Stock Review: Open House Co.

​Kevin Smith, of Delft Partners and portfolio manager of the TAMIM Asia Small Companies Fund, highlights one of the stocks in the Asia Small Companies portfolio, Open House (3288.TYO). Open House is a Japanese real estate company that trades on a single digit P/E ratio yet delivers a revenue growth rate of 30% and profit growth of 16%. Open House has both a strong brand and strong market share of single-family housing in key Japanese cities. It is taking advantage of the growing trend of smaller Japanese households and is a stock that is worthy of consideration in your international equity portfolio.

​Open House Co., Ltd. is principally engaged in the real estate development business, the Company operates in the following segments: real estate brokerage business, construction of detached houses, construction contracts, development of new apartments and property management.  Open House was founded in September 1997 as a franchisee of Century 21 and is headquartered in Tokyo.  The franchise agreement with Century 21 was dissolved in 2012 and the business then operated  with its own brand name.  Masaaki  Arai is the major shareholder and President/CEO of the Company.  Open House was one of only five Japanese companies included in the Asia Fab 50 list compiled by Forbes in 2018. The Company has 1,522 employees. 

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Accounting, Strategy and Governance Comments

Accounting

1. Full compliance with Japanese GAAP.  
2. Company policy with respect to recognition of revenue is compliant with ASBJ Statement No.29 and ASBJ Guidance No.30 which became applicable from 1st April 2018.  Revenue is recognised when the company transfers a promised asset to the customer.  Compliance with this standard avoids a common problem with companies in this sector that often recognise revenue on payment of a deposit and therefore leave the business vulnerable to revenue write-downs if the property purchased isn't completed.  The impact of implementation of this standard acted to increase revenue by ¥193 million in the second quarter reporting and retained earnings decreased by ¥1,853 million.  

​Strategy

1. Open House has a focus on providing affordable single family housing, the Open House lot size tends to be half the historic norm in Japan, averaging 640 square feet versus the long term average of 1,400 square feet in the Tokyo 23 Wards.  This strategy has proved very effective in an environment of declining household size in Japan.  Revenue growth in the single family homes segment increased by 61% in the second quarter of fiscal 2019 and accounted for 68%  of total revenue.
2. Open House  has a strategy of building market share in their key markets of Kawasaki City, Tokyo’s 23 Wards, Yokohama City and Nagoya. This strategy is proving successful, market share in Kawasaki City has grown from 2.6% in FY2103 to 13% in FY2018. Market share in Tokyo’s 23 Wards has grown from 2.8% in FY2013 to 8.4% in FY2018. Open House will open 7 new sales centres in the current year, bringing the total number of sales centres to 39. 
3. We like the fact that the company achieves a strong return on equity of 30%, while maintaining good balance sheet discipline. The Hawk One acquisition increased the debt ratio from 42.6% to 55.3%, while the proportion of short-term debt fell from 57% to 45% of the loan book.
4. Open House makes good use of share buy backs to improve earnings per share and while the dividend payout ratio is low at 17.2%, there are targets in place to gradually increase the dividend payout ratio to 20% by 2020.   The Company has bought back the equivalent of 2.88% of the issued shares in the previous fiscal year and has authority to buy back a further 1.78% of issued share capital in the current fiscal year.
5. Open House has initiated a new business in the United States, targeting affluent Japanese investors,  the business is achieving rapid growth in this early stage of development. Operating margins are expected to be maintained in excess of 10%.
6. In the period from 2013 to 2017 the Company achieved a compound growth rate for revenue at 33.1%. The company forecast for the period 2018 to 2020 expects a growth rate for revenue of 24.6% per annum.

Governance

1. The business was founded by Masaaki Arai in 1997, he retains a significant stake in the business at 41.7%.  The other shareholder of note among the business management is Hitoshi Imamura who joined in 2005 holding a stake of 1.74%.
2. Open House has a Board comprising seven Directors including two independent Directors which is the norm in Japan and fully compliant with the local corporate governance code.
3. Washington based “friendly” shareholder activist investor Taiyo Pacific Partners (TPP) announced having a stake in excess of 5% in May 2019.  TPP have endorsed the current strategy of the management team and stand ready to engage with management regarding future measures to enhance returns to shareholders.   

Value, Momentum and Quality Comments

​Open House is a consistently strong in our assessment of quality, the variation occurs in the scores for value and especially momentum. The momentum scores were hit by a wave of downgrades in the period of August 2018 to February 2019 which saw the average target share price decline from ¥8,500 to ¥6,100.  In recent months there have been no net downgrades to earnings or target share price, so the momentum score has ceased to be a drag on the overall VMQ analysis.

Open House delivered better than expected results in the first half of fiscal 2019, revenue increased by 42.9% year on year and net profits increased by 15.1%.  A significant part of the revenue increase was derived from consolidation of Hawk One Corporation for the first time.  The forecast full fiscal 2019 year are revenue growth of 30.5% and net profits growth of 16.3%. 

Conclusion

​Open House is a great success story in the Japanese real estate business, starting in 1997 as a franchise of Century 21, the business has developed a distinctive brand and strong market share in the field of single family housing.  Open House was one of only five Japanese companies to be included in the 2018 Forbes Asia Fab 50 list.  The Company is expected to maintain a compound growth rate of revenue in the mid-20s and  trades on a single figure p/e ratio.  The recent addition of activist group TPP on the shareholder register is a major positive for maintaining focus on shareholder returns, we expect continuing positive engagement between TPP and the senior management of Open House.