Bridge Report KITZ CORPORATION (6498) · Bridge Report KITZ CORPORATION ... selling brass and other bars to valve makers, ... manufacturing processes including the casting process,

Bridge Report (6498) November 14, 2013 http://www.bridge-salon.jp/company_e/

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Bridge Report KITZ CORPORATION (6498)

－ Stock Information －

Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit

¥414 109,219,944 shares ¥45,217 million 7.2% 100 shares

DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)

¥10.00 2.4% ¥29.29 14.1x ¥542.41 0.8x

* Share price as of closing on November 13, 2013. Number of shares outstanding as of most recent quarter end does not include treasury shares.

－ Consolidated Earnings Trends － (Units: Million Yen)

Fiscal Year Sales Operating Income Ordinary Income Net Income EPS (¥) Dividend (¥)

March 2010 96,592 6,976 6,248 3,079 27.23 7.00

March 2011 106,059 6,341 5,929 3,063 27.36 7.00

March 2012 108,446 4,638 4,388 2,480 22.71 7.50

March 2013 111,275 6,558 6,521 4,039 36.98 9.50

March 2014 Est. 117,000 5,400 5,300 3,200 29.29 10.00

* Estimates are those of the Company.

This Bridge Report presents KITZ CORPORATION’s earnings for the first half fiscal year March 2014.

1. Company Overview

2. First Half Fiscal Year March 2014 Earnings Results

3. Fiscal Year March 2014 Earnings Estimates

4. Conclusions

President

Yasuyuki Hotta

Company KITZ CORPORATION

Code No. 6498

Exchange TSE 1st Section

Industry Machinery (Manufacturing)

President Yasuyuki Hotta

HQ 1-10-1 Nakase, Mihama-ku, Chiba, 261-8577, Japan

Business

Activities

KITZ is the top Japanese manufacturer of valves and other devices used to control fluids.

KITZ maintains particular strength in applications within the building facility and

petrochemical industries, and supplies valves to a wide range of applications in other

industries. KITZ is also aggressively developing overseas markets for its products.

Year-end March

URL http://www.kitz.co.jp/english/

http://www.bridge-salon.jp/company_e/

http://www.kitz.co.jp/english/


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Key Points

1. Company Overview

KITZ is a comprehensive manufacturer of valves and other fluid control equipment and devices. While most people are familiar

with valves used around “water meters,” “gas meters,” and “water heaters,” few are aware of the applications of KITZ products

outside of the home that are provided to customers in a wide range of industries. At the same time, KITZ boasts of a highly efficient

integrated manufacturing system that uses bronze, cast iron, ductile cast iron (cast carbon steel with greater strength and ductile

characteristics), stainless steel and other materials to manufacture several tens of thousands of different products. In addition to

selling brass and other bars to valve makers, KITZ also operates fitness clubs and hotels. KITZ is the number one manufacturer of

valves, and the number two manufacturer of brass bars within Japan. The KITZ Group is comprised of 32 companies.

<Overview of KITZ’s Business Segments>

KITZ’s business is divided into the valve manufacturing, brass bar manufacturing, and other business segments. During fiscal year

March 2013, each of these segments accounted for 75.9%, 16.1% and 8.0% of total sales respectively.

Valve Manufacturing Business

Valves are used to “pass,” “stop,” and “control the flow” of fluids and gases in various pipe systems (water, air, gas and other

substances), and they are used in office and residential facilities, water works facilities, fresh and sewage water facilities, fire

prevention facilities, machinery and industrial use manufacturing equipment, and chemical, medical, petrochemical product

manufacturing facilities, semiconductor manufacturing facilities, petroleum refining and other industrial complexes, and various other

applications. KITZ is one of the leading valve manufacturers in the world with high market shares of corrosion resistant bronze and

highly economical brass valves, and high value added ball, butterfly and stainless steel valves. The Company boasts of integrated

manufacturing processes including the casting process, and it became the first company in Japan to acquire the “ISO9001 International

Quality Standard Certification.” With a strong lineup of various types of valves made of various materials, KITZ provides its products

to a wide range of fields including facilities in the construction and plant engineering industries, in addition to applications in the

environment, energy, and semiconductor realms. The Company is also pursuing a strategy to increase the global cost competitive

nature of its products by fortifying its overseas manufacturing facilities. During fiscal year March 2013, overseas sales accounted for

approximately 34% of total sales.

・Sales rose by 3.2% year-over-year, but operating income declined by 31.3% year-over-year during the first half of fiscal year March 2014.

The increase in sales was led by the strong performance of overseas subsidiaries. However, weak domestic demand and increases in costs

resulting from the weaker yen (Increased purchase prices of products manufactured by overseas subsidiaries) contributed to a large decline

in the nonconsolidated profits of KITZ. In addition, profitability of subsidiaries in Thailand and China also deteriorated due to the strength

in the Thai baht and the Chinese yuan relative to the United States dollar and the euro.

