BRIDGE REPORT
(3667)

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enish, inc. (3667)
Kouhei Antoku, President
Kouhei Antoku,
President
Corporate Profile
Company
enish, inc.
Code No.
3667
Exchange
1st Section of Tokyo Stock Exchange
Industry
Information, Communications
President
Kouhei Antoku
HQ Address
Roppongi Hills Mori Tower 39F 6-10-1, Roppongi Minato-ku, Tokyo
Year-end
December
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥1,472 6,932,640 shares ¥10,205 billion 32.3% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
- -% ¥0.00 - ¥428.86 3.4x
* Stock price as of close on July 31, 2014.
 
Non-Consolidated Earnings Trends
Fiscal Year Sales Operating Profit Current Profit Net Profit EPS Dividend (¥)
December 2010 415 64 71 55 821.99 0.00
December 2011 2,590 526 523 298 147.81 0.00
December 2012 4,430 666 654 373 87.28 28.00
December 2013 6,624 1,109 1,078 653 121.89 22.00
December 2014 Est. 6,500 0 0 0 0.00 -
* Estimates are those of the Company. 20 for 1 and 2 for 1 stock splits were performed in September 2012 and October 2013 respectively.
* EPS has been adjusted to reflect these stock splits.
* There are currently no dividend estimates for FY12/14.
 
We present this Bridge Report along with the first half earnings results of the fiscal year December 2014 for enish, inc.
 
Key Points
 
 
Company Overview
 
enish is a social game development company that boasts of the highly popular restaurant management simulation game "Bokuno Restaurant 2", apparel shop management simulation game "Galsho☆", and card battle game "Dragon Tactics." Effective March 2014, Kohei Antoku was appointed to serve as the new president. The Company will pursue a strategy of maintaining profitability of browser applications, while creating new hit native applications, and pursuing a strategy of deploying its contents distribution throughout Asia as well as Japan.

Native applications are applications which can be enjoyed by users by downloading them to their smartphones. At the same time, browser applications are not downloaded but can be accessed and enjoyed over various platforms like GREE, mixi, and Mobage. Both forms of applications are provided for free, but various items including tools (In the case of "Boku no Restaurant 2," recipes and items to decorate the interior of restaurants can be purchased to make the games more fun to use and more attractive to virtual customers within the game) used in the games to make them more enjoyable are offered for purchase. Responsibility for collection of the fees charged to users for items purchased over browser applications is seconded to the social network services (SNS) platform providers, and a fee is paid by enish to the platform providers as usage fees.
 
<Business Details>
enish is comprised of a single business segment of social applications (Games are included in this application category). enish will fortify its native applications capability by leveraging earnings derived from its traditional business of browser applications. While games are provided free of charge, various items which can be used within each game (In the case of "Bokuno Restaurant II," recipes and items to decorate the interior of restaurants can be purchased to make the games more fun to use and more attractive to virtual customers within the game) are sold for fees. Responsibility for collection of the fees charged to users for items purchased is seconded to the social network services (SNS) platform providers, and a fee is paid by enish to the platform providers as usage fees.
 
<Corporate History>
Against the backdrop of the birth of the "Open SNS Platforms" trend at the time of enish's establishment, Mr. Kohei Antoku and Mr. Yoshiyuki Kumon began providing social applications in October 2009 based on the philosophy of "creating services that are unique and exciting to use."

The social application market is steadily expanding, and the number of new social application providers (SAP) entering the market is rising rapidly. In addition, enish is facilitating a new structure to deal with intense competition resulting from existing game software makers entering the market in increasing numbers. Fortification of the organization to expand the breadth of its business was undertaken with a view to the listing of the Company's shares, and the founders of ZAPPALLAS Inc., a major fortune telling contents company that is listed on the First Section of the Tokyo Stock Exchange, Mr. Masanori Sugiyama (Former President) and Mr. Kosuke Matsumoto (Current Managing Director) also joined enish. With their help, both the marketing and administrative functions were fortified.

enish listed on the Mothers Market of the Tokyo Stock Exchange (TSE) in the fourth year of its operation in December 2012, and then moved to the First Section of the TSE during December 2013. Based upon the fortified development and financial structure of the Company in fiscal year December 2013 and with a view to a need to expand the native application business (Native application development begun in October 2013, and a subsidiary was established in Korea in November), the Company chose to appoint a new president. Consequently, Kohei Antoku was chosen to take the lead of enish as its new president in March 2014 because of his bountiful experiences in and familiarity of service technologies.

Fiscal year December 2014 has been identified as the second stage of growth of the company. enish maintains a mission statement to "create ever more fans of enish around the world," and is implementing an expansion of its businesses not only within Japan but also around the globe. Furthermore, the Company is promoting an expansion strategy of its development and deployment of its business in the Japanese, Chinese and Korean markets based upon its successes in native applications.
 
 
 
 
First Half of Fiscal Year December 2014 Earning Results
 
 
Sales Rise 3.4%, Operating Profit Fall 67.9%
Sales rose by 3.4% year-over-year to ¥3.254 billion. A mishap in the operations of some existing titles (Browser applications) caused sales of these applications to decline by a larger than expected amount, along with delays in new title (Native applications) releases. Therefore, actual sales grew by a much smaller margin than forecast at the start of the year.

Operating profit declined by 67.9% year-over-year to ¥230 million. This decline is attributed to a large 23.6% year-over-year increase in cost of sales due to development expenses (Labor and outsourcing fees), and a 28.5% year-over-year increase in sales, general and administrative expenses arising from growth in hiring fees (Up 2.6 times) and labor expenses (Up 22%), and booking of costs in overseas markets. At the same time, development expenses are not booked as assets, but charged as expenses in the period that they occur. Therefore, the development expenses booked in the current term include development work for titles expected to be released in the next term.

