Financial Products Group (FPG) is an independent financial services company. Its main business is Lease Arrangement Business. In this business, for each lease, the company puts together an SPC (special purpose company) that manages an operating lease business, and then places equity in the SPC’s silent partnerships with investors (primarily SMEs). The SPCs raise funds to purchase aircraft, shipping vessels, and marine shipping containers by placing stakes with investors and from bank loans. The partnerships lease the aircraft, shipping vessels, and marine shipping containers to lessees such as airlines and shipping companies. Commissions (explained in more detail below), which the company receives from SPCs, are included in the equity funding from investors.
Diversified Financial Services
Executive Summary
Overview and other information
Core business: Leasing Fund*1. Financial Products Group (FPG) is an independent financial services company. Its main business is Leasing Fund (87.4%*2 of revenues in FY09/20; includes the aircraft investment management services business).
In this business, for each lease, the company puts together a special purpose company (SPC) that manages an operating lease business, and then places equity in the SPC’s silent partnerships with investors (primarily SMEs). The SPCs raise funds to purchase aircraft, shipping vessels, and marine shipping containers by placing stakes with investors and from bank loans. The partnerships lease the aircraft, shipping vessels, and marine shipping containers to lessees such as airlines and shipping companies. Commissions (explained in more detail below), which the company receives from SPCs, are included in the equity funding from investors.
Deferred tax benefits for investors; low leasing payments for lessees. By opting for the declining balance depreciation method in their income statements, the SPCs tend to have net losses in the first half of the leasing period, before becoming profitable in the second half. Investors are able to defer taxes owed, as their overall earnings are reduced when their share of losses from the silent partnership offsets profits from their main businesses. Investors can also expect to receive investment returns with a similar interest rate to that on ordinary bank deposits. FPG’s investors are primarily concerned with tax deferrals, not returns, so capping expected investment returns with a similar interest rate to that on ordinary bank deposits allows FPG to offer competitive leases to lessees. This gives it an advantage in arranging leasing deals.
Main revenue sources: arrangement fees and commissions. Arrangement fees for arranging operating lease deals, and commissions received from the SPC for placing equity in the silent partnerships with investors are the main sources of income for FPG. Arrangement fees plus commissions are around 14% (latest 10-year average) of the total amount of equity placement in operating leases.
Earnings structure features fixed costs and high margins. FPG’s cost ratio is around 17% (latest 10-year average), and fixed costs are the main component of SG&A expenses, so incremental profit margin is high. OPM has averaged 53.1% over the last 10 years.
Limited impact from economic fluctuations. In previous economic downturns, such as FY09/09 following the global financial crisis, revenues fell 5.1% YoY, but growth resumed in FY09/10, with revenues rising 89.3%.
Large potential market. In FY09/20, the total amount of equity placement in operating leases at the Leasing Fund business was JPY94.8bn. Meanwhile, in fiscal 2019, there were 938,000 SMEs (companies with capital of JPY10mn to under JPY1bn) in Japan with aggregate recurring profit of JPY27.0tn (Shared Research estimates based on Ministry of Finance’s fiscal 2019 Financial Statement Statistics of Corporations). On the supply side, in FY09/20 the total amount of assets arranged by FPG in operating leases was JPY158.4bn, whereas the market for aircraft (a major lease asset for FPG) is massive with over 40,000 new aircraft expected to be manufactured over the next 20 years (source: Boeing’s Commercial Market Outlook 2020-2039, etc.) for a total value of JPY622tn.
Only three specialists. There are only around 10 companies involved in the Japanese Operating Lease market. Many are reluctant to expand in this area, so there are only three specialists including FPG. (See Market and value chain section for details.)
From 2016, FPG has been selected as a constituent stock for the JPX-Nikkei Index 400, stock index composed of companies that meet the requirements of global investment standards, such as the efficient use of capital and investor-focused management.
Trends and outlook
In FY09/21, revenues were JPY14.9bn (+17.4% YoY), operating profit was JPY5.2bn (+178.5%), recurring profit was JPY5.1bn (+199.4%), and net income attributable to owners of parent was JPY2.9bn (+159.4%). Growth in revenues and profits was driven by the mainstay Leasing Fund business and the Real Estate Fund business. In the Leasing Fund business, revenues were JPY11.1bn (+0.5% YoY) while operating profit grew sharply as the losses associated with the operating lease deal for Air Mauritius, which went bankrupt, were fully accounted for in Q1. In the Real Estate Fund business, revenues and profit grew substantially as the company maintained a virtuous cycle of deal origination and sales.
Effective from the start of FY09/22, FPG has adopted the revised Accounting Standard for Revenue Recognition. The company's full-year forecast for FY09/22 calls for revenues of JPY41.0bn, operating profit of JPY5.4bn, recurring profit of JPY5.6bn, and net income attributable to owners of parent of JPY3.7bn (no YoY change has been provided). The company aims for higher revenues and profits driven by expanded revenues in the Real Estate Fund business and improved profitability in the Leasing Fund business.
On November 2, 2020, the company unveiled a new medium-term management plan spanning from FY09/21 to FY09/23. It positions these years as a period to implement structural changes in its businesses in order to strengthen the company’s sustainability. FPG intends to create new business value by leveraging the various business licenses held by the FPG group (e.g., Type I and Type II financial instruments business operator licenses), and fusing them with digital technologies. As focus areas, the company plans to (1) grow the Real Estate Fund business, (2) launch a FinTech business, and (3) undertake initiatives in connection with sustainable development goals (SDGs) to enhance its enterprise value. In the updated rolling medium-term plan (FY09/22–FY09/24), the company laid out plans to reform its businesses and tackle challenges for continued sustainable growth and set a goal of steadily maintaining recurring profit of above JPY10bn from FY09/23 onward. Further, as a key initiative, the company stated it would aggressively seek out and review M&A deals to build a new business that would serve as its third pillar of earnings next to the Leasing Fund and Real Estate Fund businesses.
Strengths and weaknesses
Shared Research believes the company’s strengths are its leading market share from a track record in Japanese Operating Lease, being in a promising market with few competitors, and an efficient, high-margin earnings structure. Weaknesses: product structures may have to be reviewed due to tax system reform, the entire equity underwritten has to be placed within one year of origination, and origination amount is affected by capital investment trends in specific industries (For details see Strengths and weaknesses section).
Key financial data
Note: Results consolidated from Q2 FY09/13, and values for prior periods are for the parent.
Note: Effective FY09/22, the company has adopted the revised Accounting Standard for Revenue Recognition. The adoption of the revised standard has resulted in changes in accounting methods for sales of real estate fractional ownership investment products (in the Real Estate Fund business). Under the previous standard, only commissions paid to the company from the sale of these products were booked as revenues; under the revised standard, however, the entire sales amounts are booked as revenues.
Recent updates
Revised full-year FY09/21 earnings forecast, valuation loss on operational investment securities, change to consolidated subsidiaries
Financial Products Group Co., Ltd. (FPG) revised its full-year FY09/21 earnings forecast.
Although revenues surpassed its previous forecast announced on July 30, 2021, profits at all levels were revised down by JPY393mn, because the company is to record this amount as a valuation loss on operational investment securities (under cost of revenues).
On the same day, the company announced that it would record a valuation loss on operational investment securities.
