J Trust Co Ltd (8508)

Transcription

1 Shared Research Report J Trust Co Ltd (8508) Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an owner s manual to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at sr_inquiries@sharedresearch.jp or find us on Bloomberg.

2 Contents Recent updates... 4 Highlights... 4 Trends and outlook... 8 Business Description Market and value chain Strategy Historical performance Income statement Balance sheet Cash flow statement Other information History News and topics Major shareholders Shareholder return Profile /48

3 Income statement FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Operating revenue 4,946 16,541 16,908 24,508 55,683 61,926 69,291 YoY 54.5% 234.4% 2.2% 44.9% 127.2% 11.2% 11.9% Gross profit 2,992 13,243 11,776 19,969 34,897 35,586 YoY 30.7% 342.6% -11.1% 69.6% 74.8% 2.0% GPM 60.5% 80.1% 69.6% 81.5% 62.7% 57.5% Operating profit 240 4,165 4,324 5,539 12,005 13,745 2,656 YoY 943.5% % 3.8% 28.1% 116.7% 14.5% -80.7% OPM 4.9% 25.2% 25.6% 22.6% 21.6% 22.2% 3.8% Recurring profit 296 4,303 4,323 5,486 13,704 13,351 2,738 YoY 854.8% % 0.5% 26.9% 149.8% -2.6% -79.5% RPM 6.0% 26.0% 25.6% 22.4% 24.6% 21.6% 4.0% Net income 306 4,108 3,233 34,500 13,309 11,145 11,239 YoY 206.0% % -21.3% 967.1% -61.4% -16.3% 0.8% Net margin 6.2% 24.8% 19.1% 140.8% 23.9% 18.0% 16.2% Per share data Number of shares ('000) 27,652 29,752 30,009 30,225 63, ,386 EPS (JPY) EPS (fully diluted) (JPY) Dividend per share (JPY) Book value per share (JPY) , ,502.5 Balance sheet (JPYmn) Cash and equivalents 3,380 7,163 14,846 10,362 62, ,235 Operating loans 28,236 18,039 11,725 27,713 18,227 49,242 Loans by banking business ,210 46,701 Advances paid-installment 6,343 3,825 1,443 65,024 48,133 39,776 Purchased receivables 1,313 5,407 4,008 2,310 2,529 2,527 Total current assets 36,627 35,714 34, , , ,872 Tangible fixed assets, net 1,629 1,079 1,166 5,095 10,836 12,309 Other fixed assets 1, ,947 4,366 11,842 23,919 Total assets 39,811 37,999 37, , , ,736 Notes discounted ,291 1,776 1,500 2,173 Short-term debt 2,768 4,520 3,980 5,576 8,071 25,258 Deposits by banking business ,194 77,142 Provision for loss on interest payment 2,147 3,048 3,359 10,172 7,124 4,055 Total current liabilities 27,246 11,305 10,264 43,995 99, ,904 Long-term debt ,368 10,814 13,670 30,487 16,329 Provision for loss on interest payment 4,470 3,840 2,382 9,711 12,052 9,382 Provision for loss on guarantees , Total fixed liabilities 5,718 15,687 13,635 24,079 48,339 31,601 Total liabilities 32,964 26,993 23,900 68, , ,505 Net assets 6,846 11,005 13,961 49,471 70, ,230 Interest-bearing debt 3,883 16,671 16,085 21,022 40,058 43,760 Cash flow statement (JPYmn) Operating cash flow -2,847-6,819 9,234-16,489 9,378 16,828 Investment cash flow 1, ,424 36,764-23,169 Financing cash flow , ,165-2,441 74,464 Financial ratios ROA 1.2% 10.6% 8.5% 44.4% 7.9% 4.0% ROE 4.6% 46.1% 26.0% 111.4% 23.8% 9.3% Equity ratio 17.2% 29.0% 36.9% 42.1% 32.4% 55.0% Source: Company data 3/48

4 Recent updates Highlights On September 19, 2014, J Trust Co., Ltd. announced the acquisition of shares in public company LCD Global Investments Ltd. (Singapore). The company s subsidiary J Trust Asia Pte. Ltd. will acquire shares in LCD Global Investments Ltd. (SGX Mainboard: LCD; executive director: Mr David Lum). Objective The company established J Trust Asia on October 7, 2013, with the aim of developing in East Asia. Now the company has decided to become the top shareholder of one of Singapore s leading real estate developers by acquiring a 29.5% stake in LCD Global Investments (LCD). The company will also send directors to LCD, in a bid to build a strategic partnership advising LCD on future business expansion. The company aims to develop a comprehensive real estate business in East Asia and across the globe, with Singapore as one of its operational bases. Real estate developer LCD generates most of its revenue from hotels. It has well-known hotels and serviced apartments in Thailand, the UK, Vietnam, and Laos. The acquisition of a stake in LCD will allow J Trust to build a global real estate business, while taking full advantage of population and economic growth in the ASEAN region and the rest of the world. LCD also plans to change its name to J Trust International Ltd. in line with this share acquisition. Overview of the share acquisition The company plans to acquire 310.5mn shares (29.5% of shares outstanding) at SGD0.3 per share, for a total acquisition value of SGD93mn (about JPY7.8bn, at SGD/JPY83.8). The transfer date is scheduled for September 22, LCD FY03/15 performance and balance sheet Net assets: JPY24.3bn Total assets: JPY35.7bn Operating revenue: JPY4.8bn Net income: JPY117mn (At SGD/JPY83.8; net assets and net income are those attributable to LCD.) On September 12, 2014, the company announced that it had been selected as a bidding candidate in the bidding process for Indonesian commercial bank PT Bank Mutiara Tbk. The company participated in a public bidding process carried out by the Indonesia Deposit Insurance Corporation (Lembaga Penjamin Simpanan [LPS]) on August 21, 2014, to acquire Bank Mutiara (held by the LPS). J Trust was selected as a bidding candidate, and signed a conditional share purchase agreement on September 16, Bank Mutiara is an Indonesian commercial bank with a branch network of 62 branches spread across Indonesia and with total assets of about IDR13tn (JPY120bn; based on an exchange rate of IDR/JPY0.009 as of the end of March 2014). In November 2008, Bank Mutiara came under the control of LPS. Bank Mutiara restructured its operations under LPS supervision, and LPS began the public bidding process for the sale of all shares in Bank Mutiara in April /48

