（9616） | Publish:Fri, Jan 25, 2013 IR「BRIDGE REPORT」

BRIDGE REPORT
（9616）

プライム

Kyoritsu Maintenance Co., Ltd. (9616)

Chairman
Haruhisa Ishizuka

President
Mitsutaka Sato

Company	Kyoritsu Maintenance Co., Ltd.
Code No.	9616
Exchange	TSE 1st Section
Chairman	Haruhisa Ishizuka
President	Mitsutaka Sato
HQ Address	Soto Kanda 2-18-8, Chiyoda-ku, Tokyo
Year-end	March
URL	http://www.kyoritsugroup.co.jp

Share Price	Shares Outstanding (ex. Treasury Shares)		Market Cap.	ROE (actual)	Trading Unit
¥1,750	14,111,508 shares		¥24.695 billion	7.7%	100 shares
DPS (Est.)	Dividend Yield (Est.)	EPS (Est.)	PER (Est.)	BPS (actual)	PBR (actual)
¥38.00	2.2%	¥169.36	10.3x	¥2,334.22	0.7x

* Share price as of closing on December 12. Number of shares outstanding as of most recent quarter end, do not include treasury shares.

Fiscal Year	Sales	Operating Income	Ordinary Income	Net Income	EPS	Dividend
March 2009	82,303	5,349	4,510	2,133	¥148.49	¥38.00
March 2010	84,513	4,033	3,012	1,254	¥87.33	¥38.00
March 2011	84,983	4,610	3,308	1,052	¥73.29	¥38.00
March 2012	91,170	6,017	4,602	2,376	¥166.35	¥38.00
March 2013 Est.	100,000	6,130	4,850	2,390	¥169.36	¥38.00

* Estimates are those of the Company.

This Bridge Report provides details of Kyoritsu Maintenance Co., Ltd. and a review of first half earnings.

Key Points

Company Overview

Kyoritsu Maintenance bases its management policy upon the concept of "contributing to a broad based development of society through the provision of healthy food and comfortable living services in various stages of people' s lives." In its dormitory business, Kyoritsu seeks to provide modern versions of the "traditional Japanese boarding house" (Geshukuya - Traditional Japanese dormitories that also provide food services). Its hotel business segment can be divided into the business hotel operations where "large hot spring type bathing facilities" and "good tasting breakfast menus" developed in its dormitory business are provided, and resort hotel operations where "reasonable and high quality resort lifestyles" are provided. Kyoritsu also provides various services including building maintenance for both residential and office buildings, building rental and leasing services, parking lot operations management and other services in its contracted services business segment. In its food service business, restaurant operations and outsourced food facility management services are provided. Furthermore Kyoritsu is using its overwhelmingly strong brand recognition to maintain its position as the leader within the dormitory business, and to cultivate and accelerate growth in its hotel business. The Kyoritsu Group consists of the parent company, seven consolidated subsidiaries, three non-consolidated subsidiaries, and six companies which are not included as either consolidated subsidiaries or as equity accounting method held affiliates.

Kyoritsu Maintenance was established in September 1979. The founder, Haruhisa Ishizuka, had long been associated with the food service industry and started the Company by taking on the operations of corporate cafeteria facilities on a consigned basis. In the following year in 1980 in Sakura City, Chiba Prefecture, the Company established a two story wooden structure with 28 small four Japanese straw mat rooms as its first dormitory facility. Based on the principle of providing "food" that "fosters the health and well being of students to put their parents' minds at ease," Kyoritsu was able to steadily expand its student dormitory business through partnerships with various schools. The Company steadily expanded its operating territory to cover the Tokyo, Kanagawa, Nagoya and Osaka regions. In April 1985, Kyoritsu began offering employee dormitories that offered highly unique features of "individual rooms with commissary functions providing breakfast and dinner," and "large bathing facilities" as comforting amenities for residents. In June 1993, the Company moved its headquarters to its current location and in July of the same year they entered the resort hotel business with the opening of a facility in Nagano Prefecture, followed by their entry to the business hotel realm in August with the opening of a facility in Saitama Prefecture. In September 1994, Kyoritsu listed its shares on the JASDAQ Market (At the time called the OTC Market), in March 1999 it moved its listing to the Second Section of the Tokyo Stock Exchange, and then to the First Section in September 2001.

