BRIDGE REPORT
(3673)

東証1部

Broadleaf (3673)
President Kenji Oyama
President
Kenji Oyama
Corporate Profile
Company Name
Broadleaf Co., Ltd.
Securities Code
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
¥1,026 24,203,316 ¥24,832million 6.2% 100
DPS (Forecast) Dividend Yield (Forecast) EPS (Forecast) PER (Forecast) BPS (Actual) PBR (Actual)
¥30.00 2.9% ¥66.93 15.3times ¥799.74 1.3 times
*Share price is the closing price for June 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 (Actual) 16,824 2,514 2,493 1,251 50.47 25.00
December 2016 (Forecast) 18,000 3,000 2,970 1,620 66.93 30.00
* Forecasts provided by Broadleaf.

This Bridge Report presents Broadleaf's earnings results for the 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 automobile 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 60.52 million at the end of March 2015, 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 12.4 years at the end of March 2015, 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 1,666 at the end of December 2016, 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) Business AP Software, 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 2015 had Business AP Software account for the majority with 67.3%, 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.
 
 
-Settling Payment for Recycled Parts Service
The company operates "Parts Station NET," which is a network for distributing recycled parts with shared inventory information of recycled parts.
Recycling companies, which sell recycled parts, register their products in "Parts Station NET"; maintenance shops and sheet-metal factories, which use recycled parts, retrieve necessary products; and parts traders and recycling enterprises, which mediate transactions, check compatibility. At present, recycled parts worth about 240 billion yen per year are traded in Japan. Parts Station NET involves about 13,000 enterprises, and distributes about 10,000 parts per day, which accounts for about 17% (about 41.5 billion yen) of total sales in Japan.
In the case where parts are traded between distributors and brokers, "Parts Station Factoring NET," an online payment settlement agent for recycled parts, collects commissions.
For the term ended December 2015, it settled payment for recycled parts worth about 10 billion yen, and earned fee collection agency commissions amounting to about 670 million yen.
 
 
 
As profit declined, the ROE for the term ended Dec. 2015 was lower than 8%, which is generally considered the minimum target for 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.
 
 
Fiscal Year December 2015 Earnings Results
 
 
Decreases in sales and profit due to quality problems
Sales were 16,824 million yen, down 11.0% year on year. The sales of the Network Service section grew, but the sales of the Business AP Software section declined, because the company's activities for increasing new customers and offering new products are delayed, due in part to quality issues at the time of addition of functions to the BL parts ordering system.

While costs augmented due to the continued development for training personnel for promoting key strategies, the increases in material prices and maintenance expenses, total cost (costs for labor, personnel, R&D, advertisement, etc.) control progressed, decreasing SG&A expenses from the previous year, but it was not able to make up for the drop in gross profit. Consequently, operating income was 2,514 million yen, down 39.6% year on year, but it exceeded the revised profit estimate.
 
 
The sales of the Network Service section increased from the previous term. Although it stopped short of reaching the revised estimate, usage rate, unit price, etc. are generally within the scope of assumption, which indicates that the performance has been healthy.
On the other hand, the sales of the Business AP Software section decreased 18.1% year on year, and were 6.9% smaller than the revised estimate, because the activities for increasing new customers did not progress well due to the quality problems, and this affected the development of other products, delaying the release of new products.

The BL parts ordering system was scheduled to be installed in Yellow Hat (1st section of TSE, Code: 9882), a leading car accessories distributor, and so its popularity is expected to increase as a de facto standard. The performance of CarpodTab has been improving steadily, since its enhanced version was released in March 2015.
 
 
 
Current assets were 13,033 million yen, down 2,508 million yen from the end of the previous term, due in part to the decrease in cash and deposits through the acquisition of treasury shares. Fixed assets decreased 269 million yen from the end of the previous term, as goodwill declined 668 million and investments and other assets, including the shares of affiliates, increased 143 million yen.

Current liabilities declined 2,398 million yen from the end of the previous term, due in part to the decrease in accrued corporate income tax, etc. On the other hand, fixed liabilities augmented 1,528 million yen from the end of the previous term due to the increase in long-term debts for the future demand for funds. As a result, total liabilities dropped 869 million yen. Net assets decreased 1,908 million yen, as retained earnings dropped and treasury shares increased. As a result, equity capital ratio rose by 0.7% from the end of the previous term to 75.7%. Interest-bearing liabilities augmented by 1,412 million yen to 2,382 million yen.
 
