BRIDGE REPORT
(6498)

東証1部

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
¥473 109,218,012 shares ¥51.660 billion 5.7% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥12.00 2.5% ¥58.59 8.1x ¥601.56 0.8x
* Share price as of closing on November 14, 2014. Number of shares outstanding as of most recent quarter end does 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. 114,000 7,500 7,400 6,400 59.13 12.00
* Estimates are those of the Company.
 
This Bridge Report presents KITZ Corporation's earnings for the first half of fiscal year March 2015.
 
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 hotels. KITZ is the number one manufacturer of valves, and one of the top manufacturers of brass bars within Japan, and 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 the others, which includes hotel and restaurant management. 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 in various pipe systems (Water, air, gas, etc.), and they are used in office and residential facilities, water works facilities, fresh and sewage water facilities, fire-fighting facilities, machinery and industrial use manufacturing equipment, and chemical, pharmaceutical, 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.

KITZ customers operate within the building facilities, plant and engineering facilities, environment, energy, semiconductor, and other industries that require various valves and related products. The Company boasts of integrated manufacturing processes including the casting process, and it became the first company in Japan to acquire the "International Quality Standard Certification ISO 9001." The Company also pursues a strategy of increasing the global cost competitive characteristics of its products by fortifying its overseas manufacturing facilities.
 
 
 
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 manufacturing 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
Resort hotel operations (Suwa City, Nagano Prefecture) are conducted through the subsidiary Hotel Beniya Co., Ltd. Hotel Beniya is located in a highly favorable location close to Suwa Lake with hot spring bathing facilities with views of the sunset and various sized banquet halls. This hotel also boasts of panoramic views from the large public bathing facilities, small to large dining facilities, and conference rooms capable of hosting international conferences and large conventions. In order to focus upon the valve business and reallocate management assets, all of the shares of the 100% owned subsidiary KITZ Wellness Co., Ltd., which operates fitness clubs, were sold to Dunlop Sports Co., Ltd. on October 1, 2014.
 
<KITZ Group>
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, U.A.E. and Korea, and marketing offices in China, Singapore, Thailand, 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 (Fresh and sewage water, etc.), and 9% each to machinery equipment and semiconductor related applications. In addition, valves are sold to petroleum refining and petrochemical, general chemicals, food, paper, gas, electric power and a wide range of other industry applications.
 
 
By geographic region, 57% of overseas sales of the 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 as of fiscal year March 2014. Manufacturing facilities are maintained in Thailand, China, Taiwan, Germany and Spain.
 
 
* The data in the table above is based upon figures taken from the official earnings announcement filings, and total assets and capital required to calculate the data above are averages for the term (Using the values at the end of the previous and current terms, and therefore the data listed in the official earnings announcement filings and the data above do not necessarily coincide because they use term end equity ratio).

The deterioration in profit margins due to the booking of past year's taxes during fiscal year March 2014 contributed to a decline in ROE. However in fiscal year March 2015, ROE could exceed the level recorded during fiscal year March 2013 if KITZ can achieve its earnings estimates and because of the booking of extraordinary income from the sale of KITZ Wellness shares.

KITZ earnings are influenced by market conditions for foreign exchange and copper. Furthermore, the decline in interest bearing liabilities from ¥27.5 billion in fiscal year March 2010 to ¥23.7 billion in fiscal year March 2014 that contributed to an improvement in financial position also led to a deterioration in ROE. Moreover, ROE may rise to about 10% if KITZ can achieve its sales and net income targets of ¥143.0 (A 21.9% year-on-year increase from FY3/14 sales estimates) and ¥7.1 billion respectively as identified in its midterm business plan for fiscal year March 2016. Consequently, progress in the achievement of this midterm business plan should be closely watched.

According to the "Earnings Data Review" released by the Tokyo Stock Exchange, the ROE for companies belonging to the TSE's first and second sections and Mothers market for all industries excluding finance, manufacturing and non-manufacturing industries stood at 8.65%, 8.55% and 8.79% respectively during fiscal year March 2014 (4.99%, 4.53% and 5.67% in FY3/13).
 
