BRIDGE REPORT
(6498)

東証1部

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
¥345 109,222,350 shares ¥37.681 billion 4.7% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥9.00 2.6% ¥36.62 9.4x ¥490.65 0.7x
* Share price as of closing on November 13, 2012. Number of shares outstanding as of most recent quarter end do not include treasury shares.
ROE and BPS are calculated by using actual amounts during or at the end of the previous term.
 
Consolidated Earnings Trends
Fiscal Year Sales Operating Profit Ordinary Profit Net Profit EPS (¥) Dividend (¥)
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 106,059 6,341 5,929 3,063 27.36 7.00
March 2012 108,446 4,638 4,388 2,480 22.71 7.50
March 2013 Est. 111,000 7,200 6,900 4,000 36.62 9.00
* Estimates are those of the Company.
 
This Bridge Report presents KITZ Corporation' s earnings results for the first half of fiscal year March 2013.
 
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 customers in a wide range of industries. At the same time, KITZ boasts of a highly efficient integrated manufacturing system that uses bronze, cast iron, ductile cast iron (Cast steel with greater strength and ductile characteristics), stainless steel and other materials to manufacture several tens of thousands of different products. In addition to external sales of brass and other bars used to make valves, KITZ also operates fitness clubs and hotels. KITZ is the number one manufacturer of valves, and the number two manufacturer of brass bars within Japan. The KITZ Group is comprised of 32 companies.
 
<Corporate History>
KITZ was originally established in January 1951 under the name of Kitazawa Seisakusho Co., Ltd. for the manufacture and sales of various valves (In September 1962, the Company' s name was changed to Kitazawa Valve co., Ltd.). In April 1951, the Nagasaka Plant in Yamanashi Prefecture was completed and began manufacturing bronze valves.

KITZ established its operating base during the high economic growth period of Japan based on the principle of "always producing better quality products, cheaper and more quickly." After listing on the Tokyo Stock Exchange Second Section in April 1977, KITZ moved its shares to the First Section of the Tokyo Stock Exchange in September 1984. In August 1995, KITZ made a full scale entry into water works market though its acquisition of Shimizu Alloy Manufacturing Co., Ltd. as its subsidiary.

After 2001, KITZ promoted a management style that focused upon cash flow in addition to pursuing a strategy of "selection and concentration." While KITZ acquired the semiconductor manufacturing equipment related business from the Benkan Group in November 2001 and the valve manufacturing business from Toyo Valve Co., Ltd. in March 2005, it spun off its brass bar manufacturing business to become KITZ Metal Works Co., Ltd.. From 2005 to 2006, KITZ fortified its brass bar manufacturing business through the acquisition of the brass bar manufacturing business of Kyoto Brass Co., Ltd. and the assets of Kichou Brass Bar Manufacturing Co., Ltd. KITZ is the leading valve manufacturer in Japan, and seeks to raise its presence on a global basis by expanding its businesses in the United States, Europe, and Asia. "KITZ brand" products have come to be highly regarded by customers not only in Japan, but also around the world.
 
 
<Overview of KITZ' s Business Segments>
KITZ' s business is divided between the valve manufacturing, brass bar manufacturing, and other business segments. During fiscal year March 2012, each of these segments accounted for 72.8%, 18.5% and 8.7% of total sales, respectively.
 
Valve Manufacturing Business
Valves are used to "pass," "stop," and "control the flow" of fluids and gases in various pipe systems (Water, air, gas and other substances), and they are used in office and residential facilities, water works facilities, fresh and sewage water facilities, fire prevention facilities, machinery and industrial use manufacturing equipment, and chemical, medical, petrochemical product manufacturing facilities, semiconductor manufacturing facilities, petroleum refining and other industrial complexes, and other various applications. KITZ is one of the leading valve manufacturers in the world with high market shares of corrosion resistant bronze and highly economical brass valves, and high value added ball, butterfly and stainless steel valves. The Company boasts of integrated manufacturing processes including the casting process, and it became the first company in Japan to acquire the "ISO9001 International Quality Standard Certification." With a strong lineup of various types of valves made of various materials, KITZ provides its products to a wide range of fields including facilities in the construction and plant engineering industries, in addition to applications in the environment, energy, and semiconductor realms. The Company is also pursuing a strategy to increase the global cost competitive nature of its products by fortifying its overseas manufacturing facilities. During fiscal year March 2012, overseas sales accounted for approximately 26% of total sales.
 
