BRIDGE REPORT
(4767)

東証1部

TOW Co., Ltd. (4767)
Koji Egusa, President & CEO
Koji Egusa, President
& CEO
Corporate Profile
Company
TOW Co., Ltd.
Code No.
4767
Exchange
TSE First Section
Industry
Service
President
Koji Egusa
HQ Location
Tokyo, Minato-ku, Toranomon 4-3-13, Hulic Kamiyacho Building
Year-end
June
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (Act.) Trading Unit
¥784 22,468,452 shares ¥17.615 billion 15.8% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Act.) PBR (Act.)
¥27.00 3.4% ¥52.30 15.0x ¥358.63 2.2x
* Share price as of close on August 23, 2017. Shares outstanding as of the most recent quarter excluding treasury shares.
 
Consolidated Earnings Trends
Fiscal Year Sales Operating Profit Current Profit Net Profit EPS DPS
June 2014 12,188 1,026 1,035 638 28.90 28.00
June 2015 13,442 1,335 1,349 818 36.93 33.00
June 2016 15,230 1,678 1,682 1,083 48.35 22.00
June 2017 16,251 1,811 1,823 1,206 53.74 26.00
June 2018 (Est.) 16,673 1,851 1,851 1,175 52.30 27.00
* Estimates are those of the Company. Effective from fiscal year June 2016, the definition for net income has been changed to net income attributable to parent company shareholders (Abbreviated hereafter as parent net income). * A 2 for 1 stock split was conducted in July 2015 and EPS for FY6/14 and FY6/15 have been retroactively adjusted to reflect these stock splits.
 
We present this Bridge Report reviewing the fiscal year June 2017 earnings results and fiscal year June 2018 earnings estimates for TOW.
 
Key Points
 
 
Company Overview
 
TOW Co., Ltd. is the top ranked independent company in the sales events and promotions industry and a Tokyo First Section publicly traded company. TOW engages in event and promotion planning, creation and operations, in addition to goods and printed materials relating to sales promotions. TOW is aware of the growing influence of the Internet and is placing increased emphasis on utilizing their many years of experience in event planning and idea generation by utilizing digital technologies to create interactive promotions (IP). The Company name TOW is derived from the slogan "Top Of the World" based upon TOW's corporate philosophy of "spreading smiles by creating the world's most unique experiences",

In addition to TOW, the Group also boasts of the two consolidated subsidiaries: T2C Co., Ltd., which conducts event creation, operation, production and visual contents creation, and Sport Is Good Co., Ltd., which is focused on cultivating business within the realm of sports.

Moreover, "interactive promotions" use digital technologies and ideas to create impressive experiences that are turned into information to be proliferated and shared as part of overall promotions.
 
 
<Business Overview>
Flow of Event Planning to Implementation
Demand for event related work appears as soon as promoters come up with an objective (Transmission of information to the promoter's audience). TOW begins work on creating a plan as soon as they are briefed by the promoter about the objective. Thereafter, meetings are held at every step of the workflow process from proposal, basic plan, implementation plan, detailed plan, progress script, construction drawing, time schedule chart and document creation. TOW also creates stages and conducts rehearsals until the day of the actual event.
 
Scope of TOW's Business
In the case of events, TOW receives orders that span the entire range of the workflow process from planning to the actual holding of the event, and performs "planning", "production", "operations", and "staging" activities, in addition to conducting various onsite services during the time that the actual event is conducted. Specifically, these are tasks involved with lighting, sound, visual, stage creation, and model, companion and security guard casting. In addition, TOW provides services related to preparation, site disassembly and removal, and cleaning. TOW is responsible for acting as a total director to oversee the entire event process and outsources these various tasks to specialized service providers with a goal of ensuring that the objectives of the promoter are accurately implemented and conveyed to the audience. The consolidated subsidiary T2 Creative Co., Ltd. specializes in event "production" and "operations", while Sports Is Good Co., Ltd. specializes in sporting event experience planning and production.

The main services of promotions include "planning", "design", and "production", printing, premium goods and services, graphic design, executive operations, OOH (Out Of Home: Advertising in public transportation, outdoors), website production and other services are conducted, in addition to the service provided by TOW in its events business of total direction overseeing all aspects of promotions including direction, production and product delivery services.

