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J-COM Holdings Co., Ltd. (2462)
Yasuhiko Okamoto President
Yasuhiko Okamoto
President
Corporate Profile
Company
J-COM Holdings Co., Ltd.
Code No.
2462
Exchange
Tokyo Stock Exchange, First Section
Industry
Service
President
Yasuhiko Okamoto
HQ Address
Umeda Hankyu Building Office Tower 19F, Kakutacho 8-1, Kita-ku, Osaka-shi
Year-end
May
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥700 9,174,000 shares ¥6.422 billion 13.7% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥30.00 4.3% ¥77.12 9.1x ¥527.81 1.3x
* Stock price as of the close on January 11, 2013. Number of shares at the end of the most recent term excluding treasury shares.
 
Consolidated Earnings Trends
Fiscal Year Sales Operating
Profit
Current
Profit
Net Profit EPS Dividend (¥)
May 2009 14,162 913 953 340 7,386.18 4,000.00
May 2010 13,522 789 834 475 10,417.96 4,000.00
May 2011 15,905 901 955 489 10,701.97 5,000.00
May 2012 17,518 914 1,044 603 65.88 25.00
May 2013 Est. 19,500 1,150 1,228 720 77.12 30.00
* Estimates are those of the Company. A 200 for 1 stock split was performed in June 2011.

This Bridge Report presents details of the first half of fiscal year May 2013 earnings results for J-COM Holdings Co., Ltd.
 
Key Points
 
 
 
Company Overview
 
J-COM represents a group of companies that specialize in the provision comprehensive human resources services to particular industries. In addition to the holding company J-COM Holdings Co., Ltd., the Group is comprised of a consolidated subsidiary J-COM Co., Ltd., which provides comprehensive human resources services including worker dispatch and business process consignment for cellular telephone carrier shop operations, the equity accounting method held affiliate SUCCESS Holdings Co., Ltd. and its subsidiary SUCCESS Academy Co., Ltd., which operates nursery schools and provides related services. In addition, J-COM also has two non-consolidated subsidiaries including IFC Corporation, which targets the apparel industry through the placement of patterners and designers.
 
<Strengths and Growth Strategy>
With regards to the provision of human resources services to the cellular telephone industry, J-COM boasts of advantages in its marketing capabilities including bountiful knowhow in services provided to the cellular telephone industry across the broad range of business processes, a track record of sales commitment achievement rates for cellular telephones, the ability to interface with customers, and effective inventory control and personnel deployment capabilities. In addition, J-COM also benefits from its strong financial standing (No debt), strict compliance standards implemented as a publicly traded company listed on the First Section of the Tokyo Stock Exchange, and strong brand recognition. Based on its strong foundations of its core business, J-COM is currently endeavoring to cultivate its second and third pillars of business. Furthermore successful results of its efforts in the apparel and childcare industries services are beginning to appear.
 
<Corporate History>
The roots of J-COM can be found in the travel package company called Powers International, which was established in September 1993. In April 1996, Powers started the operation of a cellular telephone shop, and in November 1996 the Company was renamed as J-COM with a new focus upon the cellular telephone market. In October 1998, the Company began providing human resources services leveraging its experiences to the cellular telephone industry. This steady expansion in the human resources business enabled J-COM to go public on the Mothers Market of the Tokyo Stock Exchange in December 2005, and in February 2007 the Company moved its shares to the First Section of the Tokyo Stock Exchange.

J-COM rapidly expanded its earnings through the provision of human resources services to the cellular telephone industry, and four years after its listing on the Mothers Stock Exchange in December 2009 it adopted a holding company structure to more easily cultivate synergies between its various businesses. J-COM also promotes an aggressive strategy of M&A and collaborative business arrangements, as evidenced by the capital participation in SUCCESS Academy Co., Ltd. (Currently known as SUCCESS Holdings Co., Ltd.), which operates government recognized nursery school facilities, nursery school facilities in corporations and schools, and other related consignment services, in December 2009. J-COM took a capital stake in TOW Co., Ltd. listed on the First Section of the Tokyo Stock Exchange in February 2010, and acquired 100% of the shares of IFC Corporation, which was a 100% owned subsidiary of Sumikin Bussan Corp. and placement of designers and patterners to companies in the apparel industry, in September 2011.

Furthermore, the equity accounting method held affiliate SUCCESS Holdings Co., Ltd. also listed its shares on the JASDAQ Stock Market on August 7, 2012.
 
<Business Segments>
J-COM' s business segments can be divided between the comprehensive human resources services, including human resources dispatch, business process consignment, dispatched worker for employment placement and job placement, and multimedia services including cellular telephone carrier shop operations. During fiscal year May 2012, the comprehensive human resources services business accounted for 97% of consolidated sales.