 
First Half Fiscal Year March 2015
 
 
Sales, Ordinary Income Rise 0.3%, 51.6% Year-On-Year
Sales rose by 0.3% year-on-year to ¥57.530 billion. The valve manufacturing business encountered difficult conditions within the ASEAN and European regions and its overseas sales fell by 4.6% year-on-year. In addition, brass bar manufacturing business sales declined due to the rebound from the higher sales arising from one off factors in the previous term. At the same time, pricing revisions, a recovery in semiconductor application demand and favorable trends in water applications contributed to higher domestic valve manufacturing business sales and contributed to the slight rise in overall sales.

With regards to profits, the long period of time required to start up the new facilities contributed to a deterioration in profitability of the brass bar manufacturing business. However, reductions in materials costs globally and pricing revisions within Japan led to improvements in profitability of the valve manufacturing business and allowed gross income margin rose by 2.4% points year-on-year to 24.2%. The absorption of higher sales, general and administrative expenses of overseas subsidiaries arising from the decline in the yen allowed operating income to rise by 45.6% year-on-year to ¥3.590 billion. Foreign exchange translation gains (Rose from ¥65 in the previous first half to ¥152 million in the current first half) increased and contributed to a 69.0% year-on-year increase in net income to ¥2.458 billion.

Compared with earnings estimates issued at the start of the term, sales of the valve manufacturing business suffered from prolonged weakness in demand within Japan resulting from inventory adjustments by dealers (Rebound from the rush to buy before the consumption tax hike and pricing revisions) and weakness in the ASEAN and European markets, and fell below expectations. With regards to profits, delays in the start of newly introduced facilities caused profits of the brass bar manufacturing business to fall.
 
 
 
Valve Manufacturing Business: Sales, Operating Income Rise 0.7%, 39.5% Year-On-Year to ¥42.776, ¥4.647 Billion
The 4.0% year-on-year rise in domestic sales to ¥27.333 billion absorbed a decline in overseas sales of 4.6% year-on-year to ¥15.442 billion. Sales of products to building facilities applications within Japan, KITZ's subsidiary Shimizu Alloy Manufacturing Co., Ltd products to water applications, and KITZ SCT Corporation products to semiconductor applications rose by 3%, 6%, and 25% year-on-year respectively. At the same time, there was no change in the situation regarding stainless steel valves with demand from machinery equipment, petroleum refining, petrochemical, general chemical, food, textile, gas and electric power related applications trending sideways at low levels.

Despite the higher sales within Japan resulting from pricing revisions, the major application of building facilities suffered from inventory adjustments by dealers from the first quarter. Sales volumes declined due to inventory adjustments by dealers due to delays in projects arising from inability to secure construction workers. However, these inventory adjustments are expected to have peaked and to end during the third quarter.

In overseas markets, demand in North America trended favorably, but weakness in both Thailand resulting from political unrest and declines in automobile sales and Indonesia due to the slowing in the economy associated with the presidential elections caused sales in Asia to decline by 12% year-on-year. Sales in Europe also declined due to weakness in the markets there.

With regards to profits, effective cost reductions efforts globally and price hikes within Japan offset the negative impact of lower sales volumes, increases in the sales mix of lower profitability products, and higher expenses of overseas subsidiaries induced by the weaker yen, allowing profits to rise by a large margin.

While negative factors including higher sales and purchase costs due to the weaker yen were basically offset by positive factors including improvements in productivity from the introduction of new facilities globally which balanced profits at the gross income level, the negative impact of the weaker yen raising sales, general and administrative expenses of overseas subsidiaries and profits declined by ¥27 to ¥28 million for each yen that the foreign exchange rate weakened.
 
