BRIDGE REPORT
(3673)

東証1部

Broadleaf (3673)
President Kenji Oyama
President
Kenji Oyama
Corporate Profile
Company
Broadleaf Co., Ltd.
Code No.
3673
Market
TSE 1st Section
Business Type
Information/Communications
President and CEO
Kenji Oyama
Head Office Location
4-13-14, Higashi-Shinagawa, Shinagawa-ku, Tokyo
Fiscal Year End
End of December
HP
Stock Information
Share Price Shares issued
(excluding treasury shares)
Market value ROE (Actual) Trading Unit
¥2,084 26,129,216 ¥54,453 million 10.6% 100
DPS (Forecast) Dividend Yield (Forecast) EPS (Forecast) PER (Forecast) BPS (Actual) PBR (Actual)
¥25.00 1.2% ¥101.12 20.6times ¥814.96 2.6times
*Share price is closing price for March 13. Shares issued excludes treasury shares from shares issued at the end of the most recent quarter. ROE and BPS use the results from the end of the last fiscal year.
 
Trends in Business Results
Fiscal Year Sales    Operating
income
Ordinary
income
Net
income
EPS DPS
December 2010 (Actual) 15,168 1,208 723 501 2,238.14 0.00
December 2011 (Actual) 15,317 1,772 1,598 3,503 155.96 0.00
December 2012 (Actual) 15,641 2,114 2,035 815 36.30 0.00
December 2013 (Actual) 18,024 3,740 3,653 1,914 76.91 20.00
December 2014 (Actual) 18,894 4,165 4,098 2,193 84.03 20.00
December 2015 (Forecast) 19,600 4,600 4,550 2,530 101.12 25.00
* Forecasts provided by Broadleaf.

This Bridge Report presents a company overview and overview of the fiscal year ended December 2014 for Broadleaf Co., Ltd.
 
Key Points
 
 
 
Company Overview
 
Broadleaf Co., Ltd. has a high share of work applications for the automotive aftermarket. The strength of the company is a consolidated platform for different commercial distribution such as automobile parts sellers, maintenance services, bodywork services and recyclers. Currently, the company is focusing on expanding electronic transactions using this platform. Also, the BL code that the company individually assigns to each automobile part has become the de facto standard for the industry, vital for sellers to identify parts. The company is also focusing on research into creating new service areas taking advantage of this technology for managing and identifying the vast amount of automobile part information.
 
[Company History]
The company is the formal surviving company of a merger and, with support by American private equity fund the Carlyle Group, was established in September 2009 with the name CB Holdings Co., Ltd. as the receiving company for a management buy-out (MBO) by management of the effective surviving company, the former Broadleaf Co., Ltd.
CB Holdings Co., Ltd. then made the former Broadleaf Co., Ltd. a wholly-owned subsidiary through stock transfer in November of the same year. On January 1, 2010, the former Broadleaf Co., Ltd. was absorbed with its entire business activities succeeded, the company name was changed to Broadleaf Co., Ltd.

The former Broadleaf Co., Ltd., the effective surviving company of the merger, was a subsidiary of ITX Corporation, in December 2005, carrying out the "packaged software business" transferred from Tsubasa Systems Co., Ltd., which conducted system sales to automotive aftermarket businesses such as automabile parts sellers, automotive maintenance services, and automotive bodywork services.
With the global financial crisis triggered by the bankruptcy of Lehman Brothers in 2008, the MBO was carried out to respond to the sudden change in the automobile industry climate and to build a sustainable growth base and expand overseas, without worrying about short-term fluctuations in business results.
 
 
[Corporate Philosophy]
The company has a corporate philosophy of "joy and gratitude."
 
 
To ensure that this corporate philosophy is shared by all employees and to make it more practical, at the beginning of every year, all the employees gather at a management policy explanation session, where President Oyama gives a summary of the previous year and explains that year's policy, and also reiterates the corporate philosophy.
All employees carry a credo* card with them at all times, and everyone recites the code of conduct at daily morning meetings.
Employees who understand and exemplify the corporate philosophy are also awarded based on employee voting, creating a system for employees to indicate their gratitude to each other as well.
*Credo: A term originating from Latin, referring to the company's beliefs and policies in brief. Many companies use it as a tool to encourage spontaneous action by employees. Creed.
 
