TOKAI Holdings / 3167

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1 COVERAGE INITIATED ON: 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. Research Report by Shared Research Inc.

2 INDEX How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company s most recent earnings. First-time readers should start at the business section later in the report. Executive summary Key financial data Recent updates Highlights Trends and outlook Quarterly trends and results Full-year company forecasts Outlook Medium and long-term plans Strategy Business Business description Profitability snapshot, financial ratios Market and value chain Strengths and weaknesses Historical performance and financial statements Historical performance Income statement Balance sheet Statement of cash flows News and topics Other information History Major shareholders Top management Employees Dividends and shareholder benefits Investor relations Company profile /70

3 Executive summary TOKAI Holdings operates primarily in Shizuoka prefecture, where it provides a diverse range of products and services to 2.83mn customers. Operations are energy and housing-related, which includes liquefied petroleum gas (LP gas) and information and communication (including a fiber-optic network and CATV). TOKAI Holdings Corporation was established on April 1, 2011, after the management integration of TOKAI CORPORATION (registered name: The TOKAI Corporation) and TOKAI Communications Corporation (formerly VIC TOKAI Corporation; name changed on October 1, 2011), and an accompanying transfer of shares to a holding company. The company s businesses, which provide a diverse array of services targeting both retail and commercial customers, fall into six business segments: Gas & Petroleum; Information and Communications; CATV; Aqua; Building and Real Estate; and Others. The Gas & Petroleum, Information and Communications, and CATV segments account for the majority of sales and operating profit (see the business section for further details). Trends and outlook On May 9, 2017, the company unveiled its new medium-term business plan, Innovation Plan 2020 JUMP. Designed to guide the company through FY03/21, the new business plan targets FY03/21 sales of JPY339.3bn (almost double the sales in FY03/17), operating profit of JPY22.5bn (roughly an 80% increase over FY03/17), and a ROE of 13%. Under the new plan the company has allocated JPY100bn for M&A, and intends to aggressively pursue opportunities for strategic mergers, acquisitions, and business alliances. The company makes it a priority to expand the revenue and customer base of its core businesses in gas, CATV, and information and communications through M&A. For FY03/18 (first year of the Innovation Plan 2020 JUMP ) consolidated earnings, TOKAI reported sales of JPY186.1bn (+4.2% YoY), operating profit of JPY11.0bn (-14.0%), recurring profit of JPY11.2bn (-12.4%), and net income attributable to parent company shareholders of JPY6.6bn (-9.8%). Sales reached 98.2% of the company s FY03/18 full-year forecasts, operating profit 96.2%, recurring profit 98.5%, and net income attributable to parent company shareholders 102.6%. As well as expanding its sale area and launching a new communication service (LIBMO, described below), the company increased upfront investments by JPY3.7bn YoY (on cancellation prevention, etc.). Meanwhile, customer base expansion contributed JPY1.8bn to profit and established a revenue base for FY03/19 and onwards. For FY03/19, the company is forecasting consolidated sales of JPY195.6bn (+5.1% YoY), operating profit of JPY14.0bn (+27.2%), recurring profit of JPY13.9bn (+24.0%), and net income attributable to parent company shareholders of JPY7.9bn (+19.6%). FY03/19 will be the second year under the company s new medium-term business plan, Innovation Plan 2020 JUMP (see Medium- and long-term plans and Strategy sections). The company expects an increase of JPY2.1bn to profit to follow increased sales due a customer base expanded by aggressive upfront investment in FY03/18 and increased customer numbers in FY03/19. Further, although the company plans to continue upfront investment to expand its customer base in FY03/19 and achieve the medium-term business plan, it plans to reduce costs for upfront investment and the like by JPY800mn YoY. Accordingly, the company expects operating profit to increase by JPY3.0bn YoY. The company expects to record all-time highs for operating profit, recurring profit, and net income for the second financial year running. The company expects to pay an annual dividend of JPY28 per share, the same as last year, based on its policy of maintaining stable and continuous dividend payments. Strengths and weaknesses Shared Research thinks TOKAI Holdings strengths center on its regional dominance providing greater profit contributions from non-gas businesses, flexibility to take business away from major utility companies, and beneficiary of structural reform and realignment of the LP gas industry. Weaknesses center on its lack of experience in cross-selling, structural decline in LP gas market, and intensifying competition in the CATV business. 03/70

4 Key financial data Income statement FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Total sales 160, , , , , , , , , , , ,600 YoY 3.8% 3.1% -3.9% 9.8% 4.0% -0.1% 4.0% -0.8% -3.5% -1.3% 4.2% 5.1% Gas and Petroleum 95,182 99,355 89,000 95,697 98,316 94,519 97,229 93,067 80,745 73,344 76,073 Information and Communications 42,024 45,322 34,672 34,725 37,943 38,497 38,803 40,118 44,246 49,508 50,894 CATV ,653 22,647 24,292 23,786 24,187 24,359 24,608 25,396 28,386 Building and Real Estate 14,430 14,324 14,399 14,907 15,881 15,756 19,245 20,019 20,975 19,511 19,807 Aqua ,750 4,378 4,959 5,487 5,762 6,200 Others 9,087 6,699 5,502 6,923 5,498 5,374 5,142 4,987 4,875 5,108 4,706 Gross profit 52,800 58,809 63,347 67,445 69,537 68,809 68,341 68,932 69,812 73,040 75,336 YoY 0.2% 11.4% 7.7% 6.5% 3.1% -1.0% -0.7% 0.9% 1.3% 4.6% 3.1% GPM 32.9% 35.5% 39.8% 38.6% 38.2% 37.9% 36.2% 36.8% 38.6% 40.9% 40.5% Operating profit 6,362 8,279 10,029 10,755 10,923 8,934 7,392 9,003 8,245 12,750 10,971 13,960 YoY -19.7% 30.1% 21.1% 7.2% 1.6% -18.2% -17.3% 21.8% -8.4% 54.6% -14.0% 27.2% OPM 4.0% 5.0% 6.3% 6.1% 6.0% 4.9% 3.9% 4.8% 4.6% 7.1% 5.9% 7.1% Recurring profit 4, ,822 9,489 9,818 8,065 7,013 8,549 8,150 12,775 11,191 13,880 YoY -12.7% % 3.5% -17.9% -13.0% 21.9% -4.7% 56.7% -12.4% 24.0% RPM 2.6% - 6.8% 5.4% 5.4% 4.4% 3.7% 4.6% 4.5% 7.2% 6.0% 7.1% Net income 518-2,187 3,080 2,152 2,715 3,085 2,598 3,934 3,458 7,337 6,620 7,920 YoY -85% % 26.2% 13.6% -15.8% 51.4% -12.1% 112.2% -9.8% 19.6% Net margin 0.3% - 1.9% 1.2% 1.5% 1.7% 1.4% 2.1% 1.9% 4.1% 3.6% 4.0% Per share data Shares issued (year end; '000) 75,750 75,750 75,750 70, , , , , , , ,680 EPS EPS (fully diluted) Dividend per share Book value per share Balance sheet (JPYmn) Cash and cash equivalents 7,814 8,416 12,267 8,622 2,602 4,235 3,182 2,861 4,077 3,239 3,143 Total current assets 58,352 52,715 51,236 49,744 41,093 40,351 40,606 35,959 38,117 38,594 40,931 Tangible fixed assets 83,557 88, , , , , ,129 98,935 95,064 93,647 96,810 Investment and other assets 17,209 18,653 17,138 15,996 14,995 15,638 16,855 19,539 16,149 17,860 17,447 Intangible fixed assets 7,360 8,795 14,810 16,654 17,266 14,906 12,943 11,224 10,940 10,988 11,198 Total assets 166, , , , , , , , , , ,391 Accounts payable 12,375 11,743 11,193 12,652 13,636 13,019 14,105 13,035 13,511 14,779 15,670 Short-term debt 55,415 66,592 66,667 56,756 50,834 48,614 44,169 36,279 28,586 26,888 27,358 Total current liabilities 87,339 98,308 96,682 89,783 85,179 82,563 78,905 71,160 62,958 61,304 63,705 Long-term debt 54,280 46,016 61,019 65,400 53,404 44,093 41,171 36,790 42,823 39,596 36,793 Total fixed liabilities 58,734 53,513 74,804 81,866 71,374 61,068 56,385 51,074 55,373 43,361 41,235 Total liabilities 146, , , , , , , , , , ,940 Net assets 20,728 16,732 19,549 21,589 27,181 34,011 38,329 43,467 41,970 56,446 61,450 Total interest-bearing debt 109, , , , ,238 92,707 85,340 73,069 71,409 66,484 64,151 Cash flow statement (JPYmn) Cash flows from operating activities 13,587 22,406 21,915 23,521 28,584 25,713 22,806 27,265 21,395 26,692 20,909 Cash flows from investing activities -14,610-20,064-25,665-14,601-10,037-9,983-9,664-8,851-11,015-10,985-11,488 Cash flows from financing activities ,787 7,253-11,278-24,255-14,051-14,125-18,764-9,150-16,643-9,527 Financial ratios ROA (RP-based) 2.5% -0.2% 6.0% 4.9% 5.2% 4.5% 4.0% 5.0% 5.0% 7.9% 6.8% ROE 3.4% -16.8% 24.6% 15.0% 13.2% 10.4% 7.4% 9.9% 8.3% 15.2% 11.4% Equity ratio 8.8% 6.7% 7.2% 7.7% 14.3% 18.6% 21.6% 25.7% 25.6% 34.5% 36.3% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Results for FY03/11 and prior years are of TOKAI Corp. 04/70

5 Segment sales and operating profit after allocation of overhead expenses Segment sales and operating profit FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 (JPYmn) TOKAI cons. TOKAI cons. Cons.** Cons.** Cons. Cons.** Cons. Cons. Cons. Cons. Cons. Total sales 160, , , , , , , , , , ,069 YoY 3.8% 3.1% -3.9% 9.8% 4.0% -0.1% 4.0% -0.8% -3.5% -1.3% 4.2% Gas and Petroleum 95,182 99,355 89,000 95,697 98,316 94,519 97,229 93,067 80,745 73,344 76,073 YoY 8.8% 4.4% -10.4% 7.5% 2.7% - 2.9% 102.9% 102.9% 202.9% 302.9% % o total sales 59.2% 60.0% 55.9% 54.7% 54.0% 52.0% 51.4% 49.6% 44.6% 41.1% 40.9% Information Communications 42,024 45,322 34,672 34,725 37,943 38,497 38,803 40,118 44,246 49,508 50,894 YoY % 9.3% 1.5% 0.8% 3.4% 10.3% 11.9% 2.8% % o total sales 26.1% 27.4% 21.8% 19.9% 20.9% 21.2% 20.5% 21.4% 24.5% 27.7% 27.4% CATV ,653 22,647 24,292 23,786 24,187 24,359 24,608 25,396 28,386 YoY % 7.3% -2.1% 1.7% 0.7% 1.0% 3.2% 11.8% % o total sales % 12.9% 13.4% 13.1% 12.8% 13.0% 13.6% 14.2% 15.3% Building and Real Estate 14,430 14,324 14,399 14,907 15,881 15,756 19,245 20,019 20,975 19,511 19,807 YoY -21.0% -0.7% 0.5% 3.5% 6.5% -0.8% 22.1% 4.0% 4.8% -7.0% 1.5% % o total sales 9.0% 8.6% 9.0% 8.5% 8.7% 8.7% 10.2% 10.7% 11.6% 10.9% 10.6% Aqua ,750 4,378 4,959 5,487 5,762 6,200 YoY % 116.7% 116.7% 216.7% 316.7% % o total sales % 2.3% 2.6% 3.0% 3.2% 3.3% Others 9,087 6,699 5,502 6,923 5,498 5,374 5,142 4,987 4,875 5,108 4,706 YoY 2.7% -26.3% -17.9% 25.8% -20.6% -2.3% -4.3% -3.0% -2.2% 4.8% -7.9% % o total sales 5.7% 4.0% 3.5% 4.0% 3.0% 3.0% 2.7% 2.7% 2.7% 2.9% 2.5% Operating profit 6,362 8,279 10,029 10,755 10,923 8,934 7,392 9,003 8,245 12,750 10,971 YoY -19.7% 30.1% 21.1% 7.2% 1.6% -18.2% -17.3% 21.8% -8.4% 54.6% -14.0% OPM 4.0% 5.0% 6.3% 6.1% 6.0% 4.9% 3.9% 4.8% 4.6% 7.1% 5.9% Gas and Petroleum 3,465 6,434 7,111 6,154 4,577 5,200 4,520 5,549 6,973 6,942 4,967 YoY % 10.5% -13.5% -25.6% % 22.8% 25.7% -0.4% -28.5% OPM 3.6% 6.5% 8.0% 6.4% 4.7% 5.5% 4.6% 6.0% 8.6% 9.5% 6.5% % of total operating profit 54.5% 77.7% 70.9% 57.2% 41.9% 58.2% 61.1% 61.6% 84.6% 54.4% 45.3% Information Communications 4,576 4,255 3,586 4,310 4,197 3,746 3,049 3, ,065 1,866 YoY % -2.6% -10.7% -18.6% 14.3% -76.2% 269.7% -39.1% OPM 10.9% 9.4% 10.3% 12.4% 11.1% 9.7% 7.9% 8.7% 1.9% 6.2% 3.7% % of total operating profit 71.9% 51.4% 35.8% 40.1% 38.4% 41.9% 41.2% 38.7% 10.1% 24.0% 17.0% CATV - - 1,869 2,592 1, ,161 2,331 3,035 YoY % -36.4% -74.0% 126.8% -11.4% 34.7% 100.8% 30.2% OPM % 11.4% 6.8% 1.8% 4.0% 3.5% 4.7% 9.2% 10.7% % of total operating profit % 24.1% 15.1% 4.8% 13.2% 9.6% 14.1% 18.3% 27.7% Building and Real Estate YoY -39.6% -20.8% -54.1% 431.7% -35.2% -62.3% 343.1% -46.5% 36.6% -31.8% 42.1% OPM 3.1% 2.5% 1.1% 5.7% 3.5% 1.3% 4.8% 2.5% 3.2% 2.4% 3.3% % of total operating profit 7.0% 4.2% 1.6% 8.0% 5.1% 2.3% 12.5% 5.5% 8.2% 3.6% 6.0% Aqua ,029-2,107-1,448-1, YoY % OPM % % of total operating profit % -28.5% -16.1% -15.5% 0.8% 0.2% Others YoY OPM % -0.2% -7.7% -4.0% 2.2% 6.4% % of total operating profit -1.7% -8.3% -6.0% -2.5% -2.1% -0.2% -0.1% -4.3% -2.4% 0.9% 2.7% Adjustments -2,017-2,077-2,096-2, Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Segment operating profits are after allocation of overhead expenses. 05/70

6 Recent updates Highlights On August 13, 2018, TOKAI Holdings Corporation announced a capital and business alliance with Minna-Denryoku, Inc. The company underwrote a capital increase by third-party allotment of shares issued by Minna-Denryoku for the purpose of business expansion. In addition, the company concluded a capital and business alliance with Minna-Denryoku relating to the company s entry into the renewable energy business by leveraging both companies management resources. With this alliance, the company plans to provide renewable energy-related services such as the sale of renewable electricity and sale and maintenance of storage batteries from April 2019 through the group s new company. From 2019 onward, an increasing amount of solar electricity will reach the expiry of application of fixed-price purchase agreements under the Feed-in Tariff (FIT) Act. In addition to individuals owning renewable energy sources nearing the expiration of the FIT period, corporates that choose to use renewable electricity as a way to contribute to society from the perspective of RE100*, ESG**, and CSR, and municipalities aiming for local production and consumption of electricity are expected to drive the distribution of renewable energy sources. *An international association of corporates that are committed to using 100% renewable electricity. **An initialism for Environment, Social, and Governance; indicates whether a company is capable of sustainable growth. Blockchain technology is gaining attention as the base technology to support the independent expansion of distributed renewable energy sources. Blockchain technology is expected to enable owners of distributed renewable energy sources (electricity generators) to sell electricity or environmental value of renewable energy (value of energy sources that do not emit CO2) directly to consumers without going through a third-party (electricity company). Minna-Denryoku is an energy innovation startup that sells renewable electricity generated in various regions throughout Japan on its propriety energy trading platform. The share of renewable electricity to the total amount of electricity supplied by Minna-Denryoku is high even in the industry standards. Minna-Denryoku also has a track record in utilizing electricity generated by local municipalities in reginal revitalization activities. Further, it is expanding its business operations by capturing increasing demand for renewable energy of RE100 member companies in Japan to actively promote the sale of renewable energy to corporates. Minna-Denryoku is also a leader in issuing renewable energy certificates (verifies the source of electricity), and is working to provide new services by applying blockchain technology to its propriety energy trading platform such as issuing renewable energy certificates, direct energy trading between individuals and corporates, and sale and purchase of the value of energy source that were not possible with the conventional charge-based electricity sales system. TOKAI anticipates new business opportunities to stem from a steady increase in the share of renewable electricity to total electricity generated and the expected drastic change in surrounding business environments. The company believes that the renewable energy business is highly compatible with its business portfolio in that it provides services related to energy, lifestyle infrastructure, community-based services, and monthly fee-charging model, and hence, it has begun considering in earnest entering the renewable energy business. With the capital and business alliance with Minna-Denryoku, the company plans to supply electricity to existing individual customers as well as corporate customers committed to fulfilling CSR by utilizing Minna-Denryoku s electricity, a high proportion of which comes from renewable energy sources, and improve its brand value. Further, TOKAI intends to actively expand this business model to gas and CATV operators throughout Japan as part of its initiative to form alliances with other businesses under the current management plan, Innovation Plan 2020 Jump. Goals in commercializing the renewable energy business Utilize solar electricity nearing the end of fixed-price purchase agreement (FIT period) in /70

7 Establish Private entity-led new Japanese version of Stadtwerke,*** a system for local production and consumption of renewable energy Expand a service for corporates Community-based RE100 nationally ***A small-scale, community-based business in charge of management and maintenance of regional energy business and lifestyle infrastructure in various regions in Germany. Schedule for commercialization August 2018 November 2018 August 2019 Establish a Preparation Office for establishing a new company Announce a business plan Establish a new company The company expects the capital and business alliance will have minor impacts on full-year forecast for FY03/19. On August 7, 2018, the company announced earnings results for Q1 FY03/19; see the results section for details. On June , Shared Research updated the report following interviews with the company. On May 8, 2018, the company announced earnings results for full-year FY03/18. For previous releases and developments, please refer to the News and topics section. 07/70

8 Trends and outlook Quarterly trends and results Quarterly performance FY03/17 FY03/18 FY03/19 FY03/19 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1Q 2Q 3Q 4Q % of 1H 1H Est. Sales 41,618 40,583 45,231 51,199 42,531 42,380 48,425 52,733 44, % 90,100 YoY -2.5% -3.6% -0.2% 0.7% 2.2% 4.4% 7.1% 3.0% 4.8% % Gross profit 17,398 16,226 18,753 20,663 17,633 16,841 19,686 21,176 17, YoY 5.9% 2.8% 5.1% 4.6% 1.4% 3.8% 5.0% 2.5% 1.9% GPM 41.8% 40.0% 41.5% 40.4% 41.5% 39.7% 40.7% 40.2% 40.3% SG&A expenses 14,528 14,690 14,965 16,107 15,481 15,879 16,221 16,784 15, YoY -1.3% -6.1% -4.7% 3.8% 6.6% 8.1% 8.4% 4.2% 0.6% SG&A ratio 34.9% 36.2% 33.1% 31.5% 36.4% 37.5% 33.5% 31.8% 35.0% Operating profit 2,870 1,536 3,787 4,557 2, ,465 4,392 2, % 3,700 YoY 68.0% 937.8% 76.1% 7.5% -25.0% -37.4% -8.5% -3.6% 11.1% % OPM 6.9% 3.8% 8.4% 8.9% 5.1% 2.3% 7.2% 8.3% 5.4% % Recurring profit 2,900 1,528 3,818 4,529 2, ,519 4,529 2, % 3,650 YoY 75.9% % 78.2% 7.1% -24.0% -38.5% -7.8% 0.0% 12.8% % RPM 7.0% 3.8% 8.4% 8.8% 5.2% 2.2% 7.3% 8.6% 5.6% % Net income 1, ,466 2,487 1, ,189 3,185 1, % 1,890 YoY 147.3% % 20.6% -33.1% -89.6% -11.2% 28.1% 21.2% % Net margin 4.2% 1.5% 5.5% 4.9% 2.8% 0.2% 4.5% 6.0% 3.2% % Cumulative Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of FY FY Est. Sales 41,618 82, , ,631 42,531 84, , ,069 44, % 195,600 YoY -2.5% -3.0% -2.1% -1.3% 2.2% 3.3% 4.6% 4.2% 4.8% % Gross profit 17,398 33,624 52,377 73,040 17,633 34,474 54,160 75,336 17, YoY 5.9% 4.4% 4.6% 4.6% 1.4% 2.5% 3.4% 3.1% 1.9% GPM 41.8% 40.9% 41.1% 40.9% 41.5% 40.6% 40.6% 40.5% 40.3% SG&A expenses 14,528 29,218 44,183 60,290 15,481 31,360 47,581 64,365 15, YoY -1.3% -3.7% -4.1% -2.1% 6.6% 7.3% 7.7% 6.8% 0.6% SG&A ratio 34.9% 35.5% 34.7% 33.8% 36.4% 36.9% 35.7% 34.6% 35.0% Operating profit 2,870 4,406 8,193 12,750 2,152 3,114 6,579 10,971 2, % 13,960 YoY 68.0% 137.4% 104.5% 54.6% -25.0% -29.3% -19.7% -14.0% 11.1% % OPM 6.9% 5.4% 6.4% 7.1% 5.1% 3.7% 4.9% 5.9% 5.4% % Recurring profit 2,900 4,428 8,246 12,775 2,204 3,143 6,662 11,191 2, % 13,880 YoY 75.9% 148.9% 110.3% 56.7% -24.0% -29.0% -19.2% -12.4% 12.8% % RPM 7.0% 5.4% 6.5% 7.2% 5.2% 3.7% 5.0% 6.0% 5.6% % Net income 1,766 2,384 4,850 7,337 1,182 1,246 3,435 6,620 1, % 7,920 YoY 147.3% 760.6% 247.7% 112.2% -33.1% -47.7% -29.2% -9.8% 21.2% % Net margin 4.2% 2.9% 3.8% 4.1% 2.8% 1.5% 2.6% 3.6% 3.2% % Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. 08/70

