OPM reaches 50% ! AUM aiming at2 trillion yen: SPARX FY2017

Earnings

In FY 2017 Earnings, AUM reaches more than 1.1 trillion yen and OPM reaches almost 50%. Shuhei Abe, the founder and CEO of the company says that SPARX continues to grow aiming at AUM 2 trillion yen with high level of profitability.

CEO:Shuhei Abe:
I said last time that SPARX has reached the 7th stage of its recovery, to its full recovery that we are trying to achieve and our three indicators that I have been referring to say that we are fully recovered, the one is the operating profitable, two; dividend per share and the AUM asset under management that all suggests that we have completed about 70% of the journey on our road to the recovery.

Interviewer:
And that is the speed that you are expecting?

CEO: Shuhei Abe:
I think it's a bit more slower than I thought but we are taking the firm steps towards the recovery which I think is better than just achieving the way we are trying to fundamental strength of the company I think is getting stronger that's primarily the people who are trying to do it as their own goals you know not just SPARX's goals, I think that is very important culture and atmosphere that we are trying to cultivate and establish in this organization.

Interviewer:
Can you give us in detail the actual amount of the recovery for example operating profit wise?

CEO: Shuhei Abe:
Operating profit, the historical normalized peak is about 9 billion yen to 10 billion yen. This year, the reported operating profit is about 6.6 billion. So let's say it's about 70% of where it was.

Interviewer:
Dividend per share.

CEO: Shuhei Abe:
Then dividend per share; the peak was 10 yen per share. This year, we are trying to offer 7 yen per share subject to the approval of the shareholder's meeting that will be in June and the third is the AUM; the peak end of the fiscal year area AUM was 1.8 trillion yen. We closed the year with the AUM of 1.1 trillion yen that is about 70% of where it was.

Interviewer:
Right so then when are you expecting to reach your goal, the peak?

CEO: Shuhei Abe:
Well I would like to achieve within two years depending on the environment, it may be a bit earlier or it may be a bit slower that it doesn't really bother me, I think we will get there that I have no doubt about it, which is not far from now.

Interviewer:
Since the Lehman shock or the great financial crisis in 2008, please describe the evolution of the SPARX business model since then?

CEO: Shuhei Abe:
Well SPARX business was started as a boutique of investing in Japanese small cap equities that was in 1989 when I started SPARX. People viewed what we are trying to say that we are the boutique of investing very small size company in Japan because at that time I thought there was no practical effective research was done by any professionals so I came home from United States. My goal was to establish the company that is competitive in the world to do the research in that category and I put together the strategy and I introduced that strategy to the global top class investors. Some decided to support us, that's how we started. So from that time almost more than 10 years, we have only one pillar of business that is Japanese equities, listed equities from small cap to cover entire universe of Japanese companies offering different strategies including long short, including stewardship governance type of investment and so forth. I am saying from that perspective, we are long only very conventional classical pension fund, mutual fund type investor as well as based on the research that we have established. We are also doing the alternative investment including long short that was very unique and that uniqueness is being kept since then and after a while we are trying to extend our research and investment work to Asia because I thought if I apply the same rationale and thinking to Asian market, there were lots of opportunities so I established the offices in Hong Kong and Korea.

The third is the real asset investment. I remember that day when we had the earthquake in Fukushima and tsunami and also the disastrous accident in the nuclear plant. As the financial - the person in the financial business, I had to do something to contribute to the people and to the future of Japan so I thought to as an investor, I wanted to establish power generating plant that is renewable energy based. So I started doing investing indoors from one and now we have 25 locations throughout Japan and total amount of investment grew to nearly $2 billion and I think it will be multiple in the coming few years. We will be one of the largest already now, the fund investing firm in that area and coming three or five years' time, by far we will be viewed as energy company in this country is the way I look at it.

Interviewer:
And the fourth pillar?

