J Trust / 8508 COVERAGE INITIATED ON: LAST UPDATE:

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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. Key financial data Executive summary Recent updates Highlights Trends and outlook Business Description Strengths and weaknesses Historical performance Income statement Balance sheet Statement of cash flows Other information History News and topics Major shareholders Shareholder return Profile /76

3 Key financial data Income statement 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. Est. Operating revenue 4,946 16,541 16,908 24,508 55,683 61,926 63,281 75,478 85,031 77,574 YoY 54.5% 234.4% 2.2% 44.9% 127.2% 11.2% 2.2% 19.3% 12.7% - Gross profit 2,992 13,243 11,776 19,969 34,897 35,586 33,996 36,521 41,068 YoY 30.7% 342.6% -11.1% 69.6% 74.8% 2.0% -4.5% 7.4% 12.5% GPM 60.5% 80.1% 69.6% 81.5% 62.7% 57.5% 53.7% 48.4% 48.3% Operating profit (loss) 240 4,165 4,324 5,539 12,005 13,745-5,217-4,114-5,769 2,486 YoY % 28.1% 116.7% 14.5% OPM 4.9% 25.2% 25.6% 22.6% 21.6% 22.2% Recurring profit (loss) 296 4,303 4,323 5,486 13,704 13,351-2,385-4,678-6,747 YoY 854.8% - 0.5% 26.9% 149.8% -2.6% RPM 6.0% 26.0% 25.6% 22.4% 24.6% 21.6% Profit (loss) 306 4,108 3,233 34,500 13,309 11,145 10,143-5,712-9, YoY 206.0% % % -16.3% -9.0% Net margin 6.2% 24.8% 19.1% 140.8% 23.9% 18.0% 16.0% Per share data (JPY, adjusted for stock splits) Shares issued (year end; '000) 27,652 29,752 30,009 30,225 63, , , , ,537 EPS EPS (fully diluted) Dividend per share Book value per share , , , , ,415.9 Balance sheet (JPYmn) Cash and deposits 3,380 7,163 14,846 10,362 62, , , , ,172 Operating loans 28,236 18,039 11,725 27,713 18,227 49,242 65,315 49,505 49,098 Loans by banking business ,210 46, , , ,996 Advances paid installment 6,343 3,825 1,443 65,024 48,133 39,776 1,395 2,449 2,726 Purchased receivables 1,313 5,407 4,008 2,310 2,529 2,527 8,647 9,940 12,146 Total current assets 36,627 35,714 34, , , , , , ,331 Tangible fixed assets 1,629 1,079 1,166 5,095 10,836 12,309 9,352 7,510 6,474 Investments and other assets 1, ,947 4,366 11,842 15,001 16,002 13,660 14,465 Total assets 39,811 37,999 37, , , , , , ,650 Notes discounted ,291 1,776 1,500 2,173 2,226 1, Short-term loans payable 2,768 4,520 3,980 5,576 8,071 25,258 13,979 27,768 28,642 Deposits by banking business ,194 77, , , ,419 Provision for loss on interest payment 2,147 3,048 3,359 10,172 7,124 4,055 1, Total current liabilities 27,246 11,305 10,264 43,995 99, , , , ,093 Long-term loans payable ,368 10,814 13,670 30,487 16,329 13,250 23,957 26,725 Provision for loss on interest payment 4,470 3,840 2,382 9,711 12,052 9,382 5, Provision for loss on guarantees , Total non-current liabilities 5,718 15,687 13,635 24,079 48,339 31,601 23,254 28,360 30,893 Total liabilities 32,964 26,993 23,900 68, , , , , ,987 Net assets 6,846 11,005 13,961 49,471 70, , , , ,663 Total interest-bearing debt 3,181 15,888 14,794 19,246 38,558 41,587 27,229 51,725 55,367 Cash flow statement (JPYmn) Cash flows from operating activities -2,847-6,819 9,234-16,489 9,378 11,434 15,452-32,435-14,434 Cash flows from investing activities 1, ,424 36,764-17,775-15,148-7,896-4,774 Cash flows from financing activities , ,165-2,441 74,464-20,593 13,026 10,935 Financial ratios ROA (RP-based) 1.1% 11.1% 11.4% 7.1% 8.2% 4.8% -0.5% -0.9% -1.2% ROE 4.6% 46.1% 26.0% 111.4% 23.8% 9.3% 5.6% -3.3% -6.4% Net asset ratio 17.2% 29.0% 36.9% 42.1% 32.4% 55.0% 36.0% 33.2% 24.9% Source: Shared Research based on company data Note: Net Income from FY03/16 refers to net income attributable to owners of parent. The FY03/18 forecast reflects profit attributable to owners of parent. Note: Year-on-year rises of over 1,000% are shown by -. Note: IFRS applied to FY03/18 forecasts. 03/76

