Company Research and Analysis Report
FISCO Ltd.
http://www.fisco.co.jp

eREX Co.,Ltd9517 TSE Mothers

29-Sept.-15

Important disclosuresand disclaimers appear
at the end of this document.
FISCO Ltd. Analyst
Hiroyuki Asakawa

伪伪A PPS in the Electricity Retail Business Targeting
High Growth Leveraging Full Liberalization of theElectricity Market
eREX <9517> is an independent specified scale electricity provider, known as a power producer andsupplier, or PPS, operating an electricity retail business. Leveraging its advantages of a competitive
base load power supply and a flexible sales strategy, the Company is targeting high growth toward
the full liberalization of the electricity market from 2016 onward.
The Company’s customers can be broadly categorized into wholesale and retail, and it is currently
strengthening the high-margin retail business. On the sales front, the Company is distinctive in thatit uses 1,129 sales agents for retail sales. The Company gives these sales agents discretion to set
the retail price, which motivates them and stabilizes the sales price for the Company itself. Throughthe sales agents, the company has acquired over 5,000 customers, mainly in the high-voltage field(all figures are as of July 31, 2015).
The central theme of the Company’s growth scenario is the full liberalization of the electricity market,
which is scheduled to take effect in April 2016. This change will enable the Company to sell electricity
to low-voltage users, such as ordinary households, convenience stores, and shops. The Company
has elected to develop operations targeting the liberalization of the low-voltage market in partnershipwith the highly experienced US company Spark Energy LLC, and the two companies established ajoint venture in September 2015. The Company is competing mainly in the high-voltage market atpresent, and this market harbors significant growth potential for PPSs going forward. The Company
will therefore aim to achieve further growth by increasing its customer bases in both high-voltage andlow-voltage demand sectors.
The Company’s electricity procurement routes are self-generated, external purchase, and exchange
traded. One of the Company’s distinctive features is biomass generation fueled by palm kernel shells(PKS), which are the shells of palm nuts that remain after oil extraction. This biomass generation iscarried out by a consolidated subsidiary. Use of the Feed-In Tariff Scheme makes this operation highly
cost competitive, and contributes significantly to securing a low-cost, base load, power generation for
the Company. Currently, a similar biomass power station of a larger scale is under construction with
operation scheduled to start in autumn of 2016.

伪伪Check Point• Highly profitable biomass power station fueled mainly by PKS• Target market will effectively double in size with the liberalization of the low-voltage sector• Start of feasibility study for entry into the Japanese low-voltage market

We encourage readers to review our complete legal statement on “Disclaimer” page.
1

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eREX Co.,Ltd

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9517 TSE Mothers

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29-Sept.-15

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Important disclosuresand disclaimers appear
at the end of this document.
FISCO Ltd. Analyst
Hiroyuki Asakawa

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伪伪Corporate Outline
Core businesses are wholesale and retail sales of electricity tousers(1) History
The Company was established in 1999 as part of the diversification of Nittan Exco Ltd. Initially named“Nittan Energy Co., Ltd.,” the Company changed to its current name the following year. In responseto the creation of the PPS system in 2000, the Company submitted notification to the Ministryof Economy, Trade and Industry of its status as a PPS in January 2001, starting electricity retailbusinesses servicing the Kyushu region in April of the same year, and the Kanto region in November.
Subsequently, the Company expanded its sales areas one by one into the Tohoku region, theChubu region, and the Kansai region. Meanwhile, it took steps to secure power supplies throughan investment in Goi Coast Energy, Ltd. and the establishment of eREX New Energy Co., Ltd. andeREX New Energy Saiki Co., Ltd.
The Company’s shares have been listed on the Tokyo Stock Exchange Mothers Market since
December 2014.

We encourage readers to review our complete legal statement on “Disclaimer” page.
2

■■Corporate Outline

History and Electricity Business Regulatory Reforms

1995

Systemic reforms
Entry permit system lifted for wholesale electricity
business through IPPs. Became possible forgeneral electric utilities to procure electricity from
IPPs through tenders.

1999

eREX Co.,Ltd9517 TSE Mothers

29-Sept.-15

Important disclosuresand disclaimers appear
at the end of this document.
FISCO Ltd. Analyst
Hiroyuki Asakawa

2000

PPS system established to enable companies
other than general electric utilities to retailelectricity to users over 2,000 kW.

2001

eREX

Established Nittan Energy Co., Ltd. to conduct theelectricity business as part of the diversification of
Nittan Exco Ltd. (Dec.)