 
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 dissolution, 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 is the realm of KITZ Metal Works Corporation and uses the raw material of brass in the manufacture of brass bars, which it also sells. (Brass bars are used not only as materials for valves, but also in the manufacture of water faucets, gas equipment, electrical appliances and other various products.)
 
Other
KITZ operates sports and fitness clubs, hotels and restaurants within this segment.
 
<Valve Manufacturing Business Conditions>
According to data from the Japan Valve Manufacturers' Association (Released in September 2012), Japan' s valve production rose by 1.3% from 2010 to ¥397.5 billion in 2011 on the back of a recovery from the depressed demand seen in the wake of the global economic weakness caused by the Lehman Shock. However a full scale recovery in demand has been put on hold by delays in the recovery plans of the Great East Japan Earthquake, the strong yen, and global economic stagnation arising from the European sovereign debt crisis. With regards to imports and exports, China took top position (Imports from and exports to Japan of ¥132.4 and ¥56.6 billion respectively) and the United States second position (Imports and exports of ¥63.9 and ¥27.8 billion respectively). Korea, Thailand, and Taiwan were strong importers and Vietnam, Korea and Germany were strong exporters toward Japan.
 
 
 
KITZ Group Long Term Management Plan "KITZ Global Vision 2020" and Strategies in FY3/13
 
The KITZ Group is currently in the course of implementing its Long Term Management Plan "KITZ Global Vision 2020," which is a growth strategy designed to take KITZ to its 70th year anniversary in 2020. The Great East Japan Earthquake and pronounced strengthening in the yen forced KITZ to revise its fiscal year March 2013 earnings estimates, which now call for sales, and operating and ordinary profits of ¥135.7, ¥10.0, and ¥9.3 billion respectively. However in order to increase its earnings over the longer term, KITZ endeavors to (1) aggressively develop the domestic market, (2) improve the profitability of its plant engineering projects, and (3) aggressively develop overseas markets.
 
(1) KITZ Group Long Term Management Plan "KITZ Global Vision 2020"
① Qualitative Targets
KITZ maintains the theme of "evolving to become a truly global company" and maximizing corporate value while realizing its responsibilities to its various stakeholders.
 
 
② Quantitative Targets
KITZ has established targets for sales and operating profit of ¥250.0 and¥20.0 billion respectively during fiscal year March 2021. At the same time it has a target of raising overseas sales to 50% of total sales. Furthermore it targets a reduction in interest bearing liabilities from ¥27.5 billion in fiscal year March 2010 to ¥24.0 billion, a subsequent improvement in net asset ratio from 54.3% to 70%, and an improvement in capital efficiency with a rise in return on equity from 6% to 7% over the same period.
 
(2) Measures in Fiscal Year March 2013 to Help Achieve the "KITZ Global Vision 2020"
① Aggressively Develop the Domestic Market
KITZ will focus its efforts upon businesses where the potential for growth is strong including brass valves, where the variety of uses and price range is large, butterfly valves, high value added petrochemical and general chemical application use stainless steel valves, and ductile valves. KITZ will also devote efforts to developing various brass valve markets for KITZ, Toyo Valve Co., Ltd., and Miyoshi Valve Co., Ltd. branded products by leveraging the strengths of each respective company' s products.
 
 
With regards to sales, KITZ has facilitated the above mentioned three brand strategy, and it has also closed the Kawagoe Plant of Miyoshi Valve (June 2011), spun off the manufacturing and sales functions from Toyo Valve (The manufacturing function was absorbed by KITZ and the sales function absorbed by Toyo Valve in January 2012), and integrated the manufacturing and development functions at KITZ' s Chino Plant and KITZ Thailand. In the future, KITZ will promote reviews of its Chino Plant production facilities to extract greater productivity, and has made the executive director responsible for the brass valve manufacturing business also responsible for consolidation of marketing facilities and sharing of information within the Group.
 
 
② Brands and Profitability Improvements
In order to strengthen competitiveness and profitability in important markets including the petroleum refining, petrochemical, gas processing and other large plant projects, KITZ created a project management division headed by its directors in December 2011. The project management division is a specialized structure that is comprised of marketing, engineering (Design, technology, quality control) and administrative division functions for large plant projects, and is involved from the estimate creation process to help raise the accuracy of cost and other calculations to raise profitability of large projects. During fiscal year March 2013, KITZ is targeting a ¥500 million improvement in profitability of all projects.
 
③ Aggressive Development of Overseas Markets
KITZ will concentrate its resources upon the China and ASEAN regions, where the potential for growth in its businesses is large. With regards to China, the "KITZ brand" will be introduced for machinery, construction, and other industrial applications, the "PERRIN brand" for coal chemistry and petrochemical industry applications, and the KITZ SCT brand for semiconductor related applications.
 