Brass Bar Manufacturing Business: Sales, Operating Income Decline 1.8%, 50.3% Year-On-Year to ¥10,273, ¥129 Million
The brass bar market within Japan rose by 5.5% year-on-year to 15,694 tons per month during the first half of fiscal year 2014. This strong demand was also reflected in the 1.5% year-on-year increase in materials pricing and in higher pricing for KITZ Metal Works Corporation products. However, the appearance of one off factors caused sales volumes to decline by 3.9% year-on-year. At the same time, profits were negatively impacted by the decline in sales and delays in the startup of new facilities introduced to raise productivity.
 
Others Business: Sales, Operating Income Rise by 0.5%, 6.9% Year-On-Year to ¥4,480, ¥287 Million
Favorable trends in memberships at fitness clubs contributed to 1.7% and 8.9% year-on-year increases in sales and operating income to ¥2.778 billion and ¥157 million respectively. The hotel segment also saw a 1.1% year-on-year increase in sales to ¥1.681 billion and operating income also rose by a small margin. In order to focus upon the valve business and reallocate management assets, all of the shares of the 100% owned subsidiary KITZ Wellness Co., Ltd., which operates fitness clubs, were sold to Dunlop Sports Co., Ltd. on October 1, 2014.
 
 
Total assets rose by ¥884 million from the end of the previous fiscal year to ¥108.468 billion at the end of the first half. Equity ratio improved by 0.6% points over the same period to 61.7%.
 
 
 
Fiscal Year March 2015 Earnings Estimates
 
 
Second Half Earnings Estimates Revised Down on Near Term Conditions, Sale of Subsidiary
During the second half of the current fiscal year, sales and operating and ordinary incomes are expected to decline by 5.8%, 2.4% and 8.3% year-on-year to ¥56.469, ¥3.909 and ¥3.759 billion respectively. However, net income is expected to rise by 86.9% year-on-year to ¥3.941 billion.

In addition to the reductions in earnings arising from the sale of KITZ Wellness Co., Ltd, the subsidiary operating fitness clubs, second half earnings were revised downwards due to inventory adjustments of dealers for valves within Japan, continued weakness in the European markets, and the slowing economic growth in China. The brass bar manufacturing business is expected to secure similar levels of sales during the second half of the current year as the previous second half due to favorable conditions for automobile industry applications and a recovery in water faucet demand, but weakness in the wake of the anticipatory demand created by the price hikes implemented in January 2014 (Dealers rushed to purchase products in advance of the price hike) is expected to contribute to a slight decline in sales of the valve manufacturing business. Furthermore, the disappearance of sales of the fitness club operations will contribute to a large decline in other business segment sales.

With regards to profits, the negative impact of the 5.8% year-on-year decline anticipated in sales is expected to be offset by the positive effects of pricing revisions and similar levels of cost reductions as those implemented during the first half, allowing operating income to decline by a smaller margin of 2.4% year-on-year. The extraordinary income arising from the sale of KITZ Wellness shares is expected to allow net income to rise by 86.9% year-on-year to ¥3.941 billion.

An extraordinary profit of ¥2.156 billion is expected to be booked on the sale of 100% of KITZ Wellness Co., Ltd. shares on October 1, 2014. The sale price was ¥4.2 billion, and the sales and operating income of KITZ Wellness were¥5.513 billion and ¥326 million during fiscal year March 2014.
 
 
 
Full Year Estimates Call for Sales to Fall 2.9%, Ordinary Income to Rise 13.8% Year-On-Year
The contributions from cost of sales reduction efforts and pricing revisions in the valve manufacturing business during the full year are expected to allow operating income to rise by 15.9% year-on-year to ¥7.5 billion. The sale of the subsidiary's shares is also expected to allow net income to rise by 79.6% year-on-year to ¥6.4 billion.

The projected yearend dividend payment of ¥6 per share will combine with the midterm dividend for a full year dividend of ¥12 per share.
 
