Intangible Assets Driving Growth in MARUI GROUP’s Corporate Value
In addition to finances, real estate, and other tangible assets, companies also have intangible assets, like humancapital in the form of trust from customers or the happiness of employees, which are a type of invisible asset notfound on the balance sheet. Today, such intangible assets are becoming a powerful driver behind growth in thecorporate value and earnings of companies. In this section, MARUI GROUP CFO Hirotsugu Kato explains the reasons behind this phenomenon while also providing a look at the Company’s performance.
Target of PBR of 5 Times

CONTRIBUTIONS TOCORPORATE VALUEFUELED BY
INTANGIBLE ASSETS
CFO MESSAGE

H I R OT S U G U K AT O

Hirotsugu KatoDirector, Managing Executive Officer, and CFO
In charge of IR, Finance, Sustainability, and ESG Promotion
Kato joined the Company in 1987 and proceeded to gain experience in sales and credit card contracting at Marui stores and infinance, accounting, and corporate planning at the head office
before becoming general manager of the Corporate Planning
Division in 2013. He took up the position of general manager of theIR Department following its establishment in 2015. Later, Kato wasplaced in charge of ESG promotion in 2017 and then sustainability
in 2019, which was also when he assumed the position of CFO. As
general manager of the Corporate Planning Division, he has been
involved in overseeing investment in start-up companies since2015, which would eventually lead to his concurrent position aspresident of D2C & Co. Inc. in 2020. D2C & Co. is a company
established in 2020 with the goal of supporting the creation ofa direct-to-consumer ecosystem through investment in andcollaboration with direct-to-consumer start-up companies.

MARUI GROUP has put forth the target ofachieving a price-to-book ratio (PBR) of 5times to guide its pursuit of higher corporate value. Based on trends in theCompany’s price earnings ratio, which
has historically been around 20 times,
accomplishing this target will require
return on equity (ROE) of 25%. I believe
that, in order to raise ROE from its current
level of around 10% to 25%, we will needto take full advantage of our humancapital and other intangible assets (seeFigure 1). Intangible assets represent
44% of market capitalization at MARUIGROUP and 32% of that of Nikkei 225

companies, both of which are significantly lower than the 90% seen for theS&P 500 companies in the United States.
This could be because MARUI GROUP
and other Japanese companies are noteffectively utilizing their intangible assets
or because they are being used but themarket is not recognizing this fact. On theother hand, this situation could be framed
as representing the potential for thesecompanies to grow. Whatever the case,MARUI GROUP plans to make greater useof intangible assets to raise the ratio ofthese assets to market capitalization to alevel of 80%, closer to that of U.S. companies, and thereby work toward its targetof a PBR of 5 times.

Figure 1: Corporate Value That We Aspire To

Figure 2-1: ROIC for Japanese Credit Card Companies

Current

I would now like to talk about MARUIGROUP’s approach toward utilizing
intangible assets by looking at theexample of our Fintech segment. In thefiscal year ended March 31, 2023, theFintech segment posted return on
invested capital (ROIC) of 5.0%. This is
an incredibly high level in comparison toour peers (see Figure 2-1 and Figure2-2). Generally, the ROIC of capitalintensive financial businesses is around
1% to 2%. Our ROIC is thus 3 or 4 percentage points higher. I believe that thisdifference is a result of our utilizing ourintangible assets, rather than just our

5.0%

PBR 1.7 times
ROE 10%(Forecast for FY2024)(Current level)

1.2%

1.6%

1.6%

ROE 25%

PER 20 times

 arge portion of portfolio comprisingLbusinesses not dependent on balance
sheet, such as rent guarantees

Company B

Company C ow customer acquisition costs throughLstore cooperation, cards tailored to eachindividual’s interests, etc.

FuturePBR 5 times

Factors for high ROIC igh composition of interest-bearing
Hdebt and low ratio of bad debt write-offs

PER* 17 times

Intangible assets
Company A

MARUI GROUP’sFintech

Figure 2-2: ROIC Surpassing Operating Receivables Attributable to Intangible Assets* Price earnings ratio

Balance sheet

ROICOperatingreceivables

1.2%–1.6%

Other companies

74

Utilization of Intangible Assets

Intangibleassets

3.4%–3.8%

Returns from investments in human capitaland other intangible assets

Operatingreceivables

1.2%–1.6%

Returns from operating receivables, etc.

