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浙江十一选五开奖: COMPANY RESEARCH AND ANALYSIS REPORT:eGuarantee, Inc-8771-Tokyo Stock Exchange First Section( I )

2018-07-10  提供機構:FISCO  作者:FISCO  點閱次數:2

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十一选五玩法 www.yhyqa.cn ◆Summary

The outlook is for the profit growth to continue against the backdrop of the strong demand for sales credit guarantee services

The core business of eGuarantee, Inc. <8771> is to provide credit risk guarantee services targeting sales credits issued by companies to their customers. The Company hedges the credit risk it assumes by transferring the guarantees to financial institutions via reassurance contracts. It follows a recurring revenue business model in which net sales equates to the product of the balance of outstanding guarantee times the guarantee fee ratio. As the number of client companies has increased, the Company’s balance of credit guarantees outstanding has risen. As a result, eGuarantee has delivered sustained growth.

1. FY3/18 results

In the FY3/18 consolidated results, both sales and profits increased for the 12th consecutive year since the Company was listed, with net sales increasing 11.5% year-on-year (YoY) to ¥5,105mn and recurring profit rising 7.0% to ¥2,302mn. Against the backdrop of its advanced screening capabilities, the Company steadily developed new customers through setting detailed guarantee fee ratios and providing services that respond to customer needs, and the balance of guarantees outstanding rose 15.6% on the end of the previous fiscal year to ¥345.3bn, which was a factor behind the higher sales. The operating margin declined 1.7 percentage points compared to the previous fiscal year, but this was due to the worsening of the cost ratio from expanding the targets of the credits it underwrites from the previous low risk zone to some middle risks. Compared to the initial Company forecasts (net sales of ¥5,200mn and operating profit of ¥2,270mn), net sales were slightly below their forecast as the underwriting of middle risk was less than planned, but underwriting in the low-risk zone was more than expected, so on a profits basis, the results were slightly above forecast.

2. FY3/19 outlook

The outlook for the FY3/19 consolidated results is once again for new record highs, with net sales increasing 11.6% YoY to ¥5,700mn and recurring profit rising 10.7% to ¥2,550mn. The main reason for these forecasts is that there are many inquiries from companies that want to increase their sales while also hedging against the risk of uncollectable sales credits by using the Company’s services, so the number of customer referrals from regional banks, which are its alliance partners, are increasing. In this fiscal period also, its policy will be to develop a diverse range of product and services that meet customer needs and to grow results while aiming to accumulate the balance of guarantees outstanding.

3. Growth strategy

The Company’s management target for the near future is consolidated recurring profit of ¥5bn, and to achieve this level, it will need to increase the balance of credit guarantees outstanding to around ¥700bn to ¥800bn, which is approximately double the level at the end of the previous fiscal period. If growth continues at around the current pace of 15%, then the prospect is that it will be able to achieve this target in FY3/23. It is thought that this growth of the balance of guarantees outstanding of about 15% a year is possible through the Company working to strengthen the sales structure and improve productivity by increasing operational efficiency, and also by expanding the scope of credits it targets (up to middle risk). Moreover, in conjunction with the expansion in the scale of guarantees, for the building of a securitization structure also, it is strengthening its ability to tolerate risk by progressing the formation of new funds.

As the Company plans to achieving recurring profit from expanding the regular guarantee business, in addition to that, it has positioned as one growth area undertaking the guarantee of risk such as when developing the provision of financial services, of companies that utilize the Internet and provide matching services that connect companies and people and outsourcing services. Also, as a company’s strength, that it has guarantee requests from in excess of 20,000 companies a month, and after the guarantee-request process and actually providing the guarantee, it has a business model that can ascertain the actual settlement conditions and the detailed information, for example what kind of transactions are carried out among them. Alongside the business expansion, it is considered to be creating an enormous information database on corporate transactions and to be actively utilizing it in future business development.

4. Shareholder return policy

Looking at the shareholder return policy, eGuarantee’s basic policy is to pay dividends in line with earnings while retaining the internal reserves needed to aggressively expand business and ensure a strong financial position, targeting a payout ratio of around 30%. In FY3/19, eGuarantee plans to issue an annual dividend of ¥22.5 per share, representing a dividend payout ratio of 29.3%. If the Company achieves its target, it is likely to continue increasing its dividend. As for the Company’s shareholder gift program, eGuarantee awards a QUO card worth ¥1,500 to each shareholder at the end of March every year.

◆Company overview

It guarantees companies’ risk of irrecoverable sales credits and other credits and provides a service that contributes to their business expansion

1. Company history

eGuarantee can trace its origins to its establishment as a subsidiary of ITOCHU Corporation <8001> by Mr. Masanori Eto, the current president and CEO of eGuarantee, during his third year as an ITOCHU employee in September 2000. Initially, eGuarantee set out to provide a service to hedge the risk of uncollectible sales credits, such as trade notes and accounts receivable, for B2B transactions over the Internet. However, demand for these services was lower than initially anticipated. Therefore, eGuarantee evolved into a provider of credit risk guarantee services for sales credits in real B2B business transactions that do not involve the Internet.

