Kondotec Inc.
7438 Tokyo Stock Exchange First Section
Company Research and Analysis Report
FISCO Ltd.
http://www.fisco.co.jp

9-Sep-13
Important disclosuresand disclaimers appear
at the back of thisdocument.

FISCO Ltd. Analyst
Yuzuru Sato■Company projects record-high profits for FY3/14,
as construction investment is recovering in Japan
Kondotec supplies materials for infrastructure and environmental equipmentthat is indispensable for society. Specifically, it manufactures, purchases andsells industrial steel appurtenances, such as turnbuckles and shackles, andpurchases and sells electrical equipment. The company's main commercial
strengths are an extensive line of products and rapid delivery, enabled throughclose, local ties with customers. The company sells to a wide range ofindustries, from distributors of materials for civil engineering works andbuilding construction, to shipbuilders, railroads, and manufacturers ofenvironmental equipment. Because of this wide range of customer industries,
the company's business is not affected much by economic cycles.
The company's sales of construction materials are growing briskly, reflectinga recovery of construction investment in Japan due to a rise in housing starts
and the full-scale restoration of infrastructure, businesses, and homes
destroyed by the Great East Japan Earthquake of March 11, 2011. Kondotec
imports many of its products, and imports have become more expensive due toyen depreciation since late 2012, but the company raises the prices of its
products to offset an increase in their cost. The company foresees asubstantial increase in construction work in Japan from summer 2013, due tothe earthquake recovery work and other public investment in infrastructure.
Therefore, the company projects record-high profits for FY3/14.
Kondotec's strategy for growth is to increase sales to railroads,
manufacturers of environmental equipment, and companies in Southeast Asia,
to strengthen business in Greater Tokyo, and to increase its share of theJapanese market for structural steel materials.

■Check Points
・Earnings are stable, as the company has about 16,000 corporate customers
from a wide range of industries
・The company earned record-high profits in FY3/13 because of strong sales tothe construction industry
・With earnings growth in FY3/14, the company is likely to raise its dividend

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9-Sep-13

Kondotec Inc.

Consolidated Sales and Operating Profit (\mn),
FY3/08-FY3/14E
Sales (left axis)

Operating Profit (right axis)

50,0003,500
41,1533,000

38,74540,00031,44235,54833,258

2,884
2,664

30,00020,00043,372

27,347
1,786

2,000
1,926

1,911

1,500

1,275
10,000

2,500

1,000

933
500

0

0

FY3/08
FY3/09FY3/10FY3/11
Note: Figures for FY3/08-3/10 are unconsolidated.

FY3/12

FY3/13

FY3/14e■Company Description
With the start of the in-house production of turnbuckles, theirsales increased rapidly
Company History(*1) A shackle is a U-shaped
metal device which is attachedto the ends of a wire rope toconnect more than one wirerope or to suspend heavy
objects

The company was founded as Kondo Shoten (Commerce) Co. in 1947 by Mr.
Fujio Kondo, who had previously worked at an iron works. Initially, the company
sold fittings for ships and barges to specialized wholesalers of such items. At
the time, Japan's economy was rapidly recovering from the destruction of WorldWar II, and the company's sales of industrial materials, such as shackles (*1) ,wire rope clips, and chains, grew each year. From its inception, the company
aimed to sell a wide range of products and to deliver them quickly. These remain
its main goals. With the aim of selling products to manufacturers, in 1955, thecompany changed its name to Kondo Iron Works. Until 1956, the company
engaged in only minor product processing, such as putting holes some products.
From 1956, however, it forged its own shackles.

Photos of Shackles
Light TypeShackleKONDO
Standard
ShackleSuper Strong
ShackleSource: Company website

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9-Sep-13

Kondotec Inc.

■Company Description(*2) A turnbuckle is a metal
device used to adjust thetension in a rope or wire. A
turnbuckle consists of a frame
and two threaded bolts. Eachend of the frame has a hole,
one with a left-hand screw
thread, the other with a righthand screw thread. By rotating
the frame, the tension isincreased or decreased.
Turnbuckles have a wide range
of uses. Turnbuckles of about
10 grams in mass are used in
the thin cable of garden fences.
Turnbuckles of thousands ofkilograms in mass are used instructural elements of buildings
and suspension bridges.

Japan enjoyed exceptionally rapid economic growth through the mid-1960's.
During this period, the company's business expanded and changed notably,
mainly to serve the construction industry primarily. From 1956, the company's
three main products were shackles forged in-house, wire rope clips assembled inhouse, and turnbuckles which were purchased. However, it could not satisfy thedemand for turnbuckles (*2) from the construction industry, so in 1962, it
stopped producing shackles and switched to producing turnbuckles in-house,
while purchasing shackles. Kondo Iron Works supplied turnbuckles for manylarge infrastructure projects in Japan, including the Tokaido Shinkansen, and its
sales grew rapidly. At the same time, its main products changed from ship
fittings to materials for construction and civil engineering works. In 1966, thecompany opened its Kyushu plant in Nogata City, Fukuoka Prefecture. That plantis now its main plant.

