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)
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
¥626 104,568,848 shares ¥65.460 million 6.6% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥13.00 2.1% ¥47.42 13.2x ¥687.59 0.9x
Note: Share price is as of closing on November 11, 2016. Number of shares outstanding is as of the end of the most recent quarter, and does not include treasury shares.
 
Consolidated Earnings Trends
Fiscal Year Sales Operating
Income
Ordinary
Income
Net Income EPS (¥) Dividend (¥)
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 117,278 7,245 7,300 4,915 45.50 13.00
March 2017 Est 111,500 8,000 7,700 5,000 47.42 13.00
Note: Estimates are those of the Company. From the fiscal year ended March 2016, the definition of net income has been changed to net income attributable to parent company shareholders (the same goes for the rest of the report).
 
This Bridge Report presents details and analysis of KITZ Corporation's earnings for the first half of the fiscal year ending March 2017.
 
Key Points
 
 
 
Company Overview
 
KITZ is an integrated manufacturer of valves and other fluid control equipment and devices. In valve manufacturing, it ranks highest in Japan and within the top 10 worldwide. Valves are made of various materials depending on their application, including bronze, brass, cast iron, ductile cast iron (cast iron with greater strength and ductility) and stainless steel. KITZ in principle assumes integrated production (casting, processing, assembling, inspecting, packaging and shipping) of products from raw materials. The KITZ Group consists of 32 domestic and overseas subsidiaries. In addition to the production and sale of brass bars used for valves, water faucets and gas equipment (KITZ is ranked among the top manufacturers of brass bars within Japan), the Group also operates a hotel business.
 
[Corporate Philosophy: 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.]
KITZ believes that corporate value is equivalent to shareholder value from a medium- to long-term perspective. To continue increasing this value, it says that it must achieve sustained growth accompanied by earnings through earning the trust of customers.
And by improving corporate value, the Company desires to help create a more prosperous and fulfilling society by providing many types of benefits to its shareholders, customers, employees, business partners, and society. Setting these goals in the KITZ Statement of Corporate Mission, the Company seeks to further progress in the future.
 
Action Guide
Do it KITZ Way
Do it True (Sincerity and Honesty)
Do it Now (In a Timely Manner)
Do it New (Unique and Challenge)
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.
 
Do it True
In human relationships, one must be sincere to the other. The pursuit of the essence of things is important; not of superficial things. "Do it True" are words that are designed to remind employees of these basic principles when 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 who think outside the box to show creative ways forward and take on new challenges in response to changes.
 
<Overview of KITZ's Business Segments>
KITZ's businesses consist of the valve manufacturing, brass bar manufacturing and other (including hotel and restaurant management) segments. During the fiscal year ended March 2016, these segments accounted for 79.8%, 17.5%, and 2.7% of total sales, respectively.
 
Valve Manufacturing Business
Valves are used to pass, stop and adjust the flow of fluids in various pipe systems (water, air, gas and other substances). They are used in building facilities, residential utility systems, water supply facilities, fresh water and sewer systems, fire prevention equipment, machinery and industrial equipment manufacturing facilities, chemical, medical, and petrochemical product manufacturing facilities, semiconductor manufacturing facilities, oil refineries and other industrial complexes, among other applications. The Company operates an integrated production system that begins with the casting process (KITZ was the first Japanese company to acquire ISO 9001 international quality standard certification). The Company's product offerings include commercial valves, which are made of corrosion-resistant bronze and highly economical brass for use in the building construction sector, including building facilities and residential utility systems, and industrial stainless steel valves such as high-value-added ball valves. The Company has a high share of the domestic market in these mainstay product areas.
Regarding sales activities within Japan, the Company's sales bases in major cities and meticulous network of distributors leave no part of the country unattended. For overseas sales, the Company has established representative offices in India and the U.A.E. KITZ also has a global sales network, with bases in China, South Korea, Singapore, Thailand, the United States, Brazil, Germany and Spain. With regard to production, in addition to nine domestic plants, the Company has 12 overseas plants (China, Taiwan, Thailand, India, Germany, Spain and Brazil), constituting a global production network to realize global costs and production at the optimum location.
 
