Sangetsu Corporation (8130)
Shousuke Yasuda, President
Shousuke Yasuda, President
Corporate Profile
Sangetsu Corporation
Code No.
First Section, Tokyo and Nagoya Stock Exchanges
Wholesale (Commerce)
Shousuke Yasuda
1-4-1 Habashita, Nishi-ku, Nagoya-shi
March end
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥1,923 68,306,807 shares ¥131.353 billion 5.6% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥50.00 2.6% ¥92.23 20.8x ¥1,587.86 1.2x
* Stock price as of closing on July 7, 2016. Number of shares issued at the end of the most recent quarter excluding treasury shares.
ROE and BPS are based on the previous year.
Non-Consolidated Earnings Trends
Fiscal Year Sales    Operating
Net Income EPS (¥) Dividend (¥)
March 2010 108,579 5,646 6,046 3,137 39.10 37.50
March 2011 112,118 7,161 7,530 4,242 52.87 37.50
March 2012 118,518 7,095 7,180 4,151 51.73 37.50
March 2013 123,150 8,020 8,393 4,806 60.26 40.50
March 2014 131,978 8,952 9,475 5,459 71.65 37.50
March 2015 132,050 8,031 8,506 4,402 58.35 41.25
March 2016 133,972 9,112 9,463 6,393 89.92 47.50
March 2017 Est. 140,000 9,000 9,500 6,300 92.23 50.00
* DPS of March 2013 included commemorative dividend of ¥3.
* Estimates are those of the Company. 2 for 1 stock splits were conducted in April 1, 2015.
* From the current fiscal year, the definition for net income has been changed to net income attributable to parent company shareholders (Abbreviated as parent net income).
This Bridge Report provides a review of the fiscal year March 2016 earnings overview for Sangetsu Corporation
Key Points
Company Overview
Sangetsu Corporation is the largest among all Japanese trading companies specializing in wallcoverings, carpets, curtains and other interior decorating products. Being a trading firm, the Company also operates as a "fabless company" that plans and develops interior decorating products. Sangetsu boasts of a business model that is able to produce stable earnings and top market share in its main product realms. The Company maintains a goal of raising ROE to above its cost of capital at an early stage as part of its midterm business plan.
The Sangetsu Group includes the following two companies: Sungreen Co., Ltd., a dedicated distributor of exterior products, and Yamada Shomei Lighting Co., Ltd., a planner, designer, manufacturer, and distributor of lighting equipment.
<Corporate History>
Sangetsu was founded in 1849 under the original name of "Sangetsudo" to sell various traditional Japanese interior decorating products including scrolls, wall scrolls, folding screens, sliding doors, partitions, and other products made of cloth and paper. Sangetsu Corporation was incorporated in 1953 by the founding family. From the latter half of the 1970s onwards, the business was expanded into Tokyo, Fukuoka, Osaka and other parts of Japan. In 1980, Sangetsu was listed on the Second Section of the Nagoya Stock Exchange, and later in 1996 its shares were also listed on the First Section of the Tokyo Stock Exchange. Currently, Sangetsu is expanding its operations into overseas markets and has established itself as the largest total interior decorating product provider within Japan, with a widely recognized brand of interior products.
Shosuke Yasuda was appointed as the first President who is not from the founding family of Sangetsu in April 2014. He will direct the Company during its third stage of growth entitled "Our Third Founding Phase," following on the heels of the original first phase of founding and the second phase when the company became a publicly listed corporation.
<Corporate Philosophy>
Sangetsu established a new corporate philosophy including a new brand philosophy in April 2016 that will enable it to take on the challenge of implementing reforms necessary to take it to its next stage of growth.
A new "brand philosophy" has been added to the "corporate creed", "corporate mission", and "Three Principles of Sangetsu" to create an expanded corporate philosophy.

<Corporate Creed>

<Corporate Mission>
To contribute to society through interior design and strive to create daily culture of enrichment

<Three Principles of Sangetsu>
Creative Designs, High Reliable Quality, Fair Price

<Brand Philosophy>
"Joy of Design" has been adopted as the brand statement, and "We provide the joy of design to those who create new spaces." is the brand purpose.