The company's Private Equity business invests in a crypto-asset exchange provider registered with the Kanto Local Finance Bureau. After estimating the real value of the investment, the company decided to book a JPY393mn valuation loss on operational investment securities under cost of revenues in Q4 FY09/21 and revised down its full-year FY09/21 forecast accordingly.
On the same day, the company announced a change in consolidated subsidiaries.
Background
FPG is to make consolidated subsidiaries FLIP No. 243 Co., Ltd., FLIP No. 244 Co., Ltd., and FLIP No. 245 Co., Ltd. non-consolidated subsidiaries. In November 2019, the company formed three silent partnerships in its leasing business with Air Mauritius Limited (AML) as the lessee, and the three companies has operated these silent partnerships.
However, due to the fact that AML filed for voluntary administration in April 2020 under the Insolvency Act of Mauritius, the company concluded that it was unlikely to be able to transfer its equity interest in the three silent partnerships to investors. It therefore changed its accounting treatment of the investment at end-March 2021, and made the three companies consolidated subsidiaries.
After filing for voluntary administration, AML entered into restructuring talks with interested parties. The restructuring plan took effect on September 28, 2021 (local time), paving the way for AML to proceed with restructuring in accordance with the plan. Under the restructuring plan, the lease contract in the said leasing business will continue with a change of conditions. Consequently, the company's equity interest in these silent partnerships linked to their earnings in the leasing business is now unlikely to be zero, and the company decided that it would transfer its equity interest in the silent partnerships to investors in the longer term.
According to the above policy, the company decided to remove again the three subsidiaries from the scope of consolidation, because the profit/loss and income/expenses of the leasing businesses will be attributed to investors, not to the company. The company will record its equity interest as JPY1 (memorandum value) in consolidated financial statements as "equity underwritten." The three companies will become non-consolidated subsidiaries as of September 29, 2021.
Outlook
As a result of making the three companies non-consolidated subsidiaries, JPY14.70bn in assets and JPY14.69bn in liabilities will be removed from the consolidated balance sheet and the equity interest in the silent partnerships will be recorded as equity underwritten. If the equity interest in the silent partnerships were to be transferred going forward, difference between the memorandum value and transfer price will be recorded as the company's income under revenues. The removal of the three companies from the scope of consolidation and change in accounting treatment (recording the said equity interest as equity underwritten) will be reflected in FY09/21 results.
Trends and outlook
Quarterly trends and results
Note: YoY changes of over 1,000% are shown by “-“
Note: Revised full-year earnings estimates are based on those announced on July 30, 2021.
Note: YoY changes of over 1,000% are shown by “-“
Note: Total amount of inventory reflects combination of equity underwritten and money in trust (aircraft for arrangement).
Full-year FY09/21 results
Key points
Revenues and profits significantly increased YoY, driven by growth in the Leasing Fund and Real Estate Fund businesses. GPM recovered to the pre-COVID 19 level.
Main contributor to the JPY2.2bn YoY growth in revenues was the JPY1.9bn increase in revenues in the Real Estate Fund business (the business posted record-high sales in value terms). Revenues growth in the Leasing Fund business was limited to JPY57mn, with revenues staying flat YoY. Revenues in the FinTech business increased JPY173mn, and revenues in the Other businesses grew JPY47mn.
Operating profit was up sharply by JPY3.3bn (+178.5% YoY). Air Mauritius deal losses (which surfaced in FY09/20) were fully accounted for in Q1, with the company booking JPY998mn in losses in the quarter (JPY490mn in valuation losses on aircraft for sale booked under cost of revenues, and net expenses of JPY507mn under non-operating expenses including forex losses of JPY311mn). As a result, operating profit grew in reaction to the larger amount of losses associated with the Air Mauritius deal booked in FY09/20.
Trends by business
Leasing Fund business
The Leasing Fund business posted revenues of JPY11.1bn (+0.5% YoY), with the total amount of equity placement in operating leases largely flat YoY at JPY94.5bn (-0.3% YoY).
The total amount of assets arranged in operating leases increased 0.2% YoY to JPY158.7bn. While the company maintained its policy of exercising rigorous screening in the selection of aircraft leasing deals amid the COVID-19 pandemic, it focused on originating deals for shipping vessels and marine shipping containers.
Real Estate Fund business
The company reported record-high sales of real estate fractional ownership investment products. Revenues in the Real Estate Fund business came to JPY2.6bn (+282.7% YoY), spurred on in part by approximately JPY300mn in commission income from the completion of exit from two real estate fractional ownership investments (i.e., sale of associated properties).
FinTech and Other businesses
The FinTech business posted revenues of JPY429mn (+68.0% YoY). Other businesses booked revenues of JPY711mn (+7.2% YoY; Insurance, JPY366mn; Aviation JPY188mn).
Full-year company forecast
Effective from the start of FY09/22, the company has adopted the revised Accounting Standard for Revenue Recognition. For FY09/22, the company forecasts revenues of JPY41.0bn, operating profit of JPY5.4bn, recurring profit of JPY5.6bn, and net income attributable to owners of parent of JPY3.7bn (no YoY change has been provided). The company says it will aim for higher revenues and profits driven by expanded revenues in the Real Estate Fund business and improved profitability in the Leasing Fund business.
Shared Research plans to update the company forecast and medium-term management plan (FY09/22–FY09/24) sections after an interview with the company.
Note: Net income is net income attributable to owners of parent.
Note: 2H estimates are calculated by subtracting 1H estimates from full-year estimates.
Note: Effective FY09/22, the company has adopted the revised Accounting Standard for Revenue Recognition. The adoption of the revised standard has resulted in changes in accounting methods for sales of real estate fractional ownership investment products (in the Real Estate Fund business). Under the previous standard, only commissions paid to the company from the sale of these products were booked as revenues; under the revised standard, however, the entire sales amounts are booked as revenues.
Note: “Other Financial Services” and “Aviation” are collectively referred to as “Other businesses” in the company’s financial results briefing materials.
Medium-term outlook
Earnings growth driven by operating lease business; accelerated expansion since listing
FPG has grown primarily by expanding its operating lease business. Since the listing on JASDAQ in September 2010, the company has been able to strengthen its fundraising capacity and increase the amount of equity underwritten (inventory) held on its balance sheet. Accordingly, it moved to build a structure allowing quick response to investor demand, and also resolved the issue of missed sales opportunities caused by insufficient inventory. Although earnings dropped in FY09/20 due to the effects of the COVID-19 pandemic, CAGR from FY09/10 to FY09/19 was 36.5% for revenues and 37.5% for operating profit.
Note: Company adopted consolidated reporting from Q2 FY09/13; prior figures are for the parent.
Growth in operating lease business to date
Growth through expanded equity placement in operating leases
Revenues in the operating lease business are calculated by multiplying the total amount of equity placement in operating leases by commission rate (revenues divided by total amount of equity placement in operating leases). FPG’s growth in revenues has mainly been driven by an increase in the total amount of equity placement in operating leases and not by a higher commission rate.
As noted, since its JASDAQ listing in FY09/10, FPG pursued a strategy of carrying inventory (equity underwritten) that can be placed with investors as needed, and the total amount of equity placement in operating leases grew significantly as a result. Thereafter, to reduce the risk of holding equity underwritten for longer than one year after origination, the company adopted a cautious approach in building up its volume of equity underwritten through FY09/14, but in FY09/15, it switched back to building the volume of equity underwritten and equity placement in operating leases increased substantially.