CEO: Shuhei Abe:
Fourth pillar is the area that I thought few years ago there is a word of growth disappeared in this country and I was thinking where the growth would be that will be led by Japan again and I come up with the word of AI, IOT and robotics because I thought that area will be the area that Japan can be continuously strong because robot; in the form of robot the automobile is the very easy way of seeing it and Japan I think will lead that area that's what I thought. So I thought the idea of investing in that area to Toyota Motors because they are the strongest automobile company, they have to evolve towards the more sophisticated AI and robotics company. Toyota Motors agreed to my idea and they agreed to invest first JPY 10 billion so with that I went to SMBC Bank, banks are very happy, two most powerful investors that I always referred to the investors as industrial capital and financial capital. Those two get together to cultivate the future of Japan, it's a very impressive thing and I felt honored that we are chosen as a navigator of that capital. That's how we started this fund about four years ago and now we are making a quite impressive progress.
Interviewer:
Do you see any concrete results coming out from this fund?

CEO: Shuhei Abe:
Absolutely yes. Although the fund life is 10 years so I cannot conclude that the full result of the fund but after four years of the first launch of the fund, the result so far is quite impressive and I have to say, I would say far better than the expectation. Because of that the existing investors, partners they have the result and I strongly hope that they will continue investing in the second fund.

Interviewer:
I see, so we can expect some fruitful results in the coming 10 years.

CEO: Shuhei Abe:
Oh absolutely so. I think this fund will be viewed as one of the new way of investing in non-listed companies in the global way.

Interviewer:
But then how is this hybrid model able to generate profit?

CEO: Shuhei Abe:
Well because the hybrid means several things first. We are hybrid in a way that doing alternative investing as well as the straight forward pension and mutual fund type investing in listed equities. Hybrid means also we are diversifying the asset class that is real asset and the listed company asset; portfolio asset and the third is the pre IPO non listed private equities. So in many ways, it is uniquely structured hybrid investment company that I think is unique in the world not in Japan, also in Japan and I would like to stress on this.

Interviewer:
Do you think the performance fee has increased you can expect more performance fee increase in the future?

CEO: Shuhei Abe:
Absolutely, performance fee in nature is not really a volatile to the volatility, relative to the volatility of the stock market because it will be quite stable performance fee will be realized by the fund. Performance fee to look at grew to 238% over the year if you compare and this year 4.4 billion yen performance fee generated. I don't think this is particularly that high.

Interviewer:
So it's not a big jump.

CEO: Shuhei Abe:
Well I don't think so, it is really reflecting the current strength of our earnings model, business model.

Interviewer:
So we can expect?

CEO: Shuhei Abe:
Yes, this will be continued.

Interviewer:
Continued. And so let's move back to the... let's moving back to the balance sheet now and now the cash balance represents more than half of your total assets would not be better to invest the cash or to other funds or return it to shareholders.

CEO: Shuhei Abe:
Well it is high relative to the total asset that our balance sheet shows but it is not that high for me to do definitive actions, to use this cash available for us, this is our one of the strong asset that is given by the long term business that we have been conducting and also our shareholders I am sure is trying to expect the SPARX to do the next stage and for us to go up to the next stage, I would like to use this cash in a very effective way and at the same time, I would like to emphasize with this cash increasing, return on equity of the company is also growing, improving. So this cash position is not the result of sacrificing the return for the shareholders.

Interviewer:
And so how will this cash be used for example?

CEO: Shuhei Abe:
Well one of the ways that we will use this cash is to seal our future fund but probably the biggest is to pursue M&A opportunities. But M&A opportunities is not something that we should, we will be forced to do it, it should be finding like finding a good investment. If I feel that there is a good investment that will contribute to the future of the SPARX, I would like to use this cash, I like to acquire companies if that promises the growth of the company for long term.

Interviewer:
And with the start of the new fiscal year, let's briefly go looking to the future how would you and then moving on to the start of the... okay now with the start of the new fiscal year, what would be your target for this fiscal year ending March 2019 and if there are any short term or midterm goals?

