Daiwa House Industry Co Ltd

TSE:1925

Earnings Call Analysis

Earnings Call Transcript 2019-Q2

[Takeo Higuchi, executive]

We would like to present our second quarter results using the presentation material titled Financial Highlights for Fiscal Year 2018 Second Quarter. Let us first present highlights.

Net sales group, 9.6% year-on-year to JPY 1,983.3 billion. Operating income was up 5.1% to JPY 189.5 billion and quarterly income, up 5.9% to JPY 191.7 billion. Net income attributable to owners of the parent increased 6.4% to JPY 131.4 billion.

All items marked record numbers for the second quarter. Net sales grew for the ninth consecutive year and operating income, ordinary income and net income grew for the tenth consecutive year.

In light of the first half results, we have revised upward the earnings [ plan ] for the year ending March 2019. Net sales was revised up by JPY 50 billion to JPY 4.050 trillion from initial plan of JPY 4 trillion. Net income was revised up by JPY 3 billion to JPY 240 billion from initial plan of JPY 237 billion.

Regarding the annual dividend. In conjunction with the upward revision of the earnings plan, we have decided to increase it by JPY 3 to JPY 110 per share from initial amount of JPY 107 per share. Dividend payout ratio is projected at 30.5%.

As previously indicated in the press release, we will acquire treasury stock up to 2.3 million shares, the equivalent of approximately 10 billion. Please review the release for details.

Please turn to Page One. I have already explained the earnings per year shown in the top area. Earnings per share was JPY 197.70, up by 6.2% year-on-year. The bottom table is an overview of group companies. The number of group companies was 367 at the end of September 2018 with 58 additions and 8 subtractions since the end of March 2018. The change was mainly due to inclusion of the following companies that are consolidated [ subsidiaries ] Rawson Group, which consists of 28 companies operating in a single-family housing business in Australia; and Royal Gate, which provides cashless payment services in Japan.

Page 2 illustrates our analysis of major factors for changes in net sales and operating income. The top half shows analysis of factors contributing to the increase in net sales, which grew JPY 173.5 billion year-on-year. Sales of development properties increased JPY 46.3 billion. The Logistics, Business & Corporate Facilities business increased JPY 87.6 billion. The Commercial Facilities business increased JPY 32.1 billion. Other Businesses and others increased JPY 7.4 billion.

Our main breakdown is revenues of JPY 13.4 billion from Rawson Group, included a consolidated subsidiary and JPY 7.6 billion from Stanley-Martin. Single-family houses business and condominiums for sale in overseas resulted in decreased revenues of JPY 5 billion and JPY 9.1 billion, respectively.

The bottom half shows factors contributing to the increase in operating income, which grew JPY 9.1 billion year-on-year. Top line growth brought JPY 25.3 billion increase. Increased income from sales of development properties contributed JPY 8 billion.

Selling, general and administrative expenses increased JPY 11.5 billion. Cost of sales ratio, excluding the sales of development properties, deteriorated 0.8 percentage points, and resulting in decreased income of JPY 12.7 billion.

Page 3 and 4 shows the profit and loss summary. I already reported numbers earlier and operating income margin had deteriorated by 0.4 percentage point year-on-year from 10% to 9.6%.

Major companies contributing to sales increase are: Daiwa House on nonconsolidated basis by JPY 65.9 billion year-on-year. Fujita Group by JPY 38.3 billion and Daiwa Living Group by JPY 19.1 billion. Major companies contributing to operating income increase are: Daiwa House on a nonconsolidated basis by JPY 1 billion year-on-year. Daiwa Living group by JPY 2.5 billion and [ Kotomo Sanisha ] Group by JPY 1.5 billion.

Please turn to Page 4. Selling, general and administrative expenses in the top table increased JPY 11.5 billion year-on-year, of which JPY 6 billion was due to higher personnel costs, resulting properly from headcount increase of around 2,400 compared to the end of September 2017.

Next let me present the balance sheet. Please look at the top table on Page 5. Total assets increased JPY 112.5 billion since the end of March 2018 to JPY 4,147.9 billion. Current assets stood at JPY 1,785.1 billion, up by JPY 55.1 billion, mainly due to increases in inventories.

Noncurrent assets stood at JPY 2,362.7 billion, up by JPY 57.6 billion. Intangible assets increased by JPY 26.6 billion since end of March 2018.

This was mainly due to recording group [ while ] related to Rawson Group.