 
[Market Environment]
-Overview
The target market of the company is the automotive aftermarket, with a market size of approximately ¥10 trillion. The "automotive aftermarket" covers all products and services after a vehicle has been purchased, including gasoline, automotive accessories, maintenance checks, safety inspections, spare parts, resale and disposal. (From the company website)
 
 
1) Number of Automobiles Owned
The number of automobiles owned including light vehicles was 60 million at the end of March 2014, and is continuing to grow. With the average years of car usage increasing, the stock of automobiles is expected to continue to grow.
 
 
2) Average Number of Years Cars Are Used
The average number of years from when a car is first registered to when its registration is removed was 12.6 years at the end of March 2014, an increase of over 2 years from 10.4 years at the end of March 2001.
With the change in automobile users' opinions, long-term use of cars is increasing, which means demand for repairs/inspections and for replacement/consumable parts is increasing in the automobile repair market and parts market.
 
3) Number of Certified Workshops and Designated Workshops
"Certified Workshops" are workshops certified by the District Transport Bureau Chief, and can conduct automobile repair and modifications that require removing the motor, drivetrain or running gear in "dismantling maintenance."
Of certified workshops, those that meet certain standards for facilities, skills, and organization, and are designated for automobile maintenance by the District Transport Bureau Chief are referred to as "Designated Workshops."
The number of certified and designated workshops tends to remain the same or increase slightly, but in recent years the ratio of certified workshops that are designated has been increasing.
This is probably because small workshops being absorbed into medium or large workshops and groups, due to issues such as economic trend and a lack of successors to take over.
According to Broadleaf, there are approximately 70,000 workshops not associated with dealers in Japan, and of those 40,000 are small workshops with three or fewer mechanics, and the other 30,000 are medium- and large-scale workshops that Broadleaf is targeting, as workshops polarize to one extreme or the other. The number of medium- and large-scale workshops that have sufficient financial resources and use Broadleaf's system for parts orders is still only about 800, so there is still a lot of room for expansion.
 
4) Recycled Parts Market
The Automobile Recycling Law went into effect in 2005, and markets for automobile dismantling and recycled parts have gradually been developed. With the diversification of group shared recycle inventory systems and expanded use of internet auctions, the recycled parts market is expanding.
Recycled parts use helps limit CO2 emissions and may have positive effects on the environment, and is expected to continue to expand due to its social importance. Also, automobile insurance fees being updated in October 2012 should give a boost to the recycled market.

As seen above, the market environment facing the company is mostly positive.
 
[Business Outline]
In addition to providing network work applications specialized for customer industries, maintenance service and supply products to mainly the automotive aftermarket industry, Broadleaf also carries out network services for its industry platform, consisting of the following three fields: 1) System Sale, 2) System Support and 3) Network Service.
Since it is a single segment of the IT service business, the divisions shown below are carried out.
 
 
Although Business AP Software is flow income from leasing, System Support and Network Service are stock income from fixed monthly charges and pay-as-you-go charges.

The sales composition for December 2014 had Business AP Software account for the majority with 73.1%, but attempts are being made to increase the share of stock income.

(Composition of Sales Sectors)
[Business AP Software]
-Development and sales of specialized business applications
-Development and sales of information security and other packaged software
-Acquisition and sales of PCs, printers and other equipment

[System Support]
-Provision of maintenance services to clients that purchased Broadleaf's system
-Acquisition and sales of ledger sheets and OA supplies, etc.

[Network Service]
-Provision of database services to clients that purchased Broadleaf's system
-Provision of server services to clients that purchased Broadleaf's system
-Provision of clearing house service for recycled auto parts.
-Provision of electronic order functions for auto parts
-Provision of tablet-based work support tools, etc.
 
 
1) Business AP Software
Broadleaf conducts development and sales of specialized business applications used in industry platform for businesses in the automotive aftermarket industry as well as travel agencies, cellular phone dealers, and machine tool dealers.
Broadleaf's specialized business applications improve usability by catering to specific industries for their unique business flows, as well as addressing general client needs such as estimate and invoice management.
The company also carries out sales of computers with applications installed, as well as LCD monitors, tablets, printers, peripherals and other hardware.
It also carries out system development under commission, in response to client needs.
As for procedures for sales of systems, they were initially "one-off" sales, but from 2004 on, the process was changed to allow Broadleaf to sell system rights to a lease company, and then the lease company to sell it to customers with a 6-year lease contract.
 
