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COMPANY RESEARCH AND ANALYSIS REPORT:Nousouken Corporation-3541-TSE Mothers( I )

2019-03-07  提供機構:FISCO  作者:FISCO  點閱次數:1

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◆Summary

A venture company developing a network of Farmer’s Direct Sales Outlet for farm-fresh produce. Has a capital alliance with the JAPAN POST Group

Founded in Wakayama City in October 2007. Guided by its vision of sustainable agribusiness that will enrich the lives of consumers, Nousouken Corporation <3541> (hereafter, also “the Company”) is working to create a business structure that will help ensure agriculture does not disappear from Japan or the rest of the world and, towards this end, is striving to make agriculture an attractive business. The Company is an agricultural start-up firm that has listed its shares on the TSE Mothers market in June 2016.

In the FY8/18 consolidated results announced on October 12, 2018, net sales were ¥2,310mn, the operating loss was ¥96mn, the ordinary loss was ¥47mn, and loss attributable to owners of parent was ¥29mn. Looking back on FY8/18, there were many natural disasters, but the Company worked to overcome the impact of these disasters and focused on the Farmer’s Direct Sales Outlet business. Consignment sales increased, and the percentage of outright purchase consignment sales also rose, while it actively negotiated with supermarkets and other retailers and progressed the introductions of its outlets. Therefore, at the end of FY8/18, the network had grown to as many as 1,197 outlets (1,185 outlets in Japan and 12 outlets overseas). Although net sales exceeded the Company forecast, it progressed investment as planned based on the medium-term business plan, and therefore it recorded an operating loss, as expected.

The forecasts for FY8/19 are for net sales to increase 38.5% year-on-year (YoY) to ¥3,200mn, operating profit of ¥50mn, and profit attributable to owners of parent of ¥60mn. In particular, in FY8/19, with an eye to the growth in the value of goods distributed in the medium- to long-term, the Company is aiming to further expand its earnings base by utilizing the distribution platform that connects producers with supermarkets and other retailers, which it strengthened and rebuilt based on the FY8/18 investment plan. At the same time, it will continue its active investment, including to recruit human resources who will support nationwide producers and supermarkets and other retailers, and in systems to improve productivity.

On October 19, 2018, the Company announced the “Conclusion of a capital alliance agreement in order to strengthen the relationship with the JAPAN POST Holdings Co., Ltd. <6178>, the sale of shares, and the change of major shareholder.” Previously, it had established transshipment terminals and facilities to enhance transshipment terminals within post offices in Chiba and Shikoku. But toward realizing further growth, it decided it was necessary to open transshipment terminals nationwide, to expand the registered producers, and to provide a highly convenient system to the registered producers. So the Company entered into this capital alliance in order to establish a distribution network that increases the distribution efficiency of the transshipment terminals. the Company will utilize the strengths of the JAPAN POST Group, of its brand power, functions, and network, for the nationwide-use of a farm produce distribution system Farmer’s Direct Sales Outlet, and supplement its services to further enhance convenience for registered producers. In January 2019, it announced a “Business alliance with the JAPAN POST Kyushu Branch,” and the effects of the alliance with the JAPAN POST Group are already appearing. Jointly with the JAPAN POST Kyushu Branch, it will open the Tosu Center as a transshipment and distribution terminal, which is expected to improve the efficiency of distribution services and to reduce its costs.

With regard to returns to shareholders, because the Company is still in the growth stage, management believes the greatest returns to shareholders will come not from paying dividends but from building up internal reserves and putting these funds towards investments that will increase operational efficiency and growth of the business. For that reason, the Company has chosen not to pay a dividend. Going forward, the Company will continue to follow its basic policy of retaining internal reserves in order to strengthen its business structure and expand its businesses. The Company intends to pay a dividend out of retained earnings at some point in the future, but that it has not yet made a decision as to when.

◆Company profile and history

Main business: Farmer’s Direct Sales Outlet business

1. Company profile

Nousouken Group operates its business centered on Nousouken Corporation in Japan and Global Ichiba Corporation. The Company’s mainstay Farmer’s Direct Sales Outlet business involves picking up fresh produce from producers (registered producers) at designated transshipment terminals that are run by the Company or one of its subcontractors, then delivering them to be sold at the direct sales outlet located within supermarkets and other venues. As a general rule, deliveries are made the following day. In other words, it created a distribution network that connects registered producers with supermarkets and other retailers, and allows consumers to purchase traceable farm produce at supermarkets and other local retailers that they would not otherwise have been able to purchase without traveling to direct-sales stand or Michi-no-Eki outside the city.

Under the Farmer’s Direct Sales Outlet business, the Company provides a consignment sales system and whole­saling depending on the contract signed with the supermarket. The Company also undertakes outright purchase consignment sales, in which it makes outright purchases of fresh produce from registered producers, then turns and sells the goods on consignment for its own account.

2. History

Founded in Wakayama City in October 2007. Guided by its vision of realizing sustainable agribusiness to enrich the lives of consumers, the Company is working to create a business structure that will help ensure agriculture does not disappear from Japan or the rest of the world.