4 Executive summary Core businesses finance in Japan, South Korea, and Southeast Asia J Trust has a variety of businesses including banking, finance, and real estate. Over the medium term, finance businesses in Japan, South Korea, and Southeast Asia are the core sources of operating revenue and profit. Since 2009, the company has expanded its business through mergers and acquisitions of domestic consumer finance companies and credit card companies, and in 2012 it launched a South Korean savings bank business. In FY03/14 03/15 it used approximately JPY97.6bn raised in a rights offering to acquire a finance company and a savings bank in South Korea, and a commercial bank in Indonesia. From FY03/16, J Trust targets profit growth by increasing assets through its Financial Business in South Korea and Financial Business in Southeast Asia. In the Domestic Financial Business, the company concentrated on growth of the consumer finance, credit card, credit guarantee, and servicer (receivables purchase and collection) businesses through FY03/15. From FY03/16 onward, after effectively exiting the unsecured consumer finance loans business, which had limited medium-term growth potential, the company has worked to expand the real estate related credit guarantee business and the servicer business. The Financial Business in South Korea comprises three types of businesses: the savings bank business (primarily involved in retail banking followed by corporate banking), the capital business (primarily involved in providing lease and installment payment), and the servicer business. J Trust launched its finance business in South Korea in In 2012 it launched the Chinae Savings Bank (now JT Chinae Savings Bank) and from FY03/13 to FY03/15 it grew loans balances in the savings bank business primarily through M&A. Having established the infrastructure for comprehensive financial services, the company now looks to develop businesses organically to maximize their synergies going forward. The Financial Business in Southeast Asia purchased Indonesia s Bank Mutiara (currently PT Bank J Trust Indonesia Tbk.) in November The company aims to expand the loan book and widen margins by lowering the average deposit interest rate. Further, it plans to leverage the group s network in Japan, South Korea, and Southeast Asia and expand its businesses accordingly. Trends and outlook In FY03/17, operating revenue was JPY85.0bn (+12.7% YoY), operating loss was JPY5.8bn (loss of JPY4.1bn in FY03/16), recurring loss was JPY6.7bn (loss of JPY4.7bn in FY03/16), and net loss attributable to owners of parent was JPY9.9bn (loss of JPY5.7bn in FY03/16). In March 2018, the company announced a revision to its earnings forecasts. Revised forecasts were as follows: Operating revenue of JPY77.6bn (-3.2% from IFRS-based FY03/17 result), operating profit of JPY2.5bn (+88.8%), and loss attributable to owners of parent of JPY187mn (loss of JPY1.3bn on an IFRS-basis in FY03/17). The revision was due to the sale of all shares in Adores, Inc., a wholly owned subsidiary of the company s consolidated subsidiary KeyHolder, Inc. As a result, the business of Adores became classified as a discontinued operation. Strengths and weaknesses Shared Research views J Trust s strengths as its ability to proactively develop finance businesses in Asia based on its expertise accumulated in Japan, its acquisition capability, and the management s business execution skills. Its weaknesses are that it is easily affected by regulation, and that its rapid growth entails the risk of personnel shortages. (See Strengths and weaknesses section for further details.) 04/76

5 Recent updates Highlights On April 19, 2018, J Trust Co., Ltd. announced that its consolidated subsidiary will acquire shares in PT. Olympindo Multi Finance. The transaction will include a subscription to shares newly issued via a third party allotment. At the Board of Directors meeting held on the same day, the company and its consolidated subsidiary J Trust Asia Pte. Ltd. resolved to acquire shares in PT. Olympindo Multi Finance (OMF) from its owner Ang Andi Bintoro and his family, and subscribe to new shares to be issued by OMF via third party allotment. J Trust Asia s total shareholdings will amount to 60.0% of shares issued (common stocks) by OMF, making OMF a second-tier subsidiary of J Trust. The signing of share transfer and private placement agreements is scheduled for April 20, 2018, and the transactions are set to take effect on July 31, 2018 (or on another date mutually agreed upon by the signing parties). Purpose of share acquisition As OMF is a multi-finance company with 40 branches throughout Indonesia and strong partnerships with financial institutions including major banks, J Trust expects their businesses to be highly synergistic. For instance, the company believes OMF s rollout of new POSs (Point of Sales) could help expand the service areas of PT Bank JTrust Indonesia Tbk. (BJI) and attract more customers to the bank. It also hopes to leverage OMF s network of partner financial institutions to secure funding for PT JTrust Investment Indonesia (JTII) and increase opportunities for JTII to purchase receivables. Further, J Trust thinks OMF s plans to launch new services such as financing for agricultural equipment and microfinance (group loan) will help it expand the size and scope of its financial business. The company determined that by bringing OMF into the J Trust group, it could establish a three-pronged business structure in Indonesia just as it did in South Korea comprising banking (BJI), receivables purchase and collection (JTII), and financing (OMF), which would essentially complete the business foundation for J Trust s financial business in Indonesia. Overview of OMF (as of December 31, 2017) Company name: PT. Olympindo Multi Finance Location: Business: Special Capital Region of Jakarta, Indonesia Multi-finance company focusing on used car financing Earnings results and financial position of OMF (JPYmn) FY12/15 FY12/16 FY12/17 (Preliminary figures) Net assets 1,798 2,067 2,242 Total assets 9,753 13,493 14,460 Operating profit 1,968 2,567 3,396 Pre-tax profit Net income Note: JPY /IDR On April 5, 2018, Shared Research updated the report following interviews with the company. On March 26, 2018, the company announced a revision to its earnings forecasts. Revised full-year FY03/18 earnings forecasts Operating revenue: JPY77.6bn (previous forecast: JPY88.6bn) 05/76