Sangetsu endeavors to create new and entertaining value through cooperation with all of its stakeholders and by connecting interior product makers and users.
<Market Environment>
◎ Overview
The market environment for the main wallcovering and flooring products is strongly influenced by trends in the Japanese construction market. Declines in new housing start arising from declining population and changing family structures within Japan, and deflationary trends have depressed sales of the interior products market as shown in the graph below.
At the same time, the graph below shows the correlation between sales of Sangetsu relative to sales of the Japanese interior market and new housing starts (Ministry of Land, Infrastructure, Transport and Tourism data). Sales of both Sangetsu and the Japanese interior market show a close relationship to trends in new housing starts. And despite the inability of housing starts and the interior market to recover to the pre-Lehman shock levels, Sangetsu's sales have been able to recover to its most recent peak level achieved in 2000.
This strong recovery is attributed to Sangetsu's efforts to cultivate business in the non-residential realm.
The Ministry of Land, Infrastructure, Transport and Tourism reports that while private-sector non-housing construction investment was less than private-sector housing construction investment, it had recovered to the level seen in 2000. However, whereas floor space of newly constructed office buildings has trended sideways, there is some concern about the fact that floor space of retail buildings has once again begun to decline.

Moreover, the Research Institute of Construction and Economy issued a report entitled "Outlook for Construction Investment Based upon a Construction Economy Model" (October 21, 2015) that calls for a continued trend of gradual recovery at growth rates of 1.3% and 2.2% year-on-year in private sector non-housing construction investment during fiscal years 2015 and 2016 respectively, following on the heels of 2.2% year-on-year growth recorded during fiscal year 2014.

Aging of the population due to declining birthrates is contributing to a long term decline in new housing starts and overall difficult operating conditions. However, the approach of the 2020 Tokyo Olympics and Paralympics are expected to contribute to relatively favorable conditions in the private-sector non-housing construction market for the foreseeable future.
◎ Competitors
In addition to Sangetsu, there are three publicly traded competitors that operate in the interior decorating market.
The Company's high profitability and stock price valuation are in sharp contrast to those of its competitors.
<Business Description>
The main businesses include planning, development and sales of wallcovering, floor covering, curtains, upholstery and other interior products. Sangetsu boasts of a "fabless operation" and does not maintain any manufacturing facilities, but its capabilities exceed that of typical trading firms and all of the products it sells are planned, designed and developed in-house. In addition, Sangetsu provides exterior products and lighting fixtures through its subsidiary.
① "Interior Business"
(FY3/16: Sales and Operating Income of ¥115.140 and ¥8.873Billion)
Sangetsu boasts of a diverse product lineup with about 13,000 different products in total. There are about 5,000 different wallcovering products alone. Product catalogs are updated every two years (Curtain and Carpet product catalogs are updated every three years), with an existing product replacement rate for wallcovering of 50% to 55%, which compares with a 35% to 40% rate for its competitors.

Replacement of existing products is not a simple task. Disposal of products leads to wastes, but the disposal of existing products due to replacement with newly designed products is necessary to maintain the attractiveness of the product catalog and to satisfy customers. Therefore, the ability to maintain a balance between attractiveness and efficiency is highly important and is one of the strengths of Sangetsu.
◎Marketing Structure
In addition to the headquarters located in Nagoya, Sangetsu maintains 8 regional offices and 55 marketing offices throughout Japan, with 6 of these marketing offices also hosting showrooms.
The downstream interior finishing process includes the final delivery of products, booking of sales, and receipt of cash. The main customers are interior construction companies and interior and building material shops that are serviced through dealers. Furthermore, public relations and advertising for products at the start of the process are also very important.
Therefore, Sangetsu conducts public relations and advertising for its products in its product catalog, television commercials and at its showrooms. In addition to these "passive" marketing activities, Sangetsu also conducts "proactive" marketing of its products through its corporate marketing division and its 400 marketing staff to provide and gather information and propose products to clients.