2) System Support
To maintain an optimum business environment for customers, a support system has been made to respond rapidly to network, hardware and server problems, with a customer help desk open 365 days a year and specialized staff working in 35 locations (as of the end of December 2014) throughout Japan. This support system consists of "maintenance" section, which provides business application maintenance services and hardware maintenance services, and "supply" section, which conducts sales of ledger sheets and other supplies used by the business applications.
 
3) Network Service
A contingent service using Broadleaf's network for customers that purchased network specialized business applications.
Network Service consists of "stock" section, with database and server services essential for the use of the business applications, and "transaction" section with the marketplace provided for distributing recycled parts in the automotive aftermarket industry and carrying out electronic transactions for auto parts between dealers.
 
<Main Services in the Network Service Section>
-Parts Dealers and Maintenance Shops Platform Service with System Connections
Using the BL Parts Ordering System, the maintenance shops business system and parts dealer system are linked, to provide seamless service for estimate/delivery response and ordering.
Until now, to order necessary parts maintenance shops would have to call or fax parts dealers they already had done business with to order parts, the procedure that had more than enough trouble with regard to the inevitable hassle, incorrect orders, delivery time, etc.
The BL Parts Ordering System improved this situation by greatly enhancing work efficiency, facilitating transactions, and enabling immediate responses for price/delivery dates.

The System provides links between parts dealers seeking more maintenance shop clients and maintenance shops in need of necessary parts in time.
Parts dealers pay a network usage fee, and maintenance shops are charged fees on a per-use basis.
 
 
-Recycled Parts Distribution Platform Service
Parts Station Net is a network for sharing recycled parts stock over the Internet. Parts Station Net charges a commission from the buyer when a transaction is made between the buyer (i.e. parts dealer) and the seller (i.e. recycler) regarding placing and receiving of orders.
Currently, about ¥240 billion of recycled parts are sold in Japan annually, with 13,000 stores participating in Parts Station Net, and an average of 10,000 parts sold daily on the Net, accounting for about ¥41.5 billion or about 17% of total distribution in Japan. In FY 2014, around ¥10 billion of recycled parts transactions were processed as proxy, making about ¥680 million in transaction proxy fee income.
 
 
 
The ROE for the fiscal year ended December 2014 was 10.6%, higher than the averages for the TSE 1st Section, and for the Information and Communication sector as well. In comparison with DuPont analysis of the Information and Communication sector, the high net profit to sales for the year stands out.
In the financial statement's "Management Index Goals" section, ROE is mentioned (at this point, no specific numbers are given as a goal), and the company aims to continue to increase ROE.
 
 
Characteristics and Strengths
 
1) The Only IT Company That Can Lead the Automotive Aftermarket
Based on the Declaration to be the World's Most Advanced IT Nation, adopted at a Cabinet Meeting on June 2013, the Ministry of Land, Infrastructure, Transport and Tourism created the Investigative Commission for Future Vision of Effective Use of Automobile-related Information to consider how to create new services and industry innovation by using automobile information held by the country, such as car registration information (including owner information), car location and car speed information, and accident and maintenance history.
 
According to the Commission's Future Vision of Effective Use of Automobile-related Information announced in January 2015, current situation of use of automobile-related information in Japan is as follows:
The progress in computerization of automobiles in recent years has tremendously increased the volume and variety of data collected and transmitted by automobiles.
In Japan, however, effective use of the vast quantity of automobile-related information is not progressing much so far, due in part to the fact that such information is scattered across various bodies and individuals.
Various other countries are already making good use of automobile-related information for various services such as insurance services and providing automobile histories. Japan should also seek to innovate in the automobile sector by making use of IT.
These have been the Commission's analysis of the current situation and issues to be dealt with.
 
These four tasks are planned to be carried out by private sector initiatives, while promoting automobile transactions with safety and assurance through integrated management of the vast amount of data.

Under such circumstances, Broadleaf believes that it is the only company that can lead the future automotive aftermarket, based on tens of thousands of its client companies and its expertise backed with its maintenance data on tens of millions of cars.
*OBD: On-board diagnostics. Diagnostics performed by computers installed in automobiles to detect faults.
 
2) Overwhelming Share
Of the 2,200 parts dealers said to exist in Japan, around 1,500 or 70% already use Broadleaf's business system. For maintenance workshops, of the 30,000 non-dealer medium- and large-scale workshops that are the company's target, 13,000 use Broadleaf's system, demonstrating the overwhelming market share it has.
In addition, there is no company other than Broadleaf that can provide a variety of systems using a platform. There do exist several distributors dealing in limited range of systems, but their sales amount to no more than one-tenth of Broadleaf's, so the company essentially has no competitors.
 
