BRIDGE REPORT
(6498)

東証1部

投資家向けIRセミナープレミアムブリッジサロン開催!
KITZ Corporation (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
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
¥527 109,218,877 shares ¥57.558 billion 5.7% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥12.00 2.3% ¥45.77 11.5x ¥601.56 0.8x
* Share price as of closing on May 29, 2014. Number of shares outstanding as of most recent quarter end do not include treasury shares.
 
Consolidated Earnings Trends
Fiscal Year Sales Operating
Income
Ordinary
Income
Net Income EPS (¥) Dividend (¥)
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 111,275 6,558 6,521 4,039 36.98 9.50
March 2014 117,355 6,470 6,501 3,564 32.63 10.00
March 2015 Est. 122,000 8,200 8,000 5,000 45.77 12.00
* Estimates are those of the Company.
 
This Bridge Report presents KITZ Corporation's earnings for the fiscal year March 2014.
 
Key Points
 
 
 
Company Overview
 
KITZ is a comprehensive manufacturer of valves and other fluid control equipment and devices. And while KITZ valves are used in fresh and sewage water, heated water, gas, air conditioning, and other applications around the home, its products are also used in various industrial facilities. At the same time, KITZ boasts of an integrated manufacturing system that uses bronze, cast iron, ductile cast iron (Cast steel with greater strength and ductile characteristics), stainless steel and other materials used 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 30 companies.
 
<Overview of KITZ's Business Segments>
KITZ's business is divided between the valve manufacturing, brass bar manufacturing, and others, including fitness club and hotel and restaurant management, business segments. During fiscal year March 2014, each of these segments accounted for 74.9%, 17.8% and 7.3% of total sales respectively (91.2%, 5.8% and 3.0% of operating income 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 also pursues a strategy of increasing the global cost competitive nature of its products through the fortification of its overseas manufacturing facilities. During fiscal year March 2014, overseas sales accounted for approximately 35.6% 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. These materials 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 operating realm of KITZ Metal Works Corporation and uses the raw material of brass to manufacture 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 Business
Management of sports clubs (Fitness club business) and hotels and restaurants is conducted in the others business segment. Fitness clubs called KITZ Wellness Co.,Ltd. are operated primarily in the Tokyo metropolitan area where swimming schools, weight machines, fitness studios, tennis, squash, golf driving ranges and other facilities and services are provided. In the hotel business, KITZ operates the resort hotel Hotel Beniya Co.,Ltd., which offers hot spring facilities, located by the Lake Suwa, Nagano Prefecture. This hotel also boasts of panoramic views from the large public bathing facilities, small to large banquet halls, and a large convention hall capable of hosting international conferences and large conventions.
 
 
As a comprehensive valve manufacturer, KITZ maintains extensive nationwide sales coverage through its network of dealers and its own sales offices in the major cities throughout Japan. In overseas markets, KITZ has developed a global sales network with representative offices in India, the U.A.E., and Korea, and marketing offices in China, Singapore, Thailand, the United States, Germany and Spain.
 
 
The Japanese valve manufacturing business sells 46% of its products to building facilities applications, 13% to water works related applications (Both fresh and sewage water), and 9% to machinery equipment and semiconductor related applications. In addition, valves are sold to petroleum refining and petrochemical, general chemicals, foods, paper, gas, electric power and a wide range of other applications.
 
 
By geographic region, 57% of sales of the overseas valve manufacturing business were derived from Asia (ASEAN and others 41%, China 13% and Middle East 3%), 27% from North America, and 16% from Europe and other regions. The production base is developed to Thailand, China, Taiwan, Germany, and Spain.
 
 
<Corporate History>
KITZ was originally established in January 1951 under the name of Kitazawa Mfg. Works for the manufacture and sales of various valves, and in April of the same year, the Nagasaka Plant in Yamanashi Prefecture was completed and manufacture of bronze valves was started. In March 1959 a subsidiary called Toyo Metals Co., Ltd. was established for the manufacture of brass bars as raw materials for its valves. In September 1962, the Company name was changed to Kitazawa Valve Co., Ltd. In April 1977, the Company listed on the Second Section of the Tokyo Stock Exchange and then moved to the First Section in September 1984.

