BRIDGE REPORT
(6498)

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KITZ (6498)
President Yasuyuki Hotta
President
Yasuyuki Hotta
Corporate Profile
Company
KITZ CORPORATION
Code No.
6498
Exchange
TSE 1st Section
Industry
Machinery (Manufacturing)
President
Yasuyuki Hotta
HQ Address
1-10-1 Nakase, Mihama-ku, Chiba, 261-8577, Japan
Year-end
March
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥325 113,062,043 shares ¥36.745 billion 6.0% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥7.00 2.2% ¥27.41 11.9x ¥464.40 0.7x
* Share price as of closing on November 9. Number of shares outstanding as of most recent quarter end do not include treasury shares.
 
Consolidated Earnings Trends
Fiscal Year Sales Operating Profit Ordinary Profit Net Profit EPS (¥) Dividend (¥)
March 2007 149,512 11,342 10,652 9,973 86.87 15.00
March 2008 149,274 11,615 10,525 6,290 54.52 15.00
March 2009 127,095 7,188 6,475 3,396 30.02 9.00
March 2010 96,592 6,976 6,248 3,079 27.23 7.00
March 2011 Est. 105,000 6,100 5,500 3,100 27.41 7.00
* Estimates are those of the Company.
 
This Bridge Report presents KITZ Corporation’s earnings results for the first half of fiscal year March 2011.
 
If you have any questions about this report, please contact Invesstment Bridge.
Mail: kitz@cyber-ir.co.jp
 
Key Points
 
 
 
Company Overview
 
KITZ is a comprehensive manufacturer of vales and other fluid control equipment and devices. And while most people are familiar with valves used around “water meters,” “gas meters,” and “water heaters,” few are aware of the applications of KITZ products outside of the home that are provided to a wide range of industrial applications. The Company also boasts of a comprehensive manufacturing process where they create the bronze, cast and ductile iron, stainless steel, and brass that are used in the several tens of thousands of valves and other products in KITZ’s product lineup. In addition, KITZ also sells the brass bars it manufactures to various clients. The Company also operates fitness clubs and hotels in its other business segment. KITZ boasts of a group of 31 consolidated subsidiaries including Toyo Valve Co., Ltd. and Shimizu Alloy Mfg. Co., Ltd., and an overseas sales ratio of 20.9% of total sales. KITZ is the number one manufacturer of valves and the number two manufacturer of brass bars within Japan.
 
(Overview of KITZ’s Business Segments)
KITZ’s business is divided into the Valves Manufacturing, Brass Bar Manufacturing and Other Businesses segments. During fiscal year March 2010, each of these divisions accounted for 73.1%, 16.8% and 10.1% respectively.
 
Valve Manufacturing Business
The KITZ Group’s core business is the manufacture and sale of valves, connectors and other fluid control devices that play important roles in fresh and sewage water distribution, water heating, gas supply, and air conditioning applications, as well as in various applications within the petroleum, chemical, paper and pulp, semiconductor and other industries.
 
Brass Bar Manufacturing Business
In the brass bars business KITZ combines copper with zinc to create brass, tin and phosphorous to create phosphor bronze, and nickel and zinc to create nickel silver, which are then used in the dissolving, casting, rolling, pulling, forging, heating, and forming processes to create sheets, strips, pipes, bars, wires and other forms. The KITZ Group’s brass bar business uses the raw material of brass to manufacture and sell brass bars. These brass bars are used not only as materials for valves, but also in the manufacture of various water faucets, gas equipment, electrical appliances and other products.
 
Other
KITZ operates sports and fitness clubs, hotels and restaurants, and sells glass art work in its services and other businesses segment.
 
 
 
