BRIDGE REPORT
(8860)

東証1部

Fuji Corporation Ltd. (8860)
Nobutsuna Miyawaki, President
Nobutsuna Miyawaki, President
Corporate Profile
Company
Fuji Corporation Ltd.
Code No.
8860
Exchange
Tokyo Stock Exchange, 1st Section
Industry
Real Estate
President
Nobutsuna Miyawaki
HQ
1-4-23 Habucho, Kishiwada-shi, Osaka
Year End
March
Website
Stock Information
Share Price Shares Outstanding Market Cap. ROE (Act.) Trading Unit
¥741 35,895,554 shares ¥26.559 billion 13.1% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Act.) PBR (Act.)
¥27.00 3.6% ¥115.61 6.41x ¥883.73 0.84x
*Stock prices as of the close on May 12, 2017. Number of shares issued at the end of the most recent quarter excluding treasury shares.
ROE and BPS are based on FY 3/17 earnings results; EPS is based on FY 3/18 earnings estimates.
 
Consolidated Earnings Trends
Fiscal Year Sales      Operating
        Income
Ordinary
      Income
Parent
   Net Income
EPS(¥) DPS(¥)
March 2014 86,363 5,806 5,660 3,261 91.13 26.00
March 2015 79,594 4,361 4,322 2,756 76.46 26.00
March 2016 90,726 5,441 5,298 3,430 95.18 26.00
March 2017 99,359 5,969 5,721 3,945 110.06 26.00
March 2018 Est. 103,000 6,300 6,000 4,150 115.61 27.00
* Estimates are those of the Company.
 
This Bridge Report provides information about Fiscal Year March 2017 earnings results and other details of Fuji Corporation Ltd.
 
Key Points
 
 
 
Company Overview
 
Fuji Corporation Ltd. provides various real estate related services including sales of new and used condominiums and detached homes primarily in Osaka Prefecture (where the Company is based), between Osaka and Kobe, and within Wakayama City. Their main business is the sale of detached homes, albeit a built-for-sale type, that would maximize customer satisfaction by allowing for the "free-design home" regarding layout, specifications, etc. within the boundaries of Japan's Building Standards Act. Fuji also boasts of strengths in the development of properties where 50 to 200 homes are constructed in coordination with the surrounding environment and each other to provide uniformity in neighborhoods. The other main pillars of the Company's business include renovation and sale of used residential properties, collaboration with financial institutions for effective land utilization, sales of rental apartments for sale to individual investors, property leasing and management services, and custom housing.

Fuji boasts of unique knowhow developed in various businesses realms derived from its sales agency and detached home services. Furthermore, the complementary and synergistic effects that occur between its various business divisions allow the Company as a Complete Home Provider to respond with solutions that match the needs of home owners and residents in various geographic regions and times. Another strength of Fuji is local community-based management to match the time and place of the markets, and to maintain high levels of customer satisfaction by upholding the principles of "never ignoring customers after the sale" and "never ignoring customers after the completion of construction."
 
(1) Business Description
Residential Properties for Sale (33.4% of Fiscal Year March 2017 Total Sales)
Sales of detached homes and condominiums are conducted in this business. A characteristic of this business is Fuji's ability to develop neighborhoods of new detached homes in 50 to 200 units that match the local neighborhoods, and to allow its customers to participate in the designing of the property. More specifically, these "free-design" homes respond to the needs of individual customers by allowing them to customize the layout and specification of the homes to suit their tastes and needs. Furthermore, new condominiums for sale are also included in the residential properties for sale business segment. Fuji halted the condominium for sale business in spring of 2005, based upon the outlook for a weakening in pricing due to declines in demand and increases in supplies. However, in the aftermath of the Lehman Shock, declines in land prices and improvements in supply and demand conditions in the condominiums for sale market led Fuji to restart the condominiums for sale business in February 2012. Another feature of Fuji is its focus upon condominiums and residential properties that are carefully selected (such as their convenient proximity to stations) and that are attractively priced for first-time buyers.
 