Photos of Turnbuckles
Split-frame
Turnbuckle(hook & hook)

PS-type
Turnbuckle

Anchor Stopper
Turnbuckle

Source: Company website

In 1957, the company opened an office in Tokyo, and since then, it hasestablished offices throughout Japan. The company added new products tosatisfy customer needs, and its sales composition changed significantly. In 1962,
metal appurtenances, such as shackles and turnbuckles, supplied 67% of its total
sales, but by 1985, these appurtenances accounted for only 22% of total sales,
while other construction materials accounted for 24%, wire rope accounted for
23%, threaded studs accounted for 14%, and chains accounted for 9%.
In 1985, the company started selling directly to processors of steel beams,
and it subsequently sold directly to other customer industries, not just throughwholesalers. Until the mid-1980's, the company exported about \2bn of products
per year to Southeast Asia. Because of rapid yen appreciation from 1985, thecompany stopped promoting exports and switched to imports, but it continued toexport about \100-200mn of goods to long-term customers.
In 1989, the company changed its name from Kondo Iron Works to Kondotec.
As the company opened sales office throughout Japan, it also built plants aroundthe country to minimize the delivery time to customers. In 1991, it constructed
the Kanto plant in Yuki City, Ibaraki Prefecture. In 1992, it built the Sapporo
plant in Ishikari City, Hokkaido. In 2007, it opened the Shiga plant, in Gamo town,
Shiga Prefecture. From the mid-1990's, the company began importing products
from Southeast Asia and selling them in Japan. It was one of the first companies
in its industry to do so, and these imports supported its profits over the past 18
years or so, while Japan's economy has remained weak.

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9-Sep-13

Kondotec Inc.

■Company Description

In 1995, Kondotec listed its shares on the Second Section of the Osaka
Securities Exchange, and in 2011, it listed them on the First Section of theTokyo Stock Exchange. The company listed its shares for several reasons. It
wanted to increase public trust and thereby strengthen and diversify its fundprocurement. It wanted to raise its name recognition and thus increase thenumber of companies with which it does business and attract talented staff.
Finally, it aimed to boost the morale of its employees.
In 2010, Kondotec bought Sanwa Denzai Co., a wholesaler of electricalequipment based in Nagoya City, to expand the range of products it can offer tothe construction industry. In 2011, it established a representative office inThailand and resumed its efforts to promote exports to Southeast Asia.
At the end of the fiscal year through March 2013, i.e., at the end of FY3/13,
the company had 42 sales offices and four plants in Japan and a representative
office and an affiliate in Thailand. In addition, subsidiary Sanwa Denzai now has
13 offices in Japan. In July 2013, the company established a main office inTokyo to complement its main office in Osaka. It has 556 employees on aparent-company basis and 660 employees on a consolidated basis.

Company History
Year
1905

Mr. Fujio Kondo established the proprietorship Kondo Shoten (Commerce) Co. in Izuo, Taisho Ward, Osaka
City

1953

Kondo Shoten became a stock company and began selling metal appurtenances for ships

1955

Kondo Shoten changed its name to Kondo Iron Works

1956

Began forging shackles at a plant adjacent to the head office

1957

Established a satellite office in Tokyo, which is now a branch office

1962

Opened the Tokyo plant in Koto Ward, Tokyo, and began manufacturing turnbuckles there

1966

Opened the Kyushu plant in Nogata City, Fukuoka Prefecture

1967

Began producing chain for suspending scaffolding

1973

Began producing and selling threaded studs and metal appurtenances for construction and civil engineering
works

1974

Moved the head office to Nishi (West) Ward, Osaka City

1985

Opened a new business department (now the steel structures department) and began selling directly to steel
beam processors

1989

Kondo Iron Works changed its name to Kondotec, Inc.

1991

Opened the Kanto plant in Yuki City, Ibaraki Prefecture

1992

Opened the Sapporo plant in Ishikari City, Hokkaido

1995

Listed shares on the Second Section of the Osaka Securities Exchange (listed on the First Section of theTokyo Stock Exchange in 2011)

2004

Established a distribution warehouse in China under an agreement with a Chinese distribution company

2005

Concluded an agency contract with the Pewag International GmbH, of Austria, and began selling grade 10
chain sling and components and materials for this chain

2007

Opened the Shiga plant in Gamo town, Shiga Prefecture

2010

Purchased all of the voting stock of Sanwa Denzai Co., a wholesaler of electrical equipment, and made thecompany a subsidiary

2011

Opened a representative office in Bangkok, Thailand

2012

Established affiliate Kondotec International (Thailand) Co., Ltd.