However, in FY09/20, the business environment for the airline industry became particularly severe due to the rapid deterioration of the economic environment in countries around the world as a result of the outbreak of COVID-19 and ensuing restrictions on travel and various activities. Investors became more cautious in their investment decisions, and sales activities were significantly constrained under the government's declaration of a state of emergency in April and May 2020, resulting in a significant year-on-year decline in the amount of equity placement in operating leases.
Shared Research understands that in addition to the increase in the volume of equity underwritten, the expansion in the company’s funding facilities contributed to the growth in equity placement in operating leases.
Strategies to expand fundraising capacity
When the company arranges an operating lease deal, it needs to raise funds via bank loans or investments from investor customers to buy assets before the leasing period begins. The company sometimes makes a temporary acquisition of equity in operating leases on the assumption that it will eventually be transferred to investors. Funds for these temporary advances come either from the company’s own funds or from financial institutions. As such, if the company expands its fundraising capacity, it is easier to put together several deals simultaneously, and facilitates the arrangement of larger deals, contributing to earnings growth.
The aggregate value of committed credit line contracts and overdraft facilities was around JPY1.5bn before FPG was listed, but following its listing on the JASDAQ in 2010, TSE Second Section in 2011, and TSE First Section in 2012, its credit standing with financial institutions improved. At end-FY09/20, the aggregate value of FPG’s committed credit line contracts and overdraft facilities stood at JPY134.9bn.
The company receives referrals from accounting firms and financial institutions. Development and expansion of its distribution network of accounting firms and financial institutions are contributing to revenues not only in the operating lease business but also in the Diversified businesses.
Revenues and number of partner accounting firms
FPG receives referrals from accounting firms and financial institutions (regional banks and securities firms). At end-FY09/20, it had 5,313 partner accounting firms and 144 partner financial institutions, including nearly all regional banks and leading securities firms. As shown in the following figure, revenues increased in the operating lease business and the Diversified businesses in line with expansion of the company’s distribution network of accounting firms and financial institutions. In FY09/20, revenues were hurt by impact from the COVID-19 pandemic.
Review of previous medium-term management plan (Quality Growth strategy)
The key points of the company’s previous medium-term management plan (covering the period from FY09/18 to FY09/20) are shown below. The following discussion concentrates on trends through FY09/19, before the COVID-19 outbreak in 2020.
Further cement leading position in Japanese Operating Lease market
Position the Real Estate business (no change), the Insurance Sales business (former Insurance Brokerage business), and the M&A business (former M&A advisory businesses) as core businesses: Decisively introduce management resources, and accelerate growth of the Diversified businesses*
Operate businesses with a focus on assets under management**: Rapidly achieve assets under management of JPY1tn
Push IT-driven sales: Expand online marketing and build third sales channel
In October 2018, FPG updated its previously announced medium-term management plan, and announced it would target an increase in corporate value through the Quality Growth strategy and its new shareholder return policy. The Quality Growth strategy calls for growth that accompanies high profitability and efficiency based on the following measures.
Target sustainable growth driven by three engines: (1) the Leasing Fund business, (2) the Diversified businesses (Real Estate business, Insurance Sales business, and M&A business), and (3) new businesses
Expand market share through boosted product appeal and sales capabilities
Conduct management without holding assets
Enter markets distinguished by strong growth prospects and high profitability. Refrain from pursuing business expansion at the cost of profitability.
The company implemented the following initiatives based on its medium-term management plan and Quality Growth strategy.
Sustainable growth driven by three engines: Leasing Fund business, Diversified businesses, New businesses
On the earnings front, FPG targeted revenues of about JPY30.0bn by FY09/21, three years from October 2018. It expected the Diversified businesses to make up about 20% of revenues (18.5% in FY09/20). In addition, the company expected to book revenues from new businesses (third growth engine) in FY09/21.
In FY09/19, revenues increased substantially to JPY26.5bn (+20.6% YoY), with the Diversified businesses accounting for 21.8% of the total. The company was well on track to achieve the targets in its previous medium-term plan, but its earnings in FY09/20 were dealt a severe blow by the global economic downturn sparked by the COVID-19 outbreak from February 2020.
Leasing Fund business
As noted above, revenues in the Leasing Fund business increased 9.5% YoY to JPY20.8bn in FY09/19. Over the full-year, the total amount of assets arranged in operating leases topped the previous record annual total, and the total amount of equity placement in operating leases also set a new record.
Strengthening Diversified businesses
FPG planned to leverage the sales network it had developed in the Leasing Fund business (namely referrals from accounting firms and financial institutions) to offer real estate fractional ownership investment products, life insurance for corporations, and M&A advisory services to company owners and high net worth individuals. By doing so, it aimed to achieve revenue growth and diversification.
Revenues in the Diversified businesses in FY09/19 were JPY5.7bn (+90.1% YoY), comprising 21.8% of total revenues, and CAGR over the last five years was 48.1%. The main driver of revenue growth was the Real Estate business. The previous medium-term management plan called for positioning not only the Real Estate and Insurance businesses but also the M&A business as core businesses, and deploying management resources accordingly.
Note: From FY09/19, the company grouped the Insurance Brokerage business and the Insurance Agency business which started in FY09/18 under the Insurance business.
Real Estate business: targets growth fueled by increase in real estate for arrangement, deployment of specialists, and online marketing
The Real Estate business receives compensation for providing real estate fractional ownership investment products to investors (high net worth individuals and others). The business was launched in FY09/13, and generated revenues of JPY4.2mn in FY09/19 (+511.2% YoY).
Overview of new medium-term management plan (FY09/21 to FY09/23)
Basic policy
Due to the COVID-19 outbreak in 2020, FPG has positioned the three years covered by the new medium-term plan as a period to implement structural changes in its businesses in order to strengthen the company’s sustainability. The company realizes that it has not developed the Diversified businesses to their full potential in the past, and sees the next three years as a period to improve these businesses. The company also assumes its Leasing Fund business will gradually recover from the fallout of the COVID-19 pandemic over the next three years.
Strategy
The company’s core strategy entails the creation of new values through integrated use of the various licenses held by the group and the promotion of digital solutions. It will create new businesses by combining its existing business licenses (Type I/Type II financial instruments business, investment management business, investment-based trust company, specified joint real estate ventures, and real estate brokerage [as of end-September 2020]) and new business licenses it aims to acquire in the future, with digital technologies such as blockchain, AI, cloud, and big data. FPG looks to develop a FinTech business that takes advantage of its distribution network. According to the company, it is already preparing to create products and services in the fields of payment services, crowd funding, security token offering (STO), and private jets (as of December 2020).
Envisioned business model
FPG aims to leverage its strengths—expert staff, diverse business licenses and the specialized companies that hold such licenses, broad domestic network, and favorable relationships with overseas lessees—to effectively and efficiently deliver financial products and services demanded by SMEs and individuals (potential customers).
Note: “Other Financial Services” and “Aviation” are collectively referred to as “Other businesses” in the company’s financial results briefing materials.
Strategic areas and measures
Earnings outlook
We understand FPG aims to restore its earnings power to pre-pandemic levels by around FY09/23.
Shareholder returns
The company targets a payout ratio (consolidated) of 50%. Shared Research thinks profit distribution to investors will also gradually revert to normal levels in tandem with the recovery in earnings power.
