Aeon Mall Co Ltd

TSE:8905

Earnings Call Analysis

Robust Growth Amidst Strategic Expansion

The company reported record-high operating revenue, with increases in operating, ordinary, and net income. Japanese operations saw a JPY 11.4 billion rise in revenue, while China faced a JPY 0.3 billion income decline, offset by a JPY 1.6 billion increase from restructuring. Specialty store sales surged, with a 124.7% year-over-year growth. Under the 3-year medium-term plan, the focus is on overseas expansion, notably in China's Hubei and Vietnam. A new business model seeks innovation via investments in startups and a joint delivery service to optimize logistics. ESG management guides business decisions, with investments in solar energy and biodiversity efforts. Japan and overseas sales have improved, and progress in growth measures is continuous, with new stores in China and Vietnam on track.

AEON Mall Achieves Record Operating Revenue in Q3 2023 Complemented by Growth in Key Regions

In the third quarter of fiscal year 2023, AEON Mall managed to reach a record high in operating revenue which combined with increases in operating income, ordinary income, and net income attributable to owners of the parent reflects year-on-year growth. Japan's operating revenue bolstered by 11.4 billion JPY through enhanced specialty store sales across malls and urban centers, despite a marginal decrease in operating income in China by 0.3 billion JPY when excluding the extraordinary losses related to COVID-19 mall closures. The positive customer reception post-COVID and successful promotional events like Black Friday and Halloween have contributed to exceeding previous year's results by 106.2% in specialty store sales.

Strategic Experiential Events and New Business Models Drive Domestic Customer Engagement

Domestically, AEON Mall has focused on increasing customer attraction through events like Halloween and Christmas markets which are part of their strategy to offer real-life experiences that draw customers to physical stores. This supports their business model reform in Japan, where they aim to adapt to changing consumer behaviors and provide experiences that are unique and personal.

AEON Mall's 3-Year Medium-Term Management Plan: Expanding Overseas with a Customer Experience Focus

The company has laid out a 3-year medium-term management plan from fiscal 2023 to 2025, targeting growth through new store openings in overseas markets like China and Vietnam and focusing on providing experiential value through their facilities. In Hubei Province, China, the company has seen substantial visitor numbers, particularly at AEON MALL Wuhan Jiangxia. In Vietnam, AEON Mall intends to grow in areas including Ho Chi Minh City, Hanoi, Da Nang, and Hue, with commitments to open new malls and signed agreements to solidify future opportunities.

Future-Proofing Through Open Innovation and Community Co-creation

AEON Mall is actively pursuing open innovation by investing in startups that complement their business model, such as Counterworks that supports digital transformation, and launching open innovation programs seeking solutions to modern retail challenges. Such strategic partnerships and investments ensure the company's adaptability to rapidly changing markets and help maintain relevance within local communities.

A Comprehensive Approach to ESG and Sustainable Development Enhances AEON Mall's Resilience

AEON Mall has made strides in integrating ESG (Environmental, Social, Governance) principles into their business strategy. Efforts to resolve environmental issues include the installation of solar carports and joint ventures with companies like Sun Trinity for long-term renewable energy procurement. The company is also taking steps to improve logistics by launching joint delivery services, thereby reducing costs for partners and creating a sustainable logistic network. Moreover, AEON Mall's engagement with biodiversity conservation groups and local community development showcases its commitment to sustainable and socially responsible growth.

Earnings Call Transcript 2024-Q3

[Yasutsugu Iwamura, executive]

My name is Iwamura from AEON Mall. Today, after explaining the summary of financial results for the third quarter of fiscal year 2023, I will also provide an update on the progress of the medium-term management plan. Please refer to Page 3. In the third quarter, operating revenue reached a record high. Operating income, ordinary income and net income attributable to owners of the parent all increased year-on-year. Please see the next page. The slides you are looking at shows year-on-year changes in profit loss by segment.

