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

TOKAI Holdings
3167 Tokyo Stock ExchangeFirst Section

24-Feb.-16

Important disclosuresand disclaimers appear
at the end of this document.
FISCO Ltd. Analyst
Yuzuru Sato
* In March 2015, the Company beganselling the @ TCOM Hikari service
and the TNC Hikari service, which
bundle the company’s ISP service
with Nippon Telegraph and Telephone
Corp.’s (NTT) fiber-optic cables forthese services.

伪伪Pursuing growth by bundling electricity and otherservices
Based in Shizuoka Prefecture, Japan, TOKAI Holdings Corporation <3167> engages in two main
businesses, energy and lifestyle-related services, primarily the provision of liquefied petroleum gas(LPG) in canisters, and information and telecommunications services. Aiming to become a “Total
Life Concierge” (TLC), a company offering a complete range of services for everyday life, TOKAI
Holdings has completed the first fiscal year of its three-year medium-term management plan, called
Innovation Plan 2016 “Growing”. This plan targets consolidated net sales of ¥209.5bn and operating
profit of ¥12.6bn for its final year, the fiscal year through March 2017, i.e., FY3/17.
The company announced its consolidated results for Q2 FY3/16 (April - Sept. 2015) on October 29,
2015. Net sales declined 2.9% year on year (y-o-y) to ¥84,773mn, but operating profit rose 2.2% to¥1,856mn. The net sales decline reflected a revision in LP gas prices, while operating profit gained
y-o-y and exceeded initial forecasts on the strength of higher customer numbers in the Aqua (Bottled
water delivery), FTTH, and cable TV businesses, greater operational efficiencies, and reduced SG&A
expenses. At the end of September 2015, the number of customers stood at 2,543 thousand, up 8
thousand y-o-y and up 6 thousand from the end of FY3/15, showing a steady increase. The numberof customers for Hikari collaboration (the collaborative fiber-optic service*) was 117 thousand (22thousand new ones and 95 thousand conversions). Although the conversion rate (the percentageof FLET’s Hikari customers switching to Hikari collaborative) was less than initially anticipated, at
16.5%, it still exceeded the national average of 11.0%.
Management has maintained its initial forecasts for FY3/16 of a 2.5% y-o-y increase in consolidated
net sales to ¥192,200mn and a 13.8% decrease in operating profit to ¥7,760mn. The company iscurrently progressing well, and we think that management could lift its projections if there are no
major changes in the operating climate. One key focus in 2H would be the launch of bundles ofexisting services with electricity services. Applications for this new service start in January 2016.
The company will promote these bundles to existing and prospective customers. The LP gas
business, in particular, will market heavily by expanding areas of operations into Tohoku, Tokai, andKoshin regions of Japan. Numerous small and medium-sized enterprises supply LP gas, so there
should be ample scope for expanding market share on the strength of service bundles offering
more attractive prices. In the information and telecommunication services, Cable TV, Aqua, andother businesses, the company maintains a strategy of retaining customers through service bundle
rollouts and increasing the percentage of service contracts encompassing multiple services. It aims
to simultaneously expand sales and profitability by increasing average revenue per user.
The company maintains a proactive shareholder return policy. On November 6, management retired
15,520 thousand shares of treasury stock, representing 10% of the total number of issued andoutstanding shares. It also set about spending up to ¥1.8bn to acquire 3,600 thousand shares oftreasury stock by the end of February 2016. Management implemented a policy of maintaining a total
payout ratio of 100% for FY3/16, and could raise dividends if results exceed forecasts.

伪伪Check Point• The oil and gas business should drive profit growth, with the information andtelecommunications services business exceeding initial forecasts• Although full-year projections are unchanged, operating profit could exceed forecasts• Management is rolling out a 100% total payout policy that encompasses treasury stockacquisitions and other initiatives

We encourage readers to review our complete legal statement on “Disclaimer” page.
1㻯㼛㼚㼟㼛㼘㼕㼐㼍㼠㼑㼐㻌㻺㼑㼠㻌㻿㼍㼘㼑㼟㻌㼍㼚㼐㻌㻻㼜㼑㼞㼍㼠㼕㼚㼓㻌㻼㼞㼛㼒㼕㼠(¥bn)

㻺㼑㼠㻌㼟㼍㼘㼑㼟㻌㻔㼘㼑㼒㼠㻌㼟㼏㼍㼘㼑㻕

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TOKAI Holdings㻞㻜㻜3167 Tokyo Stock ExchangeFirst Section

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Important disclosuresand disclaimers appear
at the end of this document.
FISCO Ltd. Analyst
Yuzuru Sato

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24-Feb.-16(¥bn)