・During the second half of the current term, sales are expected to rise by 7.1% year-over-year while operating income is expected to decline

by 1.2% year-over-year. The main valve manufacturing business is expected to benefit from a mild economic recovery and the rush to

make purchases at the end of the term ahead of the implementation of consumption tax hikes from April 2014 in Japan. In addition,

seasonal factors are expected to contribute to higher sales in the second half compared with the first half. And while overall conditions in

overseas markets are expected to remain difficult, efforts to cultivate demand from shale gas applications in the United States and to expand

sales of Perrin and ISO branded products in China are expected to be implemented. At the same time, profits are expected to remain under

pressure from the continued weakness of the yen.

・During the full fiscal year, sales are expected to rise by 5.1% year-over-year while operating income is expected to decline by 17.7%

year-over-year. By business segment, both pricing and volumes of products in the brass bar business are expected to remain firm, while

cost reductions in the hotel operations are expected to contribute to higher profits. However, profits of the valve manufacturing business

are expected to decline due to the negative impact of the weaker yen. A dividend payment of ¥5 per share is expected to be paid at the

term end for a full year dividend of ¥10 per share.



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Various Valves Water Works Valve

Piping Materials

for Semiconductor

Manufacturing

Equipment

Various

Industrial Filters

(Source: KITZ)

Brass Bar Manufacturing Business

In the brass bars business, KITZ combines copper with zinc to create brass, tin and phosphorous to create phosphor bronze, and nickel

and zinc to create nickel silver, which are then used in the dissolution, casting, rolling, pulling, forging, heating, and forming processes

to create sheets, strips, pipes, bars, wires and other forms. The KITZ Group’s brass bar business is handled by KITZ Metal Works

Corporation which uses the raw material of brass to manufacture brass bars sells them. (Brass bars are used not only as materials for

valves, but also in the manufacture of water faucets, gas equipment, electrical appliances and other various products.)

Brass Bars

(Source: KITZ)

Other

Comprehensive sports fitness club facilities and hotel and restaurant operations are also conducted through one of KITZ’s subsidiaries.

Fitness Clubs Hotel Beniya

(Source: KITZ)

<Corporate History>

KITZ was originally established in January 1951 under the name of Kitazawa Seisakusho Co., Ltd. for the manufacture and sales of

various valves, and in April of the same year, the Nagasaka Plant in Yamanashi Prefecture was completed and manufacture of bronze

valves was started. In March 1959 a subsidiary called Toyo Kinzoku Co., Ltd. was established for the manufacture of brass bars as

raw materials for its valves. In September 1962, the Company name was changed to Kitazawa Valve Co., Ltd. and in October of the

same year the Company became the first in Japan to use a brass hot forged press machine in its manufacturing processes and the sale

and manufacture of brass forged valves began. Thereafter, the Company expanded its product line-up to include stainless steel

materials and the manufacture of stainless steel valves began at its Nagasaka Plant from November 1970.

KITZ Wellness Co., Ltd.: Fitness Club Management

Hotel Beniya Co., Ltd.: Hotel and Restaurant Management



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Since the Company’s founding, it has been able to grow by adhering to its motto of “always providing better products, at cheaper

prices, and with faster delivery times” in its business foundation. In April 1977, Kitazawa Valve was listed on the Second Section of

the Tokyo Stock Exchange, and in September 1984 the Company moved to the First Section. In August 1995, the Company entered

the fresh water supply market through its acquisition of Shimizu Alloy Manufacturing Co., Ltd. and its conversion to a subsidiary.

The Company also entered the field of semiconductor manufacturing through its introduction of industrial use filters in March 1996.

From 2001 onwards, KITZ started a strategy of “selection and concentration” within its business realms and also focused upon cash

flow management. And in November 2001, KITZ acquired the semiconductor manufacturing equipment business of Benkan Group.

In March 2004 KITZ acquired the valve business of Toyo Valve Co., Ltd. and combined it with its bar product business to be spun off

and established as a separate company called KITZ Metal Works Co., Ltd. From 2005 to 2006, KITZ acquired the copper bar

manufacturing business of Kyoto Brass Co., Ltd. as well as the assets of Kichou Shindosho Co., Ltd. as part of its strategy of fortifying

its copper bar business. In May 2007, KITZ established a valve manufacturing company in Lianyungang City, China called KITZ

Corporation of Lianyungang.

After having recovered from the global recession caused by the “Lehman Shock” in the fall of 2008, KITZ endeavored to fortify its overseas

businesses, restructure its domestic manufacturing network, and established the sales subsidiary KITZ Corporati0on of Asia Pacific Pte. Ltd.

in 2011 in Singapore. Along with the transfer of the manufacturing division to KITZ in 2012, Toyo Valve Co., Ltd. restarted its business as a

specialized sales company. In 2013, the company KITZ Europe GmbH was established to oversee and consolidate the European operations,

and the sales agency company Mikuni Engineering (Singapore) Pte. Ltd. in Singapore was acquired and renamed KITZ Valve & Actuation

Singapore Pte. Ltd.