6 Operating profit: Loss attributable to owners of parent: Basic loss per share: JPY2.5bn (JPY2.8bn) JPY187mn (JPY448mn) JPY1.82 (JPY4.35) Reasons for the revision On March 26, 2018, the company consolidated subsidiary KeyHolder, Inc. sold all its shares in Adores (KeyHolder s wholly owned subsidiary) to Wide Leisure. J Trust voluntarily adopted IFRS from Q1 FY03/18 and has begun disclosing financial statements accordingly. IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations) outlines that an entity s component, which has either been disposed of or is classified as held for sale, is classified as a discontinued operation when it represents a separate major line of business. With the execution of the sale of Adores shares, the business of Adores is classified as a discontinued operation. Accordingly, the company has decided to change its revision to the full-year financial forecasts, which reflected the recording of operating profit/loss related to Group Lease PCL (as outlined in the press release dated February 13, 2018), to the second revised forecast also outlined in the same release as forecast of the full year financial results when the share transfer of Adores is executed and the business results, gains/losses associated with Adores, disclosed as a discontinued operation. On February 13, 2018, the company announced results for Q3 FY03/18; see the results section for details. On the same day, the company announced that it would book operating profit/loss associated with Group Lease PCL in Q3 FY03/18 and revised its full-year earnings forecast. J Trust announced that it had recorded in Q3 FY03/18 operating profit/loss associated with common stock and convertible bonds issued by Group Lease PCL (GL). The company also announced revisions to its FY03/18 earnings forecasts announced in May Recording of operating profit/loss in Q3 FY03/18 Subsidiary J Trust Asia Pte. Ltd. (J Trust Asia) booked other operating revenue JPY5.4bn on a change in debt category arising from GL s convertible bond cancellation. At the same time, it booked a valuation loss on the share subscription rights portion of the cancelled convertible bonds. J Trust Asia also recorded other operating expenses of JPY8.2bn on impairment of GL shares, because the price of GL shares on the Stock Exchange of Thailand had fallen from THB18.27 (average acquisition price) to THB6.8 at end December Earnings forecast revision Revised FY03/18 full-year forecasts Operating revenue: JPY88.6bn (previous forecast: JPY89.5bn) Operating profit: JPY2.8bn (JPY10.1bn) Profit/loss attributable to owners of parent: -JPY448mn (JPY8.1bn profit) Reasons for earnings forecast revision On the operating revenue front, the company posted weak sales and profits in the General Entertainment Business, hurt by sluggish customer traffic at existing game stores and change in sales method of amusement machines from outright sales to rental sales at Highlights Entertainment Co., Ltd. (which means sales are booked over a longer period of time). Operating revenue was on track in the Financial Business in Southeast Asia, because the operating revenue outlined above compensated for lower-than-expected loan interest revenue stemming from a weak loan balance as a result of portfolio changes. However, the 06/76

7 company lowered its operating profit and net profit forecasts because it booked operating expenses in the Investment Business as noted above. On January 23, 2018, the company announced a share transfer agreement of Adores, Inc., its second-tier subsidiary. KeyHolder, Inc., a J Trust s consolidated subsidiary, has entered into an agreement to transfer all shares in Adores (KeyHolder s wholly owned subsidiary) to WIDE LEISURE Co., Ltd. KeyHolder plans to transfer 2,000 shares (at the price of JPY4.5bn) on March 26, Following this transfer, KeyHolder expects to book extraordinary gain of JPY1.2bn from the gain on sale of subsidiary shares in FY03/18. For corporate releases and developments more than three months old, see the News and topics section. 07/76

8 Trends and outlook Quarterly earnings Cumulative FY03/17 FY03/18 FY03/18 (JPYmn) Q1 Q2 Q3 Q1 Q2 Q3 % of FY FY Est. Operating revenue 19,607 38,969 63,718 20,352 41,411 66, % 77,574 YoY % 6.3% 5.0% -3.2% Operating gross profit 7,583 15,100 29,787 8,554 16,720 21,213 YoY % 10.7% -28.8% GPM 38.7% 38.7% 46.7% 42.0% 40.4% 31.7% SG&A expenses 6,809 13,581 20,576 6,435 13,088 19,475 YoY % -3.6% -5.4% SG&A, % of operating revenue 34.7% 34.9% 32.3% 31.6% 31.6% 29.1% Operating profit (loss) ,635 2,574 4,187 2, % 2,486 YoY % % 88.8% OPM 4.6% 0.7% 12.0% 12.6% 10.1% 4.0% 3.2% Recurring profit (loss) ,407 7,449 2,252 3,572 1,511 YoY % RPM % 11.1% 8.6% 2.3% Profit attributable to owners of parent ,172 6,187 1,779 2, % -187 YoY Net margin % 8.7% 5.5% - - Quarterly (JPYmn) Q1 FY03/17 Q2 Q3 Q1 FY03/18 Q2 Q3 Operating revenue 19,607 19,362 24,749 20,352 21,059 25,484 YoY % 8.8% 3.0% Operating gross profit 7,583 7,517 14,687 8,554 8,166 4,493 YoY % 8.6% -69.4% GPM 38.7% 38.8% 59.3% 42.0% 38.8% 17.6% SG&A expenses 6,809 6,772 6,995 6,435 6,653 6,387 YoY % -1.8% -8.7% SG&A, % of operating revenue 34.7% 35.0% 28.3% 31.6% 31.6% 25.1% Operating profit (loss) ,369 2,574 1,613-1,496 YoY % - - OPM 4.6% % 12.6% 7.7% - Recurring profit (loss) ,856 2,252 1,320-2,061 YoY RPM % 11.1% 6.3% - Profit attributable to owners of parent ,204 8,359 1, ,289 YoY Net margin % 8.7% - - Source: Shared Research based on company data Note: The company is applying the International Financial Reporting Standards (IFRS) from Q1 FY03/18, so IFRS have been retroactively applied to the figures for Q1 FY03/17 to allow comparison and analysis. 08/76