Business
Business
Independent financial services company: main business is Leasing Fund
FPG is an independent financial services company. Its businesses span Leasing Fund, Real Estate, FinTech, and Other businesses (Insurance, M&A, Private Equity, Securities, Trust, and Aviation businesses), with Leasing Fund being the mainstay (87.4%* of revenues in FY09/20, includes aircraft investment management services business).
Leasing Fund business sets up SPCs and places equity in the SPCs with investors
FPG’s Leasing Fund business differs from typical leasing businesses in that FPG does not own the leased assets. For each deal, FPG forms a special purpose company (SPC) to run an operating lease business, and places stakes in the silent partnerships of the SPC with investors (mainly SMEs). The SPCs use funds from investors and bank loans to buy aircraft, shipping vessels, and marine shipping containers. Through an operating lease business, these assets are leased to lessees such as airlines and shipping companies. Commissions, which the company receives from the SPCs, are included in the equity funding from investors.
Deferred tax benefits for investors; low leasing payments for lessees
By opting for the declining balance depreciation method in their P&Ls, operating lease SPCs tend to have net losses in the first half of the leasing period before having profits in the second half. Investors are able to defer taxes as their overall earnings are reduced because their share of losses from the SPC offsets profits in their main businesses. They can also expect to receive investment returns with a similar interest rate to that on ordinary bank deposits. FPG’s investors are primarily concerned with tax deferral, so by capping expected investment returns at a low level similar to the interest rate on ordinary bank deposits, the company is able to offer competitive leases to lessees, giving it an advantage in arranging leasing deals.
Main sources of earnings: arrangement fees and placement commissions
FPG’s main sources of earnings are arrangement fees for setting up operating lease deals, and placement commissions received for placing equity in the SPCs’ silent partnerships to investors. The company also receives management fees for operating the SPCs. The commission and management fees are paid by the SPCs to the company. The sum of arrangement fees and placement commissions is around 15% (average over the recent five years) of the total amount of equity placement in operating leases.
Earnings structure: high fixed cost ratio, high margins
The company’s cost ratio is around 17%, and fixed costs such as personnel expenses are the main component of SG&A expenses, so incremental profit margin is high. The OPM averaged 53.1% over the last 10 years.
Profits grow after listing owing to enhanced credibility among investors, expanding distribution network and fundraising capacity
The company has grown primarily through the operating lease business. After listing on the JASDAQ market in September 2010, revenues grew at a CAGR of 36.5% from FY09/10 through FY09/19 and operating profit at a CAGR of 37.5%. This was due to an expanded distribution network and increased fundraising capacity. In FY09/20, earnings slumped due to impact from the COVID-19 pandemic, but FPG’s domestic distribution and customer referral network expanded to 5,313 accounting firms and 144 financial institutions, encompassing nearly all regional banks and leading securities firms. This bolstered the company’s sales reach. Before the listing, the company’s credit lines totaled around JPY1.5bn, but grew to JPY140.6bn in FY09/19 and further to JPY134.9bn in FY09/20.
Limited impact from cyclical economic fluctuations
According to FPG, the impact of economic fluctuations on the Leasing Fund business is limited. In previous economic downturns, such as in FY09/09 following the global financial crisis, revenues fell 5.1% YoY but the company returned to growth in FY09/10 with revenue growth of 89.3% YoY. In FY09/20, the global economy rapidly cooled due to impact from the COVID-19 pandemic, and the company’s earnings were dealt a severe blow. However, based on the growth trend in transportation modes that are indispensable for economic society (such as aircraft and shipping vessels) and in the market for corresponding operating leases, Shared Research thinks demand in the company’s target markets will remain strong in the future.
Leasing Fund business (87.4% of FY09/20 revenues)
In FY09/21, the company renamed its Lease Arrangement business to the Leasing Fund business. The latter encompasses the previous Lease Arrangement business and the aircraft investment management services business operated by FPG Amentum. The FY09/20 revenue composition above is the share after the Lease Arrangement business was reclassified as the Leasing Fund business.
Overview of Leasing Fund business
Main players in the Leasing Fund business are FPG, SPCs, investors, and lessees. Each role is outlined below. (For details on operating leases refer to Other information page.)
FPG creates a special purpose company (SPC) to operate an operating lease business and places equity in the SPC’s silent partnership with investors (primarily SMEs).
The SPC raises equity funds from investors or through bank loans and buys aircraft, shipping vessels, and marine shipping containers, which it leases to lessees such as airlines and shipping companies. SPCs tend to have net losses in the first half of the lease period. Since they employ the declining balance depreciation method, depreciation expenses are greater than revenue early in the lease period. Later in the lease, depreciation declines, and the SPCs tend to move into profit.
Investors have a share in the profits and losses of the SPC. Through the earnings from the operating lease business, they can enjoy deferred tax benefits.
The lessees conduct business using assets (aircraft, shipping vessels, and marine shipping containers) obtained under operating leases from the SPC.
FPG’s role in Leasing Fund
In the Leasing Fund business, FPG establishes an SPC, which manages an operating lease business, and places equity in the SPC’s silent partnership with investors (primarily SMEs).
FPG and SPCs
FPG performs all the operations necessary to carry out the leasing business (it arranges operating lease deals, places partnership equity, and manages the business) under contract from the SPC. For each business activity, classified as origination, placement, or management, FPG receives commissions from the SPC. It also receives arrangement fees for origination, placement commissions for placing equity stakes, and management fees, which it books as revenues.
Arrangement fees and commissions are the main source of FPG’s revenues, amounting to about 15% of the total amount of equity placement in operating leases. Management fees comprise only a small percentage of revenues.
FPG and investors
Accounting firms and financial institutions refer investors to FPG, which directly provides investors with explanations on leasing projects in the operating lease business. Before the leasing period under the SPC begins, the company markets equity in the SPC to investors. Once the lease begins, if all the equity in the SPC has not already been placed, the company places the portion it has purchased with investors and executes a transfer in the silent partnership contract.
FPG and referring parties (accounting firms and financial institutions)
FPG has customer referral agreements with accounting firms, tax accountancies, regional banks, and securities firms nationwide. FPG provides product explanations directly to referred investors. If a contract is signed, FPG pays commissions to the referring party. Referral fees are 1–2% of the total amount of equity placement in operating leases. As of end-FY09/20, the company had alliances with 5,313 accounting firms and tax accountancies (4,801 in FY09/19), and 144 financial institutions (regional banks and securities firms) (143 in FY09/19).
Business flows in Leasing Fund business
Business flows and revenue classification in the Leasing Fund business, from receiving the mandate through the end of the lease, are as follows.
1. Order receipt (for origination)
The company receives a leasing mandate from a lessee such as an airline, an aircraft leasing company, or a shipping company via a tender or individual negotiation.
Based on a Japanese Operating Lease scheme, the company raises about 30% of funding for the project from investors who accept low expected return. As a result, compared with operating leases from a conventional leasing company, this system allows the company to offer lower-priced leasing rates for the lessee. (See Other information for explanation of Japanese Operating Leases.)
2. Deal origination
An operating lease run by an SPC is arranged based on the type of lease required by the lessee, the financial institutions’ loan terms and conditions, and the projected amount of placement with investors.