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9-Sep-13

Kondotec Inc.

■Company Description

Industrial materials supply a majority of total sales
Description of Businesses
Kondotec has three main businesses: 1) the production, purchase, and sale ofindustrial materials, mainly to retailers of metal goods, 2) the production,purchase, and sale of structural steel materials to processors of steel
structures, and 3) the purchase and sale of electrical equipment to retailers ofsuch equipment and the electrical equipment installation industry. The purchaseand sale of electric equipment is conducted by Sanwa Denzai Co., which wasmade a subsidiary in 2010. As detailed in the bar chart below, in FY3/13,
industrial materials supplied 61% of Kondotec's total consolidated sales,
structural steel materials supplied 22%, and electrical equipment provided 17%.

Breakdown of Consolidated Sales (\mn) by
Business, FY3/11-FY3/13
Industrial materials

Structural steel materials

Electrical equipment
30,00025,00025,232

23,812
21,281

20,00015,00010,0007,593 6,673

8,879

8,539
6,393

7,041

5,000
0
FY3/11

FY3/12

FY3/13

Kondotec's main products are listed in the tables below. Turnbuckles andbraces are its main products made in-house, while shackles are its mainpurchased product.

Main Products by Source
Manufactured

Purchased

Turnbuckles, Braces, Chain for suspending scaffolding, Screw products, Anchor bolts, Construction
materials, etc.
Shackles, Clips, Hooks and other metal goods, Chains, wire ropes, Threaded studs, Construction
materials, Lighting fixtures, Power distribution boards, Air-conditioning equipment, Ecological equipment
such as solar power equipment and energy-efficient hot water tanks; etc.

Main Products by BusinessIndustrial materials Turnbuckles, Shackles, Clips, Hooks, Screw products, Container bags, Sheets, Nets, etc.
Structural steel
materials

Braces, Anchor bolts, High-tension bolts, Self-supporting cone pieces, Column supports, Bracing sheets,
etc.

Air-conditioning equipment, Lighting fixtures, Ecological equipment, Electric wires, Power distribution
Electrical equipment boards, Sensors, etc.

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9-Sep-13

Kondotec Inc.

■Company Description

Kondotec is a trading company with manufacturing capability. In FY3/13,
products made in-house provided 21.2% of the parent company's sales ofindustrial materials and structural steel materials. The remaining 78.8% of thesesales were of products purchased from Japanese or foreign makers. About 25%of the purchased products were imported. Of the imports, 65% came from China,
25% from Korea, and the rest from other Asian countries and Australia. In
FY3/13, exports provided sales of only \194mn, but Kondotec plans to expand
its exports.
As detailed in the graph below, the cost-of-goods-sold ratio for Kondotec'spurchased products has remained about 78%. This constancy reflects thecompany's pricing power. If the company's cost of purchased goods rises due toan increase in the cost of steel or to foreign exchange changes, the company
can raise its prices to offset the increase in its cost because its customers value
its wide range of products and its rapid delivery, even for small amounts ofmany different products.

COGS Ratio for Manufactured Products andPurchased Products, FY3/07-FY3/13
Manufactured Products
80.0%

78.7%

79.1%

78.6%

Purchased Products

77.8%

78.6%

78.6%

77.8%

78.0%
78.0%

76.0%
74.0%

74.7%

78.3%

75.3%

74.6%

72.0%
70.0%
68.0%

70.6%

70.1%

66.0%
64.0%
FY3/07(*3) A brace is a cross-coupledwire device used to strengthen
a building with a steel
structure. Usually, this device
is called a turnbuckle brace.

FY3/08

FY3/09FY3/10FY3/11

FY3/12

FY3/13For products manufactured in-house, the cost-of-goods-sold ratio fluctuates
depending on such factors as changes in product mix, depreciation cost, andplant operating rates. In FY3/13, this ratio fell to 70.1% for two reasons. First,
the cost of steel declined. Second, the demand for the company's high valueadded braces (*3) increased, and the company raised its production of braces
while outsourcing the production of anchor bolts.

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Kondotec Inc.

■Company Description

Business is stable because company serves 16,000 customers
from a wide range of industries
Strengths and competitors
Kondotec's sales and profits remain solid, even during periods of economic
downturn, partly because the company serves many industries. Although theconstruction industry is its main customer, it also sells to many other industries,
including shipbuilding, ports and harbor construction and maintenance, electric
power, railroads, environmental equipment, and industrial waste disposal.
The demand for structural steel products, mainly steel bars and beams, is an
accurate indicator of the demand for construction work in general. As shown inthe chart below, Japanese demand for structural steel products contracted
sharply in fiscal 2009, due to the global recession stemming from the financial
crisis. Yet, Kondotec's parent-company sales fell only moderately that fiscal year
(FY3/10). In FY3/13, the pace of recovery in Japanese demand for structuralsteel products slowed, but Kondotec recorded higher parent-company sales thanever before, largely because of sales to industries other than the constructionindustry.