From 2001 onwards, KITZ started a strategy of "selection and concentration" within its business realms and also focused upon cash flow management. After having recovered from the "Lehman Shock" that occurred in fall 2008, KITZ endeavored to fortify its overseas businesses, restructure its domestic manufacturing network, and established the sales subsidiary KITZ Corporation of Asia Pacific Pte. Ltd. in 2011 in Singapore. Along with the transfer of the manufacturing division to KITZ in 2012, Toyo Valve Co., Ltd. restarted its business as a specialized sales company. In 2013, the company KITZ Europe GmbH was established to oversee and consolidate the European operations, and the sales dealer company Mikuni Engineering (Singapore) Pte. Ltd. in Singapore was acquired and renamed KITZ Valve & Actuation Singapore Pte. Ltd.

Consequently, the KITZ Group has grown to become one of the world's leading valve manufacturers comprised of 29 consolidated subsidiaries around the world. The "KITZ brand" has also become widely recognized as a manufacturer of high quality valves and other products.
 
 
Progress Achieved in the KITZ Group Second phase of Medium-Term Management Plan (FY2013-FY2015)
 
KITZ will celebrate its 70th year of operations in 2020, which coincides with the final year of its long term management plan "KITZ Global Vision 2020" (FY2010-FY2020). As part of its strategy of achieving this longer term plan, the Company is currently promoting the KITZ Group Second phase of Medium-Term Management Plan (FY2013-FY2015).

(1) the KITZ Group Second phase of Medium- Term Management Plan (FY2013-FY2015)
KITZ seeks to establish its position as a global company by raising its profitability through the implementation of business reforms, and by efficiently and effectively allocating management resources to growth realms. At the same time, the Company will maintain high levels of quality in all of its business activities (management, development, manufacturing and sales).
 
Earnings Structure Improvements
KITZ is endeavoring to improve its earnings structure by reducing its dependency upon commercial valves and improving profitability of industrial valves. Specifically, the Company will improve earnings by choosing optimal locations for manufacture of its industrial valves and restructuring its product supply structure, in addition to increasing the speed of its management decision making process by creating complex functions at its overseas facilities. Also, KITZ will increase capital investments in and strengthen its research and development function for products in the growth realm of oil and gas, and plant instrumentation markets, in addition to strengthening its ability to conduct markets analysis, M&A, and form alliances.

Through the addition of complex functions, overseas facilities will provide one stop shopping capabilities and be responsible for multiple functions including sales, marketing, engineering, inventory management, maintenance and services at three regional HQs (Europe, Americas, and ASEAN) and two hub markets (China and India). Previously, these functions were concentrated in the headquarters.
 
 
Group Synergies
KITZ will conduct reviews of the capabilities of its group companies in Japan in order to create a new structure. In addition, new products will be introduced that target hydrogen station and water works markets, and all of the Group companies will collaborate with each other to launch new businesses.
 
Further Efforts at "Selection and Concentration"
With the goal of creating a structure that will enable KITZ to become even more competitive on a global basis, KITZ will restructure and integrate its Group businesses to create an optimized supply structure. During the KITZ Group First phase of Medium-Term management plan (FY2010-FY2012), commercial valve manufacturing was transferred to the subsidiary in China and the manufacturing and sales functions of Toyo Valve Co., Ltd. were separated (KITZ integrated the manufacturing division to increase its productivity, and created s structure that allowed Toyo Valve Co., Ltd. to focus its efforts upon the sales function). Based upon progress in the facilitation of the business structure in the wake of the separation of the manufacturing and sales functions during fiscal year March 2014, KITZ concentrated the manufacturing of its copper valves at its Chino Plant and stainless steel valves at its Nagasaka Plant.
 
 
After the KITZ Group First phase of Medium-Term Management plan (FY2010-FY2012), which was impacted by a severe decline in demand arising from the sudden strengthening of the yen and the Great East Japan Earthquake, the KITZ Group Second phase of Medium-Term Management Plan (FY2013-FY2015) encountered difficult operating environment arising from delays in construction projects due to a shortage of workers, delays in the appearance of latent demand, negative impact of the weaker yen upon profits, and delays in economic recovery in Europe.

