JP-Holdings, which specializes in the child-rearing support business, is a leading operator of childcare facilities (mainly licensed nurseries). When the government allowed private companies to move into the nursery business in 2000, a rush of new players from various business sectors entered the market. However, specialist operators have had the highest market share, thanks to their childcare expertise and solid track record in the business. As the frontrunner among these operators, JP-Holdings leads in childcare worker recruitment programs and nursery management systems. In recent years, the company has sought to acquire childcare subsidiaries of major corporations and has increased its presence as a key player in industry consolidation.

Childcare services (mainly nursery services) funded by central and local government subsidies are the main source of the company’s revenue. Revenue is calculated as the number of children enrolled in a facility multiplied by the subsidy. Subsidy calculations are based on the official unit price and the designated management fee determined according to a unit price table (prices vary according to the age of the child) and have no relation to the fees that facility users pay to the local governments.

Capex needed for opening nurseries and other facilities is also subsidized. The subsidy rate (subsidy as a fraction of total cost) varies depending on the local government, but most are relatively generous (for example, 15/16, 7/8, or 3/4 of total). Figures that appear on the companies’ financial statements (such as tangible fixed assets and depreciation) are adjusted to the net amounts paid by the company, which means values excluding subsidies. Thus, in addition to the leverage effect of bank loans, nursery operators also benefit significantly from subsidized capex in terms of investment return.

Shared Research estimates the nursery and licensed nursery market was worth JPY3.6–3.8tn in FY2019. Assuming the number of children on nursery waiting lists is 600,000–850,000 and enough facilities were made available to them, we estimate the market would be worth an additional JPY1.0tn (over JPY4.5tn). However, according to official announcements by municipalities in the country, the number of children in Japan on waiting lists is rapidly declining, dropping by 7,515 YoY to 9,257 as of April 1, 2020. In December 2020, the Ministry of Health, Labor and Welfare announced its “New Plan for Raising Children in Peace of Mind,” which aims to provide services for 140,000 children over the four years through the end of FY2024. This is expected to contribute to a further decline in the number of children on waiting lists. In the face of these market changes, the company has adjusted its approach to providing new value in childcare support from a focus on “measures for children on waiting lists” to one on “measures to address the declining birthrate in society.”

Trends and outlook

FY03/21 results: For FY03/21, the company reported full-year consolidated revenue of JPY33.5bn (no YoY comparison), operating profit of JPY2.9bn (no YoY comparison), recurring profit of JPY2.9bn (+47.1% YoY), and net income attributable to owners of the parent of JPY538mn (-52.1% YoY). It should be noted that the company changed the accounting presentation of subsidy income, and revenue and operating profit figures are retroactively restated. The company continued opening new childcare facilities during the year in response to still-growing demand stemming from the rising participation of women in the workforce with the expectation that they will be able to depend on outside child-rearing support providers and ongoing issues involving children on nursery waiting lists in the Tokyo Metropolitan Area. During FY03/21 the company opened a total of 4 nurseries (all in Tokyo) and 5 after-school clubs (all in Tokyo), bringing the number of childcare facilities in operation at the end of FY03/21 to 301 (including 212 nurseries, 77 after-school clubs, 11 children’s centers, and 1 private after-school club).

FY03/22 forecast: On August 12, 2021, JP-Holdings revised its consolidated earnings forecast for FY03/22 due to a change in the accounting presentation of certain subsidy income. Subsequently, at the time of its 1H earnings announcement (November 11), the company upwardly revised its full-year forecast again. The latest forecast calls for full-year consolidated revenue of JPY33.9bn (+1.2% YoY), operating profit of JPY2.7bn (-4.4% YoY), recurring profit of JPY2.8bn (-6.4% YoY), and net income attributable to owners of the parent of JPY1.8bn (+227.4% YoY). At the beginning of the fiscal year, the number of children enrolled in the company's facilities dropped due to the Japanese government's declaration of state of emergency to prevent the spread of COVID-19. The company implemented several initiatives such as promoting virtual facility visits, offering online gymnastics, eurhythmics, and English programs, and launching an early educational program. As a result, enrollment increased as the year progressed, and JP-Holdings now expects revenue to surpass its previous estimate. On the profit front, the company has addressed special factors, such as higher provision for bonuses and systems rollout expenses, by raising efficiency and reining in spending. The latest estimates for each profit line reflect a roughly 20% increase from the previous figures.

The company believes that the number of dual-income households is rising, and is monitoring the problem of nursery waiting lists in some areas, the ongoing shortage of qualified childcare workers, and the rapidly shrinking child population in line with plummeting birth rates. As a result, the company's policy is to improve the quality of its services in response to changes in the social environment and the needs of parents, and not to pursue expanded scale by opening new facilities. The company projects that the number of children under two years old enrolling in its nurseries will decline due to the rise in people working from home amid the pandemic and the shrinking child population stemming from plummeting birth rates. The company also expects an increase in the provision for bonuses reflecting a change in bonus payment period following the introduction of a new personnel system.

At the same time as it announced full-year earnings results for FY03/21, the company announced a new medium-term management plan (covering the years FY03/22 through FY03/24). The new plan continues the policies of the previous plan, setting as priority goals improvement in three areas: profitability and efficiency; soundness; and growth potential. Specific numerical targets include revenue of JPY34.2bn and recurring profit of JPY3.0bn in FY03/23, and revenue of JPY35.2bn and recurring profit of JPY3.5bn in FY03/24. The company says it will use a rolling method to review the plan annually in order to respond swiftly and flexibly to changes in the business environment.

The key to the growth and profitability of the company is not just increasing the number of childcare facilities, but also securing the necessary number of childcare workers. Childcare workers are positioned as overhead that accounts for the bulk of personnel expenses, and at the same time the most important management resource directly responsible for bringing in subsidy revenue. For this reason, JP-Holdings continues to improve childcare workers’ pay and conditions. The company’s childcare worker salary has exceeded the national average since 2012, with the range of increase widening every year thereafter.

Strengths and weaknesses

Shared Research thinks the company’s strengths are its leading position in the child-rearing support business, its focus on nurseries, especially in high-demand locations, and high customer satisfaction owing to a group-wide, comprehensive service structure. In our view, weaknesses include a highly regulated industry based on fixed prices, a chronic shortage of childcare workers, and heavy dependence on bank loans and changes in lenders’ stance. (See Strengths and weaknesses section for details.)

Social welfare corporations and joint stock companies: Japan’s nursery system is based on the Child Welfare Law of 1947, and social welfare corporations serving as child welfare facilities have historically played a central role in the building and operation of nurseries. Social welfare corporations are legally classified as private entities.

The government allowed joint stock companies to move into the nursery business in 2000. The term private companies (or companies) used in this report refers to these joint stock companies, and does not include social welfare corporations.

Key financial data

Income statement		FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21	FY03/22
(JPYmn)		Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons. Est.
Revenue		11,868	13,789	15,747	17,868	20,553	22,799	26,779	29,299	31,719	33,500	33,900
	YoY	29.5%	16.2%	14.2%	13.5%	15.0%	10.9%	17.5%	9.4%	8.3%	-	1.2%
Gross profit		2,393	2,652	2,822	2,953	3,576	3,675	4,094	4,179	4,421	5,225
	YoY	25.9%	10.8%	6.4%	4.7%	21.1%	2.8%	11.4%	2.1%	5.8%	18.2%
	Gross profit margin	20.2%	19.2%	17.9%	16.5%	17.4%	16.1%	15.3%	14.3%	13.9%	15.6%
Operating profit		1,114	1,286	1,234	1,346	1,732	1,169	1,303	1,531	1,539	2,857	2,730
	YoY	32.7%	15.4%	-4.0%	9.1%	28.7%	-32.5%	11.5%	17.5%	0.5%	-	-4.4%
	Operating profit margin	9.4%	9.3%	7.8%	7.5%	8.4%	5.1%	4.9%	5.2%	4.9%	8.5%	8.1%
Recurring profit		1,151	1,325	1,460	1,551	1,782	1,351	1,582	1,921	2,004	2,948	2,760
	YoY	32.8%	15.1%	10.2%	6.2%	14.9%	-24.2%	17.1%	21.4%	4.3%	47.1%	-6.4%
	Recurring profit margin	9.7%	9.6%	9.3%	8.7%	8.7%	5.9%	5.9%	6.6%	6.3%	8.8%	8.1%
Net income		653	718	837	904	1,072	661	911	1,071	1,123	538	1,760
	YoY	30.7%	9.8%	16.7%	8.0%	18.5%	-38.3%	37.6%	17.7%	4.8%	-52.1%	227.4%
	Net margin	5.5%	5.2%	5.3%	5.1%	5.2%	2.9%	3.4%	3.7%	3.5%	1.6%	5.2%
Per-share data
Shares issued (year-end; '000)		16,691	16,691	83,457	83,457	87,849	87,849	87,849	87,849	87,849	87,849
EPS		7.8	1.8	10.5	12.0	14.3	7.9	10.7	12.4	12.8	6.2	20.1
EPS (fully diluted)		-	-	-	-	-	-	-	-	-	-	-
Dividend per share		3.0	3.2	3.6	4.0	5.0	2.5	3.5	3.7	3.9	3.9	4.5
Book value per share		47.6	53.3	60.3	67.1	75.2	80.9	90.6	102.2	110.2	114.4	-
Balance sheet (JPYmn)
	Cash and cash equivalents	2,768	3,188	1,808	3,191	3,778	4,018	4,456	6,816	6,206	11,021
Total current assets		3,880	4,356	3,718	5,631	6,616	7,061	7,886	10,458	9,788	15,139
Tangible fixed assets		3,654	3,821	5,626	8,087	8,771	9,775	10,102	9,898	8,620	6,701
Intangible assets		28	11	10	12	12	523	474	343	248	214
Investments and other assets		2,247	2,687	4,167	5,152	5,727	6,642	7,298	7,556	7,466	7,686
Total assets		9,808	10,876	13,521	18,882	21,127	24,002	25,759	28,255	26,123	29,741
	Short-term debt	996	1,319	1,737	2,913	2,935	3,250	3,985	3,666	1,639	3,307
Total current liabilities		3,352	3,444	4,337	6,165	5,848	6,539	8,209	7,880	5,921	7,830
	Long-term debt	2,192	2,643	3,714	6,592	8,457	9,855	8,934	10,454	9,480	10,306
Total fixed liabilities		2,478	2,980	4,150	7,110	8,999	10,609	9,794	11,424	10,566	11,903
Total liabilities		5,830	6,424	8,487	13,275	14,847	17,148	18,003	19,305	16,486	19,733
Total net assets		3,978	4,453	5,034	5,607	6,280	6,854	7,756	8,950	9,636	10,008
Total liabilities and net assets		9,808	10,876	13,521	18,882	21,127	24,002	25,759	28,255	26,123	29,741
Total interest-bearing debt		3,188	3,962	5,452	9,505	11,393	13,106	12,920	14,120	11,119	13,613
Cash flow statement (JPYmn)
Cash flows from operating activities		1,206	1,173	1,038	1,294	1,804	1,878	1,866	1,830	2,321	2,469
Cash flows from investing activities		-821	-1,268	-3,639	-3,959	-2,449	-3,305	-1,293	-940	419	191
Cash flows from financing activities		-219	514	1,221	3,749	1,553	1,646	-136	1,475	-3,349	2,155
Financial ratios
ROA (RP-based)		12.0%	12.8%	12.0%	9.6%	8.9%	6.0%	6.4%	7.1%	7.4%	10.6%
ROE		17.4%	17.0%	17.7%	17.0%	18.0%	10.1%	12.5%	12.8%	12.1%	5.5%
Equity ratio		40.5%	40.9%	37.2%	29.7%	29.7%	28.5%	30.1%	31.7%	36.9%	33.7%
Per employee data (JPYmn)
No. of employees (excl. temporary staff)		1,504	1,734	1,919	2,145	2,397	2,750	3,094	3,481	3,783	3,916
	No. of temporary staff (avg.)	1,042	1,166	1,386	1,640	1,813	2,020	2,213	2,361	2,523	2,404
Revenue per employee		7.89	7.95	8.21	8.33	8.57	8.29	8.66	8.42	8.38	8.55
Operating profit per employee		0.74	0.74	0.64	0.63	0.72	0.43	0.42	0.44	0.41	0.73
Financial ratios
Capital expenditures		826	969	2,478	3,492	2,027	2,521	1,812	1,881	854	838
Depreciation		306	332	378	487	605	639	669	704	724	729
Amortization of goodwill		15	15	4	2	0	15	30	30	30	30

