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(6498)

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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
¥574 108,216,989 shares ¥62.117 billion 9.8% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥13.00 2.3% ¥47.12 12.2x ¥686.47 0.8x
* Share price as of closing on May 25, 2015. 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 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 117,036 6,886 7,581 6,881 63.22 13.00
March 2016 Est. 120,000 8,500 8,100 5,100 47.12 13.00
*Estimates are those of the Company.
 
This Bridge Report presents KITZ Corporation's earnings for the fiscal year March 2015.
 
Key Points
 
 
 
Company Overview
 
KITZ is a comprehensive manufacturer of valves and other fluid control equipment and devices. In valve manufacturing, it ranks highest in Japan, and ranks in the top ten worldwide with a goal to take a seat within the top three in the future. Various materials are used in valves depending upon their application, such as bronze, brass, cast iron, ductile cast iron (Cast steel with greater strength and ductile characteristics), and stainless steel. KITZ assumes integrated production (Casting, processing, assembling, inspecting, packaging, shipping) of products as its fundamental process. The KITZ group is comprised of 29 domestic and foreign subsidiaries. In addition to sales of brass and other bars used to make valves (KITZ is ranked amongst the top manufacturers of brass bars within Japan), KITZ also operates hotels.
 
Corporate Philosophy - KITZ is Dedicated to Sustained Enrichment of Its Corporate Values by Offering Unique and High Quality Products and Services -
"Corporate value" is the "medium to long term shareholder value", and the improvement in "medium to long term shareholder value" requires that KITZ contributes to the sustained growth in profits through the acquisition of its customers' trust. And by improving corporate value, the Company can make various contributions to shareholders, customers, employees, business partners and society, and to contribute to the establishment of a prosperous society. Based upon these assumptions as part of the "KITZ Mission Statement", KITZ seeks to attain new achievements.
 
KITZ's Statement of Corporate Mission
To contribute to the global prosperity, KITZ is dedicated to continually enriching its corporate value by offering originality and quality in all products and services.
 
Action Guide
Do it KITZ Way
Do it True (Sincerity -Honesty)
Do it Now (Speedy-Timely)
Do it New (Creativity - Challenge)
 
Do it True
In relationships between people, what must not be forgotten is to relate to them with sincerity. The pursuit of the essence of things, rather than superficial things. "Do it True" are words that are designed to remind employees of these basic principles when pushing conducting corporate activities.
 
Do it Now
"Do it Now" expresses the image of dynamic employees who lose no time in obtaining information, making prompt decisions, and putting them into practice with certainty.
 
Do it New
"Do it New" expresses the image of employees taking on new challenges in response to changes and leaving conventional ideas behind to express .hidden creativity.
 
<Overview of KITZ's Business Segments>
KITZ's business is divided between the valve manufacturing, brass bar manufacturing, and others, including hotel and restaurant management, business segments. During fiscal year March 2015, each of these segments accounted for 77%, 18% and 5% of total sales and 95.2%, 2.5% and 2.3% 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.

The corrosion resistant bronze and highly economical brass valves, and high value added ball, butterfly and industrial stainless steel valves are used particularly in the field of building residential and office facilities. In Japan these valves are the main products with high market shares. KITZ customers operate within the building facilities, plant and engineering facilities, environment, energy, semiconductor, and other industries. 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." 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 (Kohan) 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. In the area of manufacturing, besides the seven facilities in Japan, overseas there is a manufacturing network of 11 production facilities (China, Taiwan, Thailand, India, Germany, Spain) which strives for optimized manufacturing in optimal locations.
 
 
The Japanese valve manufacturing business sells 43% of its products to building facilities applications, 14% to water works related applications (Both fresh and sewage water), 9% to machinery equipment and 12% to 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. (As of fiscal year March 2015)
 
 
By geographic region, 54% of overseas sales of the valve manufacturing business were derived from Asia (ASEAN and others 36%, China 13% and Middle East 4%), 31% from North America, and 15% from Europe and other regions as of fiscal year March 2015.
 
 
 
* 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).
 
In fiscal year March 2015, the booking of the extraordinary income of ¥2.156 billion from the sales of KITZ Wellness shares contributed to an increase in ROE from 5.70% in the previous term to 9.83% in the current term. When the ad hoc profit from the sales of stocks is factored out, ROE would actually be approximately 8.3% (Assuming the tax rate for profit from the sales of stock is 50%). Improvements in profit margins of the main valve business arising from price increases and cost of sales reductions was the driving force behind the improvement in ROE.
 