9 Quarterly performance trends by segment (segment operating profits are before allocation of overhead expenses) Segments (quarterly) FY03/17 FY03/18 FY03/19 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Sales 41,618 40,583 45,231 51,199 42,531 42,380 48,425 52,733 44,553 YoY -2.5% -3.6% -0.2% 0.7% 2.2% 4.4% 7.1% 3.0% 4.8% Gas and Petroleum 17,479 15,017 18,795 22,053 17,392 15,385 20,368 22,928 17,608 YoY -13.8% -15.0% -7.8% -1.5% -0.5% 2.5% 8.4% 4.0% 1.2% Information and Communications 11,780 11,970 12,462 13,296 12,447 12,459 12,854 13,134 12,513 YoY 19.9% 12.9% 7.8% 8.5% 5.7% 4.1% 3.1% -1.2% 0.5% CATV 6,241 6,319 6,341 6,495 6,406 7,201 7,264 7,515 7,511 YoY 2.7% 2.9% 3.4% 3.7% 2.6% 14.0% 14.6% 15.7% 17.2% Building and Real Estate 3,414 4,626 4,886 6,585 3,617 4,732 5,142 6,316 4,166 YoY -14.9% -12.5% 9.0% -8.4% 5.9% 2.3% 5.2% -4.1% 15.2% Aqua 1,424 1,505 1,462 1,371 1,456 1,599 1,597 1,548 1,653 YoY 7.9% 5.5% 5.6% 1.0% 2.2% 6.2% 9.2% 12.9% 13.5% Others 1,277 1,146 1,285 1,400 1,211 1,003 1,201 1,291 1,100 YoY 11.1% 17.1% -6.8% 2.3% -5.2% -12.5% -6.5% -7.8% -9.2% Segments (cumulative) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Sales 41,618 82, , ,631 42,531 84, , ,069 44,553 YoY -2.5% -3.0% -2.1% -1.3% 2.2% 3.3% 4.6% 4.2% 4.8% Gas and Petroleum 17,479 32,496 51,291 73,344 17,392 32,777 53,145 76,073 17,608 YoY -13.8% -14.4% -12.1% -9.2% -0.5% 0.9% 3.6% 3.7% 1.2% Information and Communications 11,780 23,750 36,212 49,508 12,447 24,906 37,760 50,894 12,513 YoY 19.9% 16.3% 13.2% 11.9% 5.7% 4.9% 4.3% 2.8% 0.5% CATV 6,241 12,560 18,901 25,396 6,406 13,607 20,871 28,386 7,511 YoY 2.7% 2.8% 3.0% 3.2% 2.6% 8.3% 10.4% 11.8% 17.2% Building and Real Estate 3,414 8,040 12,926 19,511 3,617 8,349 13,491 19,807 4,166 YoY -14.9% -13.6% -6.2% -7.0% 5.9% 3.8% 4.4% 1.5% 15.2% Aqua 1,424 2,929 4,391 5,762 1,456 3,055 4,652 6,200 1,653 YoY 7.9% 6.7% 6.3% 5.0% 2.2% 4.3% 5.9% 7.6% 13.5% Others 1,277 2,423 3,708 5,108 1,211 2,214 3,415 4,706 1,100 YoY 11.1% 13.9% 5.7% 4.8% -5.2% -8.6% -7.9% -7.9% -9.2% Operating profit 2,870 4,406 8,193 12,750 2,152 3,114 6,579 10,971 2,390 YoY 68.0% 137.4% 104.5% 54.6% -25.0% -29.3% -19.7% -14.0% 11.1% Gas and Petroleum 2,197 2,838 5,550 9,161 1,324 1,562 3,857 7,364 1,182 YoY 17.8% 6.7% 6.1% 1.9% -39.7% -45.0% -30.5% -19.6% -10.7% Information and Communications 913 1,910 2,993 4, ,541 2,410 3, YoY 32.1% 75.9% 103.3% 82.5% -15.2% -19.3% -19.5% -24.7% -6.5% CATV 717 1,451 2,125 2, ,769 2,758 3,554 1,194 YoY 44.0% 49.9% 46.2% 39.3% 22.0% 21.9% 29.8% 29.1% 36.5% Building and Real Estate , , YoY 28.6% -6.7% 18.4% -13.3% 11.1% 19.8% 10.0% 21.1% 136.7% Aqua YoY % -32.8% -26.1% -17.4% 71.4% Others and adjustments -1,060-2,318-3,396-4, ,281-3,350-4,699-1,022 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Segment operating profits are before allocation of overhead expenses. 09/70

10 Q1 FY03/19 results Results summary JPY44.6bn (+4.8% YoY) Operating profit: JPY2.4bn (+11.1% YoY) Recurring profit: JPY2.5bn (+12.8% YoY) Net income*: JPY1.4bn (+21.2% YoY) * Net income attributable to the parent company shareholders Sales reached 49.4% of the company s 1H FY03/19 forecasts (vs. 50.1% in Q1 FY03/18 of 1H FY03/18 result), operating profit 64.6% (69.1%), recurring profit 68.1% (70.1%), and net income attributable to parent company shareholders 75.8% (94.9%). Progress rates versus FY03/19 company forecasts were sales 22.8% (vs. 22.9% in Q1 FY03/18 of FY03/18 result), operating profit 17.1% (19.6%), recurring profit 17.9% (19.7%), and net income attributable to parent company shareholders 18.1% (17.9%) The company says that 1Q results were stronger than its initial internal forecasts. Household LP gas sales volume undershot, but the CATV and the Building and Real Estate segments posted larger profit gains than expected. TOKAI Holdings, under its medium-term business plan Innovation Plan 2020 JUMP, is seeking to increase the number of customers re-subscribing to its services as part of an ongoing management theme. It also plans to expand its sales areas and to have more customers sign up for multiple services based on its Total Life Concierge (TLC) concept, targeting acquisitions and alliances valued at JPY100bn over four years through FY03/21. The goal is to see a twofold increase in the number contracts, sales, and operating profit by FY03/21, the final year of the business plan, from the figures achieved in FY03/17. Note that FY03/19 is the second year of the medium-term plan. In 1Q FY03/19, the number of continuing customers of TOKAI group climbed by 313,000 to 2,883,000 (+12.2% YoY) thanks to M&A activities in FY03/18 and promotion of customer acquisition in each business. Customer count Compared with a year ago, the gas (LP, city gas) business had a net increase of 19,000 customers, and the Aqua business had a net increase of 13,000 customers. In Information and Communications services, while there was a net increase of 17,000 customers for Hikari Collaboration compared with end-fy03/18, there was an overall net decrease of 22,000 customers primarily due to the net decrease of 56,000 subscribers for the traditional ISP service. by 301,000. Change in customer numbers, by service segment Number of customers FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 YoY ('000) Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Change Gas (LP Gas, City Gas) Conventional ISP Hikari Collaboration LIBMO Mobile Information and Communications ,049 1,087 1,095 1,081 1,057 1, CATV , Aqua Security Total 2,378 2,392 2,471 2,526 2,537 2,557 2,570 2, Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Customer numbers are duplicated for Information and Communications and CATV segments when shown separately, but not in the totals. 10/70

11 The number of continuing customers rose by 7,000 from 2,876,000 at end-fy03/18 to 2,883,000. The number of members for TLC Membership Service rose 32,000 to 731,000. Breakdown by service was gas (LP, city gas) business at a net increase of 3,448 customers (up 2,879 in Q1 FY03/18), CATV net increase of 6,908 (4,930), and Aqua (bottled water delivery) net increase of 4,711 (2,732). The number of subscribers for a new, TOKAI brand MVNO* business called LIBMO** launched in February 2017 was up by 3,000 to 32,000. * MVNO (Mobile Virtual Network Operator): Business offering self-branded mobile communication services for mobile phones and PHS devices without building or operating wireless communication facilities, and instead leasing communication lines from major mobile communication carriers. ** The company is actively promoting LIBMO ( as not only a method to capture new customers in mobile communication, but also as a strategic measure to acquire more contracts and prevent contract termination of fixed-line services, by packaging it with products such as Hikari Collaboration. Specifically, TOKAI is working in partnership with major electronics mass retailers to gain new customers. The company is also working to expand sales to its existing 2.6mn customers by awarding loyalty points in addition to its TLC membership services, and by utilizing flyers and newsletters. Results by segment Segment results as reported by the company reflect allocated overhead expenses. Gas and Petroleum JPY17.6bn (+1.2% YoY) Operating profit: JPY610mn (-15.5% YoY) Operating profit declined YoY despite increased sales because of weaker gas sales volume due to high temperatures. The LP gas business had sales of JPY14.7bn (+0.4% YoY). The number of customers reached 610,000, an increase of 3,000 from end-fy03/18. While gas sales volume dropped because of higher temperatures than in Q1 FY03/18, sales increased on the boost to sales prices from higher raw material costs. In the Gas and Petroleum segment, the city gas business had sales of JPY2.9bn (+5.8% YoY). While the number of customers remained almost unchanged at 55,000, sales rose YoY as the gas rates increased due to energy regulations to reflect the change of natural gas prices. Information and Communications JPY12.5bn (+0.5% YoY) Operating profit: JPY430mn (-6.0% YoY) Profit declined on increase in CoGS in Communications business, such as higher fees to connect to NTT s network. Services for consumers generated sales of JPY7.8bn (-1.2% YoY). Amid tougher competition with major carriers, Hikari Collaboration added 4,000 customers from end FY03/18, bringing its customer count to 3247,000. However, the number of customers in traditional ISP service dropped by 14,000 to 451,000. LIMBO, a new MVNO service launched on a full scale in February 2017, as noted above, had 32,000 customers, an increase of 3,000 from end-fy03/18. Sales for corporate clients reached JPY4.7bn (+3.5% YoY). Sales rose on expansion of recurring revenue businesses and an increase in system development contracts. CATV JPY7.5bn (+17.2% YoY) Operating profit: JPY1.1bn (+43.0% YoY) 11/70

12 Sales and profit rose sharply on smooth increase in customer volume in existing areas, in addition to the boost from M&A activities in FY3/18. In CATV segment, the company sought to increase customers by enhancing price competitiveness through offering combination discounts for a broadcasting and communications bundle as well as combinations with smartphones in partnership with major cellphone carriers. By improving customer satisfaction, the company won new clients and managed to prevent many existing customers from switching to its rivals. The company also sought to prevent contract cancelations at its call center. In its broadcasting service, the company strove to promote fiber optic networks that are capable of supporting 4K broadcasts and television broadcasts which contain regional information. In its communications service, the company began an ultra-high-speed fiber optic network service (maximum speed of 10Gbps). These initiatives are part of an effort to improve customer satisfaction through enhancing services. Consequently, the CATV business had 778,000 customers, up 3,000, while customers of communications services increased by 4,000, to 261,000. Building and Real Estate JPY4.2bn (+15.2% YoY) Operating profit: JPY64mn (JPY51mn loss in Q1 FY03/18) Renovation and building business deals increased. Aqua JPY1.7bn (+13.5% YoY) Operating profit: JPY35mn (zero in Q1 FY03/18) The company aggressively promoted its bottled water brand, Oishii Mizu no Okurimono - ulunom (the Gift of Delicious Water), mainly at large commercial facilities. As a result, the overall customer count rose by 5,000 from end-fy03/18 to 151,000. Increased cost to acquire customers was the main reason operating profit fell YoY. Others JPY1.1bn (-9.1% YoY) Operating profit: JPY25mn (-67.5% YoY) The nursing care business had sales of JPY2.6mn (+6.5% YoY) after the company logged more users. In ships business, a decreased volume of ship repairs led to sales of JPY325mn (-17.2% YoY), while in the bridal events business, sales were JPY336mn (-11.6% YoY) due to a decline in the number of wedding hosts. For details on previous quarterly and annual results, please refer to the Historical financial statements section. 12/70

13 Full-year company forecasts FY03/17 FY03/18 FY03/19 (JPYmn) 1H Act. 2H Act. FY Act. 1H Act. 2H Act. FY Act. 1H Est. 2H Est. FY Est. Sales 82,201 96, ,631 84, , ,069 90, , ,600 YoY -3.0% 0.3% -1.3% 3.3% 4.9% 4.2% 6.1% 4.3% 5.1% CoGS 48,577 57, ,590 50,437 60, ,733 Gross profit 33,624 39,416 73,040 34,474 40,862 75,336 YoY 4.4% 4.8% 4.6% 2.5% 3.7% 3.1% GPM 40.9% 40.9% 40.9% 40.6% 40.4% 40.5% SG&A expenses 29,218 31,072 60,290 31,360 33,005 64,365 SG&A-to-sales ratio 35.5% 32.2% 33.8% 36.9% 32.6% 34.6% Operating profit 4,406 8,344 12,750 3,114 7,857 10,971 3,700 10,260 13,960 YoY 137.4% 30.6% 54.6% -29.3% -5.8% -14.0% 18.8% 30.6% 27.2% OPM 5.4% 8.7% 7.1% 3.7% 7.8% 5.9% 4.1% 9.7% 7.1% Recurring profit 4,428 8,347 12,775 3,143 8,048 11,191 3,650 10,230 13,880 YoY 148.9% 31.0% 56.7% -29.0% -3.6% -12.4% 16.1% 27.1% 24.0% RPM 5.4% 8.7% 7.2% 3.7% 8.0% 6.0% 4.1% 9.7% 7.1% Net income 2,384 4,953 7,337 1,246 5,374 6,620 1,890 6,030 7,920 YoY 760.6% 55.7% 112.2% -47.7% 8.5% -9.8% 51.7% 12.2% 19.6% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. For FY03/19, the company is forecasting consolidated sales of JPY195.6bn (+5.1% YoY), operating profit of JPY14.0bn (+27.2%), recurring profit of JPY13.9bn (+24.0%), and net income attributable to parent company shareholders of JPY7.9bn (+19.6%). FY03/19 will be the second year under the company s new medium-term business plan, Innovation Plan 2020 JUMP (see Medium- and long-term plans and Strategy sections). The company expects an YoY increase of JPY2.1bn to profit (see item 1 in chart below) to follow increased sales due a customer base expanded by aggressive upfront investment in FY03/18 and increased customer numbers in FY03/19. Further, although the company plans to continue upfront investment to expand its customer base in FY03/19 and achieve the medium-term business plan, it plans to reduce costs for upfront investment and the like by JPY800mn YoY (see item 2 in chart below). Accordingly, the company expects operating profit to increase by JPY3.0bn YoY. The company expects to record all-time highs for operating profit, recurring profit, and net income for the second financial year running. The company forecasts the number of customers to rise about 60,000 YoY, to 2,940,000 (not including M&A). Factors to changes in YoY operating profit in FY03/19 company forecasts (JPYmn) Company plans YoY change in OP (1-2-3) +3,000 Customer count increase and other profit contributions 1 +2,100 Gas +900 CATV +600 Hikari Collaboration +100 Corporate communications +500 Investments (YoY change) Gas business (prevention of cancellation) -500 Gas business (expansion of business locations) +100 Communication MVNO (promotion of LIBMO) -400 Other costs (YoY change) Information and communication -700 Consumption volume +300 Other +300 Source: Shared Research based on company data The company expects to pay an annual dividend of JPY28 per share, the same as last year, based on its policy of maintaining stable and continuous dividend payments. Main initiatives in FY03/19 Continue expanding customer base; take strides toward establishing new overseas hubs In the previous year (FY03/18), the company expanded its area in the LP Gas business by entering Okayama and Gifu. In the CATV business, the company expanded its customer base and area through two M&A transactions. In FY03/19, the company plans to continue expanding its customer base and aims to increase the number of customers by around 60,000 YoY on an organic basis (not including M&A). Overseas, the company is operating the Aqua business in Shanghai, a system 13/70

14 development business in Taiwan, and an LP gas piping business in Myanmar. The company is taking efforts towards entering a fourth overseas business. Promote M&A In the new medium-term management plan, Innovation Plan 2020 JUMP, which ends at the end of FY03/21, the company plans to invest JPY100bn in four years for strategic M&A and business alliances. In the previous year (FY03/18), the company acquired Tokyo Bay Network Co., Ltd. (customer base of 260,000 persons) and TV Tsuyama Inc. (10,000 persons). In the future, the company plans to consider additional M&A transactions aimed at launching new services and strengthening its existing businesses (complement areas, expand customer base, etc.). ABCIR+S President and Representative Director Katsuhiko Tokita coined the term A (AI) B (Big Data) C (Cloud) I (IoT) R (Robotics) + S (Smartphone). The company group is currently deliberating whether it can utilize ABCIR+S to generate new businesses or streamline business operations. This concept claims that in order to achieve significant growth in an era of large shifts, destructive innovation which shatters past preconceptions is required. As the company s greatest strength is its sales ability, the company can construct a deep connection with customers by utilizing ABCIR+S to strengthen its connections with its customers, which can subsequently be used in the group s growth strategy. In May 2018, the company launched the Next-Generation Management Strategy Department (renaming the Corporate Management Department) to promote the ABCIR+S model (new business generation, advancement of customer connections, information strategy, etc.) across the entire group. 14/70

15 Historical performance vs. estimates Results vs. Initial Est. FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 (JPYmn) Cons. * Cons. * Cons. * Cons. Cons. Cons. Cons. Cons. Cons. Cons. Sales (Initial Est.) 182, , , , , , , , , ,400 Sales (Results) 165, , , , , , , , , ,069 Results vs. Initial Est. -9.0% -7.3% -1.6% -1.9% -4.0% 0.3% -4.8% -5.9% -4.5% -1.8% Operating profit (Initial Est.) 7,840 10,350 9,470 8,450 6,990 9,160 8,210 7,760 12,560 11,410 Operating profit (Results) 8,279 10,029 10,755 10,923 8,934 7,392 9,003 8,245 12,750 10,971 Results vs. Initial Est. 5.6% -3.1% 13.6% 29.3% 27.8% -19.3% 9.7% 6.3% 1.5% -3.8% Recurring profit (Initial Est.) 5,900 9,670 7,610 6,550 5,750 8,370 7,380 7,410 11,830 11,360 Recurring profit (Results) ,822 9,489 9,818 8,065 7,013 8,549 8,150 12,775 11,191 Results vs. Initial Est % 24.7% 49.9% 40.3% -16.2% 15.8% 10.0% 8.0% -1.5% Net income (Initial Est.) 1,820 3,490 1,880 1,620 1,980 3,530 3,200 3,240 6,240 6,450 Net income (Results) -2,187 3,080 2,152 2,715 3,085 2,598 3,934 3,458 7,337 6,620 Results vs. Initial Est % 14.5% 67.6% 55.8% -26.4% 22.9% 6.7% 17.6% 2.6% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Results for FY03/11 and prior years are of TOKAI Corp. TOKAI tends to have conservative forecasts for profits while using slightly aggressive forecasts for sales. For FY03/14 the company revised down its forecasts on January 30, 2014, because it injected strategic costs in expanding the Aqua business in the Kanto region and purchase prices in the LP gas business sharply surpassed its assumption due to the yen s depreciation. In FY03/15, sales fell below the company s forecast since it lowered selling prices of gas in response to falls in purchase prices. However, profits surpassed the forecasts as the main businesses remained firm. FY03/16 sales were also lower than forecast, due largely to a reduction in sales prices in the gas business in line with the lower procurement prices. Nevertheless, profits exceeded initial forecasts, due to solid performance in main businesses, and a profit contribution from the time lag between the fall in gas procurement prices and lowering sales prices to customers. Sales of the gas business fell short of the company s forecast in FY03/17, because the company cut sales prices to reflect lower purchase prices. However, profits at all levels surpassed upwardly revised forecasts announced with 1H results on October 31, In FY03/18, sales also missed forecasts and even profits (excluding net income) were below forecasts. This is mainly due to higher than planned upfront spending to expand the earnings base. 15/70

16 Outlook Medium and long-term plans Medium-term plan, Innovation Plan 2020 JUMP Announced third medium-term plan and results of previous plans Four-year plan ending in 70th anniversary year On May 9, 2017, the company unveiled its new medium-term business plan, Innovation Plan 2020 JUMP a four-year plan. It is TOKAI Holdings third medium-term plan following the first Innovation Plan 2013 (FY03/12 FY03/14) and second Innovation Plan 2016 Growing (FY03/15 FY03/17). Whereas the first and second were three-year plans, the third is a four-year plan (FY03/18 FY03/21), because the company wants the final year to coincide with its 70th anniversary, which falls in 2020 (FY03/21). Innovation Plan 2020 JUMP is an aggressive plan of investing in strategic M&A and alliances to increase topline growth. Results of previous medium-term plans The company transitioned from management of individual companies to group management after establishing TOKAI Holdings in April The company made solid progress with the first medium-term plan, which focused on improving the balance sheet, and the second, which aimed to increase earnings capability. The company cut interest-bearing debt by over 50%, improved the equity ratio by 26.8pp, and increased operating profit by 18.8% versus FY03/11. Targets and results of previous medium-term plans Innovation Plan 2013 Innovation Plan 2016 "Growing" (JPYbn) FY03/11 Act. FY03/14 Target FY03/14 Act. FY03/17 Target FY03/17 Act. Customers (mn) Sales Operating profit EPS (JPY) EBITDA Interest-bearing debt Equity ratio 7.7% 17.5% 21.6% 28.6% 34.5% Source: Shared Research based on company data Note: Targets are initial targets. Operating profit fell short of target in FY03/14 because of cost increases due to competition to acquire customers. Sales fell short of target in FY03/17 because of price cuts to reflect lower gas purchase prices. Sales are increasing in real terms due to the rise in the number of retail customers. Summary of Innovation Plan 2020 JUMP Increasing customer base and services by M&A The company sees the liberalization of gas and electric power as an opportunity and plans to invest aggressively in strategic M&A and alliances (JPY100bn in total over four years; see below). Targets are companies likely to help expand existing businesses such as gas, CATV, and Information and Communications, as well as those with services and customers in new daily-life related business areas. TOKAI Holdings aims to increase consolidated earnings by M&A of companies with an earnings base in addition to organic growth of existing group businesses. It also aims to generate synergies by cross-selling of monthly fee-based daily life-related and other services acquired from other companies to harness the strengths of its business model. Growing customer base and increasing lifetime value per customer The company aims to grow the number of customers from 2.56mn at end-fy03/17 to 4.32mn at end-03/21 and increase the percentage of customers using more than one of its services from around 7% at end-fy03/17 to 20% at end-fy03/21. Its goal is to increase average revenue per user (ARPU) and lower cancellation rates (i.e., increase lifetime value per customer) by taking advantage of its direct point of contact with customers to encourage use of multiple daily life infrastructure services. Around 20% of the group s 4,000 or so employees have contact with retail customers. 16/70

17 Numerical targets The new business plan targets FY03/21 sales of JPY339.3bn (1.9x the sales in FY03/17) and operating profit of JPY22.5bn (1.8x the operating profit in FY03/17). The company expects to achieve these targets by investing JPY100bn in M&A. It also targets an interest-bearing debt to EBITDA ratio of 2.6x, equity ratio of 31.6%, and ROE of 13.0% by management that prioritizes capital efficiency. Numerical targets of Innovation Plan 2020 JUMP FY03/17 FY03/18 FY03/19 FY03/20 Act. Target Target Target FY03/21 Target (JPYbn) Vs. FY03/17 Customer count (mn) Over x Sales x Operating profit x Net income x Total assets x Interest-bearing debt / EBITDA 1.9x 2.0x 1.7x 1.8x 2.6x - Equity ratio 34.5% 33.9% 35.6% 34.9% 31.6% - ROE 15.2% 11.1% 12.8% 13.0% 13.0% - Source: Shared Research based on company data Medium-term plan, Innovation Plan 2020 JUMP Basic direction of the plan In the new medium-term plan, Innovation Plan 2020 JUMP, the company aims to Engage aggressively in M&A and alliances, investing JPY100bn over four years on a leveraged growth strategy. Acquire or partner companies that will expand the customer base of core businesses such as gas, CATV, and Information and Communications, and companies with new, monthly fee-based, daily life-related services that will help harness the strengths of the group s business model. Prioritize operating profit as well as sales, aiming to double both between FY03/17 and FY03/21, and ROE (FY03/21 target of 13.0%) Provide continuous and stable returns to shareholders. M&A strategy Summary M&A plays a crucial role in the latest medium-term plan Innovation Plan 2020 JUMP. The company sees the liberalization of gas and electric power as an opportunity and plans to invest aggressively in strategic M&A and alliances (JPY100bn in total over four years; see below). Its two main objectives are to strengthen core businesses and acquire new services. Targets are companies likely to expand existing businesses such as gas, CATV, and Information and Communications, as well as those with services and customers in new daily-life related business areas. The company s M&A strategy will be based on an investment rule that focuses on capital efficiency, targeting ROI (operating profit basis) of 8%. M&A/alliance team The company has established a team dedicated to M&A and alliances, responsible for assessing investment projects, executing acquisitions and investments, and post-merger integration. The team acts as gatekeeper to support collaboration or integration between businesses run by each group company and the M&A target or alliance partner. The team will work closely with venture capital firms and buyout funds specializing in sectors such as energy/environment and corporate/consumer IT services to form an extensive network for gathering information about seeds of growth and potential M&A candidates. 17/70