"Kyoritsu Value Up Plan!" Midterm Business Plan

Kyoritsu is currently in the course of promoting its midterm business plan called "Kyoritsu Value Up Plan!," covering the period from fiscal year March 2012 to 2016. This plan calls for "reforms of the dormitory business and implementation of new growth strategies," "acceleration of the expansion in earnings as the hotel business enters its investment recovery phase," "cultivation of new businesses to become the third pillar of operations," and "training and optimal allocation of human resources." Also, the plan has established sales, and operating and ordinary income targets of ¥137.7, ¥11.0, and ¥8.95 billion to be achieved in the final year of the plan in fiscal year March 2016.

In order to achieve these targets, Kyoritsu has been promoting the "Tokyo Region Dormitory 98 Project" to strengthen the Company' s marketing function in the most important market of Tokyo and the surrounding regions as part of its strategy of accelerating growth in its core business, in addition to promoting a individualized development program that responds to the unique needs of each individual client (Universities and corporations). At the same time Kyoritsu is considering the launch of its Dormy Inn business hotel operations in overseas markets. With regards to efforts to develop new businesses, the Public Kyoritsu Partnership (PKP: Consigned services business which regional government bodies consign to Kyoritsu and the services are provided to residents by Kyoritsu) business was launched in fiscal year March 2012.

(1) Accelerate Growth in Its Core Business

① "Tokyo Region Dormitory 98 Project"

The "Tokyo Region Dormitory 98 Project" is a plan that calls for efforts to raise occupancy rates in the Tokyo metropolitan region, which accounts for 65% of the total dormitory capacity, to 98% at the start of the term (95.6% in FY3/13).

In order to raise occupancy rates at the start of the term, various efforts to reduce cancelations of dormitory tenant contracts and to fortify marketing to potential residents taking training courses and screening during the term are being conducted. Also in order to raise occupancy rates at the term start, promotional activities targeting female students entering women' s schools on recommendations and admissions office assessed candidates are being fortified, as well as relationships with high schools. Furthermore, campaigns that target employees are being implemented during the term for employee dormitories, as well as joint marketing conducted with Dormy Inn business hotels, hiring of retirees of major corporations to strengthen ties with these companies, fortification of marketing to companies operating their own dormitories and companies expected to increase their hires, and strengthening of marketing in the highly popular regions from Shibuya to Ikebukuro.

② Pinpoint Development

With regards to development, Kyoritsu is developing facilities in areas that are in high demand by clients (Universities, companies) as part of a focused "pinpoint" facility development strategy. As part of this strategy, collaboration with financial institutions, real estate companies, trading companies, and general contractors is being strengthened to expand the breadth of information obtained. Furthermore as an exit strategy, a "sale and lease back plan" is being implemented to increase the liquidity of assets. Moreover, the announcement effect of asset sales to J-REITs in fiscal year March 2011 led to a pronounced increase in inquiries to purchase the company' s assets (Asset sales in fiscal year March 2011 and 2012 totaled ¥14.0 and ¥4.8 billion respectively).

③ Dormy Inn Overseas Deployment

In order to capture new opportunities for growth, Kyoritsu is considering the overseas deployment of its businesses. The Company is currently preparing for the opening of its first overseas Dormy Inn business hotel called the "Dormy Inn PREMIUM Seoul Garosugil Street" in Seoul, Korea in June 2014.