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Revenue and operating profit per employee were calculated inclusive of the average number of temporary workers.
Note: Revenue and operating profit figures through FY03/20 are shown before the change in the presentation of subsidies.

Main operating data

Operational information		FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
(JPYmn, facilities, children)		Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Revenue		11,868	13,789	15,747	17,868	20,553	22,799	26,779	29,299	31,719	33,500
	YoY	29.5%	16.2%	14.2%	13.5%	15.0%	10.9%	17.5%	9.4%	8.3%	-
No. of facilities operated		148	163	182	200	224	251	272	289	297	301
	After-school clubs	39	40	43	46	55	63	71	72	72	77
	Children’s centers	7	8	8	8	10	12	12	11	11	11
	Private after-school clubs	0	0	0	0	0	4	5	5	4	1
	Overseas facilities	0	0	0	0	0	0	1	1	1	0
No. of children enrolled (nurseries)		7,000	8,100	9,400	10,500	11,200	12,400	14,058	14,350	15,323	15,581
No. of facilities operated (nurseries)		102	115	131	146	159	172	183	200	209	212
No. of children enrolled per nursery (average)		69	70	72	72	70	72	77	72	73	73

Source: Shared Research based on company data
Note: Revenue is FY-based; number of facilities at FY-end (March 31). Number of children attending facility rounded to the nearest hundred. Revenue per facility is average of values at previous and current FY-end.
Note: Revenue and operating profit through FY03/20 are prior to changes in presentation of subsidy income.

Recent updates

Launch of Child-rearing Products Matching Service in the membership platform business aimed at achieving SDGs and providing child-rearing support

2021-11-22

On November 22, 2021, JP-Holdings, Inc. announced the launch of Child-rearing Products Matching Service, as the first service to be offered via its membership platform aimed at achieving SDGs (effective utilization of resources and protection of the environment) and providing child-rearing support.

On the same day, the company announced its plan to launch the Child-rearing Products Matching Service as the first service offering in its new membership platform business.

While expanding its existing child-rearing support business, the company has focused on developing new businesses that can create new value in line with its growth strategy. As part of this effort, the company has decided to launch the membership platform business, in which the children and their parents using the company group's child-rearing support facilities (nurseries, after-school clubs, and children's centers) will become the platform members. The Child-rearing Products Matching Service, the first service to be offered in the new business, will facilitate the matching of sellers and buyers (both platform members) of used baby goods, children's clothes, and other child-rearing-related products. Further, the company will collect used children's clothes and other child-rearing-related goods from parents at nurseries operated by the company group, and provide these as recycled products.

In addition to the abovementioned recycled goods matching, JP-Holdings expects to provide a wide range of products and services, including those in high demand among families with young children (infants, toddlers, and school-age children) and essential child-rearing information. The company expects to launch the Child-rearing Products Matching Service in April 2022, and gradually expand the service features with the aim of taking it overseas and further enhancing it in the future. The company said the impact of this development on its consolidated FY03/22 earnings was negligible.

Upward revision to its full-year earnings forecast, merger of its consolidated subsidiaries

2021-11-12

On November 11, 2021, JP-Holdings, Inc. announced an upward revision to its full-year earnings forecast.

On the same, the company announced a merger of its consolidated subsidiaries.

At the Board of Directors meeting held on the same day, the company resolved to merge its consolidated subsidiaries, Japan Nursery Service Inc. and Amenity Life Inc., effective April 1, 2022. The transaction will be an absorption-type merger with Japan Nursery Service being the surviving company. Amenity Life will be dissolved.

Japan Nursery Service operates 297 childcare facilities including nurseries, after-school clubs, and children's centers across Japan. Amenity Life is also a childcare service provider, operating five nurseries in Yokohama (Kanagawa Prefecture). With this merger, JP-Holdings plans to achieve better efficiency in business resource management, and improve the quality of its childcare services so that its facilities can become the location of choice among parents and guardians. It intends to strengthen and expand various childcare support programs to gain competitive advantage and scale up the business.

Since the merger is between two subsidiaries of the company, the transaction's impact on consolidated earnings is marginal.

Trends and outlook

Quarterly trends and results

Cumulative		FY03/20				FY03/21				FY03/22		FY03/22
(JPYmn)		Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	% of Est.	FY Est.
Revenue		7,741	15,517	23,444	31,719	8,005	16,262	24,228	33,500	8,371	16,815	49.6%	33,900
	YoY	9.0%	8.7%	8.6%	8.3%	-	-	-	-	4.6%	3.4%		1.2%
Gross profit		739	1,849	3,073	4,421	1,041	2,438	3,579	5,225	1,012	2,666
	YoY	20.3%	18.7%	12.9%	5.8%	40.8%	31.8%	16.5%	18.2%	-2.8%	9.4%
	Gross profit margin	9.6%	11.9%	13.1%	13.9%	13.0%	15.0%	14.8%	15.6%	12.1%	15.9%
SG&A expenses		687	1,353	2,108	2,882	778	1,499	2,216	2,956	834	1,570
	YoY	-8.8%	-2.6%	2.6%	8.9%	13.3%	10.8%	5.2%	2.6%	7.2%	4.8%
	SG&A ratio	8.9%	8.7%	9.0%	9.1%	9.7%	9.2%	9.1%	8.8%	10.0%	9.3%
Operating profit		52	496	965	1,539	263	939	1,363	2,857	178	1,096	40.1%	2,730
	YoY	-	194.9%	44.5%	0.5%	-	-	-	-	-32.2%	16.7%		-4.4%
	Operating profit margin	0.7%	3.2%	4.1%	4.9%	3.3%	5.8%	5.6%	8.5%	2.1%	6.5%		8.1%
Recurring profit		188	744	1,339	2,004	267	955	1,832	2,948	187	1,112	40.3%	2,760
	YoY	-	86.4%	38.4%	4.3%	42.5%	28.4%	36.8%	47.1%	-30.1%	16.3%		-6.4%
	Recurring profit margin	2.4%	4.8%	5.7%	6.3%	3.3%	5.9%	7.6%	8.8%	2.2%	6.6%		8.1%
Net income		139	516	850	1,123	177	551	1,144	538	106	709	40.3%	1,760
	YoY	-	118.9%	46.3%	4.8%	27.1%	6.8%	34.6%	-52.1%	-40.4%	28.6%		227.4%
	Net margin	1.8%	3.3%	3.6%	3.5%	2.2%	3.4%	4.7%	1.6%	1.3%	4.2%		5.2%
Quarterly		FY03/20				FY03/21				FY03/22
(JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
Revenue		7,741	7,776	7,927	8,275	8,005	8,258	7,966	9,272	8,371	8,444
	YoY	9.0%	8.3%	8.4%	7.3%	-	-	-	-	4.6%	2.3%
Gross profit		739	1,110	1,223	1,348	1,041	1,396	1,141	1,646	1,012	1,654
	YoY	20.3%	17.7%	5.0%	-7.4%	40.8%	25.8%	-6.7%	22.1%	-2.8%	18.4%
	Gross profit margin	9.6%	14.3%	15.4%	16.3%	13.0%	16.9%	14.3%	17.7%	12.1%	19.6%
SG&A expenses		687	666	755	774	778	720	718	740	834	736
	YoY	-8.8%	4.7%	13.5%	30.6%	13.3%	8.1%	-4.9%	-4.4%	7.2%	2.2%
	SG&A ratio	8.9%	8.6%	9.5%	9.4%	9.7%	8.7%	9.0%	8.0%	10.0%	8.7%
Operating profit		52	444	469	574	263	676	424	1,494	178	917
	YoY	-	44.8%	-6.2%	-33.5%	-	-	-	-	-32.2%	35.7%
	Operating profit margin	0.7%	5.7%	5.9%	6.9%	3.3%	8.2%	5.3%	16.1%	2.1%	10.9%
Recurring profit		188	557	595	665	267	688	876	1,116	187	925
	YoY	-	36.4%	4.6%	-30.3%	42.5%	23.6%	47.4%	67.9%	-30.1%	34.4%
	Recurring profit margin	2.4%	7.2%	7.5%	8.0%	3.3%	8.3%	11.0%	12.0%	2.2%	11.0%
Net income		139	377	334	273	177	374	592	-606	106	603
	YoY	-	49.3%	-3.3%	-44.3%	27.1%	-0.7%	77.6%	-	-40.4%	61.3%
	Net margin	1.8%	4.8%	4.2%	3.3%	2.2%	4.5%	7.4%	-	1.3%	7.1%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Revenue and operating profit through FY03/20 are prior to changes in presentation of subsidy income.