5 Purpose Through subsidiary J Trust Asia Pte. Ltd. (Singapore), the company has already begun building expertise in Indonesia and expanding its business there via a strategic business alliance with local banks. The company s selection in this bidding process allows it to increase its presence in the country, and respond to rapidly growing demand for retail finance in line with higher personal incomes. On August 13, 2014, the company announced Q1 FY03/15 earnings results; please see the results section for details. On the same day, the company announced earnings forecasts for FY03/15. On July 30, 2014, the company announced a business transfer among its subsidiaries. The company received approval from the Financial Services Commission of South Korea to transfer its loan businesses operated by KJI Consumer Finance LLC, HICAPITAL Co., Ltd., and Neoline Credit, to Chinae Savings Bank. The effective date of the transaction will be August 13, Transfer details J Trust acquired Neoline Credit in In March 2014, the company also acquired KJI Consumer Finance and HICAPITAL, both operators of loan businesses. In order to sustain operations for the loan businesses, the companies were forced to make use of high-interest financing. Transfer of the businesses will enable J Trust to repay these loans, and utilize relatively low interest rate financing under the umbrella of Chinae Savings Bank. This will provide a significant improvement to the company s overall financial standing. The transfer will also allow Chinae Savings Bank to utilize the broad customer base of the above three companies to expand its loan balance, and realize profits on a much larger scale. It will also create possibilities to offer low interest loans to customers. After the transfer is complete, HICAPIAL, KJI Consumer Finance, and Neoline Credit will specialize in purchasing bad debt and collections activities, and J Trust will consider business restructuring to better suit these new functions. On June 25, 2014, J Trust Co., Ltd. announced the following: The establishment of a subsidiary by a subsidiary; Group restructuring, including a company split (absorption-type split); The transfer of a stake in a subsidiary of a subsidiary. Subsidiary KC Card will establish a new subsidiary. Effective January 5, 2015, the new subsidiary will inherit some businesses mainly the KC Card brand via absorption-type split. On the same day, all shares in the new subsidiary will be transferred to Yahoo Japan Corporation and SoftBank Payment Service Corp. J Trust will also restructure its credit card business, with KC Card inheriting some businesses mainly the NUCS brand from subsidiary NUCS Corporation via absorption-type split. According to the company, the effect on FY03/15 earnings will be negligible. The decision to restructure the group is based on a number of factors. First, the company anticipates that the KC Card brand will face fierce competition, as major internet companies become competitors. Yahoo also values the KC Card brand highly, and J Trust will be able to maintain its credit card business via the NUCS brand. In addition, this deal will bring in approximately JPY40.4bn (about JPY35.0bn from the transfer of shares and JPY5.4bn from the repayment of loans to KC Card); the company will be able to increase corporate value by using this money together with funds from the rights offering in July 2013 to fortify existing businesses and establish new businesses. 5/48

6 Following this restructuring, the company aims to acquire companies with potential for synergies with its credit card business, and form partnerships to offer more attractive products and services. The company also plans to secure more customers and grow its credit card business by acquiring competitors that are struggling because of competition from major credit card companies and declining regional economies. Group restructuring Source: Company data 1: The new subsidiary (the new KC Card) formed by company split will inherit businesses related to the KC Card brand, including the comprehensive credit purchase and mediation business, the individual credit purchase and mediation business, the moneylending business, the prepaid method payment measure issuance business, the insurance representation business, the ETC Card business, and the collection services business. KC Card will maintain its stake in subsidiary Chinae Savings Bank. 2: Following the company split, KC Card (the former KC Card) will inherit businesses related to the NUCS brand, including the comprehensive credit purchase and mediation business, the individual credit purchase and mediation business, and the moneylending business. 3: The company will accept repayment of loans to the new subsidiary (about JPY5.4bn) upon the transfer of shares. 6/48

