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
¥900 100,027,251 shares ¥90.025 million 7.3% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥16.00 1.8% ¥62.94 14.3x ¥749.77 1.2x
Note: Share price is as of closing on November 10, 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 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. 123,000 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 first half of fiscal year ending March 2018 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, the U.A.E and Philippine. 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
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.
 
 
 
First half of Fiscal Year Ending March 2018 Earnings Results
 
 
Operating income grew 0.5% year on year after absorbing an increase in costs due to the rise in copper prices in the valve manufacturing business.
Sales were 59,592 million yen, up 8.5% year on year, consisted of 46,951 million yen (+7.4% from the plan), up 5.8% year on year, from the valve manufacturing business and 11,046 million yen (+10.5% from the plan), up 24.9% year on year, from the brass bar manufacturing business.
Operating income was 4,314 million yen, up 0.5% year on year. The rise in copper prices was a drag on the valve manufacturing business, and operating income margin deteriorated. However, the effect of price revision in the valve manufacturing business appeared earlier than expected. Thanks to this effect and the upward shift in sales, operating income was 7.9% above the initial forecast. The decline in ordinary income was due to decrease in dividend received as a result of the cancellation of cross-shareholding in the previous term.
 
 
 
 
Valve Manufacturing Business
Domestic sales increased 9.6% year on year to 30,698 million yen, while overseas sales decreased 0.9% year on year to 16,252 million yen, despite positive effect of depreciation of the yen.

In Japan, the sales of products for construction equipment increased, partially due to delivery of provisional demand associated with price revisions implemented in May. The new prices are also steadily penetrating into the market. In response to active capital investment by semiconductor manufacturing equipment manufacturers, the demand for valves for semiconductor manufacturing equipment increased significantly. Industrial valves also had strong demand for machinery as well as large projects in the petro-refining and petro-chemistry industries. Furthermore, in the water market, the delay in using up budget by local governments was covered by strong sales of filters.

Overseas, sales grew in Asia due to strong demand for semiconductor-related products. Sales in North America, which has been struggling due to sluggish crude oil prices, declined, and the company also struggled for the oil and gas industry in Europe and others, resulting in sharp fall. Sales were boosted up by 269 million yen, because the yen's depreciation against the dollar remained lower than the same period of the previous year.

Operating income was 5,606 million yen, up 0.2% year on year. The increase in copper prices, personnel expenses, and research and development expenses became burdens, despite the continued cost reduction effect, an effect of increasing the quantity due to strong sales for domestic construction equipment and semiconductor manufacturing equipment, and the effect of price revisions,
 
Brass Bar Manufacturing Business
Sales were 11,046 million yen (up 24.9% year on year) and operating income was 342 million yen (up 20.6% year on year). As product prices rose in conjunction with the copper prices that rose sharply in the second quarter, sales volume increased 3.0% year on year. On the profit side, in addition to being easy to secure profit margins due to rising copper prices, there was also a cost reduction effect.
 
Other
Sales were 1,594 million yen (down 6.5% year on year) and operating income was 56 million yen (down 49.5% year on year). In the same period last year, the hotel business had a customer attraction effect from the "pillar festival", which takes place every seven years. The rest area was also crowded with the effect of a TV drama, "Sanada Maru".
 
 
Net assets at the end of the first half increased by 1,989 million yen from the end of the pervious term to 121,137 million yen. Equity ratio was 61.9% (61.9% at the end of the previous term).
 
 
Operating cash flow decreased because 1) the settlement of receivables did not proceed as the end of the first half was a holiday of financial institutions and 2) inventory assets were accumulated toward the second half.
 
 
Fiscal Year Ending March 2018 Earnings Estimates
 
 
Sales are estimated to grow 7.8% year on year, while operating income is forecasted to rise 12.0% year on year.
Although sales forecasts were revised upward, profit forecasts remained the same, taking into account that copper prices would remain high. Sales are estimated to be 123 billion yen, up 7.8% year on year. In the valve manufacturing business, sales are expected to rise 6.6% as a result of strong demand for construction equipment and semiconductor-related business covering struggles in the overseas market. In the brass bar manufacturing business, sales are expected to rise 16.4% due to rise in copper prices. For both businesses, the sales forecasts for the second half were revised upward.
Operating income is estimated to be 10 billion yen, up 12.0% year on year. The income from the valve manufacturing business will rise 11.0% year on year as a result of cost reduction, increase in quantity, price revision effect. However, the operating income of the brass bar business is estimated to decline by 21.6% due to increases in personnel cost and depreciation cost, even though the rise in copper prices works in favor of the company's profit. In comparison with the initial forecast of the current fiscal year, the company adjusted the profit of the valve manufacturing business downwards based on copper prices, while revising the profit of the brass bar manufacturing business upwards.
 
 
Domestically, for construction equipment, which is the company's core business, delivery to large-scale projects in the metropolitan area will get into full swing. Demand for semiconductor manufacturing equipment by the manufacturers will also be strong and continue to be favorable. KITZ SCT Corporation, a subsidiary handling semiconductor manufacturing equipment, is expected to post record highs in sales and operating income for the full year. Although the company established a plant to produce system products in June 2017, it is considering further capital investment to meet the demand of semiconductor manufacturing equipment manufacturers. Although the budget spending of the public works is delayed in the water market, sales of industrial filters will be strong. In the industrial valve market, there is no plan for large-scale projects, and maintenance and renewal demand will be the main focus of the business. In addition, together with the group companies, the company is trying to capture the demand related to Tokyo Olympics and Paralympics (for construction equipment) and focus on expanding sales of butterfly valves, which are the priority valves.
Overseas, there is a feeling of bottoming out in the North American market which has been in severe conditions due to the slump in crude oil prices. The company is planning to focus on expanding sales targeting pipeline companies. Meanwhile, in the European market, the sales will struggle due to sluggish facility investment towards oil and gas. In the ASEAN region, while Indonesia's recovery is delayed, Thailand has a slight upward trend. The company will establish new marketing bases and focus on expanding sales in neighboring countries such as the Philippines and Malaysia. It has also begun to work on the development of commercial valves suitable for local markets. In China, commercial valves for construction equipment such as data center continue to be strong. It is aiming at further sales expansion using its affiliate. Furthermore, in March 2018, the company will deliver valves to a large-scale project in Middle East (Iran).
 
