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. It is broadly classified into 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

In FY03/21, operating revenue was JPY230.6bn (-5.2% YoY), operating expenses were JPY209.8bn (-4.1% YoY), recurring profit was JPY20.8bn (-14.9% YoY), and net income was JPY17.7bn (-14.5% YoY). The Credit Cards and Cash Loans business logged a JPY8.0bn drop in revenue YoY, as the COVID-19 pandemic depressed the company’s performance all around. Meanwhile, Orico managed to reduce operating expenses by JPY8.9bn YoY, thanks to processing innovation such as the rollout of online credit card statements. As a result, profits finished above the company’s plan.

The company forecast for full-year FY03/22 calls for operating revenue of JPY236.0bn (+2.7% YoY), operating profit of JPY28.0bn (+24.4% YoY), recurring profit of JPY28.0bn (+23.9% YoY), and net income of JPY22.0bn (+12.2%). (Note: The company adopted the new Accounting Standard for Revenue Recognition starting FY03/22. The YoY percentage change is calculated using FY03/21 figures retroactively adjusted to reflect the new standard.) The company does not anticipate a full-scale recovery in consumer spending in FY03/22 with COVID-19-related curbs still in place, but expects to see gradual improvement.

On October 30, 2018, Orico unveiled its medium-term management policy spanning FY03/20 to FY03/22. Further, on May 9, 2019, it released the management targets for FY03/22: namely, recurring revenue of JPY35.0bn or more, ratio of general expenses to operating revenue of less than 60%, and ROE of 10% or more. The company also revealed its plan to pay ordinary dividends at a consolidated payout ratio of 20% during the span of the medium-term management policy, and complete redemption of class I preferred stock by the end of FY03/22. Due to the pandemic, however, the company expects its FY03/22 projections to fall short of the targets under the medium-term management policy.

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

Trends and outlook

Quarterly trends and results

1H FY03/22 results

Summary

• Operating revenue: JPY114.6bn (-1.0% YoY) (Progress vs. full-year earnings forecast: 48.6％)
• Operating expenses: JPY101.0bn (-2.9% YoY) (48.6％)
• Recurring profit: JPY13.6bn (+16.1% YoY) (48.6％)
• Net income*: JPY12.4bn (+15.0% YoY) (56.6％) 
  

Key takeaways

Operating revenue: Decreased by JPY1.2bn YoY to JPY114.6bn. Revenue from cash loans/advances declined by JPY1.9bn YoY due to lower demand for funds, and revenue from the Bank Loan Guarantee business declined by JPY2.7bn YoY. On the other hand, revenue in the Settlement and Guarantee business was up JPY1.2bn YoY, maintaining growth amid the COVID-19 pandemic. Installment Credit business revenue grew by JPY2.3bn YoY, with revenue from auto loans down JPY300mn YoY and revenue from credit card shopping up JPY2.6bn. Operating revenue reached 48.6% of the company's full-year forecast.

Expenses: SG&A expenses were down JPY3.7bn YoY. Of this, general expenses declined by JPY5.4bn YoY, while bad-debt-related expenses increased by JPY1.6bn YoY. The company was able to cover the expense hike associated with transaction volume growth by expanding the scope of online credit card statements, optimizing IT costs, and accelerating process innovation. In bad-debt-related expenses, provision for losses on interest refunds increased due to a rise in the amount of interest refunds. On the other hand, provision for credit losses decreased as delinquencies fell. The ratio of general expenses to operating revenue came in at 60.5%, slightly below the company’s forecast.

Class I preferred stock: The company decided to redeem 20mn shares of its class I preferred stock (worth JPY20bn), and with this, completed the disposal of the entire class I preferred stock (paid-in amount of JPY140bn) issued in 2007 through a debt-for-equity swap. The company is reviewing its capital policy in light of the completion of the redemption of preferred stock, in conjunction with the formulation of the next medium-term management plan.

Revision of full-year earnings forecast: None

For details on previous quarterly and annual results, please refer to the Historical financial statements section.