7 On June 16, 2014, the company announced the acquisition of Standard Chartered Capital (Korea) Co., Ltd. (SC Capital) and Standard Chartered Savings Bank Korea Co., Ltd. (SC Savings Bank). SC Capital and SC Savings Bank will become subsidiaries after the company acquires all their shares from Standard Chartered Korea Limited (SC Korea). The transactions will be made on condition that J Trust will receive approval from the South Korean authorities, including the Financial Services Commission and the Fair Trade Commission of Korea. According to the company, these acquisitions will increase its loan receivables and revenue in Korea. Furthermore, the acquisition of SC Savings Bank together with existing subsidiary Chinae Savings Bank means the company will hold about 70% of the savings bank market across South Korea, allowing it to further boost its sales in the country. Overview of the new subsidiaries SC Capital A financial firm specializing in credit finance. It was established in 2007, and began operating in January It has 20 branches in major cities across Korea. Trade name: Standard Chartered (Korea) Co., Ltd. Business description: installment finance, facilities leasing, other financial services Capital: KRW108.0bn (as of December 2013) Established: December 3, SC Savings Bank Formerly Yearum Mutual Savings Bank. Acquired by Standard Chartered in February Its head office is in Bundang-gu, Seongnam-si, Gyeonggi-do, and its operations are centered on Gyeonggi Province and Jeolla Province. Main offerings include consumer finance, mortgages, and deposit products. Trade name: Standard Chartered Savings Bank Korea Co., Ltd. Business description: savings banking Capital: KRW99.9bn (as of June 2013) Established: December 28, Acquisition amount SC Capital common shares (estimated): JPY9.8bn SC Savings Bank common shares (estimated): JPY5.3bn Total (estimated): JPY15.1bn Note, assumes an exchange rate of KRW/JPY0.1. Schedule Conclusion of share purchase agreement: June 16, 2014 Transfer of shares (planned): late September, For corporate releases and developments more than three months old, please refer to the News and topics section. 7/48

8 Trends and outlook Quarterly trends and results Quarterly performance FY03/14 FY03/15 FY03/15 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of FY Est. FY Est. Operating Revenue 14,545 14,300 15,172 17,909 15, % 69,291 YoY 47.4% -2.0% -6.3% 19.2% 9.5% 11.9% Gross Operating Profit 8,441 7,978 8,237 10,930 8,188 YoY 3.2% -9.0% -18.4% 39.0% -3.0% GPM 58.0% 55.8% 54.3% 61.0% 51.4% SG&A 6,216 7,971 4,389 3,265 8,546 YoY 50.2% 50.0% -26.9% -56.1% 37.5% SG&A / Operating Revenue 42.7% 55.7% 28.9% 18.2% 53.7% OP 2, ,847 7, ,656 YoY -44.9% -99.8% -5.9% % % OPM 15.3% 0.0% 25.4% 42.8% - 3.8% RP 2, ,947 7, ,738 YoY -41.6% % % % RPM 15.6% % 43.2% - 4.0% NI 2, ,441 8, ,239 YoY -49.8% % % - 0.8% NPM 13.8% - 9.5% 47.8% % Figures may differ from company materials due to differences in rounding methods Source: Company data Operating revenue FY03/14 FY03/15 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Discount revenue Interest on loans ,043 Collection from purchased receivable Installment payment paying for commission 2,046 1,923 1,833 1,659 1,622 Guarantee commission Other financial revenue , Gain on bad debts recovered 1,247 1,139 1,189 1,559 1,174 Sales (real estate business) 703 1,326 1,835 1,103 1,846 Sales (amusement business) 4,222 4,493 3,947 3,846 3,631 Operating revenue (banking business) 2,431 2,200 2,622 5,137 2,194 Operating revenue 14,545 14,300 15,171 17,908 15,928 Source: Company data Balance by product (JPYmn) Q1 FY03/14 Q2 Q3 Q4 Q1 FY03/15 Q2 Q3 Q4 Commercial notes (current assets) 1,429 1,684 2,205 2,369 2,231 YoY (%) Accounts receivable-operating loans (current assets) 16,861 15,267 14,409 49,242 45,152 YoY (%) Advances paid-installment (current assets) 45,544 42,905 41,170 39,776 37,804 YoY (%) Purchased receivables (current assets) 2,454 2,239 2,259 2,527 2,929 YoY (%) Long-term operating loans receivable (investments and other assets) 4,153 3,110 2,769 3,951 4,220 YoY (%) Credit guarantee balance (off-balance sheet) 33,983 34,814 36,050 40,839 42,795 YoY (%) Source: Company data 8/48

9 Q1 FY03/15 results (out August 13, 2014) Operating revenue increased 9.5% YoY to JPY15.9bn. Falls in the balances of installment advances paid and loans in the banking business led to declines in installment commissions and operating revenue at banks. Other financial revenue also decreased as collections of accounts receivable remained sluggish. Sales in the amusement business also dropped due to the consumption tax hike in April. Meanwhile, loan interest at KJI Consumer Finance LLC and HICAPITAL Co., Ltd., both of which became consolidated units on the balance sheet in FY03/14, contributed to revenues. Revenues were up in the real estate segment because the rush to beat the consumption tax meant contracts on some properties were concluded in the previous year but completed and delivered in the current year. Operating loss was JPY358mn (operating profit of JPY2.2bn in Q1 FY03/14). SG&A costs rose by JPY2.3bn YoY, mainly due to increases in provisions for losses on interest repayments at KC Card and provisions of allowance for bad debts at KJI and HICAPITAL. Operating costs increased by JPY1.6bn as Chinae Savings Bank sold bad debts, thus recording a loss on the sale of receivables the company is looking to use its funds more efficiently and restructure group companies in South Korea. Recurring loss was JPY294mn (recurring profit of JPY2.3bn in Q1 FY03/14). Net loss was JPY395mn (net income of JPY2.0bn in Q1 FY03/14). The company booked extraordinary losses, including a loss on the abandonment of fixed assets at Chinae Savings Bank. Financial Operating revenue was JPY5.2bn (-17.1% YoY); segment profit was JPY1.0bn (-57.1%). Operating revenue fell as interest on loans declined on a decrease in the balance of operating loans and installment commissions dropped on a fall in the cashing balance under installment advances paid. Segment profit decreased due to the fall in operating revenue and a rise in SG&A costs, partly due to a rise in provisions for losses on interest repayments at KC Card. The breakdown of key product balances in the financial segment is as follows: Domestic operating loans: JPY9.3bn (-38.7% YoY). The balance increased in March 2012 after Nihon Hoshou (formerly Lopro) took over the consumer finance arm of Takefuji (defunct), but fell subsequently as collections proceeded smoothly. Installment advances paid: JPY38.7bn (-19.5% YoY). The shopping balance was steady, but the cashing balance fell, leading to an overall decline. Credit guarantees: JPY42.8bn (+25.9% YoY). J Trust made efforts to increase the balance, concluding guarantee alliances with nine regional banks by June Real estate Operating revenue was JPY1.8bn (+160.6% YoY); segment profit was JPY241mn (+929.0% YoY). Keynote Co., Ltd. recorded sales of properties on lots it had purchased both in south Tokyo and in west Japan. In addition, the company booked revenues on the completion and delivery of some construction contracts with contracts concluded in the previous year due to a rush of demand prior to the consumption tax hike. Moreover, rental income from commercial property purchased by ADORES, Inc. during the previous fiscal year contributed to revenues in the property asset business. Amusement Operating revenue was JPY3.6bn (-14.2% YoY); segment profit was JPY187mn (-36.3% YoY). The business was affected by a fall in sales due to store closures, sluggishness in the arcade game business, and a slump in consumer spending due to the consumption tax hike. Sales and profits were 9/48