9 Results by segment Cumulative FY03/17 FY03/18 (JPYmn) Q1 Q2 Q3 Q1 Q2 Q3 Operating revenue 19,607 38,969 63,718 20,352 41,411 66,895 YoY % 6.3% 5.0% Domestic Financial Business 2,182 4,692 7,024 2,293 4,936 7,042 YoY % 5.2% 0.3% Financial Business in South Korea 6,883 13,512 20,825 8,818 17,437 26,788 YoY % 29.0% 28.6% Financial Business in Southeast Asia 3,321 6,896 10,415 3,592 7,290 10,583 YoY % 5.7% 1.6% General Entertainment Business 3,706 7,605 11,299 3,068 6,541 9,599 YoY % -14.0% -15.0% Real Estate Business 1,296 2,949 4,684 1,635 3,003 4,404 YoY % 1.8% -6.0% Investment Business 1,348 2,005 7, ,114 7,030 YoY % -44.4% -8.4% Other 867 1,306 1, ,086 1,447 YoY % -16.8% -19.3% Operating profit 1,786 2,112 10,383 3,147 5,574 4,500 YoY % 163.9% -56.7% OPM 9.1% 5.4% 16.3% 15.5% 13.5% 6.7% Domestic Financial Business 1,148 2,677 4,083 1,121 2,488 3,495 YoY % -7.1% -14.4% OPM 52.6% 57.1% 58.1% 48.9% 50.4% 49.6% Financial Business in South Korea 370 1,263 1,915 1,647 2,449 3,097 YoY % 93.9% 61.7% OPM 5.4% 9.3% 9.2% 18.7% 14.0% 11.6% Financial Business in Southeast Asia -1,171-2,815-3, ,105 YoY OPM % % General Entertainment Business YoY OPM 1.9% 3.3% Real Estate Business YoY % 20.9% -13.5% OPM 2.0% 4.4% 5.7% 5.9% 5.2% 5.2% Investment Business 1, , ,073-2,759 YoY % 75.6% - OPM 97.5% 30.5% 100.8% 50.9% 96.3% - Other YoY % - - OPM 0.3% % 4.9% 3.9% Source: Shared Research based on company data Note: The company is applying the International Financial Reporting Standards (IFRS) from Q1 FY03/18, so IFRS have been retroactively applied to the figures for Q1 FY03/17 to allow comparison and analysis. 09/76

10 Quarterly FY03/17 FY03/18 (JPYmn) Q1 Q2 Q3 Q1 Q2 Q3 Operating revenue 19,607 19,362 24,749 20,352 21,059 25,484 YoY % 8.8% 3.0% Domestic Financial Business 2,182 2,510 2,332 2,293 2,643 2,106 YoY % 5.3% -9.7% Financial Business in South Korea 6,883 6,629 7,313 8,818 8,619 9,351 YoY % 30.0% 27.9% Financial Business in Southeast Asia 3,321 3,575 3,519 3,592 3,698 3,293 YoY % 3.4% -6.4% General Entertainment Business 3,706 3,899 3,694 3,068 3,473 3,058 YoY % -10.9% -17.2% Real Estate Business 1,296 1,653 1,735 1,635 1,368 1,401 YoY % -17.2% -19.3% Investment Business 1, , ,916 YoY % -18.7% 4.3% Other YoY % 64.5% -25.7% Operating profit 1, ,271 3,147 2,427-1,074 YoY % 644.5% - OPM 9.1% 1.7% 33.4% 15.5% 11.5% - Domestic Financial Business 1,148 1,529 1,406 1,121 1,367 1,007 YoY % -10.6% -28.4% OPM 52.6% 60.9% 60.3% 48.9% 51.7% 47.8% Financial Business in South Korea , YoY % -10.2% -0.6% OPM 5.4% 13.5% 8.9% 18.7% 9.3% 6.9% Financial Business in Southeast Asia -1,171-1, ,361 YoY OPM % % General Entertainment Business YoY OPM 1.9% 4.6% Real Estate Business YoY % -42.7% -46.0% OPM 2.0% 6.2% 7.9% 5.9% 4.3% 5.3% Investment Business 1, , ,832 YoY % - - OPM 97.5% % 145.7% - Other YoY % - - OPM 0.3% % 6.0% 0.8% Source: Shared Research based on company data Note: The company is applying the International Financial Reporting Standards (IFRS) from Q1 FY03/18, so IFRS have been retroactively applied to the figures for Q1 FY03/17 to allow comparison and analysis. Q3 FY03/18 results The company has adopted the International Financial Reporting Standards (IFRS) since Q1 FY03/18. Operating revenue was JPY66.9bn (+5.0% YoY). Operating revenue in the core Financial Businesses in Japan, South Korea, and Southeast Asia (simple sum) was JPY44.4bn (+16.1%). Operating profit was JPY2.7bn (-64.8% YoY). Profit declined sharply in the Investment Business. The company booked an impairment loss on Group Lease PCL (GL) shares and a valuation loss on the share subscription rights portion of the cancelled GL convertible bonds. However, operating profit in the core Financial Businesses in Japan, South Korea, and Southeast Asia (simple sum) came to JPY7.7bn (+205.8%). Loss attributable to owners of parent was JPY20mn (versus profit of JPY6.2bn in Q3 FY03/17). Domestic Financial Business Operating revenue was JPY7.0bn (+0.3% YoY), and segment profit was JPY3.5bn (-14.4% YoY). In Q3 FY03/17, the company booked roughly JPY500mn in one-off gains on the sale of fixed assets. Excluding this factor, segment profit in Q3 FY03/18 was more or less on par with the year-earlier level. Operating revenue amounted to 74.5% of the company s full-year FY03/18 forecast and operating profit to 79.6%. 10/76

