BRIDGE REPORT
(3673)

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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
¥808 44,244,932 Shares ¥35,749 million 9.6% 100 Shares
DPS
(Forecast)
Dividend Yield
(Forecast)
EPS
(Forecast)
PER
(Forecast)
BPS
(Actual)
PBR
(Actual)
¥22.00 2.7% ¥28.00 28.9 times ¥425.67 1.9 times
*Share price is the closing price for April 9. 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.
*A 2-for-1 share split was conducted on April 1, 2018. The split was taken into account for DPS and EPS.
 
Trends in Business Results
Fiscal Year Sales    Operating
income
Ordinary
income
Net
income
EPS DPS
December 2013 (Actual) 18,024 3,740 3,653 1,914 38.45 10.00
December 2014 (Actual) 18,894 4,165 4,098 2,193 42.01 10.00
December 2015 (Actual) 16,786 3,065 3,059 1,986 40.01 12.50
December 2016 (Actual) 16,760 2,953 2,921 1,876 39.47 21.25
December 2017 (Actual) 18,195 3,011 2,989 1,932 21.81 11.00
December 2018 (Estimate) 20,400 3,300 3,260 2,100 24.02 11.00
* Estimates provided by Broadleaf. IFRS has been adopted from the securities report for the term ended Dec. 2016.
In the above table, IFRS is used from the term ended Dec. 2015 and the Japanese standards are used till the term ended Dec. 2014.Ordinary income corresponds to pretax income. The company conducted 2-for-1 share split on Dec. 17, 2016. The company conducted 2-for-1 share split on April, 1 2018. EPS and DPS have been adjusted retrospectively.

This Bridge Report presents Broadleaf's earnings results for the fiscal year ending December 2017 and so on.
 
Key Points
 
 
 
Company Overview
Broadleaf Co., Ltd. has a high share of work applications for the automotive aftermarket. The strength of the company is the 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 on the creation of new service areas taking advantage of this technology of managing and identifying the vast amount of automobile parts 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. [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 the 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 61.25million at the end of March 2017, 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 passenger car is first registered to when its registration is removed was 12.91 years at the end of March 2017, which is in the trend of increase. 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. ③Number 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 to use Broadleaf's system for parts orders is still only 2,194 at the end of December 2017, so there is still a lot of room for expansion. Meanwhile, the customer base was further strengthened due to the company acquiring Tajima Industries, Ltd. through M&A in July 2017. Tajima, whose main clients are small businesses, is the second largest corporation in the industry. 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 generates flow-type revenue from leasing, System Support and Network Service generates recurring fee revenues from fixed monthly charges and pay-as-you-go charges. The sales composition for December 2017 had Business AP Software account for the majority of 64.5%, but attempts are being made to increase the share of recurring fee revenues. (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 clearinghouse 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 leasing company, and then the lease company to sell it to customers with a 6-year lease contract. In the future, the company will aim for more stable monetization, switching to a subscription-type price model based on cloud computing. Before that, it will use a hybrid billing system consisting of a "lump-sum lease payment combined with monthly billing." 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 2017) 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. However, the procedure 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 2017, it settled payment for recycled parts worth about 10 billion yen, and earned fee collection agency commissions amounting to about 660 million yen. 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, the 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. Based on the above, the Commission pointed out the following four matters as important tasks: 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 a 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 as a general rule, the ratio of contract renewals is from 80% to 90%, with high customer satisfaction.
 
 
Fiscal Year December 2017 Earnings Results
Sales and profit increased. Profit significantly exceeded estimates. Sales revenue increased 8.6% year on year to 18,194 million yen. Due to the contribution of Tajima Industries, Ltd., which the company acquired through M&A in July 2017, sales increased in all three sectors. Both gross profit rate and gross profit increased, offsetting augmentations in personnel expenses and stock-related costs. Operating income was 3,010 million yen, up 2.0% year on year. If we exclude the 251 million yen received as compensation after winning a system copyright suit against Azesta in the term ended Dec. 2016, the growth rate of operating income is 11.4%. Both sales and profit exceeded the initial and revised estimates. Due to the consolidation of Tajima, sales increased in each of Business AP Software, System Support, and Network Service sectors. The previously sluggish Business AP Software sector experienced an increase in sales. Sales in Network Services continue to rise steadily as the stock is accumulated. In an automobile, sales to users are recovering. Amounts are still small, but sales in non-automobile sectors are strong for both users and new customers. The company was able to offset the decrease in sales of other (equipment sales), which experienced special demand in the previous term. The service of electronically placing and receiving orders for automobile parts in an industrial platform is spreading to become a de facto standard in the field. *Cash and deposits mean cash and cash equivalents. Trade receivables mean operating and other receivables. Trade payables mean operating and other payables Current assets decreased 903 million yen from the end of the previous term, due to the drop in cash and deposits. caused by the payment of dividends, purchase of treasury shares, and M&As. Tajima was reorganized into a subsidiary, and noncurrent assets grew 3,644 million yen from the end of the previous term due to an increase in goodwill. Total assets increased 2,740 million yen from the end of the previous term to 28,062 million yen. There was a decrease in interest-bearing debt, but total liabilities increased 2,162 million yen from the end of the previous term to 8,325 million yen, due to an increase in trade payables, etc. Capital increased 578 million yen from the end of the previous term to 19,737 million yen, due to an increase in retained earnings, etc. As a result, equity capital ratio declined 5.4% from the end of the previous term to 70.3%. The increase in corporate income tax compared to the previous term caused the surplus of operating CF to shrink. The deficit of investing CF expanded due to an increase in the purchase of intangible assets (software development), and free CF declined. The surplus of operating CF shrank as pretax income decreased year on year. Investing CF was nearly unchanged. The surplus of free CF dropped. The deficit of financing CF reduced due to the decrease of treasury shares. The cash position degraded.
 