While the main marketing efforts are conducted through dealers, Sangetsu also conducts direct marketing to customers in the Nagoya and surrounding Chubu area, and the number of its directly accessed customers totals 6,000 in these regions alone. While the number of customers dealt with through dealers is not known, the total number of customers is estimated to amount to several tens of thousands nationwide.
◎Distribution Structure
Sangetsu maintains a network of 13 distribution centers nationwide. Most all products are normally stocked at the Company's distribution centers in Tokyo, Nagoya, Osaka and Fukuoka, with the number of products shipped from these centers surpassing 60,000 per day and the out-of-stock ratio amounting to a low 0.13% (About 70 products) per day. Sangetsu's nationwide distribution network makes"Just-in-Time" provision of products to match the interior construction schedules of its clients possible. Products are sourced from a wide range of over 100 supplier companies.
② "Exterior Business"
(FY3/16 Sales and Operating Income of ¥14.712Billion and ¥367 Million)
Sungreen Co., Ltd., which was turned into a subsidiary in 2005, sells doors, fences, terraces and other exterior products within Japan.
③ "Lighting Business"
(FY3/16 Sales and Operating Income of ¥4.119 Billion and ¥ -128Million)
Yamada Shomei Lighting Co., Ltd., which was turned into a subsidiary in 2008, sells down lights, z-lights and other general lighting fixtures within Japan.
<ROE Analysis>
The Company maintains a target of "achieving high levels of ROE that exceeds its cost of capital of 8% to 10% at an early stage" in its mid-term business plan.
Specifically, Sangetsu "seeks to reduce its capital from the end of March 2014 by ¥10.0 to ¥20.0 billion within three to five years" as part of its efforts to achieve a ROE ratio of 8% to 10% by fiscal year 2017 to 2019. Consequently, the Company will implement efforts to raise profitability in addition to this capital strategy.
<Characteristics and Strengths>
① Business Model Capable of Yielding Stable Earnings
Sangetsu is a pioneer in the realm of "fabless companies" that do not maintain their own manufacturing functions and therefore have lower fixed expense burdens because they don't have to carry facilities for the manufacturing process. In addition, the Company boasts of over 13,000 products, sourced from over 100 suppliers, supplied to several tens of thousands of customers, which diversifies risk in many ways. And while Sangetsu's may be considered as an economically sensitive company as its business and earnings performances are closely linked to trends in the construction market, the Company has never seen losses since its founding.
② "Creating," "Proposing," "Providing"
While the actual manufacturing of products is not conducted in-house, Sangetsu performs the planning, design and development functions internally. The previous generation of Sangetsu management made aggressive investments for "unique designs," one of the three principles of the Company. 20 in-house designers develop new and original versions of products based upon numerous basic designs. The cultivation of designers responsible for various products is done through participation in oversea exhibitions, communication with marketing staff, and discussions with outside design consultants as part of their on-the-job training. Furthermore, Sangetsu maintains a policy of aggressively taking the perceptions and opinions of younger designers and staff into consideration. Sangetsu also boasts of an overwhelming number of products of about 13,000 that far exceeds the number of products of its competitors. In addition, the Company conducts revisions of its products on a regular basis every 2 to 3 years with more than 30 types of catalogs, which far surpass those of its competitors.
Nearly one third of all employees or some 450 work in marketing functions at Sangetsu, the largest marketing function within the industry. These marketing staff are assigned to 63 offices located throughout Japan and conduct proposal- based marketing to clients. Sangetsu also staffs its eight showrooms with 45 employees. In addition, about 40 interior designers create design boards that combine samples of various products for customers to use when choosing interior products. This high level of proposal-based marketing capability is unmatched within the industry and sets Sangetsu apart from its competitors.
As mentioned earlier in this report, Sangetsu normally maintains inventories of all of its products so that they can be provided on a "Just-in-Time" basis using their nationwide distribution network. However, the Company is required to conduct speedy processing techniques as product orders are placed so that loss rates can be limited to avoid the maintenance of excess inventories and reduced efficiencies. Some wallcoverings are produced in rolls as long as 50 meters, and Sangetsu cuts these rolls into shorter segments when orders are placed for shipment. The remaining segments of wallcovering are then cut to match other orders to eliminate losses. This type of custom-made cutting technology has been cultivated over the long years of experience in the interior decorating business and is an important factor that differentiates Sangetsu from its competitors.
Fiscal Year March 2016 Earnings Overview
Sales and Profits Rise, Sales Reach Record High
Sales rose by 1.5% year-on-year to ¥133.9 billion. Sales of curtains and other products declined, but sales of wall coverings and flooring materials trended favorably. With regards to curtains, although their sales declined during the first half by double digits, sales rose during the second half due to the introduction of new products and exceeded the level for the same period last year.
The higher sales, sales pricing revisions conducted during the second half of fiscal year March 2015, and lower materials costs accompanying the decline in crude oil prices allowed gross income margin to rise by 0.9 point year-on-year to 5.3%.