Quarterly trends in main operating data

Operational information		FY03/20				FY03/21				FY03/22
(JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
Revenue		7,741	7,776	7,927	8,275	8,005	8,258	7,966	9,272	8,371	8,444
	YoY	9.0%	8.3%	8.4%	7.3%	-	-	-	-	4.6%	2.3%
No. of facilities operated		297	297	297	297	303	303	302	301	303	303
	After-school clubs	72	72	72	72	77	77	77	77	81	81
	Children’s centers	11	11	11	11	11	11	11	11	11	11
	Private after-school clubs	4	4	4	4	1	1	1	1	0	0
	Overseas facilities	1	1	1	1	1	1	0	0	0	0
Revenue per facility operated		26.4	26.2	26.7	27.9	26.7	27.3	26.3	30.8	27.7	28
No. of facilities operated (nurseries)		209	209	209	209	213	213	213	212	211	211

Source: Shared Research based on company data
Note: Revenue figures are quarterly; number of facilities is at each quarter-end.
Note: Revenue per facility: Number of facilities is average of values at previous and current quarter-end.
Note: Revenue and operating profit figures through FY03/20 are shown before the change in the presentation of subsidies.

1H FY03/22 results (out November 11, 2021)

1H FY03/22 results (April 2021–September 2021)

Revenue: JPY16.8bn (+3.4% YoY)
Operating profit: JPY1.1bn (+16.7% YoY)
Recurring profit: JPY1.1bn (+16.3% YoY)
Net income*: JPY709mn (+28.6% YoY)
*Net income attributable to owners of the parent

Business environment

During Q2, Japan remained significantly affected by the spread of COVID-19, with the state of emergency declared by the Japanese government expanding to 21 prefectures and its period extended to the end of September. The environment surrounding the child-rearing support industry continues to undergo rapid changes. The child population is shrinking at an even faster pace in line with plummeting birth rates; the number of children waitlisted for nursery enrollment has declined thanks to the emergence of more childcare facilities, and because parents and guardians have opted not to send their children to nurseries because of COVID-19. Shortage of childcare workers persists, the rate of female employment is rising, and working styles and lifestyles have shifted under the pandemic.

On December 21, 2020, the Japanese government issued a new child-rearing support plan aimed at providing universal nursery capacity and eliminating waiting lists. To meet the needs stemming from the rise in female employment rate, it plans to add capacity for roughly 140,000 children over the four years from FY2021 to FY2024. In addition, in connection with the establishment of the Children's Agency, a proposal has been made to raise the share of government spending on childcare initiatives to the same level as that of Western countries in terms of GDP. Thus, demand for nurseries remains strong.

As part of efforts to prevent the spread of COVID-19, JP-Holdings group prioritized securing the safety of children, parents, business partners, and employees in cooperation with local governments. Each facility established its own emergency response protocols and implemented thorough safety measures. At the same time, the head office in Nagoya and the Tokyo office promptly introduced staggered work hours and telework.

While continuing its policies from the previous year, the company works to develop a strong management base through effective allocation and investment of management resources based on the new medium-term management plan announced on May 13, 2021, which sets as priority goals improvement in three areas: profitability and efficiency; soundness; and growth potential.

Revenue drivers

To prevent further spread of COVID-19, a state of emergency was declared from April 25 to September 30, 2021, and the number of children enrolled at the company's facilities fell at the start of the fiscal year, as a result. However, the enrollment improved as the year progressed, thanks to the company's initiatives to make its childcare facilities the location of choice by promoting virtual facility visits, offering online gymnastics, eurhythmics, and English programs, and launching an early educational program. 1H revenue increased YoY in tandem with this rise in enrollment, along with the opening of new facilities.

Drivers of operating profit increase

The company posted higher provision for bonuses due to a change in its bonus payment period associated with the introduction of the new personnel system; expenses associated with systems installation also increased. Still, operating profit grew YoY owing to revenue growth from new facility openings and increase in enrollment, as well as cost control measures including staff realignment at each facility to improve operational efficiency, and reexamination of hiring activities and procurement system for various supplies.

Drivers of increase in recurring profit and net income

The YoY increase in recurring profit and net income attributable to owners of the parent was driven by higher operating profit due to the establishment of an efficient operating structure mentioned above.

Change in presentation of subsidies

Previously, the company accounted for subsidies received from local government for rented company accommodation for childcare workers as subsidy income in non-operating income. From Q1 FY03/22, this subsidy is now booked as revenue. This is because the importance of subsidy income to the childcare business has increased and the company has therefore decided it is more appropriate to record this subsidy in the same category as other subsidies based on the Accounting Standard for Revenue Recognition. As a result of this change, the results for Q2 FY03/21 have been restated.

Company forecast for FY03/22

Income statement		FY03/19			FY03/20			FY03/21			FY03/22
(JPYmn)		1H Act.	2H Act.	FY Act.	1H Act.	2H Act.	FY Act.	1H Act.	2H Act.	FY Act.	FY Est.
Revenue		14,278	15,021	29,299	15,517	16,202	31,719	15,956	16,956	32,912	33,700
	YoY	12.0%	7.1%	9.4%	8.7%	7.9%	8.3%	2.8%	4.7%	3.8%	0.6％
Operating profit		168	1,363	1,531	496	1,043	1,539	632	1,636	2,268	2,300
	YoY	-62.6%	59.7%	17.5%	194.9%	-23.5%	0.5%	27.5%	56.9%	47.4%	-19.5%
	Operating profit margin	1.2%	9.1%	5.2%	3.2%	6.4%	4.9%	4.0%	9.6%	6.9%	6.8%
Recurring profit		399	1,521	1,921	744	1,259	2,004	955	1,992	2,948	2,300
	YoY	-32.7%	53.8%	21.4%	86.4%	-17.2%	4.3%	28.4%	58.2%	47.1%	-22.0%
	Recurring profit margin	2.8%	10.1%	6.6%	4.8%	7.8%	6.3%	6.0%	11.7%	9.0%	6.8%
Net income attributable to owners of the parent		236	835	1,071	516	607	1,123	551	-14	538	1,450
	YoY	-32.1%	48.3%	17.7%	118.9%	-27.4%	4.8%	6.8%	-	-52.1%	169.7%
	Net margin	1.7%	5.6%	3.7%	3.3%	3.7%	3.5%	3.5%	-	1.6%	4.3%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
** Revenue and operating profit figures through FY03/20 are shown before the change in the presentation of subsidies.

Company forecast for FY03/22 (April 2021–March 2022)

Revenue: JPY33.9bn (+1.2% YoY, previously JPY33.7bn)
Operating profit: JPY2.7bn (-4.4% YoY, previously JPY2.3bn)
Recurring profit: JPY2.8bn (-6.4% YoY, previously JPY2.3bn)
Net income*: JPY1.8bn (+227.4% YoY, previously JPY1.5bn)
EPS: JPY20.12 (versus JPY6.15 in FY03/21, previously JPY16.58)
*Net income attributable to owners of parent

Reasons for the earnings forecast revision

Assumptions used in earnings forecasts

With no sign of the COVID-19 pandemic being brought under control and ongoing uncertainty over social conditions moving forward, the company has adopted a cautious outlook in its earnings forecasts. The company projects that the number of children under two years old enrolling in its nurseries will decline due to the rise in people working from home amid the pandemic and the shrinking child population stemming from plummeting birth rates. While not providing specific figures, the company also expects an increase in the provision for bonuses reflecting a change in bonus payment period following the introduction of a new personnel system.

The operating environment for childcare support businesses is rapidly changing amid an increase in dual-income households, the problem of nursery waiting lists in some areas, the ongoing shortage of qualified childcare workers, and the rapidly shrinking child population in line with plummeting birth rates. Given these factors, its policy is not to pursue expanded scale by opening new facilities, but to improve service quality to meet changes in social conditions and the needs of parents. In line with this policy, the company launched Mojizaku Land as an early educational program in June 2021 in cooperation with Gakken Holdings (TSE1: 9470), with which it formed an operational tie up in January of the same year. With the introduction of the new program, the company hopes to improve the quality of its childcare as well as strengthen its competitiveness.

Management strategy under new management team

Under the new management team led by the new president, Tohru Sakai, who assumed the role in June 2020, the company announced a management strategy centered on three main areas of profitability and efficiency, soundness, and growth. This has been used as a guideline for business operations from 2H FY03/21.

For profitability and efficiency, the company has already reviewed most of its existing facilities in 1H and plans to improve value-add for its business model. In 2H, OPM for the three-month period of Q3 (October—December 2020) was 8.8%, up 2.9pp YoY and 2.2pp QoQ. Shared Research believes this was a result of the company’s efforts to improve efficiency of facility operations by designating priority facilities, raise profitability by managing and operating facilities across the country in regional blocks, properly allocate personnel such as on-site childcare workers, and planning and executing new facility openings in line with its investment criteria. With regard to soundness, the company has set forth a number of measures that it will continue to carry out, including securing and developing personnel centered on childcare workers, enhancing personnel retention systems to curb turnover on an ongoing basis, improving the work environment through the introduction of IT, strengthening compliance through the transition to a company with an audit and supervisory committee, and enhancing business continuity plans and safety measures. In terms of growth, the company is working on digitally-enabled new businesses such as new childcare services that reduces workload for family members, online home-based childcare services, and digitization of in-house training.

The company intends to pursue this strategy in 2H FY03/21 and beyond while closely observing changes in the business environment. In 2H FY03/21, it plans to continue carrying out COVID-19 prevention measures in cooperation with local governments to ensure the safety of its children, their parents, business partners, and employees, and to reform its internal systems, including improving the pay and conditions for childcare workers to reduce turnover rates. As for new businesses, the company plans to start building out businesses in earnest in FY03/22.

In addition, the company announced a business alliance with Gakken Holdings (TSE1: 9470) on January 14, 2021. Separately, Gakken Holdings, Inc. became the company’s new principal shareholder as a result of acquiring shares from the company’s previous principal shareholder. Shared Research believes that details regarding developments through the alliance will be included in the company’s medium-term management plan for FY03/22 and beyond. Currently, the company plans to create new businesses and expand services by linking the Gakken Group’s early childhood learning programs and knowhow in the field with its own expertise in childcare support and childcare support facilities.