Submitted notification of status as a PPS to
Ministry of Economy, Trade and Industry (Jan.)
Started electricity retail sales in the Kyushu region(Apr.)Started electricity retail sales in the Kanto region(Nov.)

Promoting distributed power: Became possible tosupply power users through own distribution lines,
subject to liberalization.
Creation of wholesale power exchange: The
Participated in the establishment of Japan
government authorized the establishment of aElectric Power Exchange (JEPX), a limited liability
2003 market to trade wholesale power through facilities intermediate corporation (currently a generalaround Japan.
incorporated association) as a member (Mar.)
Liberalization scope expanded: The government
liberalized electricity retailing for contracts for sales
to power users over 500 kW in April 2004 and over
50 kW in April 2005.
Goi Power Station (Goi Coast Energy) started
2004
commercial operation (June)
2005
Registered as a trading member of JEPX (Apr.)
Started electricity retail sales in the Tohoku region
2010(Feb.)
Established eREX New Energy (consolidated
2012
subsidiary) for the power generation businessusing the Feed-in Tariff Scheme (Apr.)
The Japanese Cabinet decided on the Policy on
Electricity System Reform, which led to the policy Tosa Power Station (eREX New Energy) started
2013
on full liberalization of the electricity retailingcommercial operation (June)business
Started electricity retail sales in the Chubu region(Apr.)The Electricity Business Act was partially
Established eREX New Energy Saiki (consolidated
2014 amended, leading to the formal decision to fully
subsidiary) for the power generation businessliberalize power retailingusing the Feed-in Tariff Scheme (July)
Listed on the Tokyo Stock Exchange Mothers
Market (Dec.)
Reached 1,000 sales agents (Mar.)
Started electricity retail sales in the Kansai region
2015(Apr.)
Plan to start electricity retail sales in the Chugoku
region (Oct.)
Started full liberalization of electricity retailing: To
With full retail electricity liberalization, retail sales
2016 enable regular households also to choose electric slated to start for contracts for sales of less thanpower companies and rate menus
50 kW
Around Legal unbundling of power transmission and2018- distribution sectors and retail fee system to be2020 abolished(2) Business Model
The Company operates as a PPS, conducting wholesale sales of electricity as well as retail sales tousers. Previously, Tokyo Electric Power Company, Incorporated <9501> and other major electricity
providers (known as “General electric utilities” under the scheme) supplied electricity under regionalmonopolies. However, during the transition toward the liberalization of the electricity market, the
PPS scheme was established in 2000, and the Company started operations as the third operator toregister under the scheme.
The Company procures electricity through three channels: in-house generation, power producers,
and JEPX. It also conducts wholesale sales of electricity through JEPX and retail sales to the alreadyliberated special high-voltage sector (2,000 kW and above; large-scale plants, offices, etc.) and highvoltage sector (from 50 kW to less than 2,000 kW; small- to medium-sized plants, supermarkets,etc.). Sales to the low-voltage sector (under 50 kW; ordinary households, convenience stores,
shops, etc.) are restricted as of 2015; however, sales of electricity to the low-voltage sector are to beliberalized from April 2016, and the Company plans to be ready to conduct sales.

We encourage readers to review our complete legal statement on “Disclaimer” page.
3

■■Corporate Outline

The Company has 51 employees on a consolidated basis (as of March 31, 2015) in keeping with aphilosophy of having a small but elite team. The secret to enabling such a small team to handle sales
activities covering almost all of Japan is the sales agent system. As of July 31, 2015, the Company
was using 1,129 sales agents and had acquired 5,159 users. Compared to March 31, 2015, over fourmonths the number of sales agents increased by 112, and the number of users by 1,351.

eREX Co.,Ltd9517 TSE Mothers

eREX’s Business Model and Electricity Flow
Fuel

Generation

LNG, Coal
Oil, etc., Hydro
Nuclear, etc.

WholesaleEnd users

General electric utilities(Existing power companies)

29-Sept.-15

In-house power
generation facilities

PKS(Palm Kernel
Shell)(1) Tosa Power Station(2) Saiki Power Station(Operation scheduled tocommence in November 2016)

Notes. 1. PPS : Power Producer and Supplier2.
• • • Main flows of electricity

eREX(the Company)

Low-voltage sector(Ordinary households, shops)

PPS

High-voltage sector(Small- to medium-sized plants, supermarkets)

FISCO Ltd. Analyst
Hiroyuki Asakawa

Other power sources

Special high-voltage sector(Large-scale plants and offices)

Important disclosuresand disclaimers appear
at the end of this document.