Efforts to reduce television advertising and other expenses offset increased expenses arising from the move of the logistics facilities and consulting for reviews of the logistics function, and from opening of a new showroom in Shinagawa, Tokyo allowed operating income to rise by 13.5% year-on-year to ¥9.1 billion.
Large declines in impairment losses booked in the previous fiscal year allowed net income to rise by 45.2% year-on-year to ¥6.3 billion.

Sales rose for sixth consecutive year and achieved a new record high. Net income also rose to a new record high, surpassing the previous record set in fiscal year March 1991 of ¥6.23 billion, and rose to the target defined in the current Medium Term Business Plan of ¥6.3 billion one year earlier than expected.
While sales fell slightly below initial estimates, profits exceeded estimates.
① Interior Business
Strengthening of the product planning and development related organization allowed for establishment of a new product development structure that can more accurately respond to needs of the market. In addition, a new brand called "process#100" that appeals to the customers' emotions was launched with a goal of selling high value added products that have better design and functionality. Furthermore, strengthening of marketing capabilities for non-housing market applications, including strengthened corporate client marketing, allowed work for particularly large projects to be captured.

A new wallpaper product catalog entitled "Fine 1000", that includes medium price range wallpapers that boast of high levels of customer satisfaction and superior functionality and design compared with general use type wallpapers, was launched. This new catalog also responds to the contraction in the residential market resulting from the low birth rates and aging population by offering premium type products that match needs of the market.
In addition, efforts to strengthen sales of high value added modern Japanese paper and lacquer products contributed to an expansion in sales to hotels and other commercial facility applications.

<Flooring Materials>
Along with the expansion in the rental home market, sales of PVC tiles with realistic wood graining, manufactured using advanced printing technologies, expanded. Furthermore, fortification of product lineup and Group coordination function contributed to an expansion in the use of custom designed carpets in refurbishment of hotel banquet rooms.

