Auction will maintain the goal of regenerating Japanese modern art. At the same time, the Company will endeavor to grow its overall earnings and fortify the earnings generating capability of the auction related business by leveraging its network of high net worth customers.

Services other than auction related services will be provided to the extensive network of high net worth customers cultivated over the 28 years in art auction operations.
 
 
3) New Business Concepts
Preparations are being made to realize the new business concepts outlined below.
 
(New Business Concept 1: Shinwa Art Museum Operations and Management)
In addition to the auction function of Shinwa Auction, Shinwa Prive Co., Ltd. was established in June 2017 to perform a gallery function as part of a strategy to provide more detailed services that respond to the needs of the network of high net worth customers.

There is a global trend for auction companies to operate art galleries, and conduct sales of artworks through private sales to customers, in addition to their main service of auctions.

Shinwa Prive will serve as a "private bank" of art properties and provides high quality artworks to interested customers.
In addition, the Company plans to operate wealth management services, including real estate referrals and diamond sales for the purpose of protecting the assets of high net worth customers. Also, it will plan and operate various events supporting artists including exhibitions, cultural events, and parties.
 
(New Business Concept 2: Cultural Support, Cultural Information Transmission Activities)
Shinwa Art Auction will also work to discover and support artists not only in Japan, but in Myanmar and other Southeast Asian countries.

It will actively release information on modern Japanese and overseas art via websites and social media, and continue to participate in various cultural events.

As part of the efforts to support artists of Myanmar, in August 2017 Apec Co., Ltd. has started crowd funding through "Securite" operated by Music Securities, Inc. to market the works of the country's renowned artist Lun Gywe.
 
(New Business Concept 3: Derivative Businesses of High Net Worth Customer Business)
The solar power generation facility sales to high net worth customers has led to business expansion into the PKS biomass business, which falls in the category of renewable energy business.

Going forward, the Company will also consider the following businesses: origination of a highly credible "artists fund" leveraging Shinwa Art Auction's solid governance and compliance structure as a listed entity; for high net worth customers, sales of wearables designed to monitor and maintain health (health management data accumulation and analysis); and various businesses in Myanmar, where rapid expansion is expected with development of business infrastructure underway.

In regard to the business in Myanmar, Shinwa Art Auction recognized a need for small loans that can be made to farmers and small business operators to help raise their living standards, and saw an opportunity within. Accordingly, it began a micro-financing business through SHINWA MICROFINANCE COMPANY LIMITED, a wholly-owned subsidiary of Apec Co., Ltd.
 
(New Business Concept 4: Efforts on Blockchain)
Shinwa Art Auction believes that having the ability to conduct settlements using crypto currencies is critical in expanding and invigorating the auction market.

Among various crypto currencies, especially Bitcoin has spread rapidly, backed by the innovative and reliable technologies of "Blockchain" that allow high accessibility from anywhere and anytime at an inexpensive transaction fees. Therefore, the Company is aggressively putting efforts into the use of Bitcoin.

First, Shinwa Art Auction has started validation experiments for Blockchain from February 2017, in cooperation with CAICA, Inc. (JASDAQ, 2315), which has a forty year plus track record developing systems primarily for companies in the finance industry as well as manufacturers, logistics companies and public institutions.

These validation experiments were initiated to confirm the applications of Blockchain technologies in escrow and art property management services in the auction business conducted by Shinwa Art Auction. As an initial step, the Company will endeavor to create a platform for escrow services based on the outcome of these validation experiments. In addition, its subsidiary Apec Co., Ltd. is also participating in validation experiments to confirm the compatibility of Blockchain with its main energy business.

In consideration of the convenient usage of Bitcoin by overseas participants of auctions, a decision was made as of March 2017 to introduce Bitcoin settlement methods from the auction held in July 2017.

Further, Shinwa Art Auction has reached a fundamental agreement for collaboration and capital exchange in April 2017 with Fisco Ltd. (JASDAQ, 3807), which operates a cryptocurrency exchange for work on cryptocurrency financing, financial derivative instrument development and operations, and various services related to the usages of Blockchain.

According to this agreement, it will acquire shares of Fisco's cryptocurrency exchange and conduct joint validation experiments for cryptocurrencies, in addition to promoting joint development and validation experiments for use of Blockchain technologies in artworks registration system.
 
(New Business Concept 5: High Net Worth Platform)
"Shinwa High Net Worth SHNW.com" will be created as an information platform to provide information for potential future high net worth customers as well as existing customers.
 
 
Conclusions
 
While both sales and operating profit rose due to favorable sales of solar power generating facilities of the subsidiary Apec Co., Ltd., Shinwa Art Auction encountered difficult conditions and booked a loss in its core auction related business.

The Company will conduct reviews of its auction business alongside its transition to a holding company structure, and will endeavor to create a renewed structure that can ensure that adequate profits can be derived from this business.
Although the auction business is strongly influenced by the external environment, in which self-supporting effort might not be sufficient, it is still worth keeping a close watch on Shinwa Art Auction's efforts in "regenerating Japanese modern art."
 
 
<Reference: Regarding Corporate Governance>
 
 
◎ Corporate Governance Report
Last Update Date: September 1, 2017.

<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>
The Company states that it complies with all basic principles of the Corporate Governance Code as a JASDAQ listed company.
 
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) 2017, Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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