Japan Electric Power
Exchange (JEPX)

Coal
Off-gasSolar, etc.

Sales agents• • • Supplementary flows of electricity

Sales to special high-voltage andhigh-voltage sectors
Low-voltage sector scheduled tobe liberalized in April 2016.

Source: Earnings presentation materials

伪伪eREX Characteristics and Strengths
Highly profitable biomass power station fueled mainly by PKS(1) A competitive base load power supply
The Company has three power supply procurement channels: procurement through JEPX, purchasefrom power producers, and in-house generation. The Company’s special characteristic and strength
is the Tosa Power Station of consolidated subsidiary eREX New Energy. The power station is abiomass power station fueled mainly by PKS. Using the Feed-in Tariff Scheme, it achieves a muchhigher level of profitability than coal-fired or LNG-fired power facilities.
Power Supply Composition Ratio and Gross Profit by FuelPower Supply Composition Ratio

Gross Profit by Fuel (Estimate)
PKS utilizing
Feed-in Tariff

LNG
Thermal coal

Wood fuel(PKS, etc.)
Coal, off-gas

LNG

Fuel oil C

Source: Earnings presentation materials

We encourage readers to review our complete legal statement on “Disclaimer” page.
4

■■eREX Characteristics and Strengths

The Tosa Power Station is built on the site of the former Tosa Plant of Taiheiyo Cement Corporation<5233> and provides significant benefits to the Company by making use of the Taiheiyo Cement
Corporation’s former Tosa Plant infrastructure and personnel (former employees, etc.) Biomass
power stations vary depending on their main fuel. The Company’s Tosa Power Station uses PKS.
It was the first power station in Japan to use PKS biomass, and has the highest power output for a
PKS-fueled station in Japan.

eREX Co.,Ltd9517 TSE Mothers

29-Sept.-15

Important disclosuresand disclaimers appear
at the end of this document.
FISCO Ltd. Analyst
Hiroyuki Asakawa

Overview of Tosa Power Station
Location
Method of power
generation
Operation start

eREX New Energy
Kochi City, Kochi Prefecture
Fuel

PKS

Biomass power generation

Rated output approx. 30,000 kW

Output power

June 2013

Features
Located in former Tosa Plant of Taiheiyo Cement Corporation
First PKS biomass power generation plant in Japan
Advantage as a base-load power source due to ability to maintain stable amount of electricity

The Company’s PKS biomass power generation has a lower imbalance cost compared to solar
power generation, for example, which is a significant advantage. Electricity demand is constantly
fluctuating, creating a large gap between demand at peak and bottom. To cope with this fluctuation,
power suppliers have to procure power from other suppliers when needed (through JEPX and otherpower suppliers). This cost is referred to as imbalance cost. PKS’s biomass power generation is able
to provide a stable amount of power as long as a fuel supply is secured, in a similar manner to athermal power plant. This helps to reduce the imbalance cost.
PKS Biomass Power Supply and Solar Power Generation Amount and Imbalance Cost

Electricity generation amountElectricity generation amount

PKS

Stableoperation

Solar

Unstable
operation

Time

Low

Imbalance cost

Time

High

PKS fuel has favorable properties and a good demand and supply environment. It has high energy
density at 3,500 kcal/kg, which is advantageous for power generation fuel. Regarding demand andsupply, there is a significant gap with an annual supply of over 10 million tons, mainly from Indonesia
and Malaysia, and demand for only 1 million tons per year. With expansion in PKS generation, someare forecasting growth in demand to 3 million tons per year; however, for the time being, supply is
projected to continue outstripping demand.
(2) Flexible sales strategy.
The Company’s customers for electricity sales can be broadly categorized into retail and wholesale.
Retail sales are direct sales to end users; wholesale sales are sales to JEPX. The wholesale price
was high in the past and the majority of the Company’s electricity sales were wholesale; however,with the decline in wholesale prices, the Company is now increasing the amount of electricity sold in
the high-margin retail sector.

We encourage readers to review our complete legal statement on “Disclaimer” page.
5

■■eREX Characteristics and Strengths

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eREX Co.,Ltd

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9517 TSE Mothers

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29-Sept.-15

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Important disclosuresand disclaimers appear
at the end of this document.