18 New medium-term plan: key points The company believes that a key part of its group strategy lies in expansion of the customer base through the sale of packaged services. For the medium and long term, TOKAI said that it is paying attention to the liberalization of the electric power and gas industries. With the liberalization, the company intends to expand its customer base further by adding electric power service to the line-up of its services. The company sees its strength of having direct contact with customers based on home visits by its sales staff while major electric power companies have only indirect sales channels and contact with consumers. TOKAI thus expects synergy effects by joining hands with power and gas companies on businesses related to the liberalization. The company is already in talks with power companies regarding possible partnerships. Increase retail customer loyalty and secure multiple contracts TOKAI Holdings aims to increase the share of customers who use more than one service (multiple contracts) from 8% for the whole group at end-fy03/18 to 20% at end-fy03/21, seeking higher operating profit by preventing contract cancellation and increasing ARPU. The company will step up cross-selling to its customer base of 2.88 million as of end March Cross-selling strategies TOKAI Holding s business model relies on revenues generated by retail customers. The company aims to increase these customers loyalty and offer more services. The company plans to make its TLC point scheme* more attractive by offering more rewards. It also plans to increase the TLC points conversion ratio, and promote multiple and ongoing contracts**. *TOKAI Holdings launched TLC membership services in December 2012, offering users of multiple services loyalty points and other benefits. Customers can accumulate points by using the group s daily life-related services such as gas, Internet, CATV, and Aqua (water home delivery service). The company launched TLC Kasatoku Plus in May 2017, offering extra loyalty points to customers who already use its service and signs up for two or more services, as well as to new customers signing up for two or more services. **Customers signing up for multiple services tend to demonstrate relatively strong loyalty to the services. For example, the monthly cancellation rate in FY03/14 was 0.6% versus 1.15% for single-contract customers. The company plans to utilize customer information, engage in omni-channel retailing, provide a single call center for all services, and increase customer satisfaction by an integrated billing system as infrastructure to progress cross-selling. A summary of strategies for each business follows. LP gas The company aims to increase the number of LP gas customers (including new service areas) by 30% from 590,000 at end-fy03/17 to 760,000 at end-fy03/21, targeting a rise in customers in new service areas from 8,000 to 70,000 over the same period. Five new business bases are to be added for a total of 10. TOKAI plans to consolidate its LP gas customer base* (currently the third-largest in Japan) by an aggressive M&A strategy in established and new service areas amid the outlook** for contracting household and commercial demand for LP gas. *The company has the top share of customers in Shizuoka Prefecture (24.0%) with 190,000 customers and 6.9% share in the Kanto area with 420,000 customers (source: LP Gas Research Report Facts & Figures 2018, Sekiyu Kagaku Shinbun Sha) **METI s oil market survey working group materials (April 3, 2017) forecast a 7.1% decline in household and commercial LP gas markets in the next four years. Consumption is expected to decline by around 2% per annum amid a declining population, more energy-efficient equipment, and users adopting energy-saving habits. 18/70

19 LP gas business plan targets FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 Business Key indicator Act. Target Target Target Target LP gas Customers ('000) (FY03/17 Act.=100) Source: Shared Research based on company data City gas TOKAI expects competition in the city gas retail market fully liberalized in April 2017 will mainly be in the major cities, where large electric power companies will enter the market. The company aims to expand its service area by M&A and generate synergies in alliances with peers, as well as invest in pipeline extensions to attract new industrial demand. The city gas business is the group business where the company has made most progress with its TLC concept* (the share of multiple contracts in Shizuoka Prefecture was 37% at end-fy03/18). The company plans to promote TLC further in its medium-term plan. In the renovation business, which the group launched in April 2012 under the gas business, the company targets operating profit of JPY250mn in FY03/21 versus JPY50mn in FY03/17. *Total Life Concierge (TLC): The company s vision of providing a one-stop, one-contract, one-call center service that supports customers daily lives in a comprehensive way with close attention to detail City gas business plan targets FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 Business Key indicator Act. Target Target Target Target City gas Reform business OP (JPYmn) (FY03/17 Act.=100) Source: Shared Research based on company data Broadband (Information and Communications) The company aims to increase average revenue per user (ARPU) and average margin per user (AMPU) by promoting Hikari Collaboration and packages with LIBMO and new services. Its FY03/21 target for Hikari Collaboration s share of FTTH services is 85.1%. The company is encouraging long-term broadband use by adding services such as LIBMO and TOKAI SAFE (security service). By increasing the number of LIBMO customers to 140,000 at end-fy03/21, the company plans to increase sales further. Development of new IT-related services such as IT insurance to lift ARPU is also planned. Broadband business plan targets Business Key indicator FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 Act. Target Target Target Target Broadband FTTH ARPU (JPY) 2,521 2,671 2,813 2,938 3,048 (FY03/17 Act.=100) Source: Shared Research based on company data CATV The TOKAI group plans to maximize use of its own fiber-optic network in providing CATV services, aiming for close to 100% (97%) conversion to fiber optics at end-fy03/21 versus 71% at end-fy03/17. The company targets net increases of 30,000 broadcast customers and 60,000 telecoms customers in the next four years. With the help of government policy to grow demand for 4K broadcasting in the lead-up to 2020, the company plans to expand its customer base by offering cost-effective services that combine broadcasting with Internet. CATV business plan targets FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 Business Key indicator Act. Target Target Target Target CATV Optical ratio Source: Shared Research based on company data 19/70

20 Strategy The company is involved in a wide-range of products and services. It has a relatively simple strategy of actively adding products and services that contribute to future growth and meet the needs of customers. Since its founding, the company has focused on energy, such as LP gas, and information and communications, such as FTTH and CATV. Now it is focusing on its added value group-wide rather than the added value of each segment as a source of further growth, given that market growth is beginning to slow for these core businesses. Only a fraction of the company s customers use more than one product or service. TOKAI has begun launching various measures to encourage customers to use multiple products and services. If it can increase such customers, it will achieve synergies, reducing cancellations and improving sales efficiency. 20/70

21 Business Business description The company provides a diverse range of products and services to 2.88mn customers, primarily in Shizuoka prefecture (as of end March 2018). The company s operations are energy and housing-related, which includes liquefied petroleum gas (LPG) and information communications, including a fiber-optic network and CATV. TOKAI Holdings Corporation was established on April 1, 2011, after the management integration of TOKAI CORPORATION and TOKAI Communications Corporation, and an accompanying transfer of shares to a holding company. Prior to this, TOKAI Communications Corporation was a subsidiary of TOKAI CORPORATION. Main business segments The company s businesses, which provide a diverse array of services targeting both retail and commercial customers, fall into six business segments: Gas & Petroleum; Information and Communications; CATV; Aqua Business; Building and Real Estate; and Others. The Gas & Petroleum, Information and Communications, and CATV segments account for the majority of sales and operating profit and has the largest number of customers, as summarized in the following table. Customer count FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 ('000) TOKAI Cons. TOKAI Cons. TOKAI Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. LP gas City gas Gas total Security Aqua FTTH ADSL, other Broadband total Others Info. Comm. total Mobile Broadcasting Telecommunication CATV total ,032 Total 1,842 2,190 2,343 2,415 2,445 2,519 2,537 2,558 2,564 2,876 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Results for FY03/11 and prior years are of TOKAI Corp. 21/70

22 Segment sales and operating profit FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 (JPYmn) TOKAI Cons. TOKAI Cons. Cons.* Cons.* Cons. Cons.* Cons. Cons. Cons. Cons. Cons. Total sales 160, , , , , , , , , , ,069 YoY 3.8% 3.1% -3.9% 9.8% 4.0% -0.1% 4.0% -0.8% -3.5% -1.3% 4.2% Gas and Petroleum 95,182 99,355 89,000 95,697 98,316 94,519 97,229 93,067 80,745 73,344 76,073 YoY 8.8% 4.4% -10.4% 7.5% 2.7% - 2.9% 102.9% -13.2% -9.2% 3.7% % of total sales 59.2% 60.0% 55.9% 54.7% 54.0% 52.0% 51.4% 49.6% 44.6% 41.1% 40.9% Information and Communications 42,024 45,322 34,672 34,725 37,943 38,497 38,803 40,118 44,246 49,508 50,894 YoY 4.4% 7.8% - 0.2% 9.3% 1.5% 0.8% 3.4% 10.3% 11.9% 2.8% % of total sales 26.1% 27.4% 21.8% 19.9% 20.9% 21.2% 20.5% 21.4% 24.5% 27.7% 27.4% CATV ,653 22,647 24,292 23,786 24,187 24,359 24,608 25,396 28,386 YoY % 7.3% -2.1% 1.7% 0.7% 1.0% 3.2% 11.8% % of total sales % 12.9% 13.4% 13.1% 12.8% 13.0% 13.6% 14.2% 15.3% Building and Real Estate 14,430 14,324 14,399 14,907 15,881 15,756 19,245 20,019 20,975 19,511 19,807 YoY -21.0% -0.7% 0.5% 3.5% 6.5% -0.8% 22.1% 4.0% 4.8% -7.0% 1.5% % of total sales 9.0% 8.6% 9.0% 8.5% 8.7% 8.7% 10.2% 10.7% 11.6% 10.9% 10.6% Aqua - 3,750 4,378 4,959 5,487 5,762 6,200 YoY % 116.7% 10.6% 5.0% 7.6% % of total sales - 2.1% 2.3% 2.6% 3.0% 3.2% 3.3% Others 9,087 6,699 5,502 6,923 5,498 5,374 5,142 4,987 4,875 5,108 4,706 YoY 2.7% -26.3% -17.9% 25.8% -20.6% -2.3% -4.3% -3.0% -2.2% 4.8% -7.9% % of total sales 5.7% 4.0% 3.5% 4.0% 3.0% 3.0% 2.7% 2.7% 2.7% 2.9% 2.5% Operating profit 6,362 8,279 10,029 10,755 10,923 8,934 7,392 9,003 8,245 12,750 10,971 YoY -19.7% 30.1% 21.1% 7.2% 1.6% -18.2% -17.3% 21.8% -8.4% 54.6% -14.0% OPM 4.0% 5.0% 6.3% 6.1% 6.0% 4.9% 3.9% 4.8% 4.6% 7.1% 5.9% Gas and Petroleum 3,465 6,434 7,111 6,154 6,857 7,358 6,506 7,679 8,991 9,161 7,364 YoY -20.1% 85.7% 10.5% -13.5% 11.4% % 18.0% 17.1% 1.9% -19.6% OPM 3.6% 6.5% 8.0% 6.4% 7.0% 7.8% 6.7% 8.3% 11.1% 12.5% 9.7% % of operating profit 41.4% 62.1% 58.6% 45.1% 44.3% 55.5% 53.7% 56.2% 67.8% 52.3% 47.0% Information and Communications 4,576 4,255 3,586 4,310 5,544 4,934 4,412 4,956 2,308 4,213 3,174 YoY -4.5% -7.0% % 28.6% -11.0% -10.6% 12.3% -53.4% 82.5% -24.7% OPM 10.9% 9.4% 10.3% 12.4% 14.6% 12.8% 11.4% 12.4% 5.2% 8.5% 6.2% % of operating profit 54.6% 41.1% 29.6% 31.6% 35.8% 37.2% 36.4% 36.3% 17.4% 24.0% 20.3% CATV - - 1,869 2,592 2,298 1,251 1,808 1,669 1,975 2,752 3,554 YoY % -11.3% -45.6% 44.5% -7.7% 18.3% 39.3% 29.1% OPM % 11.4% 9.5% 5.3% 7.5% 6.9% 8.0% 10.8% 12.5% % of operating profit % 19.0% 14.8% 9.4% 14.9% 12.2% 14.9% 15.7% 22.7% Building and Real Estate ,386 1,029 1,266 1,098 1,330 YoY -39.6% -20.8% -54.1% 431.7% 14.1% -35.2% 119.0% -25.8% 23.0% -13.3% 21.1% OPM 3.1% 2.5% 1.1% 5.7% 6.2% 4.0% 7.2% 5.1% 6.0% 5.6% 6.7% % of operating profit 5.3% 3.4% 1.3% 6.3% 6.3% 4.8% 11.4% 7.5% 9.6% 6.3% 8.5% Aqua ,001-1,313-1, YoY OPM % 4.0% % of operating profit % -16.5% -9.6% -8.4% 1.7% 1.6% Others and adjustments -2,122-2,760-2,698-3,157-4,754-4,318-4,719-5,016-5,175-4,775-4,769 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Results for FY03/11 and prior years are of TOKAI Corp. FY03/12 YoY figures are vs. FY03/11 TOKAI Corp. results. Note: The aqua segment is included in gas and petroleum for FY03/12 and prior years. Note: Figures for FY03/11 and prior years are based on TOKAI Corp. data. FY03/12 comparisons are with FY03/11 TOKAI Corp. figures. Note: Segment operating profits are before allocation of overhead expenses. Gas and Petroleum segment In FY03/18, this core segment saw JPY76.1bn in sales (accounting for 41% of overall company sales) and JPY7.4bn in operating profit before allocation of overhead expenses (accounting for 47% of overall operating profit). The segment has four subsegments, of which the Liquefied Petroleum Gas & Petroleum ( LP gas ) subsegment accounts for the majority of sales and operating profit. In FY03/18, the LP gas business reported sales of approximately JPY64.5bn and operating profit of JPY6.3bn, and the city gas business reported sales of JPY11.6bn and operating profit of JPY1.0bn. LP gas This subsegment mainly sells LP gas, liquefied natural gas (LNG) and petroleum products, along with related equipment and services. The subsegment has approximately 606,000 customers spread over Tokyo and 11 other prefectures from Shizuoka prefecture to Fukushima prefecture. Of this total, Shizuoka accounted for approximately 190,000 customers and Kanto accounted for roughly 416,000 customers (as of March 31, 2018). The company has top market share (24%) in Shizuoka Prefecture, is second (7%) in Kanto, and is the third-largest LP gas business in Japan (source: LP Gas Annual Report: Facts and Figures, Vol 53, 2018, Sekiyu Kagaku Shinbun Sha). 22/70

23 LP gas utilities Rank Company 1 Iwatani Corporation 870,000 2 Nippon Gas Co., Ltd. 760,000 3 TOKAI CORPORATION 593,856 4 Toho Liquefied Gas Co., Ltd. 351,000 5 Mitsuuroko Co., Ltd. 350,000 6 Itochu Enex Co., Ltd. 343,983 7 ENEOS Globe Energy Corporation 320,000 8 Saisan Co., Ltd. 287,886 9 Gaspal Corporation 250, Horikawa Sangyo Co., Ltd. 220,000 No. of direct customers Total 22,819,000 Source: Shared Research, based on company data (source: LP Gas Annual Report: Facts and Figures, Vol 51, 2017, Sekiyu Kagaku Shinbun Sha) City gas The company supplies city gas in the cities of Yaizu, Fujieda, and Shimada, located in central Shizuoka prefecture, to 55,000 customers combined (as of March 31, 2018). Sales volume was 140mn m 3, of which large-lot users accounted for 120mn m 3 and small-lot users for 20mn m 3. High-pressure gas The company manufactures and sells high-pressure gas products such as oxygen and nitrogen, as well as related equipment. Security The company wholesales automated security services and other security systems to other security service providers. Information and Communications segment In FY03/18, this segment reported JPY50.9bn in sales (accounting for some 27% of overall sales) and JPY3.2bn in operating profit before allocation of indirect expenses (accounting for 20% of overall profit). The segment has four subsegments. The ADSL/FTTH and Mobile subsegments target individual consumers, while the System Innovation Service (SIS) and Corporate Telecommunications subsegments serve corporate customers. As of March 31, 2018, the number of customers was 1.04mn (1.06mn a year ago). The company was ranked as fourth largest Internet Service Provider (ISP) in terms of sales based on Nikkei Marketing Journal (November 5, 2014). According to the Ministry of Internal Affairs and Communications (MIC) Information & Communications Statistics Database, the company has top market share in Shizuoka Prefecture (23.0%) with 240,000 customers and a 3.8% share in the Kanto area with 470,000 customers as of end December In FY03/18, ADSL/FTTH reported sales of JPY28.1bn and operating profit of JPY2.7bn; Mobile reported sales of JPY4.6bn and operating loss of JPY781mn; SIS reported sales of JPY12.2bn and operating profit of JPY1.1bn; and Corporate Telecommunications reported sales of JPY6.0bn and operating profit of JPY1.2bn. FTTH profits in FY03/18 improved sharply due to the positive outcome of its aggressive sales promotion for Hikari Collaboration services in the previous year. ADSL/FTTH As an Internet Service Provider (ISP), the company sells services directly to consumers under three COM, a nationwide brand focusing on the Kanto region; TOKAI Network Club (TNC) in Shizuoka prefecture; and Web Shizuoka. Sales efforts for ISP were expanded to the Tohoku region in In Shizuoka prefecture and the Kanto region, the company also wholesales ADSL circuits as a telecommunications carrier. 23/70

24 Mobile The company is an agent for Softbank Mobile Corporation (a subsidiary of Softbank Corporation; TSE1: 9984) in Shizuoka and Saitama prefectures through 12 stores primarily selling mobile handsets and service contracts. In November 2012, the company began providing Mobile 4G high-speed data services as a Mobile Virtual Network Operator (MVNO). An MVNO does not maintain its own network infrastructure but instead leases wireless network infrastructure capacity from multiple telecommunications carriers. This service uses the Softbank Mobile Corporation 3G data network and the Advanced extended Global Platform (AXGP) provided by Wireless City Planning Inc. The company supplies services to end users as an MVNO. Total Optical Fiber Network Distance (as of March 31, 2016) 6,000km Source: Shared Research based on company data SIS The SIS subsegment comprises two classes: EA business and SI and DCS business. EA is outsourced software development; SI is sales, maintenance, and operation of information systems; and DCS is data centers. In FY03/15, EA accounted for 49% of subsegment sales, and SI and DCS accounted for 51%. Operating profit (excluding overhead costs) were 41% and 59%, respectively. DCS provides a range of outsourcing services, including colocation, , data backup, and cloud-computing platforms (virtual servers) from two data centers located in Yaizu city, Shizuoka prefecture (according to the company, these facilities are designed to withstand earthquakes up to level 7 on the Japanese seismic intensity scale). The company has jointly developed a third data center in Okayama prefecture with Ryobi Systems Co., Ltd., which commenced services in April The three data centers have approximately 1,100 racks. Data-center operators from throughout Japan (22 companies) are collaborating to provide business continuity- and disaster recovery-related services. In March 2013, the company established Cloud Master Co., Ltd., in Taipei, Taiwan. The company will cooperate with this joint venture company and to provide secure and low-cost hosted private cloud services. The company intends to strengthen its operations through by providing enhanced services. The company is a member of a data center alliance, which includes, as of end March 2017, Hokkaido Telecommunication Network Co., Inc. (a subsidiary of Hokkaido Electric Power Co., Inc.; TSE1: 9509); Tohoku Intelligent Telecommunication Co., Inc. (a subsidiary of Tohoku Electric Power Co., Inc.; TSE1: 9506); ITOCHU Techno-Solutions Corporation; TSE1: 4739 (a subsidiary of ITOCHU Corporation; TSE1: 8001); Hokuden Information System Service Company, Inc. (a subsidiary of Hokuriku Electric Power Company; TSE1: 9505); OGIS-RI Co., Ltd. (a subsidiary of Osaka Gas Co., Ltd; TSE1: 9532); Ryobi Systems Co., Ltd.; Sakura KCS Corporation ( a subsidiary of Sumitomo Mitsui Banking Corporation); Infocom Corporation (a subsidiary of Teijin Limited.; TSE1: 3401); Kyuden Infocom Company, Inc. (a subsidiary of Kyushu Electric Power Co., Inc.; TSE1: 9508); Nishitetsu Information System Co., Ltd. (a subsidiary of Nishi-Nippon Railroad Co., Ltd.; TSE1: 9021); Sakura Information Systems Co., Ltd. (a subsidiary of OGIS-RI Co., Ltd.); BSN Information NETwork Service; AGS Corporation; LCV Corporation (a subsidiary of TOKAI Holdings Corporation; TSE1: 3167); itec Hankyu Hanshin Co., Ltd.; LAC Co., Ltd. (JASDAQ: 3857); Ryomo Internet Data Center Co., Ltd.; NTT Software Corporation; GMO Cloud WEST; TOKAI Communications Corporation (a subsidiary of TOKAI Holdings); MEIKO TECHNOS; and data doc Inc. The alliance may implement platform service linkage and network service interconnections. 24/70

25 The EA and SI businesses have a combined total of approximately 700 engineers (as of March 31, 2018) and provide total solutions from consulting and system development through to operation and maintenance. These businesses serve a broad variety of industries and fields, including the restaurant industry, the health care sector, and the public sector, with emphasis on such systems as accounting and human resources. Corporate Telecommunications The company provides Internet connection services and interoffice telecommunications services to the corporate market via a proprietary fiber-optic network covering an area stretching from northern Kanto region in the east to Osaka in the west. The network is approximately 6,000km long. Within the subsegment, the Leased Line business which offers interoffice telecommunications services accounts for about 90% of sales, and the remainder is made up of other businesses such as the wire leasing business offering optical fiber lines. On April 1, 2013, the company extended its fiber-optic network to Okayama prefecture, accompanying the opening of the Okayama Data Center and strengthening the company s telecommunications infrastructure in western Japan. CATV segment In FY03/18, this segment reported JPY28.4bn in sales (accounting for 15% of overall sales) and JPY3.6bn in segment profit before allocation of overhead expenses (accounting for 23% of overall profit). The company provides broadcasting services and telecommunications services (ISP) in six prefectures: Shizuoka, Tokyo, Kanagawa, Chiba, Nagano, and Okayama. In FY03/18, broadcasting services accounted for 46% of subsegment sales and telecommunications services accounted for 54%. The Broadcasting Services business provides local information through community channels and a multichannel digital broadcasting service offering up to 160 channels. The Telecommunications Services business provides, in addition to conventional CATV internet, fiber-optic internet and telephone services. These services utilize the company s proprietary fiber-optic network, which has a backbone network as well as fiber-to-the-home (FTTH). The Telecommunications Services business had 257,000 subscribers (as of March 31, 2018). The number of households serviceable by the company s broadcasting and telecommunications network infrastructure is 1.38 million, of which 775,000 households (as of March 31, 2018) are subscribers. Hence, the broadcasting subscription ratio (subscribers number of serviceable households) is approximately 56%. Among these households, 61% subscribed only to broadcasting services, 28% to both broadcasting and telecommunications services, and 11% to telecommunications services only (as of March 31, 2018). Building and Real Estate segment In FY03/18, this segment reported JPY19.8bn in sales (accounting for 11% of overall sales) and JPY1.3bn in segment profit before allocation of overhead expenses (accounting for 9% of overall profit). The company designs, constructs, and renovates housing and retail stores; sells equipment and appliances; and develops, sells, leases, and brokers real estate. Contributions from leasing of retail and office space accounts for a high percentage of sales. Renovation accounted for around 28% of total sales, equipment and appliance for roughly 24%, and installation work for 13% (in FY03/18). The company entered the housing equipment business in 1970 and is involved in a broad array of operations, from the construction of single-dwelling units and rental apartments to renovation services, as well as construction of condominiums, offices, and other large-scale projects. The company also promotes the development of high-quality residential land and is involved in urban development. It wholesales housing-related equipment to house manufacturers and small-scale builders, installs air-conditioning equipment, and carries out plumbing and sewage work. In addition, in April 2010, the company acquired 61% of the total floor area of Aoi Tower, located near JR Shizuoka Station, and it leases retail and office space in this complex. The company made a full-scale entry into the general renovation business when it launched TOKAI WILL Reform in April Through its gas business and strong ties to local communities, the company has built up a solid track record in plumbing-related renovation work. Utilizing its technical know-how and over 600,000 customers in its gas business, the company is determined to 25/70