In the background to the establishment of Global Ichiba Holdings Corporation is the receipt of an investment and loan framework of ¥366mn (investment framework of ¥316mn and loan framework of ¥50mn) from Cool Japan Fund, Inc., and in consideration of the arrangement of shareholders and the investment ratio, it was decided to consolidate the Company, which was previously Global Ichiba, and three other companies through a share transfer, to establish Global Ichiba Holdings as an intermediary company, and it became a shareholder of Global Ichiba. After the establishment of Global Ichiba Holdings, Global Ichiba raised funds of ¥85mn from Cool Japan Fund through a third-party allocation from the issue of new shares. As a result, the Global Ichiba investment ratio became 61.4% for Global Ichiba Holdings, while the Cool Japan Fund investment ratio became 38.6%. Due to this, Global Ichiba is expected to become more important, so from the viewpoint of providing useful information to investors, it transitioned to consolidated results. In addition to strengthening Global Ichiba’s capital base, the company will make use of the Cool Japan Fund’s network and coordinate efforts with government ministries, local public entities, and producers to help increase the number of Japanese farmers exporting fruits and vegetables to Hong Kong.

◆Business description

Specializing in Farmer’s Direct Sales Outlet under three different contracts: consignment sales system, outright purchase consignment sales, and wholesaling

Its reporting segment consists solely of Farmer’s Direct Sales Outlet business, but the segment includes sales made through the Company’s consignment sales system, outright purchase consignment sales, and wholesaling. In FY8/18, consignment sales system accounted for 60.2% of sales, outright purchase consignment sales 26.4%, wholesaling 1.6%, other 4.5%, and subsidiaries 7.3%. From FY8/18, part of sales previously included in the con­signment sales system have been being disclosed separately in others.

1. Consignment sales system

The Company provides a distribution channel under its consignment sales system. It picks up fresh produce from registered producers to sell at the direct sales outlets located within supermarkets and other venues. Because this is a consignment sale, neither the Company nor the retailer actually buys the produce, and all of the inventory risk remains with the registered producer. In return for accepting inventory risk, the registered producer retains the right to decide what is sold, where it is sold and at what price it is sold. Under this system, the registered producer is free to sell whatever types of produce, in whatever quantities, at whatever prices, through whichever retail outlets they choose. This was made possible by linking the in-store barcode data that retailers provide with the data that registered producers provide. The Company has the barcode issuing system at its transshipment terminals so that registered producers can add information to the barcode data provided from different retail outlets. Each registered producer can issue his own barcodes that will be affixed to the produce that he wants to ship to designated retailers from the Company’s transshipment terminal. In those cases where registered producers are located far from a transshipment terminal, the Company lends tablet computers and barcode issuing equipment so they can issue barcodes and deliver the produces to retailers directly on their own.

When a consumer purchases something at their local supermarket or other retailer that was supplied by one of the Company’s registered producers, the registered producer would receive the sales price less the sales commissions paid to both the retailer and the Company. Registered producers receive the daily sales data that the Company receives from retailers by mail. Because the sales are made on consignment and the producer retains all of the inventory risk, its registered producers generally earn more than they would by going through the regular markets for agricultural products. Meanwhile, retailers don’t have to take any inventory risk on these sales because they do not actually buy the goods outright, but they still earn sales commissions in return for selling the goods. Because the Company serves as an intermediary for registered producers, retailers do not need to make payment to each and every producer and is therefore able to reduce the laborious task of making individual payments.

Part of commission income the Company collects from registered producers covers the distribution costs it bears delivering the consigned goods from its transshipment terminal to the retailer. Another part of the Company’s commission is compensation for issuing barcode. And a sales commission is paid in line with sales at the retail store. In those cases where the registered producers use tablet computers and deliver directly to retailers, the Company does not receive a commission to cover the distribution costs but does charge sales fee for the tablet computer and barcode issuing equipment. The Company also charges a registration fee when producer register at one of its transshipment terminals, and thereafter collects members’ dues once a year.

In those cases where the Company subcontracts the operations of one of its transshipment terminals to another company, the subcontractor is responsible for transporting the goods from registered producers’ farms to the designated retailers. In return, the Company pays part of the commission it earns from consignment sales originating from that terminal to the subcontractor.

Because most of the Company’s revenues are commissions earned on sales under its consignment sales system and these commissions are booked as sales, the profit margin for this part of the business is much higher than it is for either outright purchase consignment sales or wholesaling. In other words, within the value of goods distributed, the Company’s commissions are recorded in net sales, and in principle, cost of sales is not recorded.

To help realize the Group’s vision for realizing sustainable agribusiness, the Company believes it is essential for its producers to be conscientious managers, and promotes this consignment sales system in which the producers are able to take the lead in sales.

Producers deliver farm produce to the transshipment terminals that the Company has established, and the farm produce collected at the transshipment terminal is distributed to outlets nationwide via the distribution centers. The farm produce is displayed at the retailers’ direct sales outlets and sold to consumers

The network of Farmer’s Direct Sales Outlet is comprised of a framework that incorporates market distribution, like JA, and excellent locations for direct-sales distribution, such as Michi-no-Eki. One of its features is that it directly connects producers with supermarkets and other retailers.