In the case of events, TOW receives orders that span the entire range of the work flow process from planning to the actual holding of the event, and performs "planning", "production", "operations", and "production" activities in addition to conducting various onsite services during the actual time that the actual event is conducted. Specifically, these are tasks involved with lighting, sound, visual, stage creation, and model, companion and security guard casting. In addition, TOW provides services related to preparation, site disassembly and removal, and cleaning. TOW is responsible for acting as a total director to oversee the entire event process and outsources these various tasks to specialized service providers, and with a goal of ensuring that the objectives of the promoter are adequately represented and conveyed to the audience. The consolidated subsidiary T2 Creative Co., Ltd. specializes in event "production" and "operations", while Sports Is Good Co., Ltd. specializes in sporting event experience planning and production.
 
<Medium Term Business Plan and FY 6/18 Business Strategy>
Medium Term Business Plan: Japan's First "Experience Design" Production, Maintain Strong Earnings Generating Capability, Expand Scale by Leveraging Business Strategy, Capture "2020 Global Sporting Event" Business
In today's world of excessive and abundant choices, people make purchases not just "to buy a specific product", but to obtain "value in their experiences" in the process of selecting products to buy. "Interactive design" encapsulates things such as the way we purchase, the way things are made, the way things are sold. and entails the entire brand experience. TOW seeks to produce the first "interactive design" production by leveraging and combining strengths such as "real promotion events", "Internet (SNS) promotions", "interactive events utilizing AR, VR, apps and other digital technologies", "video production, promotions", "data driven PR promotions" while at the same time strengthening its IP (Designing digital and real experiences and broadcasting these inspirations across the Internet).

As of July 1, 2017, one such example is the reorganization of the current planning team and IP department into the "experience design department" (previously comprised of 25 members of the planning department and 18 members of the IP department) who will specifically design brand experiences. The "experience strategy team" has also been established with the purpose of strengthening solutions by utilizing data and pursuing promotional "accuracy" and "results". The "experience creative team" has also been established to move people and pursue "creative experiences".

In order to expand the scale of the business, TOW has been increasing and incorporating a young team by hiring new graduates from four years ago. 11 hires were made in April 2014, 15 in April 2015, 17 in April 2016, 20 in April 2017. The TOW Group has grown from 169 employees at the end of fiscal year June 2016 (TOW: 133, T2C 36) to 188 employees (TOW: 138, T2C 50).

In order to capture business related to the "2020 global sporting event" to be held in Tokyo, TOW established Sports Is Good Co., Ltd in May of 2016 as a joint venture between TOW, 1 to 10 Holdings, Inc., which pursues business possibilities through digital technologies, and Geek Pictures, which conducts movie and commercial video production, to handle planning, production and activation of sporting related events. TOW seeks to leverage its strengths in the realm of "sports" to explore new possibilities and pursue proactive participation in this realm. With now only 1,000 days remaining as of October 28, 2017 until the start of this major global sporting event, inquiries are increasing and order backlogs have risen from ¥2.8 million as of the end of fiscal year June 2016 to ¥247 million as of the end of fiscal year June 2017.
 
FY6/18 Business Strategy: Raise Productivity, Strengthen Management and Group Capabilities, Investments and M&A Activity
TOW is focusing its business resources on major advertising agencies as part of its selection and concentration strategy for its customer portfolio to increase productivity. In order to "strengthen its management capabilities" through organizational restructuring, the Kansai and Chubu branch offices were integrated with the rapidly growing subsidiary T2C Co., Ltd. And in order to strengthen the "Group capabilities", efforts will be made to strengthen the management of T2C's sales progress and accounting department to raise its capabilities to the same level as TOW.

We are also proactively pursuing investment and M&A activities with firms that have strengths in "real", "digital", "video", "PR", and "data" by creating new alliances. One such example is the capital alliance formed with the major video production company Geek Pictures Co., Ltd. (CEO Tamotsu Osano). In recent years, promotion design has required more in-depth knowledge and expertise in video planning, production. At the same time, video advertising costs and video production fee increases have been notable. Geek Pictures has expertise in video production (commercials, visual music contents, movies, TV shows) as well as digital technologies (AR, VR, MR, AI, IoT, and others), digital marketing, promotion, entertainment contents and a diverse experience, track record, and strong research function. TOW has high expectations of deriving strong synergies from this partnership in the creation of "experience design" going forward.
 