26 grow its renovation business. Also, the company actively employs female planners, producing proposals and designs that meet the needs of homemakers and other female customers. Aqua segment In FY03/18, sales were JPY6.2bn (accounting for around 3% of overall sales) and segment profit before allocation of overhead expenses was JPY246mn (accounting for 2%). The company manufactures, sells, and delivers drinking-water products. The company considers the Aqua business as a main growth area. The aqua business has developed into a significant segment and separated from the Gas and Petroleum segment, and became the Aqua segment in Q1 FY03/14. In November 2007, the company commenced a returnable-bottle service (bottles are collected, washed and sterilized, and subsequently reused) in Shizuoka prefecture, and in March 2011 it launched a nationwide one-way bottle service (bottles are home delivered and disposed of after use similar to PET bottles). The service has around 146,000 customers, of which 70,000 are in Shizuoka prefecture using the returnable bottle service. The Shizuoka prefecture service has a market penetration rate of about 5%, giving it the prefecture s largest market share. The nationwide one-way bottle service has 76,000 customers (all figures are as of March 31, 2018). The company s returnable-bottle service is affectionately known as the Oishii Mizu no Takuhaibin ( Delicious Water Home Delivery ) brand. Its one-way bottle service was rebranded as Oishii Mizu no Okurimono - ulunom ( The Gift of Delicious Water ) in May 2013, focusing mainly on the Kanto area and targeting child rearing mothers who are highly concerned about their family s drinking water. The product s main characteristic is its natural water qualities from its local area of Mt. Fuji. The company sources its water from the base of Mt. Fuji on Asagiri Plateau (Fujinomiya city, Shizuoka prefecture). According to the company, Asagiri Plateau is well-known as a high-quality water source area and is said to have abundant natural spring water with useful mineral content that has been filtered through the layer of basalt from which Mt. Fuji is formed. The company has produced water in returnable bottles at its own TOKAI Aqua Yaizu Plant (Yaizu city, Shizuoka prefecture) since April However, to meet growing demand for its one-way bottle product and as part of BCP, in March 2013 it commenced operations at a second plant Aqua Fujisan Plant located in the Fujisan Nanryo Industrial Park (Fujinomiya city, Shizuoka prefecture). The company has expanded the service from Shizuoka to cover the entire country, and in April 2012 it established a subsidiary in Shanghai, China, named TOKAI (Shanghai) Trade & Commerce Co. Ltd. Under the product name Fujishigen it commenced sales in June 2012 and targets an affluent market segment. The ARPU is around JPY4,300, or about two bottles per user (one bottle of Ulunom Fuji-no-Tennensui (natural water from Mt. Fuji) costs JPY2,050 including tax (as of March 31, 2018). Others In FY03/18, this segment reported JPY4.7bn in sales (accounting for some 3% of overall sales). The Others segment includes three businesses. Bridal, Events, and Hotel These operations include Grandair Bouquet Tokai, a facility within Aoi Tower near Shizuoka Station. Ship Repair The company undertakes ship repairs, including for ocean-going and in-shore fishing vessels. 26/70

27 Other Services This includes life and casualty insurance agency, travel-agency services, and operating of nursing care facilities. The company is working to strengthen its nursing care facility operations. In light of Japan s rapidly aging population, the TOKAI Group opened its first nursing care facility, Refrea Shimizu Komagoe Day Service, in April 2011 (Shimizu Ward, Shizuoka City, Shizuoka Prefecture). In May 2012, a second facility, Refrea Hijiri Isshiki Short Stay, opened in the Suruga ward of the same city. Furthermore, the company intends to open a third facility, Refrea Shimizu Matsumura (Shimizu Ward, Shizuoka City, Shizuoka Prefecture) in August The company intends to cater to the growing needs, and enhance its day care, short stay, and nursing care facilities, and expand its businesses while benefiting the local communities. Business model Centering on the Kanto region and Shizuoka prefecture, the company has 2.88mn customers, to whom it offers a wide variety of products and services. Historically, the company simply sold a variety of products and services, without co-branding or bundling. In May 2011, the company stated its new strategy of becoming a Total Life Concierge (TLC), offering one-stop service and product menu to its customers. As of March 31, 2018, there were 699,000 TLC members (up 113,000 members YoY). There is still some way to go with the TLC model and Shared Research thinks that it makes more sense to evaluate the company as a sum of its individual businesses. The importance of increasing the number of customers that use multiple services is shown by the fact that as of end March 2018, of the company s 2.88mn customers, that number stood at only around 8%. In December 2012, the company began issuing the TLC WAON card, using Aeon Co., Ltd. s (TSE1: 8267) WAON e-money. This marked the launch of the integrated TLC Member Service covering the entire TOKAI Group offering. Under this system, members accumulate points as they use various services provided by the company. There are eight options for exchanging these points, including WAON Points and MI Points (e-money). Shared Research thinks these new initiatives have potential and will be following developments of the service and any similar measures closely. Business portfolio In the recent years TOKAI Holdings has become more focused on its core competencies, seeing its services as a single business portfolio as opposed to a random array of unrelated services. Although Gas & Petroleum is the company s core segment, the market itself is shrinking. The company sees this business primarily as a cash cow as well as a sales platform, enabling it to offer customers other TOKAI group services and products. The gas business, historically the main growth driver, operates from 62 locations in Tokyo and 12 prefectures in Tokai, Kanto, and southern Tohoku areas (as of March 31, 2018). It employs a sales force of around 400, and accounted for 52% of the company s overall operating profit (pre-unallocated corporate expenses) in FY03/18. Another cash cow for the company is the CATV segment. In contrast, Aqua and Information and Communications (with SIS and Corporate Telecommunications subsegments as key drivers) are growth segments and the company is aggressively investing in these businesses. Geographic expansion As of end March 2018, the TOKAI Holdings group had 2.49mn customers mainly in the Kanto region and Shizuoka prefecture and 2.58mn nationwide. The outline of operations in each area is as follows. Kanto The company has steadily expanded its customer base in the Kanto region, including Tokyo, with the number of customers totaling 1.3mn as of end-fy03/18, mainly in the LP gas and information and communications businesses. Kanto is the largest 27/70

28 consumer market in Japan though there is intense competition. The company considers there is still wide room for finding new customers. Customers of LP gas and information and communications services in Kanto Customer count ('000) FY03/00 FY03/05 FY03/10 FY03/15 FY03/16 FY03/17 FY03/18 LP gas Communications Total Source: Shared Research based on company data Shizuoka As of end-fy03/18, the number of customers of the group s services in the Shizuoka area was 930,000 households, accounting for some 64% of all households in Shizuoka prefecture. In the area, the company operates the LP gas business mainly in the suburbs and the CATV and city gas services mainly in cities. It also runs the internet and Aqua businesses all over the prefecture. Though the rate of population decline, expected for 20 years later, will be high in Japan, Shizuoka is ranked second after Tokyo in all prefectures in terms of income of residents. Accordingly, the company believes that there is wide room for expansion of profits by encouraging customers to use multiple services. Other main areas The company had a total of roughly 380,000 customers in other regions as of end-fy03/18. In Suwa, Nagano prefecture, central Japan, there were 95,000 customers of the CATV service (94%). In Kurashiki, Okayama prefecture, western Japan, there were 85,000 CATV customers. The company opened its third data center in the Okayama area in April In the western Japan region, where TOKAI advanced in April 2012, the information and communications business is to turn black in FY2015. TOKAI took part in the market of Fukuoka in the western Japan (Kyushu) in April With the launch of the around-the-clock call center service outsourced from real estate companies, TOKAI started selling equipment and making efforts to find customers of its LP gas service in the Kyushu region. Extending operating areas to expand customer base In addition to efforts to enlarge its businesses in existing areas, the company plans to extend the territories to surrounding areas, focusing on the LP gas and Aqua businesses. In the LP business, now it is operating mainly in the Kanto region and Shizuoka, and has advanced into the southern Tohoku region in northeastern Japan and the Chubu and Tokai areas of central Japan from For the Aqua business, the company plans to expand it to the Hokuriku and Chugoku regions, starting from the Kansai western Japan region. The company was founded in 1950 with the objective of selling city gas in Yaizu city, Shizuoka prefecture. In 1959, the company launched its LP Gas business to expand the sales territory. After the LP Gas business achieved the top market share in Shizuoka prefecture, in 1979 the company entered the Kanto region and simultaneously diversified its Shizuoka stronghold through the launch the CATV and ISP businesses. Aqua TOKAI Holdings has used its reputation, customer relationships, and distribution know-how cultivated in the LP gas business to start up the Aqua business, a water cooler distribution business. The company thinks that selling water is an exceptional addition to its traditional LP gas retailing business the demand for water peaks in summer while the peak for gas consumption is during winters as consumers take hot baths. Although Aqua is the company s first manufacturing business, it is also a simple one the company has secured a water source that provides it with a reliable supply of water at a low price. Unlike LP gas, which is purchased at market prices, the Aqua business enjoys extremely stable input costs. Although Aqua business has its own dedicated sales force, in Shizuoka prefecture and other areas where the company has an established customer base, sales staff of the LP Gas business also conduct sales activities for the Aqua business. This business segment also utilizes LP Gas existing logistics know-how. 28/70

29 As discussed in the Market Overview section, the water delivery market has been expanding, and the potential for future growth appears to be large. In this environment, leveraging the Mt. Fuji brand and the company s sales capabilities can achieve significant market penetration in Shizuoka prefecture, as can gradually expanding the sales area. The company stated that with its outright-owned water sources it can respond adequately to future demand growth. Shared Research understands that while the Aqua business requires a significant up-front investment, it has high incremental margins. Once the breakeven has been reached, the profitability can be remarkable. The cost of goods sold has two components, water servers and the water itself (extraction at the source and other related costs). (See Profitability Snapshot, Financial Ratios for more detailed discussion). The water servers are the main cost here and as the business gains scale, the cost per server could decline somewhat. Customer acquisition (an SG&A component) is the largest cost which is high enough to make the business lose money in the initial growth phase. However, once the cash flow from existing customers exceeds the new customer acquisition costs, margins start expanding rapidly. The business segment turned profitable in FY03/17. Information and Communications An important characteristic of the SIS and Corporate Telecommunications subsegments is the company s trinity of services: data centers, system development, and corporate interoffice telecommunication services utilizing the company s proprietary fiber-optic network infrastructure. The important strength of the company s business model in this segment is that it combines in one package one-off revenues of development projects and recurring revenues of its corporate interoffice telecommunications services and data-center operations. In order to grow the profitability however, the company thinks it needs to develop cloud-based services for medium-size firms. Doing so will allow to boost its data center utilization rates (a major driver of segment profitability). CATV Sales of the CATV segment are ARPUs times the number of subscribers. ARPU change depending on whether users buy higher priced services or use multiple services. The number of subscribers is the subscription rate times the number of households in the service area. Changes in ARPU drive profit margins. In addition, more subscribers give the company bargaining power vis-à-vis suppliers of hardware and programming content. As a side note, depreciation accounts for a large proportion of cost of sales. Comparing the company with the CATV industry leader, Jupiter Telecommunications Co., Ltd., two firms have the following growth strategies in common: localized sales effort tailored to its region geography and other unique characteristics; rich service lineup; and the use of M&A to buy growth. For the company, its expertise in selling locally door-to-door, the original strength of both its LP gas and CATV businesses, could also mean a higher probability of success in pushing the total concierge strategy, cross-selling other products and services using the same sales force. Reference: LP gas LP gas is a fuel made primarily from butane and propane, which easily liquefy at room temperature when compressed. This makes LP gas cylinders easy to refill and transport. For this reason, in suburban areas and small cities where there is no city gas pipeline network, LP gas is a common household thermal source. In contrast, city gas refers to gas delivered via an urban pipeline network and is primarily made from natural gas (methane). Unlike butane and propane, liquefying natural gas requires not only pressure but also cooling to minus 16 degrees Celsius (about three degrees Fahrenheit) or below. For this reason, it is not suited for transportation in cylinders but instead is supplied to households in gas form through underground pipes. 29/70

30 LP gas usage categories (FY2016) Usage Household & commercial use General industrial use Chemical raw material Automobile use City gas Electricity generation Share in domestic demand Main features 44.3% Propane is the main ingredient and cylinders are installed on-site to supply households and commercial facilities. 20.7% Used in ferrous and non-ferrous metal processing as a thermal source, and for such applications as drying of industrial components and foodstuffs. 18.2% Demand is on an upward trend for butane as a raw material in the manufacture of such chemical products as ethylene and propylene. 7.0% Used in domestic LP gas-powered vehicles, butane is the main ingredient. 7.0% Although the main ingredient of city gas is methane, LP gas is an additive to increase thermal power 2.1% Used as a backup fuel at thermal power stations. Large-scale steelmakers Source:Shared Research based on data from the Japan LP Gas Association 0.7% Used in the steel industry for heating and heat-treating steel materials. On a nationwide basis, 24.0 million households use LP gas (approximately 45%). By contrast, within Shizuoka prefecture the company s core territory around 60% of households uses LP Gas (2015). The LP gas industry has a three-tier structure comprising primary suppliers ( motouri ), wholesalers, and retailers. As of March 31, 2012, there were eight primary suppliers, approximately 1,100 wholesalers, and 21,518 retailers. Based on the 2013 LP Gas Industry Report, the industry has several tiers (the company is mainly a retailer but also has some wholesale operations): Primary suppliers: Import and sell gas from producer countries, as well as refine crude oil and sell refined petroleum products. Fierce competition has seen significant realignment and consolidation of this part of the industry. In 1980, there were 25 primary suppliers, but by 2011 this had shrunk to eight companies. Wholesalers: Purchase LP gas from primary suppliers and sell to retailers who have direct relationships with end users. Each region has dominant wholesalers, and entry by such companies into the retail business is accelerating. Retailers: Purchase LP gas from wholesalers and sell to households and other customers as well as delivery, safety assurance, and collection of fees. There are a large number of small-scale retailers who maintain very close links with their respective local communities. These operators face a trend of rising costs for delivery and safety assurance. User charges, unlike those for electricity and city gas, are set by each seller based on its own calculation method. Whereas the basic law governing city gas suppliers is the Gas Utility Industry Law, the basic law governing LP gas suppliers is the Law Concerning the Securing of Safety and the Optimization of Transaction of Liquefied Petroleum Gas (LP Gas Law). Under the revised LP Gas Law (effective April 1997), to make tariff systems more transparent, suppliers are obligated to disclose the tariff structure to consumers in an easily understood way and indicate the content of services covered by those charges. Types of tariff structures include two-tier, three-tier, minimum usage, and multiple. As of 2015, the most common structure is a two-tier tariff. The two-tier tariff structure comprises a base charge and metered volume charge. The basic charge is a fixed amount per customer (dwelling or premises) that is not dependent on usage volume, and covers 1) the cost of equipment necessary for supply, such as cylinders and meter; and 2) the cost of safety and meter reading as well as gas alarm rental. The metered volume charge is tariff based on gas usage volume and comprises the gas input cost as well as the delivery cost. LP gas is mostly imported, and the price varies depending on the contract price (CP) and cost, insurance, and freight (CIF). CP refers to the price determined by Saudi Aramco, the national oil and natural gas company of Saudi Arabia a major LP gas producer based on a combination of factors, including crude oil price trends and spot bid prices for gas sold by Saudi Arabia and other gas-producing countries. Bid prices are unpublished, hence CP is to some extent a unilaterally notified price (CP is the handover price at the port of the exporting country and is denominated in dollars/ton). CIF refers to one type of basic set of 30/70

31 conditions used in the conduct of international trade transactions and is nowadays the most commonly used benchmark. It is the delivered price including freight and insurance. In Japan, it is usually the price to a Japanese port denominated in yen/ton. LP gas retail, wholesale, CIF, and contract prices (JPY/sqm) CIF price Wholesale price Retail price CP (right axis) (USD/MT) 1,400 1,200 1, Source: Shared Research based on data from the Oil Information Center Domestically, added to CIF are: import primary supplier costs (coastal freight, safety expenses, gas terminal expenses, general administrative expenses, and petroleum gas tax); wholesale costs (personnel expenses, delivery expenses, costs of operating charge stations, safety expenses, and general administrative expenses); and retail costs (personnel expenses, delivery expenses, depreciation expenses, safety expenses, fee collection and meter-reading expenses, and general administrative expenses). LP gas tariffs are set in accordance with the business conditions of each supplier. Margins (charges less costs) are generally determined by such factors as the competitive situation, and the time lag between cost fluctuations and tariff increases or decreases. Although a change in the import price of LP gas has a short-term impact on the earnings performance of an LP gas supplier, earnings tend to level out over time. 31/70

32 Profitability snapshot, financial ratios Profit margins FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 (JPYmn) Cons.* Cons.* Cons.* Cons.* Cons. Cons. Cons. Cons. Cons. Cons. Cons. Gross profit 52,800 58,809 63,347 67,445 69,537 68,809 68,341 68,932 69,812 73,040 75,336 GPM 32.9% 35.5% 39.8% 38.6% 38.2% 37.9% 36.2% 36.8% 38.6% 40.9% 40.5% Operating profit 6,362 8,279 10,029 10,755 10,923 8,934 7,392 9,003 8,245 12,750 10,971 OPM 4.0% 5.0% 6.3% 6.1% 6.0% 4.9% 3.9% 4.8% 4.6% 7.1% 5.9% EBITDA 16,688 20,089 23,064 26,300 28,826 26,381 24,963 26,232 24,979 28,391 26,182 EBITDA margin 10.4% 12.1% 14.5% 15.0% 15.8% 14.5% 13.2% 14.0% 13.8% 15.9% 14.1% Net margin 0.3% - 1.9% 1.2% 1.5% 1.7% 1.4% 2.1% 1.9% 4.1% 3.6% Financial ratios ROA (RP-based) 2.5% -0.2% 6.0% 4.9% 5.2% 4.5% 4.0% 5.0% 5.0% 7.9% 6.8% ROE 3.4% -16.8% 24.6% 15.0% 13.2% 10.4% 7.4% 9.8% 8.3% 15.2% 11.4% Total asset turnover Inventory turnover Days in inventory Working capital 21,826 18,250 17,990 17,237 16,595 16,066 16,146 13,745 13,405 13,117 13,525 Current ratio 66.8% 53.6% 53.0% 55.4% 48.2% 48.9% 51.5% 50.5% 60.5% 63.0% 64.3% Quick ratio 39.1% 29.6% 33.7% 32.2% 29.1% 30.5% 32.0% 32.2% 40.3% 42.5% 42.3% OCF / Current liabilities Net debt / Equity 491.5% 628.8% 596.5% 525.9% 373.9% 260.1% 214.3% 161.5% 160.4% 112.0% 99.3% OCF / Total liabilities Cash cycle (days) Changes in working capital 269-3, , Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Results for FY03/11 and prior years are of TOKAI Corp. The company s OPM in FY03/13 FY03/16 was generally lower than the previous level of around 6.0%, but improved to 7.1% in FY03/17. Although sales declined due to price cuts to reflect lower gas purchase prices, this makes minimal impact on profits due to the company s earning structure, and the profitability of priority businesses such as Hikari Collaboration and Aqua improved. ROA and ROE also improved significantly in FY03/17 as a result of higher profitability. ROE had been trending down since FY03/10, but improved to 15.2% (+6.9pp YoY) in FY03/17. However, in FY03/18, the first year of the new medium-term management plan Innovation Plan 2020 JUMP, which ends at the end of FY03/21, the company made upfront investments to expand its earnings base in the future. As a result, profitability and efficiency worsened YoY. OPM fell 1.2pp YoY to 5.9% and ROE fell 3.8pp to 11.4%. Gas and Petroleum In FY03/18, the segment OPM (before allocating overhead expenses) was 9.7%. In the mainstay LP Gas business, the lowest OPM since FY03/07 was 3.6% in FY03/08 and the highest was 12.5% in FY03/17. The decline in OPM in FY03/08 reflected a substantial rise in purchase prices. The increase in FY03/10 reflected a revision in selling prices (i.e., passing on higher costs to the end user in terms of price hikes). The OPM declined in FY 03/14, partly because selling prices failed to reflect higher purchase costs exactly. Since FY03/15, OPM improved due to the correction to the previous year s situation and rationalization efforts. However, in FY03/18, sales were solid as the company raised sales prices to match higher procurement prices and sales volume rose due the increase in customer count. On the other hand, profits were weak due to higher costs to secure new customers and prevent contract cancellations. OPM fell 2.8pp YoY to 9.7%. For reference, a USD10/ton fall in contract price (CP) adds JPY110mn to operating profit, and a one yen fall in the yen versus the USD adds around JPY50mn to operating profit (FY03/18 base). However, although there is a slight time lag between purchase price and selling price, they move in tandem for the most part and generally are stable. The company s OPMs are high compared with industry peers, the fact that Shared Research attributes to a high weight of residential customers (not businesses) in the company s mix. As the LP gas market faces gradual decline, a key issue is maintaining profitability by pursuing efficiency. Acquisitions of similar operators and thus boosting the scale of the business are one way of doing this. In addition, if the company was able to take advantage of industry realignment and utilize M&A to boost its size, it may gain some room for lowering its purchase price though greater economies of scale. The city gas business has 55,000 customers, the number that has remained more or less stable over time. The same can probably be said about profitability the regulated city gas business is a small but stable part of the company s portfolio. 32/70

33 Aqua The Aqua business turned profitable at operating profit level for the first time in FY03/17. In FY03/18, the business maintained profitability, although OPM fell 1.2pp YoY to 4.0%. The company commented that its bottled water commands a GPM of approximately 50%. An improvement in usage rates and an increase in customers who are both LP gas and Aqua customers will lead to a decrease in cancellation rates and costs. Information and Communications The OPM (base before allocating overhead expenses) was 6.2% in FY03/18, down 2.3pp YoY. The OPM declined after hitting its latest high of 14.6% in FY03/12 and dropped to 5.2% in FY03/16, mainly due to heavy promotional spending on the new fiber-optical service Hikari Collaboration. Earnings improved in FY03/17 as Hikari Collaboration began contributing to sales. In FY03/18, the company made upfront investments (secure new customers, prevent cancellations, sales promotions in MVNO business, etc.) to expand its earnings base in the future. As a result, OPM fell 2.3pp YoY. CATV In FY03/18, OPM was a record 12.5% (+1.7pp YoY), up from 11.9% in FY03/11. Though competition with major telecommunications carriers becomes fierce, the company is enjoying successful results from such measures as the bundling of broadcasting and telecommunications services and discounts for long-term subscribers to increase customer loyalty. Group companies TOKAI Holdings was established in April 2011 to coincide with the 60th anniversary of the founding of the TOKAI Group. As of March 2018, the company has 28 operating companies, led by TOKAI CORPORATION and TOKAI Communications Corporation (23 consolidated subsidiaries and five equity method affiliated companies). The figures in parentheses indicate the company s holding ratio. Core operating companies TOKAI CORPORATION (100.0%): In Tokyo and 12 prefectures from Aichi to Miyagi, the company provides a diverse range of products and services to the household sector, including LP gas, Aqua (returnable and disposable bottles), housing-related products and services, solar panels and other environmental and energy products, security, and insurance. TOKAI Communications Corporation (100.0%): Provides ICT services. TOKAI GAS CORPORATION (100.0%): A city gas supplier in the three central Shizuoka prefecture cities of Yaizu, Fujieda, and Shimada. Also a supplier of LP gas and provides renovation services. TOKAI Cable Network Corporation (100.0%): In addition to providing CATV digital multichannel broadcasting services, the company also offers FTTH Internet services and telephone services utilizing proprietary CATV fiber-optic lines. Gas and Petroleum, LP Gas subsegment Y.K. Osuga Gas Service (100.0%) Joynet Co., Ltd. (50.0%) Energy Line Corporation (100.0%) TOKAI Home Gas Corporation (100.0%) TOKAI Myanmar Company Limited (60.0%) Aqua TOKAI (Shanghai) Trade & Commerce Co. Ltd. (100.0%): Conducts home water delivery service under the Fujishigen brand in Shanghai, China. 33/70