 
The rate of increase for operating cash flow narrowed because of the decreases in current net profit before taxes, accounts receivable, etc. Investing cash flow did not change significantly, while free cash flow became negative.
The company acquired more treasury shares, but because of the income from long-term loans, etc., financial cash flow improved.
The cash position declined.
 
 
Fiscal Year December 2016 Earnings Estimates
 
 
Recovery from the second half. Sales and profit to rise.
Sales are estimated to be 18.0 billion yen, up 7.0% year on year. As it has been 7 years since the bankruptcy of Lehman Brothers and 5 years since the Great East Japan Earthquake, the number of continuous vehicle inspection is expected to increase towards the second half of the fiscal year, and the non-automobile travel market is estimated to remain healthy.
Sales are estimated to recover in the second half, because of the normalization of sales activities and the release of new products.
The company plans to keep prior investment in the development of next-generation systems, while concentrating resources on growing business sections to minimize the increase in cost. Operating income is estimated to be 3.0 billion yen, up 19.3% year on year.
As for dividends, the company plans to pay a common dividend of 25.00 yen/share, and a commemorative dividend of 5.00 yen/share for the 10th anniversary of its founding at the time of the payment of an interim dividend, that is, a total of 30.00 yen/share in a year. The estimated payout ratio is 44.8%.
 
 
◎Business AP Software Domain
User contract renewals are forecast to fall slightly from previous year's figures. The company is, therefore, adjusting its operating structure and personnel allocation with a focus on pulling in new customers.

◎Network Service Domain
The company will continue to concentrate its efforts on increasing the number of connections and contracts for the BL parts ordering system (BLP) and the CarpodTab (CPT), with the aim of creating an industry standard for electronic order and supply system design.
The company is improving transactional convenience by expanding items subject to automatic response, resulting in the increase in the number of connections and usage frequency.
 
 
Mid-term Business Plan
 
◎Direction of Business Expansion
Broadleaf plans to expand its customer base and business reach in, not only its current areas of automotive aftermarket, tourism, and mobile sales, but also other industries, such as services, distribution, and finance. It will do this by taking its wealth of data on mainly automobiles as a base to develop highly unique services for primarily business applications.
 
◎Basic Policy and Financial Targets
The company plans to overhaul pricing schedule for its Business AP Software section from FY2018, and has set the following targets for performance and sales composition for FY2017 in anticipation of this overhaul.
 
 
The company will further expand its Network Service business from the current sales ratio of 28% by continuing its advance into the electronic order and supply service market.
 
 
The company plans to widen its customer base, covering large to small-sized, through implementation of the above priority measures 1 to 3.
 
Priority Measure 1. Market Penetration of Electronic Order and Supply Service and Creation of Industry Standard
Broadleaf plans to increase the number of charged connections by continuing to strengthen BLP functions, while also expanding the number of items subject to automatic response and strengthening recommendation functions. Furthermore, it plans to provide BLP to users of other companies' products to demonstrate the system's usefulness and set an industry standard.
 
Priority Measure 2. Development and Launch of New Services and Products
Broadleaf will develop and launch platform services for the support of auto repair parts distribution.
It will also release a major upgrade to its business optimization software, "OTRS", to pull in even more users.
 
Priority Measure 3. Development and Launch of Next-generation Systems
The company will develop next-generation systems with the following features:
User-friendly interface with high functionality.
A system for any size user, where users are able to select and use only the modules required.
Increased convenience through linkage of systems and functions with the BLP and parts distribution support service.
 
 
 
 
Conclusions
 
The expectations for growth were high, and the results were disappointing: the initial earnings forecast has been revised downwardly, showing the declines in sales and profit. As the sales structure for the mainstay Business AP Software section has been normalized and the promising network service is expected to see a double-digit growth of sales this term, too. As indicated by the share price relative to TOPIX, the market expectations are apparently recovering gradually.
However, the PER based on the forecast of a 20% increase in profit is 20, higher than 15, the average in the first section of Tokyo Stock Exchange. The recovery of the share price requires the steady improvement in revenue from the next term. We would like to first pay attention to the progress of financial performance in the current term.
 
 
 
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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