Company forecasts for full-year FY03/22

Quantitative targets

The company forecast for full-year FY03/22 calls for operating revenue of JPY236.0bn (+2.7% YoY), operating profit of JPY28.0bn (+24.4% YoY), recurring profit of JPY28.0bn (+23.9% YoY), and net income of JPY22.0bn (+12.2%). (Note: The company adopted the new Accounting Standard for Revenue Recognition starting FY03/22. The YoY percentage change is calculated using FY03/20 figures retroactively adjusted to reflect the new standard.)

The company does not anticipate a full-scale recovery in consumer spending in FY03/22, since COVID-19-related curbs will continue to be in place. However, it expects to see a moderate uptick in spending in tandem with the increase in vaccinations and the implementation of major economic stimulus measures.

Assumptions and measures

Estimates on transaction volume and balance of cash loans/advances

Credit card shopping

Orico plans to achieve business revenue growth in this domain by 1) expanding membership of the dual-function Mizuho Mileage Club Card, which integrates bank card and credit card functions; 2) activating the use of revolving payment, and acquiring customers for cards dedicated to revolving payment plans; and 3) further expanding the card member base by launching new co-branded cards.

Cash advances and cash loans

The company expects the outstanding balance of cash advances and cash loans to decrease owing to a decline in funding demand. It plans to encourage the use of loan cards by launching campaigns to promote usage among new members.

Settlement and Guarantee business

In FY03/21, the volume of rent guarantee transactions increased 11% YoY as the amendment of the Civil Code resulted in market growth. In FY03/22, the company plans to expand its market share in the rent guarantee business by cultivating new customers and boosting sales activities to existing customers that manage a large number of properties. It also intends to increase transaction volume and revenue through mutual customer referrals between the company and Orico Forrent Insure. In the trade receivables guarantee business, the company will work to 1) improve existing products, 2) develop new customers/expand market share by capturing the needs to mitigate collection risks, and 3) develop new products.

Installment Credit business

The company anticipates YoY revenue growth in this segment, thanks to the recovery and further increase in the auto loan and shopping credit transaction volumes. In Japan, Orico plans to increase market share by rolling out online products, and also expand the car leasing business through collaboration with car makers, prominent car dealers, and non-life insurance companies. Overseas, it plans to increase transaction volume in Thailand by bolstering resources, and otherwise accelerate business expansion in Asia including the Philippines and Indonesia.

Bank Loan Guarantee business

The company will work to turn around the decline in the balance of bank loan guarantees. To this end, it plans to 1) implement balance-boosting initiatives with financial institutions, 2) strengthen alliance with Mizuho Bank, and 3) expand business areas through collaboration with fintech companies.

Operating revenue

The company anticipates a 3% YoY growth in operating revenue, mainly from transaction volume increases in the credit card shopping, settlement and guarantee, and installment credit operations. It expects total revenue in the growth businesses (Credit Card and Cash Loans and Settlement and Guarantee) to increase 4% YoY, with revenue hikes in card shopping as well as settlement and guarantee covering the decrease in cash advance/loan revenue. The company also expects total revenue in the core businesses (Installment Credit and Bank Loan Guarantee) to grow 4% YoY, as the rise in installment credit revenue is projected to offset the revenue decline in bank loan guarantee.

Operating expenses

Orico expects operating expenses to remain largely flat YoY. While it anticipates an increase in bad-debt-related expenses, it also projects general expenses to decline YoY, landing at JPY145.8bn, thanks to process innovation. The company says it plans to improve the ratio of general expenses to operating revenue to around 60% by Q4 FY03/22. To this end, it will further accelerate process innovation to minimize the expense increase resulting from revenue growth. Bad-debt-related expenses are projected to grow YoY due mainly to the operating asset increase accompanying the recovery of transaction volume, but the company maintains that these expenses will remain low.

Changes in the accounting policies, etc.