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Source: Created by the Company based on statistics from the Agency for Natural Resources and Energy

FISCO Ltd. Analyst
Hiroyuki AsakawaOn the sales front, the Company’s distinctive feature is its use of a sales agent system in the retailbusiness. As an independent PPS, the Company has always used sales agents, and as of July
31, 2015, the number of sales agents had reached 1,129. The sales agents are basically either
companies with licensed electrical engineers, individuals with the same qualifications, or otheroperating companies.
The Company has built a distinctive sales agent system that provides benefits to both customers
and the sales agents.
Specifically, the Company gives the sales agents discretion to set the sales price to customers. For
the sales agents, this means the freedom to create proposals for customers leading to a higher rateof successful subscriptions. We see this system acting as an incentive to the sales agents, since thesales agent system is a performance-based fee system.
Moreover, for customers, the system offers them the ability to make a contract at a price after
discussion, rather than obliging them to use a set menu. The system therefore seems better able towin customers’ approval.
Since the Company is independent, it can use the sales agent system to achieve a sales strategy witha high degree of freedom. We believe the true value of this will become clearer with the liberalizationof the retail low-voltage sector from April 2016. An indicator of users’ electricity usage is the loadfactor (total annual electricity usage / electricity contract / 24 hours / 365 days). Small, low-voltage
users such as ordinary households, the load factor is generally low. A large proportion of customers
with a low load factor pay for the power with a basic charge. Moreover, electricity companies cansell the power that they do not use to another user, generating leeway. This makes such customers
highly profitable for electricity companies. The Company’s strategy for growth is to use its sales agent
network of more than 1,000 agents to develop a customer base among small, low-voltage users suchas ordinary households.
Furthermore, the price setting for small, low-voltage users is higher than for large, high-voltage
users. The Company’s policy is to achieve a high average sales price compared to other companies
by increasing the ratio of small, low-voltage users in its customer base.

We encourage readers to review our complete legal statement on “Disclaimer” page.
6

■■eREX Characteristics and Strengths

Load Factor and Electricity Charge
Load factor and electricity charge

Important disclosuresand disclaimers appear
at the end of this document.
FISCO Ltd. Analyst
Hiroyuki Asakawa

Conventional electricity companies

Contract amountSale price to private-sector customers
Sale price to government customers (tender)

Load factor: low
Time

Time

Contract amountBasic charge

Contract amountBasic charge

1 kW¥2,000

1 kW¥2,000Usage amount

Metered charge

Usage amount

Metered charge

400 kWh¥4,000200 kWh¥2,000

Sale priceSale price(¥2,000 + ¥4,000) / 400 = ¥15/kWh(¥2,000 + ¥2,000) / 200 = ¥20/kWh

Sale price

Load factor: high9517 TSE Mothers

29-Sept.-15

Electricity used

Electricity used

eREX Co.,Ltd

Contract amount

Load Factor and Sale PriceeREX
PPS average

Low(Note) Load factor = Annual electricity usage / electricity contract × 24 hours × 365 days

Load factor (%)

High

Source: Earnings presentation materials

伪伪Medium-Term Business Plan and Growth Strategy
A period to prepare for growth to net sales of ¥50.0bn(1) Outline of medium-term business plan
The Company has a three-year medium-term business plan covering the period from FY3/16 to
FY3/18. With the core concept of “Challenge,” the plan period has been positioned as a time forpreparing for growth in net sales to ¥50.0bn and net income to ¥4.0bn and to be entering the lowvoltage household market following the full liberalization of the electricity market.
The Company has set the following medium-term numerical targets for FY3/18, the final year of theplan: net sales of ¥45.6bn, operating income of ¥3.8bn, ordinary income of ¥3.6bn, net income of¥2.5bn. Moreover, beyond this time, the Company’s management targets are to achieve net sales of¥50.0bn, ROE of 20% and a dividend payout ratio of 20%.
Challenge 500-Aiming for Net Sales of ¥50.0bnChallenge 500
Net sales
Operating income
Net income