MARUI GROUP’sFintech

75

financial capital. For example, we havebeen expanding businesses that bankon our creditability, as opposed to ourbalance sheet, like our rent guarantee
services business, while also maintaining low default rates, despite providing
credit cards to younger users. Thesefactors demonstrate the business benefits of utilizing the intangible asset thatis our core value—the co-creation ofcreditability.

Figure 3-1: Breakdown of Human Capital Investment

Fiscal year ended
March 31, 2022

Fiscal year ended
March 31, 2023

¥4.5 billion¥5.5 billion

STEP 2: R&D expenses• Personnel expenses of new businesses• Personnel expenses of co-creative teams• Personnel expenses of seconded employees¥2.4 billion¥2.6 billion

STEP 1: Human resource investments• Education/training expenses• Participation in Medium-Term Management Visionary Committee/
projects/initiatives¥0.8 billion¥1.0 billion¥7.7 billion¥9.1 billion

STEP 3: Additional investments• Employees in first year of profession
change• Investment funding

Human capital
investment

Improvement of Corporate Value
through Expansion of Intangible Assets

Figure 3-2: Human Capital Investment as Share of Personnel Expenses
Given the aforementioned examples,
expanding our portfolio of intangible
assets will involve utilizing our uniqueexpertise to incorporate these assets
into businesses that utilize existing
non-current assets and financial capital.
We will also need to embrace the latest
technologies in order to create new
products and services. This approachshould also help us develop an organizational culture that is conducive to innovation and foster the type of digitally
proficient human resources we require,
which have both been defined as goalsof the human capital management
approach that we have incorporated
into our management strategies.
Accordingly, I believe that the acceleration of human capital management willin turn grow our intangible asset portfolio and thereby drive massive improvements in our corporate value.
Redefinition of Human Capital
Investments
Since 2017, MARUI GROUP has been
disclosing an amount for human capital
investments. This indicator, which isrecognized for managerial accounting
purposes, represents personnel
expenses, as defined for standard
accounting purposes, recorded in a7635%

Share of personnel expenses
22%¥12.0 billion¥7.7 billion

FY2022¥9.1 billion

FY2023given fiscal year that are not for tasks
related to operations but rather for tasks
expected to contribute to improvements
in future earnings. In the past, this has
mainly been for training expenses.
However, discussions related to personnel capital management at Board ofDirectors’ meetings and other venues
have led to suggestions that we widen
the definition of human capital investments. Based on these suggestions, wechose to redefine human capital investments in 2022. In addition to training
expenses, the new definition for humancapital investments includes personnelexpenses related to new businesses,
which were previously treated as R&D
expenses, and personnel expenses for
employees in their first year after using
our intra-Group profession changesystem, which is an effective tool forreforming our organizational culture.

FY2024(Plan)FY2025(Plan)FY2026(Plan)

Under the new definition, human capital
investments amounted to ¥7.7 billion in
the fiscal year ended March 31, 2022, orroughly 22% of total personnel expenses.
We look to increase the amount of
human capital investments to ¥12.0
billion in the fiscal year ending March 31,2026, which should be about 35% of
total personnel expenses. In otherwords, we aim to make it so that morethan one-third of the time employees
spend working at the Company is used
for creating future corporate value(see Figure 3-1 and Figure 3-2).
Returns from Human Capital
Investments
Ever since we began disclosing figures
for human capital investments, we havecontinued to receive questions about thereturns we can expect from theseinvestments and the timing at which wewill be able to quantify the benefits. I
therefore recognize that we cannot hopefor investors to accept our plan to raisehuman capital investments to accountfor 35% of personnel expenses if we do
not provide quantitative financial information, alongside qualitative information, to justify this decision. This is why
we sought to define the returns that will
be generated from human capital investments and performed a trial calculationof the associated capital efficiency togive a more concrete picture of ourhuman capital management approach.
Human capital investments are anticipated to augment our ability to create
unique new products and services. For
this reason, the returns from theseinvestments could be seen as the marginal profit generated by those products
and services. This view, however, presents another issue, namely, how todefine the timetable for those returns.
As human capital investments target theenhancement of our organizational andcorporate culture, the returns tend to berealized in the long term. Accordingly,
accurately measuring the capital efficiency of these investments and explaining the benefits requires a long-term
perspective, and we therefore had topreface our approach on this fact.
Efficiency of Human Capital
Investments
When attempting to measure the efficiency of human capital investments,
after defining what constitutes theirreturns, we were able to glean hints
about how to go about this from theapproach used by funds that invest instart-ups. MARUI GROUP has been
investing in start-ups and funds since2017. We tend to invest at relatively
early stages of the businesses of therespective companies, which means