10 down year-on-year. International Operating revenue was JPY5.0bn (+85.2% YoY); segment loss was JPY1.3bn (loss of JPY31mn in Q1 FY03/14). Operating revenue was down in the banking business as Chinae Savings Bank saw a fall in the loan balance. Loan interest increased as KJI and HICAPITAL became consolidated subsidiaries. The segment loss was due to rises in the allowance for losses on bad loans at KJI and HICAPITAL, and losses on the sale of bad debt at Chinae Savings Bank. The loan balance increased as J Trust made KJI and HICAPITAL consolidated subsidiaries at the end of the previous year. Operating loans were JPY37.3bn (+991.0% YoY), long-term operating loans receivable were JPY1.9bn (JPY0 for Q1 FY03/14), and the total loan balance including long-term operating loans receivable was JPY39.2bn (JPY3.4bn in Q1 FY03/14). Loans by the banking business were JPY43.2bn (-27.9% YoY). The decline was due to the sale of receivables and the effect of a credit card information leak in South Korea, which restricted operations and slowed new loan processing. For details on previous quarterly and annual results, see the Historical performance section. 10/48

11 FY03/15 outlook FY03/15 Forecast (JPYmn) 1H Act. FY03/14 2H Act. FY Act. FY03/15 FY Est. Operating revenue 28,845 33,081 61,926 69,291 Operating expenses 12,426 13,913 26,339 Gross operating profit 16,419 19,167 35,586 GPM 56.9% 57.9% 57.5% SG&A 14,187 7,654 21,841 SG&A/Operating Revenue 49.2% 23.1% 35.3% Operating Profit 2,232 11,513 13,745 2,656 OPM 7.7% 34.8% 22.2% 3.8% Recurring Profit 1,661 11,690 13,351 2,738 RPM 5.8% 35.3% 21.6% 4.0% Net Income 1,144 10,001 11,145 11,239 Net Margin 4.0% 30.2% 18.0% 16.2% Figures may differ from company materials due to differences in rounding methods Source: Company data On August 13, 2014, the company announced forecasts for FY03/15. The company will use FY03/15 to lay the foundation for further growth, tackling structural reforms using M&A and business restructuring activities. As of August 2014, M&A and business restructuring activities are as follows: On June 16, 2014, J Trust concluded an agreement with Standard Chartered Korea Limited to acquire all of the shares of Standard Chartered Capital (Korea) Co., Ltd. (SC Capital) and Standard Chartered Savings Bank Korea Co., Ltd. (SC Savings Bank) held by Standard Chartered Korea. On June 25, 2014, the company and KC Card Co., Ltd. resolved to reorganize the credit card business under a new corporate structure effective January 5, KC Card will establish a subsidiary to take over part of KC Card s business mainly the KC Card brand via absorption-type company split. The company will transfer all the shares of the newly established company to Yahoo Japan Corporation and SoftBank Payment Service Corp. The company also resolved to transfer the NUCS brand from NUCS to KC Card. The group s credit card business will be assumed by KC Card after the restructuring. On July 30, 2014, the company received approval from the Financial Services Commission of South Korea to transfer its loan businesses operated by KJI Consumer Finance, Neoline Credit, and HICAPITAL acquired in March 2014 to Chinae Savings Bank. The effective date of the transaction is August 13, J Trust expects operating profit and recurring profit to fall significantly as restructuring efforts lead to a spike in operating costs. However, the company projects that net income will grow year-on-year, due to the contribution of a gain on negative goodwill generated by the share acquisitions of SC Capital and SC Savings Bank as their net assets evaluated at the time of the acquisitions surpass the purchase amounts. Since the company is awaiting approval on some of the M&A and business restructuring deals above, it is difficult to determine the timing at which these events will affect financial results. Therefore it has decided not to disclose earnings forecasts for 1H. 11/48