Difference between initial company forecasts and results

Difference between consolidated results and initial company forecasts

Results vs. Initial Est.		FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
(JPYmn)		Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
	Revenue (Initial Est.)	11,900	14,000	16,000	18,000	20,411	22,340	26,125	30,001	32,000	33,005
	Revenue (Results)	11,868	13,789	15,747	17,868	20,553	22,799	26,779	29,299	31,719	32,912
Results vs. Initial Est.		-0.3%	-1.5%	-1.6%	-0.7%	0.7%	2.1%	2.5%	-2.3%	-0.9%	-0.3%
	Operating profit (Initial Est.)	1,150	1,375	1,489	1,778	1,740	1,564	1,157	1,847	1,811	1,577
	Operating profit (Results)	1,114	1,286	1,234	1,346	1,732	1,169	1,303	1,531	1,539	2,268
Results vs. Initial Est.		-3.1%	-6.5%	-17.1%	-24.3%	-0.4%	-25.3%	12.6%	-17.1%	-15.0%	43.8%
	Recurring profit (Initial Est.)	1,190	1,400	1,600	1,800	1,740	1,651	1,400	2,196	2,300	2,153
	Recurring profit (Results)	1,151	1,325	1,460	1,551	1,782	1,351	1,582	1,921	2,004	2,948
Results vs. Initial Est.		-3.3%	-5.3%	-8.7%	-13.9%	2.4%	-18.2%	13.0%	-12.5%	-12.9%	36.9%
	Net income (Initial Est.)	682	834	961	1,082	1,270	1,057	777	980	1,212	1,163
	Net income (Results)	653	718	837	904	1,072	661	911	1,071	1,123	538
Results vs. Initial Est.		-4.2%	-13.9%	-12.9%	-16.4%	-15.6%	-37.4%	17.2%	9.3%	-7.4%	-53.8%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Comparing the company’s initial forecasts and results up to FY03/17, we can see that revenue exceeded forecasts but earnings came up short. We think this is due to the challenges and lack of continuity of JP-Holdings’ earnings structure becoming apparent. In FY03/16 and FY03/17, the company focused on improving pay and conditions for childcare workers, streamlining the working environment, and developing new businesses, having concluded that improving employee satisfaction (mainly of childcare workers) was essential to ensure sustainable growth in the longer term, even if it meant lower profits in the short term. The company also reviewed the value in use of nursery assets based on real capacity utilization rates and reduced the book value to recoverable amounts. As a result, the company booked an extraordinary loss in impairment of 34 nursery facilities (impairment loss of slightly under JPY500mn) over three fiscal years from FY03/15 to FY03/17. Profits fell short of target due to a combination of these factors.

In FY03/18, results exceeded initial company forecast for the first time in eight years. FY03/19 results were below the initial forecasts (announced at the time of the Q1 results) mainly due to the upfront spending aimed at securing childcare workers, but operating profit continued to rise and finished closely in line with plan. FY03/20 results also finished short of the company’s initial forecast, though revenue and earnings were both up YoY. In particular, management pointed to an increase in personnel expenses on improved compensation, higher repair costs in line with efforts to improve the environment in the company’s facilities, a decline in subsidies tied to rent additions, as well as the fact that it took time to develop various content for new business and to ascertain and verify the market through test marketing.

Amid a decline in the number of students accepted and a drop in product revenue due to the effects stemming from the COVID-19 pandemic, FY03/21 revenue came in at JPY32.9bn (+3.8% YoY), which was 0.3% lower than the company initially forecast. On the other hand, with gross profit improving on the optimization staff allocations and the decline in the number of children accepted as well as the closure of facilities due to the COVID-19 pandemic lowering the cost of goods purchased, operating profit came in at JPY2.3bn (+47.4% YoY), exceeding the initial target by 43.8%, and recurring profit reached JPY2.9bn (+47.1% YoY), exceeding the initial target by 36.9%. Net income of JPY538mn (-52.1% YoY) was 53.8% lower than initially forecast, largely due to the booking of impairment losses in line with the closing of facilities where profitability deteriorated due to changes in the operating environment and the moving of land and buildings off the balance sheet to avoid the risk of directly holding these assets in advance of a future sale.

Medium-term outlook

Summary of the previous medium-term management plan (FY03/19–FY03/21)

The previous medium-term management plan was formulated on the three management reform policies of “improvement in profitability and efficiency,” “improvement in soundness,” and “improving growth potential.” The company has been operating under a new structure since June 2020. As a result of the COVID-19 pandemic, revenue of JPY32.9bn came in slightly below the revised JPY33.0bn target, but recurring profit of JPY2.9bn exceeded not only the revised target of JPY2.2bn, but also the revised target of JPY2.7bn. Average annual growth over the three years was 7.1% for revenue and 24.3% for recurring profit. Moreover, RPM improved from 5.9% in FY03/18 to 9.0% in FY03/19.

New medium-term management plan (announced May 13, 2021)

New medium-term management plan targets

At the same time as it announced full-year earnings results for FY03/21, the company announced a new medium-term management plan (covering the years FY03/22 through FY03/24). The new plan continues the policies of the previous plan, setting as priority goals improvement in three areas: profitability and efficiency; soundness; and growth potential. By achieving these goals, the company expects to bolster the profitability of its existing businesses, improve the quality of the childcare support it offers, and accelerate the development of new businesses that create new value amid changes in the social and operating environments, with the company’s facilities becoming the selection of choice by consumers.

Specific numerical targets are as follows.

FY03/21 (actual) Revenue of JPY32.9bn (+3.8% YoY), recurring profit of JPY2.9bn (+47.1% YoY)
FY03/22 (forecast) Revenue of JPY33.2bn (+0.9% YoY), recurring profit of JPY2.3bn (-22.0% YoY)
FY03/23 (target) Revenue of JPY33.7bn (+1.5% YoY), recurring profit of JPY3.0bn (+29.1% YoY)
FY03/24 (target) Revenue of JPY34.7bn (+3.0% YoY), recurring profit of JPY3.5bn (+17.8% YoY)

The company says it will follow a policy using a rolling method to review the plan annually in order to respond swiftly and flexibly to changes in the business environment.

Specific measures

The company intends to implement the following measures to achieve its three key goals.

Improvement in profitability and efficiency

With the goal of reviewing its existing business operations and systems in order to evolve its business model and improve the value it offers as well as its profitability, the company will enact measures on an incremental basis in FY03/22, FY02/23 and beyond.

Measures for FY03/22

The company aims to improve profitability at existing facilities by designating some as requiring priority action. In terms of school clubs and children’s centers, the company intends to take on more projects under a dominant strategy while expanding its attractive programs and revising staffing allocations. In terms of developing new facilities, the company is taking a strategic approach involving the narrowing down of priority areas based on an analysis of expected trends moving forward, including those related to demographics and the market environment. For existing facilities, the company is focusing on new business models for the use of idle space as a result of the decline in pupil count, including for early childhood learning programs and in alliances with other companies. Finally, in terms of business operations in each segment, the company will focus on systemization and the adoption of paperless operations.

Measures for FY03/23 and FY03/24

In line with the goal of increasing the utilization rate in childcare and taking on more new school club projects, the company will focus on expanding acceptance at nursery schools by becoming the location of choice through the enrichment of learning programs and differentiation from its competitors. The company aims to double the number of school clubs and children’s center facilities over the three years through FY03/24 by cooperating with nursery schools, children’s centers, and school clubs, and taking on more new projects. In promoting new development plans in accordance with its established investment standards, the company will enact comprehensive measures for the rearing of children in cooperation with nursery schools, school clubs, and children’s centers in relevant areas, including as part of dominant strategies. In addition, vacant space as a result of the decrease in the number of children will be utilized to develop childcare-related businesses in cooperation with existing facilities (e.g., centers for early childhood learning and nursery visitation support services). Finally, the company will promote the sharing of operations by outsourcing some tasks while promoting paperless operations through the installation of mission-critical systems.

Measures to improve soundness in FY03/22

The company aims to realize an agile organizational structure through closer contact with on-site workers. To ensure a smaller head office, the company will adopt ITC functions at each facility while promoting enhanced sophistication and efficiency in operations through systematization. In order to secure adequate human resources in a changing social environment, the company will use online, referral, and school visit recruitment methods. The company will also work to assign personnel based on aptitude and develop human resources through job rotations, training, and study sessions, while at the same time promoting the sophistication and flattening of operations. In addition, a new personnel system will be introduced to evaluate human resource management for both on-site and headquarters positions, and to set competency and evaluation standards by job category. With the goal of reducing the turnover rate to 10% or lower, the company will bolster the tutoring system for new employees and ensure clear communication with the same through online interviews. Finally, the company aims to develop a strong group management base and accordingly will work to secure financial soundness and improve asset efficiency, bolster corporate governance, and reallocate human resources within the group to better promote the utilization of group management resources. It will also enhance corporate communication by promoting strategic PR/IR and providing information on brand development activities.

Measures to improve growth potential in FY03/22

The company aims to bolster competitiveness by differentiating itself from other companies. It expects to do this by improving the quality of its childcare as it expands early childhood learning programs at nursery schools through cooperation with Gakken. In terms of advancing DX, the company will integrate online and offline programs for early childhood learning, art, gymnastics, English, and eurhythmics programs that are offered at ASK-brand preschools and introduce them to nursery schools and guardians. The company will also consider external sales, including the online distribution of training content for childcare workers that was developed for group training purposes. Management also aims to enhance existing businesses and advance M&A to cement alliances, while simultaneously expanding into new business domains and promoting business alliances in line with the advancement of digital transformation efforts.

In addition to its existing gymnastics, eurhythmics, and English programs, the company launched the early childhood learning program "Mojikazu Land" in June 2021 following the establishment of the aforementioned business tie-up with Gakken Holdings. The company began introducing the system in 62 nursery schools in FY03/22, mainly in the ASK brand it operates throughout Japan. There are fewer cram schools and other learning facilities for young children in rural areas than in the Tokyo metropolitan area, and the company believes that this strategy will not only improve the quality of its childcare but also strengthen its competitiveness and increase the number of children that can be accepted by the company.

The company has identified the following areas for collaboration with Gakken: education and learning support for preschool children, development and deployment of services and content in the field of early childhood education and development, development and training of childcare personnel, improvement of childcare quality, expansion of services for parents and families, mutual utilization of assets and infrastructure, and collaboration in research and development. The company aims to create high-growth and profitable businesses such as membership platforms, early childhood education programs, and on-site training programs through the collaboration, as it expects to receive new subsidies by expanding services through the alliance with Gakken Holdings.

In order to achieve the goals of the mid-term plan, the company plans to accelerate the opening of licensed nursery schools from FY03/22, largely by carefully selecting three to five schools per year and acquiring new contracts for school clubs and children's centers in areas located nearby to existing nursery schools. The company hopes to provide a safe and secure learning environment for children throughout their infancy, early childhood, and school-age years by establishing children's clubs and centers in the same area as existing nursery schools.

In the long-term management vision announced on August 8, 2018, the company targeted consolidated sales in FY03/25 of JPY100.0bn. Given sharp changes in the external environment, including a rise in the number of people working from home amid the pandemic and the shrinking child population stemming from plummeting birth rates, the company maintained the numerical target, but eliminated the time frame in which it expects to achieve it.