FY3/16
Amount% of sales
24.0
100.00%
1.5
6.30%
0.9
3.80%

FY3/17
Amount% of sales
32.0
100.00%
2.0
6.30%
1.0
3.10%

(¥bn)
FY3/18Amount% of sales
46.0
100.00%
3.5
7.60%
2.5
5.40%

The Company’s basic strategies under the medium-term plan follow two main themes: 1) In sales,
enter the small, low-voltage user market, centered on households; 2) In electricity procurement,
the main strategies are to develop in-house power generation and to strengthen electricity trading
expertise through JEPX and procurement capacity. An important point to note is that the Company
is strengthening these aspects through its partnership with Spark Energy LLC of the United States,
where electricity liberalization is well advanced. (Further details follow below.)
Basic Strategies of the Medium-Term Business Plan
(1) Establish retail sales structure as the priority strategic businessa) Enter the ¥6.9tn low-voltage household user market that will be opened up in April 2016 and maintain a highly
profitable structure.
b) When entering the low-voltage household user market, make full use of the sales agent system.
c) Aim to strengthen relationships with US companies that have pioneered and succeeded under freecompetition.
d) In line with response to expansion of the liberalized sales sectors, expand sales areas after sufficientinvestigation and discussion.
(2) Expand supply system and focus on fuel strategya) Secure the largest biomass power generation capacity in Japan for the Company’s in-house power
generation.
b) With regard to biomass fuels, secure stable supply and pursue lower and more competitive fuel prices.
c) With regard to expertise in trading on the exchange, which is expected to become increasingly active,enhance procurement capabilities by deepening relationships with leading US companies.

We encourage readers to review our complete legal statement on “Disclaimer” page.
7

■■Medium-Term Business Plan and Growth Strategy

Target market will effectively double in size with theliberalization of the low-voltage sector(2) Growth strategy points

eREX Co.,Ltd9517 TSE Mothers

29-Sept.-15a) Sales: participation in small, low-voltage market
The low-voltage sector, which mainly comprises small users such as ordinary households and shops,
makes up 40% of total electricity demand, representing a market scale of ¥6.9tn. Only the special
high-voltage and high-voltage sectors have been opened up to PPSs. Since the majority of theCompany’s customers are in the high-voltage sector (around 35% of total electricity demand), theliberalization of the low-voltage sector in April 2016 will effectively double the size of the Company’s
target market.
List of Electricity Markets by Scale

Important disclosuresand disclaimers appear
at the end of this document.
FISCO Ltd. Analyst
Hiroyuki Asakawa

Ratio of electricity demandMarket status
Timing of market liberalization
Main users
Supply voltage
Demand scale

Special high voltage
Approx. 25%
Able to sell
Apr. 2000

High voltage
Approx. 35%
Able to sell
Apr. 2004

Large-scale plants andoffices

Small- to medium-sizedplants, supermarkets

20,000 V or above
2,000 kW or above

6,000 V or above
50 kW to 2,000 kW

Low voltage
Approx. 40%
Unable to sell
Apr. 2016
Ordinary households,
convenience stores andshops
100-200 V
Up to 50 kW

As mentioned above, customers in the low-voltage sector have low load factors, offering higher
profitability compared to customers in the high-voltage sector. The Company sells electricity throughthe sales agent system, and its strategy is to continue using the system to sell power for low-voltage
sector customers after the sector has been liberalized. A characteristic of the Company’s customers
is that their average electricity contracts (representing their scale) and load factors are among thelowest compared with other companies. We believe this point suggests that the Company’s sales
system will be able to respond smoothly to the small, low-voltage sector. Furthermore, as noted, theCompany has used the sales agents to win customers’ trust up to this point, and this method is also
likely to be effective for users in the low-voltage sector.
Load Factor and Customer Scale
Nine Major PPSs
Users’ Average Electricity Contract

eREX

Load factor
Source: Earnings presentation materials
A notable initiative toward entering the low-voltage sector is the Company’s partnership with US
company Spark Energy LLC (NASDAQ <SPKE>). On September 4, 2015, the Company announced
the establishment of a joint venture together with Spark Energy LLC, called eREX Spark Marketing
Co., Ltd. (“ESM”). The joint venture will conduct retail electricity business for low-voltage users.

We encourage readers to review our complete legal statement on “Disclaimer” page.
8

■■Medium-Term Business Plan and Growth Strategy

eREX Co.,Ltd9517 TSE Mothers

29-Sept.-15

Important disclosuresand disclaimers appear
at the end of this document.