34 Information and Communications Cloud Master Co., Ltd. (50.0%): A joint venture established in March 2013 in Taiwan with SYSCOM. Set up with the objective of providing information and communications services in the Asia market, beginning with Japan, Taiwan, and China. CATV Tokyo Bay Network Co., Ltd. (90.1%): Operates a CATV business in Chuo and Koto wards in Tokyo. EAST Communications Co., Ltd. (100.0%): Operates a CATV business in Chiba city, Chiba prefecture. Ichihara Community Network TV Corp. (90.6%): Operates a CATV business in Ichihara city, Chiba prefecture. Atsugi Isehara Cable Network, Inc. (99.2%): Operates a CATV business in Atsugi city, Kanagawa prefecture. LCV Corporation (89.2%): Operates a CATV business in the Suwa/Okaya/Tatsuno area of Nagano prefecture. KCT Corporation (98.3%): Operates a CATV business in such cities as Kurashiki, Soja and Tamano in Okayama prefecture. TV Tsuyama Inc. (96.0%): Operates a CATV business in Tsuyama city, Okayama prefecture. TOCO Channel Shizuoka Co., Ltd. (84.9%): Operates a CATV business in Shizuoka city, Shizuoka prefecture. Net Technology Shizuoka Co., Ltd. (55.0%) Others Tokai City Service Co., Ltd. (100.0%): Operates the Grandair Bouquet Tokai bridal and banquet hall. TOKAI LIFE PLUS CORPORATION (100.0%): Operates a day service and other nursing care services in Shizuoka city, Shizuoka prefecture. TOKAI Management Service Corporation (100.0%): Undertakes administrative duties for internal departments. TOKAI Human Resources EVOL Corporation (39.0%): Operates a labor dispatch business. TOKAI Zosen Unyu Co., Ltd. (90.8%): In the shipbuilding business, conducts ship repairs; in the transportation business, operates LP gas tanker trucks from Oigawa Gas Terminal. In the Aqua home-delivery service, delivers water bottles and servers from Shizuoka prefecture to household and office customers. 34/70

35 Market and value chain Market overview Gas & Petroleum LP gas demand (household and commercial use) peaked in 2006 and is now in decline. Factors contributing to this decline include a falling average number of persons per household, the penetration of energy-conserving appliances, declining volume usage driven by increased environmental awareness, and changes in energy source. LP gas demand (household use) ('000 MT) 8,000 7,500 7,000 7,897 7,942 7,969 7,802 7,827 7,933 7,710 7,603 7,404 7,312 7,153 7,134 6,811 6,631 6,535 6,500 6,297 6,275 6,000 5,500 5, Source: Shared Research based on data from the Japan LP Gas Association According to the National Institute of Population and Social Security Research, after peaking in 2019, the total number of households in Japan will begin to decline. The average number of persons per household is also expected to fall. In light of this trend, LP gas and city gas usage per household is anticipated to decline. In other words, the gas business operates in a market that started a secular decline. Japan's households and people per household Number of households Number of people per household (right axis) (mn) (Est.) 2020 (Est.) 2025 (Est.) 2.0 Source: Shared Research based on Ministry of Internal Affairs and Communications, National Institute of Population and Social Security Research data Aqua The company is strengthening Aqua, its new water delivery business, where the market has expanded rapidly. According to the Japan Water Home Delivery Association, in 2018 the estimated number of customers was 3.9mn servers (up 150,000 units YoY, with the market estimated at JPY148bn, up JPY5bn). Note: Water delivery refers not to PET bottles filled with water, but to water delivered in larger containers. A dedicated water server is placed in a home or office, which is used to dispense cold or hot water whenever users desire. 35/70

36 Water delivery market and production amount Number of delivery water customers (thousands of servers) 1,400 1,200 1, Production volume ('000 kl) ,167 1, ,114 Market size (JPYbn) 1,095 1,206 1,246 1, (est.) ('000) 4,000 3,000 2,000 1, OW BIB Returnable 2,928 3,274 3,380 3,306 3,500 3,700 3,850 1,286 1,385 1,321 1,500 1,750 1,850 2,490 1,083 1, , ,320 1,566 1,700 1,845 1,988 1,995 1,985 2,000 1,950 2, (est.) Source: Shared Research based on data from the Japan Delivery Water & Server Association Note: Returnable means reuse containers. OW (one way) and BIB (bag in box) indicate disposable containers. According to the Japan Mineral Water Association, per capita mineral water consumption in Japan continues to increase annually. The water-delivery market is growing faster than the overall domestic water market. In 2010, the per capita consumption of mineral water in Japan was 19.8 liters, substantially lower than other developed countries (Italy: liters, U.S.: 88.6 liters, UK: 33.9 liters). Based on this fact, it is possible to infer a large amount of latent market growth. According to the company, 8.8% of households planned to use water-delivery services in 2011, equal to 4.8 million households. Because there were 2.49 million existing users, the latent user market (market growth potential) is approximately 2.3 million households. Of these, the company revealed that around 800,000 are in the Kanto region, which had a higher ratio of prospective users than the national average, coming in at 10.3%. Information and Communications The fixed broadband market for individual consumers, which is handled by the Information and Communications segment, has slowed significantly in recent years. According to the Ministry of Internal Affairs and Communications, as of December 31, 2017, there were 30.1 million fiber-optic line subscribers, a 3.9% increase from a year earlier. However, the growth rate has slowed gradually and the number of increase in FY2015 was up 4.7% from the previous year. This is largely due to the penetration of smartphones and tablet devices, as well as an increase in the number of single-person households particularly young people who do not subscribe to a fixed line service. In 2014, the Nippon Telegraph and Telephone Corp. group, the largest provider of fiber-optic lines in Japan, announced a change in selling policy to launch the wholesaling of its fiber-optic services. Various business operators, including mobile telecommunications carriers, have announced their plans to introduce services using this collaboration model. They started such services in the spring of 2015 and the market is expected to be active. TOKAI, one of the companies starting the new services, also deserves attention. Shared Research anticipates growth in the SIS and Corporate Telecommunications businesses. According to MM Research Institute, the market scale of the public cloud (SaaS/FaaS/PaaS/IaaS) is expected to grow from JPY388.3bn in 2016 to JPY1.1tn in 2021, achieving 22.1% yearly growth. According to a survey by IDC Japan, a research institution specializing in IT, the data center services market in Japan is expected to grow from JPY1.1tn in 2016 to JPY1.6tn in 2021, achieving 8.1% yearly growth. CATV According to the Ministry of Internal Affairs and Communications, the number of CATV subscribers stood at 30.0mn households on September 30, 2017, translating to a penetration rate of 52.2%. However, with the penetration rate already exceeding 50%, the market is transitioning to a mature industry. 36/70

37 Cable TV subscriber households and penetration rates (mn) Subscriber households Penetration rate (right axis) % 51.6% 51.8% 51.5% 52.2% 52.3% 52.3% 52.2% Mar Mar Mar Mar Mar Mar Mar Sep % 40% 30% 20% 10% 0% Source: Shared Research based on data from the Ministry of Internal Affairs and Communications Building and Real Estate The company has positioned the housing-renovation business as a growth field, and under the New Growth Strategy approved by the Japanese cabinet in June 2010, the housing renovation market was indeed targeted to double from JPY6.0tn in 2010 to JPY12.0tn in Although the governing party at the time, the Democratic Party of Japan (DPJ) lost power in 2012 to the Liberal Democratic Party (LDP), we do not expect to see any change vis-à-vis this market. The main reason for this expectation is that the original proposal for stimulating the housing-renovation market was made during the previous LDP administration. According to the Ministry of Land, Infrastructure, Transport and Tourism, there are particularly high needs in the plumbing field related to kitchen, toilet, and bathroom renovation. In addition, since the Great East Japan Earthquake, instability in the electricity supply has led to increased renovation needs and energy conservation. Barriers to entry The company s main businesses, including LP Gas, Information and Communications, and CATV, require large-scale capital investment, making the barriers to entry high. In contrast, the Aqua business and the housing-renovation business are not necessarily market pioneers and do not require large initial investments. For such reasons, barriers to entry are not as high. However, to build these businesses to a certain level of momentum, it is necessary to have some attributes of differentiation. Shared Research sees the company s differentiation in its LP Gas customer base and the Mt. Fuji brand. Around the foot of Mt. Fuji, there are increasing moves to regulate the taking of water, meaning it is not easy to drill new wells. Competition Gas & Petroleum The number of direct customers in the LP Gas business is 606,000 (March 31, 2018). This gives the company the third largest customer base in Japan. Competitors include industry leader Iwatani Corporation (TSE1: 8088) and the second-largest operator, NIPPON GAS CO., LTD. (TSE1: 8174). In its stronghold of Shizuoka prefecture, the company has a 24.0% market share, putting it in top place. In the Kanto region (including Fukushima prefecture in the Tohoku region), it has a 6.9% market share (based on the number of subscribers; (source: LP Gas Research Report Facts & Figures 2018, Sekiyu Kagaku Shinbun Sha). Looking at historical trends, there are few cases of drastic fluctuations in market share, but competition in the industry tends to be relatively fierce. 37/70

38 LP gas retailers 30,000 25,000 25,112 24,394 23,582 22,847 22,513 22,062 21,614 21,064 20,522 19,907 20,000 19,024 15,000 10,000 5,000 0 Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Source: Shared Research based on LP Gas Annual Report data There are approximately 19,000 LP gas retailers in Japan. Although this number is in decline, the company expects a major realignment in the industry over a relatively brief period, which may decrease the number of small operators and spawn an oligopoly. Consequently, to expand the customer base, the company has indicated it will consider the use of M&A and business alliances. Aqua In the Aqua business, competitors include NAC Co., Ltd. (TSE1: 9788) and Aqua Clara, Inc. These two companies have around 20% of the market, but TOKAI's market share is around 4% (all market share figures are for 2016; source: Yano Research Institute Ltd.). Still, it has almost a 50% share when looking only at the Shizuoka area. Using the Mt. Fuji brand and its sales capabilities as key advantages, the company is preparing for a major sales push in the Kanto region. Water Direct Corporation (TSE Mothers: 2588) also operates a water-delivery service using natural water sourced from the foot of Mt. Fuji. Shared Research considers the company s competitive advantage its existing relationship with LP Gas customers. CATV Originally, the company utilized such leading-edge technologies as CATV-FTTH to offer Internet access and multichannel broadcasting, and leveraged its sales capabilities to expand the CATV business. However, the full transition to terrestrial digital broadcasting in Japan in July 2011 shrunk the area affected by signal interference, revitalizing the multichannel market. Major telecommunications carriers have also expanded into offering bundled broadcasting, Internet, and telephone services, further intensifying competition. For the company, key competitors include major telecommunications carriers, which boast abundant capital resources, infrastructure assets, and purchasing power, and utilize these to offer a rich array of content, hence leading to differentiation. In addition to efforts to reinforce its customer base by making Tokyo Bay Network a consolidated subsidiary (in July 2017), the company is aiming to generate synergies (increase ARPU) by packaging its services with the assorted comprehensive lifestyle services of the group. The CATV business of the TOKAI group is ranked third in the industry in sales, sixth in number of broadcasting households, and fourth in number of subscribing households (source: TOKAI Holdings). The company can offer one-stop access to broadcasting services, FTTH Internet access, and telephone services. It also provides broadcasting services to approximately 800,000 households (home pass total: 1.38mn households as of March 31, 2018) whom it already knows, and through strong local community-based sales it has a direct relationship with customers and is able to provide close after-sales service. The company thinks that the major telecommunications carriers are not able to cultivate such advantages. In particular, unlike the commercial free-to-air broadcasters, who are tied to programming that is backed by advertising sponsors, CATV operators have much greater freedom in deciding their programming and are able to focus on their strengths in providing content that is valuable to viewers in their defined service area. Based on this attribute, the company is working to strengthen its role as a core infrastructure provider in its respective service areas. This includes offering services that focus on local traditions and culture and services that have a strong local community perspective. 38/70

39 Information and Communications According to TOKAI, in terms of sales for the ISP business (ADSL/FTTH), the company boasts the top market share in Shizuoka prefecture, and the fourth largest share nationwide. Unlike many ISPs, the company is highly cost competitive due to its proprietary infrastructure, such as relay transmission and IP transit. Another key feature is its customer base focusing on the Kanto region and Shizuoka prefecture. In the Corporate Telecommunications and SIS businesses, the company is likely to face intensified competition from the large system integration (SI) companies, which were previously not direct competitors. This change reflects a general move in the information industry toward cloud services, which has prompted the large SI companies to target second-tier companies rather than blue chip companies. Hence, the previously existing segmented market structure is undergoing significant changes. Meanwhile, as the cloud business market expands, operations and business-support platforms, as well as application providers such as Platform as a Service (PaaS) and Software as a Service (SaaS) are expanding. In this environment, the company is striving to differentiate itself by combining hardware- and software-based services, based on a full lineup of services from data centers and network infrastructure through to SI services performed by IT engineers. In addition, SYSCOM, the company s local partner in its Taiwan joint venture, provides price-competitive cloud services. Based on these services, the company intends to roll out cloud services targeting SMEs. 39/70

40 Strengths and weaknesses Strengths Regional dominance providing greater profit contributions from non-gas businesses: The company began selling LP gas in Shizuoka prefecture, and expanded to the Kanto area. It has taken advantage of its regional strengths in providing gas services, and has successfully diversified its products and services. It provides household equipment, insurance, telecommunications services, and bottled water delivery, and has built a solid reputation and regional dominance. Its customers have grown to 2.88mn as of end March 2018, from 1.80mn in FY03/09. The company expects to continue growing its customer base through regional expansion and offering a diversified product line-up. Lean and mean provides flexibility to take business away from major utility companies: In the wake of the liberalization of Japan s electric power industry, the large utility companies have, through their group companies, attempted to expand their operations beyond the electricity business. The top three electric power companies have aggressively expanded into the telecommunications business. However, after determining that earnings were unlikely to improve owing to intensified competition, they pulled out of this business, and focused exclusively on energy-related operations. The enormous size proved too costly. However, the company has been able to penetrate this area due to its lower cost structure, aggressive management, and regional focus, expanding into other regions departed by the major electric companies. For example, the operating profit-to-sales ratio of the Information and Communications segment, the second biggest business of the segment in terms of sales, stood at an average of 8.7% for the past five years up to FY03/18, showing a stable profit status. Beneficiary of structural reform and realignment of the LP gas industry: There are approximately 20,000 gas operators supplying LP gas nationwide. Demand for LP gas is on a declining trend, and in view of this situation, Shared Research thinks that there will be an eventual realignment of the gas industry. Given its stronghold in mainstay gas operations, coupled with an improving financial position (i.e., reducing interest-bearing debt one year ahead of schedule), the company is well situated to be an acquirer rather than an acquiree. For that reason, the realignment of the gas industry will not only mean an easing of price competition, but may also provide new growth opportunities for the company. Weaknesses Lack of experience in cross-selling: Despite the company s successful sales of multiple products, only around 8% of the company s 2.5 million customers use multiple products or services of the company as of the end of March To turn the proverbial conglomerate discount into a conglomerate premium, the company needs to boost the cross-selling ratio of multiple product and services. LP gas market is in structural decline: The company s core business operates in declining market (driven by demographic factors) but is competitive (due to a commodity nature of the product offered and limited consolidation). Intensifying competition in the CATV business: Within the company s business portfolio, the CATV business has been identified as a growth area. However, there is increasing momentum in service bundling by telecommunications carriers, not only in the ISP field but also in such areas as IP telephony, terrestrial digital broadcasting, and satellite digital broadcasting (BS/CS). This means intensifying competition for customers. 40/70

41 Historical performance Full-year FY03/18 results Results summary Historical performance and financial statements JPY186.1bn (+4.2% YoY) Operating profit: JPY11.0bn (-14.0%) Recurring profit: JPY11.2bn (-12.4%) Net income*: JPY6.6bn (-9.8%) * Net income attributable to the parent company shareholders Sales reached 98.2% of the company s FY03/18 full-year forecasts, operating profit 96.2%, recurring profit 98.5%, and net income attributable to parent company shareholders 102.6%. Excluding net income attributable to parent company shareholders, results were slightly below forecasts. The main reason that operating profit and recurring profit did not reach company forecasts is that upfront spending to expand the earnings base was JPY1.2bn higher than planned (planned JPY2.5bn YoY increase in spending; however, actual spending was JPY3.7bn). The company invested more than expected (see below) in order to prevent service suspensions or cancellations and secure new customers as competition has been fierce in the Gas business and the company has been locked in harsh competition with major telecommunications carriers in the Information and Communications segment. On the other hand, contribution from YoY sales increase was JPY700mn higher than plan (JPY1.1bn planned, JPY1.8bn actual). As a result of subtracting the increase in profits from the increase in upfront spending, operating profit results were less than JPY500mn (JPY439mn) lower than company forecasts. However, the customer base (number of customers) rose 312,000, to a total of 2,876,000. As such, the company expects for monthly fee income to rise from FY03/19. FY03/18: Increase in upfront spending and impact of higher sales (JPYmn) Init. Est. Act. Notes Investments (YoY change) 1 +2,500 +3,700 Expansion in gas business area, other Construction of new locations New LP gas sites in Kurashiki, Okayama and Tajimi, Gifu Customer acquisition costs Customer acquisition commissions New LP gas customer: 47,000 (up 6,000) Beginning a new communication service LIBMO sales expansion LIBMO customer count: net increase of 27,000 Prevention of cancellation Gas business, other LP gas cancellation: 28,000 (reduced by 5,000) Communication, other Broadband cancellation: 115,000 (reduced by 9,000) Customer count increase and other sales contributions 2 +1,100 +1,800 LP gas, CATV, Hikari Collaboration, corporate communications businesses LP gas unit consumption increase Other Consolidated operating profit (YoY change) ( ) -1,400-1,800 Source: Shared Research based on company data TOKAI Holdings, under its third medium-term business plan Innovation Plan 2020 JUMP, is seeking to increase the number of customers re-subscribing to its services as part of an ongoing management theme. It also plans to expand its sales areas and to have more customers sign up for multiple services based on its Total Life Concierge (TLC) concept, targeting acquisitions and alliances valued at JPY100bn over four years through FY03/21. The goal is to see a twofold increase in the number contracts, sales, and operating profit by FY03/21, the final year of the business plan, from the figures achieved in FY03/17. 41/70

42 In FY03/18, TOKAI Holdings made upfront investments to win more contracts and achieve the goals set forth in the medium-term business plan. As expected, the cost of winning new customers and retaining existing contracts resulting from aggressive sales activities, led to a profit decline YoY, despite the enlarged revenue base. Even so, sales rose because of an increased number of customers and M&A activity. Specifically, as well as expanding its sale area and launching a new communication service (LIBMO, described below) in order to maximize profitability from FY03/19 onwards, the company increased upfront investments by JPY3.7bn YoY (on cancellation prevention, etc.). Meanwhile, customer base expansion contributed JPY1.8bn to profit and established a revenue base for FY03/19 and onwards. Customer count At the end of FY03/18, the number of customers re-subscribing to the company s services across the group rose to 2,876,000 from 2,564,000 at end-fy03/17 (+312,000, +12.2%). Of the net increase of 312,000, 273,000 were the result of M&A. Excluding M&A, the net increase of the re-subscribing customers in the existing business in FY03/18 were 39,000, six-plus times more than 6,000 in FY03/17. The effect of the company s upfront investment and aggressive sales activities, targeting an expanded revenue base, has been robust. The net number of customers for CATV rose 299,000 compared with end-fy03/17 (an increase of 273,000 from the acquisition of Tokyo Bay Network Co., Ltd. and TV Tsuyama Inc., and 26,000 from existing areas), contributing greatly to the overall customer count. In addition to efforts to increase its existing customer base by improving customer satisfaction (see below) through cancellation prevention and service enhancement, the company boosted customer count due to the 250,000 customers from its acquisition in July 2017 of Tokyo Bay Network Co., Ltd., which operates a CATV business in two wards of Tokyo (235,000 for broadcast service; 15,000 for communications service). Members of the TLC Membership Service rose to , up 113,000 compared with end-fy03/17. Change in customer numbers, by service segment Number of customers FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 YoY ('000) Q4 Q4 Q4 Q4 Q4 Q4 Q4 Change Gas (LP Gas, City Gas) Conventional ISP Hikari Collaboration Mobile Info. Comm. Total 951 1,029 1,082 1,099 1,088 1,061 1, CATV , Aqua Security Total 2,415 2,445 2,519 2,537 2,558 2,564 2, Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Customer numbers are duplicated for Information and Communications and CATV segments when shown separately, but not in the totals. Aside from CATV, compared with end-fy03/17, the gas (LP, city gas) business had a net increase of 19,000 customers, and the Aqua business had a net increase of 11,000 customers. In Information and Communications services, while there was a net increase of 24,000 customers for Hikari Collaboration compared with end-fy03/17, there was an overall net decrease of 17,000 customers primarily due to the net decrease of 34,000 subscribers for the traditional ISP service. The number of subscribers for a new, TOKAI brand MVNO* business called LIBMO** launched in February 2017 was 29,000 as of the end of FY03/18. * MVNO (Mobile Virtual Network Operator): Business offering self-branded mobile communication services for mobile phones and PHS devices without building or operating wireless communication facilities, and instead leasing communication lines from major mobile communication carriers. ** The company is actively promoting LIBMO ( as not only a method to capture new customers in mobile communication, but also as a strategic measure to acquire more contracts and prevent contract termination of fixed-line services, by packaging it with products such as Hikari Collaboration. Specifically, TOKAI is working in partnership with major electronics mass retailers to gain new customers. The company is also working to expand sales to its existing 2.6mn customers by awarding loyalty points in addition to its TLC membership services, and by utilizing flyers and newsletters. Results by segment Segment results as reported by the company reflect allocated overhead expenses. Gas and Petroleum JPY76.1bn (+3.7% YoY) 42/70

43 Operating profit: JPY5.0bn (-28.5%) Operating profit declined YoY despite increased sales due to increased customer acquisition and cancellation prevention costs. The LP gas business had sales of JPY64.5bn (+3.3% YoY). Sales increased YoY thanks to an increase in the volume of LP gas sales due to customer growth and higher sales prices owing to a rise in purchase prices. In addition to strengthening initiatives to win new clients in existing areas and retaining existing contracts amid increasing competition, the company increased customers by entering new areas. As a result, the number of customers reached 606,000, an increase of 19,000 from end-fy03/17. The city gas business had sales of JPY11.6bn (+6.1% YoY). While the number of customers remained almost unchanged at 55,000, sales rose YoY as the gas rates increased due to energy regulations to reflect the change of natural gas prices. Information and Communications JPY50.9bn (+2.8% YoY) Operating profit: JPY1.9bn (-39.1%) Operating profit declined YoY despite increased sales due to increased sales promotion expenses for the MVNO business and others. Services for consumers generated sales of JPY31.7bn (-0.7% YoY). The company sought to acquire new customers for the Hikari Collaboration broadband service and urged existing customers to switch to this service. As a result, Hikari Collaboration added 24,000 customers from end-fy03/17, bringing its customer count to 323,000. However, the number of customers for the overall FTTH services declined by 29,000 to 691,000 because of increasing competition with major mobile phone carriers. The number of customers for the overall broadband services declined by 39,000 to 755,000, due to cancellations of ADSL contracts. LIMBO, a new MVNO service launched in February 2017, as noted above, had 29,000 customers as of end-fy03/18. Sales for corporate clients reached JPY19.2bn (+9.2% YoY). Sales rose after the company increased its fee-generating services, such as cloud services, and an increase in system development contracts. CATV JPY28.4bn (+11.8% YoY) Operating profit: JPY3.0bn (+30.2%) The increase in sales and earnings was driven by the expansion of the company's CATV customer base. The company's CATV business continued to acquire new customers by offering combination discounts for a broadcasting and communications bundle as well as combinations with smartphones in partnership with major cellphone carriers. By improving customer satisfaction, the company won new clients and managed to prevent many existing customers from switching to its rivals. The company also sought to prevent contract cancelations at its call center. In its broadcasting service, the company strove to promote fiber optic networks that are capable of supporting 4K broadcasts and television broadcasts which contain regional information. In its communications service, the company began an ultra-high-speed fiber optic network service (maximum speed of 10Gbps). These initiatives are part of an effort to improve customer satisfaction through enhancing services. Additionally, 273,000 customers were added to the customer count through M&A with the acquisition of Tokyo Bay Network Co., Ltd. and TV Tsuyama Inc., (254,000 broadcast customers and 18,000 communications customers). Consequently, the CATV business had 775,000 subscribers, up 267,000 from end-fy03/17, while subscribers to communications services increased by 32,000, to 257, /70