And while KITZ was required to revise its earnings targets during fiscal year March 2014, sales of the brass bar manufacturing business trended in line with plans, and that of the valve manufacturing segment fell just shy of the revised plans. With regards to profits, the valve manufacturing business was able to exceed revised plans by a large margin due to improvements in the market and diffusion of price hikes implemented in the fourth quarter.
During fiscal year March 2015, the diffusion of price hikes and the anticipatory demand ahead of the implementation of hikes in the consumption tax are expected to allow the Japanese valve manufacturing business to see an improvement in profitability.
 
 
 
 
Fiscal Year March 2014 Earnings Estimates
 
 
Profits Decline from Previous Term, but Exceeded Estimates
Sales rose by 5.5% year-over-year to ¥117.355 billion. While valves sales within Japan only rose by a small margin, the weaker yen contributed to a 4.0% year-over-year increase in valve manufacturing business sales and stable market conditions and an increase in sales volumes allowed the brass bar manufacturing business sales to grow by 16.7% year-over-year.

Operating income declined by 1.3% year-over-year to ¥6.470 billion. Profits were negatively impacted by increases in costs resulting from the weakening of the yen and declines in product prices, but efforts to reduce materials costs through internalization allowed these higher costs to be absorbed. Net income declined by 11.8% year-over-year due in part to the booking of tax penalties amounting to ¥716 million and expected to be levied against KITZ by the Japanese National Tax Agency for allegations of transfer pricing over the past five years on products sold by KITZ's United States subsidiary.

Larger than expected reductions in materials costs of valves and large increases in sales volumes and stable market conditions for brass bars allowed profits to exceed expectations.

A dividend of ¥5 per share is expected to be paid at the term end (A ¥0.5 increase in the full year dividend to ¥10).
 
 
 
Valve Manufacturing Business
Sales rose by 4.0% year-over-year to ¥87.888 billion. Sales within Japan rose by 1.8% year-over-year to ¥56.633 billion, due in part to lackluster demand. However, favorable demand for semiconductor manufacturing applications and anticipatory demand (About ¥3.0 billion) ahead of price increases implemented in January allowed sales to rise. By market, sales to the main building facility applications fell by 1%. Despite anticipatory demand, unfavorable outcome in bidding and delays in construction activities arising from a lack of manpower contributed to weaker demand than expected at the start of the term. Furthermore, demand throughout the entire term remained weaker than expected despite routine repair demand for plants that occurred at the end of the term. At the same time, sales to semiconductor manufacturing equipment applications rose by 32% year-over-year on the back of ongoing capital investments by semiconductor manufacturers, and sales to water works applications rose by 6% due to anticipatory demand for condominiums ahead of the hike in the consumption tax. Sales to machinery equipment applications remained in line with the previous term on the back of a recovery during the second half.

Overseas sales rose by 8.5% year-over-year to ¥31.254 billion. Despite generally lackluster demand in overseas markets, the correction of the strong yen boosted sales. By geographic region, North American sales declined by 1% due to the disappearance of demand from large plant applications (About ¥1.0 billion) recorded during the previous term. Sales in Asia rose by 7% due to strong 11% and 23% increases in ASEAN and China respectively. KITZ brand sales in Europe rose by 22% year-over-year.

Operating income declined by 2.4% year-over-year to ¥8.597 billion. Internalization and other measures contributed to ¥2.25 billion reduction in materials costs, but declines in sales volumes and changes in sales compositions contributed to a ¥1.1 billion decline in profits. Furthermore, price declines (over ¥700 million) and correction in the strength of the yen contributed to increases in sales, general and administrative expenses (over ¥400 million) were also factors contributing to the lower profits.
 
Brass Bar Manufacturing Business
Sales and operating income rose by 16.7% and 24.1% year-over-year to ¥20.953 and ¥0.548 billion respectively. The brass bar market in fiscal year 2013 grew by 3.7% year-over-year to 15,415 tons per month. Sales volumes rose by 7.5% year-over-year on the back of anticipatory demand. Also, profitability improved on the back of stable copper markets.
 