ESM was established with 80% investment by eREX and 20% by Spark Energy LLC. For
administration reasons, the company was established on September 1 and will start operations from
October 1. Spark Energy LLC supplies electricity and gas to household and commercial users in
16 states in the United States, and has strong expertise and knowledge in sales in the low-voltage
sector. These assets have been the basis for the joint venture. Looking ahead, the Company plans
to make use of Spark Energy LLCs expertise not only in selling low-voltage electricity for households,
but also in supply diversification utilizing the so-called wholesale market.
Overview of Joint Venture Scheme and Spark Energy LLC
Overview of Joint Venture

Overview of Spark Energy

eREX

Spark Energy

80% investment

20% investment

eREX Spark
Marketing Co., Ltd.
(Establishment scheduled for October 2015)

FISCO Ltd. Analyst
Hiroyuki Asakawa

Retail sales of electricity to low-voltage users

Name

Spark Energy, Inc. (NASDAQ: SPKE)

Location

Houston, State of Texas, United States

Founded

1999

Representative

Nathan Kroeker

Business
activities

Electricity and gas supply service

Number of
employees

150

Features

Spark Energy LLC supplies electricity and gas tohouseholds and commercial users across 16 states in the
United States, and has rich knowledge and experience insales in the low-voltage sector

To operate in electricity retail for low-voltage users it is necessary to register as a “retail electricity
provider” with the Ministry of Economy, Trade and Industry. ESM will develop a multilayered sales
network, also using the sales agent system to foster demand among ordinary households while atthe same time forming alliances with LPG sales companies and establishing a joint venture to sellelectricity in the same way.
ESM’s Household Electricity Retail Scheme

The Hanwa Group 30.0%
ESM(alliances with sales agents)

HANWA Co., Ltd.

Toyo Energy Co.,Ltd.

eREX Spark Area Marketing(alliance with LPG sales
companies)
Electricity supply agreement

BPO agreement

Source: eREX material published Sept. 15, 2015
On September 15, 2015, ESM announced the first step in its business development. The
announcement detailed the establishment of a joint venture called eREX Spark Area Marketing
Co., Ltd. with the steel trading company HANWA Co., Ltd. and its wholly owned subsidiary, Toyo
Energy Co., Ltd., a petroleum product and LPG sales company. The joint venture will undertake retailelectricity sales in the low-voltage sector. Toyo Energy Co., Ltd. is headquartered in Osaka and has
developed strong expertise in energy sales and a powerful customer network through its operational
history of over 40 years. The new joint venture is expected to concentrate the respective strengthsof eREX, Spark Energy LLC, HANWA Co., Ltd., and Toyo Energy Co., Ltd., and use them to expand
the electricity retail business in the low-voltage sector.

We encourage readers to review our complete legal statement on “Disclaimer” page.
9

■■Medium-Term Business Plan and Growth Strategy

PPSs’ Share of Electricity Demand
Total of special high voltage and high voltage

FISCO Ltd. Analyst
Hiroyuki Asakawa

Special high voltage (2000 kW and above)
High voltage (50 kW to 2000 kW)

8.11
6.71

FY3/06 FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15

June

May

Apr.

Average

Average

Average

Average

Average

4.96

Average

9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00

Average

Important disclosuresand disclaimers appear
at the end of this document.

Average

29-Sept.-15

These trends are clear from the statistical data. Looking at PPSs’ share of electricity demand, theoverall share for PPSs as of June 2015 stood at 6.71%, and it is the high-voltage sector that is
driving growth. Although the special high-voltage sector represents special demand such as largescale plants, increasing market share in this sector appears to be plateauing. By contrast, the shareof the high-voltage sector, which represents supermarkets, offices, and so forth, continues to climb
steadily. Our analysis is that this reflects the easier acceptance of price appeal in this sector, as wehave described. The high-voltage sector represents the user segment where the Company has thegreatest strengths; it is still a blue ocean market for the Company and an important source of growth.

Average

9517 TSE Mothers

AverageeREX Co.,Ltd

It is important to bear in mind that the Company does not intend to realize all of its growth from2016 onward in the small, low-voltage sector alone. It plans to continue growing as before in thehigh-voltage sector as well. PPSs’ electricity charges are lower than those of conventional electricity
companies; however, since the absolute amounts are small in the case of ordinary households,
it is difficult to feel the difference, which could hinder efforts to attract new customers. From thisperspective, the high-voltage sector demand, with its large absolute amounts, is probably easier toappeal to. As noted, the number of customers in the high-voltage sector has risen rapidly in the fourmonths between March 31 and July 31, 2015, climbing from 3,808 by 1,351, or 35%, to 5,159.

