BRIDGE REPORT
(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)
HQ
1-10-1 Nakase, Mihama-ku, Chiba, Japan
Year-end
March
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥906 101,390,000 shares ¥91.859 million 7.3% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥16.00 1.8% ¥62.94 14.4x ¥727.78 1.2x
Note: Share price is as of closing on May 26, 2017.
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 114,101 8,929 8,799 5,400 51.43 13.00
March 2018 Est. 117,000 10,000 9,700 6,300 62.94 16.00
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 results for the fiscal year ending March 2017 and earnings estimates for the fiscal year ending March 2018.
 
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 2017, these segments accounted for 80%, 17%, and 3% 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.
 
 
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.
 
* ROE is calculated by multiplying "Net income Margin (net income divided by sales)", "Asset Turnover (sales divided by total assets)" and "financial leverage (total assets divided by equity, reciprocal number of equity ratio)".
ROE="Net Income Margin" x "Asset Turnover" x "Leverage"
* 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).
 
ROE has been improving since the fiscal year ended Mar. 2014, except the fiscal year ended Mar. 2015, in which ROE skyrocketed due to a temporary factor. According to the reference material of the company, ROE is estimated to increase to 8.5% in the fiscal year ending Mar. 2018.
In the fiscal year ended Mar. 2015, ROE was temporally boosted. This is because net income grew 93.1% year on year as a result of recording gain on sale of the shares of Kitz Wellness Corporation, which operates fitness business, amounting to 2,156 million yen as an extraordinary income.
 
 
Fiscal Year Ending March 2017 Earnings Results
 
 
Sales declined 2.7% year on year, while operating income grew 23.2% year on year.
Sales were 114,101 million yen, down 2.7% year on year. The sales of the brass bar manufacturing business dropped 6.0% year on year due to the lowering of selling prices in response to the decrease of market prices of raw materials and the decline in quantity sold. On the other hand, the sales of the valve manufacturing business, which is the mainstay of the company, were nearly equal to the sales for the previous term (down 1.9% year on year), because the sales growth in the domestic market offset the decline in sales in the overseas market due to the curtailment of equipment investment in response to the downturn of oil price and the yen appreciation.

As for profit, operating income increased 23.2% year on year to 8,929 million yen, thanks to the enhancement of profitability of the valve manufacturing business through cost reduction and the improvement of profit and loss of the brass bar manufacturing business due to the stabilization of the market price of copper. Ordinary income, too, rose 20.5% year on year, despite the posting of an exchange loss of 19 million yen (in the previous term, an exchange gain of 82 million yen was recorded).
As for extraordinary gain or loss, a gain on sale of investment securities of 2,097 million yen was posted as the company sold some of owned listed shares in accordance with the corporate governance code. On the other hand, an impairment loss of 3,756 million yen was recorded as the company established a trust beneficiary right for the real estate of its headquarters (book value: about 4.7 billion yen) and transferred it for the purpose of improving the soundness of its financial standing.
With regard to the correction amount after the investigation based on the transfer pricing taxation, which amounts to 716 million yen and was posted in the fiscal year ended Mar. 2014, the Japan-U.S discussion ended, and the company received a refund of 622 million yen and posted it as corporate income tax for retroactive year.
 
 
 
 
Valve Manufacturing Business
In Japan (for each market)
Domestic sales grew 1,224 million yen (2.1%) year on year to 58,649 million yen., The sales of products for construction equipment were relatively healthy. But as the environment of the industrial valve market did not undergo any significant changes, the sales in the second half were sluggish The sales in the water market declined in 4Q, due to the delay in the execution of a municipal budget and seasonal factors. The sales of products for semiconductor manufacturing equipment were much larger than the estimated, as the equipment investment by manufacturers was favorable.
 
Overseas (by area)
Overseas sales decreased 3,037 million yen (8.4%) year on year to 33,117 million yen (the effect of exchange rates accounts for 2,583 million yen out of the decrease of 3,037 million yen). In ASEAN countries, the sales were sluggish in Thailand and Indonesia, which are the main target areas. In South Korea, the sales remained favorable for products for semiconductor manufacturing equipment. In China, the performance of industrial valves was weak, but the sales were healthy for commercial valves for data centers. Total sales in Asia decreased 2.4 billion yen. In North America, sales remained stagnant due to the low price of crude oil. In the Americas, including Brazil MGA, sales dropped 700 million yen.
 
Operating Income
Sales declined slightly, there emerged some factors that would reduce profit, such as the differences in quantity and ratio, and personnel cost augmented, but the effect of cost reduction was considerable, the prices of raw materials were relatively low, and overseas subsidiaries' expenses in foreign currency decreased reflecting the appreciation of the yen.
 
Brass Bar Manufacturing Business
The total weight of products sold in the Japanese brass bar market was 15,765 tons/month for the fiscal year ended Mar. 2017, up 5.2% year on year. Sales decreased 1,224 million yen (6.0%) year on year to 19,333 million yen, because of the decline in the market price of copper, which affects the selling prices of products of the company, and the 0.9% year-on-year drop in total weight of products sold. As for profit, operating income was 831 million yen (a loss of 16 million yen posted in the previous term), as the market price of copper was so stable that a profit margin was secured and productivity improved.