12 Credit guarantee services The company thinks that the credit guarantee services will not become its core business due to low growth potential amid intense competition, although income has been increasing. But J Trust said that a rental housing loan guarantee tie-up with the Saikyo Bank, started in March 2014, has growth potential for the medium and long term because the balance is likely to increase smoothly due to a large amount per contract. Consumer loans The company does not expect its domestic consumer loan business will grow. Since banks have promoted the business using their brands, the loan balances at companies outside banking groups are not likely to grow. M&A in South Korea Although foreign-based consumer finance companies in South Korea have been withdrawing, J Trust has been actively acquiring them. The company sets targets of South Korean assets for the medium term at at least JPY250bn and at most JPY750bn. Interest on loans to acquire Chinae Savings Bank was around 3%. According to J Trust, its profitability will rise by absorbing loan balances of acquired institutions. Medium-term outlook Accelerate acquisitions and receivables purchases. J Trust s first growth phase spanned FY03/08-FY03/13. The second phase, punctuated by more growth, is slated for FY03/14. The July 2013 rights offering (non-commitment, gratis allotment of listed share warrants) yielded JPY97.6bn for working capital and equity injection. J Trust plans to accelerate acquisitions and receivable purchases in Japan and overseas to fuel earnings growth. It aims to increase profits through such businesses as credit guarantees, financial services in South Korea, and credit card services. Both in Japan and overseas, the company will look to enter new business fields where it sees opportunities for synergy as a means of enhancing corporate value. Expand credit guarantee services. J Trust plans to expand its credit guarantee balance by partnering with new banks and strengthening relationships with existing partner banks. Specifically, the company plans to use the customer base of Takefuji (defunct) to provide credit guarantee services to more banks. The company also plans to develop new guarantee products together with partner banks, such as rental housing loan guarantee business for land owners, as it works to build up its credit guarantee balance. As of July 2014, the number of partner banks was nine. In the longer term, the company aims to increase the average balance of credit guarantees per partner bank, and thereby boost the total balance. Grow Korean financial services. The company operates savings bank services using a highly profitable business model in Korea. In one year following incorporation in 2012, Chinae Savings Bank built a JPY50bn loan receivable balance, through receivables purchases from Mirae Savings Bank, Solomon Savings Bank and HK Savings Bank. J Trust wants to expand Chinae Savings Bank s receivable balance and maximize earnings by extending new loans and buying more receivables and businesses. Ad campaigns, launched in 2014, may increase the number of new loan accounts. Accelerate receivable purchases. To accelerate receivable purchases J Trust sees acquisitions of 12/48

13 financial firms and savings banks in South Korea. The company said that buying growth in Korea costs much less than doing it in Japan. J Trust expects to see acquisition opportunities in Korea for a year or so after FY03/14. Many savings banks and financial firms will be trying to sell themselves and there should be opportunities to buy some of them at reasonable prices. J Trust thinks Korea now is akin to Japan six years ago when there were many sellers and few buyers and the company was able to conduct acquisitions that led to its further growth. In Q4 FY03/14, the company acquired all stakes and shares of two South Korean financial companies, HICAPITAL CO., LTD. (HICAPITAL) and KJI Consumer Finance LLC (KJI), and made them its subsidiaries. In June 2014, the company announced that it will acquire all shares of two other South Korean financial institutions in late September 2014 and make them consolidated subsidiaries. They are Standard Chartered Capital (Korea) Co., Ltd. (SC Capital, total assets worth JPY126bn as of FY12/13) and Standard Chartered Savings Bank Korea Co., Ltd. (SC Savings Bank, total assets worth JPY52bn as of FY06/13). The transactions will be made on condition that J Trust will receive approval from the South Korean authorities, including the Financial Services Commission and the Fair Trade Commission of Korea. Grow credit card business. The credit card business is mainly operated by KC Card, bought August 2011, and NUCS Corporation, a consolidated unit since March The company aims to expand its customer base of the credit card services by exerting synergies based on alliances with other companies with broad customer bases and on M&A activities. It also plans to restructure the organizations of the business. In January 2015, J Trust will establish a subsidiary of KC Card and split some of the KC Card businesses, including the core KC Card brand, and transfer the new subsidiary to Yahoo Japan Corporation and SoftBank Payment Service Corp. J Trust also plans to build up a new organization for the credit card business by making KC Card absorb some of the NUCS operations, including the NUCS brand. Shared Research understands that the credit card business is suited for companies that provide consistent services to a large number of customers, because the business requires user attributes to be confirmed, and expects J Trust to expand its customer base through alliances with that kind of companies or acquisitions of those companies. Growth opportunities in emerging markets. With a view to benefiting from rapid growth in developing economies, J Trust has primarily the financial sector in its sights in the emerging markets of East and Southeast Asia. The company set up J Trust Asia PTE.LTD., an office in Singapore with JPY10.0bn in capital, to serve as its hub for the financial business. In December 2013, the company started a full-scale business advance into the region, acquiring 10% of shares of Bank Mayapada International Tbk PT, a major commercial bank in Indonesia, and striking a strategic business alliance agreement to provide Bank Mayapada with J Trust s expertise in retail financial services. J Trust said it was in discussions with international corporate groups in Southeast Asia regarding business opportunities in emerging markets. While Asian countries already have banks, some are not involved in credit card and consumer loan businesses; J Trust s strategy is to form partnerships and deepen ties with such financial institutions. 13/48