In Japan, operating revenue increased by JPY 11.4 billion due to year-on-year growth in specialty store sales in both malls and urban shopping centers. In China, operating income declined by JPY 0.3 billion from the previous year. However, we transferred fixed cost of JPY 1.9 billion related to the fiscal year 2022 mall closures due to COVID-19 to extraordinary losses. Excluding the impact of these extraordinary losses, operating income actually increased by JPY 1.6 billion. Vietnam was partially affected by the slowdown in economic growth due to sluggish external demand and power shortages. Operating income increased JPY 0.5 billion.

Please see the next page. The table below shows year-on-year changes in specialty store sales at existing malls by country. First China, although there are concerns about a slowdown in the economic growth rate due to the sluggish real estate market, our malls have maintained strong performance mainly in Jiangsu and Hubei provinces. Specialty store sales for the first 9 months of the fiscal year under review were 124.7% of the previous year level. The number of visitors is on a recovery trend. Sales are increasing mainly in the food and beverage, amusement and cinema sectors.

In addition, in the fourth quarter, since October, the sales trend has been recovering significantly as a reaction to the drop in customer traffic and sales in the previous year due to the impact of the spread of the corona infections. Next Vietnam, although there were some effects from April onwards, such as an increase in unemployment among young people due to bankruptcies of export product factories, sales in the first quarter were strong due to the purchasing demand during Tet, the Lunar New Year holiday, so specialty store sales in the cumulative Q3 achieved 106% year-on-year. In November, we held a Black Friday event to attract more customers and launched sales promotion measures aimed at improving customer spending per purchase and purchase ratio. As a result, sales in November improved to 109.6% of the previous year's level.

Lastly, let me turn to Japan. With the improvement in customers' willingness to go out following the downgrade of COVID to Class 5 disease in May, sales at specialty stores in the third quarter, cumulative period exceeded the previous year's result by 106.2% year-on-year. Sales apparel remained sluggish amid unusually warm weather from September to the first half of October. However, the Halloween promotion focused on the value of real life experiences and featured customer participation events. In addition, during Black Friday in November, the company also implemented a variety of plans to attract customers by offering featured products and novelty giveaways, et cetera.

Please refer to the next page. Regarding the Domestic Business, which has a significant impact on the consolidated business results, I would like to explain examples of initiatives implemented in the third quarter to attract more customers. In the Domestic Business, we're implementing measures to further strengthen customer attraction in the evening and later, which has been an issue. Halloween event was held at AEON MALL Ageo, to attract more customers in the evening and later. AEON MALL Makuhari Shintoshin held Christmas market at the adjacent Makuhari Toyosuna Par. Both events focused on real value that customers can only experience by actually visiting the stores.

In an age when everything can be done with a smartphone, we believe that this is the role that customer demand of us. We believe that this is a role that customers are demanding of us in an age when everything can be done with a smartphone. We'll continue to focus on providing value through real-life experiences and we'll continue to develop initiatives in malls nationwide to meet the needs and nuance of customers in local communities. For more detailed information, please refer to Pages 7 through 11, which discloses sales and financial statements of our specialty stores.

Please refer to Page 13. We're proceeding with a 3-year medium-term management plan for the period from fiscal year 2023 to 2025, I would like to explain the progress of the initiatives in accordance with policies shown in the slide. Next page. The first of the 3 growth measures in our medium-term management plan is to discover and commercialize business opportunities in overseas growth markets. In our overseas business, we will achieve further profit growth by steadily opening new stores in priority areas over the next 3 years. In our China business, we are moving forward with the opening of the new stores in the key inland province of Hubei. In Wuhan City, Hubei province, we have opened 3 malls to date, forming an area dominance.

In November last year, we opened our fourth store in Hubei province, AEON MALL Wuhan Jiangxia. The market has high growth potential and a large population of approximately 1.43 million within a 20-minute drive. We had a very good start with a number of visitors, exceeding 100,000 per day on some weekends. In terms of November, the mall ranked first in the number of visitors and second in specialty store sales among the 22 malls we operate in China. This is one of the highest levels among our facilities.