Decisions are made on the leasing period, residual value of the asset, lease rates, borrowing interest rates, followed by investors’ expected return, and arrangement fees and placement commission paid by the SPC to the company. Borrowing interest rates depend on the lessee’s credit rating and market interest rates, and expected returns are set at a similar interest rate to that on ordinary bank deposits; these conditions vary little among different products. Yet commissions from equity placement that FPG receives move with lease rates. Lease rates vary by asset and product. If there are numerous competing companies trying to originate a certain leasing deal, rates tend to be lower, while if there are fewer competing companies, they tend to be higher. Aircraft leasing rates are low because there are many companies competing for individual assets. Rates for shipping vessels and marine shipping containers are higher due to fewer competitors (see Operating lease assets section for details).
3. Private offering (placement)
Before the lease term begins, placements to potential investors of equity in the SPC’s silent partnership occur. These are treated as private offerings of securities under the Financial Instruments and Exchange Act.
When the leasing term begins, if some of the equity in the partnership has not yet been placed, FPG temporarily buys the stake on the assumption it will eventually place the stake with investors. The value of these temporary advances paid is booked on the balance sheet as equity underwritten or money in trust (aircraft for arrangement).
4. Lease start (origination)
Based on the lease contract, the SPC starts managing the operating lease business.
5. Transfer (placement)
After the day that the lease term begins, if all of the equity in the SPC has not previously been placed with investors, the company places with investors the portion it has bought, and executes a transfer under the silent partnership contract. This transfer is treated as a securities transaction under the Financial Instruments and Exchange Act.
6. Business management
Under the silent partnership contract, the company manages the operating lease business, including accounting and tax reporting.
7. Lease expiry (origination)
Once the lease has expired, the leased asset is sold, borrowings are repaid and residual assets are distributed to investors.
Role of SPCs in Leasing Fund business
SPCs raise funds by placing equity with investors and through bank loans, which they use to buy aircraft, shipping vessels, and marine shipping containers. The partnerships provide operating leases of the aircraft, shipping vessels, and marine shipping containers to lessees such as airlines and shipping companies.
SPCs and FPG
FPG performs all operations necessary for a leasing business under a contract with the SPC. It arranges operating lease deals, places partnership equity, and manages the business. For each business activity, classified as origination, placement, or management, FPG receives commissions from the SPC. It also receives arrangement fees for origination, placement commissions for placing equity, and management fees, each of which it books under revenues.
SPCs and lessees
SPCs use funds raised by placing equity with investors and taking bank loans to buy aircraft, shipping vessels, and marine shipping containers from manufacturers and other companies. They lease these assets to lessees such as airlines and shipping companies under operating leases.
Lessees use operating leases for a variety of reasons: to lower procurement costs, smooth out expenses, improve fundraising capacity, and for off-balance-sheet financing. For operating leases, around 30% of the price of the leased asset (funds raised by SPC) is equity from investors, and the funds do not incur heavy interest costs. Therefore, compared with purchasing the asset themselves, the lessees are able to reduce funds raised from financial institutions, and as such can further save on interest payments and reduce the use of credit lines with the financial institutions.
The lessees make regular payments to the SPC based on the leasing contract. If lease payments cease, (e.g., the lessee goes bankrupt), the revenues at the Operating Lease Business may worsen and investors may incur losses. As profits or losses in the Operating Lease Business belong to members of silent partnerships, they do not impact FPG’s performance directly. Still, the lessees’ failure to pay leases could hurt FPG’s reputation and is highly likely to affect FPG’s business results. Therefore, FPG restricts operating lease activities to companies with a strong capacity to meet payments. The company prioritizes flag carriers, choosing airlines such as British Airways, Lufthansa and Air France, along with major aircraft leasing companies. According to the company, it generally does not deal with airlines that have a high risk of going bankrupt. FPG chooses marine shipping container lessees from among the top 20 container shipping companies globally. FPG also says its vessels are leased to the world’s leading shipping companies. According to the company, since it launched its Leasing Fund business, there have been no cases where lease payments stalled or a lessee went bankrupt.
Following the leasing term, the SPC sells the leased asset and receives and distributes the sales proceeds.
SPCs and investors, financial institutions
The SPC executes a silent partnership agreement with investors. The partnership receives roughly 30% of the purchase price of lease assets (such as shipping vessels) and commissions by way of equity investments. It borrows roughly 70% of the lease asset cost from financial institutions under non-recourse loan contracts.
Investors enter into a silent partnership agreement, and buy a stake in the SPC. These stakes (rights) are classified as securities under the Financial Instruments and Exchange Act.
The SPC settles its accounts each accounting period and distributes earnings to investors in accordance with their share of equity. SPC revenues consist of lease payments from the lessee and income from leased asset sales. Costs are depreciation on the leased assets, the book value of the asset when sold, interest payments on loans from financial institutions, and management fees paid to FPG (arrangement fees, placement commissions, and management fees).
In the operating lease business, SPCs use the declining balance method to account for depreciation. This means that in the early part of the lease term depreciation and other expenses are higher than revenues, and the SPC tends to post a loss. In the latter part of the lease term, depreciation expenses decline, and the SPCs become profitable. Investors are allocated profits and losses in line with their share of equity, so they book losses to the extent of their investment. They can use these losses from their portion of SPC losses in the early part of the lease term to offset profits in their main businesses and thus defer taxes.
Investors’ expected returns in the operating lease business are set at a similar interest rate to that on ordinary bank deposits.
Per the company, when investors provide equity, they tend to be more concerned about deferred tax effects than about direct yields. Further, investors bear forex risk, as at the end of the lease period they often receive returns in dollars.
Investors can use the deferred taxes to smooth profits, make capital investment plans that coincide with the end of the lease term, plan for costs, and prepare for payments of retirement benefits for directors. They can also be used when an unlisted company transfers a business. They cut earnings per share, reducing the appraised value of shares. The company said that when shares are transferred to a business owner’s heir, the inheritance tax burden may be reduced.
Assume that the owner of an SME decides to retire in seven years, has decided to discontinue the business, and seeks to defer taxes by investing in an operating lease for seven years corresponding to the retirement payment (for simplification, assume losses incurred by the SPC during the fiscal period in which funds are invested can be used to dispose of the entire amount of losses equivalent to the invested funds). During the fiscal period in which the funds are invested, the SME can reduce profits by offsetting its main business’ profits with the portion of losses from the SPC and thereby defer taxes. After seven years, the SME can allocate the invested funds that are returned when the SPC’s period expires to pay for expenses incurred for the owner’s retirement payment. As a result, the SME is not required to pay taxes on profits from its main business that it would otherwise have had to pay during the fiscal period when the funds were invested. Instead, since the owner’s retirement payment is taxed, while the effective corporate tax rate is roughly 30%, retirement benefit payments are taxed at a maximum of 22.5% (1/2 of income after deductibles times the tax rate [maximum: 45%]). Investing in the operating lease business allows the retiring business owner to reduce the tax burden by the difference between the amount of taxes paid for the retirement payment and the amount that would be paid as a company.
FPG’s customers (investors) are highly profitable SMEs. Note: 50% are new customers and 50% repeat customers. They come from different industries without any concentration in specific sectors. The value of customer investments averages JPY50mn.
Case study: profits in operating lease business
For reference, profits for a SPC are shown below based on the following assumptions: investment, JPY10bn; non-recourse loan, JPY21.5bn; leasing term, eight years; lease fees, 9.0%; sale price as share of purchase price for the leased assets, 44.0%; interest rate on non-recourse loan, 2.5%; commissions (placement commissions and arrangement fees), 15.4% (versus equity investment amount). There is a limited impact from management fees, so they are not included in these calculations.
