Prospect Co., Ltd.€¦ · Though Prospect Co., Ltd. (the “Company”) has assumed the accuracy...

Prospect Co., Ltd.

Annual Results Briefing for Fiscal Year Ending March 31, 2018

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Important Notice Though Prospect Co., Ltd. (the “Company”) has assumed the accuracy and completeness of all information available to it in preparing this presentation, the Company makes no representation as to its actual accuracy or completeness. The information in this presentation is subject to change without prior notice. This report has been prepared solely for the purpose of providing information in English to shareholders of the Company and other interested parties and is not intended to be a recommendation or solicitation to buy or sell the Company shares or any other securities. Nothing contained in this presentation constitutes either an offer to sell, or invitation to purchase or subscribe for, any shares or other securities in the Company. Each recipient should consult its own legal, commercial and tax advisers as to legal, commercial, tax and related matters related to the contents of this presentation. None of the contents of this presentation may be used by any person for any purpose whatsoever without the prior written consent of the Company. Neither the presentation (nor any part of it, nor the fact of its distribution) will form the basis of, nor may it be relied upon in connection with, any contract for the sale of shares in the Company. None of the Company nor its advisers, nor any of their respective officers, employees, agents or associated companies, nor any other person, make or have been authorized to make any representation or warranty, express or implied, as to the accuracy or completeness or fairness of such information. Nothing contained in this presentation, is, or should be relied on as, a promise, representation or warranty as to the historic, current or future performance of the Company. Accordingly, none of the Company, its advisers, nor any of their respective officers, employees, agents or associated companies shall be liable for any direct, indirect or consequential loss, loss of profit or damage suffered by any person as a result of relying on any statement, omission or alleged omission from the presentation. This presentation is provided for the sole purpose of providing information in English to shareholders of the Company and other interested parties. Nothing herein constitutes an offer of securities for sale in the United States or any other jurisdiction in which required registration is absent or an exemption from registration under the applicable securities laws is not granted. Neither the US Securities and Exchange Commission nor any state securities commission has approved or disapproved of shares in the Company nor passed upon the adequacy or accuracy of the presentation. In this presentation, financial information for the year ended 31 March, 2017 and the year ended 31 March, 2018 has been derived from the audited consolidated financial statements of the Company for those financial years prepared in accordance with Japanese GAAP. As a consequence of legal restrictions, the release, publication or distribution of information contained in this presentation in certain jurisdictions or to certain persons may be restricted or unlawful. All persons who wish to view the presentation must first satisfy themselves that they are not subject to any local requirements that prohibit or restrict them from doing so and should inform themselves of, and observe, any applicable legal or regulatory requirements applicable in their jurisdiction. Statements made in this presentation with respect to the Company’s current plans, estimates, strategies and beliefs and other statements that are not historical facts are forward-looking statements about the future performance of the Company and any enlarged group. Forward-looking statements include, but are not limited to, those statements using words such as believe, expect, plans, strategy, prospects, forecast, estimate, project, anticipate, aim, intend, seek, may, might, could or should, and words of similar meaning in connection with a discussion of future operations, financial performance, events or conditions. These statements are based on management’s assumptions, judgments and beliefs in light of the information currently available to it. The Company cautions recipients that a number of important risks and uncertainties could cause actual results to differ materially from those discussed in the forward-looking statements, and therefore recipients should not place undue reliance on them. Recipients should not rely on any obligation of the Company to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Table of Contents

• Introduction 4 • History and development 5 • Corporate profile and structure 6 • Stock information 8 • Latest published financials 9 • Key business segments 12 • Advisory board 24

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INTRODUCTION

Prospect is a licensed Japanese Investment Company operates in the following main business segments: • Real Estate Development and Custom Home Building • Asset Management • Public Works Construction • Renewable Energy

Kidoh Construction Industry Co., Ltd. Construction’s track record exceeds 2,500 km of tunneling globally.

Sasaki House is a long-established home builder with 109 years of experience.

Prospect Asset Management Inc. advises mainly on Japanese equity investments.

Prospect delivers consistent services from selection of site, planning, construction, and sales to after-sales services for over 7,900 residential condominiums, mainly in Tokyo metropolitan area.