Through this process, the KITZ Group has grown to become one of the world’s leading valve manufacturers comprised of 32

consolidated subsidiaries around the world. The “KITZ brand” has also become widely recognized as a manufacturer of high

quality valves and other products.

【KITZ Group’s Second Medium Term Management Plan (FY3/14 to FY3/16)】

The KITZ Group is currently in the course of implementing its Long Term Management Plan “KITZ Global Vision 2020,” which is a

growth strategy designed to take KITZ to its 70th anniversary in 2020. In light of the results of its First Medium Term Management

Plan (FY3/11 to FY3/13), which was profoundly impacted by the Great East Japan Earthquake and the pronounced strengthening in

the yen, KITZ has restructured its corporate strategy to be implemented in its second Medium Term Management Plan covering the

period to fiscal year March 2014 to 2016.

The Second Medium Term Management Plan entails a strategy designed to break the earnings reliance upon the construction related

applications for commercial valves and to improve profitability of industrial valves used in overseas oil and gas projects as a means of

improving overall earnings. Consequently, the overall KITZ Group will implement efforts to raise quality in all of its business activities.

(1) Second Medium Term Management Plan (FY3/14 to FY3/16)

Through the pursuit of synergies within the KITZ Group and the policy of selection and concentration, KITZ seeks to strengthen its position

as a global company by leveraging its Group management resources in growth fields to strengthen its overall corporate structure. Moreover,

the Company will pursue further improvements of quality in all of its business activities (Management, development, production, and sales).

Improve Earnings Structure: Improve Profitability and Expand Earnings of Industrial Valve Business, Create Business Bases with

Multiple Functions

KITZ is endeavoring to improve its earnings structure by reducing its dependency upon commercial valves by expanding earnings and

improving profitability of industrial valves. As part of this strategy, KITZ will improve earnings by choosing optimal locations for

production of main products and restructuring its product supply structure, in addition to increasing the speed of the management's decision

making process by decentralizing the management of overseas operations through a shift in responsibility to overseas bases. Through these

moves, overseas bases will provide one-stop capabilities and be responsible for multiple functions including sales, marketing, engineering,

inventory management, maintenance and services. Also, KITZ will increase capital investments in and strengthen its research and



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development function for products in the growth realm of oil and gas, and plant instrumentation markets, in addition to strengthening its

ability to conduct markets analysis, M&A, and form alliances for the expansion, complementing and new entry of the business.

Group Synergies

Within the KITZ Group, a full review of its competitive strength and creation of its new structure will be conducted in addition to new

product launches in the realms of gasoline stations and water works related applications as part of the Group’s new business development

efforts.

Continued Selection and Concentration

Reorganization and integration of the KITZ Group to raise its global competitive capability and reviews of both product line-ups by plant and

product supply structure will be conducted to achieve an optimized product supply structure.

(2) Numerical Targets

Segment Earnings (Units: Million Yen)

FY3/13 FY3/14 Est. FY3/15 Plan FY3/16 Plan

Commercial Valves 40,533 41,000 43,600 47,000

Industrial Valves 43,847 48,800 54,400 61,200

New Business 92 1,200 2,000 3,200

Valve Manufacturing 84,472 91,000 100,000 111,400

Brass Bar Manufacturing 17,948 20,000 21,000 21,700

Services 8,855 8,000 9,000 9,900

Total Sales 111,275 119,000 130,000 143,000

Valve Manufacturing 8,808 9,250 11,400 13,950

Brass Bar Manufacturing 441 500 600 550

Other 330 350 200 400

Adjustments -3,022 -2,900 -3,300 -3,300

Total Operating Income 6,558 7,200 8,900 11,600

* Figures represent the amounts announced in May 2013.

2. First Half Fiscal Year March 2014 Earnings Results

(1) First Half Consolidated Earnings (Units: Million Yen)

1H FY3/13 Share 1H FY3/14 Share YY Change Revised Estimates

as of July Divergence

Sales 55,605 100.0% 57,380 100.0% +3.2% 55,600 +3.2%

Gross Income 13,190 23.7% 12,505 21.8% -5.2% 12,300 +1.7%

SG&A 9,603 17.3% 10,039 17.5% +4.5% 9,700 +3.5%

Operating Income 3,587 6.5% 2,465 4.3% -31.3% 2,600 -5.2%

Ordinary Income 3,403 6.1% 2,402 4.2% -29.4% 2,500 -3.9%

Net Income 1,999 3.6% 1,455 2.5% -27.2% 1,500 -3.0%

* Figures include reference figures calculated by Investment Bridge Co., Ltd. Actual results may differ (applies to all tables in this report)

Sales Rise 3.2%, Operating Income Declines 31.3% Year-Over-Year

Sales rose by 3.2% year-over-year to ¥57.380 billion. The weaker yen acted as a tailwind and contributed to higher overseas sales, which

helped to cover weaker business performance within Japan by the parent company KITZ. However, operating income declined by 31.3%

year-over-year to ¥2.465 billion. In addition to the large decline in profits of the parent company KITZ due to weak demand for valves

within Japan and the negative impact of the weaker yen that led to price increases of imported products (Made by subsidiaries), the

strengthening of the Thai baht and Chinese yuan against the United States dollar and the euro led to declines in profits of subsidiaries in



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Thailand and China.