Location:	Gangnam Sinsadon, Seoul, Korea
Facilities:	5 floors below, 20 above ground with 285 guest rooms
Operations:	Leased, 20 years

Kyoritsu Korea signed a lease agreement for the landlord of the property on November 27, 2012

Location Features

The hotel is located to the east of the major road known as the "Gangnam Road," which runs south to north, and is close to the Shinsa Station located along Subway Number Three. The location is just a one minute walk away from the highly fashionable spot known as "Garosugil Street" where trendy people come for both work and pleasure.

Source: Kyoritsu Maintenance

(2) Cultivating New Businesses

During fiscal year March 2012, the Public Kyoritsu Partnership business was launched. This business provides integrated services ranging from consulting to outsourcing designed to match the needs of regional governments undergoing administrative and fiscal reforms. Kyoritsu will take on the non-core services of the government, and contribute to the administrative and fiscal reforms by leveraging its knowhow to reduce costs, provide stable regional employment opportunities, and improve resident services. During the first year of operations in fiscal year March 2012, Kyoritsu was able to capture 37 contracts for consigned management from 16 regional government bodies including those in Yubetsucho, Hokkaido and Hidakagawacho, Wakayama Prefecture for sales of ¥910 million. During fiscal year March 2013, the number of government bodies and contracts for outsourcing services is expected to rise to 64 and 104 respectively and sales to grow to ¥3.06 billion. Currently Kyoritsu has already contracted ¥1.6 billion in sales from this business.

First Half Fiscal Year March 2013 Earnings Results

Hotel Business Drives Growth, Sales and Ordinary Income Rise 8.0% and 18.5%

Sales rose by 8.0% year-over-year to ¥47.333 billion. An increase in the number of residents moving into dormitories earlier than normal in March allowed sales of the dormitory business segment to remain in line with the previous year's level. At the same time, the contribution of new facilities (Four Dormy Inn and one resort hotel) and favorable trends at existing facilities (Occupancy rates, customer numbers, and Average Daily Rate (ADR) all rose) allowed hotel business segment sales to rise by 16.4% year-over-year. Operating income also rose by 8.8% year-over-year to ¥3.653 billion. Operating income of the hotel business segment rose by 62.2% year-over-year due to increases in the number and ADR at both the business and resort hotel facilities. This performance helped to offset declines in dormitory business segment operating income due to declines in new resident contract fees arising from increases in early entry of residents in March and increases in public utility fees. Profit from sales of marketable securities (¥63 million) and declines in interest payment (Falling from ¥747 to ¥642 million) allowed non-operating income to improve. At the same time, profit from sale of fixed assets and declines in losses from sales of marketable securities (Fell from ¥251 to ¥198 million) contributed to improvement in extraordinary income and allowed net income to rise by 41.1% year-over-year to ¥1.619 billion.

Divergence from Initial Estimates

While sales remained basically in line with initial estimates, operating income exceeded estimates by ¥273 million. The business hotel saw a ¥258 million increase in segment operating income over estimates due to higher occupancy rates and pricing, and resort hotel operations recorded a ¥102 million rise in operating income over estimates due to higher occupancy rates. Reviews of rental fees contributed to a ¥93 million increase in segment operating income over estimates in the dormitory business. At the same time, delays in booking of sales for some projects in the construction business into the second half (¥84 million below the estimates) and increased costs associated with the fortification of marketing activities for the PKP business (¥109 million) contributed to shortfall of estimates for these segments.

Dormitory Business: Sales and Operating Income Decline by 0.4% and 7.8% YY to ¥19.989 and ¥2.797 Billion

Marginal profit increased by ¥342 million due to increases in occupancy rates, which started out the year at high levels (Up from 95.3% in the previous term to 96.5%). However they could not offset the influence of early entry of dormitory residents in March (¥279 million in revenues which would have traditionally been booked in April was booked in March of the previous term), declines in large foreign student resident contracts (¥108 million, with contracts varying by about ¥100 million each year), increases in public utilities fees (¥109 million), and rises in promotional and other costs (¥81 million). As of end September, the number of resident contracts rose by 779 from the same period in the previous term to 29,481. Because second half revenues will be positively influenced by the early entry of residents in March, the dormitory business segment is expected to see growth in both sales and profits during the full year. Despite the addition of 1,200 new rooms to overall capacity anticipated in fiscal year March 2014, occupancy rates, which are an indicator for future business trends in the dormitory business, are currently trending around a high 97%.

