IR Street REPORT （Growing company・Highly profitable company）<Japanese Equity Research>

8920 TOSHO CO.,LTD

JASDAQ

sector: Service （Operation of sports clubs） 9-Nov-11

Operates Holiday Sports Clubs. Boasts the highest profit and profit margin in the industry with its own businessmodel by opening clubs in the regions.
＜Recent financial summary＞ FY3/12 2Q: As planned; Highest sales and ordinary income since its listing.
Contact；IR STREET （Ms. Oda） TEL；03-4500-6880
oda@irstreet.com
Company profile
Representative
Head OfficeBusinees line
Shares issued
Major shareholders

Toshihiro Kutsuna
URL: http://www.to-sho.net/
1-16-5 Mikawa-Anjo-cho, Anjo-shi, Aichi
Holiday Sports Club business, Hotel business, lease business
17,592,351 (as of end of Sept. 2011）
Toshihiro Kutsuna 59.8％, Yuuichiro Kutsuna 11.8％, Mayumi Kutsuna(as of end of Mar. 201 4.1％, Kazuki Kutsuna 3.4％, Ai Kikuchi 2.9％, Masahiko Wada 0.9％

Mar 09Mar 10Mar 11
Mar 12(E)Net Sales(\ million ）Ordinary income(\ million ）Net income(\ million ）Dividend(Yen)EPS(Yen)

ROE(%)

10,901
10,597
10,80311,900

1,954
2,087
2,000
2,300

1,087
1,106
1,071
1,220

10101112

65.8
65.4
60.9
68.2

23.6%
19.2%
14.5%
16.0%

661(13.3%)

637.6

-

2Q Mar 12(YoY） 5,892(+10.2%) 1,171(+4.0%)(\ million)
13,00011,000(\ million)

2,700

1,500

1,800

1,000

900

500

March 1979
February 2004

Established
Listed9-Nov-11
Stock price (￥)553
7.9

PER(est.)PBR
ROE（est.）Market cap (￥million）
Trade Unit

1.2
16.0%
9,729
100(Yen)
66

9,000
7,000
5,0000Mar 09Mar 10580Mar 11 Mar 12(E)50Mar 09

Net Sales (\ million ）Ordinary income (\ million ）Mar 10Mar 11

Mar 12(E)Net income (\ million ）EPS (Yen)

Corporate History
The company was originally established as a construction company in Aichi Prefecture by the founder and current President, Mr. Kutsuna, in 1979. Thecompany used the knowhow it had accumulated from its activities in building shops, condominiums and factories to begin its golf practice range businessin 1989, its sports club operation in 1996 and its hotel business in 1999. “The ‘Holiday Sports” brand sports club operation is the main growth driveramongst the company’s businesses and accounts for approximately 80% of sales. The major companies in the sector, led by the top operator Konami Sports,
have built up their businesses by developing luxurious facilities aimed at city dwellers and have engaged in an ever-widening, highly competitive war ofattrition centered on the concept of sports training. In contrast, “Holiday Sports Club” concentrates on regional cities (with populations of 100,000
and above) and has leveraged both facets of its unique knowledge base - its “hard” attributes such as its knowhow in building and operating its own,efficient facilities and its “soft” features which include providing reasonably priced and enjoyable health-building services to first-timers – tobecome the 8 th largest company in the sector by sales and by far the most profitable company in terms of ordinary income. By tapping latent demand
resulting from insufficient physical exercise amongst adults in regional areas, Tosho aims to expand the number of its facilities from 43 at present to100 by 2018. The company is already in the top class in the industry in terms of profitability , ROE and other financial metrics but, being a regionaloperator, the lack of name recognition for its “Holiday Sports Club” brand in urban areas has also influenced the stock market, resulting inTosho
looking highly attractive as an investment prospect and extremely undervalued in relative terms given its low
PER of about 8x (less than half the sector
average PER of 16x).
Tosho realized “increases in sales and earnings” and “the highest sales and ordinary income since its listing” in FY3/12 2Q as the effect of theacceleration of opening sports clubs from the previous fiscal year started to show. (No. of sports clubs opened: 2 in FY3/10, 5 in FY3/11). Tosho alsoplans to open 8 clubs in FY3/12. Due to the delay in the process for construction because of the earthquake disaster, there is a possibility that theopening of 1 club will be postponed to the next fiscal year but others are making good progress.
Mr. Samejima, an analyst in Ichiyoshi Research Institute covers Tosho and the company has received an A-rating with a target stock price of \1,100 (as ofAug. 4, 2011).