Housing Distribution (33.0% of Fiscal Year March 2017 Total Sale)
Sales of refurbished used residential property called "Kaizo Kun" and the new detached homes (spec new homes) are conducted in this business segment. "Kaizo Kun" refurbished used residential properties are used residential properties purchased for renovation and sales. Fuji's unique knowhow is leveraged in local community-based management and manualized procedure for renovation. On the other hand, sales of small-scale newly constructed detached homes (spec new homes) has allowed the Company to satisfy a wide range of customer needs that could not be completely met with free-design homes and large-scale development projects. Yet, the Company will end that service henceforward and will switch to free-design homes.
 
Effective Land Utilization (19.1% of Fiscal Year March 2017 Total Sale)
Contract construction for leased properties and sales of rental apartment for sale to individual investors are conducted in this business. Construction work is performed for construction of rental residential properties sold on a proposal basis and leverages Fuji's knowhow developed in its property leasing and management business. In addition, Fuji purchases lands and then constructs rental apartment buildings for sale to individual investor in this business. The highly price competitive wooden structure apartments called "Fuji Palace" were launched in November 2008, subsequently affordable rental apartments for seniors with nursing-care service, which are called "Fuji Palace Senior" as a means of differentiation. With regards to rental apartments for sales to individual investors, the price for apartments is roughly ¥100 million, and the demand for these types of rental properties remains strong as a fund management method.
 
Property Leasing and Management (14.0% of Fiscal Year March 2017 Total Sale)
The fully owned subsidiary Fuji Amenity Services Co., Ltd. provides rental apartment structure management, tenant solicitation, rent collection and other management services, in addition to consigned management of condominiums. Superior rental and management related services not only act as stable source of earnings, but also provide opportunities to achieve high synergy with contract construction of rental income properties, sales of rental apartments for sale to individual investors, and sales of condominiums.
 
Custom Housing (0.5% of Fiscal Year March 2017 Total Sale)
By leveraging the knowhow cultivated in the detached homes business, Fuji has successfully grown and marketed its services of reconstruction of existing detached homes and construction of new detached homes to land owning clients. This business has also grown to become the fifth cornerstone of its overall business.
 
(2) Strengths of Fuji Corporation
Strength as a Complete Home Provider
Knowhow in the realms of acquisition of land and building permits, design, construction and sales cultivated in the detached home services has allowed Fuji to develop a wide range of businesses including its used residential property sales, effective land utilization, rental apartment buildings for sale to individual investors, and property leasing and management, as well as to cultivate synergies between these businesses. Furthermore, its local community-based management has also contributed to cultivate synergies among these wide ranging businesses and achieve high levels of customer satisfaction in its real estate and related services.
 
 
Capabilities of the Refurbished Used Residential Property Business
The "Kaizo-kun" refurbished used residential property business was born from the fusion of knowhow cultivated in the residential property agency sales and renovation businesses, which were launched along with the start of the Company. Fuji maintains a unique business model that enables them to conduct the three main functions of the residential property sales process including "acquisition," "renovation," and "sales" of used residential properties. The Company also boasts of the ability to create used residential properties that match the needs of customers because of its creation of manuals regarding how to renovate homes and information gathering of local markets based on its local community-based management style. In addition, a service called "Fuji Home Bank" has been created where coordination with judicial scriveners is conducted to purchase properties in cases of conclusion of inheritance registration. This service also offers the convenience of paying the inheritance registration fees from the fees derived from the sale of properties.
 
 
Ability to Increase Returns by Proposing Effective Land Utilization
Fuji does not only provides the ability to propose effective land utilization, but also offers market surveys, planning, design, construction, and rental property management services to maximize its capability as a comprehensive real estate developer. Land purchases and sales, apartment and condominium reconstruction, legal and tax related services, and other various expert opinions and services are available as precise solutions to suit the needs of customers. As to its rental property management business, strict selection of land from the vast amount of real estate information is based upon meticulous market surveys conducted by its full-time marketing staff, and planning is carried out only when long-term and stable management is feasible. In addition, Fuji only purchases properties that boast of highly superior locations and other conditions to be turned into high yielding used real estate products. Moreover, Fuji proposes a bundled leasing system to property owners as a means of providing them with full "security, safety, and stability" in the rental property management service.
 