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㻲㼅㻟㻛㻝㻣㻱伪伪Business Trends
Although second-quarter revenues declined owing to LP gas pricerevisions, earnings gained y-o-y and exceeded initial forecasts(1) Q2 FY3/16 Results
In the consolidated results for Q2 FY3/16 (April - September 2015) announced on October 29, net
sales decreased 2.9% y-o-y to ¥84,773mn, operating profit increased 2.2% to ¥1,856mn, recurring
profit increased 12.2% to ¥1,779mn, and net profit increased 22.8% to ¥277mn. The company
revised LP gas prices in response to lower procurement costs, which cut sales by ¥4.3bn. At thesame time, it attracted more customers, enhanced operational efficiency companywide, and reduced
SG&A expenses, so earnings exceeded initial forecasts and were also up y-o-y.
An analysis shows that although SG&A expenses incurred in securing new Hikari collaborative
customers and promoting conversions cut ¥1.5bn from operating profit, customer number increases
for broadband, Aqua, and cable TV businesses added ¥700mn, while higher revenues from the LPgas business contributed ¥700mn to earnings and enhanced earnings in the construction and realestate business provided another ¥200mn for operating profit, which was thus up slightly.
Q2 FY3/16 Consolidated Results
Q2 FY3/15% ofResults
net sales
87,27455,48963.6%
29,969
34.3%
1,816
2.1%
1,585
1.8%

Initial plan

Results

Net sales
86,80084,773
Sales cost
52,565
SG&A expenses
30,351
Operating profit
900
1,856
Recurring profit
730
1,779
Extraordinary gains
-371
-692
and loss
Net profit
225
0.3%
-360
277
Note : Initial plans are forecasts made at the beginning of the fiscal year.

Q2 FY3/16% ofnet sales
62.0%
35.8%
2.2%
2.1%

(¥mn)
y-o-y

vs. plan

-2.9%
-5.3%
1.3%
2.2%
12.2%

-2.4%
105.6%
143.1%

-

-

-

0.3%

22.8%

-

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

■■Business Trends

TOKAI Holdings
3167 Tokyo Stock ExchangeFirst Section

24-Feb.-16

Important disclosuresand disclaimers appear
at the end of this document.
FISCO Ltd. Analyst
Yuzuru SatoAt the end of September 2015, TOKAI Holdings served 2,543 thousand customers, showing a steadyincrease of 8 thousand y-o-y and 6 thousand from the end of FY3/15. Looking at the numbers ofcustomer for the main services, the numbers of customers for the gas business, cable TV businessand Aqua increased. In December 2012, the company launched its TLC Membership Service to build
customer loyalty and increase the proportion of multi-service contracts with customers. At the end of
September, this service had 439 thousand members, expanding steadily by 43 thousand comparedto the end of FY3/15.
Number of Customers in Main Services

Gas (LPG, City gas)
Information and Telecommunications(fixed line and Wi-Fi)
MobileCable TV
Aqua
SecurityGroup Total(TLC Membership Service members)

Q2 FY3/15
626

Q3 FY3/15
624

Q4 FY3/15
626

Q1 FY3/16
625(thousand)
Q2 FY3/16
627

863

866

864

861

859

231
690
132
18
2,535
356

234
689
133
18
2,540
378

235
690
130
18
2,537
396

235
692
130
18
2,537
417

234
698
132
18
2,543
439

The oil and gas business should drive profit growth, with
the information and telecommunications services businessexceeding initial forecasts(2) Business Segment Results
Business Segment Results (Cumulative)
Net sales
Q2 FY3/15 Q2 FY3/16
ResultResult
42.8
38.0

y-o-y

Q2 FY3/15
Result2.0

Gas and oil-11.2%
Information and
19.5
20.4
4.5%
2.4
telecommunications
Cable TV
12.1
12.2
0.6%
0.8
Construction and
8.2
9.3
13.5%
0.1
real estate
Aqua
2.4
2.7
13.3%
-1.0
Other businesses and
2.2
2.1
-3.6%
-2.6
adjustments
Total
87.3
84.8
-2.9%
1.8
Note: Operating profit is before the allocation of indirect corporate costs

Operating profit
Q2 FY3/16
Plan
Result
2.2
2.7

(¥bn)
y-o-y
31.2%

0.8

1.1

-54.5%

0.9

1.0

14.8%

0.3

0.3

142.9%

-0.6

-0.6

-

-2.7

-2.6

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0.9

1.9

2.2%

○ Gas and Oil BusinessIn the gas and oil business, net sales fell 11.2% y-o-y to ¥38.0bn, but operating profit grew by 31.2%
to ¥2.7bn, exceeding the initial target of ¥2.2bn. Although sales volume was basically unchanged in
the mainstay LP gas business, the company revised LP gas prices in response to lower procurement
costs, which cut sales by ¥4.3bn. In keeping with a downturn in the crude oil market, which affects
LP gas procurement costs, those costs declined from the second half of 2014, with retail prices being
revised from 2015. The impact of price revisions should thus continue through Q3 FY3/16. The main
factors in segment operating profit changes were a ¥300mn gain on fluctuations in gas purchasecosts and selling prices, a ¥300mn reduction in indirect costs, and a ¥100mn decrease in goodwill
writedowns.