Japanese Demand for Structural Steel Products
and Kondotec's Sales (\mn), FY2006-2012
Demand for Structural Steel Products (left axis)
Kondotec's Parent-company Sales (right axis)（Thousand Tons）
8,000

40,00034,14233,258

7,000

（\mn）

35,0006,000

30,0005,000

25,0004,000

20,0003,000

15,0002,000

10,000

1,000

5,000

0

0
2006

2007

2008

2009

Sources: Japan Iron and Steel Federation, Kondotec

2010

2011

2012

2013e

（Ending in March of the following years）

Kondotec has about 16,000 corporate customers, but its top 10 customers
supply only 6% of its total sales. This widely dispersed customer base also
supports business stability. Only 0.06% of the company's sales receivable areirrecoverable because the company reviews the creditworthiness of all its
customers once a year and adjusts its credit policy accordingly. Although
Kondotec's industry tends to be sensitive to economic fluctuations, Kondotec
has suffered losses only once, and they were due to a change in accounting
practice. Kondotec also has a strong balance sheet. On a parent-company basis,
it has been debt free since FY3/01.

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9-Sep-13

Kondotec Inc.

■Company Description

The parent company trades about 40,000 items, and the consolidated entity
trades about 50,000 items. Every month, the company convenes a meeting ofsales representatives from each of its sales offices to review its product lines
and to discuss the development of new products. Representatives of thecompany's plants and its overseas operations also attend these meetings to help
determine which products will be made in-house and which will be imported from
China or elsewhere. These meetings also underlie business stability.
Approximately 60% of the orders for the company's manufactured products
are for small amounts and short delivery times. The company manufactures
products that it cannot readily procure from overseas, and its reliable supply
limits its exposure to the risk of price competition. Kondotec's four plants are
distributed throughout Japan, enabling the company to quickly supply customers
nationwide. Its main factory is the Kyushu plant, but it also has plants inGreater Osaka, Greater Tokyo and Hokkaido. Kondotec is the only Japanesemaker of braces that has received JIS standard certification for all phases of
production, from turnbuckle manufacture to brace production.
In the business of structural steel materials, Kondotec's main competitor is
Furusato Industries Ltd. (8087), which holds about 60% of the Japanese market,
compared with Kondotec's roughly 30% share. In the business of industrial
materials, competitors vary by product. In processed shackles and wire rope
products, its main competitors are unlisted companies, such as Shitaya Kinzoku
Co. and Taiyo Seiki Iron Works Co. In general construction materials, its maincompetitors are Okabe Co. (5959), Marui Sangyo Co., Kunimoto Corp., andMitsuboshi Shoji Co. In industrial tools, its main competitors are Trusco
Nakayama Corp. (9830) and Gnet.

■Business Trends
Record-high sales and profits
FY3/13 Results
In FY3/13, Kondotec's consolidated sales grew by 6.2% y-o-y to \41,153mn,
its consolidated operating profit advanced by 38.3% to \2,664mn, its recurring
profit rose by 36.4% to \2,754mn, and its net profit increased by 53.5% to\1,605mn. All these figures were the highest levels recorded to date. The parent
company raised its sales to \34,142mn, eclipsing the previous high set four
years earlier, and its recurring profit to \2,550mn, exceeding the previous highset six years before.
These strong results for FY3/13 stemmed primarily from stronger sales of
products to the construction industry, due to the reconstruction of facilities
destroyed by the Great East Japan Earthquake of March 11, 2011 and to arecovery of housing starts. The consolidated operating profit margin improvedby 1.5ppts y-o-y to 6.5%, reflecting sales growth, a decline in the cost of steel
materials, and strong sales of high value-added braces. The cost-of-goods-soldratio and the SGA cost ratio declined, as shown in the graph below. The resultsof each business are explained hereafter.

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Kondotec Inc.

■Business Trends

Consolidated COGS Ratio and SGA Cost Ratio,
FY3/11-FY3/13
COGS Ratio（％）

SGA Cost Ratio

90.0
80.0
79.3

78.5

77.5

17.1

16.5

16.0

FY3/11

FY3/12

FY3/13

70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0

Industrial materials
Consolidated sales of industrial materials increased by 6.0% y-o-y in FY3/13
to \25,232mn, and operating profit from these sales rose by 33.6% to \1,956mn.
Sales of purchased industrial materials increased by about \1bn y-o-y, as salesof nets, sheets and temporary scaffolding materials grew, mainly for the
restoration of ports and harbors and civil engineering works in the wake of theearthquake. Sales of industrial materials produced in-house, mainly braces, grewby about \400mn y-o-y. Due to restoration demand, sales in eastern Japan
increased by about \900mn y-o-y, while sales in western Japan advanced byabout \500mn. Thus, the sales weighting of eastern Japan increased to 54%,from 53% in FY3/12.