The product catalog "Sun Wink" that presents roll screens and vertical blinds was launched in September 2015. Moreover, in "AC Curtain Fabrics," the catalog launched in November to renew Sangetsu's brand image, the pricing policy was revised and product development and marketing activities were strengthened to match the needs and trends of the market. As a result of these efforts, the performance in the latter half of the year recovered to the level of the same period of the previous year, but full-year earnings declined due to a rather large contraction in the first half of the year.
② Exterior Business
Efforts were made to conduct aggressive marketing and strengthen logistics, enabling sales of the Yokohama Office to grow strongly in its second year of operations. Furthermore, efforts to strengthen sales capability in not only the Chubu region but also the Kanto region were conducted. While a recovery in the number of new housing starts during the second half of the fiscal year allowed sales to remain in line with the previous year, profits declined.
③ Lighting Business
Marketing activities to architectural design offices and lighting design offices were strengthened with a focus upon non-housing applications such as offices and hotels. In addition, energy saving lighting products were proposed including high value added products that have been developed by leveraging the lighting characteristics and controllability of LEDs. Furthermore, the Tokyo Showroom was refurbished with the objective of being able to conduct more aggressive and effective marketing of products and to derive synergies with the interior business. Consequently, sales of LED and other non-housing application products grew, but anticipatory expenses in preparation to secure future growth led to an increase in overall expenses, and valuation losses on material inventories caused a loss to be incurred.
A fall in marketable securities contributed to a decline in current assets of ¥10.7 billion from the end of the previous fiscal year. Acquisition of tangible assets (Property) and investment securities led to a ¥6.9 billion rise in noncurrent assets. As a result of these developments, total assets declined by ¥3.8 billion from the end of the previous term to ¥139.2 billion at the end of the current term.
Increases in payables caused current liabilities to rise by ¥3.7 billion from the end of the previous term. An increase in retirement benefits led to a ¥2.6 billion rise in noncurrent liabilities and a ¥6.3 billion rise in total liabilities to ¥30.7 billion.
Net assets fell by ¥10.2 to ¥108.0 billion on the back of a decline in retained earnings.
Capital adequacy ratio fell by 5.1 points from the end of the previous term to 77.9% at the end of the current term.
Increases in profits and accounts payable caused the net inflow of operating cash flow to expand.
Increases in refund of deposits also allowed the margins of net inflows of investing cash flow and free cash flow to grow.
Increases in acquisition of treasury stock and dividend payments caused the net outflow of financing cash flow to expand.
Cash position rose.
Fiscal Year March 2017 Earnings Estimates
Estimates Call for Slight Sales Growth, Flat Profits Growth
Sangetsu's earnings estimates call for sales to rise by 4.5% year-on-year to ¥140.0 billion during fiscal year March 2017 despite uncertainties in the operating environment for housing, refurbishment and non-housing segments of the market. In particular, non-housing applications have been impacted by the continued contraction in floor space of new construction starts in the fiscal year two years before and the fiscal year one year before. Against this backdrop, reviews of the business structure and release of new a wallcovering and flooring materials catalog have been conducted, along with strengthening of the marketing division entailing increases in staff numbers and opening of new smaller showrooms.
Profit estimates do not include any effect from the sales pricing revisions or procurement price reductions that were responsible for the increase in profits during the past two years. Therefore, the ability to achieve higher sales will be important in offsetting increases in sales, general and administrative expenses, and estimates call for operating income to fall by 1.2% year-on-year to ¥9.0 billion.
Gross income margin is expected to remain in line with the previous fiscal year, but the establishment of new logistic facilities is expected to raise sales, general and administrative expenses by 6.7% year-on-year.
Dividend payment is expected to be raised by ¥2.50 per share year-on-year to ¥50.00 for an anticipated dividend payout ratio of 54.2%.
Interview with President Shosuke Yasuda
We asked President Shosuke Yasuda about Sangetsu's business results during fiscal year March 2016 and progress in achieving goals identified in the Medium Term Business Plan "Next Stage Plan G".
"I am dissatisfied with our top-line growth, and will implement measures to strengthen our product lineup and marketing structure."
While we were able to achieve record high sales during fiscal year March 2016, I remain dissatisfied by the small margin of growth.
Ever since measures to "strengthen our product development structure" have been implemented as part of our business restructuring strategy, we have received high regard for our product catalogs that have been newly released after the installation of this new structure. However, this strong regard of our customers has yet to be reflected in terms of tangible increases in sales, and we will continue to implement efforts to strengthen our marketing structure and increase top-line growth.
"A new brand concept was announced, and efforts to raise awareness of the new Sangetsu are being conducted in and outside the Company."
A new brand concept was published in April 2016.