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

■■Business Trends㻲㻻㻮㻌㻼㼞㼕㼏㼑㻌㼍㼚㼐㻌㻾㼑㼠㼍㼕㼘㻌㻼㼞㼕㼏㼑㻌㼛㼒㻌㻸㻼㻳㻘㻌㻭㼜㼞㼕㼘㻌㻞㻜㻝㻠㻙㻻㼏㼠㼛㼎㼑㼞㻌㻞㻜㻝㻡㻔㻐㻛㼠㼛㼚㻕

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TOKAI Holdings
3167 Tokyo Stock ExchangeFirst Section

24-Feb.-16

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Important disclosuresand disclaimers appear
at the end of this document.

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FISCO Ltd. Analyst
Yuzuru Sato（¥㻛㻝㻜㎥）㻾㼑㼠㼍㼕㼘㻌㼜㼞㼕㼏㼑㻌㼒㼛㼞㻌㼔㼛㼡㼟㼑㼔㼛㼘㼐㻌㼡㼟㼑㻌㻔㼞㼕㼓㼔㼠㻌㼟㼏㼍㼘㼑㻕㻥㻘㻜㻜㻜㻲㻻㻮㻌㼜㼞㼕㼏㼑㻌㻔㼘㼑㼒㼠㻌㼟㼏㼍㼘㼑㻕The highlight of Q2 was that the number of LP gas customers rose 1 thousand y-o-y to 573 thousand,which was the first growth in a long time. The company had experienced ongoing gradual downturns
amid intensifying competition and a declining number of households in its area of operations(Shizuoka Prefecture and Kanto region). From FY3/16, however, expansions into Miyagi and Aichi
prefectures contributed to performance. While the new areas added just a few thousand contracts,
representing just a fraction of the total, there is growth potential.

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㻲㼅㻟㻛㻝㻠 㻲㼅㻟㻛㻝㻠 㻲㼅㻟㻛㻝㻠 㻲㼅㻟㻛㻝㻠 㻲㼅㻟㻛㻝㻡 㻲㼅㻟㻛㻝㻡 㻲㼅㻟㻛㻝㻡 㻲㼅㻟㻛㻝㻡 㻲㼅㻟㻛㻝㻢That said, the number of customers for the city gas business was unchanged from the end of FY3/15,
at 53 thousand, and with sales prices declining in keeping with the gas rate adjustment system,
earnings remained stable despite a revenue downturn.
○ Information and Telecommunications Services Business
Here, sales increased 4.5% y-o-y to ¥20.4bn, but operating profit fell 54.5% to ¥1.1bn. A key factor
in growth was an expansion in the number of broadband service customers (new and conversions
combined) to 117 thousand as of the end of September. Operating profit was down, however,reflecting ¥1.5bn in SG&A expenses incurred in securing new customers through collaboration andon promoting conversions. Nonetheless, operating profit exceeded management’s initial forecast by¥300mn.

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

■■Business Trends

TOKAI Holdings
3167 Tokyo Stock ExchangeFirst Section

Although the overall number of broadband service customers was down 6 thousand from the endof FY3/15 to 840 thousand, this reflected a decline in the number of ADSL customers. The number
of FTTH customers was up 4 thousand from end-FY3/15 to 748 thousand. Still, the number ofbroadband service customers was 30 thousand lower than planned. This was because the numberof cancelations was around 20 thousand higher than expected. Similarly, there were customer losses
to SoftBank Mobile and some other telecommunications carriers endeavoring to retain customers
through Hikari collaboration. The company aims to constrain the cancelation rate by ensuring
attentive service at its call center and by looking to deploy plans that bundle low-cost SIM card
services and other offerings.

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24-Feb.-16

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Important disclosuresand disclaimers appear
at the end of this document.

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FISCO Ltd. Analyst
Yuzuru Sato

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㻽㻞㻌㻲㼅㻟㻛㻝㻢㻔㼠㼑㼞㼙㻌㼑㼚㼐㻕㻺㼛㼠㼑㻦㻌㻮㼞㼍㼏㼗㼑㼠㼑㼐㻌㼒㼕㼓㼡㼞㼑㼟㻌㼕㼚㻌㼠㼔㼑㻌㻲㼀㼀㻴㻌㼏㼛㼘㼡㼙㼚㻌㼕㼚㼐㼕㼏㼍㼠㼑㻌㼠㼔㼑㻌㼚㼡㼙㼎㼑㼞㻌㼛㼒㻌㼏㼛㼘㼘㼍㼎㼛㼞㼍㼠㼕㼢㼑㻌㼒㼕㼎㼑㼞㻙㼛㼜㼠㼕㼏㻌㼟㼑㼞㼢㼕㼏㼑㻌㼏㼡㼟㼠㼛㼙㼑㼞㼟At the end of September, the number of Hikari collaborative customers comprised 22 thousand
new ones and 95 thousand conversions. These numbers were 7 thousand and 70 thousand lower,
respectively, than initial forecasts, with the conversion number being particularly off-target. There
were several factors in this. One was that awareness of Hikari collaborative did not expand much.
Another was that Hikari collaborative promotions at consumer electronics stores were sluggish
through August. On top of that, user conversion procedures were apparently more complex than
expected at the outset (agents initially handled these procedures, but along the way this was nolonger allowed). Still, the conversion rate (the percentage of FLET’s Hikari customers switching
to Hikari collaborative) was 16.5%, exceeding the national average of 11.0%. In light of thesefactors, management put back by a year its conversion target of 262 thousand through end-FY3/16.
Nonetheless, this should have almost no impact on medium-term results.
In contrast, the company slightly increased sales and earnings from its telecommunications services
to corporate customers. Although profits from system development were down, fiber-optic line
service and data center demand rose amid expansion in the market for cloud services.