 
Business Portfolio Synergies
The real estate industry is hugely influenced by external factors such as the economic environment and changes in interest rates. To establish a business model that can withstand these conditions, Fuji Corporation has endeavored to build a business portfolio that can generate stable profits by providing diversified products and services. Looking at the sales composition during the last 5 years, residential properties for sale has previously accounted for more than 40% of total sales in the past. However, Fuji Corporation has been able to achieve a more balanced business portfolio as the three business segments, 1) residential properties for sale, 2) housing distribution, and 3) effective land utilization and property leasing and management businesses, now account for over 30%.
 
 
Medium Term Business Plan (From Fiscal Year March 2016 to 2019)
 
With regards to the current medium term business plan, Fuji Corporation maintains targets for sales and ordinary income of ¥102.0 and ¥6.0 billion respectively to be achieved by Fiscal Year March 2019, the plan's final year. Furthermore, this plan calls for the turning of the large development of detached housing projects and the restarted sales of condominiums, which had been curtailed due to weak supply and demand conditions, into earnings drivers of the residential properties for sale business segment. Moreover, the plan also calls for growth in used residential properties through the expansion in the sales regions in the housing distribution business segment, and securing of stable profits through strengthening of property purchases in the effective land utilization business segment. In addition to these strategies, efforts to grow earnings through sustained increases in managed properties will be conducted in the property leasing and management business segment.
 
 
Midterm Business Plan Profit Assumptions
Achievements during Fiscal Year March 2016
Strong sales and profits were recorded during Fiscal Year March 2016 and they far exceeded the assumptions of the current medium term business plan. Fuji Corporation expected both free-design homes sales and property leasing and management sales to expand by large margins, and anticipated large increase in sales of the effective land utilization business on the back of increases in rental apartments for sale to individual investors. All of these business segments exceeded the Company's estimates, and the used residential properties sales also posted much better than expected sales.
 
Achievements during Fiscal Year March 2017
Both sales and profits exceeded the Medium Term Business Plan targets by large margins during Fiscal Year March 2017. Initially, increases in the number of deliveries of high quality and large scale residential properties for sale, in the number of units for sale due to an expansion in the sales region of used residential properties, and in the number of rental apartments for sale to individual investors allowed property leasing and management business to rise. In addition to these strong performances, higher sales pricing of used residential properties also contributed to the strong performance.
 
Plans for Fiscal Year March 2018
The start of deliveries of residential properties for sale of large projects in the Osaka and surrounding Hanshin regions, the restart of supplies of condominiums for sale, which had been halted, with the sale of units on a prime location in front of the Japan Railway Wakayama Station, and the delivery of rental apartments for sale to individual investors are expected to allow for growth in both sales and profits in the property leasing and management business. Sales of condominiums for sale located in front of Japan Railway Wakayama Station started a year earlier than expected in July 2016. Moreover, the Fiscal Year March 2018 estimates call for sales, ordinary income and net income of ¥103.000, ¥6.000 and ¥4.150 billion respectively, and if achieved will allow Fuji to achieve its targets of the Medium Term Business Plan one year earlier than planned.
 
Plans for Fiscal Year March 2019
Deliveries of condominiums for sale in prime locations are expected to begin contributing to sales in the residential properties for sale business. The expansion of the sales territory for used residential properties services to Hyogo and Nara Prefectures is expected to contribute to growth in sales. Moreover, sales in the property leasing and management business are also expected to grow on the back of increases in subleases and rental apartments for sale to individual investors, and to expansion in property leasing and management and used residential property assets services. The delivery of condominiums of development projects has been brought forward by a year and some aspects of the plan are expected to change henceforth.
 