Business

Business description

JP-Holdings specializes in the child-rearing support business primarily as an operator of licensed nurseries. At the group level, all child-rearing support services are under a single segment. As core services in the Child-rearing support business, the company provides operations management services for public and privately owned childcare facilities.

Scope of JP-Holdings’ business

Source: Shared Research based on company materials

Business operation under the new Comprehensive Support System for Children and Child-rearing

Governing laws and jurisdiction

The child-rearing support business is governed by three laws, including the Act on Child Education and Childcare Support. Administration, planning, and execution associated with these laws are overseen by the Cabinet Office of the Government of Japan, which has provided a cross-ministerial and integrated benefit framework. The Cabinet Office has established a Children and Child-rearing Headquarters, which works with and coordinates the efforts of the Ministry of Health, Labour and Welfare (MHLW), operating under the Child Welfare Act structure; the Ministry of Education, Culture, Sports, Science and Technology (MEXT), operating under the School Education Act structure; and local governments, regional public organizations, and facilities.

Centralized structure under the Cabinet Office (image)

Source: Shared Research based on Cabinet Office, MEXT, MHLW

Types of childcare facilities

There are several different types of childcare facilities, differing not only in terms of the operational details of the facilities but also the regulations with which they must comply and the governing agencies. The areas where JP-Holdings operates include licensed nursery schools under the Jurisdiction of the Ministry of Health, Labour and Welfare (MHLW), unlicensed nursery schools, after-school clubs, children’s centers, and private after-school clubs. The company does not operate kindergartens, which are under the jurisdiction of the Ministry of Education, Culture, Sports, Science and Technology (MEXT) or combination kindergarten-daycare facilities, which are under the joint jurisdiction of MEXT and MHLW.

Licensed nursery business

Licensed nurseries are the mainstay of the company’s child-rearing support business. These facilities fall under the jurisdiction of MHLW and are governed by the Child Welfare Act. The company’s facilities are for children with Class 2 and Class 3 certifications*. Since private companies are not allowed to run kindergartens and Early Childhood Education and Care (ECEC) centers, these facilities fall outside the company’s scope of operations. Kindergartens, supervised by MEXT and governed by the School Education Act, are for children with Class 1 certification*. ECEC centers, available to children with Class 1, 2, and 3 certifications, are governed by the Child Welfare Act and the Law for Centers for Early Childhood Education and Care, and are administered by both MHLW and MEXT.

Users of licensed nurseries sign a contract with the local government and pay a usage fee in proportion to their income, while the local government signs a contract with an operator such as JP-Holdings. The bulk of the company’s revenue from running these facilities comes from government subsidies, but some revenues come directly from users as fees to cover expenses. In the case of public licensed facilities, the company receives subsidies from local governments in the form of designated management fees, whereas in the case of private licensed facilities, operators receive an official unit price-based national subsidy plus an additional subsidy from the local government.

Non-licensed nursery business

The company also operates non-licensed nurseries that are independently certified and subsidized by local governments such as the Tokyo Metropolitan Government. The revenue structure is fees from users (childcare fees + fees covering expenses) + subsidies (Tokyo Metropolitan Government subsidy + supplement from some municipalities). The company does not operate facilities that do not receive local government subsidies such as so-called baby hotels, uncertified daycare centers, and temporary daycare centers at event venues.

After-school clubs and children’s center business

JP-Holdings also manages after-school clubs that are supported by government initiatives to provide after-school care and promote after-school classes for elementary school children. In addition, the company operates children’s centers for all youths under age 18 (under MHLW jurisdiction, and governed by the Child Welfare Act). Subsidies, namely designated management fees and outsourcing fees, account for most of the revenue from these facilities.

Difference between kindergartens, licensed nurseries, and ECEC centers

	Kindergarten	Licensed nursery	Early Childhood Education and Care (ECEC) center (unified type)
Underlying law and regulations	Act on Child Education and Childcare Support (defines the framework of cross-ministerial and unified payments in the Cabinet Office)
Underlying law and regulations	Section 3 of the School Education Act (under the jurisdiction of the Ministry of Education, Culture, Sports, Science and Technology)	Article 7 (1) of the Child Welfare Act (under the jurisdiction of the Ministry of Health, Labour and Welfare)	Article 7 (1) of the Child Welfare Act Article 2 (7) of the Licensed Children’s School Law (under the jurisdiction of the Ministry of Education, Culture, Sports, Science and Technology, and the Ministry of Health, Labour and Welfare)
Type of facility	School	Child welfare facility	School and child welfare facility
Target children *	Class 1 certification	Class 2 and 3 certifications	Class 1, 2 and 3 certifications
Basis of education and childcare content	Kindergarten Education Guidelines	Nursery School Childcare Guidelines	Licensed Children’s School Education and Childcare Guidelines
Daily education and childcare time	Four hours as standard	Eight hours as standard	Hours depending on the children (Eight hours for children requiring childcare and four hours for children requiring education) as standard
No. of education and childcare days in a year	39 weeks or more	No stipulations	Depending on the regional conditions

Source: Shared Research based on company data
Note: Class 1 certification: Children of 3 years old or older requiring education; Class 2 certification: Children of 3 years old or older requiring childcare; Class 3 certification: Children under 3 years old requiring childcare

Difference between after-school clubs and children’s centers

	After-school Clubs (broadly defined)		Children’s centers
	After-school Children’s Health Promotion	After-school Children’s Classroom Promotion	Children’s centers
Underlying laws and regulations	Article 6-3 (2) of the Child Welfare Act (under the jurisdiction of the Ministry of Health, Labour and Welfare)	Implementation of After-school Children’s Plan Promotion Business (under the jurisdiction the Ministry of Education, Culture, Sports, Science and Technology)	Article 40 of the Child Welfare Act (under the jurisdiction of the Ministry of Health, Labour and Welfare)
Nature of the facility	The aim is to provide a place for appropriate fun and lifestyles for children enrolled in elementary school whose parents are not at home after school due to work and foster them healthily by using facility such as child welfare facilities after school.	This aims to establish safe and secure activity bases (locations) for children using spare classrooms in schools after hours or on the weekends. These provide opportunities for learning and a variety of experiences and exchange activities for child on a regular and continuous basis with the participation of local residents.	This aims to offer healthy fun to children in the community, promote their health and nurture emotions. (one of children’s recreational facilities)
Target children	Grades 1 to 3 in elementary school (However, it is also possible to target children in special support elementary schools and elementary school children in grades 4 and above)	All children in the community (regardless of whether infants, children or students, and regardless of whether their parents work or not)	All children under the age of 18
Basis of education and childcare content	After-school Children’s Health Promotion Business Action Guidelines After-school Children’s Club Guidelines	After-school Children’s Class Promotion Business Action Guidelines	Children’s Center Guidelines
Daily education and childcare time	Three hours or more on average (However, this is eight hours or more as a general rule of Saturdays, school holidays and long-term holiday periods)	Four hours or less on average (however, this is eight hours or less as a general rule on Saturdays, school holidays and long-term holiday periods)	Set in accordance with the situation in the community (e.g., the age of the target children and convenience of parents)
Number of education and childcare days per year	250 days or more as a general rule (However, this can be 200 days or more depending on the form of the user’s needs)	Less than 250 days as a general rule

Source: Shared Research based on company materials

Business model

Facility operations: subsidiary-supported business

The majority of the company’s revenue comes from operating childcare facilities, with much of that coming from the national and local governments in the form of subsidy payments. Its revenue model here is basically the number of children enrolled times the subsidy per child. In the case of licensed nursery school operators, the subsidy payments are guaranteed under Japanese law.

Operation of JP-Holdings’ public and private facilities

Source: Shared Research based on company materials

The revenue of licensed nursery operators is likewise guaranteed by law. Subsidy calculations are based on the official unit price and the designated management fee determined according to a unit price table (prices vary according to the age of the child), and have no relation to the fees that facility users pay to the local governments.

Official unit price: The majority of JP-Holdings’ nurseries are private licensed nurseries, which are built and operated by the private sector. These nurseries earn revenue consisting of a subsidy that is determined by official government unit prices, and local government supplement. The government estimates the running cost for facility operation based on children’s certification categories (Class 1, 2, and 3 according to child’s age and requirements), required amount of childcare, and location of the facility, etc., and produces a detailed unit price table in line with government standards. Required amount of childcare refers to the quantity of care per month over a period set by the Cabinet Office for which the government will pay an allowance under the facility-type benefit plan. The running cost estimate takes into consideration personnel expenses, business expenses, and management expenses.

The capital spending required to open new facilities such as nurseries is also subsidized. The subsidy rate varies depending on local governments, but most are relatively generous. For example, 15/16, 7/8, or 3/4 of total costs are subsidized, which means operations are heavily subsidized. The way subsides are accounted for differs for each nursery operator. In the case of JP-Holdings, the figures that appear on its financial statements (tangible fixed assets, depreciation, and other) have been reduced to the actual burden borne by JP-Holdings (i.e., reported net of subsidies). Under this system nursery operators are able to benefit from a greater return on investment with the addition of capex-related subsidies to the leverage effect of bank loans. Nursery operators are viewed as attractive by lenders such as banks because they are seen as having a guaranteed level of revenue and facilities with a relatively low risk of default.

Growth drivers: Increases in number of facilities operated, hiring of additional childcare workers

Trends in the number of facilities operated by JP-Holdings

JP-Holdings operated 301 facilities as of the end of March 2021, up four facilities YoY. The company has been increasing the number of facilities at a steady rate of around 20 a year since FY03/07. It had 224 facilities at the end of FY03/16 (+24 YoY), 251 (+27) at the end of FY03/17, and 272 at the end of FY03/18 (+21). The pace of growth has narrowed somewhat of late, with the company operating 289 facilities at the end of FY03/19 (+17 YoY) and 297 at the end of FY03/20 (+8 YoY). Given changes in the operating environment, management aims to balance the increase in facilities with improvements in services offered.

Of the 301 facilities the company had in operation as of the end of FY03/21, 11 were public licensed nurseries operated by the private sector, 177 were private licensed nurseries (built and operated by private sector organizations), 19 were nurseries certified by the Tokyo Metropolitan Government, four were non-licensed nurseries, one was a company-led nursery, 77 were after-school clubs, 11 were children’s centers, and one was a private after-school club facility.