Consolidated Sales and Operating Profit (\mn) from theIndustrial Materials Business, FY3/11-FY3/13
Sales (left axis)

Operating Profit (right axis)

30,0002,500
23,81225,00025,2322,000

21,281
1,464

20,00015,000

1,956
1,500

1,171

1,000
10,000
500

5,000
0

0
FY3/11

FY3/12

FY3/13We encourage readers to review our complete legal statements on “Disclaimer” page.

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Kondotec Inc.

Absolute y-o-y Changes in Sales (\mn) of
Industrial Materials in FY3/13
Purchased
Products

250

Manufactured
Products

200

Secondarysteel
products

125

Other
formwork
materials

87

195

138

123

Braces

83

Goods forshipbuilding,ports andharbors

100

98

Machinery
and tools

150

50
0
-50
-100

Nets andsheets.

Temporaryscaffolding
materials

-85
Metal
fixtures usedin woodenhouses■Business Trends

Operating profit in the industrial materials business increased by \492mn y-oy. An increase in sales volume raised profit by \364mn, and an increase in the
gross profit margin added \244mn, more than offsetting a \27mn profit drop
due to lower prices and an \89mn rise in SGA costs, mainly the cost oftransportation.

Structural steel materials
Consolidated sales of structural steel materials increased by 4.0% y-o-y in
FY3/13 to \8,879mn, while operating profit jumped by 70.2% to \574mn. In H2
FY3/13, the demand to restore buildings destroyed by the earthquake increased,
and throughout the fiscal year, there was an increase in work to strengthen
public infrastructure facilities, such as schools, against earthquakes. Sales ofstructural steel materials made in-house grew by about \310mn y-o-y, reflecting
strong increases in sales of anchor bolts and braces. Due to the earthquake
recovery demand, sales in eastern Japan rose by about \400mn y-o-y, whilesales in western Japan fell by about \60mn. Thus, the sales weighting of sales ineastern Japan rose to 44%, from 41% in FY3/12.
Consolidated Sales and Operating Profit (\mn) from theStructural Steel Materials Business, FY3/11-FY3/13
Sales (left axis)

Operating Profit (right axis)

10,000
8,539
8,000

8,879

600

7,593
574

6,000

700

337

500
400
300

4,000

200
2,000

100

9
0

0
FY3/11

FY3/12

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Kondotec Inc.

Absolute y-o-y Changes in Sales (\mn) of
Structural Steel Materials in FY3/13
Purchased
Products

Manufactured
Products

150

120

108

138

80

100
50

Manufactured anchor bolts

Purchased anchor bolts-33
Braces-44

Manufactured steel structurecomponents-50

Goods for use atconstruction sites-64

Processed wire rope products(JIS standard)

-50
-100

Purchased steel structurecomponents

0

Welding and painting
materials■Business Trends

Operating profit from structural steel materials grew by \237mn y-o-y in
FY3/13. An improvement in the gross profit margin added \216mn of profit,
and an upturn in sales volume added \81mn. These factors more thancompensated for a \60mn increase in SGA costs. The operating profit margin in
structural steel materials rose by 2.5ppts y-o-y to 6.5% in FY3/13, for several
reasons. Sales of high-margin products, such as braces, were strong, while thecost of raw materials, mainly steel, fell, yet the company maintained its prices.
The outsourcing of anchor bolt production while the company increased its
manufacture of braces also contributed to improved profitability.
Electrical equipment
Consolidated sales of electrical equipment rose by 10.1% y-o-y in FY3/13 to\7,041mn, while operating profit surged by 77.0% to \173mn. Reflecting greaterpublic awareness of the need to save energy, the demand for LED lighting, solar
power systems and electrical wires increased, supporting this business.
Operating profit rose by \75mn y-o-y. A fall in air-conditioner prices caused thegross profit margin to decline, erasing \64mn from operating profit, but thesales growth lifted operating profit by \115mn and SGA costs were lowered by\24mn.

Consolidated Sales and Operating Profit (\mn) from theElectrical Equipment Business, FY3/11-FY3/13
Sales (left axis)

Operating Profit (right axis)

10,000

300
250

8,000
6,673
6,000

7,041
6,393

173

200

149
150
98

4,000

100
2,000

50

0

0
FY3/11

FY3/12

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Kondotec Inc.