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

■■Business Trends㻺㼡㼙㼎㼑㼞㻌㼛㼒㻌㻯㼡㼟㼠㼛㼙㼑㼞㼟㻌㼒㼛㼞㻌㻯㼛㼘㼘㼍㼎㼛㼞㼍㼠㼕㼢㼑㻌㻲㼕㼎㼑㼞㻙㻻㼜㼠㼕㼏㻌㻿㼑㼞㼢㼕㼏㼑㻌㻔㼠㼔㼛㼡㼟㼍㼚㼐㻕㻯㼛㼚㼢㼑㼞㼟㼕㼛㼚㼟㻺㼑㼣㻌㼍㼏㼝㼡㼕㼟㼕㼠㼕㼛㼚㼟

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TOKAI Holdings㻞㻜㻜3167 Tokyo Stock ExchangeFirst Section

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Important disclosuresand disclaimers appear
at the end of this document.

㻲㼅㻟㻛㻝㻡

㻽㻝㻌㻲㼅㻟㻛㻝㻢㻌㻽㻞㻌㻲㼅㻟㻛㻝㻢 㻽㻟㻌㻲㼅㻟㻛㻝㻢㻌㻱
FISCO Ltd. Analyst
Yuzuru Sato㻲㼅㻟㻛㻝㻢㻌㻱

㻲㼅㻟㻛㻝㻣㻌㻱
㻔㼠㼑㼞㼙㻌㼑㼚㼐㻕○ Cable TV Business
Sales in this business increased 0.6% y-o-y to ¥12.2bn. Operating profit climbed 14.8% to ¥1.0bn.
This was largely because after trending down amid fierce competition with major telecommunications
carriers, the number of customers for the cable TV broadcasting service rose 1 thousand fromend-FY3/15 to 494 thousand. Another factor was that the number of customers for cable TV
telecommunications services was up 7 thousand to 203 thousand.

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㻡㻜㻡
㻡㻜㻜

㻠㻥㻠

㻠㻜㻜
㻟㻜㻜
㻞㻜㻜

㻝㻤㻢

㻝㻥㻝

㻝㻥㻣

㻞㻜㻟

㻲㼅㻟㻛㻝㻟

㻲㼅㻟㻛㻝㻠

㻲㼅㻟㻛㻝㻡

㻽㻞㻌㻲㼅㻟㻛㻝㻢㻝㻜㻜㻜㻔㼠㼑㼞㼙㻌㼑㼚㼐㻕㻌The prime contributor to broadcasting service customer growth was bulk services for collective
housing, on which the company began focusing from FY3/15. The number of such bulk service
customers rose from 3 thousand at the end of FY3/15 to 7 thousand at the end of September.
Customer numbers should expand down the track, as collective housing accounts for around 37% ofresidences in the TOKAI group’s service area.

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

■■Business Trends

TOKAI Holdings
3167 Tokyo Stock ExchangeFirst Section

24-Feb.-16

Important disclosuresand disclaimers appear
at the end of this document.
FISCO Ltd. Analyst
Yuzuru Sato

○ Construction and Real Estate BusinessIn this segment, sales rose 13.5% y-o-y to ¥9.3bn and operating profit jumped 142.9% to ¥300mn.
Although condominium sales were down, this business performed solidly overall on sales growthin such areas as detached house and store construction, renovations, and building management
support. Three projects for large car dealerships and expansion of building management support
business drove operating profit growth. The company increased the number of buildings undermanagement by 14 thousand y-o-y to 610 thousand, with growth coming mainly in the Greater Tokyoand Fukuoka regions.
○ Aqua Business
Segment sales increased 13.3% to ¥2.7bn. The operating loss was ¥600mn, down from ¥1.0bn a
year earlier. During the term, the company expanded its area of operations beyond its main markets
of Shizuoka Prefecture and the Greater Tokyo region to include large commercial and other facilities
in the Greater Osaka, Hokuriku, and Tohoku areas. It thereby increased the number of customers
2 thousand from the end of FY3/15 to 132 thousand. The customer number increase reduced theoperating loss by ¥100mn. Price increases on some products (a ¥100 rise per unit in the beginningof 2015 to cover higher logistics, consumption tax, and other costs) cut ¥200mn from the operatingloss. Another ¥100mn in savings came from reductions in production and SG&A expenses.
○ Other Businesses, Adjustments
Here, sales declined 3.6% y-o-y to ¥2.1bn. The operating loss was unchanged, at ¥2.6bn. Althoughrevenues from the wedding ceremony business were lower, there were gains in the nursing carebusiness from a day care facilities and pay nursing home with assistance for living opened in FY3/15
in Shizuoka Prefecture reflecting the increase in users. Revenues from the shipbuilding businessrose on an increase in the number of vessel repairs.