3) Ample Experience
Sales of the first automobile parts system, called Partsman, started in 1983. Partman was sold by Tsubasa Systems Co., Ltd., a company established in 1983, but Tsubasa transferred its packaged software business to Broadleaf in 1983, the same year. Therefore, if counted from then, Broadleaf can boast of over 30 years of experience. Ever since, the company has been making databases of parts information for the approximately 30,000 parts in a single automobile, and the parts codes created by their unique know-how have become the industry standard.
With the vast amount of data collected, their database is overwhelmingly No. 1 in both quality and quantity.
 
 
4) Trusting Relationship with Clients
With a direct sales system to accurately determine client needs and carry out dedicated service, Broadleaf has formed relationships of deep trust with its clients, which is a valuable hidden asset of the company.
Despite the 6-year term of the license contract with clients, the ratio of contract renewals is from 80% to 90%, with high customer satisfaction.
 
 
Overview of Fiscal Year Ended December 2014
 
 
Revenue rose in all three sectors, with two-digit increase in profit. Sales and operating income reached record levels.
Sales increased 4.8% YOY to ¥18.8 billion. Revenue increased in all three sectors, with profit for the key network service sector rose by two digits.
Due to increased acquisitions from increased revenue, sales cost increased 2.3% YOY, SG&A increased with promotion costs for the Machi no Carunselor service brand and personnel costs both increased by 3.5% YOY but were absorbed by increased sales, and operating income increased 11.4% YOY to ¥4.1 billion.
Both sales and operating income reached record highs since the establishment of the company in December 2009.
Compared to the forecast at the beginning of the fiscal year, sales were slightly short, but profit was higher.
Also, the depreciation of goodwill of ¥668 million from the MBO was posted. The operating income before depreciation of goodwill was ¥4,834 million for a 9.6% YOY increase, and extraordinary income before depreciation of goodwill was ¥2,861 million for a 10.8% YOY increase.
 
 
All three sectors had increased sales compared to the previous year, with network service growing by two digits, but the release of the high-speed system was delayed and transactions were not able to be expanded as much as forecast, so the planned ratio was not reached.
 
 
Due to cash and deposits and other factors, current assets increased ¥1,503 million YOY to ¥15,541 million. For fixed assets, goodwill amortization decreased by ¥668 million YOY, but investment securities increased by ¥585 million YOY, for a ¥204 million decrease YOY.
An increase in accounts payable caused current liabilities to increase ¥602 million YOY. For fixed liabilities, long-term loans payable decreased ¥635 million YOY, and total liabilities decreased ¥33 million YOY. Net assets increased ¥1,332 million due to increased accumulated earnings. As a result, equity capital ratio increased 1.2% from the end of the previous fiscal year, to 75.0%. Interest-bearing outstanding liabilities decreased ¥1,387 million YOY to ¥970 million.
 
Compared to the previous year, net income before taxes increased, the amount of increase in trade receivables decreased, and trade payables increased, for an increase in payments of corporate taxes, so operating cash flow only increased by ¥263 million YOY.
With the increase in investing securities acquired and a larger minus swing for investing cash flow, the free cash flow overbalance also decreased.
Income decreased from issuing stocks, and the amount of dividend payments increased, so the financial cash flow became negative.
Cash position improved.
 
 
Forecast of Fiscal Year Ending December 2015
 
 
With increased revenue and profit, sales and operating income will continue to reach record high.
Sales are forecast to increase 3.7% YOY to ¥19.6 billion. The delayed high-speed system will be released in the first quarter and expand services. With a target client number of 2,000 maintenance workshops, marketing is focusing on large workshops.
Operating income is forecast to increase 10.4% YOY to ¥4.6 billion. Growth investment in creating new businesses and improving the database will continue, but it will be absorbed by increased revenue, and increased profit by two digits is expected.
For the first half and second half of the year, network service is expected to lead the increase in revenue in the second half.
Sales and operating income will continue to reach record high.
Dividends are planned to increase by ¥5/share to ¥25.00/share. Forecast dividend payout ratio is 24.7%.
 
 
Licenses sold and cost are expected to remain level for system sales, with a focus on acquiring new clients. Network service will be promoting stimulation of orders made and received, and increased income is expected.
 