CEO: Shuhei Abe:
Well I said within two years' time, I have very clear goal that we would like to go back up the immediate peak, the past peak that is our immediate goal that is about 1.8 trillion yen area, 9 billion to 10 billion yen operating income and also 10 yen dividend per share that is immediate goal, that I would like to achieve in two years' time, so rather than saying that what I would like to be or what I would like to earn this year I would like to emphasize that this is the goal in two years that our shareholders I hope that they will support us that we are trying our best to achieve that level in two years but again that is not our ultimate goal, ultimate goal is to upfront upon that time during this period I would like to draw and demand where the final goal for the time being would be for our company, our ambition, our dream is much bigger than 1.8 trillion yen area or 10 billion yen operating profit or 10 yen shareholders per share dividend, ambition is much bigger that I would like to make our shareholders understood at the same time we will be more concrete and specific what the goal will be in the coming couple of years' time.

Interviewer:
Looking into Japanese market or the world market in general, do you see any worrying points in the coming year?

CEO: Shuhei Abe:
Well Japanese and the world worried about Japan enough, as a result whatever the price that you see in Japan is cheap although we are a research company looking into the fundamental improvements that's being made by companies, as well as macro economies there is a gap between the price and expectations and that I see one of the biggest opportunities for the coming years, yes there are a lot of worries but worries are in the price.

Interviewer:
Now focusing on some of your specific business issues you mentioned last quarter about your Korea business experienced the significant decline in AUM and since then have you seen any signs of improvement or any reasons to be optimistic now?

CEO: Shuhei Abe:
Well last time we said that one of the large investors withdrew the fund of SPARX that damaged us temporarily but I am saying to my people in Korea that don't be discouraged take this as a good opportunity that we can really think about what's next and what's next for them is relatively easy because they have a model, model is Japan so let's try to replicate good things, please replicate good things happened at SPARX Tokyo, that is first to learn what is happening in Japan because what's happening in Japan is the future of Korea, Japan is in a way running a little bit ahead of Korea in terms of socioeconomic lifestyle let's say and they can learn about from Japan and number two Korea as equity because of the geopolitical pressures or concerns, it is very cheap and now world is focusing on the peace in North and South Korea, which I think is a very good thing, it may not be ultimate results or solutions will be made this time but at least that step has been forwarded and world is watching what's happening in Korea so it is really the unique time that we can sale this idea of Korea is cheap to the world. Number two the Korea's domestic saving has been increasing quite rapidly that means the new way of good advanced advice that SPARX is one of those that we can advise to Korean financial institutions, institutional investors in a very professional way, so by pursuing this they can replicate what happened to SPARX Japan and if they can do it profitability that they can achieve for the coming few years I think it is quite impressive.

Interviewer:
How do you view the historic event coming up, do you think that will affect the Korean market?

CEO: Shuhei Abe:
Oh, absolutely yes.

Interviewer:
In a good way?

CEO: Shuhei Abe:
Yes, communications everything should be based on the communications unless you talk good or bad, there is no understanding and misunderstanding may lead the world in the disastrous way, at least that is avoided. In that sense, I am very happy about what is happening in the Korean peninsula.

Interviewer:
And that's not just the one time phase, do you think that will...

CEO: Shuhei Abe:
Well I think this is the start of the discussion and the communication at least that's what I hope. I am not a specialist on those issues but as an investor, I am very hopeful about what is happening now.

Interviewer:
And also your the Japanese equity is the main pillar of your, the SPARX business. It has been doing extremely well over the last year but how about the stewardship or relational investment strategy and the fact that there was a rejection of shareholders proposal to
Teikoku-Sen-I?