伪伪Business Outlook
Although full-year projections are unchanged, operating profit
could exceed forecasts(1) Company forecasts for FY3/16
For FY3/16, the company’s full-year forecasts have remained unchanged from the start of the year,with consolidated net sales of ¥192.2bn, up 2.5% y-o-y, operating profit of ¥7.76bn, down 13.8%,
recurring profit of ¥7.41bn, down 13.3%, and net profit of 3.24bn, down 17.7%. The company foresees
profit declines mainly because it intends to increase its costs by ¥3.0bn, as originally planned, topromote sales of its Hikari collaborative. Although the company is currently performing well, there
are uncertainties in the mainstay LP gas business, as demand is heaviest in winter, and fluctuations
in contract prices, temperatures, foreign exchange rates, and other factors can change the picture.
So, while forecasts remain unchanged, management could revise them upward if full-year earnings
look on track to increase.
Business progress through Q2 shows that although earnings exceeded initial projections the numberof customers was around 30 thousand lower than anticipated, the shortfall mainly being in the
broadband business. Customer number trends in 2H should thus be an important consideration.
It is worth noting in that regard that the company looks to begin offering retail electricity sales
services from April 2016 and plans to begin accepting applications in January. The goal in starting
such acceptance is to offer bundle electricity with LP gas, broadband, cable TV, and other existing
services at sufficiently attractive prices to add more customers. Management plans to announce
package details at the end of December 2015.

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

■■Business Outlook

TOKAI Holdings
3167 Tokyo Stock ExchangeFirst Section

In offering packages, the company should not only add more new customers but also increase
contract rates for multiple services, which could thereby drive revenue and earnings momentum.
Multiple service contracts would strengthen ties with customers and constrain cancelation rates,
expanding average revenue per user while lowering customer acquisition and retention costs.
Only around 7% of the company’s customers have contracts for multiple services, so boosting thatpercentage is a management challenge. The deployment of new electricity packages could change
the situation, and we will keep tabs on developments.
It is worth noting that under a marketing partnership with TEPCO the company started offering highvoltage power to corporate customers in the service area of Chubu Electric in October 2015. The
company aims to secure customers with attractive pricing, the focus being its industrial LP gas
customers.
Business Segment Net Sales

24-Feb.-16

Important disclosuresand disclaimers appear
at the end of this document.
FISCO Ltd. Analyst
Yuzuru SatoGas and oil
Information andtelecommunications services
Cable TV
Construction and real estate
Aqua
Other businesses andadjustments
Total

(¥bn)
FY3/16 E
Nominal change
86.1
-6.9

FY3/1394.5

FY3/1497.2

FY3/15
93.1

38.5

38.8

40.1

47.2

7.1

23.8
15.8
3.8

24.2
19.2
4.4

24.4
20.0
5.0

24.8
22.7
5.8

0.5
2.7
0.9

5.4

5.1

5.0

5.5

0.5

181.7

189.0

187.5

192.2

4.7

Business Segment Operating Profit
FY3/13

FY3/14

FY3/15

Gas and oil
7.4
6.5
Information and
4.9
4.4
telecommunications services
Cable TV
1.3
1.8
Construction and real estate
0.6
1.4
Aqua
-0.9
-2.0
Other businesses and
-4.3
-4.7
adjustments
Total
8.9
7.4
Note: Operating profit is before the allocation of indirect corporate costs

7.7

(¥bn)
FY3/16 E
Nominal change
7.9
0.2

5.0

2.7

-2.3

1.7
1.0
-1.3

1.8
1.4
-1.0

0.1
0.4
0.3

-5.0

-5.1

-0.1

9.0

7.8

-1.2

Number of Customers by Service

Gas (LPG, City gas)
Security
Aqua
Information andtelecommunications(fixed line and Wi-Fi)
Information andtelecommunications (mobile)
Cable TV
Total

(thousand)
FY3/16 E
Nominal change
639
13
18
0
145
16

FY3/13629
19102

FY3/14628
19122

FY3/15
626
18
130

816

853

864

882

213

227

235

240

5

691
2,445

693
2,519

690
2,537

712
2,611

22
74

18

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

■■Business Outlook

TOKAI Holdings
3167 Tokyo Stock ExchangeFirst Section

24-Feb.-16

Important disclosuresand disclaimers appear
at the end of this document.
FISCO Ltd. Analyst
Yuzuru Sato