 
In the valve manufacturing business, domestic sales accounted for 63.1% of the total. Of this amount, sales for the building construction sector accounted for 43%, followed by the market for water-related products and services, the machinery- and equipment-related market, and the semiconductor-related market. the Company also provides its products to various other fields, including oil refineries, petrochemicals, general chemicals, food products and paper manufacture, gas and electricity. Overseas sales accounted for 36.9% of the total, with Asia accounting for 51.2%, the Americas 33.5% and Europe and others 14.6%.
 
 
Brass Bar Manufacturing Business
Copper alloy can take many different shapes, including sheets, strips, pipes, bars and wires through hot or cold deformation processing such as dissolution, casting, rolling, extruding, and forging. It can be made with a range of different materials, including brass (copper with zinc), phosphor bronze (copper with tin and phosphorous), and nickel silver (copper with nickel and zinc). The KITZ Group's brass bar manufacturing business is led by KITZ Metal Works Corporation and Hokutoh Giken Kogyo Corporation. These companies manufacture and sell brass bars, which are used not only as material for valves, but also in the manufacture of water faucets, gas equipment, electrical appliances and other brass-derived items.
 
Other Business
KITZ subsidiary Hotel Beniya Co., Ltd., operates a resort hotel in the city of Suwa, Nagano Prefecture. The hotel is located in a highly picturesque setting close to Lake Suwa with hot spring bathing facilities with sunset views and has a number of small and large banquet halls. The hotel also has a large convention hall, giving it the capacity to hold international conferences.
 
 
1H of Fiscal Year Ending March 2017 Earnings Results
 
 
Sales fell 8.5% year-on-year, while operating income rose 19.0%
The Company reported sales of ¥54,941 million, a decrease of 8.5% year-on-year. In the mainstay valve manufacturing business, domestic sales were in line with the previous term. However, due to a decrease in investments accompanying a drop in the price of crude oil and to the strong yen, the overseas segment struggled, bringing overall segment sales down 6.3% year-on-year. The brass bar manufacturing business saw sales fall by 18.7% year-on-year, due to a decrease in sales volume and a drop in selling prices caused by a decline in raw materials prices.

Notwithstanding the sales declines, operating income rose 19.0% year-on-year to ¥4,293 million. Profits increased thanks to lower manufacturing costs and some benefits brought about by yen appreciation in overseas subsidiaries' SG&A expenses in the valve manufacturing business, and on the back of electrolytic copper prices trending lower in the brass bar manufacturing business. Although non-operating expenses increased due to a larger foreign exchange loss (rising from ¥20 million in the same period last year to ¥134 million), ordinary income increased 18.6% year-on-year to ¥4,084 million. Net income also increased 11.1% year-on-year to ¥2,667 million.
 
 
 
 
Valve Manufacturing Business
Sales decrease 6.3% year-on-year to ¥44,393 million. Domestic sales fell 0.6% to ¥28,001 million, and overseas sales dropped 14.8% to ¥16,392 million.
In Japan, industrial valve sales increased as the Company conducted a number of regularly scheduled maintenance projects for existing plants in the first quarter. Sales for building facilities also increased, albeit slightly, even though consumer demand did not grow as expected. Meanwhile, local municipalities were slow in spending their budgets, causing the Company's valve sales for water-related products and services to decline. On a year-on-year basis, sales of semiconductor manufacturing equipment also decreased despite posting a solid result, because the Company recorded a large increase in sales during the first half of the fiscal year ended March 2016, owing to the timing of deliveries.

Overseas, affected by a combination of yen appreciation, the low price of crude oil and deceleration of the Chinese economy, sales in Asia and the Middle East slumped significantly. Similarly, sales in the Americas decreased due to the effects of the low price of crude oil, despite the new consolidation of MGA in Brazil. Europe and other regions saw sales increase due to the delivery of valves for a large project exported from Japan but subsidiaries in Germany and Spain struggled nevertheless.

