JP-Holdings 2749
JPホールディングス
Recent Updates
2022-05-13
2022-05-13
2022-04-08
Get in touch
17F Chikusa New Tower Bldg., 3-15-31 Aoi, Higashi-ku, Nagoya-shi, Aichi Prefecture
Summary
JP-Holdings, which specializes in the child-rearing support business, is a leading operator of childcare facilities (mainly licensed nurseries).
Diversified Consumer Services
Key dates
2018-03-30
Coverage initiation
Executive summary
Business overview
JP-Holdings, Inc., 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 6,805 YoY to 5,634. 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
In FY03/22, the company enjoyed record profits, reporting full-year revenue of JPY34.4bn (+2.6% YoY), operating profit of JPY3.3bn (+17.1% YoY), recurring profit of JPY3.4bn (+13.9% YoY), and net income attributable to owners of the parent of JPY2.3bn (+324.1% YoY). With increased demand for childcare stemming from the rising participation of women in the workforce and government efforts to improve the childcare environment, the social role of child-rearing support businesses is becoming increasingly crucial, with the need for nursery facilities ever-growing. During FY03/22 the company opened a total of three nurseries (all in Tokyo) and eight after-school clubs/children’s centers (all in Tokyo), bringing the number of childcare facilities in operation at the end of FY03/22 to 303 (including 211 nurseries, 81 after-school clubs, and 11 children’s centers).
Forecasts for FY03/23 are revenue of JPY35.6bn (+3.7% YoY), operating profit of JPY3.6bn (+6.4% YoY), recurring profit of JPY3.6bn (+6.6% YoY), and net income attributable to owners of the parent of JPY2.3bn (+2.0% YoY). The company plans to pay a dividend of JPY6.0 per share (JPY4.5 in FY03/22), consisting of an ordinary dividend of JPY5.0 and a special dividend of JPY1.0 to commemorate the 30th anniversary of the company's founding. Regarding the operating environment for the child-rearing support business, 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. For this reason, the company's policy is to promote digital transformation (DX) in response to changes in the social environment and the needs of parents and to further improve the quality of its services to make its childcare facilities the location of choice, instead of pursuing expanded scale by opening new facilities.
The company revised its medium-term management plan (FY03/22–FY03/24) using a rolling method, as it achieved the previous targets about two years ahead of schedule in FY03/22. Revised targets include revenue of JPY35.6bn (+3.7% YoY) and recurring profit of JPY3.6bn (+6.6% YoY) for FY03/23, and revenue of JPY36.3bn (+1.9% YoY) and recurring profit of JPY4.0bn (+10.6% YoY) for FY03/24. Based on its existing child-rearing support business, the company plans on increasing profits through such means as expanding its related peripheral businesses, developing new operations for children with special abilities, and growing the company's child-rearing support platform providing various services, products, and information by welcoming parents as members.
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 as it expands 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.)
Key financial 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.
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
Rolling medium-term management plan
On May 12, 2022, JP-Holdings, Inc. announced revisions to its medium-term management plan on a rolling basis.
The company revised its medium-term management plan (FY03/22–FY03/24) on a rolling basis, as it achieved the previous targets about two years ahead of schedule in FY03/22.
Under the revised plan, the company intends to increase profitability of its existing businesses, improve the quality of its child-rearing support services, and create new value and develop new businesses by capturing changes in social and business environment.
Revised targets include revenue of JPY35.6bn (+3.7% YoY) and recurring profit of JPY3.6bn (+6.6% YoY) for FY03/23, and revenue of JPY36.3bn (+1.9% YoY) and recurring profit of JPY4.0bn (+10.6% YoY) for FY03/24. Based on its existing child-rearing support business, the company plans on increasing profits through such means as expanding its related peripheral businesses, developing new operations for children with special abilities, and growing the company's child-rearing support platform providing various services, products, and information by welcoming parents as members.
Naming and rollout plan concerning the new online child-rearing support platform that also aims to support achievement of SDGs
On February 10, 2021, JP-Holdings, Inc. announced the naming of its new online platform, which aims to contribute to child-rearing support while simultaneously promoting effective use of resources and environmental conservation (thereby supporting the UN Sustainable Development Goals [SDGs]). The company also unveiled its plan concerning the rollout of the platform.
JP-Holdings disclosed the launch of the subject online platform on November 22, 2021. The latest announcement revealed that the platform was named "codomel," coined from the Japanese word for children (codomo) and Latin for goods (merx). The design of codomel's logo represents a circle of people holding hands, symbolizing the community circle created when children, parents/guardians, and local communities become connected through this service. The five colors used in the circle are taken from the five SDGs (out of the 17 goals) that the service focuses on.
As a first step, on February 1, 2022, the company began accepting donations of children's goods at 19 of the nurseries operated by subsidiary Japan Nursery Service Inc. On March 1, it plans to start preliminary online user registration for the codomel platform, and set collection boxes at all nurseries of Japan Nursery Service across the country to begin accepting donations from parents and guardians. Users can register free of charge, and the company also plans on giving out perks to the first group of registered users. Official online launch of the codomel platform is slated for April 1.
Trends and outlook
Quarterly trends and results
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.
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.
