NAIGAI TRANS LINE LTD. 9384

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1 Research Report by Shared Research Inc. Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an owner s manual to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at sr_inquiries@sharedresearch.jp or find us on Bloomberg.

2 INDEX Key financial data Recent updates Highlights Trends and outlook Business Description Segments Strengths and weaknesses Market and value chain Strategy Historical performance Other information Income statement Balance sheet Other information Return to shareholders History News and topics Major shareholders Top management By the way Company profile /42

3 NAIGAI TRANS LINE LTD. > Key financial data Key financial data Income Statement FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Est. Total Sales 8,735 11,444 12,538 13,405 16,797 20,095 21,000 YoY -26.7% 31.0% 9.6% 6.9% 25.3% 19.6% 4.5% Gross Profit 3,211 3,710 3,981 4,115 4,843 5,663 YoY -19.1% 15.5% 7.3% 3.4% 17.7% 16.9% GPM 36.8% 32.4% 31.8% 30.7% 28.8% 28.2% Operating Profit 636 1,031 1, ,142 1,145 1,500 YoY -42.3% 62.1% 4.7% -15.8% 25.8% 0.3% 31.0% OPM 7.3% 9.0% 8.6% 6.8% 6.8% 5.7% 7.1% Recurring Profit 809 1,036 1, ,205 1,208 1,500 YoY -26.3% 28.1% 1.0% -6.8% 23.6% 0.3% 24.2% RPM 9.3% 9.1% 8.3% 7.3% 7.2% 6.0% 7.1% Net Income ,000 YoY -36.5% 64.6% -12.9% -19.2% 59.0% -70.4% 362.4% Net Margin 4.5% 5.7% 4.5% 3.4% 4.3% 1.1% 4.8% Per Share Data Number of Shares (Thousands) 2,446 2,596 2,616 5,261 5,349 5,349 EPS EPS (Fully Diluted) Dividend Per Share Book Value Per Share 1,709 1,811 1,911 1,057 1,228 1,288 Balance Sheet (JPYmn) Cash and Equivalents 3,161 3,960 3,895 3,957 4,033 4,914 Total Current Assets 3,672 4,586 4,573 4,988 6,138 6,993 Tangible Fixed Assets, net Other Fixed Assets Intangible Assets , Total Assets 5,220 5,933 6,326 7,110 8,980 9,167 Accounts Payable ,197 1,117 Short-Term Debt Total Current Liabilities 865 1,057 1,030 1,232 2,026 1,836 Long-Term Debt Total Fixed Liabilities Total Liabilities 1,014 1,210 1,285 1,499 2,355 2,189 Net Assets 4,206 4,723 5,041 5,611 6,625 6,978 Interest-Bearing Debt Cash Flow Statement (JPYmn) Operating Cash Flow Investment Cash Flow Financing Cash Flow Financial Ratios ROA 16.0% 18.6% 17.1% 14.5% 15.0% 13.3% ROE 9.8% 14.6% 11.7% 8.7% 12.0% 3.2% Equity Ratio 80.2% 79.2% 79.0% 78.2% 73.1% 75.1% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. The company conducted a 1-to-2 stock split in FY12/12. FY12/12 dividend per share consists of interim 25 yen (pre-split) and year-end 15 yen (post-split) for annual 55 yen (pre-split basis) FY12/15 dividend per share is the total of an interim dividend prior to a stock split effective July 2015, and a year-end dividend following the split. 03/42

4 NAIGAI TRANS LINE LTD. > Recent updates Recent updates Highlights On August 20, 2015, Shared Research updated the report following interviews with management. On July 30, 2015, Naigai Trans Line Ltd. (NTL) announced earnings for 1H FY12/15; see the results section for details.. On the same day, the company made an announcement concerning the establishment of a subsidiary in Shenzhen, China. During the board of directors meeting on July 30, 2015, NTL decided to establish a subsidiary of its Hong Kong subsidiary, NTL-Logistics (HK) Ltd. in Shenzhen, China, with capital from NTL-Logistics (HK). However, its direct impact on FY12/15 performance will be minimal. Purpose of establishment The NTL Group currently has four strongholds in China, including Shanghai. They are under the umbrella of Shanghai NTL-Logistics, Ltd., and mainly offer less-than-container-load (LCL) and full-container-load (FCL) services between Japan and China. Anticipating the future shift of Japanese corporations from China to ASEAN nations, the company has made the strategic decision to open a subsidiary of NTL-Logistics (HK) in Shenzhen with an eye on strengthening its presence in South China and firming up its sales base centering around its Hong Kong subsidiary. NTL-Logistics (HK) has already obtained a CEPA (Hong Kong- China Closer Economic Partnership Agreement) permit from the Hong Kong Trade and Industry Department, conferring on it preferential treatment in trade with mainland China). Company details Name: Business: Capital: Establishment: Business start: NTL-Logistics (Shenzhen) Ltd. (provisional) less-than-container-load services, forwarding, airfreight, warehousing, etc. RMB5.5mn September 2015 (planned) December 2015 (planned) Capital structure: NTL-Logistics (HK): 100% On June 15, 2015, the company announced revisions to earnings forecasts for 1H FY12/15. Overview of the revisions (previous forecast in parentheses) Sales: JPY11.1bn (JPY10.0bn) Operating profit: JPY730mn (JPY650mn) Recurring profit: JPY730mn (JPY650mn) Net income: JPY470mn (JPY440mn). 04/42