Impact on FY03/22

The application of changes in accounting treatment (items 2 to 4 above) reduced the total assets and total liabilities at the beginning of the fiscal year by 1.74tn and 1.70tn, respectively, and retained earnings by JPY32.6bn. The decrease in retained earnings reflected the transfer of the unearned portions (as of the start of the fiscal year) to current liabilities, so these portions will be booked as revenue eventually as their contract periods pass. Allowance for doubtful accounts recorded against guaranteed debts not collected by Orico is booked as allowance for loss on debt guarantees.

Medium-term management policy

On October 30, 2018, the company unveiled its medium-term management policy spanning FY03/20 to FY03/22.

Basic policies

Orico’s vision statement

Orico aims to “support its customers in their realization of prosperous lives and dreams by winning genuine acceptance of its raison d’être from society and providing the very best financial services and products to those customers with credit and payment-related needs.”

Basic strategies

In line with the slogan “Innovation for Next Orico,” the company realigned its operations into growth businesses (segments: Credit Cards and Cash Loans, Settlement and Guarantee) and core businesses (segments: Installment Credit, Bank Loan Guarantee). The current medium-term management policy calls for the rebuilding of a firm revenue structure and the creation of a new business model to prepare the company for a new era. To realize these objectives, Orico developed the six basic strategies (outlined below) and is working to strengthen collaboration with Mizuho Financial Group.

Digital innovation

 Create a new business model through open innovation

 Collaborate and cocreate with startups by leveraging the Orico Digital Fund, etc. 

Process innovation

Optimize the cost structure by introducing drastic changes to the operational processes, taking advantage of the new shared core system and cutting-edge technology

In specific terms, 1) achieve greater efficiency in operations, 2) upgrade customer relations, 3) bring credit card statements online and charge a fee for paper statements, 4) rebuild operational structure, and 5) optimize IT costs

Business expansion in Asia

Increase auto loan revenue in Thailand, accelerate entry into the Asian markets (e.g., Thailand, Indonesia, Philippines), roll out businesses in earnest

Expansion of synergies within the Orico group

Engage in acquisitions aimed at expanding business domains, actively advance alliances 

Strengthen functions of group companies, enhance consolidated management by making use of Orico group’s channels 

Enhancement of consulting-based sales

Provide multi-tiered payment and financial services by taking a market-driven approach 

Organize a team dedicated to consulting-based sales to market such services

Enhancement of sustainability initiatives

Aim to realize a sustainable society while enhancing corporate value (To do so, focus on stakeholder’s expectations/requests and select priority themes among the various social challenges, and provide financial products and services that are fitting to the company’s basic corporate vision of “acting as a company that contributes to society”) 

Quantitative targets and business strategies

In the medium-term management policy, Orico aimed for a recurring profit of JPY35.0bn or more in FY03/22. However, in light of the weak consumer spending owing to the pandemic, the company thinks it would be difficult to achieve the target.

Other targets and initiatives outlined in the medium-term management policy were: 1) achieve transaction volume of JPY3tn in credit card shopping, 2) advance cashless payment (use of prepaid cards, debit cards, etc.), 3) achieve transaction volume of JPY70bn in overseas auto loans, 4) promote use of auto leasing service, 5) achieve full automation of credit checks, and 6) promote use of corporate credit cards and the receivables guarantee service.

Redemption of preferred stock

The redemption of preferred stock is also an important agenda for Orico. There was JPY70.0bn in class I preferred stock outstanding at end-March 2018. Since then, the company made progress with the redemption, and the outstanding balance was reduced to JPY20.0bn by end-March 2021. While maintaining an appropriate level of equity, the company aims to fully redeem the outstanding preferred stock by end-FY03/22.

Shareholder returns

At the time of disclosing the medium-term management policy (October 30, 2018), the company stated it would initially focus on steady redemption of preferred stock while ensuring appropriate level of equity, and also conduct stable and sustainable dividend payment. It added that it plans to reevaluate the company’s shareholder returns policy once the full redemption of preferred stock is in sight. On May 9, 2019, Orico disclosed its management targets, including ordinary dividend payments at a consolidated payout ratio of 20% during the span of the current medium-term management policy (starting FY03/20).

Business

Business overview

Company profile

Market leader in consumer credit with strengths in auto loans and bank loan guarantees