Earnings in First Half of Fiscal Year March 2011
 
 
High Raw Material Prices, Product Pricing Strategy Issues Cause Valve Profitability to Deteriorate, Operating Profits Decline 5.4%
Sales during the current term rose by 11.2% year-over-year to ¥51.34 billion. In the main valve manufacturing business, domestic demand from applications in the construction equipment, machinery, and semiconductor industries grew, along with a doubling in demand from the Asia region. Higher product pricing for brass bar segment products on the back of a recovery in demand and higher copper prices contributed to a large rise in sales. However operating profits declined by 5.4% year-over-year to ¥2.79 billion. Higher raw material prices and product pricing strategy issues limited growth in gross profits to a small margin. Also KITZ was unable to absorb the rise in fixed costs resulting from increases in the number of subsidiaries. However reductions in interest bearing liabilities contributed to a ¥100 million decline in interest payments, which in turn allowed ordinary profits to rise by 0.8% year-over-year to ¥2.58 billion. Improvements in extraordinary profit and the lightened tax burden arising from the booking of ¥130 million in tax adjustments allowed net profit to rise by 10.7% year-over-year to ¥1.31 billion. KITZ assumptions for foreign currency call for a ¥91.02 per US Dollar (¥93.71 in the previous fiscal year) and ¥119.24 per Euro (¥130.51 during the previous fiscal year). Also price assumptions for electrolytic copper are ¥681,000 per ton, which compares with ¥620,000 in the previous year.

Amongst KITZ’s main subsidiaries, Toyo Valve Co.,Ltd saw increases in sales and profits on the back of a recovery in demand from the construction industry. Also rapid growth in sales of KITZ SCT Co, Ltd., which provides products to the semiconductor manufacturing equipment industry, allowed it to return to profitability. At the same time higher raw material prices contributed to higher sales, but led to sharp declines in profits of KITZ (THAILAND) Ltd., which manufactures brass and bronze valves. Also KITZ Corporation of Jiangsu Kunshan, which provides cast carbon steel valves to the petroleum refining and petrochemical industries, suffered declines in production volumes and incurred losses. At the same time PERRIN GmbH, which was acquired during the previous term, was unable to record profits.
 
 
 
Valve Manufacturing Business
Domestic sales of valves grew 6% year-over-year to ¥25.6 billion due to improvements in the construction equipment market, and increased demand from the machinery and equipment related, and semiconductor related markets (sales of valves to the semiconductor related applications rose by 2.2 times). The stronger demand in these fields offset declines in demand from the petroleum refining, petrochemical, and food paper industries. While sales in North America declined by 41% year-over-year, sales in Asia rose by 94% year-over-year and the acquisition of Perrin GmbH in December 2009 allowed sales in Europe to rise by 11% year-over-year. Consequently overseas sales rose by 8% year-over-year to ¥10.8 billion. With regards to profits, higher sales and efforts to reduce costs were not able to offset the impact of increased raw materials prices, higher expenses, and issues with product pricing strategy. In particular, weaker demand and product pricing strategy issues led to deterioration in the profitability of cast carbon steel valves (used in petroleum refining and petrochemical industry applications).
 
Brass Bar Manufacturing Business
KITZ Metal Works Corporation, which manufactures and sells brass bars and other products, recorded higher sales volumes and pricing on the back of stronger demand (The brass bar market rose by 16% year-over-year). Improvements in capacity utilization rates of manufacturing facilities resulting from the higher sales, and the effect of rationalization of production facilities allowed operating profits to grow.
 
Other
Despite the reductions in highway tolls, sales of hotel facilities operated by KITZ declined. However sports clubs newly opened during the previous fiscal year contributed to higher sales of sports club operations and offset lower hotel sales. At the same time the strong performance of the sports club operations allowed KITZ to offset the lower profits from the hotel operations.
 
 
(3) Financial Conditions and Cash Flow
At the end of the first half of the current fiscal year, total assets declined by ¥3.02 billion from the end of the previous fiscal year to ¥94.5 billion. Declines in accounts receivables allowed KITZ to reduce its interest bearing liabilities. With regards to cash flow, increases in working capital along with the recovery in sales led to large declines in operating cash flow. However a small reduction in capital investments allowed KITZ to realize free cash flow of ¥1.12 billion. At the same time a net outflow was realized in financing cash flow of ¥2.77 billion due in part to reductions in interest bearing liabilities combined with translation losses of ¥190 million, and cash and equivalents fell by ¥1.84 billion from the end of the previous term to ¥7.89 billion at the end of the first half of the current term.
 