■Business Trends

Sales Composition in the Electrical Equipment
Business, FY3/12-FY3/13
100%
90%
35%

80%

Other products

35%

Ecological equipment

70%
60%

9%

50%

15%

11%

Electric wires

17%

Lighting fixtures

40%
19%

30%

18%

Air-conditioners andelectric fans

20%
10%

22%

19%

FY3/12

FY3/130%Absolute y-o-y Changes in Sales (\mn) ofElectrical Equipment in FY3/13

250

202

220

18

19

44

44

Circuitbreakers
and wiring

50

Machines

79

100

96

98

Electricalpipingequipment

150

Lighting
fixtures

200

0
-50

-31

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Ecologicalequipment

Electric wires

Electrical
tools

-62
Airconditioners
and electricLightelectricalequipment
Electricalsupplyequipment
Otherelectricalequipment

-100

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Kondotec Inc.

■Business Trends

Company may exceed its forecasts as public investment is
growingCompany Forecasts for FY3/14
For FY3/14, Kondotec projects a 5.4% y-o-y rise in its consolidated sales to\43,372mn, an 8.2% increase in operating profit to \2,884mn, a 7.9% upturn inrecurring profit to \2,972mn, and a 4.5% increase in net profit to \1,678mn.
As shown in the bar chart below, the Research Institute of Construction andEconomy, a unit of Japan's Ministry of Land, Infrastructure, Transport andTourism, forecasts a 7.9% y-o-y rise in Japanese investment in construction to\48.4 trillion in fiscal 2013, which corresponds with the company's FY3/14. The
demand for earthquake recovery work is growing, as are housing starts. The
strengthening of public infrastructure is also advancing, and more buildings andstructures are being reinforced against earthquakes. The Japan Iron and SteelFederation forecasts a 10% rise in Japanese demand for structural steel
products in fiscal 2013 to 5 million tonnes, the fourth consecutive yearly
increase. Processors of structural steel products are operating at full capacity,
so Kondotec's sales of braces in FY3/14 are likely to remain strong. Kondotec isincreasing its production capacity by expanding an automated production line at
its Kanto plant. Even if the company's cost of imported goods rises due to yen
depreciation, it should be able to raise the prices of its products to offset such arise.
To date, most of the demand for earthquake recovery work has been forports and harbors and public infrastructure, but from now on, the demand for
housing replacement will supplement the previous demand. Furthermore, theJapanese government plans to increase public works investment and to
stimulate private demand by lowering taxes on capital investment. Thus, thebusiness outlook for Kondotec is bright, and the company may surpass its
forecasts for FY3/14.

Japanese Investment in Construction,
FY1995-FY2014F
Private-sector, non-residential investment（T r i l l i on Ye n）

Private-sector housing investment

90
80

Public-sector investment

79.0

70
60
48.4

50

45.0

40
30
20
10
0
1995

2000

2005

2008

2009

2010

2011Est2012Est

2013F

2014F

Ministry of Land, Infrastructure, Transport and Tourism for FY1995-FY2010, the Ministry's
Research Institute of Construction and Economy for FY2011-FY2014

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13

9-Sep-13

Kondotec Inc.

■Growth Strategy
Improving anchor bolt installation
Kondotec plans to gain maximum benefit from the reconstruction of facilities
destroyed by the 2011 earthquake. Its growth strategy entails the strengtheningof four businesses: the structural steel materials, all businesses in Greater
Tokyo, the railroad equipment business, and overseas business.
In recent years, the company has concentrated its purchases of materials forlarge customers at its head office in Osaka. As part of its plan to increase its
business in Greater Tokyo, in July 2013, it established a second head office inTokyo. It also bolstered the sales function of the Tokyo office by adding two
sales people to the group selling anchor bolt installations, one to the grouppromoting exports, and a technician to support sales.
To increase its sales of structural steel materials, Kondotec has beenpromoting the installation of anchor bolts. The company acquired the license
required to install these bolts in 2006, and in FY3/13, anchor bolt installation
provided sales of \481mn. The installation of anchor bolts promotes their saleand enables the company to gain valuable information about the customer's needfor other construction materials, since anchor bolt installation is one of the firstprocesses undertaken at a construction site.
The company is now trying to improve its installation process to shorten
troublesome work at construction sites, such as checking for reinforcement
bars, thereby reducing work time and cost. Through these efforts, the company
hopes to raise its sales from anchor bolt installation and its share of theJapanese market for structural steel products.
Kondotec's main product for railroads is its patented square hook bolt. Since
the company first supplied this bolt in 1999, many railroad companies haveadopted it. Previously, railroad companies used round bolts to secure the ties
crossing steel railway bridges, but these bolts tend to weaken due to vibration,requiring frequent inspection and replacement. Kondotec's square hook bolts
remain tight longer than round bolts, so railroad companies can reduce theirinspection and replacement time and cost. Thus, Kondotec's bolts have been
widely accepted, and they are one of its most profitable products. Hereafter, thecompany plans to sell these bolts to more railroads and to sell other products torailroads.
As mentioned previously, Kondotec stopped promoting exports from the mid1980's through 2010 because yen appreciation raised the foreign currency pricesof goods made in Japan. However, rapid economic growth in recent years in
Thailand, Indonesia and Vietnam convinced the company that the demand for its
products in these countries would grow. Therefore, in 2011, Kondotec
established a representative office in Bangkok, Thailand, and in November 2012,
the company set up a joint venture in Bangkok with a Thai company. Kondotec
owns 49% of affiliate Kondotec International (Thailand) Co., Ltd. Hereafter,
Kondotec intends to expand its imports and its exports. For FY3/14, it targets
export sales of \339mn, double its export sales in FY3/13.