Number of facilities and children enrolled

Operational information		FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
(JPYmn, facilities, children)		Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Revenue		11,868	13,789	15,747	17,868	20,553	22,799	26,779	29,299	31,719	32,912
	YoY	29.5%	16.2%	14.2%	13.5%	15.0%	10.9%	17.5%	9.4%	8.3%	3.8%
No. of facilities operated		148	163	182	200	224	251	272	289	297	301
	After-school clubs	39	40	43	46	55	63	71	72	72	77
	Children’s centers	7	8	8	8	10	12	12	11	11	11
	Private after-school clubs	0	0	0	0	0	4	5	5	4	1
	Overseas facilities	0	0	0	0	0	0	1	1	1	0
No. of children enrolled (nurseries)		7,000	8,100	9,400	10,500	11,200	12,400	14,058	14,350	15,323	15,581
No. of facilities operated (nurseries)		102	115	131	146	159	172	183	200	209	212
No. of children enrolled per nursery (average)		69	70	72	72	70	72	77	72	73	73

Source: Shared Research based on company data
Note: Revenue and operating profit figures prior to Q1 2021 are shown before the change in the presentation of subsidies.

Most of the facilities operated by JP-Holdings are in the Kanto area. As of the end of March 2021, 174 out of 212 nurseries, 74 out of 77 after-school clubs, five out of 11 children’s centers, and the private after-school club were in the Kanto area.

JP-Holdings opens nurseries after carefully considering local characteristics, needs, and location of the facility in each municipality. The Tokyo area, which has a high population density, offers the best economic advantages for nursery operators because of the fit between users’ need for proximity to home and workplace, and operators’ need to improve operational efficiency. The company aims for management that is mindful of social needs including the problem of nursery waiting lists, makes the most of its strengths as a private company, and responds to the expectations of shareholders and other stakeholders. For the time being, the company plans to continue focusing on opening nurseries in the Tokyo area, where demand remains tight.

Securing childcare workers

The number of children attending facilities is another variable that affects the company’s revenue. The number of children attending facilities is calculated as the number of facilities the company operates x capacity x enrollment versus capacity (close to 100%).
A formula for cost is as follows:
Cost = (number of childcare workers x average salary) + personnel expenses of other employees + company-wide (administrative) expenses + facility operation costs + depreciation + other expenses. The number of children per childcare worker depends on the child’s age. (The government’s standard is one childcare worker per every three children for infants under a year old, six children under three years, 20 children aged three years, and 30 children aged four years and older.) Some local governments have tougher requirements. Children under three years old account for almost 50% of those attending the company’s facilities, with the average number of children per childcare worker at around 4.8 assuming all childcare workers were full-time employees.

The number of children attending the company’s nurseries has increased by about 7.4x from the end of March 2008 (around 2,100 children) to the end of March 2021 (15,581 children). The average number of children per facility went up from around 60 a decade ago to a stable 70 or so in the past few years. According to the company, the average capacity utilization rate of its facilities has been running around 75%. Average revenue per facility (of all facilities run by the company, including nurseries, after-school clubs, children’s centers, and others) has remained above JPY100mn from FY03/18.

Number of facilities (left axis) and average enrollment per facility (right axis)

Average revenue generated per facility

Source: Shared Research based on company data
Note: Number of facilities at FY-end

The capacity utilization rate of the company’s nurseries is still only around 75% owing to the chronic shortage of childcare workers. According to the Ministry of Health, Labor and Welfare, the effective job offers-to-applicants ratio for childcare workers in April 2021 was 2.04x, down 0.41pp from April 2020. While this marks a temporary decline, it is still roughly double the overall job offers-to-application ratio of 1.04x (down 0.19pp YoY, see the “Market and value chain” and “Childcare worker shortage” sections for details) The childcare worker shortage is especially bad in Metropolitan Tokyo, with the active job offers-to-applicants ratio reaching about 3.41x, roughly three times that of the overall job offers-to-applicants ratio, making recruiting workers in the Tokyo area especially difficult.

Efforts to recruit childcare workers

Recruiting enough childcare workers is key to the company’s growth and profitability. The company cannot resolve the chronic shortage of childcare workers, because even if it hires young (new graduate) recruits, their average time in employment is usually around four years, with many leaving when they get married or relocate when their husbands have a job transfer. JP-Holdings is implementing the following measures to secure its resources.

Improving pay and conditions and stepping up recruitment program

Ongoing improvement of pay and conditions: The company’s average childcare worker salary was below the national average until 2011, but exceeded it in 2012, with the range of increase widening every year thereafter. In 2019, the company’s average salary was approximately JPY4.02mn, about JPY400,000 higher than the national average of JPY3.64mn (see below).

Measures to step up recruitment program: JP-Holdings runs career seminars and nursery bus tours across the country, pays an allowance to new recruits, provides employee dorms and housing, and pays a rent subsidy.

Measures to attract latent childcare workers: Flexible hiring program to attract as many potential recruits as possible, including shorter working hours and fixed working hours (instead of changing shifts, employees can work early or late shifts only).

Support to gain childcare worker qualifications

Hiring unqualified students as full-time employees and providing support for them to study for national qualification

Measures to reduce workload

Hiring office and janitorial staff to reduce childcare workers’ tasks

Streamlining administrative tasks by the use of technology

Reducing workload of late shift workers by employing part-timers who work only early or late shifts

Number of childcare workers hired

The company hired 178 new graduates and 219 mid-career staff as childcare workers, for a total of 397 in FY03/16, and 197 new graduates and 241 mid-career staff (438 in total) in FY03/17. In FY03/18, the company hired a total of 574, broken down to 247 new graduates and 327 mid-career staff. In FY03/19, the company hired a total of 601, broken down to 276 new graduates and 325 mid-career staff, while in FY03/20, 248 new graduates and 269 mid-career staff (for a total of 517 individuals) joined the company. For FY03/21, the company hired a total of 474, broken down to 182 new graduates and 292 mid-career staff. Moving into FY03/22, the company on April 1, 2021 hired 166 new graduates and 137 mid-career staff. The company has established a program for students studying for the childcare worker qualification. The program attracted 23 new graduate recruits in FY03/17, 32 in FY03/18, 46 in FY03/19, 26 in FY03/20, and nine in FY03/21. On April 1, 2021, seven joined the company on the program. New graduates hired on the program study for national exams held twice a year (in late April and October). According to the company, reduced hiring is the result of a more careful approach in hiring, largely to reduce turnover.

Distinguishing itself from competitors with higher salaries

JP-Holdings puts ongoing improvements to childcare workers pay and conditions at the top of its initiatives for securing human resources. The company’s salary for childcare workers was below the national average until 2011, but exceeded the national average in 2012 and has widen the gap every year since. In 2019, the company’s average salary of JPY4.02mn was about JPY383,000 higher than the national average of JPY3.64mn.

In contrast to childcare workers working at private facilities (run by private companies or social welfare service corporations), childcare workers employed by public facilities run by local governments are public servants and paid accordingly. In the case of Nerima-ku, Tokyo, the average annual income of childcare workers at local public nurseries in FY2020 was JPY6.92mn (source: FY2020 disclosure on personnel administration by Nerima city office). This is high, even allowing for the average age of 47.0. The high salaries paid to government childcare workers not only exceeds the 2020 national average (JPY3.75mn, average age of 37.6) for childcare workers, it also handily exceeds the average salary of JPY4.36mn for all workers of that age (46.7), according to 2020 statistics from the National Tax Agency. This highlights the sharp pay gap between public- and private-sector nurseries.

Since childcare workers in public nursery schools are "local government employees," they are assured of salary increases based on their years of service, a salary level comparable to that of average government employees, and a full range of benefits. To become a full-time employee at a public nursery school, you need to pass not only the nursery teacher exam but also the local civil service recruitment exam, which is rather difficult. Since compensation is considered better than at private nursery schools, employment tests for public sector childcare worker positions often attract up to 10 or more applicants for each available position. However, even if an applicant passes the exam, that person will not be able to work at a public nursery school unless there is an open position, and if there is no such vacancy within a year, that person will have to take the local government employment exam again. That said, the stable income and generous benefits make these positions very much in demand, putting the job offers-to-applicants ratio (the reciprocal of the hiring rate) in stark contrast to that for private sector nursery teachers.

Average annual salary of childcare workers

Source: Shared Research, based on company data

Childcare worker employment-related data

No. of childcare workers hired		FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21	Apr. 1, 2021
No. of hires (new graduates and mid-career)		397	438	574	601	517	474	303
	New graduates	178	197	247	276	248	182	166
	Mid-career	219	241	327	325	269	292	137
	Pre-qualification trainees (new graduates)	0	23	32	46	26	9	7
Childcare workers and trainees (new graduates)		397	461	606	647	543	483	310
Administration (company-wide)		FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
	No. of employees	29	38	43	56	124	124
	Average salary (JPYmn)	4.05	4.34	4.18	4.2	4.8	4.8
	Total personnel expenses (JPYmn)	117	165	180	237	598	598
	Average age	47.5	45.8	47.0	47.9	40.4	40.4
	Average years of service	3.9	3.4	3.4	3.0	3.1	3.1

Source: Shared Research, based on company data

Competition

Companies growing fast in childcare support business

Social welfare corporations have historically played the main role in building and running nurseries, until joint-stock companies were permitted to enter the business in 2000. Licensed nurseries operated by these private, for-profit companies accounted for only 6.2% of all licensed nurseries (based on the number of facilities) as of October 1, 2018, but the number of such nurseries is increasing. Although the number of public nurseries whose operation is contracted out to the private sector has been declining slowly in recent years, there is still scope for growth. The increase in private companies in the childcare support business has been especially visible in Greater Tokyo, which has long nursery waiting lists. Although there are entry barriers to private companies in some municipalities that are opposed to their presence in childcare support services, we expect these to disappear as more companies establish a solid track record in the business.