2015

Source: Created by FISCO based on statistics from the Ministry of Economy, Trade and IndustryPlan to Capture Contract Electricity

Special high voltage and high voltage
Low voltage

FY3/15ResultFY3/16
ResultFY3/17
ResultFY3/18Plan

Source: Earnings presentation materials

We encourage readers to review our complete legal statement on “Disclaimer” page.
10

■■Medium-Term Business Plan and Growth Strategyb) Procurement: In-house electricity generation
The liberalization of the low-voltage sector in April 2016 will double the size of the Company’s target
market in one stroke. Electricity procurement is a vital issue underpinning expansion of the customer
base.

eREX Co.,Ltd9517 TSE Mothers

The Company established eREX New Energy Saiki in July 2014, and is currently constructing
a new PKS biomass power station in Saiki City, Oita Prefecture. The facility has a rated power
output of 50,000 kW, approximately 70% higher than Tosa Power Station, and is scheduled to start
operation in autumn of 2016. In FY3/18, when Saiki Power Station is operating, the power supply
composition ratio is expected to have a ratio of biomass generation up to around 30%, strengthening
the Company’s low-cost base load power supply. Moreover, with the addition of renewables andother sources, the power supply is also expected to become even more diversified.

29-Sept.-15

Important disclosuresand disclaimers appear
at the end of this document.
FISCO Ltd. Analyst
Hiroyuki Asakawa

Overview of eREX New Energy Saiki
Location
Method of power
generation
Operation start

eREX New Energy Saiki Co., Ltd.
Saiki City, Oita Prefecture
Fuel

PKS

Biomass power generation

Rated output 50,000 kW

Output power

Autumn 2016

Features
Located on the former Saiki Plant site, Oita Factory of Taiheiyo Cement Corporation
Received expertise in operation and fuel procurement from eREX New Energy’s Tosa Power Station
Stable operation with fuel procurement using the PKS Center
Planned return on investment of IRR 15% or above

Power Supply Composition Plan
FY3/15 Result

FY3/18 Plan
Hydro
0.1%

Hydro
0.0%

LNG Off-gas
7.8% 1.2%

Off-gas
16.1%
LNG
16.1%

Solar
1.6%

Solar
14.0%
Coal
46.7%

Coal
52.4%

Biomass
13.7%

Biomass
30.3%

Source: Earnings presentation materials

We encourage readers to review our complete legal statement on “Disclaimer” page.
11

伪伪Financial Results
Start of feasibility study for entry into the Japanese lowvoltage market

eREX Co.,Ltd9517 TSE Mothers

29-Sept.-15

Important disclosuresand disclaimers appear
at the end of this document.
FISCO Ltd. Analyst
Hiroyuki Asakawa(1) Most recent financial results and full-year forecast for FY3/16
a) Most recent financial results
For FY3/15, the Company recorded steady increases in both sales and profits year on year (YoY),
with consolidated net sales of ¥17.0bn, up 11.5%, operating income of ¥1.4bn, up 4.9%, ordinary
income of ¥1.1bn, down 18.6%, and net income of ¥0.9bn, up 13.2%.
Net sales made steady gains atop an increase in customers associated with an increase in thenumber of sales agents and the effect of price increases attendant on the shift from wholesale toretail sales. Operating income increased as controls on selling, general and administrative (SG&A)
expenses absorbed a YoY decline in gross profit due to an increase in electricity procurement.
Ordinary income declined, partly reflecting the payment of an arrangement fee by a consolidate
subsidiary.
For Q1 FY3/16, consolidated net sales were ¥4.8bn, operating income was ¥0.1bn, ordinary income
was ¥0.1bn, and net income was ¥0.1bn. These results were mostly in line with the plan, as the shift
to retail sales effectively increased the average sale price for electricity, absorbing the effects of acontinued decline in wholesale prices on the exchange since FY3/15.
In developments on the operating front, the Company started retail electricity sales in the Kansai
region in April 2015, and during Q1 FY3/16 began a feasibility study with the aforementioned US
company Spark Energy LLC regarding entry into the Japanese low-voltage market. This resulted in
the establishment of a joint venture on September 1, which has prepared the way for a full-scale startof business from April 2016 with the full liberalization of the retail electricity market.
Overview of Most Recent Financial Results
FY3/14

FY3/15Full year

Plan

Resultvs Plan

15.3
23.2%
1.4
21.4%
9.2%
1.3
19.4%
0.8
19.9%

16.8
10.4%
1.5
8.7%
9.1%
1.3
-6.3%
0.9
12.4%

17.0
11.5%
1.4
4.9%
8.6%
1.1
-18.6%
0.9
13.2%

1.0%
-3.6%
-13.1%
0.7%-

Net sales
YoY
Operating income
YoY
Operating income margin
Ordinary income
YoY
Net income
YoY