Total inventories shown in the bottom left stood at JPY 885.6 billion, up by JPY 101.3 billion. Land for sale for Others decreased JPY 24.9 billion and building for sale for others decreased JPY 11.9 billion, mainly due to the sale of development real estate to Daiwa House REIT.

Rental sales for the overseas business increased JPY 70.4 billion, and buildings for sale for the overseas business increased JPY 10.8 billion. This was mainly due to the new projects in China and Australia.

Total property, plant and equipment in the bottom right increased JPY 49.7 billion on the back of steady progress in investments in real estate development and so on.

Page 6 shows liabilities and net assets. Liabilities stood at JPY 2,558.6 billion, increased by JPY 37.1 billion since the end of March 2018. Net assets were JPY 1,589.2 billion, up by JPY 75.6 billion. Interest bearing liabilities shown in the bottom table increased JPY 34.8 billion to JPY 815.4 billion at the end of September 2018.

Debt equity ratio stood at 0.53. Net assets ratio stood at 37.2%.

Page 7 illustrates sales and operating income by segment. As shown at the top, sales increased for Rental Housing Business, Commercial Facilities business, Logistics, Business & Corporate Facilities business and Other businesses.

The increases in operating income are as follows: the Commercial Facilities business segment, up by JPY 12.9 billion; and the Logistics, Business and Corporate Facilities business segment, up by JPY 7.1 billion.

Page 8 shows sales gross margin and gross margin ratio of each segment by category: Construction, Rental Management and Sales of development properties.

Page 9 states the breakdown of investment real estate. The book value of investment real estate was JPY 971.9 billion at the end of March 2018 and JPY 1,025.5 billion at the end of September 2018, increased by JPY 53.5 billion in 6 months.

The book value of real estate available-for-sale was JPY 691.2 billion, of which properties being rented were JPY 254.8 billion and not being rented JPY 436.3 billion. The breakdown of real estate available-for-sale by type is indicated in the top right.

Logistics facilities were worth JPY 504 billion and continue to be our core investment. The bottom table shows the breakdown of rented real estate available-for-sale, rented profit earning real estate and NOI yield. NOI yield of real estate available-for-sale was 5.7%, deteriorated by 0.4 percentage points compared to the end of March 2018. This is mainly due to the effect of new properties being rented and NOI yield of profit earning real estate was 12.5%, improved by 0.4 percentage point compared to the end of March 2018.

From Page 10, earnings forecast for the fiscal year ending March 2019 are presented. As we highlighted at the outset, we have revised upwards the earnings plan for the year ending March 2019. The bottom part shows projected earnings per share at JPY 360.77.

Page 11 shows the 4-year forecast of sales and operating income by segment. The top table shows sales.

Based on the first half earnings progress and recent orders received trends, we revised sales forecast an increase of JPY 50 billion for a total compared to previous forecast. There is no change to our previous forecast for operating income, but we are reevaluating our [ plan ] for each segment.

Page 12 shows sales gross margin and gross margin ratio of each segment by category: Construction, Rental management and Sales of development properties.

Page 13 and 14 show Daiwa House's results and forecast of orders received and sales by segment on a nonconsolidated basis for this fiscal year.

In light of the first half results, we have revised our forecast of orders received and sales for the full year.

Page 15 illustrates the progress of the investment plan. In the 6 months, we invested JPY 116.3 billion for real estate development, JPY 32.9 billion for general capital investment and JPY 43 billion for merger and acquisition. We invested JPY 192.3 billion in total.

Cumulative investment spend is JPY 617.6 billion out of JPY 720 billion planned for real estate development during the 3-year Fifth medium term management plan. Our cash flow stands as shown in consolidated statements of cash flows in the bottom table.

Page 16 shows capital investment and depreciation expenses. Capital investments stood at JPY 127.9 billion and depreciation expenses at JPY 33.9 billion.

The top table on Page 17 shows the number of rental housing units managed and occupancy rates. The occupancy rate at the end of September 2018 was 95.9%, up by 0.2 percentage points compared to the end of September 2017.

The bottom table shows the stock of completed condominium, which stood at 392 units, including 12 units with orders recognized at the end of September 2018.

Page 18 and Page 19 indicate our overseas business. The top table on Page 18 shows the cumulative overseas investment balance, which was JPY 235.6 billion at the end of September 2018. The bottom section shows regional overview.

Net sales and operating income were JPY 115.3 billion and JPY 3.1 billion for fiscal year 2018 second quarter.

Page 19 indicates the sales status of the overseas condominium business. Projects in Changzhou and Wuxi, China have sold out all units.

This completes the presentation.