 
The assumptions of the Second Midterm Business Plan (From fiscal years March 2014 to 2016) included the effects of Prime Minister Abe's economic policies, increases in capital investments in Japan due to the weaker yen and reconstruction demand. However, latent demand failed to surface due to a weak increase in capital investments within Japan and delays in construction projects due to a shortage of workers. Consequently, earnings have trended below plans but KITZ has been able to maintain growth in sales and continued improvements in profitability.
 
 
Fiscal Year March 2015 Earnings Results
 
 
Sales Decline by 0.3%, Operating Income Rises by 6.4%
In the main valve manufacturing business, overseas sales increased due to favorable conditions in North America and the effect of a weaker yen, while sales in Japan decreased in reaction to the rush to purchase ahead of pricing revisions made in January 2014, adjustments to distribution inventories, and delays in construction projects because of a shortage of workers. Sales declined by 0.3% year-on-year to ¥117.036 billion.

On the profit side, gross income rose by 5.2% year-on-year due to profitability improvements of the valve manufacturing business resulting from pricing revisions and cost price reduction in Japan. Consequently, the increase in sales, general and administrative expenses resulting from higher yen-based expenses of overseas subsidiaries because of the weaker yen was offset and allowed operating income to increase by 6.4% year-on-year to ¥6.886 billion. Non-operating income improved due to an increase in foreign exchange gain (¥164 million → ¥401 million). Net income rose by 93.1% year-on-year to ¥6.881 billion due to the extraordinary income of ¥2.156 billion derived from the sale of shares of KITZ Wellness Co., Ltd. as extraordinary income.
Operating income fell short of the revised estimate announced in the second quarter by approximately ¥600 million. This shortfall was due in part to weak growth in demand in the valve manufacturing business from building facilities within Japan and a worsening of market conditions in the brass bar manufacturing business during the fourth quarter.
 
 
 
Valve Manufacturing Business
Sales rose by 2.6% year-on-year to ¥90.152 billion. Sales within Japan declined by 1.1% year-on-year to ¥56.026 billion, due to the effects of the rush to purchase ahead of price increases implemented in January 2014 and adjustments to distribution inventories, which continued until December. However, the pricing revisions have been smoothly implemented and delivery of valves to the major building facilities, where delays in construction activities had arisen from a lack of manpower, began from the fourth quarter (Full-scale recovery is expected sometime after the second quarter of fiscal year March 2016). Industrial valves, which are made of stainless steel, are used in machinery, petroleum refining, petrochemical, general chemical, food and paper manufacturing applications trended weakly, because the demand was for maintenance and renewal mainly. On the other hand, brisk capital investment by overseas semiconductor manufacturers continued throughout the term, and valves for semiconductor manufacturing equipment applications increased by 26%. Favorable demand for earthquake resistant valves allowed valves for water applications to grow by 3%. Overseas sales rose 9.2% year-on-year to ¥34.125 billion. North America grew its sales by 25% year-on-year on the back of the weaker yen. Declines in the ASEAN and other regions due to the negative influence of political changes in Thailand and the presidential elections in Indonesia were offset by sales increases of 2% in the China and the Middle Eastern regions. While sales in Europe and other countries continued stagnate in local currency terms, the weaker yen contributed to a 4% year-on-year increase.

Operating income rose by 10.6% year-on-year to ¥9.506 billion. The decline in profits within Japan and higher expenses of overseas subsidiaries due to the weaker yen were offset by the effects of pricing revisions and cost of sales reductions. In addition, the balance between dollar based sales and purchases of the overseas subsidiaries diminished the effect of the weaker yen on gross income.
 
Brass Bar Manufacturing Business
Sales rose by 0.3% year-on-year to ¥21.021 billion and operating income declined by 54.7% to ¥248 million. In fiscal year 2014, the brass bar market in Japan decreased by 3.6% year-on-year in volume terms. But on a weight basis, it declined only by a marginal 0.3% year-on-year to 15,364 tons per month. On the Company, brass market prices fell from January to March, but year-on-year increases in pricing from the third quarter allowed sales to rise by a small margin. With respect to profits, delays in the ramping up of production of new facilities installed at the beginning of the term (washing equipment for raw materials) contributed to declines in yields and a worsening of profitability from February to March due to pricing declines.
 
Other Business
Sales and operating income by declined by 31.3% and 18.9% year-on-year to ¥5.863 billion and ¥231 million respectively. Consolidated sales and profits declined due to the removal of KITZ Wellness Co., Ltd. from the scope of consolidation. Guest room refurbishments at Hotel Beniya contributed to a 1.3% increase in sales and a turn to profits from losses seen in the previous term. However, repair costs for exterior painting and construction costs contributed to a loss to be realized in the hotel business.
 