Full-year FY03/22 results (out May 12, 2022)
Earnings summary
Full-year FY03/22 results (April 2021–March 2022)
*Net income attributable to owners of the parent
In FY03/22, revenue, operating profit, recurring profit, and net income reached 101.4%, 122.5%, 121.7%, and 129.5% of the company’s full-year forecast (revised November 11, 2021), respectively. The company achieved the targets set under its medium-term management plan (FY03/22–FY03/24), which was announced with the full-year FY03/21 results, roughly two years ahead of schedule in FY03/22.
Business environment
During FY03/22, even as the pandemic's impact persisted in Japan with economic activity continuing to stagnate, there have been efforts to normalize economic and social activities by relaxing restrictions on these activities in response to the global economic recovery and progress made in vaccinations. The outlook remains uncertain due to concerns about a slowdown in corporate performance owing to soaring resource prices resulting from the conflict in Ukraine, as well as infections making a comeback in the form of mutant strains.
The environment surrounding the child-rearing support industry continued to undergo rapid changes. The drop in child population picked up pace in line with plummeting birth rates. The number of children waitlisted for nursery enrollment declined, with parents and guardians opting not to send their children to nurseries because of COVID-19. Further, the shortage of childcare workers persisted amid heightened demand for childcare from the rise in female employment rate and changing work styles and lifestyles under the pandemic.
On December 21, 2020, the Japanese government issued a new child-rearing support plan, promoting various measures to improve the environment for child-rearing, including an initiative to accelerate improvement of after-school clubs based on the new comprehensive after-school plan for children. Furthermore, the societal role of the child-rearing support business is becoming more important, as evidenced by Cabinet approval of a bill to establish an agency for children and families, which is scheduled to be launched in April 2023, and the promotion of measures to create an environment where it is easy to raise children.
Measures undertaken by the company
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 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. Cumulative Q3 revenue increased 2.6% YoY in tandem with this rise in enrollment, along with the opening of new facilities.
Profit drivers
Expenses increased YoY. Main factors were higher provision for bonuses from a change in the company's bonus payment period due to the introduction of a new personnel system, and a rise in expenses associated with systems installation. 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. Operating profit increased 17.1% YoY and recurring profit increased 13.9% YoY as a result of efforts to improve profitability and control costs at each facility.
Recording extraordinary gains
In FY03/21, facilities experiencing deteriorating profit due to changes in the local environment were closed and, in addition, the company decided to move ten nurseries off the balance sheet to avoid the risk of directly holding the land and buildings in advance of any future sales, with extraordinary losses incurred due to the recording of impairment losses. In FY03/22, an extraordinary gain of JPY183mn was recorded due to a significant decrease in impairment losses resulting from improved profitability of facilities and the sale of land and buildings of three of the above ten facilities, resulting in a 324.1% increase in net income.
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 FY03/21 have been restated.
User registration begins for "codomel," a new service
The company in November 2021 announced the launch of “codomel,” a childcare support platform. As a first step, the company began childcare matching services on April 1, 2022. The platform targets individual users, nurseries, childcare facilities, and schools. The company began recruiting users on March 1 and provides 600 points (equivalent to JPY600) as a registration reward. The company plans to generate commission revenue from this platform, targeting JPY1.8bn–2.0bn in handling volume in the sixth year.
Company forecast for FY03/23
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 FY03/23 (April 2022–March 2023)
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 promote DX to meet changes in social conditions and the needs of parents and further improve service quality to make its childcare facilities the location of choice. 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. The company plans to further increase the number of facilities where the program is available to 100. With the introduction of the new program, it hopes to further improve the quality of its childcare as well as strengthen its competitiveness.
Difference between initial company forecasts and results
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 children accepted and a drop in product revenue due to the effects stemming from the COVID-19 pandemic, FY03/21 revenue came in 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 and recurring profits exceeded the initial targets by 43.8% and by 36.9%, respectively. Net income 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.
In FY03/22, the state of emergency was imposed from the end of April to the end of September 2021 to prevent further spread of COVID-19, 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 programs, and launching an early educational program. The company also opened new facilities. Revenue exceeded the initial forecast. Although expenses increased due to higher provision for bonuses and system installation, revenue was up and efforts were made to improve profitability and control costs at each facility, helping profits exceed the initial targets. Net income also exceeded the initial forecast thanks to the sale of land and buildings at three of the ten facilities where assets were moved off of the balance sheet during FY03/21, leading to the recording of extraordinary gains.
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 released on May 13, 2021 are as follows.
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. On November 11, 2021, JP-Holdings upwardly revised its full-year forecast for FY03/22. The latest forecast calls for full-year consolidated revenue of JPY33.9bn (+1.2% YoY) and recurring profit of JPY2.8bn (-6.4% YoY). See the Trends and outlook section for details.
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.
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.
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.
(defines the framework of cross-ministerial and unified payments in the Cabinet Office)
(under the jurisdiction of
the Ministry of Education, Culture, Sports, Science and Technology)
(under the jurisdiction of
the Ministry of Health, Labour and Welfare)
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)
(Eight hours for children requiring childcare and four hours for children requiring education) as standard
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
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.
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.
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.
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.
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.
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.
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 region (right)
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).
Note: Accounting standards different from those used by joint-stock companies
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).
Notes: Poppins and Pigeon announce full-year earnings in December. The FY12/21 figure for Pigeon is a company forecast, and the FY12/21 figure for Poppins is not shown as it is a range forecast.
Revenues for LIKE are for the Child-Rearing Support Service business and the former LIKE Kids; revenues for Poppins are for the EduCare business; and revenues for Pigeon are for the Child Care Service business in Japan.
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.
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
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 children 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.