The sales and operating income of other business declined, because the number of operating days of some floors of Hotel Beniya dropped due to renovation and hotel guests decreased due to unfavorable weathers in the summer.
 
 
In the debit side, tangible assets decreased due to the handover of the real estate of the headquarters and investments, other declined due to the sale of some investment securities. On the other hand, intangible assets grew due to the investment in IT. In the credit side, net assets shrank due to the acquisition of treasury shares and the drop in foreign currency translation adjustment. Equity ratio was 61.9% (62.9% at the end of the previous term), and return on invested capital improved from 5.2% in the previous term to 7.2%.
 
 
Operating cash flow increased from the previous term, as net income before taxes and other adjustments, depreciation, and inventories declined, while free cash flow improved from minus 171 million yen in the previous term to 10,838 million yen, as the gain on sale of tangible assets grew and the company did not carry out the acquisition of shares of subsidiaries through M&A, which had been conducted in the previous term.
 
 
Fiscal Year March 2018 Earnings Estimates
 
 
Sales are estimated to grow 2.5% year on year, while operating income is forecasted to rise 12.0% year on year.
Sales are projected to increase 2.5% year on year to 117 billion yen. The sales in Asia, especially Japan, and the Americas are estimated to grow. It is estimated that the sales of the valve manufacturing business will expand 2.4% year on year while the sales of the brass bar manufacturing business will increase 3.5% year on year due to the rise in copper price.
Operating income is forecasted to be 10 billion yen, up 12.0% year on year. It is forecasted that the profit of the brass bar manufacturing business will decrease 51.9% year on year due to the augmentation of depreciation and labor cost, while the profit of the valve manufacturing business will grow 13.6% year on year due to the effects of cost reduction and price revision (which will be described later).
 
 
 
Valve Manufacturing Business
Inside Japan, the company will concentrate on the diffusion of new prices after price revision (announced in April and applied from the shipment in May). In the market of construction equipment, the demand related to Tokyo Olympics and Paralympics is expected to get into full swing in the second half, and reach a peak during a period from the fiscal year ending Mar. 2019 to Mar. 2020. The company aims to meet this demand steadily. In the industrial valve market, the company will mainly keep satisfying the demand for maintenance and renewal of existing plants, but the number of large-scale capital investment projects is estimated to increase. The semiconductor market is expected to keep thriving for the foreseeable future. But the company seems to have concerns over the risk of slowdown in the second half.
As for overseas markets, North America has hopeful signs. It is forecasted that the energy-related market will start fluctuating in the second half of this year. On the other hand, the corporate equipment investment in ASEAN countries is stagnant, and the situation is forecasted to remain harsh. For expanding sales, the company will strive to strengthen its systems by increasing sales footholds and establishing technological centers. In China, it is anticipated that the construction equipment market, where commercial valves are used, will remain healthy, although the performance of industrial valves will remain sluggish. The company plans to promote sales by utilizing local affiliates. In South Korea, the sales are estimated to remain favorable for products targeted at the semiconductor market. The company will enhance its sales activities for meeting the demand of EPC (a project of an engineering company). In Europe, equipment investment is still stagnant, and it is estimated that the demand will not recover for industrial valves.

As for profit, the factors in decreasing profit are the market trend of raw materials and the augmentation of labor cost, while the factors in increasing profit include the continued effect of cost reduction, the selling price strategy (new prices from the shipment in May), and the differences in quantity and ratio.
 
Brass Bar Manufacturing Business
The assumed copper price is 680,000 yen/ton (for electrolytic copper; the average copper price in the previous term: 604,000 yen/ton). The domestic demand for brass bar is estimated to decline year on year, and the company will strive to maintain its share. Profit is forecasted to drop due to the augmentation of depreciation and labor cost, but the company will make efforts to improve productivity and promote high value-added products for curbing the drop in profit.
 
Other
As for the hotel business, the renewal of guest rooms (on the 10th and 11th floors) is expected to bear fruit, and the company will try to attain target sales and profit by improving its online booking system, reeling in foreign visitors to Japan, and attracting sightseers through campaigns.
 
 
(3) Topics
Revision to selling prices in Japan (prices raised)
The revision to selling prices in Japan was announced on Apr. 4, 2017, and new prices were applied from the shipment on May 1. The company explained the reason for the price revision, "Since quantity sold decreased and market prices dropped due to the changes in the demand structure, and the prices of raw materials skyrocketed in the second half of the fiscal year ended Mar. 2017, it became difficult to keep the current prices only by our corporate efforts, such as improving productivity and rationalizing manufacturing processes." Product price was raised by 10% for bronze and brass valves, 7% for cast iron valves, 7% for ductile cast iron valves, 10-15% for stainless valves, and 10% for cast steel valves.
 