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14

9-Sep-13

Kondotec Inc.

■Growth Strategy

Sales (\mn) by Four Businesses Targeted for
Growth, FY3/12-FY3/14E
Business in Greater Tokyo

Anchor bolt installation business

Railroad equipment business

Overseas business (exports)

700

500
400

633

599

600
495

500

481

339

325

300
195

200

144

116

172

167

100
0
FY3/12

FY3/13

FY3/14e

Kondotec has stressed the importance of acquiring new customers, and it has
succeeded in this strategy, gaining one new customer per month, on average, persales person. Thus, new customers provide about 5% of its annual sales. The
company plans to continue this stress to support its growth.
After acquiring Sanwa Denzai Co. in 2010, Kondotec established a sales officefor this subsidiary in Osaka which has steadily increased its sales. Kondotec
plans to expand the areas of operation for the subsidiary and to promotesynergy with it to encourage growth.
Kondotec's medium-term targets are consolidated sales of \50bn and aconsolidated operating profit margin of 8%. To improve profitability, the company
aims to raise the proportion of its parent-company sales of industrial materials
and structural steel materials to 25%, from 21.2% in FY3/13. It will also continue
to emphasize improvement in measures of productivity. As shown in the graphbelow, sales and recurring profit per employee continue to rise. These measures
now exceed the levels before the global economic downturn of 2008-2009.

Measures of Productivity, FY3/10-3/13
Sales per Employee (left axis)(\mn)

Recurring Profit per Employee (right axis)

(\mn)

70.00

7.00

60.00

6.00

50.00

5.00

40.00

4.00

30.00

3.00

20.00

2.00

10.00

1.00
0.00

0.00
FY3/10FY3/11

FY3/12

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FY3/1315

9-Sep-13

Kondotec Inc.

■Financial Condition andShareholder Return Policy■Financial Condition and Shareholder Return Policy
Strong and improving with profit growth
Financial Condition
As mentioned previously, Kondotec has carried no debt on a parent-company
basis since 2000. On a consolidated basis, its debt is low, compared with its
cash and cash equivalents. The company's finances are stable, as measured byits current ratio and its equity ratio, and its ROE exceeds 10%. As its profits
grow, its profitability and financial condition improve.

Balance Sheet (\mn), 3/08-3/13
FY3/08

FY3/09FY3/10FY3/11

Non-consolidated
Current assets

FY3/12

FY3/13

Consolidated

14,37915,233

13,943

15,874

18,52821,310Cash and cash equivalents

2,208

3,898

3,234

3,396

2,790

4,798

Inventories

2,556

2,186

1,878

2,341

2,670

2,746

Tangible fixed assets

8,044

7,733

7,854

8,636

8,425

8,636

Intangible fixed assets

32

84

203

485

378

264

Investments, etc.

1,152

1,616

1,615

1,197

1,070

981

Total assets

23,60824,667

23,61626,19428,40331,192Current liabilities

9,382

9,096

7,621

10,071

11,551

12,462

Fixed liabilities

1,492

1,579

1,678

1,741

1,754

1,739

-

-

-

900

700

800

Total liabilities

10,874

10,676

9,299

11,812

13,305

14,201

Total equity

12,733

13,991

14,317

14,381

15,097

16,990Total liabilities & equity

23,60824,667

23,61626,19428,40331,192Current ratio (current assets ÷ current liabilities)

153.3%

167.5%

183.0%

157.6%

160.4%

171.0%

Equity ratio (total equity ÷ total assets)

53.9%

56.7%

60.6%

54.9%

53.2%

54.5%

-

-

-

6.3%

4.6%

4.7%

ROA (recurring profit ÷ average total assets)

7.6%

7.9%

4.1%

5.5%

7.4%

9.2%

ROE (net profit ÷ average shareholders' equity)