Under declining-balance method and useful life of eight years, depreciation rate is 25.0%, revised depreciation rate is 33.4%, and guarantee rate is 7.909. From year six, when the unadjusted depreciation amount is lower than the guaranteed depreciation amount (purchase price times guarantee rate), the depreciation limit is calculated by multiplying the revised depreciation rate by the revised purchase price.
Note: When transactions occur in foreign currencies, there may be an impact from currency fluctuations.
During the lease term, the SPC receives lease payments from the lessee. Lease payments are determined based on lease term, non-recourse loan interest rates, and other factors.
Loan repayments are via the principal and interest method, so early during the lease term there is a larger share of interest payments. As the loan matures the interest payment portion tapers off. The non-recourse loan interest rates reflect the credit rating of the lessee.
The declining balance method is used for depreciating the lease assets, so depreciation expenses are large during the first half of the term of the lease, and decline during the second half of the term.
The SPC incurs startup costs including arrangement fees and placement commissions in its first fiscal year. The sum of arrangement fees and placement commissions is around 15% of the total amount of equity placement in operating leases.
Following lease expiry, the leased asset is sold and revenue received. The asset sales price is generally decided based on the book value after deducting expenses.
Profits from operating leases are distributed to investors after the various components are accounted for as shown below.
As shown in the previous table, profits for the SPC are leasing fees plus asset sale receipts minus interest expenses, depreciation, placement commissions, arrangement fees, etc. The SPC tends to generate losses in the first half of the lease term and profits in the second half. Investors can use deferred tax benefits as their share of losses given their share of equity.
Aircraft investment management services business operated by FPG Amentum
In FY09/21, the company consolidated the aircraft investment management services business operated by FPG Amentum into the Lease Arrangement business, creating the Leasing Fund business.
FPG Amentum handles aircraft lease arrangement, lease management, remarketing, and the arrangement of finance, and receives commissions and compensation in exchange. FPG Amentum has two mainstay businesses, one of which is JOL origination and remarketing where it collaborates with FPG’s operating lease business. It also manages aircraft for third parties independent of FPG.
Real Estate Fund business (5.4% of FY09/20 revenues)
Real Estate Fund business (name changed in FY09/21)
This business receives compensation for providing real estate fractional ownership investment products to investors (high net worth individuals and others). Prior to April 2016, FPG had been offering real estate fractional ownership investment products under the Real Estate Specified Joint Enterprise Act. Since April 2016, it has been offering real estate fractional ownership investment products by leveraging the trust functions of FPG Trust.
These products are for buildings located in prime locations in central Tokyo, which are managed by subsidiary FPG Trust Co., Ltd. (FPG Trust), with trust beneficiary interests from the assets sold to investors.
After units are sold, FPG Trust manages the properties as a single trust asset and distributes revenues generated from the buildings to investors.
After a certain period, the property is sold, the payment distributed to investors, and the trust terminated.
For tax purposes the trust beneficiary interests are valued as a real estate asset, so it is valued at 20–30% of the invested amount. As such, it offers investors greater inheritance or gift tax benefits compared to cash.
FPG receives 7–8% of the sales price in commissions.
Real Estate fractional ownership investment products offer investors several benefits. They can invest in small lots of real estate located in prime locations in central Tokyo, are not responsible for time-consuming operations (property management and operation), and the asset can be used for asset management while also being used to transfer assets via inheritance or as a gift.
These features are similar to features of products complying with the Real Estate Specified Joint Enterprise Act, but because costs for purchasing the trust beneficiary interests are handled differently from costs for products under the Act, investors are able to take advantage of new benefits, including various tax benefits and lower costs when acquiring the units. Furthermore, according to the company, since real estate fractional ownership investment complying with the Real Estate Specified Joint Enterprise Act are treated as physical real estate, customer referrals from financial institutions was sluggish, as many financial institutions were concerned about regulations regarding dual businesses. In contrast, the new small-lot real estate product that sells trust beneficiary interests to investors is regarded as an investment security, and therefore should see increased referrals from financial institutions.
FinTech business (2.0% of FY09/20 revenues)
In FY09/21, FPG renamed its IT business as the FinTech business. In this business, the company aims to provide new financial products and services derived from a combination of the various financial business licenses held by the group and the technologies of its IT business. The newly established fintech promotion division at FPG and subsidiary FPG Technology will jointly drive the FinTech business.
FPG Technology generates revenue mainly through its SI business (system development on contract, and development of in-house products, which it sells to own customers) and the network infrastructure development business. In FY09/20, the FinTech business reported revenues of JPY250mn.
Other businesses (5.2% of FY09/20 revenues)
The former Diversified businesses comprised the operations of FPG’s domestic subsidiaries encompassing the Real Estate, Insurance, M&A, Private Equity, Securities, Trust, IT, and Aviation businesses. In FY09/20, the Diversified businesses made up 18.5% of total revenues (12.6% after reclassifying the aircraft investment management services business to the Leasing Fund business). Although the impact of these businesses on consolidated earnings is low compared to the Leasing Fund business, their revenues have expanded from JPY137mn in FY09/12 to JPY5.7bn in FY09/19, before the COVID-19 outbreak.
In FY09/21, the company reclassified the Insurance Sales business, the M&A business, and the Private Equity business under Other Financial Services, which, together with the Aviation business, are collectively referred to as Other businesses in disclosure materials.
Other Financial Services businesses
Insurance Sales business
This business primarily offers insurance products to SMEs. FPG is an intermediary between customers (insurance policyholders) and insurance companies. Independent from the insurers, FPG offers the most suitable insurance to the policyholders. When an insurance contract is signed, it receives a predetermined commission from the insurance company. Insurance products vary in terms of premiums and cash surrender rates based on the gender and age of the insured individual and on the insurance company. FPG uses an insurance product comparison table to propose optimal insurance products from over 100 types based on coverage and tax benefits.
Private Equity business
In this business, the company engages in investment activities for the purpose of generating capital gains through the sales of investee company shares and interests in private equity funds. FPG improved the organizational structure and began full-scale operation from October 2019.
M&A business
This business is mainly concerned with selling customers’ businesses and brokering M&A deals under advisory contracts. This generates commissions and predetermined success fees upon the successful sale of a business.
Securities business
This business aims to transition away from its original business centered on currency derivatives, and is making contributions to aircraft lease operations through investment management services.
Trust business
This business earns revenues by operating and managing trust assets based on trust contracts between FPG and customers. Consolidated subsidiary FPG Trust Co., Ltd. runs this business.
Aviation business
This business earns revenues by transporting people, conducting sightseeing flights, and providing aerial photography services as an air carrier or aerial work service operator. Building on the existing operations of North Japan Airlines, the company plans to develop a private jet charter business geared toward individual customers.
Earnings structure
Leasing Fund business
The Leasing Fund business accounts for most of FPG’s revenues, at 87.4% of the total in FY09/20. From FY09/21, the company included the aircraft investment management services business operated by FPG Amentum into the Leasing Fund business, but we present the figures for the former Lease Arrangement business in the discussion below to ensure continuity of data.
Note: YoY rises of over 1,000% are shown by “-“
Key revenue source: placement commissions
Main sources of revenues in the Leasing Fund business: arrangement fees for arranging operating lease deals and placement commissions received from the SPC (for placing equity in the SPC’s silent partnerships with investors). The company also receives arrangement fees for originating operating lease deals and management fees for operating the SPC, but this is a negligible share of revenues.