 
Fiscal Year June 2017 Earnings Result
 
 
Strengthening of Collaboration with Companies in Other Industries in "Interactive Promotions" Allows Sales, Operating Profits to Rise 6.7%, 7.9%
Sales increased 6.7% year-on-year to ¥16.251 billion. The use of digital technologies in interactive promotions and collaboration with companies whose strength lies in contents creation or video production and strong overall promotions department allowed sales to rise for the second consecutive year to new all time highs.

Both TOW and T2C saw increases in big projects orders. Gross profit margins fell slightly by 0.1% point to 16.1%, but this was offset by increased revenues and increased overall gross profits. Sales, general and administrative expenses rose only slightly due to cost controls and operating profit rose 7.9% year-on-year to ¥1.811 billion. An increase in dividend and other income within non-operating income combined with effective tax accounting to allow net profit to increase 11.4% year-on-year to ¥1.206 billion.
 
 
 
 
 
 
Total assets rose by ¥953 million from the end of the previous term to ¥11.807 billion at the end of the current fiscal year. Cash and equivalents, and net assets increased due to improved cash flow and strong earnings. However, both accounts receivable and payables also increased due to the expansion in business. Capital adequacy ratio rose to 68.2% from 66.2% in the previous year, and return on invested capital rose to 14.8% from 14.5% over the same period.
 
 
 
 
Against the backdrop of strong public relations sales, the contribution from a major convenience store promotion allowed sales of productions to grow by a large margin.
 
 
While sales to industries which account for a smaller portion of sales decreased, sales to the four industries, including the information and communications, food and beverages, cosmetics and toiletries and sundries, and automobiles, which account for larger portion of sales, grew.
 
 
Small projects by order value declined, and medium and large projects between ¥50 million and ¥100 million increased. Despite a slight overall drop in the number of projects, the average price per project increased and now stands above ¥10 million. T2C's sales to outside customers saw a similar pattern where overall projects increased by 2 to 230, and the average price per project increased from ¥7.2 to ¥8.4 million.
 
 
The number of orders, primarily smaller projects, dropped slightly. However, orders where proposals were submitted and won, and appointed orders, which are orders of highest priority, increased in overall value.
 
 
The proposal success rate continued to trend well above the 30% level stipulated as an important benchmark for the health of operations in the company guideline.
 
 
Fiscal Year June 2018 Earnings Estimates
 
 
Estimates Call for Sales, Operating Profit to Rise 2.6%, 2.2% Year-On-Year
TOW expects increases in orders for both digital and real experience type promotions and contributions from the 2020 global sporting event project. Estimates of a slight decline in net profit is due to T2C having a higher statutory effective tax rate than TOW and their profits having a higher contribution to consolidated earnings, thus causing the overall tax burden to rise. One of the reasons why T2C (capital ¥100 million) has a higher statutory effective tax rate than TOW is that it is a corporation exempted from external standards taxation.
 
(2) Fiscal Year June 2018 Business Strategy: Improve Productivity, Strengthen Management and Group Capabilities, Capital Ties and M&A
TOW will endeavor to raise productivity by implementing a strategy of focusing resources upon major advertising agencies. In addition, operations of the Kansai and Chubu branch offices were integrated with the subsidiary T2C Co., Ltd. at the beginning of the fiscal year. Therefore, higher sales and profits of T2C due to productivity gains from integration of the Kansai and Chubu region office operations and increases in external sales (Rose from ¥3.791 to ¥3.850 billion) allowed the lower sales and profits of TOW to be offset. Moreover, investment and M&A activities with firms that have strengths in "real", "digital", "video", "PR", and "data" will be proactively pursued.
 
 
 
 
(2) Dividends
TOW uses dividend payout ratio and dividend yield on a consolidated basis as two fundamental indicators to determine profit distribution. Specifically, the Company uses a dividend payout ratio target of 40% based upon consolidated earnings for the coming year and the dividend yield of 4.5% based upon the closing share price at the close on August 7, 2017, the day before the earnings announcement, and selects the higher of the two indicators to determine its dividend payment. (But based upon the fundamental policy for retained earnings, a maximum dividend payout ratio of 50% has been determined.)

Using the above calculations, fiscal year June 2018 dividend per share is expected to be ¥26.15. Given this estimate, the expected dividend is ¥27, for a 1 yen increase from the previous fiscal year (Dividends of ¥13 and ¥14 expected to be paid at the end of the first half and full year respectively).
 