Operating income increased 10.1% year-on-year to ¥5,594 million. In addition to a drop in selling prices, SG&A expenses and amortization of goodwill rose due to the consolidation of MGA in Brazil. However, these negative factors were sufficiently offset by significantly lower manufacturing costs and the lower purchase costs of parts produced overseas as a result of lower raw materials prices and the stronger yen. Yen appreciation also had a positive effect on SG&A expenses at overseas subsidiaries.
 
Brass Bar Manufacturing Business
Sales decreased 18.7% year-on-year to ¥8,843 million, with operating income at ¥284 million (the same period last year saw an operating loss of ¥29 million). In the domestic brass bar market, transactions were 15,222 tons/month in the period from April through September. This amount represents an increase of 4.5% year-on-year, but a slump in copper prices led to a drop in the selling prices of copper products and a decrease in the sales volume. However, despite falling unit prices stemming from the low market price of copper, the Company succeeded in securing a margin, as the market was relatively stable.
 
Other Business (Hotel)
Sales were down 2.9% year-on-year to ¥1,704 million, with operating income down 20.3% year-on-year at ¥111 million. Although segment sales and profit decreased, both exceeded initial forecasts. Negative factors included unseasonable weather in the summer that led to a slump in customer numbers in the hotel business, as well as the sale of the insurance business at the end of the previous June.
 
 
 
 
(3) Efforts to Reinforce Sales in Asia
To bolster sales in Asia, the Company set up a representative office in Vietnam for the sales company in Singapore in June, and in September, reorganized its representative office in South Korea into a sales company.
 
Establishment of a representative office in Vietnam
In June 2016, KITZ Corporation of Asia Pacific Pte. Ltd. (in Singapore, hereafter "KAP") established a representative office in Ho Chi Minh City, Vietnam, to market its valve products. This was part of its efforts to reinforce marketing activities in the ASEAN countries, which collectively forms one of the key regions for the Company's businesses. The Company expects strong growth in the valve market in Vietnam in step with that country's economic development. In ASEAN countries, the Company established sales companies under the umbrella of KAP, first in Singapore in March 2013, and then in Thailand in April 2015, to meet the needs of customers in each country. The Company aims to expand its businesses in the region by establishing new bases and reinforcing existing bases.
 
Establishment of a local sales subsidiary in South Korea
KITZ Corporation of Korea, located in Seoul, began operations in September 2016. It had been first established as a representative office in September 2013 and was reorganized into a full-fledged sales base. The Company is working to build a network of distributors covering the entire South Korean market, while also strengthening marketing activities geared toward South Korean engineering companies. Also, the Company will support sales activities conducted by Group companies KITZ SCT and KITZ Microfilter to semiconductor manufacturing equipment manufacturers. By creating Group synergies, the Company is working toward a sales target of ¥2 billion by the fiscal year ending in 2020. KITZ Corporation of Korea was established in August 2016 to sell valves in the region, with common stock of 150 million won.
 
 
Compared to the end of the previous term, total assets at the end of the first half were down by ¥5,160 million to ¥114,261 million. Receivables, inventories and payables decreased due to a drop in sales and the impact of foreign exchange fluctuations. The foreign currency translation adjustment turned negative, at -¥2,220 million, from ¥1,220 million at the end of the previous term. The equity ratio was 62.9% (62.9% at the end of the previous term).
 
 
Operating cash flow increased from ¥2,945 million in the same period last year to ¥6,072 million. Factors contributing to this increase included increased profits, lower working capital due to yen appreciation and decreased tax expenses. Securing free cash flow of ¥3,201 million, the Company spent ¥1,392 million on the acquisition of treasury stock.
 
 
Fiscal Year March 2017 Earnings Estimates
 
 
Full-year earnings forecast remains unchanged; operating income to rise 10.4% year-on-year, despite a 4.9% decline in sales
Results in the first half exceeded the Company's initial forecast. However, the Company left its full-year earnings forecast unchanged, as the overseas business environment is expected to be more severe in the second half. As many overseas subsidiaries end their fiscal years in December, they are already halfway through the fourth quarter.