9.0%

8.2%

4.7%

5.8%

7.1%

10.0%

Operating profit margin

5.7%

5.7%

3.4%

3.6%

5.0%

6.5%

Inventory turnover rate (COGS ÷ year-end inventories)

9.61

11.84

11.33

12.05

10.84

11.61

Asset turnover rate (sales ÷ year-end total assets)

1.33

1.35

1.16

1.36

1.36

1.32

Sales (\mn) per employee

55.85

57.64

48.75

53.62

58.88

62.35

Recurring profit (\mn) per employee

3.15

3.31

1.76

2.08

3.07

4.17

Interest-bearing debt

Measures of financial stability

Debt/equity ratio (interest-bearing debt ÷ total equity)
Measures of profitability

Measures of efficiency

Measures of productivity

Company may raise its dividend if profits surpass its forecasts
Shareholder Return Policy
The company's basic policy toward shareholder returns is to pay a stabledividend, with reference to its dividend payout ratio, while ensuring that its
profits and enterprise value grow. In FY3/13, its dividend payout ratio fell to23%, the lowest level in years. Based on the company's EPS forecast and planned
dividend for FY3/14, the dividend payout ratio would remain 23%. If profits
surpass the company's forecasts, the company may raise its dividend.

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

16

9-Sep-13

Kondotec Inc.

■Financial Condition andShareholder Return Policy

Dividend (\) Per Share and Dividend Payout Ratio,
FY3/96-FY3/14E（\）

DPS (left axis)（％）

Dividend Payout Ratio

70.0%

20.00
18.00
16.00
13.0

14.00
12.00

13.0 13.0

30.3%

40.4%

11.0
28.1% 28.4%
24.2%

8.00
4.00

13.0 13.0

10.0

10.00
6.00

60.0%

50.7%

4.25

4.75

5.0

5.0

5.5

27.8% 26.6% 26.7%
25.0% 25.9%
5.5

6.0

6.0

29.2% 29.3% 29.3%

13.5

14.0

14.0

50.0%
40.0%

33.4%

30.0%

23.0% 23.0%

6.0

20.0%

15.5% 15.1%

10.0%

2.00
0.00
FY
3/
FY 96
3/
FY 97
3/
FY 98
3/
FY 99
3/
FY 00
3/
FY 01
3/
FY 02
3/
FY 03
3/
FY 04
3/
FY 05
3/
FY 06
3/
FY 07
3/
0
FY 8
3/
FY 09
3/
1
FY 0
3/
FY 11
3/
FY 12
3/
FY 13
3/
14
e

0.0%

Note: In January 2012, the company made a 2-for-1 share split. Per-share figures for fiscal years
before FY3/12 have been adjusted to reflect this split.

Income Statement (\mn), FY3/10-FY3/14E

Sales

FY3/10FY3/11

FY3/12

FY3/13

FY3/13E

Non-consolidated

Consolidated

Consolidated

Consolidated

Consolidated

27,34735,54838,745

41,15343,372

y-o-y

-17.8

-

9.0

6.2

5.4

Cost of goods sold21,291

28,20530,412

31,890-COGS ratio

77.9

79.3

78.5

77.5

-

5,122

6,067

6,406

6,597

-

18.7

17.1

16.5

16.0

-

SGA cost
SGA cost ratio
Operating profit

933

1,275

1,926

2,664

2,884

-51.1

-

51.0

38.3

8.2

Operating profit margin

3.4

3.6

5.0

6.5

6.7

Recurring profit
y-o-y
Recurring profit margin
Extraordinary profit
Extraordinary loss

986
-48.4
3.6
179
9

1,376
3.9
263
136

2,019
46.7
5.2
0
19

2,754
36.4
6.7
0
29

2,972
7.9
6.9
-

Pretax profit

y-o-y

1,156

1,503

2,000

2,725

-

y-o-y
Pretax profit margin

-39.0
4.2

4.2

33.1
5.2

36.2
6.6

-

492

669

954

1,120

-

Tax rate

42.6

44.5

47.7

41.1

-

Tax
Net profit
y-o-y
Net profit margin
Measure index
Average number of shares outstanding (000)
EPS (\)DPS (\)BPS (\)
Dividend payout ratio (%)
Number of employees

664

834

1,046

1,605

1,678

-39.4
2.4

2.3

25.4
2.7

53.5
3.9

4.5
3.9

25,922
25.6
13.0
552.3
50.7
561

25,922
32.1
13.0
554.8
40.4
663

25,922
40.3
13.5
582.4
33.4
658

26,422
60.7
14.0
615.2
23.0
660

27,622
60.7
14.0
23.0
-

Note: In January 2012, the company made a 2-for-1 share split. Per-share figures for fiscal years
before FY3/12 have been adjusted to reflect this split.

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17

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