Start of operation of Changshu Branch of KITZ Corporation of Shanghai
In order to enrich necessary functions (development of new products, manufacturing, quality assurance, technical services, logistics, etc.) for promoting sales further in China, the company established a branch as a base for multiple functions in Changshu, Jiangsu, located to the northwest of Shanghai. From now on, the company will obtain necessary certifications, such as ISO9001 and fire-fighting certification.
 
Installation of coating robots
Ina Plant is remodeling its production line for improving productivity and reducing cost. As manpower saving in the assembly process progressed first, the subsequent coating process is being improved. Coating robots were installed in two lines.
 
 
 
Medium Term Business Plan
 
KITZ Corporation's Long Term Business Plan (from fiscal years March 2011 to 2021) called "KITZ Global Vision 2020" calls for achievements to be made in fiscal year 2020 (FY3/21). The First Medium Term Business Plan (FY3/11 to FY3/13) and the Second Medium Term Business Plan (FY3/14 to FY3/16) have been completed, and the Third Medium Term Business Plan (FY3/17 to FY3/19) is in progress.
 
3rd-phase mid-term managerial plan
(1) Basic policies
To achieve an operating income of over 10 billion yen in the fiscal year ending Mar. 2019, and a record-high profit in the fiscal year ending Mar. 2021 (an operating income of 12.5 billion yen).
To emphasize profit and cash flow, and aim to achieve an ROE of 8% or higher.
To concentrate managerial resources in the main target markets where the company can exert its strengths
To enrich the return to shareholders
 
(2) Numerical goals and activities for major businesses
 
 
Valve manufacturing business
The company will narrow down its target markets to "construction equipment," "petro-chemistry and general chemistry," and "clean energy (hydrogen and LNG)," and target areas to Japan, Europe, the Americas, ASEAN countries, China, and India, particularly ASEAN countries and the Americas. Then, the company will aim to expand its shares by launching new specialized products and offering combined functions.
Based on the matrix system constituted by the vertical structure (functional divisions) and the horizontal structure (company-wide cross-sectional organizations), the company will strengthen the management of both "organizations" and "products," and implement business strategies.
The company will utilize existing resources economically and fully and realize globally competitive costs, to expand sales and profit.
 
Brass bar manufacturing business
The company aims to enhance added value by maximizing profit by improving productivity and restructuring its business. For maximizing profit, the company will reduce processing cost by remodeling its manufacturing lines and curtail material costs through the optimal blending of raw materials. For restructuring its business, the company will integrate the processes for cutting and forging workpieces in the group and maximize its effects, to expand its business.
 
Water business
The company will develop businesses utilizing the smart aquaculture and water treatment technologies of KITZ. The smart aquaculture of KITZ is a new business launched in response to the growing demand in the global fishery market and the shortage of natural resources. On the other hand, the business utilizing the water treatment technologies will meet the global demand for water and respond to the enhanced awareness of the environment, based on the collaboration among KITZ, Toyo-Valve, Shimizu Alloy Mfg., KITZ Microfilter, etc.
 
Long-term managerial plan "KITZ Global Vision 2020"
(1) Qualitative goal
Under the slogan: "evolution to become a true global enterprise," the company aims to maximize its corporate value and become a strong, good company.
 
 
 
 
Future remarkable points
 
The mid-term managerial plan indicates that the company aims to achieve sales of 120 billion yen and an operating income of 10 billion yen in the fiscal year ending Mar. 2019. But the company will strive to attain the target operating income in the fiscal year ending Mar. 2018, one year earlier than the planned. Sales are estimated to reach 115 billion yen, which is the goal for the fiscal year ending Mar. 2018. However, it will be still below 120 billion yen, due to the decrease in equipment investment in the oil & gas market and the slowdown of the economies of China and emerging countries. In the Japanese valve market, which is the major domain of the company, the effects of the price revision are expected to get into full swing and the demand related to Tokyo Olympics and Paralympics is forecasted to grow in the second half of the fiscal year ending Mar. 2018. Outside Japan, North America has hopeful signs in the energy market, and it is expected to recover from the second half. In China, the sales are growing for commercial valves, whose demand has been cultivated. But the industrial valve market is shrinking. The target sales are 135 billion yen and the target operating income is 12.5 billion yen for the fiscal year ending Mar. 2021. These were first considered to be distant, but are now within reach.
 
 
<Reference: Regarding corporate governance>
 
The company recognizes the strengthening of corporate governance as one of important missions, and plans to promote sound, transparent business administration. In the fiscal year ended Mar. 2017, the company conducted the following 5 measures, including the establishment of a "compensation committee" and a "nominating committee."
 
<Measures in the fiscal year ending Mar. 2017>
To adopt a stock compensation plan for directors, excluding outside directors, and executive officers
To conduct a questionnaire survey about the effectiveness of the board of directors, targeting directors and auditors
To discuss issues to be solved for improving the effectiveness of the board of directors based on the survey results
To establish a "compensation committee," in which the majority of members are outside directors and the policies for directors' remunerations and their details are deliberated
To establish a "nominating committee," in which the majority of members are outside directors and candidate directors, auditors, and executive officers are selected from a multifaceted perspective
 
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) 2017, Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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