11 In this segment, the company plans to focus on credit guarantee services and collection of receivables for growth of profits. The performance of the credit guarantee services and collection of receivables were as follows. Credit guarantee services Operating revenue for credit guarantee services was JPY4.7bn and operating profit JPY2.7bn. As priority measures focusing on real estate related credit guarantee services, the company provides guarantees for syndicated rental housing loans including Flat 35 in partnership with a major housing developer, Flat 35 loan agencies, and others and has added new credit guarantee structures for reverse mortgage type real estate-backed card loans and guarantees for overseas real estate-backed loans. With these measures, it is steadily growing its credit guarantee balance. The company had guarantee services partnerships with seven regional financial institutions as of end-december The balance of credit guarantees, the base of revenues in the business, totaled JPY128.9bn (+68.9% YoY). The balance of guarantees on rental housing loans, which the company sees as the growth driver of credit guarantee balances, was JPY88.7bn (+135.3%), and thus drove an increase in the credit guarantee balances. The commission to guarantee balance ratio stood at 2.30% (3.50% in Q3 FY03/17). The company mainly selects properties close to stations (10 minute walk to nearest station) in the Tokyo, Nagoya, Osaka, and Fukuoka areas (these account for 98% of the handled properties) as targets for rental housing loans, and also carefully selects the housing developers it partners with. As a result, the occupancy ratio for rental properties under the company s credit guarantees remains above 98%, and the company has not recorded any default on a rental housing loan in the last four years. The balance of credit guarantees expanded on an increase in guarantees for rental housing loans. The commission to guarantee balance ratio declined YoY as the share of guarantees for rental housing loans increased. (Commission to guarantee balance ratio is relatively low for rental housing loans.) Collection of receivables Operating revenue in the receivables collection business was JPY2.1bn and operating profit JPY855mn. Since the number of domestic servicers is decreasing, the company aims to pursue profits as a remaining player through M&A activities on the strength of its superior collection capability. The company also reinforced collection of corporate loans receivable and expanded operations into business rehabilitation services. The balance of purchased receivables was JPY12.6bn (+4.3% YoY), and the claimable loan balance was JPY766.4bn (+2.4%). In addition, claimable off-balance sheet receivables succeeded from Takefuji totaled roughly JPY130.0bn (JPY100.0bn in Q3 FY03/17). Financial Business in South Korea Operating revenue was JPY26.8bn (+28.6% YoY) and segment profit was JPY3.1bn (+61.7%). Operating revenue amounted to 74.7% of the company s full-year FY03/18 forecast and operating profit to 86.8%. The increase in operating revenue for the segment was due to an increase in operating revenue in the banking business, which reflected a combination of higher loan balance and lower interest rates as the company shifted its loan portfolio from consumer to corporate loans amid a tightening of regulations on household loan balances by regulatory authorities. Profits increased on lower SG&A expenses due to reductions in online advertising expenses accompanying restrictions by the regulatory authorities on household loan balances and to measures to reduce other expenses. In this segment, the company singled out its savings bank and capital business and the receivables collection business as the main businesses in which it expects to realize profit growth. The following is a summary of conditions of the savings bank and capital business and the receivables collection business. 11/76

12 Savings bank business and capital business JT Chinae Savings Bank and JT Savings Bank conduct savings bank services, and JT Capital conducts installment payment and lease services. The company is working to improve profitability by building up personal loans to customers with good credit and stabilize the loan portfolio by focusing on loans to major corporations, secured loans, and government guaranteed loans. The amount in loans in the banking business has grown with an increase in both volume and value of new loans due to effective business strategies and marketing. Meanwhile, operating loans decreased as JT Capital transferred consumer credit loans receivable to a group savings bank to be compliant with the consumer loan limits stipulated in the revised Specialized Credit Finance Business Act put to effect from September However, growth in receivables other than consumer credit loans such as corporate loans supported an increase in the loan balance. As a result, as of end-december 2017, loans by the banking business were JPY273.5bn (+26.1% YoY) and operating loans were JPY64.3bn (+58.2%). The loan balance increased to KRW3.2tn (+21.0% YoY) on a local currency basis even though the company reshuffled its portfolio to comply with regulatory requirements (discussed below). The breakdown of the loan balance was KRW1.2tn in loans to individuals (+11.1%) and KRW1.8tn in loans to major corporations, secured loans, and government guaranteed loans (+21.7%). According to the company, a revision of the Mutual Savings Banking Supervisory Provisions in March 2017 raised the doubtful account reserve ratio for receivables with loan interest rates of 20% and above, placed restrictions on amounts of lending to individuals, and adopted a more stringent classification for non-performing loans and stricter criteria governing allowances for doubtful accounts for receivables with loan interest rates under 20%. The company indicated that its experience with a decline in consumer loan rates and limits on total volume in Japan allowed it to adapt to the tighter regulations in advance by raising its share of receivables with medium- to low-interest rates. The ratio of delinquent loan balance (amount of loans at least 30 days delinquent) to total loan balance for December 2017 fell to 4.79% (4.76% in December 2016) as a result of increases in the new loan balance under stringent credit management. The average lending interest rate and average deposit interest rate, both key factors that influence earnings in this business, were 12.7% (13.9% in Q3 FY03/17) and 3.1% (3.0% in Q3 FY03/17), respectively. (Figures are the weighted averages for JT Chinae Savings Bank, JT Savings Bank, and JT Capital.) The decline in the average lending interest rate reflected a reduction in the maximum interest rate from 34.9% to 27.9% in March 2016, as well as the company s strategy of offering low-interest products to customers with good credit ahead of its competitors. Note that the maximum interest rate was lowered to 24.0% in February J Trust anticipates changes in the business environment for consumer lending similar to those observed in Japan in the 2000s. It thinks that South Korea will lower maximum interest rates, that interest rates on consumer loans will fall, and that banks will account for an increasing share of loans to individuals. The company says it has been able to employ a proactive business strategy based on its experience in consumer lending in Japan in response to changing business conditions. Receivables collection business The balance of purchased receivables was JPY2.2bn (+21.4% YoY). Financial Business in Southeast Asia Operating revenue was JPY10.6bn (+1.6% YoY), and segment profit was JPY1.1bn (loss of JPY3.5bn in Q3 FY03/17). Operating revenue amounted to 78.2% of the company s full-year FY03/18 forecast and operating profit to 106.3%. At Bank J Trust Indonesia, the banking business saw an increase in operating revenue thanks to a drop in deposit interest rates and an increase in net interest revenue brought about by loan portfolio reshuffling. At Bank J Trust Indonesia, operating expenses decreased as provision of allowance for doubtful accounts was reduced thanks to improved loan quality and ongoing strengthening of receivables collection activities. The company recorded business structure improvement expenses in FY03/17, and the absence of such costs in FY03/18 resulted in a decline in expenses and an increase in profit. However, PT JTrust Investments Indonesia, which engages in receivables collection in Indonesia, posted an operating loss. 12/76

