BRIDGE REPORT
(3673)

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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
¥1,273 24,948,416 ¥31,759million 10.6% 100
DPS (Forecast) Dividend Yield (Forecast) EPS (Forecast) PER (Forecast) BPS (Actual) PBR (Actual)
¥25.00 2.0% ¥47.95 26.5times ¥814.96 1.6 times
*Share price is the closing price for August 12. 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) 17,700 2,500 2,450 1,200 47.95 25.00
* Forecasts provided by Broadleaf.

This Bridge Report presents Broadleaf's earnings results for the first half of fiscal year ending December 2015.
 
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.

The chart below shows the history of the company since establishment.
 
 
[Corporate Philosophy]
The company has a corporate philosophy of "joy and gratitude."
 
We work with our customers to develop successful businesses, based on the spirit of "joy and gratitude". We believe that is an essential part of forming close relationships between people and companies. When you see how our products and services contribute to your business, we hope that you will be happy that you chose Broadleaf.
We hope you will also rejoice as you see your business grow day by day. Those positive feelings give us joy and gratitude, too, and inspire us to create even better products and services.
Our aim is to grow hand in hand with our customers, based on this shared sense of joy and gratitude. That is our corporate philosophy and the guiding principle behind our business here at Broadleaf.
(From the company website)
 
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.
 
(About the company name)
Broadleaf trees are supported by the earth, which enables them to give nutrients back and enrich the earth through their leaves. In much the same way, we are able to contribute to industry thanks to the support we have received from countless customers across various different sectors.
Having accumulated information thanks to our customers' support, our aim here at Broadleaf is to feed that information back into industry, to make our customers happy.
That's the sort of cycle we want to create as a company, so that we can repay our customers. That is why we named the company Broadleaf.
(From the company website)
 
[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)
 
The following four points are important to the automotive aftermarket environment.
 
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 8%, which is typically targeted by Japanese companies.
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 First Half of Fiscal Year Ending December 2015
 
 
The earnings forecast revised downward, because of the quality problem
Sales were 8,325 million yen, down 8.3% from the same period of the previous year. Sales increased in the network service sector, but in the business application software sector, sales decreased from the same period of the previous year, because the increase of new customers and the provision of new products were delayed due to the quality problem in additional functions for the BL parts ordering system.
Operating income was 1,008 million yen, down 45.5% from the same period of the previous year, as the Company continued development for strengthening systems and training personnel for implementing intensive strategies, and conducted additional investment for securing quality, increasing total costs, including labor, personnel, R&D, and advertising expenses.
It was considered that it would take considerable time to solve the quality problem, and so the Company revised downward the earnings forecasts for the first half and full fiscal year, on July 9, 2015.
 
 
For the business application software sector, the Company anticipated that the number of existing users updating would decline, and so the Company estimated that sales would decrease about 3% from the same period of the previous year, even when increasing new customers and injecting new products and services. In reality, the number of existing users updating exceeded the estimate in 2Q (Apr. to Jun.) and the number for the first half was as estimated, but new customers did not increase due to the quality problem, affecting the development of other products and delaying the injection of new products. Consequently, sales decreased 14.1% from the same period of the previous year, 11.8% smaller than the estimate.
 
 
Current assets came to 14,305 million yen, up 1,235 million yen from the end of the previous year, mainly due to the augmentation of trade receivables. Fixed assets decreased 164 million yen, because goodwill amortization declined by 334 million yen.
Current liabilities decreased 1,757 million yen from the end of the previous year, mainly due to the decline in accrued income tax, etc. Fixed liabilities augmented by 1,837 million yen due to the increase in long-term debt for future capital needs. Consequently, total liabilities increased 79 million yen. Net assets decreased 1,479 million yen, due to the decrease in retained earnings. As a result, equity capital ratio decreased by 1.6% from the end of the previous year to 73.4%. Interest-bearing outstanding liabilities increased by 1,716 million yen to 2,687 million yen.
 
 
Operating cash flow became negative, because of the decrease in net income before income taxes, the decline in trade receivables increment, the increase in trade payables, etc. from the same period of the previous year. The negative gap in investing cash flow widened, because of the augmentation of expenditures for acquiring intangible fixed assets, etc., and so free cash flow became negative. Financial cash flow recovered as more treasury shares were acquired, but the Company received long-term loans. Cash position declined
 
 
Forecast of Fiscal Year Ending December 2015
 
 
 
Decreases in sales and income
As mentioned above, the full-year earnings forecast has been revised downward. Sales are estimated to be 17,700 million yen, down 6.3% from the previous term. Because the Company places top priority on quality in the development of new functions and products, their release will be postponed, thus sales are estimated to be sluggish also in the second half.
Operating income is estimated to be 2,500 million yen, down 40.0% from the previous term. The Company will reduce expenses, but the cost for securing quality will augment, leading to a double-digit decline in income.
There are no revisions to the estimated dividend. The dividend is estimated to be 25.00 yen/share, up 5 yen/share from the previous term. The estimated payout ratio is 52.1%.
 