 
 
 
Fiscal Year March 2017 Earnings Results
 
 
Sales, Ordinary Income Rise 9.5%, 8.0% Year-On-Year
Sales and all levels of profits exceeded initial estimates and reached new record highs.
Sales rose by 9.5% year-on-year to ¥99.359 billion. With regard to sales, higher sales values of free-design homes within the residential properties for sale business and higher sales values of used residential properties in the housing distribution business allowed all segment sales to rise. In addition, new orders booked, which are a reflection of sales conditions, for condominiums for sale and increases in orders for rental apartments for sale to individual investors allowed overall orders to rise by 11.8% year-on-year. The leading indicator for sales of order backlog at the end of March 2017 also rose by 13.9% year-on-year.
Ordinary income rose by 8.0% year-on-year to ¥5.721 billion. By business segment, profits of the residential properties for sale declined due to anticipatory investments in television commercials to raise the brand image and subsequent higher advertising expenses. However, the contribution from higher pricing of used residential properties in the housing distribution business and increases in consigned properties allowed profit of these business segments to rise. Increases in sales of high profitability used residential properties and consigned construction of rental properties allowed gross income margin to rise by 0.4% from the previous term. However, anticipatory investments arising from advertising and hiring costs caused sales, general and administrative expenses to sales ratio to rise by 0.4% year-on-year and operating margins to remain in line with the previous year's level at 6%. Therefore, operating income rose by 9.7% year-on-year to ¥5.969 billion. The margin of increase in ordinary income fell below that of operating income due in part to the occurrence of commitment fees of ¥177 million (compared with ¥12 million in the previous term) arising from a commitment type syndicated loan contract within non-operating expenses for use to acquire improved used residential properties for sale. Aside from this, the disappearance of ¥88 million in impairment loss that occurred in the previous term allowed growth in parent net income to exceed the growth rate in operating income.
 
 
Within the residential properties for sale, business rose by 7.4% year-on-year to ¥33.182 billion but operating income declined by 19.7% year-on-year to ¥2.417 billion. While sales of condominiums for sale declined, free-design homes trended favorably. The decline in profits is attributed to increases in advertising expenses arising from anticipatory investments in television commercials to improve the brand image and despite the higher sales of free-design homes. At the same time, orders rose by 22.1% year-on-year to ¥39.470 billion on the back of booking of orders for 733 free-design homes (compared with 749 in the previous term) and 272 condominiums for sale (compared with 118 in the previous term). Order backlogs also rose by 28.6% year-on-year to ¥28.276 billion on the back of the contribution from increases in condominiums for sale.

In the housing distribution business, sales and operating income rose by 11.0% and 25.9% year-on-year to ¥32.829 and ¥1.373 billion respectively. The higher sales and profits are attributed to the contribution from higher sales derived from price increases in used residential properties. And while the number of orders for used residential properties declined to 1,526 from 1,539 in the previous term, increases in pricing of used residential properties allowed orders to rise by 6.3% year-on-year to ¥32.145 billion. Order backlogs declined by 15.6% year-on-year to ¥3.711 billion on the back of declines in spec new homes.

Sales and operating income of the effective land utilization business rose by 6.6% and 51.5% year-on-year to ¥18.971 and ¥2.274 billion respectively. Increases in deliveries of rental properties consigned construction contributed to the higher sales and profits. In addition, sustained high construction costs have been factored into business plans and the improvement in gross margin contributed to the large increase in profits. Orders for rental properties consigned construction declined, but orders for rental apartments for sale to individual investors continued to trend favorably and allowed total orders to rise by 3.9% year-on-year to ¥19.377 billion. Also, the increase in orders for rental apartments for sale to individual investors offset declines in orders for rental properties consigned construction and allowed backlog to rise by 2.6% year-on-year to ¥16.011 billion.

Aside from the above mentioned developments, the property leasing and management business segment recorded growth in both sales and operating income of 15.7% and 32.7% year-on-year to ¥13.872 and ¥1.181 billion respectively. Because of the link between the effective land utilization and property leasing and management businesses, deliveries of condominiums for sale contributed to an increase in managed properties and increases in the used residential income properties within the used residential property asset business. Moreover, custom housing sales and operating income rose by 7.1% and 46.9% year-on-year to ¥503 and ¥38 million respectively.
 
 
 
 
Both new orders and order backlogs are growing.
 