 
Conclusions
 
TOW saw the impact of difficulties encountered by major advertising agency clients in fiscal year June 2017, and therefore realized a small decline in TOW's operating profit (-0.5% year-on-year), which was offset by the favorable performance by T2C. During fiscal year June 2018, TOW will endeavor to improve productivity by focusing its sales efforts on the major advertising agencies. Despite its conservative profit estimates, the business environment appears to be favorable. According to Dentsu Inc., the 2018 global advertising market is expected to grow 4.8% to US$587.6 billion (approx. ¥65.2200 trillion). Internet advertising is expected to account for 37.6% of the overall advertising space and is expected to exceed television advertising (35.9%) for the first time. Japan is expected to see similar trends with a shift to digital advertising, which will act as a strong tail wind for TOW, which has taken early steps to strengthen its business in digital realm. The business environment is looking favorable and TOW expects its business strategy to achieve its targets. Therefore, TOW expects to achieve all time highs for both sales and earnings for the third straight year in fiscal year June 2018.
 
 
Reference: Regarding Corporate Governance
 
 
◎ Corporate Governance Report
Updated on Oct. 7, 2016
Basic View
Our company believes that corporate governance means the "establishment and utilization of a system, which realizes appropriate and efficient decision-making and business execution by the management, prompt reporting of results to stakeholders, and healthy, equitable and highly transparent management, aimed at continuous improvement of corporate value." In order to thrive continuously and increase medium- and long-term corporate value of our company while carrying out our responsibilities to our shareholders, clients, employees, and other stakeholders, we will strive to realize effective corporate governance in accordance with the following basic policies:
 
1. Our company respects the rights of shareholders and ensures equality.
2. Our company takes account of the benefit of stakeholders, including shareholders, and makes appropriate cooperation.
3. Our company discloses information on our company appropriately and ensures transparency.
4. Our company boosts the effectiveness of the functions to oversee business execution by our board of directors.
5. Our company has constructive dialogue with shareholders whose investment policy is consistent with medium- and long-term benefits of shareholders.
 
<Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>
Supplementary principle 1-2-4 Use of the electronic voting platform, and English translations of convening notices of general shareholders meetings
Supplementary principle 3-1-2 Disclosure and provision of information in English
Supplementary principle 3-1-5 Explanation about reasons why the board of directors has designated each executive and appointed each candidate for the director
Supplementary principle 4-1-2 Commitment to medium-term management plans
Supplementary principle 4-10-1 Involvement and advice by independent outside directors regarding important matters, such as nomination and remuneration
Supplementary principle 4-11-3 Analysis and evaluation of the effectiveness of the board of directors
 
<Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>
Principle 5-1 Policies on constructive dialogue with shareholders
In order to fulfill our responsibilities, our company has considered it as one of the top priorities to attain effective corporate governance with the aim of sustainable growth and medium- and long-term increase in corporate value of our company by encouraging constructive and bidirectional dialogue with shareholders and investors.
Based on the foregoing, we will take the following measures:

1. Appointment of a director in charge of dialogue with shareholders
In our company, the top management himself engages in dialogue with shareholders and the team leader of the general affairs team is in charge of IR activities.
2. Measures to make organic cooperation internally among departments
In our company, the general affairs team, which is in charge of IR activities, regularly holds meetings and exchanges opinions with the accounting team. In addition, the two teams cooperate in producing materials used for information disclosure and discuss the content of such materials with each other and even with the top management.
3. Efforts to enrich means of dialogue other than individual interviews
Our company has deemed general shareholders meetings as an important opportunity for dialogue with shareholders and therefore will strive for business management that enables us to earn all shareholders' trust through various approaches, including ensuring ample disclosure of information on our business. Furthermore, we will endeavor to realize closer communication with shareholders and investors by holding financial results briefings on a periodic basis.
4. Measures to feed back shareholders' opinions and concerns
Our company will develop a structure in which the department in charge summarizes opinions and concerns about our company expressed by shareholders and investors through dialogue and regularly reports such opinions and concerns to the management and the board of directors according to their importance and characteristics.
5. Measures to manage insider information
Aiming to ensure substantial fairness of shareholders and investors, our company has formulated a basic policy on impartial information disclosure. Based on the basic policy, we will disclose important information on our company in a timely and fair manner and put forth efforts to thoroughly manage such information so that they are not provided only to some shareholders or investors.
 
Disclaimer
This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.
Copyright(C) 2017 Investment Bridge Co.,Ltd. All Rights Reserved.
 
 
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