5 NAIGAI TRANS LINE LTD. > Recent updates Reasons for the revisions NTL now expects sales to outperform initial forecasts, as robust sales of mainstay less-than-container-load (LCL) services persist, and air freight and other new businesses grow. The company also expects profits to rise in line with higher sales, despite rising transportation costs caused by the weak yen. As a result, the company has raised its earnings forecasts. NTL has maintained its full-year earnings forecasts, owing to uncertain business conditions. On May 15, 2015, the company announced a stock split and a revision to the dividend forecast. The company plans to conduct a two-for-one stock split with a record date of June 30, 2015 and an effective date of July 1, The number of shares outstanding will increase from 5,349,000 to 10,698,000 as a result of the split. In line with the stock split, the company has revised its annual dividend per share forecast from JPY50 to JPY40 (interim dividend of JPY30 [unchanged]; year-end dividend of JPY10 [JPY20 prior to the revision]). Effectively, there is no change to the dividend (in view of the stock split). For corporate releases and developments more than three months old, please refer to the News and topics section. 05/42

6 NAIGAI TRANS LINE LTD. > Recent updates Trends and outlook Quarterly trends and results Quarterly Performance (cml.) FY12/14 FY12/15 FY12/15 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of FY FY Est. Sales 4,604 9,640 14,671 20,095 5,546 11, % 21,000 YoY 32.8% 28.5% 22.3% 19.6% 20.4% 17.9% 4.5% Gross Profit 1,242 2,673 4,098 5,663 1,506 3,074 YoY 22.5% 19.9% 17.1% 16.9% 21.3% 15.0% GPM 27.0% 27.7% 27.9% 28.2% 27.2% 27.0% SG&A Expenses 1,006 2,350 3,411 4,518 1,099 2,293 YoY 20.2% 33.6% 25.5% 22.1% 9.2% -2.4% SG&A / Sales 21.8% 24.4% 23.2% 22.5% 19.8% 20.2% Operating Profit , % 1,500 YoY 33.4% -31.3% -12.1% 0.3% 72.6% 141.7% 31.0% OPM 5.1% 3.4% 4.7% 5.7% 7.3% 6.9% 7.1% Recurring Profit , % 1,500 YoY 15.7% -37.3% -16.1% 0.3% 73.6% 142.6% 24.2% RPM 5.1% 3.3% 4.8% 6.0% 7.3% 6.8% 7.1% Net Income % 1,000 YoY 6.9% % 94.7% % NPM 2.7% % 4.4% 4.2% 4.8% Quarterly Performance FY12/14 FY12/15 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Sales 4,604 5,035 5,031 5,424 5,546 5,819 YoY 32.8% 24.8% 11.9% 12.9% 20.4% 15.6% Gross Profit 1,242 1,431 1,425 1,565 1,506 1,568 YoY 22.5% 17.8% 12.2% 16.5% 21.3% 9.6% GPM 27.0% 28.4% 28.3% 28.9% 27.2% 26.9% SG&A Expenses 1,006 1,344 1,061 1,107 1,099 1,194 YoY 20.2% 45.8% 10.5% 15.2% 9.2% -11.1% SG&A / Sales 21.8% 26.7% 21.1% 20.4% 19.8% 20.5% Operating Profit YoY 33.4% -70.3% 17.1% 26.9% 73.2% 329.0% OPM 5.1% 1.7% 7.2% 8.5% 7.3% 6.4% Recurring Profit YoY 15.9% -71.9% 16.7% 37.9% 74.0% 328.8% RPM 15.7% 1.7% 7.7% 9.3% 7.3% 6.4% Net Income YoY 6.9% % 75.4% 94.7% - NPM 2.7% - 4.7% 7.1% 4.4% 3.9% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. Performance Breakdown by Segment (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Sales 4,604 9,640 14,671 20,095 5,546 11,365 YoY 32.8% 28.5% 22.3% 19.6% 20.4% 17.9% Japan 3,243 6,811 10,481 14,293 3,806 7,723 YoY 31.8% 29.1% 23.9% 20.8% 17.4% 13.4% Overseas 1,361 2,829 4,189 5,801 1,739 3,642 YoY 35.4% 27.2% 18.6% 16.8% 27.8% 28.8% Operating Profit , YoY 33.4% -31.3% -12.1% 0.3% 72.6% 141.7% Japan YoY 56.3% 30.2% 28.9% 34.1% 39.0% 15.6% Overseas YoY 4.9% -90.6% -56.3% -39.5% 103.0% - Eliminations, Company-wide (Quarterly) FY12/14 FY12/14 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Sales 4,604 5,035 5,031 5,424 5,546 5,819 YoY 32.8% 24.8% 11.9% 12.9% 20.4% 15.6% Japan 3,243 3,568 3,670 3,812 3,806 3,916 YoY 31.8% 26.7% 15.2% 13.2% 17.4% 9.8% Overseas 1,361 1,467 1,361 1,612 1,739 1,903 YoY 35.4% 20.5% 4.0% 12.3% 27.8% 29.7% Operating Profit YoY 33.4% -70.3% 17.1% 26.9% 72.6% 329.0% Japan YoY 56.3% 13.7% 27.0% 44.9% 39.0% -4.8% Overseas YoY 4.9% % -1.2% -0.9% 103.0% - Eliminations, Company-wide Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. FY12/15 FY12/15 06/42