(3) Main Activities
-Increased Order Transactions
Focus will be on expanding the number of transactions for auto parts between parts dealers and maintenance shops.

As mentioned before, of the approximately 2,200 parts dealers in Japan, 1,500 are already users of Broadleaf's system, out of which 161 have been using transactions with the BL Parts Order System as an additional feature during the term ending December 2014.
According to Broadleaf, the top 200 parts dealers account for about 60% of all transactions in Japan, so they are targeting these major companies that have the fiscal leeway to introduce the BL Parts Order System, which, according to the company's estimate, seems to present an attainable goal in the near future.

As for maintenance shops, also as mentioned earlier, 13,000 medium- and large-scale shops already use Broadleaf's system, out of which 797 are also using the BL Parts Order System during the term ending December 2014. The goal is to increase that number to 2,000 this year. Since connections already exist, this number, according to Broadleaf's estimate, is not at all unfeasible.

Also, in order to build stronger relations with maintenance shops, promotion of the Machi no Carunselor service is being further increased.
Machi no Carunselor is a service brand begun in 2013 by Broadleaf to help support automobile maintenance shops in finding customers. Machi no Carunselor allows car owners to use a tablet when their car is being maintenanced, for easy-to-understand explanations, ample parts information, and reliable skills, to increase car owner satisfaction. Broadleaf provides backup in training, group training, providing software tools, and consulting.

After reaching the goals of 200 parts dealers and 2,000 maintenance shops, the issue will be how to increase transactions. In order to reach the target number and to increase the number of successful transactions, the following three points will be improved.
 
<Increased Functionality>
When maintenance companies check parts from parts dealers at a car owner's request, a quick response of about 20 seconds is necessary to connect to the actual order and not just an estimate.
The high-speed system that was delayed the previous fiscal year will definitely begin operation this year. Also, a recommend function that will propose other appropriate parts based on instant analysis of the vast quantity of data available nowhere else but at Broadleaf will lead to increased orders and increased unit value.
 
<Improved Structure>
Previously, there were about 20 full-time supervisors and about 600 marketing staff at 35 locations nationwide, but to expand order transactions, teams of full-time staff other than supervisors will be brought together to enhance marketing.
 
<Improved Strategy>
For both parts dealers and maintenance shops, the regions and client layer to be marketed to will be clarified.
 
(4) Mid-term Business Plan
<Growth Strategy>
The following two points will be the focus for growth.
 
1) Expand Target Areas for Information Service
For the first phase, the linking between different industries for the BL Parts Order System on the industry platform will be further expanded to increase order transactions and to improve the quality of service of client companies to car owners and support creation of business.

The second phase will transform big data, ever growing in its quality and quantity, into more effective data by the use of a recommendation engine equipped with super-high-speed searching and artificial intelligence capabilities. Such big data will be provided as a pay service to alliance companies that assume that car owners will be their future clients. The company's goal is not to sell system, but to become a "B to B to C" business that monetizes information itself. The company also aims at providing even greater convenience to car owners.
 
2) Business Expansion in Asian Markets
Price information on auto parts is extremely rare worldwide, and the value of Broadleaf's database is reportedly very esteemed not only in Japan but overseas as well.
Leveraging this advantage along with the company's database and know-how gained in Japan, the company will expand business in China and ASEAN countries.
A local corporation was established in China in 2012. With used parts dealers as partners, sales of used parts to repair shops and parts dealers will be supported using the database.
Next, the business will expand to ASEAN countries, supporting the distribution of used cars as well as used parts.
There are also plans to provide market information services in the future to insurance companies, recycling companies, parts buyers, and repair shops.
 
<Performance Goals>
The three-year plan ending on December 2016 is in its mid-point this year, and the company plans to update forecasts for results for the fiscal year ending December 2016; as of now forecasts are for ¥22.5 billion in sales and ¥7 billion in operating income.
 
 
Conclusions
 
A short-term point of interest is how transactions will increase with the high-speed processing due to forecast expansion in the second half of the year.
A mid-term point of interest is how large of a market the company is expecting for "expanding target regions for information services" and "expanding business into Asian markets," and what speed they plan to develop these markets at. These will be covered in future reports.
 
 
Disclaimer
This report is intended solely for information purposes, and is not intended as a solicitation for investment. The information and opinions contained within this report are made by our company based on data made publicly available, and the information within this report comes from sources that we judge to be reliable. However we cannot wholly guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and 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.
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