13 Banking business J Trust has been working for some time to turn around Bank J Trust Indonesia, which was under the management of the Indonesia Deposit Insurance Corporation. An increase in provision for doubtful accounts (based on a review of loan receivables), personnel reductions, and closing and consolidation of overlapping outlets have been completed. Hereafter, in addition to lowering the average deposit interest rate and raising the current and savings account (CASA) ratio, the company aims on the lending side to improve net interest revenue by reshuffling its loan portfolio, reducing low-interest and large-lot corporate loans of about JPY1bn while increasing medium loans in the range of JPY100mn 500mn. The balance of loans in the banking business declined to JPY95.2bn (-1.5% YoY) as a result of loan portfolio changes to reduce large loans. Consolidated subsidiary Bank J Trust Indonesia, which drives the banking business in the Financial Business in Southeast Asia segment, posted operating revenue of JPY10.6bn (+8.0% YoY). Although the average lending interest rate declined, the amount of loans in the banking business increased, fueling growth in operating revenue. On the profit front, operating profit came to JPY1.3bn (versus operating loss of JPY3.7bn in Q3 FY03/17), reflecting an increase in operating revenue, a decline in deposit interest rates, and a decline in expenses related to doubtful accounts. As of end-december 2017, the loan balance in the banking business stood at IDR11.4tn (+2.2% YoY) (JPY95.2bn based on an exchange rate of JPY0.0084/IDR). The total loan balance in the banking business declined due to progress with a strategic reshuffle of the lending portfolio. In the process of restructuring the lending portfolio, the amount of loans in the banking business initially declined, but turned upward from July As noted above, the company has restructured its loan portfolio by reducing low-interest and large-lot corporate loans of about JPY1bn while increasing commercial loans in the range of JPY100mn 500mn. In addition, the company aimed to increase loans to SMEs (loans of under JPY100mn). As a result, the balance of loans to SMEs totaled IDR8.9tn (IDR7.2tn in Q3 FY03/17). Within the loan asset balance, the weighting of loans accumulated through Bank J Trust credit rose to 49%. Finally, the delinquency rate remained stable, coming in at 2.93% in December 2017 (2.74% in Q3 FY03/17). The average lending interest rate was 11.03% (11.9% in Q3 FY03/17). The company aimed to reduce large-lot corporate loans for which rates are relatively low, while increasing the number of SME loans, which have comparatively high rates. However, the average lending interest rate declined YoY due to competition with competitors. The cost of funds was 7.44% in April June 2017 (7.43% in April June 2016), on par with the year-earlier level, but declined to 7.19% in July September 2017 (7.51% in July-September 2016), and further to 6.78% in October December 2017 (7.51% in October December 2016). The CASA ratio stood at 11.91% in April June 2017 (11.32% in April June 2016), and rose to 12.24% in July September 2017 (12.43% in July-September 2016), and further to 13.19% in October December 2017 (11.94% in October December 2016). The company adopted a marketing strategy involving TV commercials, and this enabled it to secure current and savings account deposits at a relatively low procurement cost, resulting in a higher CASA ratio and lower cost of funds. Receivables collection business In Indonesia, PT JTrust Investments Indonesia conducts receivables collection services. PT JTrust Investments Indonesia reported operating revenue of -JPY66mn (versus operating revenue of JPY557mn in Q3 FY03/17) and an operating loss of JPY377mn (versus operating profit of JPY137mn in Q3 FY03/17). The operating loss reflected the booking of JPY931mn in loss on revaluation of purchased receivables, which were not a factor in Q3 FY03/17. 13/76