Source: Company Home

HISTORY & DEVELOPMENT

1937 Inami Kigyo Co., Ltd. established in Toyama Prefecture Started production of special artificial silk for domestic demand (start of textiles business)

1961 Changed trade name to Carolina Co., Ltd. Listed on Second Section of Osaka Stock Exchange (de-listed in March 2003)

1962 Listed on Second Section of Tokyo Stock Exchange (Ticker: 3528)

1993 Started internally developed condominium business

1994 Withdrew from textiles business

2001 Changed trade name to Gro-Bels Co., Ltd.

2012 50th anniversary of listing on Tokyo Stock Exchange Acquired all shares of Sasaki House Co., Ltd.; made a consolidated subsidiary

2013 Acquired all shares of (former) Prospect Co., Ltd.; made a consolidated subsidiary Started overseas real estate-related business

2014 Acquired all shares of Kidoh Construction Co., Ltd.; made a consolidated subsidiary Entry into renewable energy (solar) power generation business Absorption-type merger of subsidiary (former) Prospect Co., Ltd.; changed trade name to "Prospect Co., Ltd."

2015 Started solar power generation

2017 Acquired all shares of The Prospect Japan Fund Limited; made a consolidated subsidiary Source: Company Home Page

Established in 1937, the textile business was the cornerstone of the Company. In the early 1990s, the Company changed its focus to the property business. The Company has developed and sold over 7,800 condominiums, mainly in the Tokyo metropolitan area. The Company has been diversifying its revenue sources from its traditional condominium business since Curtis Freeze became President and now includes housing construction, investment advisory, public works construction and renewable energy businesses, as well as overseas real estate investments.

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Prospect Co., Ltd., corporate profile

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• Established: 1937 • Head Office: 1-30-8, Sendagaya, Shibuya-ku, Tokyo 151-0051, Japan • Total Employees of Prospect Group: 188 • Directors: Curtis Freeze, Masato Tabata, Dominic Henderson

General Shareholders Meeting

Representative Director, President

Board Meeting

Board of Auditors

Management Meeting

General Affairs

Accounting

Business Promotion

Operation

Construction

Marketing

Business Development

Stock Research

Auditors

Audit Office

Administrative Division

Property Division

Asset Management

Division

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Prospect Co. Ltd. Tokyo

(Japanese Ticker: 3528)

Prospect Asset Management (CI) Ltd.

(PAMCI) Guernsey Registered

Manager

Prospect Asset Management, Inc.

(PAMI) US SEC registered

Advisor

Sasaki House (Japan)

Single family home builder

Kidoh Construction (Japan)

Micro Tunneling

Prospect Energy Management

(Japan) Renewable Energy

The Prospect Japan Fund Limited (Guernsey)

Company Description Number of employees Company Management

Prospect Co., Ltd. Real Estate Developer 41 C. Freeze, M. Tabata, Outside director D. Henderson

Sasaki House Co., Ltd. Home Builder 37 K. Endo, sent in from Prospect to be President, has over 30 years of experience in Real Estate Development

Prospect Asset Management, Inc. Asset Management 1 K. Matsumoto, H. Smith both have over 20 years of experience in investment and management

Kidoh Construction Co., Ltd. Public Works Construction 109 M. Nakano, over 30 years of experience in construction. President of Japanese Micro-tunneling Association

Prospect Energy Management Co. Ltd. Renewable Energy 5* Y. Yoda, over 20 years of experience in Trust Banks,

JREIT and Real Estate

The Prospect Japan Fund Limited Investment Fund 0 J. Hawkins, non-executive chairman, a director of a range of funds which include hedge funds and equity funds investing in Japan and Asia.

* employees of Prospect Co., Ltd.

Numbers are only full time employee, does not include directors, part-time employees or contract workers

• Second section of Tokyo Stock exchange: Ticker 3528 • Outstanding shares: 435,992,628** • Number of shareholders: 22,115* • Closing share price: JPY 59* • Market cap: JPY 25.7 billion* • Total shares traded in fiscal year ending March 31, 2018: 1,935 million = 592% of

weighted average TSO (total shares outstanding) • Monthly average volume in Fiscal Year Ending March 31, 2018: 48% of TSO • Dividend forecast: 3 Yen per share. Prospect’s dividend yield of 5.08%* is one of the

highest in Japan.