7 NAIGAI TRANS LINE LTD. > Recent updates 1H FY12/15 results Sales: JPY11.4bn (+17.9% YoY) Operating profit: JPY781mn (+141.7% YoY) Recurring profit: JPY776mn (+142.6% YoY) Net income: JPY474mn (up from a loss of JPY408mn in 1H FY12/14). On a parent-level basis, less-than-container-load (LCL) sales were up year-on-year in both quantity and amount. Sales for full-container-load (FCL) and airfreight likewise exceeded Q2 FY12/14 figures. In consolidated subsidiaries, both domestic and overseas companies generally attained an increase in sales and profits, making their contribution to the overall performance. Gross profit came to JPY3.1bn (+15.0% YoY), whereas GPM stood at 27.0%, a 0.7pp decline from the previous year. According to the company, this decline was due to increased sales of relatively low-margin FCL export services; and decreased surcharge in LCL export services. SG&A expenses came to JPY2.3bn (-2.4% YoY). The company reported provisions for doubtful accounts of JPY274mn, due to delays to collections of accounts receivable at consolidated subsidiary NTL-LOGISTICS (INDIA) PRIVATE LIMITED (NTL-INDIA) in the previous year. Provisions for doubtful accounts declined in 1H FY12/15. Meanwhile, SG&A expenses of its overseas subsidiaries picked up year-on-year because of the weak yen. For these reasons, operating profit was JPY781mn (+141.7% YoY), recurring profit came to JPY776mn (+142.6% YoY), and net income stood at JPY474mn (up from a net loss of JPY408mn in the previous year). The company had posted extraordinary losses of goodwill amortization at NTL-INDIA (JPY303mn), system development fee-refund lawsuit (an allowance for doubtful accounts of JPY84mn and settlement costs of JPY20mn), and valuation losses on investment securities (JPY102mn) in the previous year. The situation improved for the current 1H FY12/15 as those extraordinary losses no longer applied. Shifts in segment share in the overall group sales and operating profit According to the company, since the 2008 global financial crisis, it has used acquisitions to move away from an earnings structure overly reliant on LCL export sales to diversify risk. As a result, it can now grow earnings on a consolidated basis without relying on LCL sales growth. Comparing trends in share of overall group sales in Q2 of FY12/11, FY12/13, and FY12/15, there was a steady decline at the parent level from 72% to 61% to 48%, while domestic subsidiaries showed a consistent growth from 2% to 10% to 22%; likewise with overseas subsidiaries, which went from 31% to 33% to 37%. A similar pattern was seen in shifts in segment share in the overall group operating profit in Q2 of FY12/11, FY12/13, and FY12/15. While the parent s share went down from 67% to 57% to 42%, that of domestic subsidiaries changed from 4% to 1% to 7%, and that of overseas subsidiaries went up from 34% to 51% to 52%. Japan Sales: JPY7.7bn (+13.4% YoY) Operating profit: JPY386mn (+15.6% YoY). 07/42

8 NAIGAI TRANS LINE LTD. > Recent updates At the parent level, sales of FCL services rose 31.6% year-on-year, while airfreight sales surged 167.4% YoY, and the mainstay LCL services picked up by 5.1% YoY. The domestic subsidiary UCI Airfreight Japan recorded increased sales on the strength of customs clearance services at Kansai and Narita Airports and also of robust airfreight business. The increased sales and profits of FCL export services were partially brought about by the fact that customers have shifted from LCL to FCL services due to the reduced rates. Among the domestic subsidiaries, UCI Airfreight Japan (international airfreight and ocean freight transport) made significant contributions to the company s increased sales and profits on the strength of its customs clearance services at Kasai and Narita Airports and also of robust airfreight business. Overseas Sales: JPY3.6bn (+28.8% YoY) Operating profit: JPY408mn (up from a profit of JPY23mn in Q2 FY12/14) NTL has nine consolidated subsidiaries in Asia and the US, which mostly generate sales by shipping cargo from Japan. Overseas sales were up year-on-year owing to an increase in freight from Japan and also to a business pickup in China, Thailand, South Korea, etc., where subsidiaries opened and extended their niche markets. Other consolidated subsidiaries similarly achieved healthy sales. In addition, the weak yen compared to local currencies also contributed to the increased sales and profits. For details on previous quarterly and annual results, please refer to the Historical Performance section. 08/42

9 NAIGAI TRANS LINE LTD. > Recent updates Full-year (FY12/15) outlook FY12/15 Forecasts (JPYmn) 1H Act. FY12/14 2H Act. FY Act. 1H Act. FY12/15 2H Est. FY Est. Sales 9,640 10,455 20,095 11,365 9,635 21,000 YoY 28.5% 12.5% 19.6% 17.9% -7.8% 4.5% CoGS 6,967 7,465 14,432 8,291 Gross Profit 2,673 2,990 5,663 3,074 YoY 19.9% 14.4% 16.9% 15.0% GPM 27.7% 28.6% 28.2% 27.0% SG&A Expenses 2,350 2,168 4,518 2,294 SG&A / Sales 24.4% 20.7% 22.5% 20.2% Operating Profit , ,500 YoY -31.3% 22.4% 0.3% 141.7% -12.6% 31.0% OPM 3.4% 7.9% 5.7% 6.9% 7.5% 7.1% Recurring Profit , ,500 YoY -37.3% 27.8% 0.3% 142.6% -18.5% 24.2% RPM 3.3% 8.5% 6.0% 6.8% 7.5% 7.1% Net Income ,000 YoY % -70.4% % 362.4% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. NTL expects that the Japanese economy will stay on a path of self-sustaining recovery. The company also believes that the global economy will maintain the current pace of growth despite uncertainties. Earnings forecasts are based on assumption that the yen will trade at JPY112/USD. Full-year earnings forecasts for FY12/15: Sales: JPY21.0bn (+4.5% YoY) Operating profit: JPY1.5bn (+31.0% YoY) Recurring profit: JPY1.5bn (+24.2% YoY) Net income: JPY1.0bn (+362.4% YoY) NTL forecasts a 31% YoY increase in operating profit. In reality, however, this would be an increase of only 1.9% as profits were dragged down a year earlier after the India unit set aside JPY327mn in provision for doubtful accounts. In FY12/14, NTL posted extraordinary losses totaling JPY509mn (JPY303mn in goodwill expenses related NTL-INDIA, JPY104mn stemming from a lawsuit involving system development costs, and JPY102mn in securities valuation losses). For FY12/15, the company does not expect such losses. Therefore, in FY12/15, operating profit, recurring profit, and net income are expected to be little changed from a year earlier. SG&A expenses are expected to rise outside Japan because the company will dispatch more Japanese employees to overseas locations, hire local workers, and pay higher wages. Japan NTL expects a moderate increase in LCL export sales, and stronger sales and profits from import and air freight operations. The cargo handling volume for LCL exports may increase by 2 3% YoY, and that for full-container-load (FCL) exports by 6 7%. Import operations may remain almost unchanged. 09/42