Other Business
Sales and operating income declined by 3.9% and 13.6% year-over-year to ¥8.514 and ¥0.285 billion respectively. The number of members during the first half fell below the same period in the previous term and caused sales of the fitness clubs to fall by 1.5% year-over-year. Inability to use some rooms due to renovation of air conditioning systems contributed to a 5.6% year-over-year decline in sales of the hotel division. With regards to profits, increases in the number of members during the second half and expense reductions allowed fitness club operating income to rise by 6.9% year-over-year, but sales declines and painting and other renovation expenses contributed to an operating loss in the hotel division.
 
 
(3) Trends by Group Companies
KITZ itself saw 1.1% and 15.0% year-over-year declines in sales and ordinary income. Sales within Japan actually rose by 0.8% year-over-year to ¥46.137 billion due in part to a 4.3% year-over-year increase in sales of brass valves used in building facilities arising from anticipatory demand ahead of pricing revisions and despite a 3.3% year-over-year decline in sales of stainless steel valves used in machinery equipment and industrial plants. At the same time, overseas sales fell by 5.7% year-over-year to ¥18.301 billion due in part to declines in sales within North America and Asia, which offset increases in increases in sales within Europe.

With regards to profits, the decline in high profitability stainless steel valves and increase in import costs due to the weakening of the yen caused operating income to decline by 26.7% year-over-year to ¥2.543 billion. Despite an increase in dividends from subsidiaries and declines in interest payments, ordinary income declined by 15.0% year-over-year. The subsidiaries KITZ SCT Corporation, which sells products to semiconductor manufacturing equipment applications, and KITZ Micro Filter Corporation, which sells industrial use filters, both recorded increases in sales and profits. At the same time, declines in demand from the oil and gas industry applications in the United States, and weak demand from coal chemistry industry related applications in China caused sales and profits of Perrin GmbH to decline.
 
 
Total consolidated assets rose by ¥7.610 billion from the end of the previous term to ¥107.583 billion at the end of the current term. Increases in working capital at the term end, anticipatory demand ahead of the hike in the consumption tax, and a rise in the valuation of overseas assets arising from the weakening of the yen were the main factors contributing to this increase in total assets (Foreign exchange translation provisions: -¥2.849 billion to ¥516 million). Equity ratio improved by 1.8% points from the end of the previous term to 61.1% at the end of the current term.
 
 
In addition to the decline in profits and an increase in working capital, an increase in tax expenses (-¥1.050 to -¥2.955 billion) contributed to a decline in the net cash inflow of operating cash flow (¥1.120 billion). However, free cash flow remained positive despite this decline. Increases in working capital on the back of rises in short and long term debt contributed to a net cash inflow in financing cash flow, compared with a net outflow recorded in the previous term. Moreover, ¥3.4 billion in both capital investments and depreciation were recorded during the term.
 
 
Fiscal Year March 2015 Earnings Estimates
 
 
Sales, Ordinary Income to Rise 4.0%, 23.0% in FY3/15
The valve manufacturing business is expected to see an increase in sales on the back of recoveries in Japan, Europe, and North America. With regards to profits, the weakening of the yen is expected to be a negative factor depressing profits by about ¥200 million, cost reductions through internalization (About ¥2.1 billion expected), positive effect of pricing revisions (About ¥1.45 billion expected) and improvements in profitability of the valve manufacturing, brass bar manufacturing and other business segments are expected to increases in profits.
 
Dividend Payment Raised by ¥2 to ¥12 per Share (¥6 Payments at First Half and Full Year End)
KITZ believes that a payout ratio of about 25% of consolidated net income is appropriate. In the future, KITZ is aiming to distribute approximately one-third of consolidated net income to shareholders, including repurchases of stock.
 
 
 
Valve Manufacturing Business
Sales and operating income are expected to rise by 4.7% and 19.8% year-over-year to ¥92.0 and ¥10.3 billion respectively. Sales inside and outside of Japan are expected to rise by 4% and 6% year-over-year to ¥58.9 and ¥33.1 billion respectively. Within Japan, the negative influence of a rebound from the anticipatory demand arising from price revisions from January 2014 is expected to be unavoidable, but progress in inventory adjustments anticipated during the first half are expected to allow declines from the anticipatory demand to be offset. By market, sales to all market segments are expected to increase, and despite some potential delays in construction projects arising from labor shortages, the large number of redevelopment projects in the Tokyo metropolitan region expected to be started between 2014 to 2016 and latent demand for projects related to the 2020 Tokyo Olympics are expected to begin to surface and contribute to earnings. The recovery in machinery related applications are expected to continue, and regularly scheduled maintenance work in plant related applications are expected to rise after falling below expectations in the current term. Demand from semiconductor manufacturing equipment applications is expected to continue to trend at the high levels of the current term, with increases in demand from manufacturing equipment and facility parts applications anticipated.