Stock information

* As of Marth 31, 2018

** As described in the Quarterly Report of the Company dated May 15, 2018, as at March 31, 2018, 435,992,628 ordinary shares of the Company were issued and outstanding, and traded on the Tokyo Stock Exchange. As at the same date, Prospect held 2,779,484 ordinary shares (in treasury). Under Japanese practice, "the number of shares in issue and outstanding" includes the number of ordinary shares held in treasury. The number of shares in issue and outstanding outside of treasury was 433,213,144 as at March 31, 2018.

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LATEST PUBLISHED FINANCIALS

Source: Company Securities Report

Revenue came in at 11.9 bn yen, down 15.7% year over year. Decline came from a number of things, but largely due to sales of real estate and equipment of our solar plant was recorded in previous fiscal year. Custom-built home sales and construction business were slightly down. Operating loss was JPY 1,354 mn (vs. operating loss JPY 44 mn) largely due to increased legal and advisory expenses on the first-of-its-kind cross boarder share for share acquisition of The Prospect Japan Fund Limited (TPJF). Non-operating income improved primarily due to profits from the completion of the Keauhou Place condominium project in Honolulu, Hawaii. In August 2017, the Company successfully acquired The Prospect Japan Fund Limited (TPJF). The excess of net assets in TPJF over the acquisition cost was recorded as negative goodwill with resulting JPY 2.4bn increase in extraordinary profits. Extraordinary profit also includes profit from selling the Sanbu Solar project in March, 2018.

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Year ended March 31

2017 2018 YoY change Unit: MM JPY

Sales 14,143 11,928 -2,215 Cost of goods sold 11,880 9,345 -2,535 Gross profit on sales 2,263 2,582 319 Selling, general and administrative expenses 2,307 3,937 1,630

Operating profits -44 -1,354 -1,311 Non-operating income 1,416 1,072 -344 Non-operating expenses 856 627 -229 Ordinary profits 516 -909 -1,425 Extraordinary profits 9 3,015 3,006 Extraordinary losses 85 1 -84

Net profit before silent partnership profit distribution and taxes 440 2,104 1,664

Silent partnership profit distributions 7 3 -4

(Included distributions to Prospect) 0 0 0

Net profit before taxes 433 2,101 1,668 Corporate, inhabitant and enterprise taxes 179 239 60

Adjustments on corporate tax, etc. -221 130 351 Net profit attributable to non-controlling interests -13 12 25

Net profits 489 1,720 1,231

Source: Company Securities Report 10

Current Assets 27,901

Tangible fixed assets

7,675 Intangible fixed assets

882 Investments and other assets

3,939

Long-term liabilities 8,009

Current liabilities 6,737

Net Assets 25,650

Unit: MM JPY

Total Assets: 40,397 Total Liability and Equity: 40,397

Equity ratio 65.4%

LATEST PUBLISHED FINANCIALS Balance Sheet Overview


LATEST PUBLISHED FINANCIALS

For the past five years, Prospect’s Total Asset has grown more than 4X and Net Asset has grown more than 6X.

Prospect’s Market Cap has grown 22X since 2010.

Total Asset & Net Asset Units: MM JPY

Equity Ratio Units: %

Market Cap Units: MM JPY

KEY BUSINESS SEGMENTS

Real estate development business

Revenue: JPY 6,409m 53.7% of total revenue

Asset management business

Revenue: JPY 396m 3.3% of total revenue

Public works construction business


Renewable energy business



Revenue

Segment

FY 2017 FY 2018 YoY change

2016/04 - 2017/03 2017/04 - 2018/03

Amount Share Amount Share

Unit: MM JPY % Unit: MM JPY % %

Real estate development 7,933 56.1 6,409 53.7 -19.2

Condominiums 4,103 29.0 4,926 41.3 20.1 Land and buildings 2,264 16.0 0 0.0 -100.0 Custom-built houses 1,565 11.1 1,482 12.4 -5.3 Asset management 173 1.2 396 3.3 128.5

Public works construction 5,722 40.5 4,615 38.7 -19.3

Renewable energy 250 1.8 533 4.5 113.0 Total 14,080 99.6 11,955 100.2 -15.1

Others 62 0.4 50 0.4 -19.2 Elimination of intersegment transactions 0 0.0 -78 -0.7 0.0

Total 14,143 100.0 11,927 100.0 -15.7

Real estate development business


Source: Company Home Page and latest Interim Report

Since entering the real estate business over 20 years ago, the Company has developed 7,904 condominiums, mainly in the Metropolitan Tokyo area. The Company takes into consideration factors such as “floor plan and/or location suitable for customer’s life plan” as well as “environmental symbiosis, health, child rearing, crime prevention, disaster preparedness” etc.