14 In the accounting (revenue booking) practice for PT JTrust Investments Indonesia s receivables collection business, receivables collection amount is recorded based on an NPL collection plan. The company uses gain/loss on revaluation of purchased receivables as an account item for recording the difference between the targeted and actual collection amount. The balance of purchased receivables taken over from Bank J Trust Indonesia in October 2015 was JPY1.1bn (-60.2% YoY) at the end of Q3 FY03/18. In addition to achieving higher collections, the company also conducted a revaluation of purchased receivables in Q3 FY03/18. General Entertainment Operating revenue was JPY9.6bn (-15.0% YoY) and segment loss was JPY673mn (JPY86mn loss in Q3 FY03/17). Real Estate Operating revenue was JPY4.4bn (-6.0% YoY) and segment profit was JPY230mn (-13.5%). Investment Operating revenue was JPY7.0bn (-8.4% YoY) and segment loss was JPY2.8bn (segment profit of JPY7.7bn in Q3 FY03/17). This business mainly consists of J Trust Asia s investment operations and management support provided to investment targets. In Q3 FY03/17, J Trust Asia booked gains on the sale of shares in PT Bank Mayapada International Tbk. and valuation gains on the share subscription rights portion of the GL convertible bonds as other operating revenue. In cumulative Q3 FY03/18, J Trust Asia recorded revenue associated with a change in receivables category arising from the cancellation of GL convertible bonds (discussed below) under other operating revenue. However, overall revenue declined. J Trust Asia dissolved its convertible bond agreement with GL (roughly JPY20.0bn) at end-november 2017, and has demanded immediate repayment. In Q3 (October (Octobers, it cancelled the GL convertible bonds (initial value: JPY20.0bn, value after adjusting for cumulative derivatives losses: roughly JPY14.6bn), changed the receivables category to monetary claims of JPY20.0bn, and booked an operating revenue of roughly JPY5.4bn. On the profit front, J Trust Asia booked a roughly JPY3.5bn valuation loss on the share subscription rights portion of the cancelled GL convertible bonds, and a roughly JPY1.7bn allowance for doubtful accounts for monetary claims. In addition, J Trust Asia booked a roughly JPY4.7bn valuation loss resulting from a decline in the value of its GL shareholdings (shares listed on Stock Exchange of Thailand) from an average acquisition price of 18.27THB to 6.8THB per share at end-december The combination of these factors drove a decline in profit. The company changed the receivables category of the GL convertible bonds to monetary claims in Q3, and this will ensure that no valuation profits or losses on derivatives will arise for the share subscription rights attached to the convertible bonds in Q4 and beyond. According to the company, J Trust Asia has pushed for a corporate rehabilitation of GL. Other than activity required for normal transactions, Thai bankruptcy regulations prohibit GL from engaging in sales, payments, transfers, rental operations, debt payments, debt origination, or assumption of obligations on property. For details on previous results, see the Historical performance section. 14/76

15 Full-year company forecasts (as of FY03/17 results announcement) FY03/18 earnings forecasts Source: Shared Research based on company data Earnings forecasts by segment (IFRS basis) Source: Shared Research based on company data FY03/17 FY03/17 FY03/18 FY03/18 FY03/18 (JPYmn) FY A ct. FY A ct. Previous Est. Rev. Est. (Feb.) Rev. Est. (Mar.) J GAAP (ref.) IFRS IFRS IFRS IFRS Operating revenue 85,031 80,123 89,490 88,577 77,574 Operating expenses 43,963 Operating gross profit 41,068 Operating GPM 48.3% SG&A expenses 46,837 SG&A, % of operating revenue 55.1% Operating profit (loss) -5,769 1,317 10,058 2,844 2,486 OPM - 1.6% 11.2% 3.2% 3.2% Recurring profit (loss) -6,747 RPM - Profit (loss) -9,876-1,270 8, Net margin % - - FY03/18 FY03/18 (JPYmn) Previous Est. Revised Est. Operating revenue 89,490 77,574 Domestic Financial Business 10,721 9,556 Financial Business in South Korea 34,123 35,870 Financial Business in Southeast Asia 16,783 13,532 Investment Business 2,773 7,652 General Entertainment Business 16,518 3,651 Other 8,572 7,313 Segment profit (loss) 10,058 2,486 Domestic Financial Business 4,648 4,392 Financial Business in South Korea 3,260 3,567 Financial Business in Southeast Asia 2,457 1,039 Investment Business 2,541-2,483 General Entertainment Business 351-1,850 Other -3,199-2,179 J Trust has voluntarily adopted IFRS from 1Q FY03/18, so its FY03/18 earnings estimates are compiled based on IFRS. In FY03/18, the company forecasts operating revenue of JPY88.6bn (+10.6% relative to IFRS-based FY03/17 result), operating profit of JPY2.8bn (+115.9%), and loss attributable to owners of parent of JPY448mn (loss attributable to owners of parent of JP1.3bn in FY03/17). With the execution of the sale of Adores shares on March 26, 2018, the business of Adores is classified as a discontinued operation. Accordingly, the company has decided to change its revision to the full-year financial forecasts, which reflected the recording of operating profit/loss related to Group Lease PCL (as outlined in the press release dated February 13, 2018), to the second revised forecast also outlined in the same release as forecast of the full year financial results when the share transfer of Adores is executed and the business results, gains/losses associated with Adores, disclosed as a discontinued operation. IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations) outlines that an entity s component, which has either been disposed of or is classified as held for sale, is classified as a discontinued operation when it represents a separate major line of business. In February 2018, J Trust announced that it had recorded in Q3 FY03/18 operating profit associated with common stock and convertible bonds issued by Group Lease PCL (GL). The company also announced revisions to its full-year FY03/18 earnings forecasts announced in May The revised forecasts are JPY913mn lower than the previous forecast for operating revenue, JPY7.2bn lower for operating profit, and call for an expansion of JPY8.6bn for loss attributable to owners of parent. By segment, the company mainly changed 15/76