 
Total consolidated assets rose by ¥8.207 billion from the end of the previous term to ¥115.790 billion at the end of the current term due to expansion of business and improvement of cash flow. The current ratio stood at 248.2% (269.8% in the previous term), noncurrent ratio at 69.9% (78.7% in the previous term), and equity ratio at 64.2% (61.1% in the previous term), reflecting highly favorable levels of liquidity and long term financial stability.
 
 
The net inflow of operating cash flow rose from ¥4.667 billion in the previous term to ¥8.923 billion in the current term due to an increase profits and improvement in capital efficiency. Capital investment remained in line with the previous term, but the net cash outflow of investing cash flow contracted with the sale of KITZ Wellness Co., Ltd. shares. Consequently, the net inflow of free cash flow increased to ¥7.912 billion. A net outflow of financing cash flow was recorded due to the repayment of loans. Consequent to these changes, cash and equivalents rose from ¥7.923 billion at the end of the previous term to ¥12.575 billion at the end of the current term.
 
(4) Shareholder Returns
KITZ's consolidated dividend payout ratio target of 25% is considered to be reasonable given its goal of maintaining stability with sustainability. In addition, the Company seeks to "achieve a dividend payout ratio of about 33% including direct payment and stock buybacks."

On the back of the ¥1 increase in the midterm dividend to ¥6, KITZ plans to increase its yearend dividend by ¥2 to ¥7 per share for a ¥3 increase in full year dividend to ¥13 per share. The total amount of dividend payment will be ¥1.412 billion for an anticipated dividend payout ratio of 20.6%. The comprehensive shareholder return totaled ¥1.899 billion including ¥487 million in stock buyback implemented during December 2014 for a comprehensive payout ratio of 27.6%. If the ad hoc profits derived from the liquidation of the subsidiaries shares is excluded, the payout ratio and comprehensive payout ratio would rise to 27.8% and 37.4% respectively.
 
Topics - Introduction to Global Standard Trunnion Ball Valves, Establishment of Sales Affiliates in Bangkok -
(1) Line up of Global Standard Trunnion Ball Valves
Trunnion ball valves independently developed by the three companies KITZ Corporation, KITZ Corporation of Europe, S.A. (Spain) and Perrin (Germany) have been integrated and newly added to the produce lineup as a group standard model. This integration will enable global parts procurement and optimized manufacturing to be conducted to strengthen the product's competitiveness in terms of both cost and delivery time. KITZ seeks to increase overall sales by boosting sales of global standard trunnion ball valves from ¥3.5 billion in fiscal year March 2015 to ¥7 billion in fiscal year March 2021.

The trunnion ball valve is suitable for large diameters or high pressure applications and is used in various industrial fields, such as the oil and gas, petrochemical, electric power, and other market applications. The valve uses a structure where two stems or plates are used to secure the upper and lower section of the ball and to reduce the influence of fluid pressure on the operating torque. This global standard trunnion ball valve has obtained the important API 6D and ISO 14313 certification for industrial valves demanded by various markets.
 
(2) Establishment of New Sales Subsidiary in Bangkok
The new KITZ group company "KITZ Valve & Actuation (Thailand) Co., Ltd." (Hereinafter, KVT), which was established in Bangkok, began business from April 1, 2015. "KITZ Corporation of Asia Pacific Pte. Ltd.," has been established to oversee operations in the ASEAN region, an area which is positioned as an important region in the global strategy of the KITZ group (Hereinafter called KAP), and KVT has been established as a satellite subsidiary of KAP to strengthen sales and marketing in Thailand, the most important country in that same region.

Until now, Thailand performed business activities through KAP, but the establishment of KVT makes it possible to conduct business in a closer proximity to customers. KITZ will endeavor to further expand its business in not only Thailand, but also other ASEAN regions, with a goal of achieving sales of ¥5.5 billion in the fiscal year March 2021.
 
KITZ Valve & Actuation (Thailand) Co., Ltd.
Location Bangkok, Thailand
Business Purchases and sales of valves and other fluid control equipment
Founded March 2015
Capital 6,000,000 THB (Thailand Baht)
 
 
Fiscal Year March 2016 Earnings Estimates
 
 
Sales, Operating Income to Rise 2.5%, 23.4% in FY3/16
If the influence of the removal of KITZ Wellness from the scope of consolidation is excluded, sales and operating income are expected to rise by 2.1% and 9.5% year-on-year respectively. The main valve manufacturing business is expected to see domestic sales rise by 2% year-on-year due to the abating of the influence of the rush to purchase ahead of pricing revisions and adjustment of distribution inventories, and a recovery in construction market demand. In addition, strength in ASEAN, China and North America is expected to offset continued weakness in Europe and to allow overseas sales to rise by 9% year-on-year.