In addition to improvements in foreign exchange translation gains from a loss of ¥71 million in the same period of the previous year to a gain

of ¥65 million, sales of marketable securities contributed to a profit of ¥109 million. At the same time, impairment losses declined from

¥105 to ¥25 million, helping to limit the decline in net income to 27.2% year-over-year to ¥1.455 billion.

Foreign Exchange Rates, Electrolytic Copper Pricing Assumptions

FY3/12 Average FY3/13 Average FY3/14 Est. 1H FY3/13 Average 1H FY3/14 Average

Yen / US Dollar 79.45 80.11 100.00 79.77 95.89

Yen / Euro 111.17 103.44 130.00 103.73 125.76

Electrolytic Copper, Yen / Ton 717,000 696,000 750,000 666,000 747,855

(2) Trends by Business Segment

Business Segment Sales, Operating Profits (Units: Million Yen)

1H FY3/13 Share 1H FY3/14 Share YY Change Revised Est.

as of July Divergence

Valve Manufacturing 42,062 75.6% 42,459 74.0% +0.9% 40,700 +4.3%

Brass Bar Manufacturing 8,813 15.8% 10,464 18.2% +18.7% 10,200 +2.6%

Other 4,730 8.5% 4,456 7.8% -5.8% 4,700 -5.2%

Total Sales 55,605 100.0% 57,380 100.0% +3.2% 55,600 +3.2%

Valve Manufacturing 4,584 91.3% 3,331 86.3% -27.3% 3,600 -7.5%

Brass Bar Manufacturing 167 3.3% 260 6.7% +56.0% 200 +30.3%

Other 268 5.3% 268 6.9% -0.0% 200 +34.3%

Adjustments -1,432 - -1,395 - - -1,400 -

Total Operating Income 3,587 - 2,465 - -31.3% 2,600 -5.2%

Share of business segment operating profit does not take adjustments into consideration, and the same calculation method for segment operating income share

is used throughout this report.

Valve Manufacturing Business: KITZ Encounters Difficult Conditions

Sales rose by 0.9% year-over-year to ¥42.459 billion while operating income declined by 27.3% year-over-year to ¥3.331 billion. Sales

within Japan alone fell by 4.3% year-over-year to ¥26.270 billion. The restart of capital investments by large semiconductor manufacturers

contributed to a 12.6% year-over-year increase in sales to applications in the semiconductor related industry, and highly active condominium

construction led to a 7% year-over-year increase in sales of meterunits, connectors, and water supply products. At the same time, actual

demand from the construction industry (Fell by 5% year-over-year) for office buildings applications, which use a large amount of fluid

control equipment and apparatuses, was weak and excess inventory conditions for commercial valves remained in place. Furthermore,

capital investments in the machinery (Down 11% year-over-year) and other industrial applications remained lackluster, and bronze/brass and

stainless steel valves sales trended weakly (Machinery and other industrial applications in general saw a sales decline of over 10%).

Overseas sales rose by 10.8% year-over-year to ¥16.189 billion. The weaker yen acted as a tailwind and allowed sales in Asia, North

America, and Europe to grow by 7%, 2% and 38% year-over-year respectively. In addition to the stronger yen acting as a tailwind for sales

in Asia, fortification of the marketing function of the local subsidiary in Singapore, KITZ Valve & Actuation Singapore Pte. Ltd. , allowed

sales in the ASEAN and neighboring regions to rise by 12% year-over-year. Despite the slowing economy and movement to boycott

purchases of Japanese products, sales of Perrin (Germany) products in China managed to rise by 10% year-over-year.

With regards to profits, reduction in cost of sales totaling ¥1.02 billion through internalization could not offset other negative factors including

decline in sales volumes of highly profitable products within Japan (¥870 million decline), foreign exchange impact (¥780 million decline),

increases in materials costs including higher electrolytic copper prices (¥220 million decline), and reviews of pricing strategies within Japan

(¥260 million decline).

Brass Bar Manufacturing Business: Prices Hiked to Absorb Higher Material Costs, Sales Volume Increase

Brass bar manufacturing, which is the responsibility of KITZ Metal Works Corporation saw strong increases in both sales and operating



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income of 18.7% and 56.0% year-over-year to ¥10.464 billion and ¥260 million respectively. During the second quarter between July to

September, prices of brass bars within Japan remained relatively stable at a 0.8% year-over-year decline to ¥14,877 per ton per month.