14 Business Description Financial: lion s share of earnings. J Trust has several segments financial, real estate, amusement, and international. However, financial is the overwhelming revenue and profits contributor. International, the company provides savings bank services in Korea, a long-term growth driver. Operating revenue/op by segment FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Operating revenue 4,946 16,541 16,908 24,508 55,683 61,926 YoY 54.5% 234.4% 2.2% 44.9% 127.2% 11.2% Financial 3,772 14,634 13,326 19,605 33,186 25,193 YoY 32.8% 288.0% -8.9% 47.1% 69.3% -24.1% % of Total 76.3% 88.5% 78.8% 80.0% 59.6% 40.7% Real Estate 1,173 1,557 3,166 2,645 4,285 4,970 YoY 224.9% 32.7% 103.3% -16.5% 62.0% 16.0% % of Total 23.7% 9.4% 18.7% 10.8% 7.7% 8.0% Amusement ,484 16,510 YoY % % of Total % 26.7% International ,916 2,793 13,214 YoY % 373.1% % of Total % 5.0% 21.3% Operating profit 328 4,292 4,466 6,050 12,647 16,000 YoY 326.0% % 4.1% 35.5% 109.0% 26.5% Financial ,888 4,017 5,571 12,293 11,435 YoY % 38.7% 120.7% -7.0% % of Total % 89.9% 92.1% 97.2% 71.5% Real estate YoY % 19.7% -67.8% 106.1% 83.7% % of Total - 7.9% 9.1% 2.2% 2.1% 3.1% Amusement YoY % % of Total % 5.9% International ,046 YoY % of Total % % Source: Company data 14/48

15 Financial (40.7% of operating revenue, 71.5% of operating profit in FY03/14) Balance by product FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Commercial notes (current assets) 990 1,497 1,900 2,119 1,656 2,369 YoY -12.2% 51.2% 26.9% 11.5% -21.8% 43.1% Operating loans (current assets) 28,236 18,039 11,725 27,713 18,227 49,242 YoY 317.6% -36.1% -35.0% 136.4% -34.2% 170.2% Advances paid-installment (current assets) 6,343 3,825 1,443 65,024 48,133 39,776 YoY % -62.3% % -26.0% -17.4% Purchased receivables (current assets) 1,313 5,407 4,008 2,310 2,529 2,527 YoY % -25.9% -42.4% 9.5% -0.1% LT operating loans receivable (investments and other 1,858 assets) 2,776 2,286 8,487 4,686 3,951 YoY % 49.4% -17.7% 271.3% -44.8% -15.7% Credit guarantee balance (off-balance sheet) 2,455 7,536 9,699 22,072 33,194 40,839 YoY -37.2% 207.0% 28.7% 127.6% 50.4% 23.0% Source: Company data Financial business operating revenue FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Interest on loans, discount revenue (consumers) 96 4,277 2,801 3,479 4,964 2,812 Other financial revenue 1,293 6,068 5,823 3,358 6,868 3,091 Collection on purchased receivables 1,556 2,106 2,669 2,740 2,403 3,018 Commissions on installment payments - 1, ,236 10,016 7,463 Guarantee commissions received ,751 2,377 Gain on bad debt recovered ,634 5,135 Source: Company data Segment operating revenue (FY03/14 %) Credit card and consumer credit services: 29.6 Consumer loan services: 11.2 Servicer operations: 12.0 Credit guarantee services: 9.4 Business loan services: 1.7 Credit guarantee services are a key driver of both earnings and growth. Credit guarantee services (9.4% of financial business operating revenue in FY03/14) Group companies Nihon Hoshou, KC Card, and Credia provide credit guarantees on consumer loans to banks and cooperative-type financial institutions. It had nine partner banks as of July The credit guarantee business is to guarantee consumer loans and property-backed loans by banks and other lenders. The business does not tie up assets and thus does not impact the balance sheet. The P&L entry is guarantee commissions received. 15/48

16 Credit guarantee balance, guarantee commission FY03/09 received FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Unsecured 8 4,743 4,594 9,614 16,458 21,007 Secured 2,446 2,792 5,104 12,457 16,735 19,832 Total credit guarantee balance 2,455 7,536 9,699 22,072 33,194 40,839 Guarantee commission received ,751 2,377 Source: Company data Court ruling. In January 2006 Japan s Supreme Court ruled that the interest rate gap between the Investment Act and the Interest Rate Restriction Act was not valid. The upshot: consumer lenders are forced to lend money at lower rates while implementing more stringent borrower screening. In June 2010 the Money Lending Business Act was revised. The revised law restricts loans up to one third of the annual income of borrowers, paring opportunities for consumer loan businesses to lend. So Japan is unlikely to see many more people taking out consumer loans or going for higher balances. Banks though are exempt from the lending ceiling restrictions and that increased their presence and influence in the market. Yet banks lack screening and loan recovery expertise when it comes to higher-risk unsecured consumer loans, so are turning to consumer financial firms to guarantee loans. In the guarantor business, the guarantor firm will be the one that repays the bank in the event that a borrower becomes unable to make loan payments. J Trust has expanded its credit guarantee balance through unique services, targeting small regional banks. It sends credit guarantee specialists to these banks. This arrangement is win-win for J Trust and partner banks, providing J Trust with solid revenues and letting banks access specialist knowledge. Customers of J Trust (eg, Nihon Hoshou) are introduced to a partner bank. Credit guarantee specialists from J Trust also help the bank to collect debt and extend additional/new loans. A consumer loan customer introduced to a partner bank becomes a consumer loan customer of the bank. Rates on unsecured loans are about 15% and 8% for secured loans. The change of lenders from a consumer financial firm to a bank can make the borrower feel more comfortable. The partner bank and the company split the interest income: on unsecured loans the bank receives about one-third of interest income and the company receives two-thirds; on secured loans the bank and the company receive half the interest income each. Since the company is providing its unique expertise to the partner bank, the company receives a higher share of interest income than is typical for other companies. Banks lack consumer loan receivables collection skill and have little incentive to collect, especially when the receivables are subject to a credit guarantee (no risk of loss). Under J Trust s credit guarantee scheme, dispatched debt collection specialists sharply reduce loan losses. J Trust s credit loss rate hovers at 1% vis-à-vis 4% at other credit guarantee firms. J Trust intends to partner with more banks and build up its credit guarantee balance by using its proprietary credit guarantee scheme. J Trust aims to grow its credit guarantee balance further by having dispatched specialists take an active stance toward the extension of additional loans or finding new customers. As a key business in the future, the company announced in March 2014 that it had entered into a business alliance with the Saikyo Bank, Ltd. to offer a on rental loan business. The interest rate on rental housing loans tends to be lower than on consumer loans, and J Trust s income is only around 1% of loan amounts. But this business has potential for medium term growth because contracts are large at around JPY90mn per contract compared with JPY500,000 for consumer loans meaning the loan balance is easy to grow. 16/48