77

that it can take quite a bit of time before
we start seeing returns. We thus realized that the timetable used to assess
returns from human capital investments
should be similar to that employed forstart-ups. Generally, funds use a timetable of 10 years from the process ofcommencing investments and thencollecting returns and ending the fund.
The first five years of this period areprimarily characterized by investment
while the last five years are whenreturns are collected. In the end, thefund will present its internal rate ofreturn (IRR) for the 10-year period.
Mirroring this approach, we chose toaggregate the investment amount overthe five-year period from the fiscal year
ended March 31, 2017, when we began
calculating and disclosing figures forhuman capital investments, to the fiscal
year ended March 31, 2021. The returns,
meanwhile, were calculated as theprojected marginal profit to be generated by the unique new products andservices created over the 10-year period
from the fiscal year ended March 31,
2017, to the fiscal year ending March 31,2026. Based on these parameters, a trial
calculation on the returns from humancapital investments resulted in projected
returns of ¥56.0 billion from new products and services in the anime and otherbusinesses over the period leading up to
the fiscal year ending March 31, 2026.
Given that aggregate human capital
investments in the fiscal years ended
March 31, 2017 to 2021, totaled ¥32.0billion, the IRR will be 12.7% (see Figure 4).
Expansion of Human Capital
Investments
The IRR of 12.7% for human capital
investments is projected to surpass ourshareholders’ equity costs, which meansthat these investments will contribute tocorporate value. It is also important tomention that this rate of return is above
the hurdle rate of 10% that we use forinvestments in tangible assets. MARUIGROUP intends to invest ¥40.0 billion intangible assets over the next five years.
These investments will primarily target
existing businesses to advance us
further down our current growth track.
As for human capital investments, whichfeature higher efficiency than investments in tangible assets, we plan toinvest ¥65.0 billion, about 1.6 times
more the amount for investments intangible assets. These investments are
anticipated to result in growth that ismuch greater than what would havebeen achieved on our current growth
track. I am confident that this will move
us closer to our target of a PBR of 5times (see Figure 5).

Figure 4: MARUI GROUP’s View of Internal Rate of Return

Recovery period (FY2017 to FY2026)

Investment period (FY2017 to FY2021)¥56.0 billion¥(32.0) billion
April 2016

March 2021

March 2026
(Billions of yen)

FY2017FY2018FY2019FY2020

FY2021

FY2022

FY2023

FY2024(Forecast)

FY2025(Target)FY2026(Target)Investment
amount

4.1

5.4

8.1

8.5

6.3

—

——

—

—

Income

0.1

0.4

1.5

2.6

3.4

4.7

6.2

8.6

12.4

15.9

Figure 5: Expansion of Human Capital Investment
Tangible investments

Intangible investments

Stores and facilities, etc.

Human capital investment

Hurdle rate IRR 10%

IRR 12.7%*

FY2024 to FY2028

FY2024 to FY2028

Investment amount ¥40.0 billion

Investment amount ¥65.0 billion

Highly efficientmanagement* Calculate return on investment by considering marginal profits from the Company’s unique new businesses and services created through human capital
investment as returns (Investment period: FY2017 to FY2021; Recovery period: FY2017 to FY2026)

78

IRR 12.7%