10 NAIGAI TRANS LINE LTD. > Recent updates The company expects earnings to grow at domestic subsidiaries, particularly from air freight operations at UCI Airfreight Japan and integrated transport solutions at Flying Fish. Overseas After booking provisions for doubtful accounts at NTL-INDIA in FY12/14, the company now expects earnings at this subsidiary to pick up, and for it to begin making an operating profit. The company is also targeting higher sales and profits at other overseas subsidiaries, including its operations in Shanghai. Progress as of Q2 Q2 results against the full-year FY12/15 company forecast were robust, with sales at 54.1%, operating profit at 52.1%, recurring profit at 51.8%, and net income at 47.4%. Q2 results exceeded NTL s original 1H FY12/15 forecast all around: sales by 13.6%, operating profit by 20.1%, recurring profit by 19.4%, and net income by 7.7%. However, the company refrained from making a long-term projection in terms of the full-year FY12/15 forecast, in view of the element of uncertainty in the business environment. Dividend The company plans to issue a special dividend of JPY10 per share at the end of Q2 FY12/15 (interim dividend), to commemorate its move from the Second to the First Section of the Tokyo Stock Exchange on March 20, Together with the commemorative dividend, this means the company now forecasts an interim dividend of JPY30, a year-end dividend of JPY10, and a full-year dividend of JPY40 (the year-end dividend represents the figure after the stock split of July 1, 2015, where the company conducted a two-for-one stock split). 10/42

11 NAIGAI TRANS LINE LTD. > Recent updates Long-term outlook NTL in April 2014 released a medium-term management plan that covers a three-year period from FY12/14 through FY12/16. Medium-term targets TNL targets sales growth of 5% in Japan and 10% overseas, particularly in ASEAN nations. Sales target: JPY23bn Operating profit margin target: 7% or more ROE target: 12% or more Medium-term management plan The management plan, which calls for the company to become a major global freight forwarder, has the following goals: The establishment of the company s status as a major global freight forwarder that mainly provides import and LCL export services through collaboration of its existing operations with new businesses such as air transport and seamless transport services Expanding overseas operations with the goal of raising the consolidated earnings ratio to 50% Strengthening group operations with the support and oversight of the parent company Nurturing of young, capable employees who excel in the global environment NTL will probably generate most of its sales in Japan from import operations undertaken by Flying Fish. NTL is also considering entering third-party logistics (3PL) and warehousing businesses that require physical assets. In FY12/14, the eight overseas subsidiaries generated sales of JPY6.5bn, of which 3.1bn, or 48%, came from the parent company. Of that amount, JPY1.8bn, or 28% of the overall group sales, was generated from LCL transactions with the parent. Overseas units had gross profit of JPY862mn, or 47% of the group s gross profit. LCL export operations have a higher margin than other businesses, but NTL does not expect that these operations will expand in the medium term. The company, therefore, wants to reduce overseas subsidiaries dependence on LCL. For this purpose, NTL will expand overseas logistics operations. Warehousing operations contribution is limited, but they provide convenience for regular clients. As of February 2015, the company had warehouses in India, Singapore, Thailand, and South Korea. In the medium term, the company may expand into other locations as well. However, the company stated that it would take two or three years to establish 3PL services that include warehousing. In December 2014, NTL announced that it would join a project to build a warehouse at the Busan New Port in South Korea. The project was announced in September 2014 by the Busan Port Authority. The port is located in a free-trade zone, where the company will receive various tax benefits. For the first three years, the company would also benefit from reduced rent for land. NTL will rent 319,000sqm of land, form a venture with a local company, and invest WON15bn to run warehousing operations from October The business will include storage, loading, and processing services for cargoes between Japan and South Korea. This management plan does not reflect the effects of M&A. However, Shared Research expects that the company s past corporate acquisitions would increase its sales by several dozen billion yen. Shared Research thinks that the company may 11/42

12 NAIGAI TRANS LINE LTD. > Recent updates be able to increase sales to JPY25bn in FY12/16. According to NTL, the company must first improve the profitability of subsidiaries that it acquired during the past few years. The management plan also calls for an operating profit margin of 7% or more, which the company achieved in 2H FY12/13. According to the company, it may not be easy to maintain the current operating profit margin as the company plans to increase the sales composition ratio of import operations and reduce the ratio of high-margin LCL businesses. However, the company may be able to push margins up by increasing load factors (see Glossary), making operations more efficient, and aggregating operating bases. NTL stated that the management plan emphasizes continued efforts to strengthen marketing, enhance employee training, and bolster the IT system. According to NTL, the company has already started providing training to employees. The company thinks that it will be able to increase sales without raising the number of workers from the level seen at the end of December Thus, SG&A expenses are not likely to increase significantly. 12/42