 
While sales rose on a year-on-year basis during the fourth quarter (January to March), operating income declined due to anticipatory investments for television commercials implemented to raise the brand image of Fuji and subsequent increases in advertising expenses.
 
 
Total assets rose by ¥17.971 billion from the end of the previous term to ¥114.872 billion at the end of March 2017 due in part to increases in inventories and tangible assets, along with increases in short and long term loans and net income attributable to parent company shareholders. The main components of inventories included real estate for sales, partially completed real estate for sale, and development use real estate which rose from ¥21.89 to ¥23.28, ¥14.86 to ¥21.02, and ¥36.22 to ¥38.47 billion respectively. At the same time, interest bearing liabilities rose by ¥13.472 billion. Capital adequacy ratio declined by 1.8% points from the end of the previous term to 27.6%.
 
 
With regard to cash flow, the increase in the margin of expansion in inventories caused operating cash flow to turn to a net outflow from a net inflow in the previous term. Increases in acquisition of tangible assets contributed to an expansion in the net outflow of investing cash flow. At the same time, large increases in long term loan allowed financing cash flow to turn from a net outflow in the previous term to a net inflow in the current term. As a result of these developments, cash and equivalents increased by 40.7% year-on-year.
 
 
Fiscal Year March 2018 Earnings Estimates
 
 
Estimates Call for Sales, Ordinary Income to Rise by 3.7%, 4.9% Year-On-Year
Fuji Corporation's earnings estimates for Fiscal Year March 2018 call for sales and ordinary income to rise by 3.7% and 4.9% year-on-year to ¥103.0 and ¥6.0 billion respectively.
With regard to sales, the termination of spec new home supplies is expected to cause a decline in housing distribution sales, but increases in condominiums for sale and rental apartments for sale to individual investors are expected to allow sales of the residential properties for sale and effective land utilization businesses to grow. At the same time, increases in stable income derived from stock type services are expected to allow sales of the property leasing and management business to expand. Moreover, higher used residential property purchase pricing is expected to make purchases difficult and lead to only marginal sales growth.
With regard to profit, the positive factor of higher sales, and negative factors of declines in high profitability consigned construction of rental properties, termination of spec new home supplies, and higher expenses from advertising and hiring have been factored into profit estimates. Consequently, operating income margin is expected to rise by 0.1% from the term just ended to 6.1%. In addition, deliveries of condominiums for sale expected during the second half is expected to contribute to weaker earnings in the first half compared with the previous first half.
Dividend payment is expected to be raised by ¥1 per share to ¥27 (¥14 and ¥13 dividend payment at the end of the first half and full year).
 
 
In the residential properties for sale business, 737 free-design homes and 243 condominiums for sale are expected to be sold (compared with 772 and 110 respectively in the term just ended).
In the housing distribution business, the number of used residential properties sold is expected to rise from 1,516 in the term just ended to 1,562 in the coming term.
In the effective land utilization business, Fuji expects to sell 112 rental apartments for sale to individual investors and 44 rental property consigned constructions (compared with 104 and 51 respectively in the term just ended).

(*): Fuji Corporation is expected to terminate supplies of spec new home for sale and switch to free-design homes from here onwards.
 
(2) Main Topics
New Business Deployment of Detached Homes for Sale within Wakayama City
Fuji launched sales activities for a record breaking sized condominium with 256 units located in front of Japan Railway Wakayama Station from July 2016. This project has contributed to an increase in the brand recognition and credibility of Fuji amongst residents living within Wakayama City and the Company will leverage this increased brand recognition and credibility to launch sales of detached homes (free-design homes) within Wakayama City. Fuji has established a target of selling 200 units per year and expects to actively pursue acquisition of land to be used to create a detached home project in the near future.
 
Commitment Type Syndicated Loan Contract Signed
Fuji Corporation signed a commitment type syndicated loan contract of ¥7.5 billion with Sumitomo Mitsui Banking Corporation on January 31, 2017. Funds sourced from this loan will be used mainly for refurbishment and purchases of used residential properties, and will enable Fuji to make more active acquisition of used residential properties. The commitment is for a period of three years.
 