44 Building and Real Estate JPY19.8bn (+1.5% YoY) Operating profit: JPY655mn (+42.0%) Orders at the renovation and housing sales businesses fell YoY. However, the number of installation works and properties handled by the building management support services increased. Aqua JPY6.2bn (+7.6% YoY) Operating profit: JPY26mn (-74.4%) The company aggressively promoted its bottled water brand, Oishii Mizu no Okurimono - ulunom (the Gift of Delicious Water), mainly at large commercial facilities. As a result, the overall customer count rose by 11,000 from end-fy03/17 to 146,000. Increased cost to acquire customers was the main reason operating profit fell YoY. Others JPY4.7bn (-7.9% YoY) Operating profit: JPY301mn (+167.4%) Sales decreased YoY, but recovery in profitability continued, resulting in an increase in operating profit. The nursing care business had sales of JPY1.0bn (+18.0% YoY) after the company logged more users. In the shipbuilding business, a decreased volume of ship repairs led to sales of JPY1.4bn (-5.9% YoY), while in the bridal events business, sales were JPY1.5bn (-23.2% YoY) after the company shut down its Vrai Cloche Bouquet Tokai Mishima bridal and banquet hall at end Mach Q3 FY03/18 results Results summary Overview JPY133.3bn (+4.6% YoY) Operating profit: JPY6.6bn (-19.7%) Recurring profit: JPY6.7bn (-19.2%) Net income*: JPY3.4bn (-29.2%) * Net income attributable to the parent company shareholders TOKAI Holdings, under its third medium-term business plan Innovation Plan 2020 JUMP, is seeking to increase the number of customers re-subscribing to its services as part of an ongoing management theme. It also plans to expand its sales areas and to have more customers sign up for multiple services based on its Total Life Concierge (TLC) concept, targeting acquisitions and alliances valued at JPY100bn over four years through FY03/21. The goal is to see a twofold increase in the number contracts, sales, and operating profit by FY03/21, the final year of the business plan, from the figures achieved in FY03/17. In cumulative Q3 FY03/18, TOKAI Holdings made upfront investments to win more contracts and achieve the goals set forth in the medium-term business plan. The cost of winning new customers and retaining existing contracts led to a profit decline as expected, resulting from aggressive sales activities. Even so, sales rose because the company added more customers. The rate of 44/70

45 YoY decline in operating profit shrank considerably in cumulative Q3 compared to 1H (-29.3% YoY in 1H to -19.7% in cumulative Q3). The company forecast for operating profit is a YoY decline of 10.5%. Progress Sales reached 70.4% of the company s FY03/18 full-year forecasts (in cumulative Q3 FY03/17, sales were 71.3% of the company s FY03/17 full-year results), operating profit 57.7% (64.3%), recurring profit 58.6% (64.5%), and net income attributable to parent company shareholders 53.3% (66.1%). There are no changes to the FY03/18 company forecasts. TOKAI Holdings says sales were fairly in line with plan, but operating profit came in about JPY300mn above plan. Not only did the CATV and corporate communications businesses perform better than expected, but the efficiency of indirect costs was improved more than anticipated. However, in Information and Communications, the subscriber count is falling faster than expected on cancellations of the traditional ISP service and, in the LP gas business, the capture of subscribers fell slightly short of plan. For this reason, the company will take the JPY300mn by which operating profit exceeded its plan in cumulative Q3 and apply it toward the cost of capturing subscribers and preventing cancellations in Q4. As a result, the company s FY03/18 budget for upfront spending has been increased from the original plan of JPY2.5bn to about JPY3.0bn. In Information and Communications, the company will continue to focus on selling bundles of Hikari Collaboration and the new TOKAI brand MVNO* service called LIBMO**. In the gas business, it will focus on capturing gas subscribers. With these measures, TOKAI Holdings believes it will be able to achieve its target of 2.88 million subscribers by end-fy03/18. As set out in its medium-term plan, Innovation Plan 2020 JUMP, the company s FY03/19 targets are sales of JPY202.0bn (+6.7% YoY) and operating profit of JPY14.0bn (+22.7%). It assumes 2.88 million customers as of end-fy03/18 in order to achieve these targets. * MVNO (Mobile Virtual Network Operator): Business offering self-branded mobile communication services for mobile phones and PHS devices without building or operating wireless communication facilities, and instead leasing communication lines from major mobile communication carriers. ** The company is actively promoting LIBMO ( as not only a method to capture new customers in mobile communication, but also as a strategic measure to acquire more contracts and prevent contract termination of fixed-line services, by packaging it with products such as Hikari Collaboration. Specifically, TOKAI is working in partnership with major electronics mass retailers to gain new customers. The company is also working to expand sales to its existing 2.8mn customers by awarding loyalty points in addition to its TLC membership services, and by utilizing flyers and newsletters. M&A The medium-term business plan, Innovation Plan 2020 JUMP, calls for JPY100.0bn in spending on M&A and alliances during the four years from FY03/18 to FY03/21, but the company has already used the M&A and alliance budget of JPY1.3bn for FY03/18. It has established a team dedicated to M&A and alliances to act as gatekeeper to support collaboration or integration between businesses run by each group company and the M&A target or alliance partner. TOKAI Holdings says it has seen an increase in the number of projects proposed since it announced Innovation Plan 2020 JUMP and has made a list of projects that exceed the proposed budget. Once the team has established standards for carefully assessing these projects, it will select or discard individual projects. Customer count At the end of Q3 FY03/18, the number of customers re-subscribing to the company s services across the group rose to 2,839,000 from 2,564,000 at end-fy03/17 (+275,000). This number also rose 288,000 compared with end-q3 FY03/17. The net number of customers for CATV rose 269,000 compared with end-fy03/17 (243,000 for broadcast service; 25,000 for communications service), contributing greatly to the overall customer count. In addition to efforts to increase customer satisfaction (see below) such as cancellation prevention and service enhancement, the company boosted customer count due to the 250,000 customers from Tokyo Bay Network Co., Ltd. (235,000 for broadcast service; 15,000 for communications service). Members of the TLC Membership Service rose to 669,000, up 83,000 compared with end-fy03/17. Aside from CATV, the gas (LP, city gas) business had a net increase of 11,000 customers compared with end-fy03/17 (net increase of 18,000 YoY), and the Aqua business had a net increase of 8,000 customers (net increase of 8,000 YoY). The capture of 45/70

46 LP gas customers has been falling slightly short of the company target. In Information and Communications services, while there was a net increase of 20,000 customers for Hikari Collaboration compared with end-fy03/17 (net increase of 31,000 YoY), there was an overall net decrease of 14,000 Information and Communications services customers (net decrease of 13,000 customers YoY) primarily due to the net decrease of subscribers for the traditional ISP service. Competition with major telecommunications carriers on the capture of subscribers is heating up. The number of subscribers for a new TOKAI brand MVNO business called LIBMO launched in February 2017 was 21,000 as of the end of Q3 FY03/18. Although there was an uphill battle immediately after the LIBMO service launched, subscriber capture is now proceeding in line with the company s expectations. TOKAI Holdings is increasing upfront spending in Q4 and focusing on selling Hikari Collaboration and mobile brand LIBMO bundles, especially via the mass retailer route, to shore up the communications field, which has been falling short of plan. It will also focus on capturing LP gas subscribers and still believes it will be able to reach its target of 2.88 million customers by end-fy03/18. Change in customer numbers, by service segment Number of Customers FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 YoY ('000) Q3 Q3 Q3 Q3 Q3 Q3 Q3 Change Gas (LP Gas, City Gas) Conventional ISP Hikari Collaboration Mobile Info. Comm. Total 938 1,010 1,073 1,099 1,094 1,060 1, CATV , Aqua Security Total 2,414 2,427 2,510 2,540 2,553 2,551 2, Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Customer numbers are duplicated for Information and Communications and CATV segments when shown separately, but not in the totals. Results by segment Segment results as reported by the company reflect allocated overhead expenses. Gas and Petroleum JPY53.1bn (+3.6% YoY) Operating profit: JPY2.1bn (-47.3%) The LP gas business had sales of JPY44.9bn (+3.5% YoY). Sales increased YoY thanks to an increase in the volume of LP gas sales due to customer growth and higher sales prices owing to a rise in purchase prices. In addition to strengthening initiatives to win new clients in existing areas and retaining existing contracts amid increasing competition, the company increased customers by entering new areas. As a result, the number of customers reached 599,000, an increase of 11,000 from end-fy03/17. The city gas business had sales of JPY8.3bn (+4.4% YoY). While the number of customers remained almost unchanged at 54,000, sales rose YoY as the gas rates increased due to energy regulations to reflect the change of natural gas prices. Information and Communications JPY37.8bn (+4.3% YoY) Operating profit: JPY1.4bn (-32.6%) Services for consumers generated sales of JPY23.7bn (-0.2% YoY). The company sought to acquire new customers for the Hikari Collaboration broadband service and urged existing customers to switch to this service. As a result, Hikari Collaboration added 20,000 customers from end-fy03/17, bringing its customer count to 319,000. However, the number of customers for the overall FTTH services declined by 23,000 to 697,000 because of increasing competition with major mobile phone carriers. The number 46/70

47 of customers for the overall broadband services declined by 30,000 to 764,000, due to cancellations of ADSL contracts. LIBMO, a new MVNO service launched in February 2017, as noted above, had 21,000 customers as of end Q3 FY03/18. Sales for corporate clients reached JPY14.0bn (+12.9% YoY). Sales rose after the company increased its fee-generating services, such as cloud services, and an increase in system development contracts. CATV JPY20.9bn (+10.4% YoY) Operating profit: JPY2.4bn (+31.2%) The increase in sales and earnings was driven by the expansion of the company's CATV customer base. The company's CATV business continued to acquire new customers by offering combination discounts for a broadcasting and communications bundle as well as combinations with smartphones in partnership with major cellphone carriers. By improving customer satisfaction, the company won new clients and managed to prevent many existing customers from switching to its rivals. The company also sought to prevent contract cancelations at its call center. In its broadcasting service, the company strove to promote fiber optic networks that are capable of supporting 4K broadcasts and television broadcasts which contain regional information. In its communications service, the company began an ultra-high-speed fiber optic network service (maximum speed of 10Gbps). These initiatives are part of an effort to improve customer satisfaction through enhancing services. As previously mentioned, the 250,000 customers from Tokyo Bay Network Co., Ltd. were added to customer count. Consequently, the CATV business had 751,000 subscribers, up 243,000 from end-fy03/17, while subscribers to communications services increased by 25,000, to 251,000. Building and Real Estate JPY13.5bn (+4.4% YoY) Operating profit: JPY189mn (+10.1%) Orders at the renovation and housing sales businesses fell YoY. However, the number of installation works and properties handled by the building management support services increased. Aqua JPY4.7bn (+5.9% YoY) Operating profit: JPY46mn (-67.9%) The company aggressively promoted its bottled water brand, Oishii Mizu no Okurimono - ulunom (the Gift of Delicious Water), mainly at large commercial facilities. As a result, the overall customer count rose by 8,000 from end-fy03/17 to 143,000. Increased cost to acquire customers was the main reason operating profit fell YoY. Others Operating profit: JPY3.4bn (-7.9% YoY) JPY163mn (versus operating profit of JPY13mn in Q3 FY03/17) The nursing care business had sales of JPY778mn (+19.4% YoY) after the company logged more users. In the shipbuilding business, a decreased volume of ship repairs led to sales of JPY972mn (-8.2% YoY), while in the bridal events business, sales were JPY1.1bn (-22.6% YoY) after the company shut down its Vrai Cloche Bouquet Tokai Mishima bridal and banquet hall at end Mach /70

48 1H FY03/18 results Results summary JPY84.9bn (+3.3% YoY) Operating profit: JPY3.1bn (-29.3%) Recurring profit: JPY3.1bn (-29.0%) Net income*: JPY1.2bn (-47.7%) * Net income attributable to the parent company shareholders Sales ended roughly in line with company forecasts while operating profit, recurring profit, and net income ended 14.9%, 18.6%, and 15.4% higher than forecasts, respectively. In addition to the CATV and corporate communications businesses performing better than expected, the company was able to cut indirect costs more than it had forecasted. There are no changes to the FY03/18 company forecasts. TOKAI Holdings, under its third medium-term business plan Innovation Plan 2020 JUMP, is seeking to increase the number of customers re-subscribing to its services as part of an ongoing management theme. It also plans to expand its sales areas and to have more customers sign up for multiple services based on its Total Life Concierge (TLC) concept, targeting acquisitions and alliances valued at JPY100bn over four years through FY03/21. The goal is to see a twofold increase in the number contracts, sales, and operating profit by FY03/21, the final year of the business plan, from the figures achieved in FY03/17. Sales increased YoY in 1H FY03/18 due to a higher customer count among other factors. TOKAI Holdings made upfront investments to win more contracts and achieve the goals set forth in the medium-term business plan. The cost of winning new customers and retaining existing contracts went up as expected by around JPY2.0bn YoY *1, partly offset by a sales growth effect of JPY700mn due to a higher customer count *2, resulting in a JPY1.3bn YoY OP decline. The profit decline in 1H was as expected, and although profits were down, they exceeded the company forecast. *1 Breaks down into approximately JPY900mn for gas business service area expansion and winning new customers, JPY500mn sales promotion costs for new communication service LIBMO (see below), and JPY700mn spending to retain existing customers. *2 As a result of upfront investments, the number of LP gas customers increased by 4,000 YoY and the net increase in LIBMO customers was 11,000, while the number of service cancellations in LP gas and Information and Communications businesses fell by 5,000. New LP gas customers increased from 17,000 in 1H FY03/17 to 21,000 in 1H FY03/18, while service cancellations fell from 18,000 in 1H FY03/17 to 15,000 in 1H FY03/18. In the broadband (Information and Communications) business, service cancellations were down from 64,000 in 1H FY03/17 to 62,000 in 1H FY03/18. Compared with the FY03/18 full-year forecast, sales were 44.8% (in 1H FY03/17, sales were 46.0% of the company s FY03/17 full-year target), operating profit 27.3% (34.6%), recurring profit 27.7% (34.7%), and net income attributable to parent company shareholders 19.3% (32.5%). Customer count At the end of 1H FY03/18, the number of customers re-subscribing to the company s services across the group rose to 2,827,000 from 2,564,000 at end-fy03/17 (+263,000). This number also rose 273,000 compared with end-1h FY03/17. The net number of customers for CATV rose 262,000 compared with end-fy03/17 (239,000 for broadcast service; 22,000 for communications service), contributing greatly to the overall customer count. In addition to efforts to increase customer satisfaction (see below) such as cancellation prevention and service enhancement, the net increase in the customer count for CATV was due to the 250,000 customers from Tokyo Bay Network Co., Ltd. (235,000 for broadcast service; 15,000 for communications service). On an organic basis (adjusted for the contribution of Tokyo Bay Network), the net increase in the overall customer count from end-fy03/17 was 13,000, far exceeding the net increase of 6,000 during full year FY03/17. Members of the TLC Membership Service rose to 642,000, up 56,000 compared with end-fy03/17. 48/70

49 Change in customer numbers, by service segment Number of Customers FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FT03/18 YoY ('000) Q2 Q2 Q2 Q2 Q2 Q2 Q2 Change Gas (LP Gas, City Gas) Conventional ISP Hikari Collaboration Mobile Info. Comm. Total ,062 1,093 1,093 1,071 1, CATV Aqua Security Total 2,398 2,405 2,498 2,535 2,543 2,554 2, Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Customer numbers are duplicated for Information and Communications and CATV segments when shown separately, but not in the totals. Aside from CATV, compared with end-fy03/17, the gas (LP, city gas) business had a net increase of 6,000 customers (net increase of 14,000 YoY), and the Aqua business had a net increase of 6,000 customers (6,000). In Information and Communications services, while there was a net increase of 16,000 customers for Hikari Collaboration compared with end-fy03/17 (net increase of 43,000 YoY), there was an overall net decrease of 11,000 customers (net decrease of 21,000 customers YoY) primarily due to the net decrease of subscribers for the traditional ISP service. The number of subscribers for a new, TOKAI brand MVNO* business called LIBMO** launched in February 2017 was 13,000 as of the end of 1H FY03/18. * MVNO (Mobile Virtual Network Operator): Business offering self-branded mobile communication services for mobile phones and PHS devices without building or operating wireless communication facilities, and instead leasing communication lines from major mobile communication carriers. ** The company is actively promoting LIBMO ( as not only a method to capture new customers in mobile communication, but also as a strategic measure to acquire more contracts and prevent contract termination of fixed-line services, by packaging it with products such as Hikari Collaboration. Specifically, TOKAI is working in partnership with major electronics mass retailers to gain new customers. The company is also working to expand sales to its existing 2.6mn customers by awarding loyalty points in addition to its TLC membership services, and by utilizing flyers and newsletters. Results by segment Segment results as reported by the company reflect allocated overhead expenses. Gas and Petroleum JPY32.8bn (+0.9% YoY) Operating profit: JPY393mn (-77.8%) The LP gas business had sales of JPY27.5bn (+0.6% YoY). The volume of LP gas sales remained almost unchanged YoY because in addition to winning new clients and retaining existing contracts amid increasing competition, the company increased customers by entering the Okayama Prefecture market. The number of customers reached 594,000, an increase of 6,000 from end-fy03/17. The city gas business had sales of JPY5.3bn (+2.4% YoY). While the number of customers remained almost unchanged at 54,000, sales rose YoY as the gas rates increased due to energy regulations to reflect the change of natural gas prices. The LP gas market is mature, and while annual market growth of LP gas for industrial use and for city gas is forecast at around 3%, gas for household use is expected to decline 2% per year in FY2016 FY2020 (based on METI s oil market trends working group survey reports). For this reason, TOKAI Holdings medium-term goals are to expand its service areas by aggressive investment and to increase market share. The company has expanded into the five locations of Gifu, Toyokawa, Nishimikawa, Iwaki, and Sendai in the Chubu (Gifu and Aichi Prefectures) and Tohoku (Miyagi Prefecture) regions in FY03/17, and into Kurashiki (Okayama Prefecture) in 1H FY03/18. The company began offering LP gas services in areas where it operates a CATV business, taking advantage of name recognition in the CATV business to conduct aggressive marketing activities. TOKAI Holdings plans to begin doing business in Tajimi (Gifu Prefecture) and Kyushu in 2H FY03/18 and in Nagano and Mie Prefectures in FY03/19. 49/70

50 Information and Communications JPY24.9bn (+4.9% YoY) Operating profit: JPY906mn (-32.7%) Services for consumers generated sales of JPY15.7bn (+0.5% YoY). The company sought to acquire new customers for the Hikari Collaboration broadband service and urged existing customers to switch to this service. As a result, Hikari Collaboration added 16,000 customers from end-fy03/17, bringing its customer count to 315,000. However, the number of customers for the overall FTTH services declined by 15,000 to 705,000 because of increasing competition with major mobile phone carriers. The number of customers for the overall broadband services declined by 20,000 to 774,000, due to cancellations of ADSL contracts. LIBMO, a new MVNO service launched in February 2017, as noted above, had 13,000 customers as of end 1H FY03/18. Sales for corporate clients reached JPY9.2bn (+13.2% YoY). Sales rose after the company increased its fee-generating services, such as cloud services, and an increase in system development contracts. Group company TOKAI Communications Corporation uses its own fiber-optic trunk lines between Tokyo/Nagoya/Osaka and Okayama totaling approximately 6,000km *1 in length (as of end March 2017) to provide an integrated three-in-one service for enterprises consisting of data centers (one each in Shizuoka and Okayama), fiber-optic networks, and system development. On October 30, 2017, TOKAI Communications *2 concluded a strategic business alliance agreement with Cloud Ace (Japan s leading Google Cloud services specialist) to promote sales of Google Cloud Platform (GCP ). The purpose of the alliance is to combine TOKAI Communications infrastructure (data center and networks) and technological/development capabilities in system integration and backbone systems with Cloud Ace s strengths in GCP installation and integration. The two companies aim to expand the scope of the business by maximizing each company s area of strength and gain customer referral effect by collaborating in proposals to clients. *1 The Information and Communications business owns 2,618km and the CATV business 3,551km including trunk and branch lines (excludes incoming lines). *2 TOKAI Communications has been focusing on providing connection services with major cloud services such as Amazon Web Service (AWS) using its own network infrastructure. The company has been accredited as a GCP Technology Partner and began offering a wide-band, stable connection service to GCP in September 2015 CATV JPY13.6bn (+8.3% YoY) Operating profit: JPY1.5bn (+22.3%) The increase in sales and earnings was driven by the expansion of the company's CATV customer base. The company's CATV business continued to acquire new customers by offering combination discounts for a broadcasting and communications bundle as well as combinations with smartphones in partnership with major cellphone carriers. By improving customer satisfaction, the company won new clients and managed to prevent many existing customers from switching to its rivals. The company also sought to prevent contract cancelations at its call center. In its broadcasting service, the company strove to promote fiber optic networks that are capable of supporting 4K broadcasts and television broadcasts which contain regional information. In its communications service, the company began an ultra-high-speed fiber optic network service (maximum speed of 10Gbps). These initiatives are part of an effort to improve customer satisfaction through enhancing services. As previously mentioned, the 250,000 customers from Tokyo Bay Network Co., Ltd. were added to customer count. Consequently, the CATV business had 748,000 subscribers, up 239,000 from end-fy03/17, while subscribers to communications services increased by 22,000, to 247,000. The CATV business operates in Shizuoka, Tokyo, Kanagawa, Chiba, Nagano, and Okayama prefectures. TOKAI Cable Network Corporation and Toco Channel Shizuoka Corporation run the CATV business in Shizuoka, Tokyo Bay Network Co., Ltd. in Tokyo, Atsugi Isehara Cable Network Co., Ltd. in Kanagawa, Ichihara Community Network TV Corp. and East Communications Co., Ltd. in Chiba, LCV Corporation in Nagano, and Kurashiki Cable Television in Okayama. 50/70

51 TOKAI Holdings plans to expand the CATV business by M&A in the medium term. A recent acquisition is Tokyo Bay Network Co., Ltd., which became an equity-method subsidiary in February 2017 and a wholly owned subsidiary in July after additional investment by the company. In November 2017, the company announced the acquisition of TV Tsuyama Inc., which became a consolidated subsidiary. Tokyo Bay Network has 250,000 customers and TV Tsuyama has 10,000 customers, adding a combined 260,000 customers to the TOKAI Group. The company commented that it had initially planned to make Tokyo Bay Network a wholly owned subsidiary in 2H FY03/18, but brought it forward to July Building and Real Estate JPY8.3bn (+3.8% YoY) Operating profit: JPY57mn (+100.5%) Housing sales and new store construction rose, and so did the number of properties handled by the building management support services. However, sales of solar equipment fell YoY. Aqua JPY3.1bn (+4.3% YoY) Operating profit: JPY12mn (-86.6%) The company aggressively promoted its bottled water brand, Oishii Mizu no Okurimono - ulunom (the Gift of Delicious Water), mainly at large commercial facilities. As a result, the overall customer count rose by 6,000 from end-fy03/17 to 141,000. Increased cost to acquire customers was the main reason operating profit fell YoY. Others Operating profit: JPY2.2bn (-8.6% YoY) JPY18mn (versus operating loss of JPY59mn in 1H FY03/17) The nursing care business had sales of JPY506mn (+18.3% YoY) after the company logged more users. In the shipbuilding business, a decreased volume of ship repairs led to sales of JPY686mn (-10.6% YoY), while in the bridal events business, sales were JPY672mn (-23.3% YoY) after the company shut down its Vrai Cloche Bouquet Tokai Mishima bridal and banquet hall at end Mach Q1 FY03/18 results Results summary JPY42.5bn (+2.2% YoY) Operating profit: JPY2.2bn (-25.0%) Recurring profit: JPY2.2bn (-24.0%) Net income*: JPY1.2bn (-33.1%) * Net income attributable to the parent company shareholders According to the company, the higher sales and lower profits were in line with 1H FY03/18 company forecast. This is attributable to upfront investment made in keeping with the medium-term plan. Q1 results surpassed the company forecast for Q1. TOKAI Holdings, under its third medium-term business plan Innovation Plan 2020 JUMP, is seeking to increase the number of customers re-subscribing to its services as part of an ongoing management theme. It also plans to expand its sales areas and to have more customers sign up for multiple services based on its Total Life Concierge (TLC) concept, targeting acquisitions and 51/70