Hotel Business: Sales, Operating Income Rise by 16.4% and 62.2% to ¥19.752 and ¥2.065 Billion

By business segment, sales of the business hotel and resort hotel operations rose by 15.2% and 17.3% year-over-year to ¥9.633 and ¥10.119 billion respectively. Four new Dormy Inn and one new resort hotel were opened during the term, bringing the number of business and resort hotels and rooms to 49 and 8,149 and 19 and 1,964 respectively. With regards to profits, hotel business segment operating income rose by ¥792 million from the same period in the previous term, with business hotels operations contributing with a ¥415 million year-over-year increase (Existing facilities saw an improvement of ¥351 million, while operating and other costs led to a negative ¥64 million) and resort hotels operations contributing with a ¥377 million year-over-year increase (Existing facilities saw an improvement of ¥393 million, while operating and other costs led to a positive ¥16 million). Moreover, Kyoritsu was able to acquire first place ranking in both the business hotel category of the JCSI (Japanese Customer Satisfaction Index) and the J.D. Power Asia Pacific 2012 Japan Hotel Service Customer Satisfaction Survey for hotels under ¥9,000 per night in reflection of the continued favorable reception of its facilities and services by the market.

Other Business: Sales Rise 1.7% to ¥12.267 Billion, Operating Loss Expands to ¥289 Million From ¥127 Million in Previous Year

Improvements in restaurant and cafeteria outsourcing services operations profitability contributed to a rise in sales and a reduction in the operating loss of the food services business. Despite an increase in sales, a deterioration in profitability of the contracted services business due to cancelations of large contracts led to an operating loss (Operating income recorded in previous term). Construction business also suffered from delays in ongoing construction projects into the second half, causing sales to decline and an operating loss to be incurred (Operating income seen in previous term). Sales of the PKP business rose, but anticipatory investments contributed to an increase in operating losses.

At the end of the first half, total assets declined by ¥6.272 billion from the end of the previous fiscal year to ¥119.377 billion. The higher level of cash and equivalents at the end of the previous fiscal year are attributed to the inclusion of advanced payments of annual management fees. Furthermore, cash was used for the regularly scheduled repayment of interest bearing liabilities, which contributed to declines in both cash and equivalents and interest bearing liabilities. In addition, some tangible fixed assets were liquidated during the first half.

With regards to cash flow, the margin of the net outflow in operating cash flow declined on the back of declines in working capital arising from higher profit and inventories despite increases in tax expenses (Up from ¥945 to ¥1,541 million). At the same time, the margin of net outflow in investing cash flow expanded on the back of declines in the amount of tangible fixed assets sold and payments for security deposits (A large net outflow was recorded in financing cash flow during the first half of fiscal year March 2012 due in large part to the redemption of bonds.) Capital investments during the first half declined to ¥1.492 billion from ¥2.565 billion in the previous first half. Depreciation also fell to ¥1.462 billion from ¥1.669 billion. During the full fiscal year, ¥6.0 billion in real estate asset liquidation is expected (Compared with ¥14.0 and ¥4.8 billion in FY3/11 and FY3/12).

Credit Rating Raised

On October 23, 2012, the Japan Credit Rating Agency, Ltd. (JCR) raised its rating on the long term issuances of Kyoritsu from "BBB- " to BBB" . The JCR cites three points as the reasons for the improved rating.
① The outlook for Kyoritsu to maintain stable earnings in the future (Stable earnings generation of the main dormitory business)
② The establishment of the hotel business as a stable earnings driver (Establish the earnings foundation for the hotel business) due to successful fortification of management and implementation of cost controls.
③ While new capital investments for the dormitory and hotel businesses continue, success in the strategy of striking a healthier financial balance has been achieved.