13 NAIGAI TRANS LINE LTD. > Business Business Description Business model The company aims to be an international, comprehensive freight forwarder. A forwarder is a business that does not own means of transportation (such as vessels, airplanes, railcars and trucks) but acts as an agent on behalf of the shipper. A freight forwarder primarily conducts door-to-door intermodal transport through the use of other parties transport systems. Unlike carriers that own vessels and aircraft, NTL runs a service business without the holding of such assets. Given that NTL s business focus is on less-than-container-load (LCL) exports, its suppliers largely divide into large shipping companies and warehousing companies. The company consigns ocean freight transport to shipping companies, while warehousing companies fill containers with cargo. Domestic shipping companies that serve as NTL s suppliers include Nippon Yusen K.K. (NYK LINE, TSE1: 9101), Mitsui O.S.K. Lines, Ltd. (TSE1: 9104), and Kawasaki Kisen Kaisha, Ltd. ( K LINE, TSE1: 9107). In addition, NTL has long-term consignment agreements with Hong Kong-based Orient Overseas Container Line Ltd. (0316HK) and South Korea-based HANJIN SHIPPING Co., Ltd. (117930KS), among others. Warehousing suppliers include Mitsubishi Logistics Corporation (TSE1: 9301), Mitsui-Soko Co., Ltd. (TSE1: 9302), and Sankyu Inc. (TSE1: 9065). The company serves various customers, such as manufacturers and trading companies, large and small. These customers engage NTL to transport all kinds of cargo, including machinery, auto parts, chemicals, and textiles. Also, because NTL is an independent NVOCC, industry peers (e.g., shipping companies) often use the space it has secured when they cannot fill a container with their consigned shipments. This is called co-loading. Roughly 50% of sales come from co-loading involving shipments handled by industry peers. NTL aims to increase sales from dedicated container shipments directly consigned by shippers. Source: Shared Research based on company data 13/42

14 NAIGAI TRANS LINE LTD. > Business LCL export services In LCL exports, small-lot (i.e., less-than-container-load) export cargo originating from multiple clients is packed and transported in a container. LCL exports are characterized by high gross profit margins, at around 35% (the parent-only gross profit margin was 41.8% in FY12/14), compared with about 15% for full-container-load (FCL) exports (the parent figure was 16.2% for FY12/14), which use an entire container for each client. The industry average load factor necessary to break even appears to be around 45% for LCL exports, while NTL claims its average load factor is about 60%. Per-client sales are low, at around a maximum of JPY5mn per month, due to the small size of the cargo handled. NTL regularly serves approximately 6,000 corporate clients. The company s advantage is that it does not heavily depend on particular industries and clients. However, as company materials indicate, Japan s total export value influences NTL s performance. As a result, its business is undoubtedly affected by macroeconomic conditions. As mentioned above, the majority of NTL s clients are regulars. They appear to value NTL s reliable services. The company said its shipping charges are set 10-20% higher than those of competitors, reflecting its comprehensive strengths, such as frequent shipping schedules, the greater ability to secure container space from shipping companies, and the use of reliable business partners. NTL also offers direct connections to key ports across the world, providing distinct advantages in the form of swift information delivery and lower cost, compared with competing services. Source: Shared Research based on company data 14/42

15 NAIGAI TRANS LINE LTD. > Business Segments The company s segments consist of Japan and Overseas. As of FY12/14, the Japan segment accounted for 71.1% of consolidated sales and 71.0% of operating profit. The Overseas segment accounted for 28.9% of sales and 29.0% of operating profit (before eliminations). Segment sales and profit FY12/07 FY12/08 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14 (JPYmn) Results Results Results Results Results Results Results Results Sales 11,486 11,910 8,735 11,444 12,538 13,405 16,797 20,095 YoY - 3.7% -26.7% 31.0% 9.6% 6.9% 25.3% 19.6% Japan 9,166 9,677 6,883 8,955 9,128 9,798 11,829 14,293 YoY - 5.6% -28.9% 30.1% 1.9% 7.3% 20.7% 20.8% Composition 79.8% 81.3% 78.8% 78.3% 72.8% 73.1% 70.4% 71.1% Overseas 2,320 2,233 1,852 2,489 3,410 3,607 4,968 5,801 YoY % -17.1% 34.4% 37.0% 5.8% 37.7% 16.8% Composition 20.2% 18.7% 21.2% 21.7% 27.2% 26.9% 29.6% 28.9% Operating profit 1,058 1, ,031 1, ,142 1,145 YoY - 4.2% -42.3% 62.2% 4.6% -15.8% 25.8% 0.3% Japan YoY - 1.9% -46.6% 66.4% 5.8% -18.4% -1.2% 34.1% Composition 77.2% 75.5% 69.8% 71.6% 69.5% 65.9% 52.5% 71.0% Overseas YoY % -28.9% 52.4% 16.9% -3.4% 72.8% -39.5% Composition 22.8% 24.5% 30.2% 28.4% 30.5% 34.1% 47.5% 29.0% Corporate and eliminations Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. Japan segment The Japan segment is composed of the parent company, UCI Airfreight Japan, Inc., Flying Fish, Co., Ltd., and Global Maritime Co., Ltd. As of FY12/14, the parent company generated 71.1% of the segment s sales, and 95.3% of the segment s operating profit. Japan segment (JPYmn) FY12/07 FY12/08 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14 Sales 9,166 9,677 6,883 8,955 9,128 9,798 11,829 14,293 Parent 9,818 10,168 7,054 9,137 9,096 9,022 9,494 10,156 % of Total 107.1% 105.1% 102.5% 102.0% 99.7% 92.1% 80.3% 71.1% Vs. consolidated ,334 4,138 % of Total % 7.9% 19.7% 28.9% Operating profit Parent % of Total 100.0% 100.0% 100.6% 102.2% 95.7% 101.2% 106.5% 95.3% Vs. consolidated % of Total % % Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. Parent performance by service Sales by service at the parent can be divided into LCL exports, FCL exports, LCL imports, and FCL imports. As of FY12/14, exports comprised 72.7% of sales, and imports comprise 27.3%. 15/42