In addition, the comprehensive human resources services business can be divided by various contract categories including dispatched worker contracts, business process consignment (Processes outsourced to J-COM), and dispatched worker for employment placement and job placement contracts. Each of these categories accounted for 63.1%, 36.6%, and 0.3% of segment sales respectively during fiscal year May 2012. By industry, sales to the cellular telephone industry remained high at 91.9% of total segment sales, with sales to the apparel industry growing to 4.8% and telecommunication industry at 2.1%. By geographic region, eastern Japan, western Japan, and Tokai regions accounted for 47.4%, 40.1% and 12.5% respectively.
 
 
 
 
The shift of J-COM' s business from the operation of cellular telephone shops to the provision of comprehensive human resources services to the cellular telephone industry enabled it to capture the strong expansion in the overall cellular telephone market and grow its earnings strongly. In addition to listing its shares on the Mothers Stock Exchange within nine years after the launch of its first shop, J-COM was able to maintain rapid growth by expanding into the eastern Japan region. And in February 2007 it moved its shares to the First Section of the Tokyo Stock Exchange.

While J-COM was unable to avoid the negative impact of the Lehman Shock and potential revisions in the Worker Dispatch Law (Potentially negative for the entire industry), the heightened need for highly skilled sales staff able to explain the increasingly complicated fee structures and product lineup arising from increasing competition within the cellular telephone industry allowed the Company' s earnings to bottom in fiscal year May 2010.

During fiscal year May 2011, a shift in customer needs to an increased reliance upon outsourcing of business processes was followed by the subsequent start of business process consignment services during fiscal year May 2012 by J-COM. However the increased work process burden upon sales staff associated with the shift to sales of smartphones from feature phones caused profits to fall below expectations. However, a shift in customer contracts which were unprofitable is expected to contribute to strong growth in profits during fiscal year May 2013.
 
 
Progress of Major Strategies
 
During fiscal year May 2013, J-COM will focus upon four endeavors to expand its businesses: 1) The improvement of its service quality, 2) fortification of its second and third pillars of business, 3) strengthening of its group management structure, and 4) continued emphasis upon a compliance structure that will enable it to respond quickly to changes in the business environment.
 
 
(1) Service Quality Improvement
In order to continue to be the human resources company of choice by both corporate customers and job seeking workers, J-COM is endeavoring to raise the value addition of the various services it provides. As part of this strategy, the Company is promoting efforts to introduce new college graduates to small to medium sized cellular telephone agencies, which are encountering difficulties in securing human resources, and has already formed alliances with 100 colleges, which includes discussions to assume consignment of these colleges' career center operations. The number of college graduates placed with companies is expected to rise from 30 during fiscal year May 2012 to 300 (Entering companies in spring 2013) in the current fiscal year May 2013.
 
(2) Establish Second, Third Pillars of Business
① Services Provided to Apparel Industry
The comprehensive human resources services company J-COM turned IFC Corporation into a 100% owned subsidiary in September 2011 to extract synergies between the two companies, and to expand the breadth of J-COM' s services. During the first half of fiscal year May 2013, expansion in orders for both short term and medium to longer term employment contracts, and orders from major metropolitan regions including Tokyo and Osaka, which is attributed to the Company' s successful track record in providing solutions in non-metropolitan regions, was recorded. Also J-COM Holdings sales to the apparel industry is expected to rapidly expand to ¥1.5 billion in fiscal year May 2013, and apparel industry sales are expected to grow over the medium to long term to ¥5.0 billion based on its growing track record and knowhow in this realm. Furthermore, IFC Corporation has been able to establish a solid base of knowledge through its bountiful experience placing patterners and designers to the industry.
 
 
② Expansion of Childcare Services Business
The equity accounting method held affiliate SUCCESS Holdings Co., Ltd., operates 52 government approved and privately operated public nursery schools, and school aged children' s clubs. In addition, the Company operates 144 child care facilities within educational institutions, hospitals, and corporations, including those at the Tokyo University and Osaka University, on a consignment basis. Along with the listing of its shares on the JASDAQ market of the Osaka Stock Exchange on August 2012, SUCCESS Holdings promoted measures to fortify its overall structure and operations in order to expand its business of operating public childcare facilities on a consigned basis in the Tokyo metropolitan and other regions. With regards to the biggest issue in the childcare services business of how to secure nursery school teachers, J-COM will leverage and fortify its nationwide network of alliances in its nursery school teacher dispatch services. Moreover, SUCCESS Holdings is expected to have begun operation of 13 new nursery schools on a consigned basis and open 11 new public nursery schools (All located in the Tokyo metropolitan region) during the fiscal year December 2012.
 