Sasaki House, custom home builder

Gro-bel – Company’s condo brand

Keauhou Place, Hawaii condo tower

The Company also looks for opportunistic projects, such as a joint development of a mixed use project in Hawaii, comprising 422 residential units for sale and rental and commercial facilities including a parking lot. The project was completed in October 2017. More than 99% of the units have been sold.

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Recent property development



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Name: Gro-bel Koenji Premium

Location: Koenji station 6 minutes from Shinjuku station

Completion: 10/25/2017

Units: 43

Name: Gro-bel Kokubunji Crysta

Location: Kokubunji station 19 minutes from Shinjuku station


Units: 36

Recent property development


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Name: Gro-bel Minami-Ōtsuka

Location: Ōtsuka station 8 minutes from Shinjuku station


Units: 41

Name: Gro-bel Ōmori

Location: Ōmori station 18 minutes from Shinjuku station

Completion: June, 2018

Units: 34


Future property development

Source: Company Home Page and latest Interim Report 16

Name: Gro-bel Hitotsubashi Gakuen

Location: Hitotsubashi Gakuen station 35 minutes from Shinjuku station

Completion: January, 2019

Units: 37

Name: Gro-bel Higashi Koenji Mae

Location: Higashi Koenji station 9 minutes from Shinjuku station

Completion: January, 2019

Units: 40


Asset Management Business Revenue: JPY 396m 3.3% of total revenue

【Subsidiary】 Prospect Asset Management, Inc. (“PAMI”) is an Investment Advisor focusing on Japanese shares, primarily through advising the Prospect Japan Fund Limited and joined Prospect Group in 2006.

PAMI was founded in 1994 as a Japan focused Investment Advisor, and has a strong long-term track record. In 2006 PAMI was acquired by former Prospect Co., Ltd., which is also a provider of non-discretionary investment advice.

Prospect Japan Fund Holdings * Prospect Japan Fund Sector Weightings *

17 * as of March 31, 2018

Security % of total

assets

FUKUSHIMA BANK LTD 29.6

DAITO BANK LTD 21.9

PINNACLE RENEWABLE 20.6

SHAKLEE GLOBAL GROUP INC

16.5

NAGANO BANK LTD

0.2

Sectors % of total assets

Banks 51.7

Retail 16.5

Energy-Alt Sources 20.6

Total*

88.8

No of Positions 5

【New holding】 As part of the Prospect Group’s strategy of expanding into the renewable energy business, the Prospect Japan Fund has participated in the IPO of Pinnacle Renewable Holdings Inc. (“Pinnacle”, trades in Toronto Stock Exchange under symbol PL) in January 2018, and subsequently increased its holding to 6.16%* of Pinnacle’s total outstanding shares through purchases in the market. 【 About Pinnacle】 Pinnacle is one of the world’s leading manufacturers and distributors of industrial wood pellets, which are used by global utilities and large-scale power generators as a fuel to produce renewable and reliable baseload power. Its main customers are large utilities in the UK, Europe and Asia (including Japan). Pinnacle recently has entered long term off-take contracts with Japanese trading houses and power plants, such as Toyota Tsusho, Sumitomo, Ube, Hanwa, etc., which brings their contracted backlog to 3.8 billion Canadian dollars.

18 * Holding announcement on March 19, 2018

Asset Management Business Revenue: JPY 396m 3.3% of total revenue

Public Works construction business


【Subsidiary】 Kidoh Construction Industry Co., Ltd. (“Kidoh”) Construction track record exceeds 2,500km of tunneling. Joined Prospect Group in 2014. Kidoh was established in 1946 as a civil engineering and construction contractor to commercialize its unique jacking method. The company is headquartered in Osaka, Japan and has branches in Kansai, Kanto, Nagoya, Kanazawa, and Kyushu, Japan. It has number of patents/utility models in relation to construction methods focused on underground jacking works for water/sewerage, gas, telephone, electrical tunnels and also prestressed concrete (PC) works for building/bridge construction.