Business Strategy
With Japan facing the problems of an aging society and a falling birth-rate and health-oriented consumption booming mainly among seniors, the future
growth prospects for this market look very promising. The sector which is made up of sports clubs aimed at eliminating insufficient levels of physicalexercise amongst urban dwellers is a business model characterized by a red ocean of excessive competition, huge amounts of capital expenditure and an
extremely difficult environment in which to make money. By contrast, the development of the motorization of regional areas has created an environment inwhich the level of inadequacy in physical exercise amongst residents is even higher than that for urban dwellers resulting in latent demand for sports
clubs to help them maintain good health and eliminate the problem of insufficient exercise from their lifestyles. That said, regional sports clubs have,to date, consisted of swimming schools aimed at children and the conventional wisdom in the sector has been that the prospects for making money from thedevelopment of sports clubs for adults are bleak. In the face of this commonly-held view, Tosho has built up its business model to suit the demands ofadult residents of regional areas keen to improve their health on the foundation of its key principles of “building low-cost, high-quality facilities
by using its own knowhow,” “nurturing and training its employees to become instructors,” “running a varied range of new programs” and “creating alow-fee operating structure” and continues to win through with these core concepts. Tosho has created an astoundingly profitable business model withanordinary income ratio of over 30% and ROI against funds invested on an ordinary income basis of in excess of 18%.
Tosho has developed a model capable ofopening a sports club on a smaller land area by further developing the business model. Tosho’s model will be focused on a “Comprehensive 2000” model
to realize an annual sales of \168 million and an ordinary income of \55 million (a profit margin of 33%) with “an area of 4,959 square meters, a
population of 100 thousand people, 2,000 members, an average fee of \7,000 and an investment of \350 million.” The percentage of the Japanesepopulation who are sports club members is 3% (against 15% in America) which means that it is a market of 3,000 people in a city of 100,000 people. Inaddition, Tosho has developed a “No swimming pool” model which has no swimming pool and requires an even smaller land area and investment amount. With
these compact business models, Tosho plans to enter into the Tokyo area next year. Due to the prolonged recession, the land prices are falling andTosho’s opportunities to open sports clubs are increasing.
In October 2011, Tosho announced its midterm plan centered on the acceleration of the opening of “Holiday Sports Clubs.” Tosho aims to open 74 clubs
in FY3/15 and aims to raise sales to \17.5 billion, ordinary income to \4.4 billion and ordinary income ratio to 25%.
For hotel business and leasing
business, there will be no new investments. Also, the company plans to lower depreciation expense year by year and improve profit margin. Regarding theshareholder return policy, Tosho plans to increase dividends by linking dividend payments to profits aiming a dividend payout ratio of 20%.
Corporate analysis by IR STREETStrengthOpportunity

1.Has knowhow in building and operating facilities unlike any other companies
1.Health conscious associated with aging
2.Most profitable company in the industry by developing its own business model
2.Regional towns and cities with high potential demand
3.Drop in land prices under the deflationary environment and3.The average age of employees is the youngest among the JASDAQ listed companies
opportunities for securing human resources
and conducts human resources programs
Weakness
Risk
1.Lack of recognition of individual investors, with many concentrated in urban areas1.Financial institutions’ lending stance
2.Demand for funds for the opening of new clubs (reliance on low-capital-cost bank 2.Maintaining policy of opening facilities in suitable locations《Peer comparison》

FY2010Sales

Ordinary income(￥million)

Click for IR Information

Tosho(Holiday Sports
Central Sports (4801)
Renaissance (2378)
Megalos (2165)

10,803
46,13537,04813,927

2,000
1,719
1,049
322

YoY(%)Net income(￥million)

Market cap(￥billion)

1,071
440
288
72

98106
80
38

18.5%
3.7%
2.8%
2.3%

EPS(￥)60.9
38.4
13.4
18.9

CLICK HERE TO GET MORE IR INFORMATION OF THE COMPANY
Copyright© 2010

Finantec Co., Ltd. All Right Reserved.

This report is provided for information purpose only, and constitutes neither investment advice nor the recommendation to purchase or sell securities named in this report.

ＰＥＲ（times）

Dividend yield

9.1
24.3
27.8
53.2

1.9%
1.6%
1.0%
1.9%

(￥)