Television Commercial Broadcast Started
Fuji began broadcasting television commercials from January 20 (Friday), 2017 based upon the main theme of "Sumi no Ie" (literal translation: House of Ash) for its residential properties for sale that allows purchasers to create the homes of their dreams. Fuji created four different versions of television commercials about the encounter between a family, to whom the father was devoted, and the Company's "Sumi no Ie", describing the comfort of the house. In addition, the Company will also launch a limited time special campaign website. These television commercials will be aired primarily in the Osaka and surrounding Kansai regions over the course of the full year. In addition, coordinated large outdoor advertisements, Internet commercials and advertising will be carried across other media at the same time.
 
Selected as the "Health and Productivity Stock Selection"
The "Health and Productivity Stock Selection" is a program that recognizes value in terms of corporate management concern and strategies for the health and productivity of employees and company. Fuji Corporation has been recognized for its efforts to raise the creativity and productivity, while at the same time promoting the health of its employees. Also, its management has deployed a management strategy that places a high value upon leadership and risk management.
Fuji Corporation was selected as a "2016 Health and Productivity Stock Selection" recipient by the Ministry of Economy, Trade and Industry (METI) and the Tokyo Stock Exchange (TSE) on January 21, 2016. Also, Fuji was selected as the "2017 Superior Health Management Company (White 500)" by METI on February 21, 2017, and on March 24, 2017 received top rank from the Development Bank of Japan in its "DBJ Health Management Ranking".
 
 
Future Highlight Points
 
Fuji Corporation is expected to see a concentration of deliveries of condominiums from its large condominium development project in front of JR Wakayama Station during the second half of Fiscal Year March 2018. Therefore, Fuji's estimates call for profits to decline by a large margin year-on-year during the first half. However, the high level of orders for condominiums for sale booked during the term just ended suggests that the risk that full year earnings estimates will not be achieved is small. At the same time, the Company will need to expand sales of free-design homes in order to cover potential declines in condominium sales during Fiscal Year March 2019. Consequently, Fuji is actively promoting a campaign to raise its brand image and expand sales by broadcasting television commercials. By leveraging these television commercials, Fuji seeks to expand orders for its free-design homes during the coming term. In addition, the ¥7.5 billion commitment type syndicated loan contract signed in January 2017 will allow the Company to accelerate its acquisition of used residential properties for refurbishment. A key will be how quickly it can acquire and expand sales of used residential properties. Fuji seeks to achieve medium to long term growth in earnings that will not be influenced by conditions in the real estate market. Therefore, Fuji expects to expand investments in elderly care homes with nursing services as a means of actively increasing its stable "stock" based earnings. While these stable "stock" based earnings are not expected to comprise a significant portion of sales until several years forward, this business strategy is expected to attract renewed interest of investors who tend to dislike the severe earnings volatility posed by real estate market conditions. Therefore, Fuji's efforts in this elderly care homes business should be closely watched.
 
 
<Reference: Regarding Corporate Governance>
 
 
◎ Corporate Governance Report
The company submitted its latest corporate governance report on November 25, 2016 after applying the corporate governance code.
 
 
 
<Other>
In Basic Views regarding corporate governance, the company states that "it is crucial for the improvement of our business performance that the president himself demonstrates the management philosophy, business purposes, and code of conduct and the directors with excellent "capabilities," "enthusiasm," and "attitude" and great willingness to contribute to our company work in a complete solidarity toward the same aim in order to increase the shareholder investment value."
Compared to the first time that the company's corporate governance code was introduced, out of the principles required by the governance guidelines, the number of principles they did not comply with was 6 at the time of the submission of their first report and they reduced the number to 1 this time. The company specifically explains the current situation and provides a future improvement plan regarding the principle they do not implement. In addition, the company had 1 outside director the year before last and decided at the general meeting held in June 2016 to have 2 outside directors. Regarding disclosure in accordance with each principle, they added and updated the reasons for the appointment of directors and auditors on the explanation of "Enrichment of Information Disclosure". Such an action has made their latest report lively, indicating the satisfactory progress in improvement and enhancement of their corporate governance system.
 
Disclaimer
This report is intended solely for informational 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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