 
Furthermore, KITZ has developed a network of distributors in Shanghai, Beijing, Guangzhou and Hong Kong to strengthen its marketing to local machine manufacturers. Furthermore, the localization of design and development functions for a wide range of products to match needs of local markets from low end products such as general use valves for building facility applications, middle end products such as brass valves, and high end products such as automated ball valves is being promoted.
 
 
In addition, KITZ established KITZ Corporation of Asia Pacific Pte, Ltd. (KITZ Asia Pacific) in Singapore in October 2011 as a key element in its expansion strategy for the ASEAN region. KITZ Asia Pacific will initially concentrate its efforts upon developing a network deeply rooted in each of the respective markets in the ASEAN region.
 
 
 
First Half of Fiscal Year March 2013 Earnings Results
 
 
Sales Fall 1.3%, Ordinary Profit Rise 60.6%
Sales declined by 1.3% year-over-year to ¥55.605 billion. The decline in the copper market contributed to weaker sales of brass bar products, but most of these declines were absorbed by higher sales of the valve business on the back of strong overseas demand.

With regards to profits, the disappearance of unprofitable projects (Large gas processing plant related work in the Middle East) that occurred in the previous term, progress in structural reforms to improve earnings, diffusion of price hikes in overseas markets, and stronger sales of high value added products allowed gross profit margin to improve by 2.8% points. The higher gross profitability helped to absorb higher sales, general and administrative costs arising from retirement related expenses associated with the absorption of the manufacturing division of the subsidiary Toyo Valve Co., Ltd. and the establishment of facilities in Singapore. Consequently operating profit rose by 53.0% year-over-year to ¥3.587 billion. Declines in interest payments due to the redemption of a corporate bond (Capital was sourced in December 2010 in advance of the redemption date in October 2011) allowed ordinary profit to rise by 60.6% year-over-year to ¥3.403 billion. Despite the booking of an impairment loss of ¥105 million from the decision to liquidate the factory and real estate of the subsidiary Miyoshi Valve Co., Ltd. as an extraordinary loss, net profit still rose by 86.2% year-over-year to ¥1.999 billion.
 
 
 
Valve Manufacturing Business
Sales grew by 4.4% year-over-year to ¥42.062 billion. Sales within Japan remained in line with the first half of the previous year (¥15 million increase) at ¥27.455 billion. Strong demand for valves for use in fresh and sewage water applications from the earthquake disaster relief efforts, fresh water meter manufacturers, and favorable demand from petrochemical, gas and electric power industries contributed to sales growth. At the same time, sales of vales to the semiconductor equipment manufacturing industry applications fell, as did valve sales to the construction industry due to the disappearance of extraordinary demand (¥600 to ¥700 million) in the aftermath of the Great East Japan Earthquake.

Overseas sales of the valve manufacturing business rose by 13.7% year-over-year to ¥14.606 billion. Sales to the petroleum refining and petrochemical industries (Accounting for 90% of sales) primarily in North America grew. Sales of Kitz branded high value added ball valve in Europe also grew. In addition, strong demand in China and the newly opened facility in Singapore allowed sales in Asia and the ASEAN regions to grow.

Valve manufacturing business operating profit rose by 43.8% year-over-year to ¥4.584 billion. This strong growth is attributed to the disappearance of unprofitable projects including large gas processing plants in the Middle East that occurred in the previous term. Furthermore internalization, reductions in materials pricing both within and outside of Japan, improvements in manufacturing line efficiency, and progress in other reform measures to bolster profitability are also cited as reasons for the stronger profits. In overseas markets, profitability was boosted by the diffusion of price hikes and increases in sales of high value added products. Furthermore, improvements in profitability arising from lower prices in the copper market helped to offset higher material prices of cast steel valves in China.
 
Brass Bar Manufacturing Business
Reflecting a contraction in the brass bar market, brass bar manufacturing business sales fell by 21.3% year-over-year to ¥8.813 billion. During the first half, the brass bar market saw a 9% year-over-year fall in demand to 15,033 tons per month, and declines in materials prices led to a 17% year-over-year drop in product pricing. With regards to profits, operating profit fell by 14.7% year-over-year to ¥167 million due primarily to the lower sales volume (a 6% year-over-year fall) and contraction in profit margins and despite efforts to reduce sales, general and administrative costs. Translation profits on materials that occurred during the first quarter (April to June) exceeded initial estimates of ¥67 million.
 