52 alliances valued at JPY100bn over four years through FY03/21. The goal is to see a twofold increase in the number contracts, sales, and operating profit by FY03/21, the final year of the business plan, from the figures achieved in FY03/17. In Q1 FY03/18, TOKAI Holdings made upfront investments to win more contracts and achieve the goals set forth in the medium-term business plan. The cost of winning new customers and retaining existing contracts (especially for the gas business) led to a profit decline as expected, resulting from aggressive sales activities. Even so, sales rose because the company added more customers. The results exceeded the company s initial internal forecast thanks to an increase in fee-based contracts and a more-than-expected decline in intermediate costs. Sales were 49.5% of the company s 1H FY03/18 target (in Q1 FY03/17, sales were 50.6% of the company s 1H FY03/17 target), operating profit 79.4% (65.1%), recurring profit 83.2% (65.5%), and net income attributable to parent company shareholders 109.4% (74.1%). Progress in terms of profits exceeded that of Q1 FY03/17. Sales benefited from the increased number of paid contracts. In terms of cost, the unused indirect cost was larger than the more-than-expected cost of winning new customers and retaining existing contracts. Compared with the FY03/18 full-year forecast, sales were 22.5% (in Q1 FY03/17, sales were 23.3% of the company s FY03/17 full-year target), operating profit 18.9% (22.5%), recurring profit 19.4% (22.7%), and net income attributable to parent company shareholders 18.3% (24.1%). Customer count At the end of Q1 FY03/18, the number of customers re-subscribing to the company s services across the group rose to 2,570,000 (up 6,000) from 2,564,000 at end-fy03/17. However, the net increase of 6,000 was 2,000 short of the target. The number of newly acquired customers surpassed the target by 2,000, but the number of cancellations exceeded the forecast by 4,000. Change in customer numbers, by service segment Number of customers FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 YoY ('000) Q1 Q1 Q1 Q1 Q1 Q1 Q1 Change Gas (LP Gas, City Gas) Conventional ISP Hikari Collaboration Mobile Information and Communications ,049 1,087 1,095 1,081 1, CATV Aqua Security Total 2,378 2,392 2,471 2,526 2,537 2,557 2, Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Customer numbers are duplicated for Information and Communications and CATV segments when shown separately, but not in the totals. By service, the gas (LP, city gas) business had a net increase of 2,879 customers (in Q1 FY03/17, the net increase was 131), while the CATV business had a net increase of 4,930 customers (5,924) and the Aqua business had a net increase of 2,732 customers (947). Meanwhile, the company managed to limit a net decrease in the number of customers at the Information and Communications services to about 40% YoY after it won customers for a new, TOKAI brand MVNO* business called LIBMO** launched in February The number of acquired customers was slightly short of the target at the gas business, in line with the target at the Aqua business, over the target at the broadband business, in line with the target at the CATV business, in line with the target at the MVNO (LIBMO) business in May and June despite a sluggish start in April 2017, and in line with the target at the conventional ISP and Hikari Collaboration businesses. The shortage of 2,000 customers over the target is attributable to a shortage of 1,000 customers at both gas and MVNO businesses. * MVNO (Mobile Virtual Network Operator): Business offering self-branded mobile communication services for mobile phones and PHS devices without building or operating wireless communication facilities, and instead leasing communication lines from major mobile communication carriers. ** The company is actively promoting LIBMO ( as not only a method to capture new customers in mobile communication, but also as a strategic measure to acquire more contracts and prevent contract termination of fixed-line services, by packaging it with products such as Hikari Collaboration. Specifically, TOKAI is working in partnership with major electronics mass retailers to gain new customers. The company is also working to expand sales to its existing 2.6mn customers by awarding loyalty points in addition to its TLC membership services, and by utilizing flyers and newsletters. 52/70

53 The company is steadily expanding its revenue base with a focus on expansion of the service area, sales promotion of new information services centered on the MVNO service, and measures to prevent contract cancellations of existing retail customers. In Q1, the cost of winning new customers and retaining existing contracts exceeded the plan. As the company intends to focus on service area expansion at the gas business in 2H FY03/18, it expects an increase in new customers. At the MVNO business, it plans to start offering immediate connection at stores in 2H, aiming at a higher customer acquisition rate. In 2H, the cost of winning new customers for the gas business is expected to rise, but the company forecasts higher profits YoY for 2H with higher sales from customers acquired in 1H. Results by segment Segment results as reported by the company reflect allocated overhead expenses. Gas and Petroleum JPY17.4bn (-0.5% YoY) Operating profit: JPY1.3bn (-39.7%) The LP gas business had sales of JPY14.7bn (-0.1% YoY). The volume of LP gas sales remained almost unchanged YoY because the company won new clients and retained existing contracts amid increasing competition. The number of customers reached 591,000, an increase of 3,000 from end-fy03/17. The city gas business had sales of JPY2.7bn (-2.5% YoY). While the number of customers remained almost unchanged at 54,000, gas consumption by industrial users fell. Information and Communications JPY12.4bn (+5.7% YoY) Operating profit: JPY774mn (-15.2%) Services for consumers generated sales of JPY7.9bn (+1.7% YoY). The company sought to acquire new customers for the Hikari Collaboration broadband service and urged existing customers to switch to this service. As a result, Hikari Collaboration added 11,000 customers from end-fy03/17, bringing its customer count to 310,000. However, the number of customers for the overall FTTH services declined by 7,000 to 713,000 because of increasing competition with major mobile phone carriers. The number of customers for the overall broadband services declined by 10,000 to 784,000, due to cancellations of ADSL contracts. LIBMO, a new MVNO service launched in February 2017, had 8,000 customers as of end Q1 FY03/18. Sales for corporate clients reached JPY4.6bn (+13.3% YoY). Sales rose after the company increased its fee-generating services, such as cloud services, and an increase in system development contracts. CATV JPY6.4bn (+2.6% YoY) Operating profit: JPY875mn (+22.0%) The increase in sales and earnings was driven by the expansion of the company's CATV customer base. The company's CATV business continued to acquire new customers by offering combination discounts for a broadcasting and communications bundle as well as combinations with smartphones in partnership with major cellphone carriers. By improving customer satisfaction, the company won new clients and managed to prevent many existing customers from switching to its rivals. The company also sought to prevent contract cancelations at its call center. Consequently, the CATV business had 510,000 subscribers, up 2,000 from end-fy03/17, while subscribers to communications services increased by 3,000, to 229, /70

54 Building and Real Estate JPY3.6bn (+5.9% YoY) Operating profit: JPY90mn (+11.1%) Housing sales rose, and so did the number of properties handled by the building management support services. However, sales of solar equipment fell YoY. Aqua JPY1.5bn (+2.2% YoY) Operating profit: JPY56mn (+194.7%) The company aggressively promoted its bottled water brand, Oishii Mizu no Okurimono - ulunom (the Gift of Delicious Water), mainly at large commercial facilities. As a result, the overall customer count rose by 3,000 from end-fy03/17 to 138,000. Others Operating loss: JPY1.2bn (-5.2% YoY) JPY970mn (versus operating loss of JPY1.1bn in Q1 FY03/17) The nursing care business had sales of JPY245mn (+16.7% YoY) after the company logged more users. In the shipbuilding business, an increased volume of ship repairs led to sales of JPY393mn (+6.1% YoY), while in the bridal events business, sales were JPY380mn (-24.8% YoY) after the company shut down its Vrai Cloche Bouquet Tokai Mishima bridal and banquet hall at end Mach Full-year FY03/17 results Results summary JPY178.6bn (-1.3% YoY) Operating profit: JPY12.8bn (+54.6%) Recurring profit: JPY12.8bn (+56.7%) Net income*: JPY7.3bn (+112.2%) * Net income attributable to the parent company shareholders Despite a small drop in sales because of unit price cuts to reflect falling gas raw material prices, operating profit, recurring profit, and net income all recorded all-time highs due to earnings improvement of the Hikari Collaboration* service and Aqua business, which the company has been focusing on. The roughly JPY2.3bn YoY decline in sales stemmed primarily from a reduction in rates charged to customers following a decline in natural gas prices (approx. JPY6.5bn). Sales growth was largely solid at the company's other businesses. The company marked the sharp rise in profits as the Hikari Collaboration service and Aqua (bottled water) business, positioned as the main growth drivers for FY03/17, steadily improved in profitability. The Hikari Collaboration service s earnings improved by about JPY2.9bn thanks to vigorous sales promotion activities in FY03/16; the Aqua (bottled water delivery) business benefited from an improvement of about JPY1.4bn in improved balance of income and expenditure brought on by a shift in sales strategy, and finished in the black for the first time since its inception. *Hikari Collaboration: Fiber-optic services provided by ISPs that wholesale NTT Group's fiber-optic service. 54/70

55 As a result, compared to the company s upwardly revised full-year forecast issued on October 31, 2016, sales reached 99.4%, operating profit 100.0%, recurring profit 103.4%, and net income attributable to parent company shareholders 112.9%. In short, sales and operating profit finished in line with the revised forecast, recurring profit slightly ahead, and net income well ahead. Customer count At the end of FY03/17, the number of customers re-subscribing to the company s services across the group was 2,564,000, up 6,000 from 2,558,000 at end-fy03/16. Subscribers to TLC (Total Life Concierges) services, which offer one-stop services with loyalty points to customers in multiple contracts with the company, were 586,000, up from 491,000 at the end-fy03/17. However, the company noted that the net increase of 6,000 continuing customers for the whole group in FY03/17 was somewhat disappointing. Change in customer numbers, by service segment Number of Customers FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 YoY ('000) Q4 Q4 Q4 Q4 Q4 Q4 Change Gas (LP Gas, City Gas) Conventional ISP Hikari Collaboration Mobile Info. Comm. Total 951 1,029 1,082 1,099 1,088 1, CATV Aqua Security Total 2,415 2,445 2,519 2,537 2,558 2,564 6 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Customer numbers are duplicated for Information and Communications and CATV segments when shown separately, but not in the totals. By service, both the gas and CATV businesses continued to expand their customer base, increasing their acquisition of new customers and realizing net increases in their customer counts for the second straight year. The Information and Communications business saw a decline in its overall customer count due to the drop in traditional ISP service customers, but the count in Hikari Collaboration an area of focus for the company saw steady growth. As a result of this shift in customer base toward higher revenue-generating Hikari Collaboration, the Information and Communications business was able to realize double-digit gains in overall revenues for the year. On January 31, 2017, as a part of its Information and Communications services, the company made a full-scale entry into the MVNO* business and announced the launch of the LIBMO low-cost SIM** service. *MVNO (Mobile Virtual Network Operator): Business offering self-branded mobile communication services for mobile phones and PHS devices without building or operating wireless communication facilities, and instead leasing communication lines from major mobile communication carriers. **Low-cost SIM: Low-cost SIM cards provided by MVNO operators. SIM (subscriber identity module) cards are small IC cards installed in cellular phones such as smartphones. Use of voice and mobile internet requires a SIM card. The company is actively promoting LIBMO ( as not only a method to capture new customers in mobile communication, but also as a strategic measure to acquire more contracts and prevent contract termination of fixed-line services, by packaging it with products such as Hikari Collaboration. Specifically, TOKAI is working in partnership with major electronics mass retailers to gain new customers. The company is also working to expand sales to its existing 2.83mn customers by awarding loyalty points in addition to its TLC membership services, and by utilizing flyers and newsletters. Financial condition The solid results helped the company continue to improve its financial position (a management priority for six fiscal years since business integration in 2011), including reducing its interest-bearing debt. As of the end of FY03/17 the company's balance sheet showed total interest-bearing debt of JPY54.1bn versus JPY71.4bn at the end of FY03/16. Conversion into stock of bonds with stock acquisition rights issued in 2015 has also progressed. In addition, the equity ratio rose to 34.5% (versus 25.6% at the end of FY03/16). EBITDA made a solid improvement from JPY25.0bn in FY03/16 to JPY28.4bn in FY03/17. 55/70

56 Results by segment Segment results as reported by the company reflect allocated overhead expenses. Gas and Petroleum JPY73.3bn (-9.2% YoY) Operating profit: JPY6.9bn (-0.4%) Sales declined as the company reduced sales price in the previous period following the drop in imported LP gas prices, but this had no real impact on segment earnings. Operating profit was basically flat versus the previous year. The LP gas business had 588,000 customers at the end of FY03/17, up 8,000 from the end of FY03/16. Although sales volume of LP gas was also on par with a year earlier, sales were down as the company brought down its selling prices to reflect the drop in imported fuel costs. The number of customers at the end of FY03/17 in the city gas business was 54,000 (unchanged from end-fy03/16). Sales volume in the city gas business was likewise on par with the previous year, but the company lowered the gas rates due to new regulations forcing utility providers to pass along lower costs more quickly to consumers. As a result, sales were down YoY. Information and Communications JPY49.5bn (+11.9% YoY) Operating profit: JPY3.1bn (+269.5%) The double-digit increase in sales and sharp increase in operating profit were due mainly to the increase in the number of subscribers to the Hikari Collaboration service. At the broadband business, the TOKAI group worked to acquire new customers and actively marketed to existing customers to get them to switch to its new wholesale fiber-optic services "TCOM Hikari" and "TNC Hikari." As a result, the Hikari Collaboration service added some 79,000 subscribers during the year, bringing its subscriber count to 299,000 at the end of FY03/17. With the competition intensifying among newcomers, including major mobile phone carriers, the number of customers for the company s overall FTTH services at the end of FY03/17 came to 720,000 and that of overall broadband customers, including ADSL, was 794,000, down 39,000 from the end of FY03/16. CATV JPY25.4bn (+3.2% YoY) Operating profit: JPY2.3bn (+100.7%) The increase in sales and earnings was driven by the expansion of the company's CATV customer base. The company's CATV business continued to acquire new customers by offering combination discounts for a broadcasting and communications bundle as well as combinations with smartphones in partnership with major cellphone carriers. Further, it moved to improve customer satisfaction by improving customer support as a measure to prevent contract termination and enhancing dissemination of local information through a community channel. As a result, its CATV business reported a total of 508,000 subscribers at the end of FY03/17, up 9,000 from the end of FY03/16. Subscribers to communications services increased by 15,000, to 225,000. Building and Real Estate JPY19.5bn (-7.0% YoY) Operating profit: JPY461mn (-31.7%) 56/70

57 Orders at the housing sales and renovation businesses fell, depressing segment earnings despite gains at building management support services. Aqua Operating profit: JPY5.8bn (+5.0% YoY) JPY101mn (versus operating loss of JPY1.3bn in FY03/16) During FY03/17, the company promoted sales of its bottled water brand, Oishii Mizu no Okurimono - ulunom (the Gift of Delicious Water), mainly at large commercial facilities. As the company spread its net wide in an effort to secure customers, its overall customer count was about 135,000, up 2,000 from end-fy03/16. The number of sold bottles also increased YoY and the company reduced expenses to acquire customers and advertisement spending, helping the Aqua unit move into the black for the first time. Others Operating profit: JPY5.1bn (+4.8% YoY) JPY112mn (versus operating loss of JPY197mn in FY03/16) Sales grew at the company's nursing care business, which logged continued steady growth in the number of patients served. In the shipbuilding business, an increased volume of ship repairs boosted sales. Revenues were on par with the previous year at the company's bridal events business as the number of weddings hosts and usage of event halls kept up the year-before levels. FY03/16 results JPY180.9bn (-3.5% YoY) Operating profit: JPY8.2bn (-8.4%) Recurring profit: JPY8.2bn (-4.7%) Net income: JPY3.5bn (-12.1%) Profits were lower due to forward costs aimed at expanding sales of Hikari Collaboration, the company's fiber-optic services using NTT Group's wholesale fiber-optic service. (JPYmn) FY03/15 FY03/16 Diff. YoY % of total Est. Sales 187, ,940-6, % 94.1% 192,200 CoGS 118, ,128-7, % - - Gross profit 68,932 69, % - - SG&A 59,928 61,567 1, % - - SG&A/Sales 32.0% 32.8% Operating profit 9,003 8, % 106.3% 7,760 OPM 4.8% 4.4% Recurring profit 8,549 8, % 110.0% 7,410 RPM 4.6% 4.3% Extraordinary Gains&Losses -1,007-1, Net Income 3,934 3, % 106.7% 3,240 NET margin 2.1% 1.8% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. The roughly JPY6.6bn decline in revenues stemmed primarily from lower rates charged to customers (which reduced sales by about JPY10.3bn) following a decline in raw material (gas) prices. Sales growth was largely solid at the company's other businesses. The decline in earnings is attributable to roughly JPY3.0bn in promotional spending on the company's new Hikari Collaboration service. That said, because this was offset in large part by an increase in the company's customer base and a time lag between the time natural gas prices declined and rates to customers were actually reduced (which together added about 57/70

58 JPY2.2bn to earnings), operating profit finished the year down by only about JPY800mn. As a result, even though sales fell short of the company's initial forecast, operating profit, recurring profit, and net income all came in above plan. As of end-fy03/16, the number of customers re-subscribing to the company s services across the group was up by 20,000 versus end-fy03/15, to 2.56mn customers. The company's gas and CATV businesses drove the overall increase in customer count. Faced with heavy competition, the company's information and communications services (fixed line and wireless) saw its subscriber count drop by 12,000, to 852,000, but the company focused on the higher margin Hikari Collaboration model, which saw its subscriber count jump by 215,000 (to 219,000 at the year-end). The solid results helped the company further improve its financial position, including reducing interest-bearing debt. As of end-fy03/16 the company's balance sheet showed total interest-bearing debt of JPY71.4bn versus JPY124bn at end-fy03/11. Based on this strong financial position, the company returned 100% of profits to shareholders in FY03/16 through combined share buybacks and dividends. Reflecting earnings coming in above plan and an improved financial profile, the company raised its annual dividend payout in FY03/16 to JPY14 per share (versus an initial forecast of JPY12). This was the company's first dividend increase since shifting to a holding company structure in April Segment results (operating profit by segment) reflect allocated overhead expenses. Trends and outlook by business segment (JPYmn) Sales Operating profit (before allocation for overhead expenses) Customer count FY03/1 FY03/1 FY03/1 FY03/15 FY03/16 Diff. YoY FY03/16 Diff. YoY ('000) YoY Gas and Petroleum 93,067 80, % 5,549 6,973 1, % Gas and Petroleum Information and Communications 40,118 44,246 4, % 3, , % Information and Communications(fixed wireless) CATV 24,359 24, % 862 1, % (Wholesale fiber optic) Building and Real Estate 20,019 20, % % Information and Communications(mobile) Aqua 4,959 5, % -1,448-1, CATV Other 4,987 4, % Aqua Security Total (Con.) 187, ,940-6, % 9,003 8, % Total (Con.) 2,537 2, Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Information and Communications (fixed and wireless) and CATV communication services are not included in the total, as they overlap. Gas and Petroleum JPY80.7bn (-13.2% YoY) Operating profit: JPY6.9bn (+25.7%) The sales decline reflected the drop in imported LP gas prices and had no real impact on segment earnings. The segment benefited from lower LP gas procurement costs and greater operational efficiency. The LP gas business had 580,000 customers (up 8,000 from the end of FY03/15), primarily owing to expanding operations into Iwaki City and the region south of Sendai City, in addition to measures to prevent service termination. The number of customers in the city gas business was 54,000 (largely unchanged YoY). Although sales volume of LP gas was in line with a year earlier, sales were down as the company brought down its selling prices to reflect the drop in imported fuel costs. Sales volume in the city gas business was likewise on par with the previous year, but the company lowered the gas rates due to new regulations forcing utility providers to pass along lower costs more quickly to consumers. As a result, sales were down YoY. Information and Communications JPY44.2bn (+10.3% YoY) Operating profit: JPY829mn (-76.2%) 58/70

59 Despite the top-line gains, segment earnings finished the year down sharply, hurt by the heavy spending needed to acquire new customers and get existing customer to upgrade to new FTTH services. At the broadband business, the company actively marketed to existing customers to get them switch to its new wholesale fiber-optic services "TCOM Hikari" and "TNC Hikari." With some 160,000 existing customers having switched to these Hikari Collaboration services (a changeover rate of 27.8%), the TOKAI group has been quick switching customers over to FTTH. Although many new entrants to the market (including major mobile phone carriers) created an increasingly competitive environment, the TOKAI group also stepped up efforts to win new customers, and added about 4,000 new FTTH customers since the end of last fiscal year, reaching a total of 748,000. However, TOKAI did not get as many new subscribers as expected due to the relatively slow wholesales of fiber-optic service. The number of ADSL customers also dropped 17,000 from the end of last fiscal year, with the overall number of customers for its broadband business dropping to 833,000 overall (down 13,000 from the end of last fiscal year). CATV JPY24.6bn (+1.0% YoY) Operating profit: JPY1.2bn (+34.6%) Despite the ongoing competition from major telecom companies, the company's CATV business reported a total of 499,000 subscribers as of the end of FY03/16, up 6,000 versus a year earlier. Subscribers to telecommunications services increased by 14,000, to 211,000 (156,000 CATV-FTTH subscribers, 54,000 CATV internet subscribers). Building and Real Estate JPY21.0bn (+4.8% YoY) Operating profit: JPY676mn (+36.4%) The growth in segment sales reflected solid housing sales, construction of retail premises, and building management support services. Operating profit also started to improve as sales increased. Aqua Operating loss: JPY5.5bn (+10.7% YoY) JPY1.3bn (versus operating loss of JPY1.4bn in FY03/15) The Aqua business maintained large commercial facilities and was active in the Kansai, Hokuriku, and Tohoku regions, in addition to the Shizuoka and Kanto regions. As the company spread its net wide in an effort to secure customers, its overall customer count of about 133,000 at the end of FT03/16 was up 3,000 from the end of the previous fiscal year. While still in the red, the Aqua unit was making substantial progress toward reducing losses with the help of reduced advertising and controlled promotion expenses. Others Operating loss: JPY4.9bn (-2.2% YoY) JPY197mn (versus operating loss of JPY386mn in FY03/15) The operating loss was attributable primarily to heavy upfront investment at the company's nursing care business, which logged continued steady growth in the number of patients served. In the shipbuilding business, although the number of ships undergoing repairs declined year-on-year, average customer spend increased, causing sales to grow. Revenues were down at the company's bridal events business, as the number of weddings hosts declined following the closure in end March 2015 of its Bouquet Tokai Gotenba facility. 59/70