Against the backdrop of these conditions, KITZ raised the prices of its products by 11% due to the rise in materials costs and sales volumes

increased by 9% year-over-year.

Other: Improvement in Profitability Allows Hotel Profits to Rise

Sales declined by 5.8% year-over-year to ¥4.456 billion and operating income remained in line with the previous first half at ¥268 million.

Declines in the number of members of the KITZ Wellness fitness clubs contributed to a 3.6% year-over-year decline in sales of the fitness

club operations. The hotel operations managed by Hotel Beniya also suffered a decline in sales of 5.5% year-over-year due in part to the

closure of a highway leading to the hotel in December 2012 resulting from the collapse of the Sasago tunnel. With regards to profits, the

lower sales contributed to a 14.5% year-over-year decline in operating income of the fitness club operations, but efforts to reduce costs

allowed income of the hotel operations to rise by 22.2% year-over-year.

Quarterly Sales, Operating Income Trends (Units: Million Yen)

3/13-1Q 2Q 3Q 4Q 3/14-1Q 2Q

Valve Manufacturing 20,433 21,628 20,666 21,743 19,717 22,741

Brass Bar Manufacturing 4,563 4,250 4,320 4,814 5,312 5,152

Other 2,207 2,523 2,151 1,973 2,010 2,446

Total Sales 27,204 28,401 27,138 28,530 27,040 30,340

Valve Manufacturing 2,328 2,255 2,082 2,141 1,642 1,689

Brass Bar Manufacturing 122 44 82 192 147 113

Other 32 236 98 -36 7 261

Adjustments -748 -683 -719 -870 -731 -663

Total Operating Income 1,734 1,853 1,543 1,426 1,065 1,400

(3) Trends by Companies in Valve Manufacturing Business

KITZ, Non-Consolidted (Units: Million Yen)

1H FY3/13 Share 1H FY3/14 Share YY Change Revised Est. as of July Divergence

Sales 32,713 100.0% 31,288 100.0% -4.4% 31,500 -0.7%

Operating Income 1,997 6.1% 908 2.9% -54.5% 1,000 -9.1%

Ordinary Income 2,205 6.7% 1,515 4.8% -31.3% 1,600 -5.3%

Net Income 1,401 4.3% 1,086 3.5% -22.5% 1,000 +8.6%

On a non-consolidated earnings basis, KITZ sales declined by 4.4% year-over- year to ¥31.288 billion, with sales in Japan falling by 4.6%

year-over-year to ¥21.939 billion. While sales of cast carbon steel valves used in plant applications grew by 30% year-over-year, weak

demand from the building air conditioning and sanitary equipment applications contributed to an 8% year-over-year decline in sales of

bronze/brass valves. At the same time, sales of stainless steel valves used in a wide variety of machinery applications also fell by 8%

year-over-year. Overseas sales declined by 3.9% year-over-year to ¥9.350 billion due to weak sales to the United States and the Middle East

and despite stronger sales in Asia and Europe resulting from the weaker yen.

Operating income fell by 54.5% year-over-year to ¥908 million. Declines in highly profitable bronze/brass and stainless steel valves were

compounded by higher sales, general and administrative expenses including information technology related depreciation an amortization.

The improvement in non-operating income is attributed to increases in interest received and dividends from subsidiaries.

Trends in Valve Manufacturing Business Subsidiaries

Within Japan, strong demand for products used in meter boxes, condominium water supply and other applications could not offset weaker

sales of Toyo Valve Co., Ltd. and subsequently sales and profits declined.

In overseas markets, the weaker yen acted as a tailwind (Contributed to higher profits after foreign exchange translation) and allowed sales of



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subsidiaries to increase. Sales of the four manufacturing subsidiaries KITZ (Thailand) Ltd., KITZ Corporation of Taiwan, KITZ

Corporaiton of Kunshan, and KITZ Corporation of Jiangsu Kunshan rose on the back of the weaker yen, while sales of Perrin (Germany) and

KITZ Corporation of America each saw declines of over 20% in local currency terms. KITZ (Thailand) Ltd. and KITZ Corporation of

Taiwan incurred declines in profits due to strengthening of their native currencies relative to the dollar and euro.

Due to the resumption of capital investments by major semiconductor manufacturers, KITZ SCT Corporation recorded higher sales and

profits. KITZ Metal Works Corporation of Brass Bar Manufacturing Business became similar, too.