Other
Sales and operating profit fell by 2.8% and 11.3% year-over-year to ¥4.730 billion and ¥268 million respectively. The disappearance of the influence of the Great East Japan Earthquake (The Sendai and Mito facilities were fully operational after being temporarily closed in the previous term) and higher sales of the fitness club business could not offset the loss of sales from the sale of "Suwa Glass no Sato" in June. Cost reductions contributed to an increase in profits of the hotel business, while increases in advertising and promotional expenses led to a decline in profits of the fitness club business. The sale of "Suwa Glass no Sato" was also a factor in the lower profits.
 
 
 
KITZ SCT, which sells valves products to semiconductor manufacturing equipment applications, saw a large decline in both sales and profit. However the KITZ Corporation was able to record higher sales and profit and its overseas subsidiaries were able to absorb the negative impact of the stronger yen to record favorable earnings overall.
 
KITZ Corporation (Non-Consolidated)
KITZ, the parent company, was able to record sales and ordinary profit growth of 20.4% and 144.9% year-over-year. Sales grew by ¥5.548 billion, but nearly 50% of this growth can be attributed to the absorption of Toyo Valve' s manufacturing division (¥2.7 billion). With regards to profits, the higher sales was complimented by adjustments in transfer pricing to KITZ America and the disappearance of unprofitable projects in the Middle East, allowing operating profit to grow by just under 5 times to ¥1.997 billion. A deterioration in non-operating income is attributed to the disappearance of dividends from Toyo Valve.
 
Subsidiaries
In the realm of construction and fresh and sewage water applications, favorable demand created by the disaster relief efforts and from the fresh water meter equipment manufacturers, and an increase of just under 20% in sales of Shimizu Alloy Manufacturing, which sells products for both fresh and sewage water applications, led to large improvements in profitability (Seasonal factors normally contribute to a loss during the first half, but profits were secured during the current term). At the same time, Toyo Valve, which separated its sales and manufacturing functions, recorded lower sales and profits, and KITZ Thailand also saw declines in both sales and profits due to the stronger yen (Rose from ¥2.66 per Baht to ¥2.57).

With regards to plant and energy related applications, KITZ America (Rose from ¥81.77 to ¥79.77 per US Dollar) and Perrin (Rose from ¥115.98 to ¥103.73 per Euro) were both able to absorb the impact of the stronger yen against local currencies to grow sales and profits by large margins. At the same time KITZ Corporation of Kunshan was able to grow both sales and profits through its sales of high value added stainless steel valves. Taiwan Kitazawa, which saw losses during the previous term, and KITZ Corporation of Jiangsu Kunshan, which sells general use cast valves, turned profitable during the current term. At the same time, declines in sales and profits were recorded by KITZ SCT, which sells products used by semiconductor manufacturing equipment makers for use in their pre-manufacturing semiconductor glass production lines, due to declines in capital investments, and KITZ Micro Filter Corporation, which sells hollow fiber membrane filters.
 
 
Total assets at the end of the first half rose by ¥1.871 billion from the end of the previous term to ¥96.852 billion. An improvement in operating cash flow and declines in receivables were factors contributing to this increase. Net asset ratio improved by 0.4% points to 56.8%.
 
 
Operating cash flow saw the margin of net inflow grow by a large margin due primarily to an increase in profits and a decrease in taxes (-¥1,392 to -¥349 million). Therefore while overseas capital investments increased, they were kept to within the bounds of operating cash flow. Cash and equivalents at the end of the first half declined by a large margin from the end of the first half of the previous term due in part to the redemption a ¥6.0 billion corporate bond during the second half of the previous term. However the decline from the end of the previous fiscal year was limited to only ¥42 million.

During the first half, capital investments totaling ¥2.040 billion were made primarily to expand output capacity for butterfly valves and bronze valves in Thailand. Capital investments during the full term had been expected to reach ¥6.0 billion, but are now expected to remain around ¥4.0 billion. Depreciation expenses during the first half were ¥1.370 billion and are expected to reach ¥2.750 during the full year.
 
 
Fiscal Year March 2013 Earnings Estimates
 
 
Cautious Second Half Earnings Estimates: Difficult Conditions in Valve Sales to Semiconductor Manufacturing Equipment Applications, Weak Demand for Bass Bars
While full year earnings estimates were revised upwards in light of the strong first half earnings performance, operating profit estimates for the second half were effectively revised down and a conservative stance was taken overall with regards to second half earnings. And while sales of KITZ' s overseas businesses, including sales of the valve business in North America and ASEAN regions, are expected to rise, sales to semiconductor manufacturing equipment applications are expected to continue to stagnate and domestic sales estimates have been revised down. Furthermore, "more difficult operating conditions than initially expected" forced KITZ to revise its estimates for the brass bar manufacturing business downwards. KITZ' s foreign currency assumptions are ¥80 per US Dollar and ¥105 per Euro, and its outlook for electrolytic copper price is ¥700,000 per ton.
 