In overseas markets, recoveries in North America and Europe are expected, while uncertainties cloud the outlook regarding demand from the ASEAN region. KITZ will endeavor to grow orders from chemical plants including shale gas and oil applications in North America by 14% year-over-year, and cultivate demand for its products in oil, gas and mining applications in Central and South Americas. Demand in Europe is expected to grow by 8%, with detailed responses to demand from small capital investment projects expected to be created. At the same time, sales in Asia are expected to rise by 1% year-over-year. With regards to the ASEAN region, efforts to capture plant projects in Singapore, and to cultivate demand in the Philippines, Vietnam, and Malaysia will be conducted. However, earnings in the region are expected to trend weakly during the first half of the coming fiscal year due to uncertainties arising from political unrest in Thailand and impending presidential and congressional elections in Indonesia. Sales in China are expected to decline by 2% year-over-year due to boycott of Japanese goods purchases in addition to slowing economic growth. KITZ will also endeavor to cultivate new demand by conducting aggressive promotions of both the Perrin and ISO brand products.
 
 
Brass Bar Manufacturing Business
Sales and operating income are expected to rise by 0.2% and 9.4% year-over-year to ¥21.0 and ¥0.6 billion respectively. Domestic demand is expected to remain in line with the term just ended, and therefore production and sales are expected to also trend in line with the previous term. Cost reductions are expected to contribute to improvements in profitability. KITZ has based these earnings estimates upon assumptions for manufacturing volume of 3,250 tons per month (Compared with 3,230 tons in the term just ended), and copper prices of ¥750,000 per ton (¥750,000 in the term just ended).
 
Other Business
Sales and operating income are expected to rise by 5.7% and 40.2% year-over-year to ¥9.0 and ¥0.4 billion respectively. Increases in sales of optional products, contributions from exercise programs targeting elderly and opening of small facilities are expected to allow sales of the fitness club division to rise by 2.3% year-over-year. Fortification of customer cultivation activities through the renewal of the "Lake Spa Resort Kiseki No Yu" facility, strengthening of order cultivation capability through the use of online reservation functions, and cultivation of foreign traveler customers are expected to allow sales of the hotel division to grow by 10.7%. At the same time, operating income is expected to improve by a margin of ¥120 million and turn to profits after losses recorded in the term just ended.
 
 
Conclusions
 
With regards to the future driver of overseas sales, KITZ seeks to speed up its management decision making process by promoting the creation of complex functions (Responsible for multiple functions including sales, marketing, engineering, inventory management, maintenance and services) at three regional HQs (Europe, Americas, and ASEAN) and two hub markets (China and India). With regards to profits, the pursuit of group synergies and successful strategy of selection and concentration (Reduction of costs through reviews of the supply structure to improve profitability and create a structure that allows for the optimized manufacture of main products at the ideal manufacturing center) since the KITZ Group First phase of Medium-Term Management Plan, and the diffusion price hikes implemented in the term just ended are expected to contribute to further improvements in profitability. Despite the uncertainties caused by the external environment during the KITZ Group Second phase of Medium-Term Management Plan , near term conditions have improved.

In addition to demand from the recovery efforts in the aftermath of the Great East Japan Earthquake and demand for development projects in the Tokyo metropolitan region, latent demand for various projects related to the 2020 Tokyo Olympics is expected to surface in the future and the outlook for sales of valves within Japan is positive. In overseas markets, uncertainties continue to cloud the horizon in the main ASEAN countries of Thailand and Singapore, but recoveries are in progress in North America and Europe. In particular, Japanese engineering companies are seeing increases in their order activity in North America, and the potential business opportunities for KITZ are growing. And by achieving the sales and profits estimates announced at the start of the term, KITZ can maintain progress in the KITZ Group Second phase of Medium-Term Management Plan.
 
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) 2014 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
PAGE TOP