Our brand statement is: "Joy of Design: We provide joy of designing for those of you who aspire to create new space. In addition, new corporate logos and symbols have also been adopted. Along with the announcement of the new brand concept, nationwide showrooms have been renamed; the Shinagawa Showroom is now called "Sangetsu Design Site" and other smaller regional showrooms "Sangetsu Design Studios".
The new brand concept, of course, aims at increasing the awareness of the "New Sangetsu" outside the Company. But not only that, it is also meant to be a message within the Company: an expression of company-wide determination to "create a New Sangetsu by ourselves".
"Clear Change in Employee Awareness"
Nearly all of the measures designed to reform the human resources system and revise the business structure in accordance with our Medium Term Business Plan have been completed.
In addition to increases in promotions and reforms of the salary system, the awareness of employees is clearly changing through the implementation of a "strategy of creating a New Sangetsu" and the subsequent efforts to "achieve goals" and "proactively take steps to achieve goals". As evidence of these efforts, two of the Sangetsu Design Studios recently opened were proposed by our employees.
"Prepare a Necessary and Sufficient Quality Management Structure"
In order to establish a necessary and sufficient quality management structure as a fabless manufacturer, staffing of the quality management technology office was strengthened. In addition to the office manager responsible for quality management, testing research, exterior technology and flooring material technology managers were also hired externally.
In addition to strengthening of the technology support structure for new product development, quality management was strengthened to eliminate faulty products, a fieldwork system for suppliers was introduced, and improvements to the in-house product quality assessment function were conducted.
Because reductions in customer complaints can contribute to significant improvements in profitability, efforts to further strengthen quality management will be implemented.
"Similar functions to those in Japan will be facilitated in China to establish the brand and cultivate the China market."
"Sangetsudo China" was established in Shanghai, China in April 2016.
The wallpaper market in China is already double the size of that in Japan.
Currently, 85% of walls in Chinese construction are finished using paints, with wallpaper accounting for only 8% of the total wall space. However, demand for wallpaper is expected to steadily expand along with increasing desire to decorate homes and offices with more unique designs.
"Sangetsudo China" is a Japanese-style local company with warehousing, distribution, showroom and installation functions.
Sangetsu could have pursued a short term strategy which may have been more effective in producing sales and profits by not establishing a local company with these functions and relying upon local agents and outsourcing installation of wallpaper to local companies. However, our Company maintains a goal of establishing Sangetsu as a company known for its superior "Japanese wallpapers" and has therefore decided to create a local company with these various functions.
And while it may take some time to yield tangible results, Sangetsu will endeavor to realize profits over the long term by firmly establishing the "Sangetsu brand" to cultivate the huge local market potential.
While sales during the year just ended rose to a new record high, President Shosuke Yasuda states that results of measures called for in the Medium Term Business Plan have yet to be realized. And despite uncertainties in the external environment including postponement of the consumption tax hike and potential continued contraction in floor space of new non-housing construction starts, positive influence of the release of a new product catalog and establishment of new showrooms should be watched closely.
<Reference: Medium Term Business Plan "Next Stage Plan G">
Sangetsu identifies 2014 as its "Third Founding Phase" and has created the "Midterm Business Plan (2014-2016) Next Stage Plan G" to define the vision to be pursued and direction to be taken in the coming years. The targets included in this plan entail "corporate restructuring and fortification, investments and preparations for future growth, and preparations to cultivate development of business over the next three years."
In addition, Sangetsu will promote the four specific measures mentioned below as part of "4) Diffusion of Our Corporate Philosophy and Principles" strategy.
Sangetsu endeavors to achieve record high levels of profits while at the same time conducting anticipatory investments to facilitate a structure that can achieve sustained growth.

In addition to refurbishment of existing businesses and promotion of large scale renovation of hospitals and nursing care facilities in the interior business, a shift to high value added products and efforts to achieve higher sales are expected to be promoted. Sales, general and administrative expenses are expected to increase in the absence of sales because of the startup of new business development and overseas business deployment. Based upon the assumption of limited expansion in the exterior business, Sangetsu is expected to prioritize the establishment of a stable business foundation for the lighting business. Consequently earnings are not expected to grow.

◎Targets to Be Achieved Between 2017-2019
Based upon this midterm business plan, the next midterm business plan is expected to end in fiscal year March 2020 and maintains the themes of "realizing profitability of new, overseas businesses, and consolidated subsidiaries," "steadily expand earnings of the interior business," and "introduction of new capital strategy." In addition, the next plan maintains a "target of achieving ROE of 8% to 10%."
This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.
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