This property thoroughly pursues real experience value that can only be obtained by visiting the store, and we have attracted many entertainment facilities that can be enjoyed by both adults and children as well as specialty stores that offer a variety of food experiences. Food and beverage, amusement and cinema facilities account for 39% of the total floor space. In addition to the first store in the adjacent Hunan Province, AEON MALL Changshu Xinqu scheduled to open in 2024, the second store in Hunan Province. AEON MALL Changshu Xinqu new area is scheduled to open in 2025. We will continue to accelerate the opening of stores in Hubei and Hunan provinces, where market growth is expected.

Next page. In Vietnam, our most important area for new store openings, we will expand into the southern area, centering on Ho Chi Minh City and the northern areas centering on Hanoi, where we are currently operating. In addition, we are accelerating the opening of dominant stores in the central area, such as Da Nang and Hue, Vietnam's third largest economic zone and your surrounding cities and towns. In the second half of 2024, we plan to open the seventh AEON Mall in the central area of Vietnam. In December last year, we signed a comprehensive momentum of understanding MOU on investment and business promotion related to shopping mall development with Bac Giang Province and Can Tho City and in January this year with Quang Ninh Province. We have already signed with MOUs with 5 provinces and are making steady progress in securing future pipelines.

Next page. The second growth measure is pursuing business model reform in Japan. By promoting reform of existing business models amid accelerating changes in customers' consumption behavior and purchasing habits, we will strive to strengthen our ability to attract customers and improve profitability in our domestic business. In the direction of future mall development, we will strive to propose new value propositions by promoting the establishment of various development patterns in accordance with the location characteristics of the areas where we will open our new stores. JIYUGAOKA de aone, which opened last October, is located a 2-minute walk from JIYUGAOKA Station. It is located in the largest commercial area in Meguro-ku, where many unique specialty stores and restaurants are located. We're often associated with the image of a company that develops large shopping malls in the suburbs.

However, we have an unwavering commitment to urban development, and we aim to create a facility where people can meet and interact with each other. A large green terrace of approximately 1,000 square meters is located on the third floor as an outdoor space with a sense of openness. It provides a space where local residents and visitors can relax and gather. In December last year, CeeU Yokohama opened in Nishiguchi, Yokohama City.

The new mall creates piloti-shaped plaza in front of the main entrants that can be used in conjunction with adjacent Yokohama Vivre thereby revitalizing the Yokohama West exit area and creating an exciting and lively atmosphere. In 2023, we have opened 4 new stores in Japan, but this is not a near pursuit of efficiency. We are proud that we were able to develop facilities that provide customers with experiences that can only be held in real life, such as plazas that create community and comfortable spaces with greenry, where they can relax and enjoy their time. Next page. The third growth measure is the creation of new business models that break from existing business frameworks.

In an era of rapid and uncertain change, we're focusing not only on the development of existing businesses, but also on the creation of new businesses to create new value. Through the establishment of the corporate venture capital life design fund and investment in start-up companies we'll provide new value by bringing together the cutting-edge technologies and know-how start-up companies. We will also take on the challenge of creating business value through the resolution of local issues and advancement of store operations.

In November last year, we invested in Counterworks, a company that supports digital transformation for retail and commercial facilities as our first investment. By combining the technology of Counterworks, whose mission is to digitize all commercial real estate and create a new infrastructure for commerce, with the know-how, we have cultivated through the operation of our commercial facilities and our locations will leverage effective company assets in providing spaces more integrated with local communities and achieving community co-creation.

Next page. From October to November last year, we held an open innovation program, and we recruited partners based on the 3 themes shown on the slide and received 185 applications. In an era of rapid change and uncertainty, we are committed to working with partners who share our philosophy and who share our business synergies in order to meet the expectations of our customers and to earn the support of the local community even more than before. Next page.

Logistics issues in Japan are becoming increasingly serious. We have launched a joint delivery service to provide value to our partner specialty retailers. Our joint delivery service collects cargo from the specialty store warehouses and delivers it to AEON Mall, other companies' commercial facilities and roadside stores. That service also includes store deliveries and return shipping and is designed to improve the efficiency of both pickup and delivery within an area. The service was launched in February last year in the Kinki and Tokai areas. But in response to requests from many companies, the service area was expanded to 24 prefectures in 7 areas in December. We will continue to create cost reductions and maintain logistics quality for our partners as we build sustainable logistics network.