Key variables: equity placement, commission rate from equity placement, and number of partner accounting firms and financial institutions
Revenues in the Leasing Fund business are calculated by equity placement (value of equity in SPC placed with investors in FY09/20: JPY94.8bn) multiplied by the commission rate (revenues divided by total amount of equity placement in operating leases in FY09/20: 12.5%; assuming that the total amount of equity placement in operating leases for full-equity deals amounts to 34% of the total funding for the deal; under full equity deals, funds are exclusively raised from investor equity without any bank loans).
Equity placement
The total amount of equity placement in operating leases reflects the total amount (including value of beneficiary interests in aircraft leasing) of equity FPG sells to investors (equity placed in silent partnerships or in general partnerships under the Japanese Civil Code in the operating lease business).
Per the company, economic fluctuations have a limited impact on the total amount of equity placement in operating leases. It cites that many SMEs are profitable even during economic slumps, and the leased asset market is large. In past downturns, such as in FY09/09, equity placement fell 5.1% YoY but in FY09/10 equity placement grew 89.3% YoY.
In FY09/20, however, the economic conditions worldwide worsened at an accelerated pace due to the effects of the COVID-19 pandemic, and the operating environment in the aviation industry was hit particularly hard by restrictions on immigration and movement. Investors became more cautious with their investment decisions and marketing activities were greatly restricted in the months of April and May 2020 following the Japanese government’s declaration of a state of emergency. As a result, the total amount of equity placement in operating leases fell sharply YoY. Although demand remains robust, the operating environment for the aviation industry is expected to recover only gradually, and the total amount of equity placement is therefore likely to expand at a moderate pace.
Number of partner accounting firms and financial institutions
The company has developed and expanded its distribution network of accounting firms and financial institutions (regional banks and securities companies), and this has contributed to growth in revenues in the Leasing Fund business. As of end-FY09/20, FPG had 5,313 partner accounting firms and 144 partner financial institutions.
Expanding fundraising capacity
When the company arranges an operating lease in the Leasing Fund business, it needs to raise funds via bank loans or investments from customers to buy assets until the lease begins. The company sometimes makes a temporary investment in the equity, assuming that it will eventually be transferred to investors. Funds for these temporary advances are covered either by the company’s own funds or from financial institutions.
If the company expands its fundraising capacity, it is easier to put together several deals at the same time and it also facilitates the arranging of larger deals and enables the company to conduct transactions with lessees based on favorable terms. The end result is that it should contribute to the company’s profit growth.
The aggregate value of committed credit line agreements and overdraft facilities was around JPY1.5bn before the company was listed. Following FPG’s listing on the JASDAQ in 2010, TSE Second Section in 2011 and TSE First Section in 2012, its credit standing with financial institutions improved. The value of such agreements hit JPY134.9bn in FY09/20. FPG also increased the number of lender banks and the amount of funds raised through them via face-to-face negotiations.
Note: Total amount of assets arranged reflects total for equity underwritten and money in trust (aircraft for arrangement).
Commission rate
Commission rate varies depending on the lease asset. Due to competition among companies offering leases, leasing rates tend to be lowest for aircraft, followed by shipping vessels, and then marine shipping containers.
From FY09/11 through FY09/19, the commission rate has been around 14–17%. In FY09/20, it was only 12.5% due in part to the impact from the COVID-19 pandemic and a drop in margins for aircraft deals.
Note: From FY09/11 to FY09/16, the commission rate excludes full equity deals, whereby funds are exclusively raised from investor equity without any bank loans.
Note: The commission rates from FY09/17 assumes that the total amount of equity placement in operating leases for full equity deals under silent partnerships and trust beneficiary interests deals amounts to 34% of the total funding.
Cost of revenues
Key components of cost of revenues are customer referral fees and deal arranging expenses in the Leasing Fund business. In FY09/20, cost of revenues also included valuation losses on equity underwritten for aircraft for sale related to the AM deal. Accounting firms and financial institutions refer the company to investors, and FPG pays referral commissions to the referring party when it signs a contract. Referral fees are about 1–2% of equity placement based on referrals. Arranging expenses include legal fees paid to lawyers who prepare legal agreements, tax advice fees, and costs relating to appraisal reports (calculating the lease cost upon the completion of the lease period).
SG&A expenses
SG&A expenses, such as personnel and rent, are mostly fixed. Personnel expenses are increasing, due to the expansion of operations and more consolidated subsidiaries.
Note: Personnel expenses include salaries and allowances, bonuses (including provision of allowances), legal and other welfare expenses, and recruitment costs. The figures have been disclosed since FY09/12. Amounts below JPY1mn were rounded.
Reportable segments and operating segments
FPG’s reportable segments, operating segments, subsidiaries and affiliates, as well as their relationships, are shown below. The company adopted the following organizational structure from FY09/21.
Note: rises of over 1000% are shown by “-”
Note: From Q1 FY09/20, the company reclassified FPG Amentum, previously included under the “Other” segment, as a separate reportable segment. At the same time, it reclassified the former reportable segment FPG Securities under the “Other” segment. The “Other” segment includes FPG Securities (Securities business), FPG Trust (Trust business), FPG Insurance Services (Insurance business), North Japan Airlines (Aviation business), and FPG Technology (IT business). Figures for FY09/19 have been retroactively adjusted to reflect the business classification used from FY09/20.
Note: From Q1 FY09/21, the company reclassified FPG Trust, previously included under the “Other” segment, as a separate reportable segment. The “Other” segment includes FPG Securities (Securities business), FPG Insurance Services (Insurance Sales business), North Japan Airlines (Aviation business), and FPG Technology (IT business). Some corporate life insurance products, mainstay of the Insurance Sales business, were discontinued in the wake of 2019 tax reforms. The company saw the need to streamline the group’s Insurance Sales business and exited insurance brokerage services. In January 2021, FPG began offering insurance agency services and consolidated the group’s Insurance Sales business therein.
Strengths and weaknesses
Strengths
Leader in Japanese Operating Leases:
FPG has spearheaded growth in the Japanese Operating Lease transactions market as a leader in this space. Shared Research thinks that the company is more competitive than its industry peers because it was an early mover in building its business base, and as a result has competitive products, customer bases, and operating lease origination capabilities. Since FPG was established, there have been no instances of its lessees failing to make lease payments or going bankrupt. As of end-FY09/20, the company’s customer base of investors was underpinned by a referral network spanning 5,313 accounting firms and 144 financial institutions. In regard to origination capabilities, FPG has built a solid relationship with FPG AIM (headquartered in the Netherlands with bases in Singapore and the United Arab Emirates), which introduces operating leasing deals for shipping vessels and marine shipping containers from around the world exclusively to FPG, and provides origination support. Leveraging this relationship, the company has maintained a major presence in the Japanese Operating Lease market for shipping vessels and marine shipping containers.