16 NAIGAI TRANS LINE LTD. > Business Parent performance by service p y (JPYmn) FY12/13 FY12/14 Exports Total 6,918 7,388 YoY - 6.8% % of Total 72.9% 72.7% LCL Exports 4,562 4,708 YoY - 3.2% % of Total 48.0% 46.4% FCL Exports 1,676 1,984 YoY % % of Total 17.6% 19.5% Other Exports Imports Total 2,577 2,768 YoY - 7.4% % of Total 27.1% 27.3% LCL Imports 1,327 1,491 YoY % % of Total 14.0% 14.7% FCL Imports YoY - 0.4% % of Total 9.4% 8.9% Source: Shared Research based on company data Even with the weakening yen, NTL does not expect cargo for export to continue increasing as in the past. Accordingly, the company commented that it will likely become a comprehensive freight forwarder, rather than remaining an NVOCC focusing on port-to-port ocean freight transport. An NVOCC (Non-Vessel Operating Common Carrier) does not own vessels. It buys space from a carrier and sub-sells it to smaller shippers. Sales contributions from imports have risen in the past several years. However, according to the company, import operations require specific knowledge not only about ocean freight transport and customs clearance but also about imported goods and related industries. Therefore, NTL appears to be struggling to develop its import business. In February 2013, NTL established a subsidiary, Flying Fish Co., Ltd., which acquired the business in Japan of Flying Fish Services Corp. in June Flying Fish specializes in international transportation operations. Domestic subsidiaries UCI Air Freight Japan International air and ocean transportation; acquired in April 2012 to enter the air freight forwarding business. Flying Fish International transportation operations; established in February 2013 and took over the international transportation operations business from Flying Fish Services in June Global Maritime Shipping agency business. 16/42

17 NAIGAI TRANS LINE LTD. > Business Overseas segment The Overseas segment is composed of subsidiaries in China (a local subsidiary of the parent, and a local subsidiary of Flying Fish), South Korea, Hong Kong, Singapore, Thailand, Indonesia, India and North America. Overseas segment (JPYmn) FY12/07 FY12/08 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14 Sales 2,320 2,233 1,852 2,489 3,410 3,607 4,968 5,801 YoY % -17.1% 34.4% 37.0% 5.8% 37.7% 16.8% Operating profit YoY % -28.9% 52.4% 16.9% -3.4% 72.8% -39.5% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. Functions of overseas subsidiaries Country Established Primary business areas Singapore Apr LCL import/export, warehousing, transshipment Thailand Jun LCL import/export, equipment import Indonesia Apr LCL import/export, equipment import China Jan LCL import/export, equipment import (five locations) US Aug LCL import/export, equipment import (three locations) Acquired international ocean shipment company Cargo One Inc. in July 2010 as a subsidiary South Korea Sep LCL import/export (two locations) Hong Kong Feb LCL import/export India Acquired and consolidated in Import/export, domestic shipping, warehousing (seven locations) Jan Source: Shared Research based on company data Seven of the company s overseas subsidiaries are tasked with import agency duties for freight that is shipped from the parent or domestic subsidiaries to overseas ports, as well as freight that is being shipped from overseas to either Japan or other overseas locations. The remaining two companies deal in domestic shipping within India and China, and act as comprehensive freight forwarders for air, land, and ocean freight, including warehousing for the freight. 17/42

18 NAIGAI TRANS LINE LTD. > Business Profitability snapshot, financial ratios For the company, a growing economy means higher container space purchase costs and, consequently, lower gross profit margins. In contrast a shrinking economy means lower container space purchase costs, resulting in higher GPMs. For operating profits, the dynamics are different: a growing economy usually contributes to higher sales and gross profit, which absorb fixed costs and accordingly improve OPMs, despite lower GPM. We note that GPM in FY12/09 (the period after the 2008 financial crisis) improved 3.5 percentage points YoY while OPM fell 2.0 percentage points. From FY12/10, a mild economic recovery caused GPMs to decline, but excluding special factors higher GP led to OPM improvements (with the exception of FY12/11 when the company booked goodwill write-offs in connection with the acquisition of LOGISTICS PLUS INDIA PRIVATE LIMITED, FY12/12 when the company saw labor costs rise in connection with accelerated hiring, and FY12/13 when goodwill write-offs increased on establishing Flying Fish). In FY12/14, SG&A expenses rose because TNL-INDIA set aside JPY324mn in provisions for doubtful accounts. Profit Margins FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Gross Profit 3,211 3,710 3,981 4,115 4,843 5,663 Gross Profit Margin 36.8% 32.4% 31.8% 30.7% 28.8% 28.2% Operating Profit 636 1,031 1, ,142 1,145 OP Margin 7.3% 9.0% 8.6% 6.8% 6.8% 5.7% EBITDA 685 1,106 1,212 1,059 1,324 1,337 EBITDA Margin 7.8% 9.7% 9.7% 7.9% 7.9% 6.7% Net Profit Margin 4.5% 5.7% 4.5% 3.4% 4.3% 1.1% Financial Ratios ROA 7.8% 11.7% 9.3% 6.8% 9.1% 2.4% ROE 9.8% 14.6% 11.7% 8.7% 12.0% 3.2% Total Asset Turnover Working Capital Requirement Current Ratio 425% 434% 444% 405% 303% 381% Quick Ratio 410% 423% 433% 392% 284% 356% OCF / Current Liabilities Net Debt / Equity -68.0% -75.5% -68.8% -60.3% -52.8% -67.2% OCF / Total Liabilities Cash Cycle (days) Changes in Working Capital Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. 18/42