(4) Financial Conditions and Cash Flow

Financial Conditions (Units: Million Yen)

FY3/13 End 1H FY3/14 End FY3/13 End 1H FY3/14 End

Cash 6,662 6,666 Payables 5,259 5,669

Receivables 23,809 24,987 ST Interest Bearing Liabilities 7,707 8,779

Inventories 17,116 18,199 Current Liabilities 21,149 20,513

Current Assets 49,956 52,449 LT Interest Bearing Liabilities 14,612 15,314

Tangible Fixed Assets 35,811 36,395 Fixed Liabilities 18,603 19,347

Intangible Fixed Assets 3,269 3,279 Net Assets 60,219 63,464

Investments, Others 10,935 11,199 Total Liabilities, Net Assets 99,972 103,325

Fixed Assets 50,016 50,875 Total Interest Bearing Liabilities 22,319 24,094

Total consolidated assets rose by ¥3.353 billion from the end of the previous fiscal year to ¥103.325 billion at the end of the first half of the

current fiscal year. The valuation of the Group’s assets increased due to the weaker yen, and foreign exchange translation accounts declined

from a -¥2.849 billion during the previous first half to -¥780 million. Equity ratio stood at 60.4%.

Cash Flow (Units: Million Yen)

1H FY3/13 1H FY3/14 YY Change

Operating Cash Flow (A) 2,244 179 -2,064 -92.0%

Investing Cash Flow (B) -2,252 -1,784 +468 -

Free Cash Flow (A + B) -8 -1,604 -1,595 -

Financing Cash Flow -63 1,035 +1,099 -

Cash and Equivalents at Term End 5,593 5,806 +213 +3.8%

With regards to cash flow, the decline in profits was compounded by a large increase in tax expense (-¥0.349 to -¥1.876 billion), causing the

net cash inflow from operating activities to contract. At the same time, restrain in capital investments primarily for maintenance of existing

facilities allowed the cash outflow from investing activities to be reduced. The assumption of long term debt contributed to an increase in

liquidity on hand.

3. Fiscal Year March 2014 Earnings Estimates (1) Second Half Endeavors, Estimates

Valve Manufacturing Business

Japan: Weak Market Recovery Expected

While latent demand from the recovery efforts of the Great East Japan Earthquake have yet to surface, a rush to purchase products during the

fourth quarter ahead of the implementation of a hike in the consumption tax from April 2014 is anticipated. By market, demand from

semiconductor related applications is expected to recover during the second half, with demand for products used in water supply related

applications expected to trend firmly on the back of strong condominium sales. In addition, sewage application use valves are entering the

seasonally strong demand period with progress made in correction of inventories, and gradual recoveries in demand from machinery and

construction industry related applications is also anticipated. Orders for short term delivery of valves for processing lines of plants have

already been booked and are expected to contribute to sales from the next term forward, and new orders for a large LNG plant project at



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Toyama Port is also anticipated.

ASEAN: Outlook for Thailand, Indonesia Unclear

The economy in Thailand has begun to slow due to the conclusion of the economic stimulus package in 2012 compounded by the negative

impact from the completion of recovery efforts for the flooding, and new investments are on the decline. Consequently sales during the

second half are expected to be weak. In addition, concerns over the strong sales seen during the first half in Indonesia have arisen due to the

instability in the local currency. At the same time, the Singaporean subsidiary KITZ Valve & Actuation Singapore Pte. Ltd. is fortifying its

automated valve assembly function and is expected to be able to expand its sales during the second half. Furthermore, KITZ will continue

to implement measures to capture orders from projects in various countries in the region.

China: Expand Sales of Perrin, ISO Brands

While lingering fears over the potential for a slowing in the economy and boycott of Japanese goods remained in place in China, KITZ

expects to leverage Perrin (Germany) and ISO (Spain) brand products, which saw strong sales during the first half, to cultivate new clients.

North, South Americas: Capture Downstream Plant Construction Demand for Shale Gas Applications

While demand from the pipe industry in North America remained weak, demand from downstream plant construction for shale gas

applications is on the rise. In addition, sales of new copper compound valves which do not contain lead have been started from November

in response to revisions to safety regulations relating to fresh water supplies in the United States. At the same time, KITZ aims to develop

demands from oil and gas market, and mine market in South American markets.

Europe: Overall Demand Remains Weak

While sporadic investments in the Southern Europe region have begun to appear, demand overall remains weak. KITZ EUROPE GmbH

will continue coordinate efforts of the three Group companies in Europe to secure profits despite the difficult market conditions.

Oil and Gas Market Application Earnings Expand

In the North American market, construction for chemical plants that produce ethylene using shale gas and oil is on the rise, and an increasing

number of orders are being booked by Japanese engineering companies (EPC). In light of this changing environment, KITZ expects to step

up its efforts to capture business opportunities and expand its sales of cast carbon steel, stainless steel, and ball valves.

Company EPC Details Start

Chevron Corporation JGC Corporation World’s largest ethylene plant with annual output capacity of 1.5 million tons 2013

KURARAY Co., Ltd. Mitsui Engineering &

Shipbuilding Co., Ltd.