17 Credit card and consumer credit services (29.6% of financial business operating revenue in FY03/14) KC Card (bought August 2011) and NUCS Corporation (a subsidiary since March 2014) provide credit card services. The credit card and consumer credit service business earns money from commissions on installment payments and interest income on cash advances. Cardholders pay annualized interest rates of % on installment payments. Cash advances, available up to JPY500,000, command an annualized 18% interest rate. The credit card units also issue cards exclusively for cash advances up to JPY3mn ( % interest rate). Balance sheet treatment: advances paid on cardholder installment payments and the balance of cash advances are booked as installment advances paid (current assets) and as long-term operating loans receivable (fixed assets) if the loans have been delinquent for one year, or those that are likely to take at least one year to collect. P&L: revenues are commissions on installment payments. Commissions on installment payments are noted as credit card revenue, and interest income on cash advances is recorded as financing revenue. Balance of advances paid-installment FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Advances paid-installment 6,343 3,825 1,443 65,024 48,133 39,776 Long-term operating loans receivable ,115 3,205 1,037 Total (balance of advances paid-installment) 6,345 3,870 1,475 72,139 51,338 40,814 Source: Company data Installment payment paying for commission FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Credit card revenue ,028 2,853 2,848 Financing revenue ,926 6,937 4,450 Installment payment paying for commission - 1, Total (installment payment paying for commission) - 1, ,236 10,016 7,463 Source: Company data Balance of installment advances paid declining. This was mainly owing to lower cashing volumes amid stable balance of shopping installment payments. As a result, the balance of loans was down in FY03/14. The company sees no growth in cashing-only cards, given loan ceiling regulations and in turn migration of balances to large banks and related service providers (who have more marketing clout). Thus J Trust intends to focus more on the credit guarantee services subsegment. The company plans to restructure the organizations of the business. In January 2015, J Trust will establish a subsidiary of KC Card and split some of the KC Card businesses, including the core KC Card brand, and transfer the new subsidiary to Yahoo Japan Corporation and SoftBank Payment Service Corp. J Trust also plans to build up a new organization for the credit card business by making KC Card absorb some of the NUCS operations, including the NUCS brand. After the planned restructuring in the credit card business, J Trust plans to develop and provide attractive services and products through synergistic M&A and business tie-ups with companies sporting a big customer base. Otherwise, the company will focus on acquiring its peers, which have lost profitability 17/48

18 amid competition with major credit card companies or sluggish regional economies, at reasonable prices, in a bid to expand its customer base and the business. Consumer loan services (11.2% of financial business operating revenue in FY03/14) J Trust makes unsecured loans at 15-18% interest rate. Group companies Nihon Hoshou and Credia, handle these services. Loans extended are booked on the balance sheet as accounts receivable, operating loans, or long-term operating loans receivable. Interest income is recorded on the P&L as interest on loans. Sum of loans receivable, interest on loans FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Accounts receivable-operating loans 25,663 16,256 9,504 20,903 12,025 6,733 Long-term loans receivable 1,772 2,672 2,224 1,322 1,405 1,242 Total (sum of loans receivable) 27,435 18,928 11,728 22,226 13,431 7,976 Interest on loans 96 4,277 2,801 3,479 4,964 2,812 Source: Company data The balance of consumer loans is trending south driven by customer introductions to partner banks in the credit guarantee services subsegment. Bad debt recovery services (20.4% of financial business operating revenue in FY03/14) J Trust uses its expertise to accelerate bad debt recovery. According to J Trust the purchased receivables it assumed from Takefuji (defunct) included performing receivables along with bad debt already written off the balance sheet. Written-off bad debt has no book value, so recovery implies zero-cost profits. Through use of its proprietary expertise, the company is making progress in recoveries. Revenues from bad debt recovery are booked on the P&L as gain on bad debt recovered. The gain hit JPY6.6bn in FY03/13 and JPY5.1bn in FY03/14. Other financing revenues (12.3% of financial business operating revenue in FY03/14) In factoring services, the difference between the recovered amount for loan receivables and the cost of purchasing loan receivables is booked as other financing revenue this mainly applies to loan receivables inherited from Takefuji. Other financing revenues were JPY6.9bn in FY03/13 and JPY3.1bn in FY03/14. Costs in the financial business J Trust does not disclose gross operating profits by segment. However, estimating from P&L data, it seems that the main operating cost in the financial business is interest on borrowings. Main selling and general expenses: provisions for bad debts, provisions for losses on interest repayments, provisions for losses on credit guarantees, personnel costs, and other overheads. 18/48