In terms of the flow of commissions and information, the registered producers can receive sales fees and the supermarkets and other retailers and the Company can receive sales commissions through consumers purchasing farm produce at supermarkets and other retailers. Also, by receiving daily sales data from the supermarkets and other retailers, the Company communicates sales conditions to the registered producers through its in-house developed app and by email. The Company receives commissions corresponding to distribution costs according to the shipment amount and also commissions alongside issuing barcodes, while the supermarkets and other retailers receives commissions according to the sales amount.

The flow of commissions and information is as shown below.

2. Outright purchase consignment sales

In the event that the volume of farm produce supplied is unstable due to unseasonable weather or other factors, or in the event that there is a request for a certain supply volume from supermarkets and other retailers, such as when they are holding a food fair, the Company buys farm produce from registered producers and others to secure the supply volume and conducts consignment sales with supermarkets and other retailers. Recently, alongside the expansion in transactions with large- and medium-sized producers, these sales have been trending upward in the form of responding to the purchasing needs from these producers. Since the Company incurs inventory risk, it determines the purchase price, setting the price around the same level or a bit higher than the price the producer could expect if he shipped his produce to market and then the Company determines the selling price. The retailer and the consumer get the same benefit as if the sale were made under the Company’s regular consignment sales system. However, it is characterized by a small loss rate through pricing that anticipates consumer demand.

For outright purchase consignment sales, the Company books the sales price of the goods less the retailer’s sales commission as sales. However, the profit margin on this is much lower than the revenues received under its regular consignment sales system because from these sales it must also subtract the cost of goods sold.

3. Wholesaling

Under its wholesaling operations, the Company makes outright purchases of fresh produce from registered produc­ers then resells the goods to a supermarket or other outlet in the regular pattern of the standard wholesaler. And, just as it does when it makes an outright purchase consignment sale, the Company records its purchasing cost as the cost of goods sold and the amount received from selling the goods as sales. The difference is the retailer takes all the inventory risk, so the price at which the Company can sell the goods under a standard wholesale transaction is roughly the same or even a bit less than the market price. This means the Company’s profit margin under wholesaling is less than it is under either consignment sales or outright purchase consignment sales.

That said, because consignment sales, outright purchase consignment sales, and wholesaling are all reported under a single segment (Farmer’s Direct Sales Outlet business), the Company does not disclose detailed results for these individual areas.

4. Group companies

There are three consolidated subsidiaries; Global Ichiba Holdings, which is a holdings company; Global Ichiba, which is a specified subsidiary that exports Japanese farm produce overseas; and Nippon Ichiba Hong Kong Limited, which imports and conducts sales of Japanese farm produce in Hong Kong.

The Group company Global Ichiba is responsible for the overseas network of Farmer’s Direct Sales Outlet. The value of goods distributed is steadily growing and it has relocated its own centers and established a consignment sales platform and wholesales model. The value of goods distributed is increasing, and in FY8/18 Q4, it had grown to around 10 times the value in FY8/17 Q1.

◆Strengths and business risks

Holds solid growth potential with its ability to expand business through its steady-growth business model and M&As

1. Strengths and competition

The Company’s strengths include its creativity in establishing a new distribution channel for agricultural goods utilizing IT, and its ability to connect farmers with urban retailers to sell fresh traceable farm produce.

Compared with other companies currently distributing agricultural products, the Farmer’s Direct Sales Outlet network that the Company has created cannot compete with large-scale market distributors in terms of sales volume. Nevertheless, it is a reliable medium-sized supply channel that supermarkets and others can count on year-round thanks to the wide geographic distribution of the Company’s registered producers stretching from all the way Southern to Northern Japan and the short time the goods spend in transit. While nearby Michi-no-Eki provides the freshest produce the volume and geographic reach are limited.

Compared with JA from the producer’s perspective, the Farmer’s Direct Sales Outlet allows producers to make their own production decisions including price and shipments. While registered producers bear inventory risks, they could earn a higher degree of sales revenue depending on their efforts.

Compared with JA from the retailer’s perspective, the Company allows the retailers to introduce the system in a short period of time without inventory risk and the retailers will be in a better position to attract more customers. Finally, from the consumer’s perspective, the Company provides fresh farm produce, that is hard to come by in urban areas, conveniently at local supermarket and with sense of security with its traceable farm produce.

2. Business risks

The business risks include that to expand the business, it is necessary to increase both the number of outlets within supermarkets and other retailers, and the number of registered producers it conducts transactions with. If these prerequisites are not smoothly achieved, it is possible that this could impact the Company Group’s results.

Also, in the Company Group’s Farmer’s Direct Sales Outlet business, in FY8/18 the extent of its reliance on specific customers increased, with AEON RETAIL Co., Ltd., accounting for 13% of total sales and HANKYU OASIS Co., Ltd., for 11.7%.

Outside of these business risks, the Company is also subject to the risk that are unique to agricultural goods, including food safety, effects of unseasonal weather, fluctuations in the agricultural products market and seasonal variation .

 

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