60 Income statement Income statement FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 (JPYmn) Cons.* Cons.* Cons.* Cons.* Cons. Cons. Cons. Cons. Cons. Cons. Total sales 160, , , , , , , , , ,631 YoY 3.8% 3.1% -3.9% 9.8% 4.0% -0.1% 4.0% -0.8% -3.5% -1.3% Gas and Petroleum 95,182 99,355 89,000 95,697 98,316 94,519 97,229 93,067 80,745 73,344 Information and Communications 42,024 45,322 34,672 34,725 37,943 38,497 38,803 40,118 44,246 49,508 CATV ,653 22,647 24,292 23,786 24,187 24,359 24,608 25,396 Building and Real Estate 14,430 14,324 14,399 14,907 15,881 15,756 19,245 20,019 20,975 19,511 Aqua ,750 4,378 4,959 5,487 5,762 Others 9,087 6,699 5,502 6,923 5,498 5,374 5,142 4,987 4,875 5,108 CoGS 107, ,892 95, , , , , , , ,591 Gross profit 52,800 58,809 63,347 67,445 69,537 68,809 68,341 68,932 69,812 73,040 YoY 0.2% 11.4% 7.7% 6.5% 3.1% -1.0% -0.7% 0.9% 1.3% 4.6% GPM 32.9% 35.5% 39.8% 38.6% 38.2% 37.9% 36.2% 36.8% 38.6% 40.9% SG&A expenses 46,438 50,529 53,317 56,690 58,614 59,874 60,948 59,928 61,567 60,290 SG&A-to-sales ratio 28.9% 30.5% 33.5% 32.4% 32.2% 33.0% 32.2% 32.0% 34.0% 33.8% Operating profit 6,362 8,279 10,029 10,755 10,923 8,934 7,392 9,003 8,245 12,750 YoY -19.7% 30.1% 21.1% 7.2% 1.6% -18.2% -17.3% 21.8% -8.4% 54.6% OPM 4.0% 5.0% 6.3% 6.1% 6.0% 4.9% 3.9% 4.8% 4.6% 7.1% Non-operating income 3,313 1,885 3, , , Non-operating expenses 5,513 10,422 2,472 2,240 2,200 1,852 1,385 1, Recurring profit 4, ,822 9,489 9,818 8,065 7,013 8,549 8,150 12,775 YoY -12.7% % 3.5% -17.9% -13.0% 21.9% -4.7% 56.7% RPM 2.6% - 6.8% 5.4% 5.4% 4.4% 3.7% 4.6% 4.5% 7.2% Extraordinary gains 1,302 1, Extraordinary losses 2,165 1,878 2,317 3,533 2,626 1,954 1,508 1,210 1, Tax charges 1, ,546 3,015 4,695 3,073 3,381 3,573 2,924 4,685 Implied tax rate 55.0% % 48.5% 62.9% 49.8% 56.4% 47.4% 45.4% 38.7% Minority interests ,008 1, Net income 518-2,187 3,080 2,152 2,715 3,085 2,598 3,934 3,458 7,337 YoY -85.0% % 26.2% 13.6% -15.8% 51.4% -12.1% 112.2% Net margin 0.3% - 1.9% 1.2% 1.5% 1.7% 1.4% 2.1% 1.9% 4.1% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Results for FY03/11 and prior years are of TOKAI Corp. FY03/09 results The company achieved an operating profit of JPY8.3bn during the fiscal year, but recorded non-operating expenses of JPY10.4bn, including a JPY6.8bn loss related to derivative trading. Non-operating income of JPY1.9bn did little to offset these losses, and consequently, the company suffered a recurring loss of JPY257mn for the fiscal year. By segment, Information and Communications (currently separated into two segments, Information and Communications and CATV) recorded a decline operating profit, while the Gas & Petroleum segment achieved a significant increase in operating profit. Start-up costs affected profits in the aqua business, and lower purchasing expenses and adjustments in retail price improved LPG operations significantly. FY03/10 results The company achieved record high operating profits despite a decline in sales. In addition to the favorable growth in operating profit, recurring profits increased significantly, supported by a rise in non-operating income, mainly due to a JPY2.1bn gain in derivatives trading (recorded derivative losses as non-operating charges in FY03/09) during the fiscal year. By segment, operating profit expanded in the Gas & Petroleum segment due to lower purchasing costs and customer growth in the aqua business. Information and communications (currently separated into two segments Information and Communications and CATV business) also achieved significant operating profit growth, supported by a rise in intra-firm communication projects, together with an increase in CATV customers as a result of an acquisition. FY03/11 results The company recorded its highest-ever sales and operating profits in FY03/11. However, recurring profit declined mainly due to gains from derivatives trading (non-operating income) recorded a year earlier. 60/70

61 By segment, Gas & Petroleum operations suffered a decline in operating profit, hurt by an increase in purchasing costs and decline in unit consumption by households, despite profit improvement in the aqua business. However, operating profit for the Information and Communications segment increased, supported by improvements in the mobile business. CATV segment operating profit increased, supported by its FTTH service and contributions from two CATV companies made into subsidiaries in FY03/10. Operating profit for the building and real estate segment increased due to improved profitability on real estate leasing operations of Aoi Tower. FY03/12 results Sales were JPY181.9bn (+4.0% YoY), operating profit was JPY10.9bn (+1.6%), recurring profit was JPY9.8bn (+3.5%), and net income was JPY2.8bn (+26.2%). The company achieved record-high sales and operating profit for the fiscal year. The company was able to absorb costs of roughly 1.6 billion related to becoming a holding company, and managed to increase operating profit. By segment, Gas & Petroleum operations, and Information and Communications business contributed to the increase in profits. FY03/13 results Sales were JPY181.7bn (-0.1% YoY), operating profit was JPY8.9bn (-18.2%), recurring profit was JPY8.1bn (-17.9%), and net income was JPY3.1bn (+13.6%). Information and Communications services saw higher sales, but other segments struggled. As a result, despite the decline over the previous year, operating profit was better than the company s forecast, which was revised up on July 31, The number of customers for the company s recurring services grew by 30,000 compared with the start of FY03/13, to 2.4 million households as of end of FY03/13. An increase in broadband subscribers in the Information and Communications segment made up for a decline in customers in the LP Gas and Petroleum, and CATV segments. In addition, the number of TLC memberships, a new customer service introduced in December 2012, reached 105,000 members as of end of March TLC membership is a service that allows member customers to earn points from using the company s electronic money card, TLC WAON card for its various services. FY03/14 Results Sales were JPY189.0bn (+4.0% YoY), operating profit was JPY7.4bn (-17.3%), recurring profit was JPY7.0bn (-13.0%). Sales were up but profits were down YoY, due to higher promotional expenses in the FTTH and Aqua businesses and delays in passing on increased procurement costs of LP gas. However, results outperformed forecasts announced in January The customer base for recurring services increased by 73,000 over the year, to 2.5mn. The broadband and Aqua businesses both saw robust growth in subscriber count. TLC membership also increased by 201,000 over the year, to 306,000. TOKAI launched the TLC Membership Service in December 2012, to increase customer loyalty. The TLC Membership Service allows customers who hold multiple service contracts to earn loyalty points. FY03/15 results Sales were JPY187.5bn (-0.8% YoY), operating profit was JPY9.0bn (+21.8%), recurring profit was JPY8.5bn (+21.9%), and net income reached record highs at JPY3.9bn (+51.4%). Sales increased due to a rising subscriber count in the aqua and broadband businesses. Profits increased significantly the result of lower marketing, customer acquisition, and advertising costs in the aqua business due to more efficient sales, coupled with higher productivity and other streamlining initiatives in the LP gas business. Operating profit surpassed the company s latest target of JPY8.9bn, which had been revised upward from the initial forecast of JPY8.2bn when it announced its 1H FY03/15 results. On a segment basis, the three main businesses of Gas and Petroleum, Information and Communications and Aqua drove the overall improvement in group earnings. In particular, the Gas and Petroleum segment, which made efforts to streamline distribution, administrative and other expenses in the LP gas business, made significant contributions. 61/70

62 Balance sheet Balance sheet FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 (JPYmn) Cons.* Cons.* Cons.* Cons.* Cons. Cons. Cons. Cons. Cons. Cons. ASSETS Cash and deposits 7,814 7,405 11,084 8,622 2,602 4,235 3,182 2,861 4,077 3,239 Marketable securities 2,914 1,011 1,183 Accounts receivable 23,459 20,653 20,298 20,321 22,180 20,944 22,073 20,085 21,305 22,838 Inventories 10,742 9,340 8,885 9,568 8,051 8,141 8,178 6,695 5,611 5,058 Others 13,423 14,306 9,786 11,233 8,260 7,031 7,173 6,318 7,124 7,459 Total current assets 58,352 52,715 51,236 49,744 41,093 40,351 40,606 35,959 38,117 38,594 Buildings, net 34,370 35,603 49,735 50,084 48,186 45,598 42,157 38,413 35,178 33,718 Machinery and equipment, net 26,463 26,360 25,563 24,507 23,353 22,830 22,081 21,684 22,074 21,848 Land 17,861 18,165 21,994 21,918 21,584 21,799 21,918 22,006 21,825 22,634 Other fixed assets, net 4,863 8,228 10,486 14,104 17,084 16,375 16,973 16,832 15,987 15,447 Total tangible fixed assets 83,557 88, , , , , ,129 98,935 95,064 93,647 Total other fixed assets 17,209 18,653 17,138 15,996 14,995 15,638 16,855 19,539 16,149 17,860 Goodwill 6,331 7,490 13,186 15,022 15,540 12,632 10,241 8,270 6,589 5,861 Other 1,029 1,305 1,624 1,632 1,726 2,274 2,702 2,954 4,351 5,127 Total intangible fixed assets 7,360 8,795 14,810 16,654 17,266 14,906 12,943 11,224 10,940 10,988 Total fixed assets 108, , , , , , , , , ,496 Total assets 166, , , , , , , , , ,112 LIA BILITIES Accounts payable 12,375 11,743 11,193 12,652 13,636 13,019 14,105 13,035 13,511 14,779 Short-term debt 55,415 66,592 66,667 56,756 50,834 48,614 44,169 36,279 28,586 23,490 Other current liabilities 19,549 19,973 18,822 20,375 20,709 20,930 20,631 21,846 20,861 23,035 Total current liabilities 87,339 98,308 96,682 89,783 85,179 82,563 78,905 71,160 62,958 61,304 Long-term debt 54,280 46,016 61,019 65,400 53,404 44,093 41,171 36,790 42,823 30,646 Other fixed liabilities 4,454 7,497 13,785 16,466 17,970 16,975 15,214 14,284 12,550 12,715 Total fixed liabilities 58,734 53,513 74,804 81,866 71,374 61,068 56,385 51,074 55,373 43,361 Total liabilities 146, , , , , , , , , ,665 Net assets Capital stock 14,004 14,004 14,004 14,004 14,000 14,000 14,000 14,000 14,000 14,000 Capital surplus 8,516 8,511 4,786 2,207 21,868 22,183 22,183 22,315 19,258 24,286 Retained earnings -5,718-8,477-2, ,780 4,225 5,436 7,803 9,870 15,048 Treasury stock -2,172-2,434-2, ,224-8,313-8,191-8,033-6,409-3,285 Others ,006 3,992 6,460 4,344 5,606 Total net assets 20,728 16,732 19,549 21,589 27,181 34,011 38,329 43,467 41,970 56,446 Working capital 21,826 18,250 17,990 17,237 16,595 16,066 16,146 13,745 13,405 13,117 Total interest-bearing debt 109, , , , ,238 92,707 85,340 73,069 71,409 54,136 Net debt 101, , , , ,636 88,472 82,158 70,208 67,332 50,897 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Results for FY03/11 and prior years are of TOKAI Corp. Assets For the past few years, the company has been aggressively investing in growth, placing priority on improving profitability. Consequently, total assets have expanded to JPY193.2bn as of FY03/11. However, with the establishment of TOKAI Holdings, the company improved its financial position by reducing working capital and only investing in areas where it can achieve high returns. As a result, total assets were decreasing. In FY3/17, however, total assets increased YoY, because the value of investment securities rose due to a rise in the market value. Liabilities As a result of the company s aggressive investment strategy, which was mainly debt-financed, its interest-bearing debt grew to JPY127.7bn in FY03/10. The company will focus on developing a more stable financial position going forward and aims to reduce interest-bearing debt to less than JPY100bn by the end of FY03/14 as part of its medium-term business plan developed following the establishment of TOKAI Holdings Corporation. Hence, interest-bearing debt totaled JPY92.7bn as of FY03/13, achieving its target one year ahead of schedule. The debt amount further improved in FY03/17, totaling JPY54.1bn. Net assets Equity ratio was 7.7% as of FY03/11, but as mentioned, the company has been improving its financial position by reducing interesting-bearing debt and increasing retained earnings. As a result, its equity ratio improved to 18.6% at the end of FY03/13. The company has been improving its equity ratio even prior to merging its business operations (TOKAI Corporation with VIC TOKAI Corporation in 2010) and achieved its equity ratio target of at least 17%, as highlighted in its medium-term business plan, one year ahead of schedule. The ratio stood at 34.5% in FY03/17. 62/70

63 The company held 12.9 million shares of treasury stock (9.2% of shares outstanding) as of end of March The company has suggested that it will consider capital tie-ups or alliances going forward. Per share data Per share data (JPY) FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 Cons.* Cons.* Cons.* Cons.* Cons. Cons. Cons. Cons. Cons. Cons. Shares issued ('000, year end) 75,750 75,750 75,750 70, , , , , , ,680 EPS EPS (fully diluted) Dividend per share Book value per share Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Results for FY03/11 and prior years are of TOKAI Corp. Statement of cash flows Cash flow statement FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 (JPYmn) Cons.* Cons.* Cons.* Cons.* Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities (1) 13,587 22,406 21,915 23,521 28,584 25,713 22,806 27,265 21,395 26,692 Cash flows from investing activities (2) -14,610-20,064-25,665-14,601-10,037-9,983-9,664-8,851-11,015-10,985 Free cash flow (1+2) -1,023 2,342-3,750 8,920 18,547 15,730 13,142 18,414 10,380 15,707 Cash flows from financing activities ,787 7,253-11,278-24,255-14,051-14,125-18,764-9,150-16,643 Depreciation and amortization (A) 10,326 11,810 13,035 15,545 17,903 17,447 17,571 17,229 16,734 15,641 Capital expenditures (B) -16,627-16,999-21,438-13,845-11,193-10,747-10,083-9,712-11,435-11,331 Working capital changes (C) 269-3, , Simple FCF (NI + A + B - C) -6,052-3,800-5,063 4,605 10,291 10,314 10,006 13,852 9,097 11,935 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Results for FY03/11 and prior years are of TOKAI Corp. Cash flows from operating activities The company has a stable source of operating cash flow and has managed to reduce its debt repayment period (interest-bearing debt operating cash flow) from 5.8 years in FY03/10 to 2.0 years in FY03/17. Cash flows from investing activities The company s investment cash flow changes in tandem with capital expenditures. Cash flows from financing activities The company has been free cash flow positive since FY03/11 and has been using excess cash to reduce interest-bearing debt. 63/70

64 July 2017 News and topics On July 20, 2017, the company announced the additional share acquisition of Tokyo Bay Network Co., Ltd., an equity-method affiliate, making it a consolidated subsidiary. Tokyo Bay Network operates a CATV business in the Koto and Chuo Wards of Tokyo where revitalization and development plans are expected, including construction of stadiums and athletes village for Tokyo Olympic and Paralympic Games. TOKAI has collaborated with Tokyo Bay Network since it became an equity-method affiliate in February Now that it has become a consolidated subsidiary through additional share acquisition, TOKAI plans to expand sales area and customer base, and, going forward, leverage both companies expertise to maximize synergy and expand the CATV business. Details of the share acquisition Number of shares to be acquired: 21,944 shares (number of voting rights: 21,944) Acquisition price: JPY1.6bn Number of shares after transfer: 30,728 shares (number of voting rights: 30,728; ratio of voting rights held: 90.2%) Share transfer date: July 20, 2017 February 2017 On February 27, 2017, the company made an announcement regarding the acquisition of Tokyo Bay Network Co., Ltd. shares (making it an equity-method affiliate) and, as compensation for the shares, the disposal of treasury shares by private placement. Tokyo Bay Network operates a cable television business in the Koto and Chuo Wards of Tokyo. Acquisition of Tokyo Bay Network shares will enable the company to expand its sales area and generate synergies by capitalizing on each company s expertise. TOKAI decided to acquire the shares as it concluded that it would lead to an increase in enterprise value over the medium- to long-term. With the share acquisition, Tokyo Bay Network is expected to become an equity-method affiliate of the company. It is likely that the impact of the acquisition on earnings in FY03/17 and FY03/18 will be minimal. As it was agreed through negotiation with the seller that the company s shares would be used as compensation for the acquisition, the company will dispose of treasury shares with the seller being the intended recipient. Number of shares to be acquired, acquisition price, and shares held before and after the acquisition Number of shares held prior to the transfer 0 shares Number of shares to be acquired 8,784 shares(number of voting rights: 8,784) Acquisition price JPY661mn (includes JPY631mn in Tokyo Bay Network shares and JPY30mn in advisory fees) Number of shares after transfer 8,784 shares(number of voting rights: 8,784; ratio of voting rights held: 25.8%) Acquisition schedule Date of resolution by board of directors February 27, 2017 Contract conclusion date March 15, 2017 (expected) Stock acceptance execution date March 15, 2017 (expected) Summary of disposal of treasury stock by private placement Disposal date March 15, /70

65 Number of shares for disposal 840,700 common shares Disposal price JPY751 per share Total amount of disposal price JPY631mn Disposal method Disposal by private placement Intended recipient of disposal Tadaaki Chigusa October 2016 On October 31, 2016, the company announced earnings results for 1H FY03/17, and a revision to full-year earnings forecast, and dividend forecast; see the results section for details. 65/70

66 Other information History The company was established as Yaizu Gas Co., Ltd., and began operations as a city gas supplier in It changed its name to TOKAI Gas Corporation in 1956 and expanded by establishing TOKAI Gas Transportation Corporation in 1967 and Yaizu Cable Vision Corporation in Yaizu Cable Vision Corporation changed its name to VIC TOKAI Corporation in TOKAI Gas Corporation went public in 1981, listing its shares on the First Section of the Nagoya Stock Exchange. The company listed its shares on the First Section of the Tokyo Stock Exchange in 1987 and changed its name to TOKAI Corporation. VIC TOKAI Corporation listed its shares on the JASDAQ in TOKAI Corporation announced a merger with VIC TOKAI Corporation in The two companies established a joint holding company, TOKAI Holdings Corporation in April 2011, and listed its shares on the First Section of the Tokyo Stock Exchange. In October 2011, VIC TOKAI Corporation changed its name to TOKAI Communications Corporation. 1950s 1960s 1970s 1980s 1990s 2000s 2010s Diversify businesses and services Expand regions and customer base 1950: Founded as Yaizu Gas Co., Ltd City gas business 1950 Yaizu city 1959 LP gas business Energy-related 1959 All Shizuoka Source: Shared Research based on company data 1970 Housing equipment business 1972 Wedding venue operation 1973 Insurance business 1987: Listed in First Section, Tokyo Stock Exchange; renamed to TOKAI Corporation 1984 Security business 1983 SIS business 1988 CATV business 1985 Data center business (introduced Tandem NonStop system) Information & communication, broadcasting 1979 Kanto region (7 prefectures + Fukushima) 2007 Aqua business New businesses 1996 Internet business 2001 Broadband business 2006 Mobile business 2011: TOKAI Holdings established 2011 Nursing care business 2006 Aichi (B2B) 2009 Nagano, Okayama 2012 Osaka, Miyagi 2012 Shanghai 2013 Taipei 2014 Myanmar 2016 Electric power sales Growth through diversified products and services, solid regional coverage and customer base * 2.5mn customers * As of end-march 2017 Business development The company began its mainstay operations in energy as a city gas supplier in However, its city gas business was regulated by the government, which limited its service area. Consequently, the company expanded into the liquefied petroleum gas (LP gas) business in 1959, an industry that offered an unregulated service area. Since then, the company has developed into a diversified service provider involved in a wide-range of operations that include its mainstay energy business, housing business (started in 1970), bridal business (1972), insurance business (1973), security business (1984) and, in recent years, aqua business (2007) and nursing care business (2011). In addition, the company has expanded operations in its Information and Communications segment to include SIS business (1983), data center services (1985), CATV business (1988), Internet operations (1996), broadband business (2001), and mobile operations (2006), and has gradually transformed into a comprehensive information and communications provider. 66/70

67 Major shareholders Top shareholders Amount held Aioi Nissay Dowa Insurance Co., Ltd. 5.41% Japan Trustee Services Bank, Ltd. (Trust account) 4.28% Suzuyo Shoji Co., Ltd. 4.15% The Master Trust Bank of Japan, Ltd. (Trust account) 3.98% Tokio Marine & Nichido Fire Insurance Co., Ltd. 3.57% The Shizuoka Bank, Ltd. 2.91% TOKAI Group Employee Stock Holding Association 2.77% Sumitomo Mitsui Trust Bank, Ltd. 2.73% Mizuho Bank, Ltd. 2.57% Astomos Energy Corporation 1.95% Source: Shared Research based on company data (As of March 31, 2017) Top management Katsuhiko Tokita, President and Representative Director Born in 1945, Mr. Tokita joined the Ministry of International Trade and Industry (currently, Ministry of Economy, Trade and Industry) in In 1992, he was promoted to director-general s secretariat at the Agency for Natural Resources and Energy. In July 1993, Mr. Tokita became vice-governor of Kyoto. Mr. Tokita served as Chief of the Central Procurement Office at the Ministry of Defense in 1996, Director-General of the Small and Medium Enterprise Agency in 1998, and Director of the Japan National Oil Corporation in Mr. Tokita became an advisor to TOKAI Corporation in 2002, and subsequently served in various senior executive positions, eventually becoming TOKAI Holdings President and Representative Director and Chairman of TOKAI Cable Network in He became Chairman and Representative Director of TOKAI Gas Corporation and TOKAI Management Service Corporation in 2013, and Chairman and Representative Director of TOKAI Corporation in Employees The company had 3,821 employees (consolidated basis) and 807 part-time workers as of the end of March In addition, there were 77 employees at the holding company. Average years worked there was 14.7 years, with an average annual salary of JPY6.10mn. The number of employees in each business segment is presented below (part-time workers in parenthesis). Gas & Petroleum: 1,405 (352) Building and Real Estate: 273 (39) CATV: 505 (65) Information and Communications: 1,131 (90) Aqua: 127 (79) Others: 241 (169) Corporate: 139 (13) The company s employees belong to two labor unions, the TOKAI Labor union, which is a member of the Federation of Gas Workers Union of Japan, and the All Japan Shipbuilding and Engineering Union (Yaizu Branch). Union members totaled 2472 employees as of the end of March Dividends and shareholder benefits Dividends The company adheres to a policy of maintaining stable and continuous dividend payments, while strengthening its corporate structure and developing future businesses. 67/70

68 Shareholder Benefits The company offers gifts and benefits to shareholders of record holding at least one trading unit (100 shares) at the end of the first half (September) and fiscal year (March). Based on the number of shares owned, shareholders can select one of the following gifts: A. Oishii Mizu no Takuhaibin ( Delicious Water Home Delivery ) and Oishii Mizu no Okurimono ulunom ( The Gift of Delicious Water - ulunom ) products B. Gift certificates (prepaid QUO Card) C. Meal vouchers for the company s French restaurant Beau Ciel D. Points for the company s membership service, TLC Membership Service Special: Free LIBMO service for one year with cut-price smartphones The company also offers shareholders a 10% discount on wedding ceremonies held at its wedding halls and 20% discount at its French restaurant, Beau Ciel. A B C D Special : Choose one shares 300-4,999 shares 5,000+ shares A Aqua products "Urunom Fuji-notennensui", Natural mineral water (500ml) One bottle of "Oishii-mizuno-takuhaibin", "Urunom" water (12 liters) WorthJPY1,900 WorthJPY3,800 WorthJPY7,600 B Gift certificates Quo card JPY500 JPY1,500 JPY2,500 C Beau Ciel (Restaurant) Meal tickets JPY1,000 JPY3,000 JPY5,000 D Membership services TLC points 1,000 points 2,000 points 4,000 points Special Bargain smartphone service LIBMO Voice comm. (unlimited calls up to 10 min./call) + Data comm. (3GB) Regular fee JPY1,880/ month JPY0/month (for one year) Common for all options GRANDAIR Bouquet TOKAI One 10%-discount ticket for wedding ceremony (up to JPY100,000) Beau Ciel 20% discount for dining (12 tickets) Source: Shared Research based on company data Investor relations The company holds earnings briefings following release of first half and full-year business results. 68/70