Nurseries broken down by provider entity

	Public			Social welfare corporation			Companies			Other			Total
	Facilities	% of total	YoY	Facilities	% of total	YoY	Facilities	% of total	YoY	Facilities	% of total	YoY	Facilities	% of total	YoY
2010	9,884	45.6%	-	10,528	48.6%	-	-	-	-	1,269	5.9%	-	21,681	100.0%	-
2011	9,484	43.6%	-4.0%	10,918	50.2%	3.7%	-	-	-	1,349	6.2%	6.3%	21,751	100.0%	0.3%
2012	9,811	41.3%	3.4%	12,273	51.7%	12.4%	-	-	-	1,656	7.0%	22.8%	23,740	100.0%	9.1%
2013	9,525	39.6%	-2.9%	12,740	52.9%	3.8%	555	2.3%	-	1,256	5.2%	-24.2%	24,076	100.0%	1.4%
2014	9,306	38.0%	-2.3%	13,141	53.6%	3.1%	723	2.9%	30.3%	1,339	5.5%	6.6%	24,509	100.0%	1.8%
2015	9,085	35.5%	-2.4%	13,647	53.4%	3.9%	1,051	4.1%	45.4%	1,797	7.0%	34.2%	25,580	100.0%	4.4%
2016	8,851	33.7%	-2.6%	14,049	53.5%	2.9%	1,337	5.1%	27.2%	2,028	7.7%	12.9%	26,265	100.0%	2.7%
2017	8,711	32.1%	-1.6%	14,493	53.4%	3.2%	1,686	6.2%	26.1%	2,247	8.3%	10.8%	27,137	100.0%	3.3%
2018	9,413	33.7%	6.3%	14,384	51.5%	2.4%	1,720	6.2%	28.6%	2,434	8.7%	8.3%	27,951	100.0%	3.0%

Source: Shared Research, based on data from MHLW “Survey of Social Welfare Institutions”
Note: Number of facilities in operation as of October 1 every year; Figures prior to 2012 also include facilities operated by for-profit entities (companies)

Business conditions at nursery schools run by social welfare corporations: under pressure from costs to secure childcare workers

Japan’s Welfare and Medical Service Agency (WMA; an independent administrative agency) conducts a survey of the management status of all borrowers (mainly social welfare corporations) every fiscal year. According to the FY2019 survey, which covered 5,290 licensed nursery schools that have been open for at least a year (excluding small-scale, night-time operations), facilities with capacity for 61–90 children accounted the largest share at 29.4% of all licensed facilities. By region, the Kanto area (Tokyo, Kanagawa, Saitama, and Chiba prefectures) accounted the largest share with around 30% of the total.

Nurseries, by capacity(Left)
Nurseries, by region(Right)

Source: Shared Research based on Welfare and Medical Service Agency research report “Management status of nurseries and Children’s Houses” (FY2019)

A profitability analysis by the Welfare and Medical Service Agency found that service activity revenue per employee was JPY5.62mn and personnel expense per employee was JPY4.11mn (personnel expense ratio: 73.2%) in FY2019. Accounting standards applied to social welfare corporations analyzed by the agency are different from those applied to joint-stock companies, making simple comparisons of profit margins and personnel expense ratios unsuitable. However, the data can be useful in providing insight into nurseries’ management status in general (e.g., changes over time and regional differences) as well as in estimating market size (see following).

Business conditions at nurseries operated by social welfare corporations (1)

Accounting metrics			Unit	2015	2016	2017	2018	2019	2018–2019 change
Accounting metrics			Unit	2015	2016	2017	2018	2019	2018–2019 change
No. of nurseries surveyed			facilities	4,214	4,401	4,617	5,113	5,290	177
Licensed capacity (average)			children	108.3	107.1	107.6	106.8	107.0	0.2
Utilization rate			%	104.9	100.8	102.4	101.2	99.7	-1.5
Service activity revenue per child (monthly)			JPY	103,430	108,980	111,602	114,410	117,781	3,371
No. of employees per facility			children	26.1	26.1	26.9	26.8	26.8	0.0
	Childcare workers and helpers		children	20.8	20.9	21.0	20.9	20.9	0.0
	Other		children	5.3	5.2	-	-	-	-
Years of service (avg. for regular employees)			years	9.5	9.1	9.4	9.4	9.4	0
Service activity revenue			JPY'000	140,944	141,179	147,611	-	-	-
	Nursery business revenue		JPY'000	140,275	140,767	147,115	-	-	-
		Subsidized business revenue	JPY'000	16,297	-	-	-	-	-
Service activity expenses			JPY'000	130,264	131,361	138,450	-	-	-
	Personnel expenses		JPY'000	99,315	100,765	106,991	-	-	-
	Miscellaneous expenses		JPY'000	26,375	26,269	26,893	-	-	-
Service activity net revenue (OP equivalent)			JPY'000	10,680	9,818	9,161	-	-	-
Personnel expense ratio			%	70.5%	71.4%	72.5%	73.4%	73.2%	-0.2%
Miscellaneous expense ratio			%	18.7%	18.6%	18.2%	18.6%	18.7%	0.1%
Depreciation ratio			%	3.2%	3.0%	3.1%	3.2%	3.2%	0.0%
Service activity net revenue ratio (OPM eqv.)			%	7.6%	7.0%	6.2%	4.8%	4.9%	0.1%
Service activity revenue per employee			JPY'000	5,396	5,409	5,488	5,529	5,615	86
Personnel expense per employee			JPY'000	3,802	3,861	3,978	4,061	4,111	50
Pay addition eligibility ratio ("Career Path" required)			%	-	87.7%	91.1%	91.6%	91.5%	-0.1%
Pay addition eligibility ratio			%	-	-	-	90.8%	91.8%	1.0%
Multiple childcare workers addition eligibility ratio			%	-	4.3%	-	-	-	-
Rent addition eligibility ratio			%	-	5.6%	-	-	-	-
Ratio of loss-making facilities			%	13.4%	15.4%	17.2%	22.8%	21.6%	-1.2%

Source: Shared Research based on Welfare and Medical Service Agency research report “Management status of nurseries and Children’s Houses” (FY2019)
Note: Accounting standards different from those used by joint-stock companies

Business conditions at nurseries operated by social welfare corporations (reference)

Accounting metrics					Unit	2017	2018	2017–2018 B569change
Accounting metrics					Unit	2017	2018	2017–2018 B569change
Revenue and expenses	Revenue	Recurring revenue composition	Service activity revenue		%	98.7	98.7	0
		Recurring revenue composition	Other		%	1.3	1.3	0
		Service activity revenue composition	Nursery business revenue		%	99.7	99.8	0.1
		Service activity revenue composition	Other		%	0.3	0.2	-0.1
	Expenses	Service activity expenses as % of service activity revenue	Personnel expenses		%	72.5	73.4	1
			Miscellaneous expenses		%	18.2	18.6	0.3
				Meals	%	5.1	5	-0.1
				Utility	%	2.1	2.1	0
				Outsourcing	%	2	2.1	0.1
				Repair	%	0.8	0.8	0
				Rents	%	1.4	1.7	0.3
			Depreciation		%	3.1	3.2	0.1
			Other		%	0	0	0
			SUM		%	93.8	95.2	1.4
Service activity net revenue (OP equivalent) as % of service activity revenue					%	6.2	4.8	-1.4
Service activity net revenue (OP equivalent) as % of recurring revenue					%	6.5	5.2	-1.3
Service activity revenue per employee					JPY'000	5,488	5,529	41
Labor productivity					JPY'000	4,320	4,329	8
Personnel expenses per employee					JPY'000	3,978	4,061	83
Labor share					%	92.1	93.8	1.7
Interest expenses as % of recurring revenue					%	0.2	0.2	0

Source: Shared Research based on Welfare and Medical Service Agency research report “Management status of nurseries and Children’s Houses” (FY2018)
Note: Accounting standards different from those used by joint-stock companies

A FY2019 survey of nursery schools operated by social welfare corporations showed profit margins* following a downward course, dropping 2.7pp over the four years from FY2015 (7.6%) to FY2019 (4.9%), due largely to a raise in the labor cost ratio, including a 2.7pp YoY gain from 70.5% in 2015 to 73.2% in 2019. (*Profit margin calculated (service activity revenue – service activity expense)/service activity revenue.) In FY2019 employees at these facilities earned an average of JPY4.11mn a year, an increase of JPY309,000 over FY2015 (reflecting the increase in the official unit price over FY2016). With 91.5% of facilities receiving the career path portion of the supplement for improved pay and conditions, it appears that childcare worker pay and conditions have improved at about 90% of facilities operated by social welfare corporations.

Business conditions at nursery schools run by joint-stock companies

Most of the private sector operators of nursery schools that operate as joint-stock companies can be classified broadly into two groups, companies that operate nursery schools as their main business and companies where nursery schools are only one of several businesses.

In the former category, we find listed competitors such as LIKE Kidsnext (unlisted; a consolidated subsidiary of LIKE Co., Ltd. TSE1: 2462), and Global Kids Company (TSE1: 6189). Other unlisted companies include Poppins Holdings, Aigran Co., Ltd. and Pigeonhearts Corporation.

In the latter category we find companies that entered the nursery school business to complement their local market-oriented mainstay businesses in personnel development/training and education. These include such education/nursing-related companies as Meiko Network Japan (TSE1: 4668), Gakken Holdings (TSE1: 9470), Benesse Holdings (TSE1: 9783), Nichiigakkan (TSE1: 9792), fitness-related companies such as Sports Cub NAS, a subsidiary of Daiwa House Industry (TSE1: 1925), and Tipness Ltd., a subsidiary of Nippon Television Holdings (TSE1: 9404), and even railway companies such as Odakyu Electric Railway (TSE1: 9007) and Keio Corporation (TSE1: 9008).

Gross revenues at major nursery school operators

Source: Shared Research based on data from each company and from Nikkei Marketing Journal’s “Survey of Service Industries”

Looking more closely now at the competition, let’s see how JP-Holdings stacks up against two other listed companies whose main business is nursery school operations: LIKE Kidsnext and Global Kids Company. When making comparisons, it is important to remember that LIKE Kidsnext and Global Kids Company do not book fixed assets through subsidies received in the same manner as JP-Holdings. When subsidies are received in connection with the opening of new facilities, JP-Holdings subtracts the value of subsides and other concessions received from the amount it invested and on its balance sheet and records the value of that asset net of subsidies; the related spending is then booked under the cost of revenue generated by that asset. In contrast, LIKE Kidsnext and Global Kids Company book the entire subsidy received in connection with the opening of a new facility in one lump sum under non-operating income. This makes LIKE Kidsnext and Global Kids Company appear more profitable at the recurring profit level by pushing up their recurring profit margin in those periods when they receive subsidy payments. As of August 28, 2020, LIKE Kidsnext Co., Ltd. became a wholly owned subsidiary of LIKE, Inc. and was therefore delisted.

In the most recent fiscal year, we find JP-Holdings reporting a recurring profit of JPY2.9bn for a recurring profit margin of 9.0% in FY03/21. In contrast, LIKE Kidsnext recurring profit of JPY2.6bn in FY04/20 represented a recurring profit margin of 11.3%, and Global Kids Company’s recurring profit of JPY916mn in FY09/20 represented a recurring profit margin of 4.1%. The income statements of LIKE Kidsnext and Global Kids Company show both companies getting a major boost from subsidy income from new facility openings reported at the non-operating income level, with LIKE Kidsnext reporting subsidy income from facility openings of JPY2.0bn (+5.2% YoY) and Global Kids Company reporting subsidy income from facility openings of JPY606mn (-70.7% YoY). In FY09/20, Global Kids Company reduced the number of new facilities opened, resulting in a significant decrease in capex-related subsidy income.