19 NAIGAI TRANS LINE LTD. > Business Strengths and weaknesses Strengths High-quality services: The forwarder industry is essentially a service business, and therefore service quality leads to differentiation. Such factors as frequent shipping schedules, reliability, efficient documentation, and appropriate trouble follow-ups underpin service quality. Handling many clients and cargos put the company in the position to ship more frequently to more ports of destination than its competitors. Frequent shipping schedules enable NTL to attract more clients and offer less-than-container-load (LCL) services more frequently. Sound balance sheet: NTL s net assets stood at roughly JPY7.0bn as of the end of FY12/14, of which JPY4.7bn, or more than 60%, was cash and equivalent. Interest-bearing debt was less than JPY100mn (practically debt-free). Such a strong financial position will be an advantage for NTL in future investments and acquisitions, while showing the company s immunity from external conditions. Drive for growth: It appears to Shared Research that NTL is led by a chairman with substantial buying power (i.e., ability to secure container space) and supported by highly motivated personnel. Since its IPO, the company has been operating under a corporate culture focusing on growing into a global freight transporter. Weaknesses Domestic business with low growth potential: NTL s growth potential is limited domestically, and the Japanese economy should take some blame. Japan s exports market, where NTL has been traditionally strong, has been hollowing out as manufacturers (the company s customers) increasingly move their production overseas. However, Flying Fish Co., Ltd., which acquired the business of Flying Fish Services Corp. in June 2013, has the potential to do domestic business through its development of a comprehensive forwarding structure including door-to-door delivery. Executives to step in after acquisitions: NTL s growth largely depends on acquisitions. But changing management at a newly acquired company requires executives of considerable skill particularly due to differing management styles between companies in Japan and elsewhere. NTL accepts that it possesses a limited number of executives capable of managing a company overseas. An industry lacking skilled workers: Similar to numerous growth companies, the company is faced with the problem of hiring skilled workers. The shipping industry is a conservative industry, and given that there isn t much movement of personnel, finding qualified and skilled workers is difficult. According to the Ministry of Health, Labour and Welfare, the average nationwide accession rate was 16.3% and the separation rate was 15.6% in 2013, while in the shipping industry the accession rate was 12.5% and the separation rate, 12.9%, both lower than the national average. (The accession rate is defined as the number of hired employees divided by the number of regular employees as of January 1st times 100. The separation rate is the number of departing employees divided by the number of regular employees as of January 1st times 100.) 19/42

20 NAIGAI TRANS LINE LTD. > Business Market and value chain Market overview Exports and the forex rate (JPYtn) 3.6 (USD/JPY, index) H FY2010 2H FY2010 1H FY2011 2H FY2011 1H FY2012 2H FY2012 1H FY2013 2H FY2013 1H FY2014 2H FY Shipping export value (left axis) USD rate (right axis) Export trade volume index (right axis) Source: Shared Research based on Ministry of Finance, Foreign Trade Statistics Exports (Value and Volume) H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H Shipping export value (JPYtn) USD rate (JPY) Export trade volume (index) Source: Shared Research based on Ministry of Finance, Foreign Trade Statistics The company s earnings are influenced by exports of containerships, trade data, and the yen-dollar exchange rate. The yen weakened against the US dollar during the latter half of Exports of container ships rose in tandem with the yen s decline. The export volume index, which edged up during the latter half of 2013, fell in the beginning of The index was little changed during the latter half of 2012 through the first half of During the latter half of 2014, the value of container exports continued to rise. This increase was due not only to the yen s weakness but also to a rise in the export volume index. Export shipments According to Finance Ministry data, Japan s exports totaled JPY73.1tn in 2014 (+4.8% YoY), marking a second consecutive annual increase. Exports included automobiles (14.9% of total exports in 2013), steel (5.4%), electronics components such as semiconductors (5.1%), and auto parts (5%). Total exports (JPYbn) 90,000 80,000 70,000 60,000 50, Source: Shared Research based on Ministry of Finance 20/42

21 NAIGAI TRANS LINE LTD. > Business Total exports and main exports (JPYbn) Total exports 65,657 75,246 83,931 81,018 54,171 67,400 65,546 63,748 69,774 73,102 YoY 7.3% 14.6% 11.5% -3.5% -33.1% 24.4% -2.7% -2.7% 9.5% 4.8% Automobiles 9,929 12,300 14,317 13,736 6,693 9,174 8,204 9,225 10,413 10,919 YoY 7.8% 23.9% 16.4% -4.1% -51.3% 37.1% -10.6% 12.4% 12.9% 4.9% Composition 15.1% 16.3% 17.1% 17.0% 12.4% 13.6% 12.5% 14.5% 14.9% 14.9% Steel 3,037 3,485 4,042 4,574 2,906 3,675 3,709 3,496 3,793 3,958 YoY 20.5% 14.8% 16.0% 13.1% -36.5% 26.5% 0.9% -5.8% 8.5% 4.4% Composition 4.6% 4.6% 4.8% 5.6% 5.4% 5.5% 5.7% 5.5% 5.4% 5.4% Electronics such as semi-conductors 4,402 4,855 5,243 4,625 3,419 4,153 3,565 3,339 3,553 3,691 YoY 0.1% 10.3% 8.0% -11.8% -26.1% 21.5% -14.2% -6.3% 6.4% 3.9% Composition 6.7% 6.5% 6.2% 5.7% 6.3% 6.2% 5.4% 5.2% 5.1% 5.0% Auto parts 2,801 3,023 3,356 3,066 2,309 3,083 2,997 3,205 3,476 3,475 YoY 9.3% 7.9% 11.0% -8.6% -24.7% 33.5% -2.8% 6.9% 8.5% 0.0% Composition 4.3% 4.0% 4.0% 3.8% 4.3% 4.6% 4.6% 5.0% 5.0% 4.8% Source: Shared Research based on Ministry of Finance Containerships Containerships account for approximately 16% of the world seaborne trade. Global major carriers fleet com position World Seaborne Trade MOL NYK "K" Line COSCO (China) APM-Maersk (Denmark) Frontline (Bermuda) Teekay (Norway) MISC (Malaysia) Evergreen (Taiwan) Pacific Basin (Hong Kong) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: Shared Research based on FY03/13 MOL data Containership Dry Bulker Car Carrier Tanker LNG Carrier Note: See Glossary for details of the ship types appearing in the chart above. NTL thinks less-than-container-load (LCL) exports account for about 2% of all containers shipped from Japan. NTL commands approximately 20% of this LCL export market. The company commented that the LCL shipping market may grow to 5% of the global container shipping market over the medium and long term. The rationale behind this expectation is the diversification of consumer needs: companies shift to a high-mix, low-volume model should lead to demand growth for LCL shipping. The world seaborne trade has gradually expanded. In the chart below, cargos that NTL handles are likely included in the Others category. It is clear that this category drove world seaborne trade growth in line with global economic expansion. 21/42