The Company expects lower sales in both the valve manufacturing business and the brass bar manufacturing business, with the former affected by yen appreciation and weak demand in overseas markets, and the latter due to a drop in market prices for raw materials. However, on the profit front, the Company also expects favorable effects from the stronger yen, a drop in raw materials prices and manufacturing cost reductions in the valve manufacturing business, and stable market prices for raw materials in the brass bar manufacturing business.

The Company anticipates year-end dividends of ¥7 per share, which together with the interim dividend would make ¥13 for the year. The Company acquired treasury stock in the first quarter. Therefore, assuming it achieves the target profit levels and awards the aforementioned dividends, the total return ratio in the fiscal year ending March 2017 is set to be around 50%.
 
 
(2) Second Half Forecast by Segment
Valve Manufacturing Business
In the domestic market, conditions in the market for building facilities are expected to remain severe. The Company will focus on securing orders for redevelopment projects in the Tokyo metropolitan area and in response to demand ahead of the Olympic and Paralympic Games Tokyo in 2020. However, these efforts are not expected to contribute to earnings before the next fiscal year. Due to seasonal factors, sales in the market for water-related products and services are expected to improve compared to the first half, but public works spending is expected to remain slow, causing sales to trend lower than in typical years. Regarding industrial valves, regularly scheduled maintenance projects were mostly finished by the first half. On the upside, the Company is seeing a large number of orders coming from manufacturers of semiconductor manufacturing equipment, elevating its expectations for higher sales in the sector.
Overseas, market conditions are expected to remain severe in ASEAN countries, the Americas and Europe. In Thailand, the effect of the king's death is expected to continue throughout the one-year mourning period, and capital investment could be limited. The Company is also likely to struggle in Singapore, as its main customers in the region are in petroleum-related industries. Although the Company believes the market in Indonesia has bottomed out, future prospects remain uncertain. In China, the decelerating economy makes it unrealistic to expect high demand for industrial valves, so the Company will focus on marketing commercial valves for the building facilities industry, including high-class hotels and data centers. In North America, distributors have completed inventory adjustments following a drop in the price of crude oil, yet the market remains sluggish. MGA in Brazil, acquired in the previous period, has so far contained the decline to a minimum while Brazilian economy continues to slump due to the low prices of natural resources. In Europe, the Company aims to promote sales of KITZ-brand products amid severe market conditions. Revenues at German subsidiary Perrin are likely to be affected by the slowdown in the Chinese economy, as 40-50% of its sales derive from the oil industry in China.
 
Brass Bar Manufacturing Business
Product sales for faucet-related applications continue to fare well, and demand is expected to increase for gas appliances. However, the Company expects earnings in the automobile sector to remain low.
 
Other Business (Hotel)
The key in this business lies in minimizing off-season losses until spring arrives. The Company will focus on capturing inbound tourist demand and attracting demand for banquets by strengthening local sales activities. The Company will also run a "Pre-30 Year Anniversary Campaign" highlighting the 30-year anniversary of the hotel's establishment in 2017.
 
 
Conclusions
 
In the valve manufacturing business, current market conditions for semiconductor manufacturing equipment are favorable. In the medium term, demand related to redevelopment in the Tokyo metropolitan area and ahead of the Olympic and Paralympic Games Tokyo 2020 are expected to surge. Olympics/Paralympics-related demand is expected to gain momentum from the latter half of 2017, and reach its peak from 2018 to the first half of 2019. Overseas, demand for commercial valves remains reasonably high in China, but a slump in capital investment in the oil industry is affecting the Company's earnings negatively.
In the brass bar manufacturing business, the Company expects solid sales contribution from faucet-related and gas appliance applications toward year-end. Backing up the Company's confidence, the Japan Copper and Brass Association (Taito, Tokyo) has announced an upward revision to its fiscal 2016 copper products demand forecast, raising total domestic and export demand to 780,810 tons, up 1.2 percentage points from its forecast in March and up 2.7% year-on-year. However, it should be noted that the price of copper has turned upward recently.
 