As to why JP-Holdings chooses not to book all of the subsidies received for opening new facilities in a single lump-sum, Shared Research believes that it prefers to benefit from the smaller fixed asset value (after netting out the subsidies received), as this reduces the amount of revenues needed to recoup its investment and effectively increases the investment leverage effect while at the same time reducing the risk of having to write down assets as a result of variations in a given facility’s performance versus plan due to lower-than-expected enrollments or delays in opening the facility.

Comparison with competitors (listed companies)

		2749 JP-Holdings			6065 LIKE Kidsnext			6189 Global Kids Company
		FY03/19	FY03/20	FY03/21	FY04/18	FY04/19	FY04/20	FY09/18	FY09/19	FY09/20
(JPYmn)		Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Revenue		29,299	31,719	32,912	17,777	20,534	22,967	17,032	19,694	22,160
	YoY	9.4%	8.3%	3.8%	20.7%	15.5%	11.8%	29.5%	15.6%	12.5%
Operating profit		1,531	1,539	2,268	463	830	602	337	173	477
	YoY	17.5%	0.5%	47.4%	623.4%	79.3%	-27.5%	-17.2%	-48.7%	175.7%
	Operating profit margin	5.2%	4.9%	6.9%	2.6%	4.0%	2.6%	2.0%	0.9%	2.2%
Recurring profit		1,921	2,004	2,948	2,397	2,749	2,604	1,917	1,786	916
	YoY	21.4%	4.3%	47.1%	135.3%	14.7%	-5.3%	29.8%	-6.8%	-48.7%
	Recurring profit margin	6.6%	6.3%	9.0%	13.5%	13.4%	11.3%	11.3%	9.1%	4.1%
Net income attributable to owners of the parent		1,071	1,123	538	1,657	1,994	1,809	559	1,116	438
	YoY	17.7%	4.8%	-52.1%	138.8%	20.3%	-9.3%	-29.3%	99.6%	-60.8%
	Net margin	3.7%	3.5%	1.6%	9.3%	9.7%	7.9%	3.3%	5.7%	2.0%
Per-share data
EPS		12.4	12.8	6.2	158.0	190.2	172.6	62.6	122.2	47.7
Dividend per share		3.7	3.9	3.9	0.0	0.0	0.0	0.0	0.0	0.0
	Payout ratio	29.7%	30.4%	63.4%	-	-	-	-	-	-
	DOE	3.8%	3.7%	3.5%	-	-	-	-	-	-
Book value per share		102.2	110.2	114.4	413.5	606.1	778.1	720.3	840.4	882.8
Balance sheet (JPYmn)
Total assets		28,255	26,123	29,741	15,465	18,440	24,603	15,691	18,259	18,561
Net assets		8,950	9,636	10,008	4,334	6,353	8,156	6,577	7,706	8,146
Cash flow statement (JPYmn)
Cash flows from operating activities		1,830	2,321	2,469	2,559	2,395	1,685	2,028	2,196	1,999
Cash flows from investing activities		-940	419	191	-2,800	-2,773	-3,628	-2,963	-2,842	-1,044
Cash flows from financing activities		1,475	-3,349	2,155	1,168	734	3,511	989	825	-619
Financial ratios
Cash and cash equivalents		6,816	6,206	11,021	3,434	3,790	5,359	1,301	1,480	1,816
ROA (RP-based)		7.1%	7.4%	10.6%	17.3%	16.2%	12.1%	13.0%	10.5%	5.0%
ROE		12.8%	12.1%	5.5%	47.0%	37.3%	24.9%	9.0%	15.7%	5.5%
Equity ratio		31.7%	36.9%	33.7%	28.0%	34.5%	33.2%	41.8%	42.1%	43.8%
Per-employee data (JPYmn)
No. of employees		3,481	3,783	3,916	2,534	2,856	3,121	2,212	2,678	2,941
	Temporary workers	2,361	2,523	2,404	2,010	2,095	2,150	757	818	848
	Temporary employees ratio	40.4%	40.0%	38.0%	44.2%	42.3%	40.8%	25.5%	23.4%	22.4%
Revenue per employee		5.02	5.03	5.21	3.91	4.15	4.36	5.74	5.63	5.85
Operating profit per employee		0.33	0.32	0.47	0.53	0.56	0.49	0.65	0.51	0.24
Number of children enrolled		14,350	15,323	15,581	8,915	9,934	10,648	7,339	8,365	8,865

Source: Shared Research, based on company data
Note: Enrollment figures for JP-Holdings for FY03/17 and FY03/18 rounded to nearest 100
Note: Revenue and operating profit figures prior to Q1 2021 are shown before the change in the presentation of subsidies.
Note: LIKE Kidsnext was delisted in August 2020 and is a wholly owned subsidiary of LIKE Co., Ltd (TSE1: 2462).

Barriers to entry

The barriers to entry to the nursery school business are high, as it is regulated by the Cabinet Office and Ministry of Health, Labour, and Welfare, as well as having to work closely with local governments under strict guidelines.

Since the first joint-stock companies were authorized to operate nursery schools in the year 2000 there has been a steady stream of new entrants into the industry of for-profit companies all sizes and from a range of different industries. Still, the number of nursery schools operated by these private sector companies only accounted for 6.2% of all nursery schools as of October 1, 2018, as where there have not been regulatory barriers there have often been practical barriers to entry, such as local zoning laws making it difficult to acquire land for nursery schools or depopulated areas.

Among the large railway companies and manufacturers that have entered the industry, the primary motivation in most cases has simply been a desire to provide childcare services for their employees and the local community. However, because it takes experience and expertise to run a nursery school profitably, such companies need the experience and expertise of companies who specialize in operating nursery schools. What this means is, even though outside companies may have initially entered the business, there are inevitably cases where those new nursery school businesses cannot be sustained. One such example is the nursery schools run by Sotetsu Amenity Life, a subsidiary of railway operator Sotetsu Holdings (TSE1: 9003). JP-Holdings acquired all shares in Sotetsu Amenity Life in September 2016 and now operates it under the name Amenity Life.

As Japan’s population ages and the number of young children continues to decline, Shared Research believes there is likely to be a surplus of nursery schools in Japan in the long term. In this event, the nursery school industry in Japan may well follow the same path as it did in England and much of the rest of Europe, where private companies with long experience and solid track records drove consolidation within the industry and turned the focus to the quality of nursery school operations.

Earnings analysis

Profit margins	FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
(JPYmn)	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Gross profit	2,393	2,652	2,822	2,953	3,576	3,675	4,094	4,179	4,421	5,225
Gross profit margin	20.2%	19.2%	17.9%	16.5%	17.4%	16.1%	15.3%	14.3%	13.9%	15.9%
Operating profit	1,114	1,286	1,234	1,346	1,732	1,169	1,303	1,531	1,539	2,268
Operating profit margin	9.4%	9.3%	7.8%	7.5%	8.4%	5.1%	4.9%	5.2%	4.9%	6.9%
EBITDA	1,413	1,611	1,582	1,799	2,288	1,821	1,998	2,266	2,293	3,028
EBITDA margin	11.9%	11.7%	10.0%	10.1%	11.1%	8.0%	7.5%	7.7%	7.2%	9.2%
Net margin	5.5%	5.2%	5.3%	5.1%	5.2%	2.9%	3.4%	3.7%	3.5%	1.6%
Financial ratios
ROA (RP-based)	12.0%	12.8%	12.0%	9.6%	8.9%	6.0%	6.4%	7.1%	4.3%	1.8%
ROE	17.3%	17.0%	17.7%	17.0%	18.0%	10.1%	12.5%	12.8%	12.1%	5.5%
Total asset turnover	1.23	1.33	1.29	1.10	1.03	1.01	1.08	1.08	1.17	1.18
Inventory turnover	119.2	206.5	183.4	121.0	141.0	184.6	176.0	180.7	227.3	198.7
Days in inventory (JPYmn)	3.1	1.8	2.0	3.0	2.6	2.0	2.1	2.0	1.6	1.8
Working capital	-54	-91	-40	-10	-51	-56	1	3	-8	36
Current ratio	115.8%	126.5%	85.7%	91.3%	113.1%	108.0%	96.1%	132.7%	165.3%	193.4%
Quick ratio	113.6%	125.4%	83.3%	89.0%	111.4%	106.3%	94.3%	131.1%	163.9%	191.3%
OCF / Current liabilities	0.34	0.35	0.27	0.25	0.30	0.30	0.25	0.23	0.34	0.36
Net debt / Equity	10.5%	17.4%	72.4%	112.6%	121.3%	132.6%	109.1%	81.6%	42.6%	45.8%
OCF / Total liabilities	0.2	0.2	0.1	0.1	0.1	0.1	0.1	0.1	0.1	0.1
Cash conversion cycle (days)	-1.6	-2.4	-2.0	-0.8	-0.8	-1.2	-0.6	-0.1	-0.2	0.0
Change in working capital	-30	-37	51	31	-41	-5	57	1	-11	45

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: EBITDA = Operating profit + depreciation + goodwill amortization

The earnings structure of JP-Holdings underwent a big change in FY03/17. In FY03/16 and FY03/17, the company focused on salary reforms, improved childcare workers’ work environment, and pioneered new businesses, having concluded that improving employee satisfaction (mainly of childcare workers) was the crucial factor that would ensure sustainable growth in the longer term. The company revised its medium-term plan midway through the three-year period along these lines. In FY03/17, revenue exceeded the company forecast at JPY22.8bn (+10.9% YoY), but operating profit fell 32.5% to JPY1.2bn as a result of larger-than-expected expenses to improve childcare workers’ pay and conditions. Despite the impact from the COVID-19 pandemic, FY03/21 GPM improved 2.0pp YoY thanks to a decline in the cost of sales and an increase in students accepted in line with the opening of new facilities.

At JP-Holdings, childcare workers are positioned as an overhead that accounts for the majority of personnel expenses, as well as the most important management resource directly responsible for bringing in subsidy revenue.

The company’s business model has been one of aggressive and focused management (i.e., using stable earnings from subsidies as security to borrow from banks and harnessing the bank loan leverage effect to invest in new facilities) that has resulted in growth. The management team seeks to build on this foundation by acquiring nursery operator subsidiaries from major companies and developing new businesses that do not depend on subsidies to ensure sustainable growth.

Total assets and ROA (RP-based)	Shareholders’ equity and ROE
OPM and EBITDA margin	Current ratio and Net debt / Equity ratio

Source: Shared Research based on company data

Total asset turnover

Equity ratio