 
Since the release of new functions has been postponed to the third quarter and the promotion of use is behind schedule, sales would be smaller than the estimates in all fields, except network services, whose sales are estimated to increase from the previous term.
 
(3) Intensive measures for this term
To increase the transactions for sales orders
At the first phase, the Company has placed its top priority for this term on increasing the transactions for sales orders for automotive parts between parts dealers and maintenance shops. The specialized sales staff is promoting the installation of the BL parts ordering system.
As mentioned above, the Company's business operation system has already been implemented at 1,500 firms among about 2,200 parts dealers in Japan. As of the end of June 2015, 249 firms have installed the BL parts ordering system as an additional function, and are engaged in transactions.
According to the Company, top 200 parts dealers account for about 60% of all domestic transactions. The target clients for introducing the BL parts ordering system are these leading firms that can afford to install it, and so the Company expects that the system will be distributed smoothly.
As for maintenance shops, the clients that have already installed the business operation system of the Company are about 13,000 firms, mainly middle- and large-scale ones. Among them, the maintenance shops that have adopted the BL parts ordering system are 1,113 firms as of the end of June 2015. The Company aims to increase the number to 2,000 in this term. Due to the occurrence of troubles, the distribution of the system slightly slowed down, but the Company is preparing to reaccelerate it.
 
To secure the quality of the BL parts ordering system
The most prioritized objective for the second half is to secure the quality of the BL parts ordering system, which is the prerequisite for "increasing transactions for sales orders."
When the Company was speeding up the system in March this year, a small trouble occurred. Subsequently the shipping of the simultaneous multi-inquiry function was put off in June.
The test release is to be conducted in the 4th quarter (Oct. to Dec.). By releasing the system smoothly, the Company will increase the transactions for sales orders, the targeted first-phase goal, and proceed to the second phase, at which the Company will offer data-related services and new services to alliance partners and car owners.
 
Quality improvement in product development
After facing the trouble, the Company is improving the development process and tightening the criteria for shipping, in order to develop high-grade products and enhance productivity.
Firstly, the Company will train the design staff.
The Company will organize a professional team for design, and strengthen the reviewing system. The Company aims to boost productivity and reduce the period and cost for development by decreasing reprocessing.

Secondly, the Company will strengthen the standards for quality control.
By making quality tests, including the inspection by third parties outside the company, more rigorous, the Company will secure the quality of the products at the time of shipping, and reduce sales cost.

Thirdly, the Company will adopt a new base for developing new products.
Standardizing new products as common modules (adopting GCP) will augment cost temporarily, but it will decrease maintenance cost in the medium term.
 
Progress on growth strategies
In addition to "increasing the transactions for sales orders," the Company continuously engages in "the development and release of new products" and "the R&D for creating new services."

For "increasing the transactions for sales orders," the Company will increase the number of connections, and promote the sales of "Carpod Tab," which is a strategic product and a terminal for placing orders. The number of contracted "Carpod Tab" systems has steadily increased from 879 one year ago, 1,265 half a year ago to 1,679 as of the end of June 2015. It is estimated to increase further from the third quarter.

For "developing and releasing new products," the Company is renewing "OTRS," software for analyzing work and optimizing business operation. It was first scheduled to be released in the second quarter (Apr. to Jun.), but the Company is adjusting the timing of release to prioritize the acquisition of the patent for it.
In addition, the Company is developing new products for maintenance firms, for expanding the client market.

"OTRS" is the software for analyzing work and optimizing business operation based on industrial engineering. It films the motions of veteran engineers and inexperienced workers, compares them and turnaround time, and improves their performance in units of minutes or seconds. Its effect of improving the efficiency of production lines is so significant that it has been already adopted as an on-site operation improvement tool by many manufacturers, including domestic automobile makers, Canon Inc., Murata Manufacturing Co., Ltd., and Calbee, Inc. It has been said that in some cases, the efficiency has been improved by 20% every year for 5 years.
The Company is preparing for the release of the renewed version, which includes 7 new patented functions, by the end of this fiscal year.

For "the R&D for creating new services," the Company continues survey and research activities for promoting the utilization of plentiful automobile-related data owned by the Company.
 
Active interaction across different business sectors
At "Toyota Motor Business Solution Summit 2015," the president Oyama joined the panel discussion under the theme "Future automobile aftermarket-automobile maintenance and distribution to be changed by data."

In addition, at "Google Atmosphere Tokyo 2015," the president Oyama participated as a panelist, under the theme "R&D by applying telematics to the company-owned vehicles using Google Map."

The Company continues R&D for creating next-generation services, and interacts with different business sectors actively.
 
 
Conclusions
 
Due to the quality problem, it has become difficult to achieve the short-term goal described in the previous report: "to increase transactions by realizing high-speed systems, which are to be distributed from the second half."
The Company is striving to catch up. We would like to pay attention when the "increase of transactions for receiving orders" will be accelerated.
In the medium term, we would like to keep watching the "expansion of the target area of information provision services" and "business operation in the Asian market."
 
 
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.
Copyright(C) 2015 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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