 
 
(2) Second Half Business Strategy by Business Segment
Valve Manufacturing Business
Within Japan, the peak in inventory adjustments by dealers has passed, and adjustments are expected to end in the third quarter. By market, demand from the building facilities market is expected to recover from the third quarter, and the favorable conditions for fresh water applications is expected to continue during the second half. While the summer is a seasonally weak period for product shipments to semiconductor related applications, sales are expected to continue to trend at high levels during the second half. At the same time, KITZ will endeavor to capture maintenance related demand to help offset weak demand for industrial use valve applications, which is expected to trend sideways at low levels. Moreover, marketing to large projects including LNG plants will be fortified.

In overseas markets, favorable conditions are expected to continue within North America, with special efforts focused upon capturing orders for chemical and other plants to be implemented. In addition, KITZ will strengthen its marketing efforts to cultivate markets in Central and South Americas. Recoveries in ASEAN markets, which trended weakly during the first half, are anticipated, with industrial investments expected to restart in Thailand for the first time since the takeover of the military government and a gradual recovery in Indonesia in the wake of the presidential elections. At the same time, public and private industrial investments are expected to continue to trend weakly in China. Approvals for large projects are expected to be restrained. Due to the outlook for continued weakness in the European markets, KITZ will also fortify its marketing efforts for its three brands of KITZ, Perrin and ISO.
 
Brass Bar Manufacturing Business
Favorable conditions for automobile related applications are expected to continue with a recovery in demand for fresh water applications also expected. At the same time, the seasonal peak for demand from gas equipment related applications in the third quarter is approaching. The stabilization of the newly launched manufacturing facilities is expected to contribute to progressive improvements in earnings.
 
Other Business
Hotel Beniya Co., Ltd. has advertised the fact that it has completed renewal of its facilities on its homepage and in pamphlets, and begun taking group hotel reservations as part of its fortified marketing activities to attract customers. At the same time, KITZ has performed reviews of its products and widened its product lineup sold at the Suwa Lake expressway service area.
 
<Topics: Sales of New Industrial Use Butterfly Valves>
KITZ began selling project use high performance butterfly valves (Double offset type) and triple offset butterfly valves in August. High performance butterfly valves (Double offset type) boasts of low wear seat facings and maintains high levels of sealing performance in high pressure applications used in petroleum refining, petrochemical, general chemical, LNG, electric power generating, sea water desalination and other plant uses. Furthermore, triple offset butterfly valves boast of superior sealing capabilities in even higher pressure application uses.

The lineup of both products enables KITZ to respond to demand for valves in high pressure plant applications by packaging them with conventional cast and stainless steel industrial use valves and ball valves. Therefore these products are expected to contribute to an expansion in the industrial use valve business. The target for industrial use butterfly valve sales is ¥3.0 billion by fiscal year March 2021.
 
 
 
Conclusions
 
Despite the relatively weak sales of valves within Japan, the book to billing (BB) ratio exceeded 1 time, and orders appear to have bottomed. KITZ expects orders for building facility use valves to begin to appear in increasing numbers from the latter half of the third quarter. Furthermore, sales of forged trunnion ball valves (Used in a wide range of application in the petroleum refining, petrochemical, natural gas pipeline, general chemical, and machinery industries) made by the Spanish subsidiary under the brand name of ISO in North America are expected to ramp up. In addition, Perrin, which had encountered difficult conditions from a decline in products, has successfully booked large project orders from China (Perrin boasts of particular strengths in high temperature and pressure specialty metal seat technologies that are used in the manufacture of metal seat ball valves used in petroleum refining and petrochemical plants.).

Moreover, KITZ has successfully booked orders for automated valves for large chemical plants in North America. The Company will also strengthen its marketing efforts targeting potential customers in new realms such as floating LNG applications. The Company will also strengthen the competitive position and earnings generating capabilities of products targeting the highly important petroleum refining, petrochemical, gas treatment and other large plants. Also, successful results of KITZ's establishment of a "Project Management Division" for large projects under the direct leadership of its directors in December 2011 have begun to appear. While KITZ expects to be able to offset some of the weaker orders during fiscal year March 2015 with higher prices, orders are expected to recover beginning in fiscal year march 2016.
 
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.

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