Few competitors in a promising market:
According to Yano Research Institute (Japanese Operating Lease 2019 market survey), as of June 2019, only 10 of 170 leasing companies in Japan were involved in Japanese Operating Lease, and according to the company there were only three Japanese Operating Lease specialists including FPG. Japanese Operating Lease have been around for 30 years, but there have been almost no new entrants. Bank-affiliated leasing companies are not used to holding equity underwritten, so they are reluctant to expand in this area. Accordingly, industry peers only allocate a fixed equity placement amount to deals every fiscal year. As a result there is not excessive competition lowering leasing rates, and FPG is able to receive placement commissions that are high for a financial product. In fiscal 2019, there were 938,000 SMEs (potential customers) with aggregate recurring profit of JPY27.0tn (calculated by Shared Research from fiscal 2019 Financial Statement Statistics of Corporations). In FY09/20, the total amount of equity placement in operating leases at the company was JPY94.8bn, so Shared Research thinks that there is plenty of scope for market expansion.
Efficient, high-margin earnings structure:
According to Japan Exchange Group, Inc.’s (TSE1: 8697) survey of business results of listed companies for fiscal 2019 (April 2019 to March 2020), companies listed on TSE First Section showed an ROE of 6.3% and an operating profit margin of 5.3% (the average of all industries). Meanwhile, over the last 10 years FPG’s ROE and OPM have averaged 33.5% and 53.1% respectively. The high ROE is due to the high OPM. In Shared Research’s view the high OPM stems from a business environment with few competitors, low costs and SG&A expenses that are primarily fixed. Shared Research thinks this is because margins are on an uptrend as revenues expand.
Weaknesses
Review of product structure may be needed depending on tax system reform:
The scheme for Japanese Operating Leases, the core of the Leasing Fund business, must conform to the Japanese tax system with regard to elements such as depreciation methods and the scope of investors’ tax deductions, which restricts freedom when structuring products. Furthermore, product structure needs to be altered with each tax reform. The predecessor to Japanese Operating Leases as the mainstream tax deferral product in the 1990s and early 2000s was Japanese Leveraged Leases (based on the finance lease formula). In the 1998 tax reform, the depreciation method of offshore lease assets was changed to the straight-line method, and in the 2005 reforms, the ceiling on investor deductions was changed to 100% of their investment. These Japanese Leveraged Leases became Japanese Operating Leases as we know today.
Equity underwritten has to be placed within one year of origination:
Since FY09/11, the company has had a strategy of holding equity underwritten as inventory, and then placing it in line with investor needs. Since it launched the Leasing Fund business in 2004, FPG has not held unplaced equity underwritten for more than one year. If equity underwritten is held for more than one year, investors will not be able to have first year losses, which are the largest of the lease term, reflected in their settlements, so product marketability will worsen.
Origination amount affected by capital investment trends in specific industries:
Leased assets in the Leasing Fund business mainly involve aircraft, marine shipping containers, and shipping vessels. As a result, capital investment trends in the aviation and marine transport industries can affect the origination amount of operating lease deals. In FY09/20, hurt by a rapid slowdown in global economy due to the COVID-19 pandemic and deteriorated business environment in the aviation industry, the total amount of assets arranged in operating leases fell 70.5% YoY to JPY158.4bn.
Group companies
Key consolidated subsidiaries
FPG Securities Co., Ltd. (100%)
Established in June 2004. Became a consolidated subsidiary in March 2013. Aims to transition away from its original business centered on currency derivatives, and is making contributions to aircraft lease operations through investment management services.
FPG Real Estate Co., Ltd. (100%)
Established as a wholly owned subsidiary in April 2013. Operates a real estate leasing business under master leases.
FPG Trust Co., Ltd. (100%)
Established in March 2009 and made a subsidiary in October 2014.
FPG Insurance Services Co., Ltd. (100%)
Launched insurance agency services from June 2018.
North Japan Airlines Co., Ltd. (100%)
Was made a wholly owned subsidiary in November 2019.
FPG Technology Co., Ltd. (100%)
Was made a subsidiary in April 2020, and renamed from Ken First Co., Ltd.
FPG Amentum Limited (75%)
Based in Dublin, this business is involved in aircraft lease arrangement, lease management, remarketing, and arranging finance. FPG bought a 25% stake in Amentum in November 2013 and entered into a business alliance. The company bought further equity in May 2015 and made Amentum a consolidated subsidiary. In 2019, it established FPG Amentum HK Limited, which started operations in July of the same year.
FLIP No. 243 Co., Ltd. (100%), FLIP No. 244 Co., Ltd. (100%), FLIP No. 245 Co., Ltd. (100%)
These companies operate the aircraft operating leases in the Leasing Fund business.
Equity-method affiliates
FPG AIM (FPG Asset & Investment Management B.V.)
Headquartered in the Netherlands with offices in Singapore (FPG Asset & Investment Management Asia Pte. Limited) and the United Arab Emirates (FPG Asset & Investment Management Middle East FZ LLC). This company refers vessel and marine shipping container leasing deals from around the world exclusively to FPG, thus supporting FPG’s origination business. It was established in February 2012 with a 75% investment by a non-Japanese partner and 25% from FPG. The company aims to expand its presence in arranging overseas leases, cultivate new overseas lessees, and strengthen relationships with existing lessees.
FPG pays FPG AIM commissions for arranging leasing deals.
Market and value chain
Overview of Japan Operating Lease market
Total amount of equity placement in operating leases and number of deals
According to Yano Research Institute (Japanese Operating Lease market survey), the size of the Japanese Operating Lease market based on the value of investors’ equity investment is as follows.
The impact of the 2008 global financial crisis caused declines on the supply side from aircraft and marine vessel manufacturers and reduced interest from the companies who would ordinarily have invested in operating leases, so the Japanese Operating Lease market continued to shrink through fiscal 2009 (April 2009–March 2010).
In fiscal 2010 (April 2010–March 2011), the Japanese Operating Lease market started to grow again, with 121 deals worth JPY165.6bn. As the effects of the global financial crisis eased, investor demand remained firm in early 2011 and European airlines started to request leasing deals, giving the market a tailwind. By fiscal 2011 (April 2011–March 2012), the market was worth JPY166.5bn, with 129 deals.
In fiscal 2012 (April 2012–March 2013)—the year FPG listed on the First Section of the Tokyo Stock Exchange—it grew to JPY194.2bn and 128 deals, underpinned by robust investor demand.
From fiscal 2013 (April 2013–March 2014), the market expanded, driven by an increase in the number of aircraft deals amid robust investor demand.
The market in fiscal 2017 (April 2017–March 2018) was worth JPY420.1bn, with 275 deals. Shipping vessel and marine shipping container deals slowed down partly due to the impact from the bankruptcy of a major Korean shipping company. Turning to aircraft deals, there was a growing polarization driven by intensifying competition for JOL deals as companies diversified fundraising methods amid bankruptcies of European LCCs and a decline in interest rates. As a result, some companies refrained from actively pursuing leasing deals, while new airline companies in Europe and the Middle East (and to a certain extent also in China and North America) started to request for arranging leasing deals.
The market in fiscal 2018 (April 2018–March 2019) was valued at JPY453.2bn, with 220 deals, and is expected to be worth JPY572.5bn in fiscal 2019 (April 2019–March 2020), with 242 deals. In fiscal 2018, the number of deals arranged appears to have declined, but this is due to a pullback from a temporary sharp increase in the number of deals arranged in the aircraft category by some companies in fiscal 2017. According to Yano Research Institute, the tide is turning in a more favorable direction as intense competition in the business environment for aircraft lease arrangement is easing.
FPG commanded a 31.7% market share based on the value of the Japanese Operating Lease market in fiscal 2018 (source: September 2019 data).