With regards to profits, increases in copper prices and information technology related investments are expected to compound increases in sales, general and administrative expenses of subsidiaries arising from the weaker yen. However, increases in volumes on the back of a recovery in demand of the domestic market is expected to contributed to continued declines in cost of sales, which in turn will allow profitability of the main valve business to improve. At the same time, brass bar manufacturing business is expected to see improvements in profitability on the back of stable market conditions. Interim and year end dividends of ¥6 and ¥7 are expected to be paid, for a full year dividend of ¥13 per share.
 
 
Capital Investments Expected to Nearly Double
Capital investments to reduce costs and for development activities are expected to increase from ¥3.5 billion in the term just ended to ¥6.9 billion in the coming term. Furthermore, a flexible stance towards M&A activities is expected to be adopted.
 
 
Valve Manufacturing Business
Sales and operating income are expected to rise by 4.9% and 18.9% year-on-year to ¥94.6 and ¥11.3 billion respectively. Domestic sales are expected to rise by 2% year-on-year. The disappearance of the rebound from the rush to purchase ahead of pricing revisions and adjustment of distribution inventories in construction market related applications are expected to allow favorable orders to be booked. With regards to near term conditions, a recovery in redevelopment projects in the Tokyo and surrounding regions is expected to allow the Tokyo office established in the previous term to capture demand and to protect the pricing revisions made during the previous term. At the same time, weak plant investments due to consolidation of plants and a lack of investments for large projects is expected to contribute to weak demand for stainless steel valves and other industrial valves. Fortified marketing activities are expected to allow demand from end users in the machinery, food and paper industries to be cultivated. Furthermore, favorable conditions seen within the semiconductor industry during the previous term are expected to continue, but conditions during the coming second half remain uncertain.

Overseas sales are expected to rise by 9% year-on-year. Sales in the ASEAN, China, and Middle East regions are expected to grow. Within the ASEAN region, sales in Thailand and Indonesia are expected to begin recovering during the second half, and efforts to capture demand from the oil and gas market applications are expected to be made, as well as demand for the plant. The newly established sales function in Thailand is expected to begin contributing to earnings during the coming term. And while demand for industrial valves in China is expected to deteriorate due to the slowing of the economy, fortified marketing function and introduction of new products are expected to offset by an expansion in commercial valve sales. At the same time, business in North America is expected to continue to trend favorably, but slow slightly from the term just ended. Efforts will be promoted to expand sales of chrome valves by leveraging KITZ's strengths in the downstream applications of chemical plants. The risk of a further weakening in economies of Europe are expected to contribute to continued difficult conditions in that region. Consequently KITZ will fortify its collaboration with sales agents. Perrin is seeking to fortify its marketing to Europe, North America, and Asia to reduce its high dependency upon Chinese petroleum related projects.
 
Brass Bar Manufacturing Business
KITZ assumes manufacturing volumes will rise from 3,109 tons per month in fiscal year 2014 to 3,300 tons per month in fiscal year 2015, and copper prices to rise from ¥766,000 per ton to ¥780,000 over the same period. One off factors including deterioration in yields arising from delays in ramp up of manufacturing facilities seen during the term just ended are expected to disappear, and profitability to be restored to normal levels.
 
Other Business
Despite the decline in sales and profits arising from the removal of KITZ Wellness from the scope of consolidation, the hotel business is expected to see an increase in sales and profits due to increases in customers due to the refurbishment of Lake Resort Spa "Kiseki No Yu," fortification of online reservation functions, and increases in inbound visitors from foreign countries.
 
 
 
Conclusions
 
The main valve manufacturing business is expected to see increases in sales and improvements in profitability. Sales in North America have grown on the back of high reputation for its industrial valves and due to fortification of sales networks in Asia through mergers and acquisitions and establishment of subsidiaries, sales in Asia are in good condition. At the same time, sales in Europe, which is suffering from weak near term macroeconomic conditions, are expected to grow over the medium term. Moreover, delivery of construction projects which had been delayed in the mature market of Japan are expected to allow KITZ to increase its share of industrial valves on the back of its competitive delivery times and pricing. With regards to profits, efforts to optimize global standard from the design stages, which is seen in trunnion ball valves as a representative, are being conducted to communize parts sourcing and reduce the number of parts required. In addition, the effects of three dimensional module design are expected to begin contributing positively over the medium term. At the same time, productivity improvements are being pursued at all factories and product lines. These efforts, which have been implemented for years and producing significant results, are expected to give KITZ continuous effects, differing from pricing revision.
 
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) 2015, Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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