Resin plant manufacturing LCD film 2013

Shin-Etsu Chemical

Co., Ltd.

Shin-Etsu Engineering Co., Ltd. Cellulose semiconductor plant 2013

The “T60 three piece trunnion ball valve” (Large valves used in natural gas, petroleum refining, chemicals and other plants) launched by

KITZ Corporation of Europe, S.A. in September 2010 has come to be highly regarded by the market. This product has been chosen for use

in projects by ExxonMobil Indonesia Ban Yun Yurip in Indonesia, and Audex/Vopak Metionine Tank in Singapore.

A cooperative agreement with GIVA Group of Italy has been formed with a view to business development in upstream (excavation) and

midstream (transportation) market applications. KITZ seeks to capture orders leveraging its lineup of high temperature and high pressure

valve product lineup.

Sale of New Lead Free Product “XA Metal”, “XC Metal” Launched in US Market

KITZ and its subsidiary KITZ Metal Works Corporation have jointly developed lead free anticorrosion brass “XA Metal” and “XC Metal”

products which boast of high recyclability and cutting performance. Despite the fact that anticorrosion brass “XA Metal” and “XC Metal”

products do not use lead, these products are the first of their kind to have achieved high levels of anticorrosion (Superior dezincification,

corrosion induced splitting resistance, and erosion and corrosion resistance). Along with the revision of the Safe Drinking Water Act in the

United States to become effective from January 2014, copper compound piping related materials that do not contain lead will be required for

use in all fresh water applications. KITZ plans on cultivating opportunities in the North American market through the introduction of its



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new products that conform with this law.

Moreover, erosion and corrosion is known as “holing and pitting corrosion,” and describes the chemical and physical processes that fluids use

to cause corrosion. These conditions are observed on the inside and curved sections of pipes and are major causes of leakage.

Material: Sales launch: September 2013, Sales target: ¥350 million (FY3/16)

Valves: Sales launch: November 2013, Sales target: $3.700 million USD (FY3/17)

KITZ Competitor A Competitor B

Q

Materials Lead-Free Bismuth Brass KEEPALLOY II (C46750) Lead-Free Silicon Copper

Compound

Lead-Free Bismuth Silicon Brass

Anti Dezincification ○ ○ ×

Anti SCC ○ ○ ×

C Valve material pricing ○ △ ◎

Recyclability ○ × ○

D

Inventories △ (Some product inventories already available, will be

available from KITZ Corporation of America by December

2013)

○ Products available ○ Products available

Brass Bar Manufacturing Business

While special factors seen during the first half will disappear during the second half, demand is expected to remain strong as the water faucet

manufacturers start mass production and as the period of seasonally strong demand from gas related equipment applications starts. In

addition, continued strong demand from automobile and stationery related applications is expected to lead to stable sales pricing and volumes.

Other

Efforts to increase the number of members through various club visitations, trial usage and other efforts to fortify marketing for fitness clubs

will be undertaken, along with implementation of short term courses in swimming and exercising. At the same time, efforts will be made to

reduce various expenses. With regards to the hotel operations, occupancy rates are expected to increase on the back of refurbishment of air

conditioning and other facilities, and the refurbishment of the Lake Resort Spa “Kiseki No Yu.” In addition, reviews of service costs and

introduction of new services and products are expected to contribute to improvements in profitability of its various services.

Half Term Earnings (Units: Million Yen)

1H FY3/13 1H FY3/14 YY Change 2H FY3/13 2H FY3/14 Est. Share YY Change

Sales 55,605 57,380 +3.2% 55,669 59,619 100.0% +7.1%

Gross Income 13,190 12,505 -5.2% 13,012 14,494 24.3% +11.4%

SG&A 9,603 10,039 +4.5% 10,042 11,560 19.4% +15.1%

Operating Income 3,587 2,465 -31.3% 2,970 2,934 4.9% -1.2%

Ordinary Income 3,403 2,402 -29.4% 3,118 2,897 4.9% -7.1%

Net Income 1,999 1,455 -27.2% 2,040 1,744 2.9% -14.5%

Sales, Operating Income by Business Segment (Units: Million Yen)

1H FY3/13 1H FY3/14 YY Change 2H FY3/13 2H FY3/14 Est. Share YY Change

Valves 42,062 42,459 +0.9% 42,410 45,540 76.4% +7.4%

Brass Bars 8,813 10,464 +18.7% 9,134 10,035 16.8% +9.9%

Others 4,730 4,456 -5.8% 4,124 4,043 6.8% -2.0%

Total Sales 55,605 57,380 +3.2% 55,669 59,619 100.0% +7.1%

Valves 4,584 3,331 -27.3% 4,223 4,118 92.8% -2.5%

Brass Bars 167 260 +56.0% 274 239 5.4% -12.8%

Others 268 268 -0.0% 61 81 1.8% +32.8%

Adjustments -1,432 -1,395 - -1,589 -1,504 - -

Operating Income 3,587 2,465 -31.3% 2,970 2,934 - -1.2%



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(2) Consolidated Earnings (Units: Million Yen)