○ LP Gas Business
The company intends to launch LP gas Set Plans in April 2016 that bundle electricity with other groupservices including broadband, cable TV, and Aqua. The strategy is to suppress cancelation rates
and strengthen efforts to attract new customers. Around 24 million households in Japan use LP gas.
There are as many as 21 thousand LP gas suppliers, but more than 80% of which are small andmedium-sized enterprises with an average of fewer than 1 thousand customers. The company ranks
third in this sector, yet its market share is just over 2%. It has the top share of the market in Shizuoka
Prefecture, at 19.6%, and is second, with a 6.3% share, in the Greater Tokyo region (Tokyo and six
surrounding prefectures and Fukushima Prefecture). In rolling out packages at attractive prices,
the company aims to expand customer numbers in existing operational areas while attracting newcustomers in the Tohoku and Tokai areas, where it launched operation during this fiscal year. In theeffort to cultivate new customers, the company will ally with small and medium-sized suppliers withexisting customer bases and engage in M&As. Electric power liberalization will probably lead to a
weeding out among LP gas suppliers, with business concentrating among major players, presenting
business expansion opportunities for TOKAI Holdings.
○ Cable TV BusinessIn this business, the company will continue pushing forward with promoting bulk services forcollective housing. At the same time, it will endeavor to secure solid average revenue per user byoffering reasonably priced telecommunications and multi-channel broadcasting service packages. In
2H the company will seek to strengthen ties with existing preferential customers (who use both its
broadcasting and telecommunications services) by setting up routine inspection teams. From April
2016, it will also start offering other services and offerings for which electricity Set Plans will be a
key component.
○ Information and Telecommunications (Broadband) BusinessIn 2H FY3/16, the company will step up efforts to secure conversions for collaboration services. It willdraw on the results of approaches to customers through Q2 to leverage telemarketing in cultivating
solid leads. The company increased sales staff numbers at consumer electronics stores by 20%
from October 2015. From January 2016, the company aims to roll out attractively priced bundles that
include electricity Set Plans in an effort to reach its targets.

*	For detached houses, the two-year
value pack price is ¥5,100 per
month, while for customers living incondominiums, the monthly priceis ¥3,800. Moreover, customers
living in condominium housing canreceive a price of ¥3,700 per monthfor one year if they join before theend of August.

The monthly pricing of the company’s collaboration service package is ¥5,100*, which is the lowest in
the industry. Traditionally, the Internet services provider charge was ¥1,200 per month. Under Hikari
collaboration contracts that combine Internet service provider and fiber-optic circuit components, themonthly charge is fourfold higher, at ¥5,100 monthly, so the impact of the revenue increase is high.
The company estimates that its Hikari collaborative will yield 50% more gross profit than its ISP
broadband services. Consequently, if the proportion of its broadband services provided throughHikari collaboration grows, its gross profit margin will decline, but its overall gross profit will increase.
Assuming that the customer acquisition cost for the Hikari collaborative is the same as that for the
ISP services, the increase in the proportion of broadband services provided by Hikari collaborative
would expand profits substantially.
For FY3/16, the company projects a ¥2.7bn y-o-y drop in operating profit in the broadband services
business to ¥700mn, because of the planned ¥3.0bn increase in sales promotion costs. However,for FY3/17, the company foresees a y-o-y drop in sales promotion costs, supporting a recovery
in business operating profit to ¥3.1bn (original plan), and an increase in consolidated businessperformance.

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

■■Business Outlook㻯㼛㼙㼜㼍㼚㼥㻌㻲㼛㼞㼑㼏㼍㼟㼠㼟㻌㼛㼒㻌㻼㼞㼛㼒㼕㼠㼟㻌㼕㼚㻌㼠㼔㼑㻌㻮㼞㼛㼍㼐㼎㼍㼚㼐㻌㻮㼡㼟㼕㼚㼑㼟㼟(¥bn)

㻳㼞㼛㼟㼟㻌㼜㼞㼛㼒㼕㼠㻿㻳㻒㻭㻌㼑㼤㼜㼑㼚㼟㼑㼟

㻝㻠㻚㻜
㻝㻞㻚㻜

TOKAI Holdings

㻝㻜㻚㻥㻌

㻝㻝㻚㻟㻌
㻝㻜㻚㻢㻌

㻝㻝㻚㻣㻌

㻝㻜㻚㻜

3167 Tokyo Stock ExchangeFirst Section

㻤㻚㻜

㻝㻞㻚㻠㻌

㻤㻚㻢㻌

㻤㻚㻢㻌

㻣㻚㻡㻌

㻢㻚㻜
㻠㻚㻜

24-Feb.-16

㻟㻚㻠㻌

㻞㻚㻜

㻟㻚㻝㻌

㻝㻞㻚㻣㻌

㻤㻚㻞㻌

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㻲㼅㻟㻛㻞㻜㻱

㻜㻚㻣㻌㻜㻚㻜

Important disclosuresand disclaimers appear
at the end of this document.