Q1
4.8
0.1
0.1
0.1
-

FY3/16E
Progress
rate
20.3%
11.5%
10.2%
10.7%
-

(¥bn)
Full year
(E)
24.0
41.1%
1.5
2.4%
6.3%
1.4
24.1%
0.9
1.5%

b) Financial forecasts for FY3/16
For FY3/16, eREX is forecasting net sales of ¥24.0bn up 41.1% YoY; operating income of ¥1.5bn, up
2.4% YoY, ordinary income of ¥1.4bn up 24.1% YoY, and net income of ¥0.9bn up 1.5% YoY. eREX
has not revised its initial forecasts.
Net sales are expected to increase, reflecting the continuing increase in the number of sales agentsand an increase in customers with the start of electricity retail services in the Chugoku region in
October. On the profit front, operating income growth is expected to be only 2.4% due to plans forperiodic repairs at eREX New Energy’s Tosa Power Station. Apart from this, there has basically been
no change in the business environment, and the Company intends to increase the pace of its shift
from wholesale to retail by expanding the customer base and to focus on improving profitability.

We encourage readers to review our complete legal statement on “Disclaimer” page.
12

伪伪Shareholder Returns
Dividend more than doubled in FY3/15
The Company basically makes returns to shareholders in the form of dividends. The level of dividend
is based on a targeted dividend payout ratio of 20% under the medium-term business plan.

eREX Co.,Ltd9517 TSE Mothers

29-Sept.-15

For FY3/15, the Company paid an ordinary dividend of ¥10 plus a commemorative dividend of ¥10,for a total of ¥20. This represented an increase of more than double the dividend of ¥9 (adjusting fora stock split) paid in FY3/14. For FY3/16, the Company plans to hold the dividend at the same levelof ¥20. However, this dividend will comprise an ordinary dividend of ¥20, representing an increase on
an ordinary dividend basis. The dividend payout ratio is 29.1% on the projected earnings per share of¥68.66 for FY3/16, a step up from 22.4% for FY3/15. As noted, the Company’s dividend payout ratio
target is 20%, and the dividend is expected to increase further in line with profit growth going forward.

Important disclosuresand disclaimers appear
at the end of this document.

㻱㼍㼞㼚㼕㼚㼓㼟㻌㻼㼑㼞㻌㻿㼔㼍㼞㼑㻘㻌㻰㼕㼢㼕㼐㼑㼚㼐㼟㻌㻼㼑㼞㻌㻿㼔㼍㼞㼑㻘㻌㼍㼚㼐㻌㻰㼕㼢㼕㼐㼑㼚㼐㻌㻼㼍㼥㼛㼡㼠㻌㻾㼍㼠㼕㼛㻔¥㻕

FISCO Ltd. Analyst
Hiroyuki Asakawa

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We encourage readers to review our complete legal statement on “Disclaimer” page.
13

Disclaimer
FISCO Ltd. (the terms “FISCO”, “we”, mean FISCO Ltd.) has legal agreements with theTokyo Stock Exchange, the Osaka Exchange,and Nikkei Inc. as to the usage of stock
price and index information. The trademark and value of the “JASDAQ INDEX” are theintellectual properties of the Tokyo Stock Exchange, and therefore all rights to them belong
to the Tokyo Stock Exchange.
This report is based on information that we believe to be reliable, but we do not confirm or
guarantee its accuracy, timeliness,or completeness, or the value of the securities issued bycompanies cited in this report. Regardless of purpose,investors should decide how to use
this report and take full responsibility for such use. We shall not be liable for any result of its
use. We provide this report solely for the purpose of information, not to induce investment
or any other action.
This report was prepared at the request of its subject company using information provided
by the company in interviews, but the entire content of the report, including suppositions andconclusions, is the result of our analysis. The content of this report is based on informationthat was current at the time the report was produced, but this information and the content
of this report are subject to change without prior notice.
All intellectual property rights to this report, including copyrights to its text and data, areheld exclusively by FISCO. Any alteration or processing of the report or duplicationsof the report, without the express written consent of FISCO, is strictly prohibited. Anytransmission, reproduction, distribution or transfer of the report or its duplications is also
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The final selection of investments and determination of appropriate prices for investment
transactions are decisions for the recipients of this report.
FISCO Ltd.