 
(3) Fortification of Compliance Structure
In addition to hiring and dispatching staff with bountiful experience, J-COM is also implementing measures to cultivate staff who have no prior experience. Therefore, J-COM will conduct ongoing efforts to provide intensive and thorough training of staff after they are hired and promote a corporate culture and systems to cultivate inexperienced staff in addition to strict compliance with laws.
 
 
Fiscal Year May 2013 Earnings Results
 
 
Sales Decline 7.2%, Current Profit Rise 8.9% Year-Over-Year
Sales declined by 7.2% year-over-year to ¥8.105 billion. While sales to the apparel industry rose by a large margin on the back of nationwide marketing efforts and increased brand recognition amongst large clients, the increase could not offset declines in sales to the cellular telephone industry. The lower sales to the cellular telephone industry is attributed to the shift in unprofitable contracts during the third quarter of fiscal year May 2012 from business process consignment to dispatching contracts arising from the approach of the infringement date () of contracts, and the move by some cellular telephone carriers to directly hire staff. Therefore comprehensive human resources services business sales fell by 7.9% year-over-year to ¥7.814 billion while multimedia services business sales rose by 20.6% year-over-year to ¥291 million.

With regards to profits, the shift of unprofitable business process consignment contracts to dispatching contracts contributed to a 0.8% point increase in gross profit margin to 17.1%. Furthermore, the margin of sales, general and administrative costs improved by 0.2% points to 11.2% due to declines in labor and communications costs associated with the business process consignment contract and operating profit rose by 12.3% year-over-year to ¥479 million. A decline in subsidy related income caused current profit to grow by a smaller margin of 8.9% year-over-year. At the same time, ¥38 million in changes in equity accounting method holdings arising from the listing of SUCCESS Holdings was booked as extraordinary profit and combined with tax effect accounting to allow net profit to rise by 26.7% year-over-year to ¥368 million.

The divergence in results from estimates is attributed to the same reasons as mentioned above. The shift of some communications carriers contracts for sales staff from business process consignment to dispatching are the main reason for the shortfall in sales. However it also contributed to a 0.8% point increase in gross profit margin and a 0.2% point decline in sales, general, and administrative cost margin.
 
Infringement Date
Labor dispatch law mandates a maximum period of time that dispatched workers can be employed for tasks other than the 26 tasks outlined within the law. Therefore, the infringement date refers to violations of the employment of dispatched workers beyond the maximum period (Specifically the day immediately following the end of the maximum employment period). Because dispatched workers cannot be retained for more than the maximum period, a switch from dispatched worker contract to a business process consignment contract must be made or the company must directly hire workers. Only after a cooling off period (Three months and one day after the termination of the dispatched worker) can a dispatched worker be employed.
 
Response to Unprofitable Projects (Shift from Business Process Consignment to Worker Dispatch)
Demand for human resources within the cellular telephone industry has expanded on the back of the shift from feature phones to smartphones. In light of the revisions to the worker dispatch laws, J-COM undertook aggressive efforts to capture orders from a shift in demand from dispatched workers to business process consignment. However, the increased time and burden upon each sales staff required to explain usages and fee schedules of smartphones caused some of these business process consignment contracts to become unprofitable. Therefore J-COM initiated discussions to increase contract fees and shifted some consignment contracts for which prices hikes could not be implemented to dispatched worker contracts during the third quarter of fiscal year May 2012. This shift in contracts is a reason for the lower overall sales during the current term, but it also contributed to an larger than expected improvement in profitability of various projects (While the shift to dispatched worker from business process consignment contracts contributed to lower sales, it eliminated unprofitable contracts).
 
 
(2) Comprehensive Human Resources Services Business Trends
By type of contract, business process consignment related sales declined by 20.6% year-over-year due to the shift to resolve unprofitable projects, and dispatched worker related sales fell by 1.1% year-over-year due in part to the direct hiring of sales staff by cellular telephone carriers. At the same time, an increase in direct hiring of staff by cellular telephone service carriers contributed to a rise in sales of job placement services. Furthermore, the job placement services targeting small to medium sized cellular telephone agencies, which are encountering difficulties in finding staff, continued on course. J-COM already has alliances with about 100 universities, and is promoting discussions to take over operations of career center functions within these universities on a consigned basis.

By industry, sales to the cellular telephone industry declined on the back of measures to resolve unprofitable projects and direct hiring of staff by some carriers (Despite strong demand for human resources on the back of the rapid diffusion of smartphones), but sales to the apparel industry rose by 2.1 fold to ¥622 million due to nationwide marketing strategies and increases in brand recognition by large clients. While sales remain small, J-COM continues to cultivate its knowledge base in the childcare and nursing industries.