Fiscal Year March 2013 Earnings Estimates

Full Year Earnings Estimates Remain Unchanged, Sales and Ordinary Income Expected to Rise by 9.7% and 5.4%

Sales are expected to rise by 9.7% year-over-year to ¥100.0 billion. The contribution from newly opened facilities will lead to growth in sales of both the dormitory and hotel business, and the PKP business and others are also expected to record higher sales. With regards to profits, increases in public utility expenses due to price hikes, strategic advertising to establish the Kyoritsu Maintenance brand, higher system depreciation expenses, and consigned services fees for the establishment of a special subsidiary designed to promote employment of handicapped people are factors behind the relatively low 1.9% year-over-year growth in operating income. Furthermore, while operating income exceeded first half estimates by ¥273 million, this increase over estimates will be used for front loaded refurbishment of facilities in the hotel business (¥200 million for business hotels, and ¥100 million for resort hotels). Capital investments are expected to decline from ¥3.957 billion in the previous term to ¥3.690 billion in the current term, and depreciation to rise from ¥3.429 billion to ¥3.569 billion.

Expectations for new facility openings are expected to progress in line with Kyoritsu' s midterm business plan targets. The reason for the anticipated shortfall in dormitory rooms is attributed to the promotion of a "scrap and build" strategy. At the same time, the anticipated shortfall in the resort hotel rooms is attributed to the strategy of prioritizing refurbishment of existing facilities based on the current economic conditions. Furthermore, the anticipated shortfall in the number of rooms at senior citizen facilities is attributed to regulatory and approval issues.

Conclusions

During the first half, the dormitory business recorded declines in both sales and profits. However, if the factor of early entry of dormitory residents is excluded, the dormitory business segment actually realized higher sales and profits and it remains to be a stable earnings driver. The hotel business, which has gone through a period of severe operating conditions, has been able to establish a stable earnings structure due to successful efforts to raise customer satisfaction and improve productivity. These efforts are the reason for the improved credit rating, and at the same time Kyoritsu is implementing new business endeavors including the PKP business and the overseas expansion of the Dormy Inn business. Furthermore, the "stability of its main businesses is enabling Kyoritsu to take on the challenges in new business realms despite their generation of losses in the near term." During fiscal year March 2013, the outlook for a new record high level of ordinary income is expected to be achieved for the first time in seven terms is strong. Should the final year targets of the current midterm business plan be realized in fiscal year March 2016, net income will rise to nearly double the level of fiscal year March 2013.

Aside from the core businesses, Kyoritsu has become a supporter of the "Hakone Ekiden" long distance relay race for university students to be held over the upcoming New Year holidays. This Hakone Ekiden relay race is held every year between top level universities in the Kanto region with the first leg of the run from Tokyo to Hakone held on January 2, and the return leg on January 3. This relay is broadcast on major television networks so the sponsorship of the race and related television commercials by Kyoritsu will serve as a great opportunity for the "Kyoritsu Maintenance" brand to be seen by a wide range of viewers. These promotional activities are a reason for the decline in profitability during the second half over the first half, with strategic advertising to establish the Kyoritsu Maintenance brand of ¥180 million factored into second half earnings.

Despite the decline in birthrates, the rate of advancement of students to four year universities is on the rise and efforts to develop new four year university clients since 2006 have proven successful (The number of dormitory resident contracts from four year universities has risen from 29.6% of all contracts in FY3/06 to 52.0% in FY3/13). Therefore the decision to become a supporter of the "Hakone Ekiden" long distance relay run of university students is expected to enable Kyoritsu to cultivate new four year university clients.

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.
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