16 operating revenue and operating profit forecasts for the Financial Business in Southeast Asia, the General Entertainment Business, and the Investment Business. Domestic Financial Business In the Domestic Financial Business, J Trust forecasts operating revenue of JPY9.6bn (-3.2% YoY) and operating profit of JPY4.4bn (-21.1%). The revised forecasts are JPY1.2bn lower (-10.9%) than the previous forecast for operating revenue, and JPY256mn lower (-5.5%) for operating profit. The company plans to continue recording profit in the business in a sustainable and stable fashion. It forecasts a credit guarantee balance of JPY142.2bn (+65.4% YoY). It expects credit guarantee balance to continue growing driven mainly by low risk products such as apartment loan guarantees; it also plans to focus on reverse mortgage loan guarantees. The claimable loan balance had grown to JPY766.4bn by end-december 2017 (+4.9% from end-fy03/17). Shared Research assumes the company is looking for growth in operating revenue in the credit guarantee business and the receivables collection business amid increases in the credit guarantee and claimable loan balances. We believe its outlook for a YoY decline in profit reflects conservative assumptions for profit from NPL collection. Financial Business in South Korea In the Financial Business in South Korea, J Trust forecasts operating revenue of JPY35.9bn (+28.2% YoY) and operating profit of JPY3.6bn (+16.1%). The revised forecasts are JPY1.7bn higher (+5.1%) than the previous forecast for operating revenue, and JPY307mn higher (+9.4%) for operating profit. In this segment, the company has established an infrastructure for comprehensive financial services and accumulated operating assets. It kept revenue in the black for two consecutive years, and worked to expand business scale. In the South Korean savings industry, regulatory authorities have issued guidance to control further growth of household loan balance in response to concerns over household debt. Changes in standards governing allowances for doubtful accounts have also been implemented demanding higher reserve ratios for loans with interest rates of 20% or more. That said, the company intends to secure revenue by expanding and enhancing the quality of its operating assets. It plans to increase purchased receivables while keeping the balance between loans outstanding and allowance for doubtful accounts, and increase new loans through effective marketing efforts and branding strategies. J Trust targets a lending balance of KRW3.3tn (up KRW4.5bn YoY, +16% YoY) in the business. Shared Research believes it is fully capable of achieving this target considering monthly increases averaged KRW73.3bn in FY03/17. The company forecasts combined operating expenses and SG&A expenses of JPY30.9bn (up JPY6.0bn YoY, +24.1% YoY). In addition to an increase in deposit interest rates accompanying growth in the lending balance, the company anticipates higher expenses associated with doubtful accounts due to changes in standards governing allowances for doubtful accounts as noted above. However, even after factoring in the booking of JPY1.2bn in negative goodwill eliminations in FY03/16, the projected increase in operating expenses is significant and Shared Research thinks the company is being conservative in its forecast. Financial Business in Southeast Asia In the Financial Business in Southeast Asia, J Trust forecasts operating revenue of JPY13.5bn (-5.4% YoY) and operating profit of JPY1.0bn (operating loss of JPY4.2bn in FY03/17). The revised forecasts are JPY3.3bn lower (-19.4% YoY) than the previous forecast for operating revenue, and JPY1.4bn lower (-57.7%) for operating profit. Interest on loans receivable fell below the company plans due to sluggish growth in the loan balance and other factors, which were the result of changes to the loan portfolio. 16/76

17 J Trust streamlined the business in FY03/17 by implementing structural reforms for the business such as increasing the allowance for doubtful accounts (about JPY4.6bn) based on a review of loan receivables with the aim of strengthening financial health, headcount reductions (cutting staff from about 1,300 at the end of September 2016 to 789 at the end of March 2017), and consolidation of overlapping outlets (discontinuing operations at 18 outlets, bringing the total count to 41). This supported transition to a revenue structure that generates profit from the banking business. In terms of fund procurement in FY03/18, the company will invest JPY500mn in TV commercials and other advertising, concentrate on securing low-interest deposits, invest in IT infrastructure such as retail internet banking and branchless banking, shift focus from high-interest to low-interest deposits, and aim to improve the current and savings account (CASA) ratio and net interest margin (NIM). The company plans to cut its average deposit interest rate by 1pp from 7.6% at the end of March 2017 to 6.6%, and has indicated the 1pp drop is expected to reduce costs by about JPY1.0bn. On the lending side, the company will aim to improve net interest revenue by reshuffling its loan portfolio, reducing low-interest and large-lot corporate loans of about JPY1bn while increasing high-interest loans in the range of JPY100mn 500mn (commercial loans). Investment business In the Investment business, J Trust forecasts operating revenue of JPY7.7bn (+163.4% YoY) and an operating loss of JPY2.5bn (operating loss of JPY198mn in FY03/17). The revised forecasts are JPY4.9bn higher (+175.9%) than the previous forecast for operating revenue, and JPY5.0bn lower for operating profit. In its previous forecasts, the company looked to book an unrealized gain to reflect the difference between the acquisition price and the issue price of the Group Lease PCL convertible bonds that the company underwrote in August 2016 (total issue price: USD130mn). The revised forecasts include roughly JPY5.4bn in operating revenue from a change in receivables category arising from the cancellation of GL convertible bonds, but also a roughly JPY3.5bn valuation loss on the share subscription rights portion of the cancelled convertible bonds, and a roughly JPY1.7bn allowance for doubtful accounts for monetary claims. In addition, J Trust Asia projects an operating loss due to the booking of a valuation loss attributable to the decline in the value of its GL shareholdings (shares listed on Stock Exchange of Thailand) from an average acquisition price of THB General Entertainment Business In the General Entertainment Business, J Trust forecasts operating revenue of JPY3.7bn (-76.3% YoY) and an operating loss of JPY1.9bn (operating loss of JPY25mn in FY03/17). The revised forecasts are JPY12.9bn lower (-77.9%) than the previous forecast for operating revenue, and JPY2.2bn lower for operating profit. The revisions factor out the earnings results and the gains/losses from the sale of Adores Inc. (operating revenue of JPY11.0bn and operating profit of JPY358mn), which will be excluded as a discontinued business upon the sale of all shares in Adores Inc. In addition, the business has been affected by sluggish customer traffic at existing game stores and a change in sales method of amusement machines from outright sales to rental sales at Highlights Entertainment Co., Ltd., which meant sales will be booked over a longer period of time. 17/76