CEO: Shuhei Abe:
Well Teikoku-Sen-I is one of the case that I am trying to establish over the past four years. I have been very closely communicating with the management of the company. I think they understood what we are trying to say but to change it is hard for them but I have to continue pursuing this so that they understand that it is, the obligation responsibility to comply with what the shareholders had to say. This time, we proposed two things. One is to increase the dividend from 30 yen per share to 90 yen per share, that we said jeopardizing their balance sheet safety rather it is basically just pay out the unnecessary used, not used cash flow that is being amounted in a cash position, so they have to reduce it so that they can normalize the way of return on equity for the shareholders. Number two, to reduce the tenure of the directors from two years to one year that is the normal practice by among other companies in Japan, we got two approved votes, more than 20% approved votes we represent out of that 6% so more than 15 to around 20% of the shareholders supported our proposals that was very encouraging for me and I think that delivered a very strong message to the existing top management people so I would like to continue this because this is a very typical case of Japan, very good business, long history of the company but top management do not appreciate the importance of efficient use of capital and asset that if they do it, Japanese company in aggregate can produce a huge amount of profit for shareholders that is very good for Japan and good for the market, so I would like to be catalyst of this.

Interviewer:
And then in fact it is the philosophy of SPARX.

CEO: Shuhei Abe:
Absolutely yes, this is not just for this case but our investment is to do any investment even if we have only one share of the company, we should take a responsibility as an owner of the company and an owner has to interact with the management people, management people should listen to the owner, so very common thing in the western world is not fully understood by Japanese companies many companies yet. We would like to be catalyst of this but what do we have to say to them should be supported by the public. We strongly believe that what we said the company is strongly supported by public.

Interviewer:
And finally concerning the Mirai Creation Fund or the fund that invests the pre-IPO companies, it has actually made 48 investments by the end of this March. What are your plans for the future for this?

CEO: Shuhei Abe:
I agree that investment from Toyota Motors which is probably one of the most strong and largest industrial capital provider and also Mitsui Sumitomo Bank; the financial capital provider, and we added another limited partners, fund started with the total amount of capital of 36.5 billion yen and as I said it's about 80% invested and results so far is far better than people expected. Although the life of the fund is about 10 years, so it is a little bit too early to say the full result of the fund, so far few companies are public, did the IPO and with that result to me is quite impressive and I think our limited partners are impressed quite a bit.

Interviewer:
So SPARX is investing for the future I would say that is quite unique in Japanese companies?

CEO: Shuhei Abe:
This is really the future of Japan. A few years ago, I realized that the word of growth disappeared in this country and I thought about it where the growth would be and growth would be worded in three ways. One is AI, two is IoT and third is robotics and I thought about it further and those three new technology would be in the form of product, like car automobiles, mobility, it will be the area that will integrate all those new technologies so I approached with that concept to Toyota Motors, Toyota Motors agreed that they would like to participate in this fund which is very unique to us and very, very strong support that I could earn from these Japanese companies. So they are happy when that happens and with that fund is doing well I think it's more encouraging to me.

Interviewer:
So you are one step ahead of other investment companies?

CEO: Shuhei Abe:
Well a little bit ahead of the time which I think is very important as an investor and we are getting first fruit out of this courageous step that made by our limited partners.


Interviewer:
This has been Sparx Group's fiscal year results for 2018 and the prospects for the fiscal year 2019.



Disclaimer:
Certain information set forth in this presentation contains "forward-looking information", including "future oriented financial information" and "financial outlook", under applicable securities laws (collectively referred to herein as forward-looking statements). Except for statements of historical fact, information contained herein constitutes forward-looking statements and includes, but is not limited to, the (i) projected financial performance of SPARX; (ii) the expected development of SPARX's business, projects and joint ventures; (iii) execution of SPARX's vision and growth strategy, including with respect to future M&A activity and global growth; and (iv) future liquidity, working capital, and capital requirements. Forward-looking statements are provided to allow potential investors the opportunity to understand management's beliefs and opinions in respect of the future so that they may use such beliefs and opinions as one factor in evaluating an investment.
These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements.
Although forward-looking statements contained in this presentation are based upon what management of SPARX believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. SPARX undertakes no obligation to update forward-looking statements if circumstances or management's estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.
Nothing in this presentation should be construed as an offer to provide investment advisory services nor a solicitation of an offer to invest in any investment vehicle managed by SPARX. Registration as an investment adviser does not imply any special skill or training. Past performance does not guarantee future results.

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