㻲㼅㻟㻛㻝㻡

㻲㼅㻟㻛㻝㻢㻱

㻲㼅㻟㻛㻝㻣㻱

㻲㼅㻟㻛㻝㻤㻱

Source: The company’s forecasts


FISCO Ltd. Analyst
Yuzuru Sato㻟㻚㻤㻌㻻㼜㼑㼞㼍㼠㼕㼚㼓㻌㼜㼞㼛㼒㼕㼠○ AquaThe number of new customers has tailed off somewhat, so the company aims to draw on its own
channels and partnerships with other companies to broaden its sales channels to boost customer
numbers. It has already acted in that regard by concluding a customer acquisition outsourcing
contract in November 2015 with BIGLOBE, Japan’s third-largest Internet service provider, with morethan 3 million subscribers. The company aims to secure new customers through BIGLOBE’s website.
The company currently secures customers through a nationwide sales network of 150 agencies and2 thousand shops and through online channels. It ranks sixth in this industry, with a market share ofaround 4%.

Aiming to reach medium-term management plan targets by
expanding customer numbers through electricity service packages(2) Outline of Innovation Plan 2016 “Growing”
In June 2014, the company announced its medium-term management plan, Innovation Plan
2016 “Growing,” for the three fiscal years through FY3/17. This plan has three main objectives:
1) continued sales growth and improved profitability by building up the number of customers; 2)
continued improvements of financial structure and stable management and 3) delivery of steadyand sustained returns to shareholders. The plan targets consolidated net sales of ¥209.5bn andoperating profit of ¥12.6bn for FY3/17.
In FY3/16, the forecast is for operating profit to decline owing to higher SG&A expenses for Hikari
collaborative. For FY3/17, however, the company should be able to reach its targets by leveraging
electricity service packages to expand customer numbers.
Financial Targets in Innovation Plan 2016 “Growing” versus FY3/15 Results and FY3/16 Forecasts
FY3/14
ResultFY3/15ResultFY3/16
Initial forecast

Number of customers
2.52
2.54
2.61
(mn)
Net sales (¥bn)
189.0
187.5
192.2
Operating profit (¥bn)
7.4
9.0
7.8
EBITDA (¥bn)
24.9
26.2
25.3
Interest-bearing debt (¥bn)
85.8
73.1
72.5
Equity ratio
21.6%
25.7%
26.1%
Note: FY3/17 numbers are per the medium-term management plan announcement in June 2014.

FY3/17
Plan
2.73
209.5
12.6
28.7
64.7
28.6%

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

■■Business Outlook

Enhancing financial position through zero-coupon bond issuance(3) Financial position

TOKAI Holdings
3167 Tokyo Stock ExchangeFirst Section

24-Feb.-16

Important disclosuresand disclaimers appear
at the end of this document.

At the end of September 2015, total assets were ¥160.2bn, down ¥5.5bn from the end of FY3/15.
The main factors were decreases of ¥2.2bn in sales receivable, ¥2.2bn in fixed assets, and ¥800mn
in goodwill. Total liabilities were ¥117.7bn, down ¥4.5bn from the end of FY3/15. In June 2015,
the company issued ¥10bn in convertible bonds. Its borrowings were down ¥6.9bn, payables were
down ¥1.6bn, and other current assets (mainly deposits and accrued consumption taxes) were
down ¥4.2bn. Because the convertible bonds have a zero-coupon component, interest-bearing debt
effectively declined ¥6.8bn, improving the company’s financial position. Net assets were down ¥1.0bn
from the end of FY3/15, at ¥42.5bn. This reflected the impacts of ¥700mn in dividend payments anda ¥300mn decline in net unrealized gains on other securities.
The conversion price of the convertible bonds is ¥585, for issuable shares of around 11%. If theshare price rises and the conversion ratio is 100%, the equity ratio would rise to about 36.2% in
FY3/17, from 25.9% at the end of September 2015. If the conversion rate is lower, a greater reduction
than expected in interest-bearing debt would result in the equity ratio rising to 30.1% in FY3/17,
compared with the 28.6% targeted under the medium-term management plan.
Consolidated Income Statement

FISCO Ltd. Analyst
Yuzuru Sato

FY3/14
Total assets
173.6
Total liabilities
135.3
Net assets
38.3
Balance of interest-bearing debt
85.8
Convertible bonds
ROE (%)
7.4
Equity ratio (%)
21.6
Reliance on interest-bearing debt
49.4
Note: Figures are rounded to whole numbers below.