In March 2007, the Company was listed on the JASDAQ Securities Exchange (listing changed to the Tokyo Stock Exchange 1st Section in December 2012), and using the funds it raised from the listing, in 2008 it formed its first fund investing in corporate credit risk and started operations through a subsidiary. Previously, it had packaged its guarantees according to the degree of risk and sold these packages to all financial institutions for them to hedge risks. But by forming new funds, it is aiming to diversify its opportunities for profits and to expand the risk that it underwrites, thereby accelerating growth (as of March 2018, the fund association consisted of four consolidated subsidiaries and one equity-method affiliate).

In January 2012, eGuarantee acquired the factoring business of Coface Japan Finance Co Ltd., the Japanese arm of Coface Group, which is a leading French credit guarantee group. The purpose of the acquisition was to upgrade and expand the Company’s business foundations and bolster its product development capabilities by obtaining expertise related to export credit guarantees. By leveraging the expertise obtained through this acquisition, eGuarantee entered into business alliances with local financial institutions in South Korea in December 2013 and China in June 2014, and has commenced export credit guarantee service business in those countries.

Alongside the expansion of its business scope, in 2013 the Company established eGuarantee Solution Inc., as a subsidiary to carry out sales-related administrative work (contract-related work and data registration services) and in 2014, it established RG Guarantee, Inc., as a subsidiary to be a specialized provider of small-ticket credit guarantee services. Then 2017, it separated the sales-related administrative work from eGuarantee Solution, Inc. and newly established eGuarantee Shared Services, Inc.

A stock-type business model that accumulates net sales from the “balance of guarantees outstanding x the guarantee fee ratio”

2. Business overview

(1) Description of businesses

eGuarantee’s main business is insuring against the sales credit risk arising through transactions among companies. This business is illustrated graphically below.

First, eGuarantee and its client company sign a contract by which eGuarantee promises to pay to the client a fixed amount to compensate for a sales credit from transactions with other companies if it should become irrecoverable by paying a guarantee fee to eGuarantee, the client company minimizes its risk of loss from an irrecoverable sales credit. In other words, the client company is able to pay a certain guarantee fee in exchange for minimizing its risk of loss from an irrecoverable sales credit. Most contracts are effective for one year, and the client company pays the entire guarantee fee on the business day before the guarantee start date in principle. eGuarantee divides the sales proceeds into 12 equal monthly installments and records the sales every month, so month-to-month sales fluctuations are relatively small and this functions as a recurring revenue business model.

As eGuarantee’s net sales are the product of its balance of guarantees outstanding times its guarantee fee ratio, the key to driving growth in net sales lies in increasing the balance of credit guarantees. eGuarantee refers to various data, including economic indicators published daily, trends in the number of corporate bankruptcies and the probability of credit default based on past experience, and revises guarantee fees every month based on this data. When the number of corporate bankruptcies is decreasing, the credit risk is lower. This means that the guarantee fee ratio will also be set lower. The actual guarantee fee ratio is set for individual contracts and based on the result of eGuarantee’s investigations of risk associated with the companies subject to the guarantee. eGuarantee is not bound by industry practice in setting its guarantee fee, but sets a fee that justifies the cost of hedging the risk for the client.

In regard to the credit risk assumed by the Company, eGuarantee packages its guarantees into a portfolio of financial risk products according to risk. It then transfers the guarantees to financial institutions, investment funds and other entities (securitization). Upon the transfer of credit risk, eGuarantee pays guarantee fees and commissions to the entities that accept its guarantee packages. These guarantee fees and commissions constitute the bulk of eGuarantee’s cost of sales.

Therefore, eGuarantee’s gross margin depends mainly on the spread between the guarantee fee ratio agreed upon by the Company and its clients and the reinsurance fee ratio that applies to fees and commissions paid by the Company to the entities that accept the transfer of credit risk. eGuarantee has been reducing the cost-of-sales ratio by diversifying and upgrading its methods of transferring credit risk to lower the reinsurance fee ratios and by arranging investment funds at a subsidiary that shrinks the amount of guarantee fees paid to third parties. It has also benefited from a lower deflation ratio than anticipated. Although the cost of sales ratio has been on a declining trend in recent years, in the fiscal year ended March 31, 2018 the cost of sales ratio has increased due to the start of middle-risk credit guarantee services.

