<Japanese Equity Research>

IR Street REPORT（Growing company・Highly profitable company）

8920 TOSHO CO.,LTD

JASDAQ

sector: Service （Operation of fitness clubs）

7-Feb-11

Operates Holiday Sports Clubs mainly in the regions.
Boasts the highest profit and profit margin in the industry.
Contact；IR STREET （Ms. Oda）

oda@irstreet.com

TEL；03--3560-5444

Company profile
Representative
Head OfficeBusinees line
Shraes issued

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

4-Feb-11
Stock price (￥)PER(est.)
PBRROE（est.）
Market cap (￥million）
Trade Unit

(as of the end of Sept, 2010）

Major shareholders Toshihiro Kutsuna 60.0％,Yuuichiro Kutsuna 11.8％, Mayumi Kutsuna(as of the end of Sept, 2010 4.1％, Kazuki Kutsuna 3.4％, Ai Kikuchi 2.9％, Masahiko Wada 0.9％

Mar 08Mar 09Mar 10Mar 11(E)Net Sales

Ordinary income

Net income

Dividend

EPS(\ million ）(\ million ）(\ million ）

(Yen)

(Yen)

(%)

10,808
10,901
10,597
10,815

1,603
1,954
2,087
2,200

885
1,0871,106
1,200

1210101053.6
65.8
65.4
68.2

23.20%
23.6%
19.2%

1,699(+0.9%)842(-1.9%)--

3Q Mar 11 (YoY） 8,027(+1.3%)(\ million)
12,00011,00010,000
9,000
8,000
7,000
6,000
5,000
Mar08

Mar09

Net Sales (\ million ）Mar

102,700(\ million)
1,500

1,800

1,000

900

500

00Mar 11(E)March 1979
February 2004

Established
Listed

ROE

560
8.2
1.2
18.5%
9,852100(\)
66
5850

Mar 08Mar

Ordinary income (\ million ）09Mar10Net income (\ million ）Mar 11(E)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. The company used the knowhow it had
accumulated from its activities in building shops, condominiums and factories to begin its golf practice range business in 1989, its sports club operation in 1996 and its hotel business in 1999.
The ‘Holiday Sports’ brand fitness club operation is the main growth driver amongst the company’s businesses and accounts for approximately 80% of sales. The major companies in thesector, led by the top operator Konami Sports & Life, have built up their businesses by developing luxurious facilities aimed at city dwellers and have engaged in an ever-widening, highly
competitive war of attrition centred on the concept of sports training. In contrast, ‘Holiday Sports Club’ concentrates on regional cities (with populations of 100,000 and above) and hasleveraged 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 – to become the eighth largest company in the sector by sales and by far the most profitable company in terms ofordinary 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 37 at present to100 by 2018. The company is already in the top class in the industry in terms of profitability, ROE and other financial metricsbut, being a regional operator, the lack of name recognition for its‘Holiday Sports Club’ brand in urban areas has also influenced the stock market, resulting in Tosho lookinghighly 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).
FY3/11 3Q results brought YoY growth in sales. However, because the company posted development costs of new sports clubs that have been expanding since this fiscal year, there was aslight decrease in operating income compared with the previous fiscal year (No. of sports clubs opened: 2 in FY3/10, 5 in FY3/11). This is within the scope of the assumption and the openingof new sports clubs and company performance are generally as expected. In 2011, an analyst in Ichiyoshi Research Institute started covering Tosho. The company has received an A-ratingwith a target stock price of ¥1,200 (as of Feb. 4, 2011)

Business Strategy
With Japan facing the problems of an ageing society and a falling birth-rate and health-oriented consumption booming, the future growth prospects for this market look very promising. Thesector which is made up of fitness clubs aimed at eliminating insufficient levels of physical exercise amongst urban dwellers is a business model characterized by a red ocean of excessivecompetition, 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 hascreated an environment in which 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 atchildren and the conventional wisdom in the sector has been that the prospects for making money from the development of sports clubs for adults are bleak. In the face of this commonly-heldview, Tosho has built up its business model to suit the demands of adult 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 programmes’ and ‘creating a low-fee operating
structure’ and continues to win through with these core concepts. Tosho has created an astoundingly profitable business model with aordinary income ratio of over 30% and an ROI against
funds invested on an ordinary income basis of in excess of 18%. Its highly profitable model for new club openings targets regional cities with populations of 150,000 and over with a ¥400
million budget for investment per facility, 2,500 members, an average monthly membership fee of ¥7,000, annual revenues of ¥210 million and ordinary income of ¥75 million (ordinary income
ratio of 35%).The percentage of the Japanese population who are sports club members is 3% (against 15% in America) which means that it is a market of 4,500 people in a city of 150,000people. With more than 2,500 members, it is possible to run facilities with profit margins of over 40%.
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.
Tosho aims to raise the overall ordinary income ratio for the company into the medium-term from 19.7% at present to 25% in FY3/2015 (raising ordinary income from¥2.1 billion to ¥4.4 billion).
Corporate analysis by IR STREETStrength
1.Has knowhow in building and operating facilities unlike any other companies
2.Most profitable company in the industry

Opportunity
1.Health conscious associated with aging
2.Regional towns and cities with high potential demand
3.The average age of employees is the youngest among the JASDAQ listed companies and conducts 3.Drop in land prices and securing human resources will pave the way for businessexpansion
human resources programs
Weakness
1.Lack of recognition of individual investors, with many concentrated in urban areas
2.Demand for funds for the opening of new clubs (reliance on low-capital-cost bank loans)《Peer comparison》

FY2009Sales

Tosho(Holiday Sports Club)8920

Click for IR

Risk
1.Financial institutions’ lending stance
2.Maintaining policy of opening facilities in suitable locations

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

Ordinary income(￥million)

10,59746,60836,419
13,694

2,087
1,372754419

YoY
(%)

Net income(￥million)

106.8%
156.0%
103.5%
66.8%

1,106632
142
206

Market cap(￥billion)

98
105
6442

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.

EPS
(￥)

ＰＥＲ
（times）

65.4
55.1
6.7
54.1

8.5
16.6
44.8
20.3

Dividend yield(￥)

2.2%
2.2%
1.0%
1.9%