Executive summary

Business overview

Orient Corporation (Orico) is a major consumer credit company in Japan. Consumer credit is credit extended to individuals to finance the purchase of goods and services, and is broadly classified into two categories: closed-end credit (installment credit issued for a specific purchase for a set period of time) and open-end credit (revolving credit that can be used for any purchase, i.e., credit card). Orico offers both types of services. In FY03/21, the company had a 21.5% market share in closed-end credit, with its transaction volume reaching JPY1.97tn. In open-end credit, its market share was 3.3%, at a transaction volume of JPY2.44tn.

Orico’s operations divide into the Credit Cards and Cash Loans business (generated 33.1% of total business revenue and 38.8% of total segment profits [before deducting company-wide expenses, etc.] in FY03/21), Settlement and Guarantee business (8.8％, 5.5％), Installment Credit business (37.0％, 40.1％), Bank Loan Guarantee business (17.4％, 13.7％), and Other businesses (3.7%, 1.9%). The company is an equity-method affiliate of Mizuho Financial Group (TSE 1: 8411; owns a 49.0% stake in the company) and Itochu Corporation (TSE1: 8001; 16.5%).

Founded in 1954, Orico is a pioneer in the Japanese consumer credit industry. In the 1980s, however, the company shifted focus to corporate lending, and with the collapse of the bubble economy in the early 1990s, it accumulated bad debts and business conditions quickly deteriorated. Since 2002, Orico issued preferred stock for a total of JPY640.0bn, receiving support from Mizuho Bank and others. After forging alliance with Mizuho Financial Group in 2004, the company concluded a business and capital alliance with Itochu Corporation in 2005. Orico’s book value per share (BVPS), after deducting preferred stock, remained negative from FY03/03 to FY03/15. In 2010, Mizuho Financial Group made the company an equity-method affiliate by converting Orico’s preferred stock into common stock, and in 2015, it raised the stake to 49% from 22%. By FY03/16, Orico’s BVPS turned positive, and in FY03/17, the company revived dividends payment. By end-FY03/21, the outstanding balance of preferred stock decreased to JPY20.0bn, owing to Orico’s ongoing redemption efforts. The company plans to complete redemption in FY03/22.

Orico provides credit to the mass retail market. Its value chain includes credit check, credit provision (granting credit and concluding contracts with speed), and receivables management (managing receivables, collecting payments, and processing calculations and other administrative tasks). The company says it outshines the competition in credit expertise for auto loans and collection track record at its subsidiary Japan Collection Service (JCS; Japan’s first special servicer). Orico’s credit transactions are typically based on a three-party contract involving the company, a member merchant, and a consumer. For the member merchant, the company adds value by providing the means to encourage big-ticket purchases that cannot be easily paid in cash. For the consumer, it offers the means to pay in installments and reduce the monthly financial burden.

Installment Credit business: In this business, Orico handles auto loans and shopping credit (loans for other purposes such as those to cover education or home improvement costs). For each transaction, the company conducts a credit check of the purchaser (consumer) and concludes a separate credit contract. The company’s mainstay auto loans are used by some 1.57 million customers annually. With a transaction volume of JPY0.86tn, the company ranked first in this business in FY03/21, followed by competitor JACCS (TSE 1: 8584). Auto loans are provided to consumers purchasing new and used cars. The company pays the car dealers upfront on behalf of the purchasers, who then repay in installments. The sources of revenue are commissions from member merchants and installment payment commissions from individuals; the latter makes up the lion’s share of shopping credit revenue. Installment payment commissions can be calculated as “price of purchased item × commission per JPY100 (annual percentage rate [APR] of 9.5–12.2%）÷ JPY100.” The sum of the price of purchased item and the commissions payable is the full amount the customer is obliged to pay, and this full amount divided by the number of payments is the monthly payment billed. Payments are generally made in three to 36 installments.