FY3/15
165.7
122.2
43.5
73.1
9.9
25.7
44.1

Q2 FY3/16
160.2
117.7
42.5
76.3
10.0
25.9
47.6

Nominalchange
-5.5
-4.5
-1.0
+3.2
+10.0
+0.2pt+3.5pt(¥bn)
FY3/16 E
170.2
124.7
45.5
72.5
10.0
7.5
26.1
42.6

伪伪Shareholder Return Policy
Management is rolling out a 100% total payout policy thatencompasses treasury stock acquisitions and other initiatives
Management aims to bolster shareholder returns in FY3/16, as it has steadily enhanced thecompany’s financial position. Management has announced that it is rolling out a 100% total payout
policy and that it will acquire treasury stock (spending up to ¥1.8bn to purchase 3,600 thousand
shares by the end of February 2016). The company plans to pay dividends of ¥12.0 per share for
FY3/16, unchanged y-o-y, based on maintaining a dividend payout ratio of 40% to 50%, for a payout
ratio of 42.8%. With this combined with the treasury stock acquisition, the total payout would be
100%. The company could therefore increase dividends if its results exceed forecasts.
The company also presents gifts to its shareholders at the end of September and March. For each
unit of shares held, a shareholder can receive one of the following gifts: ¥1,900 of bottled Aqua
products, such as the Urunon “Fuji-no-tennensui (Mt. Fuji natural water), a QUO card for ¥500, ¥1
thousand of food coupons, or ¥1 thousand worth of points in the TLC Membership Service. After
including the gifts, the total investment yield is more than 4%.

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

■■Shareholder Return Policy㻰㼕㼢㼕㼐㼑㼚㼐㼟㻌㻼㼑㼞㻌㻿㼔㼍㼞㼑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¥㻕㻌㻰㼕㼢㼕㼐㼑㼚㼐㼟㻌㼜㼑㼞㻌㼟㼔㼍㼞㼑㻌㻔㼘㼑㼒㼠㻌㼟㼏㼍㼘㼑㻕㻰㼕㼢㼕㼐㼑㼚㼐㻌㼜㼍㼥㼛㼡㼠㻌㼞㼍㼠㼕㼛㻌㻔㼞㼕㼓㼔㼠㻌㼟㼏㼍㼘㼑㻕

㻞㻝㻚㻜

㻣㻜㻚㻜

㻝㻤㻚㻜

TOKAI Holdings㻝㻡㻚㻜3167 Tokyo Stock ExchangeFirst Section

㻝㻞㻚㻜

㻢㻜㻚㻜

㻡㻞㻚㻥
㻠㻠㻚㻞

㻠㻞㻚㻤

㻠㻜㻚㻞
㻟㻡㻚㻝

㻢㻚㻜

㻟㻜㻚㻜
㻝㻞㻚㻜㻌

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㻟㻚㻜

㻞㻜㻚㻜
㻝㻜㻚㻜

㻜㻚㻜

Important disclosuresand disclaimers appear
at the end of this document.

㻡㻜㻚㻜

㻠㻜㻚㻜

㻥㻚㻜

24-Feb.-16

（㻑）

㻜㻚㻜
㻲㼅㻟㻛㻝㻞

㻲㼅㻟㻛㻝㻟

㻲㼅㻟㻛㻝㻠

㻲㼅㻟㻛㻝㻡

㻲㼅㻟㻛㻝㻢㻱FISCO Ltd. Analyst
Yuzuru Sato* 	Iwatani Corporation<8088>,
MITSUUROKO CO.,LTD. <8131>,
SINANEN HOLDINGS CO., LTD.
<8132>, ITOCHU ENEX CO., LTD.
<8133>, Nippon Gas Co., Ltd.
<8174>On November 6, the company retired 15.52 million shares representing 10% of the number of issued
and outstanding shares. Management recognizes that the company’s share price is undervalued
compared with those of other players in its industry, and it identifies this as a reason to be concerned
about future dilution, which reflects a high treasury stock ownership of 25.3%.
For reference, we compared the share price valuation based on management’s forecasts for FY3/16
and the annual investment yield (dividends plus gifts) with the closing prices of the shares of fiveother LP gas companies* on December 15, 2015. The stock is trading at a P/E ratio of more than 19x,
comparatively higher than an average of 13.9x for the other five companies. This seems attributable
to the company’s high investment yield and return on equity. At the same time, EV/EBITDA multiple,
which indicates the total market valuation with respect to EBITDA, was 2.9x, which is undervalued
compared with the average of 5.2x for the other five companies. This is because amortization,
including for goodwill, is about 2.3-fold operating profit, which is considerably higher than the 0.8fold for the other five companies. That said, amortization does not entail cash expenditures, so
given that EBITDA indicates the profitability of core businesses, there seems considerable scope for
improvement at the current share price level.

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

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
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This report is based on information that we believe to be reliable, but we do not confirm or
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This report was prepared at the request of its subject company using information provided
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of this report are subject to change without prior notice.
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The final selection of investments and determination of appropriate prices for investment
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FISCO Ltd.