By client, sales to cellular telephone carriers declined due to the direct hiring of staff by some carriers and measures to resolve unprofitable projects for major carriers. At the same time, sales to the mass retailers and other retail channels grew on the back of shortages in staff for cellular telephone services.

By region, sales to the western Japan and tokai regions declined by large margins due to the direct hiring of staff by certain carriers and due to measures to deal with unprofitable projects. At the same time, sales of services to apparel industry, nursery schools and other industry applications in eastern Japan also declined by a small margin (Specifically in the Tokyo and surrounding metropolitan region, sales to other industries was able to offset declines in sales to the cellular telephone industry and allowed overall sales to grow by 0.1% year-over-year).
 
 
 
 
Due to the impact of the shift of unprofitable business process consignment contracts to dispatched worker contracts during the third quarter of the fiscal year May 2012, costs of sales margins improved from 83.7% in the previous first half to 82.9% in the current first half. In addition, labor and marketing (variable) costs declined by 0.2% and 0.3% points respectively, allowing SG&A margins to fall by 0.2% points. At the same time, efforts to fortify its human resources training and hiring with an eye to an expansion of business during the second half led to a 0.4% point increase in hiring and training cost margin.
 
 
The basic positive financial position of J-COM with no outstanding debt and bountiful liquidity remains unchanged. However, total assets declined by ¥36 million from the end of the previous first half to ¥6.233 billion at the end of the first half. Also net asset ratio improved by 4.3% points to 77.7% over the same period. Progress in recovery of receivables and declines in redemption of trust beneficiary rights were recorded, while both cash and equivalents and marketable securities (Rose from ¥771 to 868 million) rose. Declines in staff payroll arising from declines in staff were noted, while net assets increase.
 
 
Increases in sales and progress in recovery of receivables allowed a net inflow of ¥261 million in operating activities to be recorded after a net outflow of ¥208 million from the same period in the previous term. Redemption of trust beneficiary rights contributed to a net inflow in investing activities and allowed free cash flow to see a net inflow of ¥582 million. While a net outflow was seen in financing cash flow due to dividend payment, cash and equivalents rose by ¥446 million from the end of the previous term to ¥1.787 billion (An increase of ¥662 million from the end of the previous first half).
 
 
Fiscal Year May 2013 Earnings Estimates
 
 
During the second half of the current fiscal year, sales and current profit are expected to rise by 29.7% and 25.8% year-over-year to ¥11.394 billion and ¥673 million respectively. Efforts to capture projects during the busy season and expansion in the apparel industry related business are expected to contribute to an increase in sales and a decline in cost of sales.
 
 
Full Year Earnings Estimates Remain Unchanged, Sale and Current Profit Expected to Rise 11.3% and 17.5% Year-Over-Year
Sales in the full year are expected to rise by 11.3% year-over-year to ¥19.5 billion. Multimedia services business sales are expected to decline, but comprehensive human resources business sales are expected to rise by 11.8% year-over-year to ¥19.0 bilion. This increase is expected to be derived from higher sales to the cellular telephone industry and strong growth sales to the apparel industry (Up from ¥817 million in FY5/12 to ¥1.5 billion in FY5/13). Operating profit is also expected to grow by 25.7% year-over-year to ¥1.15 billion on the back of improvements in business process consignment profitability and sales of highly profitable campaign projects. Dividends are expected to be raised by ¥5 per share to ¥30 per share (¥15 per share first half and year end dividends).
 
 
 
Conclusions
 
During the first half, measures to eliminate unprofitable projects and direct hiring of staff by some communications carriers led to an temporary decline in sales. However, sales are expected to reflect the strong demand for human resources by the cellular telephone industry during the second half. In addition to the increased sales competition amongst various carriers amidst the expansion in the smartphone market, the increased difficulty of products being sold, including the rapidly growing tablet computer terminals, requires an extended period of time and increased amount of knowledge by sales staff to deal with customers at the time of sales and contributes to a chronic shortage of qualified sales staff. Consequently, demand for human resources not only directly involved with the sales task but including related tasks is growing. Therefore, the business environment for J-COM is expected to remain favorable. Furthermore, the second pillar of J-COM' s business of human resources services provided to the apparel industry is entering a growth phase. In addition, funds sourced from the listing of SUCCESS Holdings on the JASDAQ Market in August 2012 are being leveraged to promote an aggressive government approved nursery school facilities opening strategy in the Tokyo metropolitan region. These measures are expected to allow J-COM to expand its apparel industry and nursery school related businesses a step further during the next term. With regards to earnings in the current term, the outstanding sales estimates may appear to be a relatively optimistic target, but the profit estimates appear to accurately reflect the current operating environment. Should current profit estimates be realized during the current term, a third consecutive term of record high current profits may be a realistic target in fiscal year May 2014.
 
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) 2013 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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