Credit Cards and Cash Loans business: In this business, Orico offers consumers the “buy now, pay later” option through the use of credit cards. Unlike installment credit, credit card transactions (open-end credit) allow consumers to make purchases repeatedly up to a preapproved credit limit and until the card expires. Orico also provides cash advances and cash loans (via loan cards) in this business. In FY03/21, the volume of open-end-credit transactions handled by the company totaled JPY2.44tn, and the number of active card members came to 11,063,000. The company says its mainstay card, Orico Card THE POINT, is known for the high return rate of its reward point program. The main sources of revenue in this business are fees and commissions charged to the card members. These include annual membership fees, shopping commissions, installment payment commissions (APR of 12.2–15.0%), and revolving payment/cash advance commissions (APR of 15.0–18.0% for cash advances made). Orico also receives commissions from member merchants (1.8–5.0% of the amount charged on credit).

Settlement and Guarantee business: In this business, Orico provides payment guarantees for rent, trade receivables, and small leasing transactions. It also offers a stand-alone payment collection service. In the rent guarantee business, the company collects monthly rent from apartment tenants, whom it credit-checks and approves in advance. The collected rent is paid to property management companies, to which Orico also guarantees payment. The company operates the business together with consolidated subsidiary Orico Forrent Insure, with a view to expanding mutual customer referrals. In the trade receivables guarantee business, Orico collects payment on receivables from B2B transactions between its member merchants and businesses, which are also credit-checked and preapproved by the company. Collections are made on behalf of the member merchants, and in the event the obligors default, the company pays the merchants a predetermined guarantee. Revenue in this business can be derived by multiplying the guaranteed principal by the fee rate.

Bank Loan Guarantee business: In this business, Orico guarantees the personal loans extended by its partner financial institutions, upon their request. The borrowers are prescreened and approved by the company. By offering its knowledge on credit checks and guarantees, the company aims to support the retail finance business of partner financial institutions. As of end-March 2021, Orico had 570 partner financial institutions and the outstanding balance of its bank loan guarantees stood at JPY1.16tn. Revenue in this business can also be derived by multiplying the guaranteed principal by the fee rate (2.0–7.0%).

The company’s operating expenses, which accounted for 91.0% of operating revenue in FY03/21, comprise general expenses such as systems operation and personnel expenses (65.1% of operating revenue), bad-debt-related expenses (21.5%), and financial expenses (4.2%). In the current medium-term management policy, the company aims to reduce the ratio of general expenses to operating revenue to less than 60%. The ratio of bad-debt-related expenses to operating assets was 0.9% in FY03/21, lower than the 1.2% average over the past 10 years. The delinquency rate and the charge-off rate have remained stable at low levels. The company says it has no major concerns over refunds on overpaid interests (those exceeding the 20% ceiling under the Interest Rate Restriction Act), as the expenditure on refunds based on claims has been trending downward.

In FY03/21, the company procured a total of JPY3.1tn from financing activities, which increased the ratio of funds raised to trade receivables (including securitized receivables) to 57.4%, versus the 41.8% average over the past 10 years. The net D/E ratio was 5.8x, up from the 4.5x average over the past 10 years. 41.1% of the funds raised were borrowed from financial institutions (ratio of long- to short-term borrowings was nine to one). 58.9% was procured directly from various markets, of which 41.7% was through the securitization market. Because of the nature of the business, consumer credit companies need cash for upfront payments on a daily basis. The company says securitization is an effective way to raise funds and generate cash flows.

Orico’s free cash flow turned positive in FY03/21 for the first time in six years. In FY03/22, the company plans to complete redemption of the remaining JPY20.0bn in class I preferred stock held by Mizuho Bank. Shared Research understands that once the preferred stock is fully redeemed, the company will have greater flexibility in raising capital. By reducing long-term borrowings (the company’s reliance on interest-bearing debt increased from 20.6% [FY03/14–FY03/16 average] to 31.5% [FY03/19–FY03/21 average]), it will be able to improve the interest coverage ratio (2.16x in FY03/21). If consumer spending remains weak due to the prolonged effect of COVID-19, Orico’s growth in the installment credit and credit card businesses will be modest. As a basic policy, the company will thus work to expand the guarantee business, which does not use the balance sheet, develop the overseas auto loan markets, and improve profitability.

Earnings trends

For FY03/22, operating revenue was JPY229.8bn (+0.01% YoY), operating expenses were JPY200.8bn (-3.1% YoY), recurring profit was JPY29.0bn (+28.6% YoY), and net income attributable to owners of the parent was JPY19.5bn (-1.1% YoY). Operating revenue was on par with FY03/21, primarily due to growth in credit card shopping and the Settlement and Guarantee business. On the other hand, cost reductions achieved through process innovation resulted in a YoY increase in recurring profit.