Next page. The company has adopted genuine integrated ESG management as the basis of its entire medium-term 3-year management plan. ESG initiatives are not merely a social contribution activity, but a way to ensure our survival as a company that all stakeholders look forward to and choose in the future. We will co-create with our stakeholders to improve and solve social issues, implement environmental management that creates economic and social value, and we aim to be a developer company that can grow sustainably together with local communities. We're working to resolve environmental issues in 3 directions: realization of our decarbonized society, realization of circular molds and preservation of biodiversity.

In order to realize a decarbonized society, we have been installing solar carports in outdoor parking lots at new stores since last year. We're introducing solar carports at existing stores as well. AEON Mall signed an on-site PPA agreement with Sun Trinity, a joint venture established by Sumitomo Corporation and Shikoku Electric Power Company. The on-site PPA agreement is a form of agreement in which the utility company builds and owns a solar power generation facility and sells the power to us utilizing our outdoor parking lot. The agreement allows for stable procurement of renewable energy over the long term without initial investment and management costs.

The on-site PPA agreement will enable us to install solar carports at 12 AEON Mall facilities in Japan, representing the largest such installation in Japan capable of generating 15,000 kilowatt of energy. The company will further accelerate the collaboration to install solar carports at AEON Malls nationwide, aiming to have a total of more than 50 installations by fiscal 2025.

Next page. We have joined the 30/30 alliance for biodiversity. Through participation in this alliance, we will continue to actively promote biodiversity conservation activities in cooperation with companies, municipalities, NPOs and local communities that share the same goals and aim to be registered in the international database as an OECM. We will contribute to the achievement of the 30/30 goal and achieve nature positive status. Next page. To achieve the community co-creation set forth in our 2030 vision, we are working with like-minded partners to co-create activities that will lead to the future of sustainable local communities and create activities not only in commercial facilities, but also in local communities and society.

Last December, we concluded a business co-creation partner agreement with Japan Rugby League One. The agreement is not merely any advertising sponsorship of the league, but also a joint effort to actively send visitors to the stadiums where official League One games are held by providing digital signage, apps, events and other locations and spaces in local malls. How much can we increase the number of visitors to the stadiums by maximizing the use of our assets. This partnership agreement was concluded because we wanted to take on the challenge of providing the potential of our company's various locations. This is a great opportunity for us to prove the value of our assets to the world. We're confident that we can realize the promotion of Japan Rugby by utilizing the potential of the facilities. Rugby teams are often based in companies that have strong roots in the local community and the sport has strong ties among fans. Through this partnership agreement, we would like to provide AEON Mall's unique value of a place where customers can connect with fun memories by supporting local teams.

In the pursuit of real experience value, it is very important to create an entry point for new experience value for the community and customers. In the future, we will enhance the value of the time and place spending most by deepening the connection with sports, not only rugby, but also other sports that can serve as an opportunity to build local communities that concludes the slide presentation.

As I explained earlier, Mall sales in Japan and overseas generally improved in the third quarter and operating revenue, operating income, ordinary income and net income attributable to owners of the parent all increased. In addition, we have made progress in the growth measures set forth in our medium-term management plan. The new store opened in November in inland China is off to a very good start. Preparations for the opening of new stores in China and Vietnam, which are scheduled to open in the next fiscal year and in 2025 are progressing steadily. In Japan, in order to maximize our strength of having real locations, we'll actively invest in existing stores and focus more on the value of the customer experience in order to secure profits.

In addition, we will continue to implement new initiatives such as the joint delivery initiatives I explained today. We are also moving steadily into the implementation phase of new initiatives that transcend the framework of existing businesses such as the joint delivery service I mentioned today. We're still moving into the stage of creating social economic values and the implementation phase of new initiatives that go beyond the framework of existing businesses, and we will work to make them profitable as soon as possible. We will execute our midterm plan by promoting reforms in a flexible manner in cooperation with various partners in response to changes in the world in regional circumstances. We are far from satisfied with our management situation, but we'll continue with these initiatives.

That concludes my presentation. Thank you very much for your attention.