 
Full Year Sales, Ordinary Profit Expected to Rise by 2.4% and 57.2% Year-Over-Year
Sales are expected to rise by 2.4% year-over-year to ¥111.0 billion. Lower sales of the brass bar manufacturing business due to weakness in market conditions and declines in demand for brass bars and the influence of the sale of "Suwa Glass no Sato" are expected to be absorbed by growth in the valve manufacturing business, led by strong demand in overseas markets. With regards to profits, higher sales and the disappearance of unprofitable projects are expected to lead to improvements in gross profit margin. Increases in sales, general and administrative costs are expected to be absorbed, allowing operating profit to rise by 55.2% year-over-year to ¥7.2 billion. KITZ' s adopts foreign exchange rate assumptions of ¥80 per US Dollar, ¥105 per Euro, and a price of ¥700,000 per ton for electrolytic copper. A yearend dividend of ¥4.5 per share is anticipated (Full year dividend of ¥9 per share.).
 
 
Valve Manufacturing Business
Within Japan, valves used in semiconductor manufacturing equipment (KITZ SCT) and industrial use filters (KITZ Micro Filter) are expected to continue to suffer from weak demand, with sales estimates for this segment being reduced by over ¥1.0 billion during the second half. Within Japan, valves used in building facilities and valves for fresh and sewage water applications are expected to trend favorably during the second half. In overseas markets, uncertainties surrounding China are expected to continue, but North America and ASEAN regions are expected to continue to trend strongly. Furthermore Europe is expected to see favorable business trends during the current term (Subsidiaries ending their fiscal year in December are already in their fourth quarter of the year.). Therefore the downward revision to profits during the second half are primarily adjustments made in response to these sales outlooks.
 
 
Brass Bar Manufacturing Business
Weak demand in the brass bar market and declines in copper market prices were main reasons behind the downward revision to second half sales estimates. However, potential positive surprises with regards to profits could appear depending upon progress in cost reduction efforts.
 
Other
KITZ' s outlook for declines in both sales and profits during the second half are based on the seasonal factor for a larger portion of sales and profits to be realized during the first half of the fiscal year.
 
 
(3) Second Half Strategy: Facilitating Sales Structure for Europe
In order to further expand earnings in the European region, KITZ Armaturen GmbH (100% owned subsidiary of KITZ), the holding company of Perrin GmbH, will be leveraged to derive further synergies. As part of this strategy, KITZ, which has pursued its own independent marketing activities, is conducting reforms of the sales structure of both KITZ Corporation of Europe, S.A. (KCE, Barcelona, Spain) and Perrin. KITZ Armaturen GmbH will consolidate the above three mentioned companies in order to realize a quicker decision making process and to increase cooperation between these companies. In addition, the functions of marketing, market development, product development, and sale of KITZ brand products will be consolidated by KITZ Armaturen GmbH.
 
 
 
 
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Conclusions
 
Amongst the key points of the first half were the favorable business trends of the valve manufacturing business in overseas markets and improvements in profitability. And while the disappearance of unprofitable projects recorded during the previous term was a factor contributing to the improved profitability, other longer term factors including KITZ' s successful efforts at internalization, reductions in material pricing within and outside of Japan, and improvements in operating efficiency of manufacturing facilities were also responsible for the higher profits. Furthermore the diffusion of price hikes and increased sales of high value added products also contributed to the better profitability.

While second half earnings estimates remain cautious, near term business trends in the ASEAN and North America regions remain favorable due to the establishment of offices in Singapore and aggressive activities in shale gas exploration and production, respectively. Furthermore, business conditions within Japan remain robust with the exception of products supplied to semiconductor manufacturing equipment companies, and dealer inventories continue to trend stably at favorable levels. While uncertainties are on the rise, including the weakening of economies due to the sovereign debt crisis in Europe and slowing demand for valves in China, KITZ' s subsidiaries end their fiscal year in December so the impact of these overseas uncertainties upon fiscal year March 2013 consolidated earnings is expected to be limited. In the following fiscal year March 2014, a "tug of war" between favorable business trends in the ASEAN region and North America, and potential economic weakness in Europe and China is expected to appear. However the influence of synergies derived from within the KITZ Group in Europe is also expected to be a positive factor.
 
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) 2012 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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