At the end of the first half, the total number of employees rose by 50 to 194 (Including 19 employees working on a consignment basis) compared with the end of the previous fiscal year. Within this total, 29% are engineers, 34% designers, 23% directors, and 14% are managers. While enish rapidly facilitated its development structure and this facilitation process worked well, therefore it is expected to pursue a highly selective strategy for hiring going forward in its efforts to further strengthen its structure.
 
 
Decline in Sales Contribute to ¥10 Million Decline in Operating Profit
Stagnant sales of existing titles caused sales during the second quarter to fall by 15.4% compared with the first quarter to ¥1.491 billion. By category, sales of the main card battle games fell by a larger than expected margin of 28.9%, while the decline in sales of the main simulation game remained within expectations at 8.1%. With regards to new titles, enish's first full native application "Bokuno Restaurant III" and a browser version of the native application "Bahamut Crisis" were released in May and June 2014 respectively (Provided over the platform "d Gam" operated by NTT Docomo). However, advertising expenses were restrained after the release of these titles due to the need to fine tune the structure and quality of these games (Full scale promotion expected to start from the second half).

Operating profit during the second quarter fell by a large margin below that of the first quarter (¥220 million) to ¥10 million. Despite a decline in operating expenses, the decline in sales caused operating profit to decline by a large margin. Development expenses (Cost of sales) and overseas business related costs rose, and sales commissions paid to platform operators (Cost of sales) declined in line with the decline in sales.
 
 
 
 
At the end of the first half, total assets declined by ¥501 million from the end of the previous fiscal year to ¥3.521 billion. Cash and equivalents declined on the back of payment of unpaid corporate tax, etc., which in turn caused current liabilities to decline as well. Equity ratio improved by 10.0 points from the end of the previous fiscal year to 84.4%.
 
 
 
Return on equity (ROE) during fiscal year December 2013 stood at 32.3%. Against the backdrop of the favorable earnings arising from an expansion in business and fortification of equity contributed to a decline in ROE, but it still remains at a high level. However, a flattening in earnings arising from anticipatory investments is expected to contribute to a decline in ROE in fiscal year December 2014.
 
 
Fiscal Year December 2014 Earnings Estimates
 
(1) Second Half, Full Year Earnings Estimates
Promotional Expenses for Development Costs for New Titles, New Applications to be Released Next Term Contribute to a ¥220 Million Operating Loss in 2nd Half
Sales are expected to decline by 6.5% year-over-year to ¥3.250 billion during the second half of the current term. And while a gradual decline in sales of existing titles is expected to be inevitable, efforts to bolster earnings will be implemented by strengthening of the management structure. At the term's beginning, a total of three new titles had been expected to be released during the second half of the term, but delays caused by efforts to perfect these titles and further improved operational structure are expected to lead to only one new title being released. At the same time an operating loss of ¥220 million is anticipated. In addition to promotional expenses for titles released in the first and second halves, developmental expenses for titles to be released next year and expenses from the deployment of business in overseas markets have been factored into the second half earnings estimates. And while cost controls will continue to be implemented, enish will take a flexible stance towards strategic investments when and as needed.

During the full year, sales are expected to fall by 1.9% year-over-year to ¥6.5 billion, and break even is expected at every level of profits below the operating level.
 
 
 
(2) Strategies from Second Half Onwards
Existing Titles
Currently, enish is endeavoring to reconfigure its operational structure to achieve stability, including efforts to facilitate structures to "cultivate and share various know-how", "improve art work quality", and "correct event balance". Furthermore, enish is promoting various efforts to expand the number of "new platforms" it provides contents to and to implement system tuning.
 
 
New Titles
In addition to full-scale launch of promotional activities for "Bokuno Restaurant III" and "Bahamut Crisis" launched during the first half, an accelerated multiple platform strategy for "Bahamut Crisis" will be implemented. In addition, the native application "1000 Year Kyoshin" will be released in Autumn, and preparation for distribution in overseas markets of both "Bokuno Restaurant III" and "1000 Year Kyoshin" will be conducted.
 
 
Future Pipeline
Currently, enish is conducting development of a total of four titles in Tokyo (1 title), Korea (2 titles for Japan) and Shanghai, China (1 title). Furthermore, localization of "Bokuno Restaurant III" and "1000 Year Kyoshin" for launch in Asian markets is being conducted.
 
 
Direction of Future Growth Strategy
In addition to making a transition to "native applications," a "global business deployment strategy" will also be pursued to capture growth of the Asian markets. Furthermore, enish will promote its "O2O business" as part of the game peripheral business.
O2O is an acronym for Online to Offline, and is a strategy designed to encourage users to make purchases at stores and to support customer cultivation at stores by leveraging user motivation and loyalty.
 
 
 
Currently, enish has three subsidiaries that are not considered within the scope of consolidation. However, enish expects to include these subsidiaries in the scope of consolidation as necessary in accordance with the "principle of materiality."
 
 
Conclusions
 
While growth rates in the Japanese social game market are slowing, native applications are expected to expand in the future. Enish will fortify its position by leveraging its bountiful experience in browser applications, while at the same time capturing growth by cultivating the native application business. As part of this strategy, "Bokuno Restaurant III" and "Bahamut Crisis" were released in May and June 2014 respectively. And while their releases were delayed, both titles are seeing growth in the number of their users as planned, and near term user growth is trending favorably. At the same time, skill adjustments and changes in parameter designs are proving effective for existing titles, and performance of card battle games, which recorded large declines during the first half, are said to be improving. Furthermore, earnings are expected to bottom and begin recovering during the second half on the back of progress in the facilitation of development and distribution functions in China and Korea.
 
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) 2014 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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