19 Provisions for losses on interest repayments: Business accounting in Japan requires that repayment of interest that has been overpaid on loans with so-called gray zone interest rates that were in excess of maximums set forth in the Interest Rate Restriction Act must be provided for in the accounts of loan lenders. The provision for loss on interest repayments is calculated as follows. First, the estimated provision for loss on interest repayments at the end of the current period is calculated. Next, the loss on interest repayments for the current year is deducted from the provision balance at the end of the previous year. If there is a shortfall after allocating the current year s losses, provisions must be topped up, and recorded as SG&A expenses. Provisions for credit guarantee losses: provisions for credit guarantees from periods prior to the current one where there is a high likelihood of losses. Provisions for allowances FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Provisions for allowance for doubtful accounts 1,075 2,041-2, Provisions for losses on interest repayment 296 2,457 2,535 1,460 1, Provisions for bad debts ,484-3,575 Source: Company data Provisions of allowance for bad debts rose temporarily due to the consolidation of KC Card in FY03/12. In FY03/13 and onward, provisions fell as falls in the relevant balance and loan loss ratio saw the inflow of new provisions decline. Provisions for losses on interest repayments are on a downward trend in line with falls in the number of claims and reimbursement of overpayment cases. Provision for loss on guarantees in FY03/13 included not only loss provision related to credit guarantee services, but also provision of allowance for contingent liabilities. The allowance was reversed in FY03/14 because the liabilities were fully repaid. Personnel and sundry expenses are on an uptrend due to the bigger scale of the business and employee numbers following M&A activity. International business (21.3% of operating revenue, 19.0% of overall profit (FY03/14) Long-term focus: expanding savings bank services. J Trust s international business consists of savings bank services. consumer loan services, and purchases and collections of loan claims. Savings bank services (Korea) Starts consumer financing in 2009, founds Chinae Savings Bank in In October 2012 J Trust set up Chinae Savings Bank in Korea, and began offering consumer loan services there integrating its expertise in credit screening and receivables management. Neoline Credit joined J Trust group in 2011 having previously launched a Korean consumer financial business in Neoline Credit had been tracking steady growth. As such J Trust, via Neoline Credit, already had knowledge of Korea s consumer loan market before it established Chinae Savings Bank. According to J Trust, other Japanese companies are directly affected by bad loans of Korean savings banks they acquired as they invested in existing banks, but Chinae Savings Bank took over only good assets and debts (deposits) of defunct financial institutions, so the effect of bad loans is limited. J Trust decided in January 2014 on recapitalization of Chinae Savings Bank to improve its capital adequacy ratio 19/48

20 (based on the BIS standards), to be undertaken by KC Card, but the amount was only JPY5bn. Korea s consumer financing business is highly profitable. Korea s consumer financial arena can be more profitable than Japan s. Korea allows higher loan rates (up to 34.9%), has no overcharged interest problem, and levies a lower corporate tax rate. Chinae Savings Bank lends to consumers at about a 29% interest rate. Per J Trust, Korea s interest rates on deposits at 3% and credit loss rates at around 10-15% are higher than Japan s. Yet Chinae Savings Bank is highly profitable. Loans by the banking business recorded on financial statements. Loans extended here are recorded on the balance sheet as loans by the banking business. Interest income is booked on the P&L as operating revenue from banking operations. Overseas savings banks FY03/13 FY03/14 (JPYmn) Cons. Cons. Loans 48,210 46,701 Operating revenue 1,222 12,392 Source: Company data Raises balances of consumer loans, banking loans by M&A. The company has continued increasing its balances of consumer loans and banking loans in Korea through M&A activities. In October 2012 J Trust took over about JPY20bn of consumer credit loan receivables from Mirae Savings Bank. In January 2013 the company bought JPY29.9bn of consumer loan receivables from Solomon Savings Bank. In June 2013 J Trust bought JPY15.3bn of consumer loan receivables from HK Savings Bank. In FY03/14, J Trust acquired all shares in KJI Consumer Finance LLC and HICAPITAL Co., Ltd., both operators of loan businesses in South Korea, and made them its consolidated subsidiaries. As a result, a total of some JPY37bn in the two companies liquid assets was consolidated, comprised of KJI s JPY23bn and HICAPITAL s JPY14.1bn. The balance of consumer loans abroad increased from JPY4bn in FY03/13 to JPY42bn in FY03/14. In July 2014, J Trust announced a business transfer among its subsidiaries. The company will transfer its loan businesses operated by KJI, HICAPITAL, and Neoline Credit to Chinae Savings Bank in August In order to sustain operations for the loan businesses, the subsidiaries were forced to make use of high-interest financing of around 9%. Transfer of the businesses will enable J Trust to repay these loans, and utilize relatively low interest rate financing of around 3% of Chinae Savings Bank. This will provide a significant improvement to the company s overall financial standing. In June 2014, the company announced the acquisition of Standard Chartered Capital (Korea) Co., Ltd. (SC Capital) and Standard Chartered Savings Bank Korea Co., Ltd. (SC Savings Bank) in September 2014, on condition that J Trust will receive approval from such authorities as the Financial Services Commission and the Fair Trade Commission of Korea. SC Capital had JPY126bn in total assets in FY12/13 and SC Savings Bank had JPY52bn in FY06/13. They will become wholly-owned subsidiaries. According to J Trust, the acquisition of SC Savings Bank will boost the operating territories of its savings bank business to around 70% of South Korea, along with the coverage of Chinae Savings Bank. In the financing businesses in South Korea, there is a division of operations in the company group, where the savings bank units provide new loans and the consumer financing units change the articles of incorporation and focus on buying and collecting loan receivables. 20/48