 
<Reference: Corporate Governance>
 
 
◎ Corporate Governance Report               Updated on June 29, 2016
The Company fully complies with the basic principles of the corporate governance code.

<Disclosure Based on the Principles of the Corporate Governance Code>
1. Cross-Shareholdings (Principle 1-4)
(1) Basic Stance on Cross-Shareholdings
The valve manufacturing business, the Company's mainstay, requires integrated technologies from raw materials to finished products, and strong business relationships with various companies (including product development, production, sales, and distribution) are crucial. The Company invests in and holds shares of related business parties that it considers strategically important to facilitate business activities.
(2) Significance and the Rationality of Cross-Shareholdings
The significance and the rationality of cross-shareholdings is reported to the Board of Directors, along with measures to face management challenges over the medium to long term, enhance corporate value and associated risks of holdings.
(3) Holdings and Sales of Cross-Shareholdings
The Company holds shares if the Company deems such shareholdings to be useful in maintaining or reinforcing transactional relationships. At the same time, however, the Company examines its rationale on an annual basis and considers selling the shares should the significance of the holdings decrease.
(4) Standards for Exercising Voting Rights
When exercising voting rights on cross-shareholdings, the Company exercises its rights appropriately after determining the overall rationale of proposals from the perspective of enhancing corporate value of the company in which investments have been made.
 
9. Policy for Constructive Dialogue with Shareholders (Principle 5-1)
In order to achieve sustainable growth and increase corporate value over the medium to long term, the Company, as a part of its fiduciary responsibility and accountability, acknowledges the importance of disclosure to shareholders, investors and stakeholders in an appropriate and timely manner, as well as the fairness and transparency of management. The Company also acknowledges that IR activities should not be limited to delivering and disclosing useful information on an ongoing basis to shareholders but also to responding and enhancing views and concerns obtained from outsiders (shareholders) to advance management. The Company has established an IR structure headed by the president and IR executive officer. To ensure constructive dialogue with shareholders and describe management strategy and business plans, the Company undertakes the following measures:

(1) To ensure constructive dialogue with shareholders, the Company has appointed a representative IR executive officer. Individual company meetings with shareholders are usually handled by the head of IR. However, in the event that holdings of shares exceed a certain amount and/or the purpose of the meeting is specific, either the president or the IR executive officer also meets with investors.
(2) The representative IR executive officer, along with the IR Office, collaborates and holds meetings with the Corporate Planning Department, Accounting Department, General Affairs and Personnel Department, Legal Affairs Department and other departments, as needed.
(3) The Company holds earnings results meetings for analysts and institutional investors after interim results in September and full-year results in March, and analysts meetings after quarterly results in June and December. The Company also holds regular presentation meetings for individual investors. The president conducts all of the aforementioned meetings. The Company also makes materials such as financial results, the annual securities report, management plans, stock information, notices of general meetings of shareholders and corporate financial information available through the Company website.
(4) The views and concerns obtained from institutional investors and analysts through IR activities are relayed to the president and IR executive officer and reported to the Board of Directors and management meetings when considered necessary.
(5) The Company appoints the executive officer of the accounting department as the representative director of information, and the executive officer, IR Office and Management Planning Division discuss and manage the appropriate disclosure of information including insider information, before engaging in dialogue with institutional investors and analysts.
(6) Each year at the end of March and September, the Company undertakes institutional shareholder identification activities to determine the actual holders of shares, in addition to studying the shareholder registry. The information obtained through this research is used for later IR activities.
(7) The Company formulates long-term business plans and medium-term management plans that include targets for sales, operating income, ordinary income, overseas sales ratio, interest-bearing liabilities, equity ratio and ROE. The Company discloses such information through the Company website, and at earnings results meetings describes specific measures to realize these targets. The medium-term management plans are reviewed as appropriate to reflect Company earnings, the state of society and the economy. Should changes be made, the reasons for and factors behind these changes are explained at general meetings of shareholders and earnings results meetings.
 
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) 2016, Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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