 
Fiscal Year December 2018 Earnings Estimates
Sales and profit are estimated to increase due to the recovery of Business AP Software and full contribution by Tajima. Sales revenue is estimated to be 20.4 billion yen, up 12.1% year on year. Tajima's sales of 2.6 billion yen will fully contribute. In addition to the recovery of business AP software, network services will continue to expand, particularly in stock. Operating income is estimated to drop 9.6% to 3.3 billion yen. Cost of sales, stock-related expenses, depreciation expenses, etc. will increase, but it will be offset by increases in non-consolidated sales and Tajima's profits. After the 2-for-1 share split on Apr. 1, 2018, the dividend is expected to be 11 yen/share, unchanged from the previous term. The payout ratio is forecasted to be 45.8%. (3) Integration policy with Tajima The company will fully promote an integration policy from this term. It will standardize accounting principles, introduce a fixed monthly amount of data sales and maintenance fees, and begin to reduce purchase costs through group procurement. In addition, from Jan. 2018, the company will work to promote the group philosophy system, and in Mar. 2018, it will integrate the headquarters and call centers and promote the standardization of headquarters operations. From July, the company will also consolidate business footholds one by one. There will be initial integration costs, but the company will pursue synergistic effects such as optimizing business operation and promoting cross-selling.
 
 
Future Management Plan
<Change to a business platform vendor> The company, which produces the network of clients and has an extensive database that others in the industry cannot match, aims to be not only a package vendor but also a "business platform vendor" that provides a comprehensive, IT-based business platform in the form of services and APIs. Using the platform it has built, the company will shift to a business model that will increase sales by providing diverse value to end users, including the company itself and third-party vendors. To that end, the company is promoting a conventional IT-based cloud model so that it can respond properly to a variety of innovations and changes in the business environment. The company will develop new services on the cloud platform, utilizing a variety of technologies such as AI. In particular, by using its core competence, they will analyze and provide data with a lot of added value, such as transaction and replacement history of spare automobile parts, gathered from 30 million vehicles. The company's source of revenue will be platform usage fees and settlement fees. <Schedule for development of the next-generation business system> A minimally functional cloud version of the next-generation business system, which is currently being developed, is scheduled to be introduced to the market through Tajima during the current term. Among other functions, it will be equipped with a function in which an AI makes presumption and recommendations based on transaction history. By introducing a version that targets Tajima's main clients, small businesses, the company will effectively acquire new clients. It can then take the market's reaction into consideration, using feedback to develop a version for medium-sized businesses, and eventually a full version for large-scale businesses. The company is currently planning to introduce the version for medium-sized businesses in 2019, and the version for large-scale businesses around 2020. Leading up to this, their product strategy is to introduce an updated version of the .NS2 system, and make the transition to a hybrid billing system, which consists of a "lump-sum payment combined with monthly billing." When they begin targeting medium and large-scale businesses, the company will switch to a subscription-based billing system. <Important management indicators and performance targets> Although the company regards achieving an ROE of 12% in the medium-to-long term as an important management indicator, it is currently proceeding with providing platform services by switching to business platform vendors, and making the transition to a profit model with a subscription fee. As a result, the transition to a full-scale profit structure will take place in 2020 or later. *Performance targets (Sales revenue) Based on the organic growth of existing business, the company anticipates sales of 22 billion yen in 2019. The 2-year CAGR is 10.3%. From 2018 to 2019, the number of system users renewing their contracts will increase. The company will also aggressively acquire new clients and increase the number of users. (Operating income) In addition to an increase in temporary expenses, such as the consolidation of Tajima's business footholds, the company will invest in cloud development and create new businesses, but due to the increased revenue, operating income is estimated to be 3.9 billion yen in 2019, with an operating income rate of 17.7%. <Company Vision> In the automobile industry, the evolution of automatic driving technology and electric vehicles is accelerating, and it is expected that players in the automobile industry will undergo major changes. As such, automobile aftermarket businesses, the company's main clients, will also experience changes and transformations, which the company will have to cope with. In order to properly respond to these changes, the company will develop new services by combining data (one of its strong points) and modern technology, and provide new value to society.
 
 
Conclusions
In the previous report (Aug. 2017), we stated that "Although the recent trend of the share price is strong, the company still has a long way to recover its share price to the highest price since listing. It seems that it is indispensable for Broadleaf, whose recent non-consolidated performance is sluggish, to get back on the road towards growth." However, since then the share price has continued to rise past 2015 high, and it seems that the increase in revenue by Broadleaf's non-consolidated Business AP Software has been assessed by the market as it entered a recovery trend. In the short term, we would like to pay attention to the recovery trend of the update by automobile users, and in the medium and long term, we would like to pay attention to the progress of the next-generation business system which began this term, as well as its influence on profit, etc.
 
 
<Reference: Regarding Corporate Governance>
◎ Corporate Governance Report Updated on Mar. 31, 2017 <Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)> "As of March 31, 2017, we have implemented all the principles of corporate governance code." <Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>
 
 
Disclaimer
This report is intended solely for information purposes, and is not intended as a solicitation for investment. The information and opinions contained in 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) 2017 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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