 
 
 
TOPICS
 
(1) Establishment of a representative office in the Philippines by KITZ Corporation of Asia Pacific Pte. Ltd.
KITZ Corporation of Asia Pacific Pte. Ltd. is expanding its marketing bases one by one in ASEAN, one of the priority areas. As a part of this effort, it established a representative office in Viet Nam in June 2016, and in August 2017, it opened a representative office of KITZ Corporation of Asia Pacific Pte. Ltd. (KAP) in the Philippines (Manila) which is expected to grow significantly in the future. KAP Philippines is working on marketing of various valves, and sales in the Philippines for the fiscal year 2017 are estimated to be approximately USD 4.8 Million (approximately 530 million yen). It plans to continue developing the marketing system in order to respond to the needs of customers around the world.
 
(2) Construction of a hydrogen station using a compact package unit
The company will build a hydrogen station using a compact package unit as a private facility at the Nagasaka Plant (Hokuto city, Yamanashi prefecture). The construction is scheduled to be completed in March, 2018.

The Ministry of Economy, Trade and Industry (METI) plans to develop 160 hydrogen stations in 2020, 320 stations in 2025, and 900 stations in 2030, but if the hydrogen station is the same size as the conventional one (filling 6 fuel-cell vehicles in 1 hour), both the construction and operation costs will be high for the current number of fuel-cell vehicles in use. For this reason, it is necessary to construct hydrogen stations of a scale suitable for the market in preparation for the full-scale popularity of fuel-cell vehicles.

The company will construct a hydrogen station of the scale capable of filling up 2 fuel-cell vehicles in 1 hour using a compact package unit (compressor/ pressure accumulator unit) that is smaller than the conventional one in the Nagasaka Plant. In addition, it will actually utilize fuel-cell vehicles and fuel-cell forklifts as company vehicles and verify the operation. In addition to accumulating technologies for valve development in the future, the company plans to proceed with verification with a view to propose compact, high-function, and inexpensive compact package units to the market in the future.
The company has been selling the valves for hydrogen stations since July 2012. As of June 2017, their valves are used at most of 99 commercial hydrogen stations in Japan (including the plan for FY 2017). The hydrogen station to be constructed this time using the compact package unit adopts the world-class in-house ball valve that is capable of sealing high pressure hydrogen gas of 100 MPa (1 million Pascal) class.

Construction site:       KITZ Nagasaka Plant (Hokuto city, Yamanashi prefecture)
Supply method:          Off-site supply method using a compressor/ pressure accumulator package unit
Supply capacity:         55 Nm3/h (capable of filling 2 fuel-cell vehicles per hour)
Estimated completion date:      March 2018
 
 
Future remarkable points
 
In the valve manufacturing business, although somewhat brightness seems to come out in North America, the tough situation has not changed. The situation in Europe seems to be more severe than in the United States. On the profit side, high copper prices are a matter of concern. At the beginning of this term, the market price of electrolytic copper was forecasted to be 680,000 yen/ton, but currently it turned out to be about 830,000 yen/ton, which is higher than the initial estimate by 20% or more.
Meanwhile, the business is strong in Japan. In the second half, the delivery of redevelopment-related products mainly in the metropolitan area will become full-fledged, and the effect of price revision will also appear on a full scale. During a period from the fiscal year ending March 2019 to March 2020, the demand related to Tokyo Olympics and Paralympics is anticipated to grow, and the cost reduction effect is also expected to continue. Therefore, as long as the copper prices do not rise sharply from the current level, the valve manufacturing business is expected to grow steadily both in terms of sales and profits, covering overseas struggles, in the next term and thereafter. In the field of non-construction equipment, it is hoped that sales of butterfly valves will grow to strengthen the sales of industrial valves.
 
 
<Reference: Concerning corporate governance>
 
 
◎Corporate governance report                 Updated on: June 28, 2017
It is our corporate philosophy to continually improve corporate value by offering creative and high-quality products and services. With this corporate philosophy in mind, as a socially responsible company, we are working to realize the management that takes into consideration all stakeholders including our shareholders.
In addition, we are working to enhance corporate governance through various measures to realize prompt, efficient, sound and highly transparent management based on requests from stakeholders and social trends to strengthen management efficiency and compliance.
 
<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>
We undertake all principles of the Corporate Governance Code.
 
<Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>
9. Policy for Constructive Dialogue with Shareholders (Principle 5-1)
We recognize that, in order to achieve sustainable growth and enhance medium- to long-term corporate values, it is important to be aware of the accountability as a trustee of management, disclose information to stakeholders such as shareholders and investors in a timely and appropriate manner, and maintain fairness and transparency in management. We also believe that it is important to provide necessary information on an ongoing basis and also to conduct IR activities to utilize opinions and requests from external viewpoints for management improvement. Therefore, in order to promote constructive dialogue with shareholders to obtain shareholders' understanding of management strategies and management plans, we have established an IR system centered around our president and executive officer in charge of IR, and we are implementing the following measures.
 
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) 2018, Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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