22 NAIGAI TRANS LINE LTD. > Business World seaborne trade (mn tons) 12,000 10,000 8,000 6,000 4,000 2, (est.) (est.) Others LNG LPG Petrochemicals Crude Oil Grain Coal Iron Ore Source: Shared Research based on The Shipbuilder s Association of Japan Container Prices Global container prices trended downward until the beginning of 2012 on the back of containership oversupply and lower shipping volume due to European debt crises. From the spring of 2012, however, as shipping companies have reduced their fleet holdings, container prices have shown a temporary rise. Container prices declined in the summer of 2013 amid uncertainty of the economy, but they increased toward the year-end. In 2014, containerships fees did not rise because of an oversupply, despite strong demand for shipping. Container prices are generally affected by seasonal factors (i.e., shipping volume fluctuations by season). Usually, container prices tend to be higher from summer to calendar year end because the shipping volume increases as European and US markets near the Christmas selling seasons. As container prices are directly linked to NTL s purchase costs, the price fluctuations would be a short-term risk factor for NTL. Barriers to Entry As forwarders do not own ships, barriers to entry are low. NTL is the industry leader with a roughly 20% share in Japan s LCL shipping market. The 20% share is not particularly high, meaning the market has many players. Considering most of these players are running small businesses, again, barriers to entry are low. Competition As mentioned above, NTL is the leader in the domestic LCL shipping market with a 20% share. Main competitors in the market are Seino Logix Co., Ltd. (unlisted), Yusen Logistics Co., Ltd. (TSE1: 9370), Transcontainer Ltd. (unlisted), and other large forwarders. The company also competes with many others that are all small in scale and offering reasonable services, such as Marine Star Corporation (unlisted) and TRI-NET (JAPAN) INC. (unlisted). Although not competing head to head, NTL is often compared with AIT Corporation (TSE1: 9381), as AIT s sales (JPY19.1bn in FY02/14) are roughly on par with NTL s. AIT s focus is on China, mainly importing garments and other goods. NTL aims to grow into an international comprehensive freight forwarder that can compete with Kintetsu World Express, Inc. (TSE1: 9375) and Yusen Logistics. In Asia especially, Australia-based Toll Holdings Limited (ASX: TOL) is expanding. Since its IPO in 1993, Toll has acquired more than 100 companies, and Toll s FY12/11 sales were roughly JPY140bn (based on forex rates at the time, at JPY80 22/42

23 NAIGAI TRANS LINE LTD. > Business yen/aud). Source: Shared Research based on company data 23/42

24 NAIGAI TRANS LINE LTD. > Business Strategy Shift regional focus and strengthen services NTL plans to strengthen the Forwarding Business division (to handle integrated transport services including customs clearance, delivery, and machinery installation) and to expand the division s operations, thereby growing into a comprehensive freight forwarder. NTL is keen to become a comprehensive freight forwarder out of fear that it could not meet the increasingly challenging needs of corporate clients unless it offered comprehensive (door-to-door) freight forwarding services on top of the port-to-port transport services that it provides as a non-vessel operating common carrier (NVOCC). Efforts in this regard include the April 2012 acquisition of UCI Airfreight Japan, Inc. (unlisted). With this acquisition, the company entered the air forwarding business. In the mainstay LCL export business, the company aims to raise the load factor by introducing price settings that have a competitive advance. The company also aims to raise GPM, lowering COGS through price negotiations with shipping companies. Overseas In addition to expanding less-than-container-load (LCL) export sales, the company plans to build a comprehensive LCL import structure to offer door-to-door delivery. Using this structure, NTL aims to raise the import sales ratio (sales composition of 27% in FY12/14) and double import revenues in the long run. To achieve that, the company began sales activities linking domestic offices and overseas subsidiaries. The company established a new subsidiary, Flying Fish Co., Ltd. in February 2013, which then acquired the domestic business of Flying Fish Services Corporation in June of that year. Flying Fish Service Corp. has a strong international integrated transport services with a strong customer base in providing foodstuff imports for large corporations. Consequently, Flying Fish aims at increasing imports and developing a comprehensive forwarding structure including door-to-door delivery services. Another part of the NTL s strategy is to establish new business bases in India, China, Southeast Asia, and Europe, expanding its reach to major countries and ports worldwide. In January 2011, NTL acquired LOGISTICS PLUS INDIA PRIVATE LIMITED (international freight forwarder based in New Delhi, India; now NTL-INDIA). With the support of LPI, NTL aims to secure new routes from Southeast Asia to South Asia by utilizing its own warehouse in Singapore. In the long run, LPI will serve as a freight transfer center for container cargos bound for Europe. New businesses NTL has started offering third-party logistics (3PL) services. NTL acknowledges that the 3PL business is new for the company, and it needs to acquire suitable personnel and warehouses. A 3PL operator often undertakes logistics operations outsourced by a shipper lacking its own logistics functions. Because of this, 3PL operators have to be familiar with the details of the logistics processes of their clients. As of April 2014, despite the lack of personnel with such expertise, NTL thinks that it could transport (export) clients cargos to any part of the world in time. NTL is also considering entering warehousing and other businesses that require physical assets. The company plans to begin warehousing operations in October 2016 at the Busan New Port focusing on storage, loading, and processing services for cargoes between Japan and South Korea. 24/42