FY3/13 Share FY3/14 Est. Share YY Change Initial Est. Divergence

Sales 111,275 100.0% 117,000 100.0% +5.1% 120,000 -2.5%

Gross Income 26,203 23.5% 27,000 23.1% +3.0% 29,400 -8.2%

SG&A 19,645 17.7% 21,600 18.5% +10.0% 22,200 -2.7%

Operating Income 6,558 5.9% 5,400 4.6% -17.7% 7,200 -25.0%

Ordinary Income 6,521 5.9% 5,300 4.5% -18.7% 7,100 -25.4%

Net Income 4,039 3.6% 3,200 2.7% -20.8% 4,300 -25.6%

Full Year Sales Expected to Rise 5.1%, Operating Income to Decline 17.7% Year-Over-Year

Uncertainties regarding the future of economies in the ASEAN region and the impact of volatility in foreign exchange rates have already been

factored into the downward revision in earnings estimates during the second half. By business segment, continued favorable trends in both

pricing and volumes in the brass bar manufacturing business and effective cost reductions in the hotel operations of the other business

segment are expected to contribute to increase in profits. However volatility in foreign exchange is expected to impact the valve

manufacturing business and reduce its profits. A dividend of ¥5 per share is expected to be paid at the term end (In addition to the ¥0.5 per

share increase in dividend paid at the end of the first half, the full year dividend is expected to total ¥10 per share.).

Business Segment Sales, Operating Profits (Units: Million Yen)

FY3/13 Share FY3/14 Est. Share YY Change

Valve Manufacturing 84,472 75.9% 88,000 75.2% +4.2%

Brass Bar Manufacturing 17,948 16.1% 20,500 17.5% +14.2%

Other 8,855 8.0% 8,500 7.3% -4.0%

Total Sales 111,275 100.0% 117,000 100.0% +5.1%

Valve Manufacturing 8,808 92.0% 7,450 89.8% -15.4%

Brass Bar Manufacturing 441 4.6% 500 6.0% +13.4%

Other 330 3.4% 350 4.2% +6.1%

Adjustments -3,022 - -2,900 - -

Total Operating Income 6,558 - 5,400 - -17.7%

<Topics: Sales of High Pressure Ball Valves for Hydrogen Stations>

The world’s first ball valve using a high precision seal structure has been developed, with which KITZ will enter the ultra-high pressure valve

market. This business will be promoted by KITZ Corporation, KITZ SCT Corporation and Perrin GmbH on a worldwide basis. This

business will target hydrogen fueling stations which are the equivalent of gasoline stations providing fuel to fuel cell vehicles (FCV), of which

19 stations will be established in fiscal year 2013, 100 by 2015, and 1,000 by 2025 within Japan. Germany maintains targets for hydrogen

stations of 50 by 2015, 100 by 2017, and 400 by 2023, and the United States targets 68 by 2015. Japanese, European and United States

automobile manufacturers are expected to begin sales of fuel cell vehicles from fiscal year 2015, with sales targets of 200,000 in Japan by

2025 and 100,000 in Germany by 2017 (Daimler Benz). The industry has high expectations for demand from hydrogen transportation and

home use next generation solar hydrogen station applications. KITZ maintains a sales target for hydrogen station use valves of ¥800 million

in fiscal year March 2016.



12

(Source: KITZ)

4. Conclusions The Second Medium Term Business Plan (From FY3/14 to FY3/16) currently in progress maintains a goal of reducing KITZ’s reliance upon

commercial valves provided to the construction industry by expanding valves provided to oil and gas industry applications in overseas

markets and improving overall profitability. Fortunately in North America, construction of chemical plants producing ethylene and other

products using shale gas and oil is on the increase, and the incidence of orders booked by Japanese or affiliates of Japanese engineering

companies is on the rise. In addition, the “T60 three piece trunnion ball valve” produced by KITZ Corporation of Europe, S.A.

(Spain) has come to be highly regarded by customers, with sales being booked in South America and it has been chosen for use in projects in

Indonesia and Singapore (Order values worth ¥50 million each). However, the contribution to earnings near term is expected to be limited,

and the speed with which KITZ can cultivate demand for this product will be an important factor in determining its earnings. Therefore,

close attention must be paid to the development of business opportunities in upstream (excavation) and midstream (transportation)

applications, and sales of hydrogen station use valves.

This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and

opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable.

However we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said

information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which

may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after

proper consideration.

Copyright(C) 2013, Investment Bridge Co., Ltd. All Rights Reserved.


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Bridge Report KITZ CORPORATION (6498) · Bridge Report KITZ CORPORATION ... selling brass and other bars to valve makers, ... manufacturing processes including the casting process,