For FY03/23, the company forecasts operating revenue of JPY233.0bn (+1.4% YoY), operating profit of JPY25.0bn (-13.8% YoY), recurring profit of JPY25.0 (-13.8% YoY), and net income of JPY21.0bn (+7.8% YoY). Operating revenues are expected to increase, mainly due to growth in the Settlement and Guarantee business and overseas business, which are key markets. Operating expenses are seen rising due to an increase in general and other expenses resulting from upfront investments in the cultivation of human resources for DX and the launch of a new collection system for demand collection operations.

On May 6, 2022, the company disclosed its medium-term management plan (FY03/23-FY03/25). As management targets, the company aims to achieve consolidated recurring profit of JPY40.0bn or more, ROE of 10% or more, and a ratio of general expenses to operating revenue of less than 60% for FY03/25.

Strengths and weaknesses

Strengths:
1) Wide-reaching auto loan sales platform underpinned by an exclusive partnership with Japan Used Car Dealers Association that provides access to the largest domestic distribution network for used cars
2) Unique customer screening capability grounded on an in-house-developed credit scoring model
3) Depth of collection expertise accumulated through subsidiary Japan Collection Service Co., Ltd., Japan’s first servicer 
Weaknesses:
1) Slow to develop recurring-revenue businesses in Credit Cards and Cash Loans compared to some fast-growing rivals
2) Greater exposure to interest rate hikes versus rivals, as the revenue generation capability falls behind the increase in interest-bearing debt
3) Late start in expanding into the growth markets overseas as a result of having to spend time on rebuilding the capital base
(See the “Strengths and weaknesses” section for details.) 

Glossary

Key financial data

Recent updates

Announcement of a new medium-term management plan

On May 6, 2022, Orient Corporation announced the formulation of its new medium-term management plan.

The company disclosed its new medium-term management plan (FY03/23-FY03/25).

Under the new medium-term management plan, with the slogan Transformation Now!, Orico aims to transform itself from a traditional consumer credit sales model into a financial services group that creates value from the customer's point of view, based on 1) digital, 2) green, and 3) open innovation.

The management targets are consolidated recurring profit of JPY40.0bn or more, ROE of 10% or more, and a ratio of general expenses to operating revenue of less than 60% for FY03/25.

The company has the following four business strategies

1. Deepening of the Settlement and Guarantee business and overseas business, which are priority domains, and search for new businesses
2. Establishment of market-oriented sales
3. Creation of new products and services through digital marketing and open innovation
4. Deepening of process innovation

Announcement of issuer rating upgrade

On March 31, 2022, Orient Corporation (Orico) announced that Rating and Investment Information, Inc. (R & I) has upgraded Orico's issuer rating. 

Credit ratings

Date of rating change: March 31, 2022

Announcement of transition to  a Company with Audit and Supervisory Committee board structure

On 25 March 2022, Orient Corporation (Orico) announced that it plans to transition to a Company with Audit and Supervisory Committee board structure.

The company decided to transition from a Company with Auditors to a Company with Audit and Supervisory Committee, assuming approval by the annual shareholders meeting scheduled for June 2022. At the same time as changing to a Company with Audit and Supervisory Committee board structure, Orico aims to increase the weighting of outside directors on the board of directors to at least one third. The company also plans to establish a Conflict of Interest Committee, with outside directors making up the majority of members.

Annoucement of the transfer of shares in Ohtori Corporation.

On March 4, 2022, Orient Corporation (“Orico”) announced the transfer of shares in Ohtori Corporation. 

The company decided to transfer all shares in consolidated subsidiary Ohtori Corporation to Ichinen Holdings Co., Ltd. 

The company made the decision as part of an overhaul of group businesses ahead of the release of its next medium-term management plan, currently being formulated.  

Overview of share transfer

Subsidiary to be transferred: Ohtori Corporation
Business overview: Development, management, and operation of parking facilities

Transferee: Ichinen Holdings Co., Ltd.

Number of shares to be transferred: 18 (100% of voting rights)

Transfer price: Not disclosed

Transfer date: March 31, 2022 (planned)

Trends and outlook

Quarterly trends and results