 
 
Fiscal Year March 2011 Earnings Estimates
 
 
Estimates Call for Sales Growth of 6.4% and Ordinary Profit Decline of 20.9%
KITZ expects sales of all three of its business segments to grow during the second half of the current term. And while sales estimates for the valve manufacturing and other business have been revised down slightly, anticipation of continued increases in copper market pricing contributed to an upward revision in sales of the brass bar manufacturing business. With regards to profits, higher raw materials pricing, difficult product pricing strategies, and declines in prices of exports resulting from the stronger yen are expected to contribute to declines in gross profits. Also increased fixed costs arising from the rise in the number of subsidiaries is expected to contribute to a 17.8% year-over-year decline in operating profits. And while cost reductions are expected to exceed those anticipated in the estimates announced at the start of the term, higher than expected raw materials pricing and the stronger than expected yen forced KITZ to revise its operating profit estimate down by 16.4% from its initial estimates.
 
 
We summarize the second half comparisons with the first half for each business segment as follows.

In the valve manufacturing business, KITZ expects to achieve sales of ¥38.79 billion during the second half compared with ¥36.4 billion recorded during the first half. Of this, domestic sales are expected to rise by 6% or ¥1.6 billion compared with the first half of the current fiscal year. These figures are based on the assumption of continued stagnant demand from the petroleum refining and petrochemical industries, and favorable demand from the semiconductor related and construction equipment markets. At the same time pricing declines are expected in machinery and equipment market related applications, but higher volumes are likely to allow valve manufacturing sales to remain in line with the first half. Seasonal factors are expected to contribute to a ¥1.5 billion rise in demand from the fresh and sewage water applications compared with the first half of the year. Overseas sales during the second half are expected to rise by ¥800 million or 7% from the first half, of which ¥400 million is expected to be derived from Asia. Another factor expected to contribute to the stronger overseas sales during the second half is an increase in large projects, which fell dramatically during the first half. Rise in product prices resulting from the rise in the copper market pricing are expected to boost sales of brass bar manufacturing to ¥10.26 billion during the second half compared with ¥9.73 billion recorded during the first half. Because seasonal demand weakens during the second half for hotels and sports clubs, KITZ anticipates the second half sales in its other business to decline to ¥4.59 billion from ¥5.2 billion recorded during the first half.

With regards to profits, the valve manufacturing business is expected to see operating profit rise to ¥4.31 billion in the second half from ¥3.58 billion in the first half. While the assumption of higher prices for copper is expected to reduce operating profit by about ¥200 million, higher sales are expected to offset the impact of the copper market. In addition to the higher sales, improvements in productivity are expected to allow brass bar manufacturing business operating profits to rise to ¥300 million during the second half from ¥290 million during the first half. Operating profits in the other business are expected to decline to ¥120 million in the second half from ¥270 million in the first half.
 
 
(2) Fiscal Year March 2011 Consolidated Earnings Estimates
During the full fiscal year March 2011, KITZ calls for sales to rise by 8.7% year-over-year and ordinary profit to decline by 12.0% year-over-year. The Company also projects a full year dividend payment of ¥7 per share (¥3 per share at the end of the first half and ¥4 per share at the end of the full year).
 
 
 
Conclusions
 
While sales during the first half appear to have bottomed, higher raw materials prices negatively impacted the pricing strategy of the valve manufacturing business. One of the largest factors influencing KITZ’s pricing strategy was the weakness in demand for cast carbon steel valves from the petroleum refining and petrochemical industries, and this condition is expected to continue to negatively impact profitability during the second half of the current year. KITZ expects to increase its production capacity in China in addition to reviewing its production capabilities in Japan as part of its efforts to increase its competitive standing and profitability in the valve manufacturing business. However continued reductions in petroleum refining output capacity within Japan, and weak demand in the United States is expected to lead to a prolonged period of adjustment in supply and demand balance.

Furthermore due to the inherent nature of being highly economic sensitive products, KITZ’s cast carbon steel valves and other products are expected to be affected by various factors including the lack of political leadership in Japan, the strong yen, prolonged economic weakness in the United States, further repercussions from the financial crisis in Europe. Therefore the business environment for KITZ is expected to remain difficult. While the scale of their sales is still small, the strong growth in sales of 150% in Thai and Indonesia, 50% in China and in other growth markets throughout Asia is expected to help allay other negative factors. In order to capture growth opportunities in middle markets in addition to its traditional lineup of higher value added products, KITZ has created a office to consider strategies specifically in China. Consequently KITZ will implement a strategy of returning earnings to a high growth path by focusing on opportunities in the high growth region of Asia.
 
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) 2010, All Rights Reserved by Investment Bridge Co., Ltd.
 
 
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