(2) Operational structure

In addition to its head office in Tokyo, eGuarantee has opened branches in Osaka, Fukuoka, Aichi, and Hokkaido in the course of expanding its network across Japan. The Company plans to maintain its current operational structure in terms of its business locations for the time being. Meanwhile eGuarantee has efficiently developed customers by forming business alliances with financial companies, primarily regional banks, trading companies, leasing firms and other partners. In particular, eGuarantee had entered into business alliances with 51 regional banks as of the end of March 2018, establishing an alliance network spanning nearly all of Japan. Looking at the breakdown of the number of customer referrals, referrals from regional banks now account for around 80% of the total, followed by referrals via trading companies and those from other channels. Additionally, eGuarantee has been ramping up business alliances with shinkin banks, which have many local small and medium-sized companies among their customers, since FY3/16 and had alliances with seven shinkin banks at the end of March 2018.

eGuarantee had more than 2,000 client companies, ranging from small and medium-sized enterprises to major corporations. Furthermore, the Company screens the credit of over 20,000 companies every month. eGuaran­tee’s customers are spread out evenly across a multitude of industries, including the wholesaling, retailing, and manufacturing sectors, and this means that its business performance is not susceptible to business volatility in any particular sector.

The size of the sales credit market exceeds ¥200tn with robust growth potential

3. Market size

The size of the market for trade receivables (trade notes and accounts receivable) targeted by the eGuarantee’s mainstay service is estimated to be more than ¥200tn. While not all of these trade receivables will require credit risk guarantee services, trade receivables guarantee services are used extensively in the US and Europe and have robust growth potential.

In addition, the number of corporate bankruptcies, which has an impact on the guarantee fee ratio, has continued to decline since peaking out in fiscal 2008. In fiscal 2017, the number of corporate bankruptcies shifted to an increase of 1.6% YoY to 8,285, an increase for the first time in nine years. In addition to the ongoing recovery of the Japanese economy, accommodative loans terms from banks under an ultra-low interest rate policy, and other positive factors form the backdrop to the declining number of corporate bankruptcies. The fewer number of corporate bankruptcies has been accompanied by a decline in the guarantee fee ratio, and the guarantee fee ratio currently stands at just under 2%. A decline in the guarantee fee ratio is a negative factor that pushes down net sales. Meanwhile, considering that a lower guarantee fee ratio also reduces the fees paid to acceptors of securitized guarantees, a decrease in the guarantee fee ratio is a neutral factor that has no impact on the gross margin. During an economic recovery, companies tend to see an increase in the number of their new transaction counterparties in step with sales growth, and tend to generate surplus cash that can be used to hedge the credit risk of sales credits. For these reasons, the balance of credit guarantees outstanding tends to increase in recovery times.

4. Risks

We examine the risks that should be taken into consideration when looking at eGuarantee’s business performance. The following are the three primary risks that could affect the Company’s business results. However, we believe that these risks do not present major concerns at this time.

(1) Profit-structure risk

The Company’s profit structure is that it records as net sales the guarantee fees it receives from customers, and it records as costs of sales the payments to financial institutions and others that transfer risk to it, with the difference between these two amounts being the Company’s profits. The payments to the customers that transfer risk to it are determined by the track record in executing guarantees over several years, so even if it temporarily incurs large costs from the execution of guarantees, this will not become a factor causing costs to rise in the short term. However, during a period in which the execution of guarantees continues to occur frequently, such as during an economic recession, the risk-transference cost rises. If the Company cannot transfer this rise in the risk-transference cost to the prices of guarantee fees, it becomes a factor causing profitability to deteriorate. Also, on the one hand it is possible that demand for the Company’s services will increase during an economic recession due to the rise in the risk of bankruptcy, but on the other hand, it also considered possible that the balance of guarantees outstanding will decrease due to a decline in the number of contracts from a rise in the guarantee fee ratio and a fall in the contract-renewal rate. In FY3/09, which was the time of the last economic downturn, the balance of guarantees outstanding declined 2% on the end of the previous fiscal year, but net sales increased by double-digits due to the rise in the guarantee fee ratio. There is also the risk that the Company will be unable to execute guarantees during an unprecedented economic recession in the event of the management collapse of the financial institutions and others that transfer risk to it.

(2) Competition risk

There are hardly any other companies like the Company that specialize in providing sales credit guarantee services, but there are factoring companies affiliated to major financial institutions that provide guarantee factoring as a similar service, and also property insurance companies that provide transaction credit insurance and other such services. However, in terms of the scope of the companies that are targets of the guarantees, the guarantee-limit amount, and the credits targeted, the Company’s strengths include that it is able to respond flexibly to diverse customer needs, so at the present time it is considered to have almost no competition risk. However, if in the future, financial institutions or other companies develop the same services as the Company and launch businesses, thereby causing competition to intensify, its profitability may decline. The Company does face some competition from a small-scale provider of a small-ticket sales credit guarantee service, of Trust & Growth Co., Ltd., which is a subsidiary of Raccoon Co., Ltd. <3031>. But small-ticket sales credit guarantees constitute only a small percentage of the Company’s total business and the penetration rate of this service is also low, so this competition has hardly any effect on it.

(3) Legal-regulations risk

Credit risk guarantee services are not subject to legal regulations, such as the Insurance Business Act and the Financial Instruments and Exchange Act. However, if in the future legal regulations relating to these services are newly enacted, this may affect the Company’s results, such as changing its business model or changing the competitive environment.

 

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