Source: Company Home

Large water tank in Toyama Prefecture

Construction of multi-level crossing Near Toyama Station

Source: Company Home Page

The Company has made continuous efforts and progress to make solar power generation a core part of its renewable energy business, which generates stable and predictable cash flow. The Company started sales from its first solar project in 2015. And currently has 6 solar projects producing electricity across Japan, 4 projects under development and scheduled to come online over the next few years. Total output of the 10 projects is expected to be 96 mW. In addition, 1 project is currently at planning phase. The Company has 4 bn yen in equity investment and more than 40 bn yen was committed to the 11 projects.

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Sendai City Project

Renewable energy business


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Renewable energy business Solar power plants

Solar Plant Location Output

Capacity (mW)

Prospect’s % of Project

Start Operation

Site Area ㎡

Output from 3/2017 to

3/2018 (kWh)

Feed-in Tariff

yen/kWh

Plants producing electricity

Asago Project Asago City, Hyogo 1.1 80% Mar-15 12,752 1,186,758 36 Rikuzentakata Project Rikuzentakata City, Iwate 1.6 80% Jan-16 27,716 1,450,636 36 Ushiku Project Ushiku City, Ibaraki 1.8 80% Feb-16 34,049 2,173,103 36 Katori Project Katori City, Chiba 2.0 80% Jul-16 31,237 2,359,740 36 Sendai Project Sendai City, Miyagi 1.8 80% Jan-18 97,000 328,934 36 Tokujiro Utsunomiya I & II Utsunomiya City, Tochigi 4.8 100% Feb-18 93,800 618,602 36

Plants under development

Higashi Hiroshima Project Higashi Hiroshima City, Hiroshima 18.7 40% Jul-18 1,130,000 n/a 36 Narita Kozaki Project Narita City, Chiba 24.0 55% Oct-18 540,000 n/a 36 Okayama Aida Hikari CC Mimaku City, Okayama 38.0 30% Dec-20 606,000 n/a 32 Sanbu Minami Project Sanmu City, Chiba 2.0 80% Sep-18 32,000 n/a 36

In March 2018, the Company successfully sold the Sanbu Higashi project, achieving a 100%+ return on its investment in 3 years. Potential future buyers for the Company’s solar projects are infrastructure funds, pensions or life insurance companies looking for high yield investments in yen.

Solar Plant Sanbu Higashi Project Location Sanmu City, Chiba Output Capacity (mW) 5.1 Feed-in Tariff, yen/kWh 36 Investment started Feb-15 Start Operation Mar-17 Project Sold Mar-18 Total investment (mn yen) 520 Profit (mn yen) 568 Return 109%

Source: Japan’s Minister of Economy, Trade and Industry

Renewable Energy - New Business Project: Wood Pellet Production for Biomass Power Generation Location: Russia Partner: RFP Group

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It has signed two Letters of Intent (“LOI”) with the RFP Group on joint investments in wood pellet mill projects during the Russian-Japanese Business Forum in Tokyo in December, 2016. One LOI is for a financing effort to build a 90,000 tons wood pellet plant in the Russian Far East, with expansion to 135,000 tons per annum. Wood pellets are biofuels made from compacted sawdust and used for biomass electrical production plants in Japan. The other LOI is to develop additional wood pellet plants with capacity up to 500,000 tons. Both projects will be focused on the Japanese end user market.

Under the aggressive push of the Feed-in Tariff (FiT) scheme in Japan, certified woody biomass power output has been well oversubscribed (16k mW certified vs 7.3k mW targeted as of September, 2017). The Company has realized the possible shortage of biomass fuel supply in the near future and started to expand into and pursue attractive investment opportunities in the renewable energy business.

Source: Company Press Releases dated December 16, 2016 and May 28, 2018

Partner: RFP Group

Unused wood Wood chip/pellet Biomass power

Generation plant

Since the signing, the Company has been making significant progress towards to the goal of starting production in late 2019. In April 2018, the Company has signed the Investment and Shareholders’ Agreement with RFP Group and established two JVs in Japan and Russia. The Company has also signed LOIs with 2 Japanese off-takers, which fully accounts for the initial 90k tons. In addition, the Company has entered a Cooperation Agreement with the RFP Group and the Russia-Japan Investment Fund (RJIF) during the St. Petersburg International Economic Forum on May 25, 2018. RJIF was launched by the Russian Direct Investment Fund and Japan Bank for International Cooperation in 2017. The investment fund aims to generate competitive returns by investing in projects and corporations that foster economic cooperation between Russia and Japan. RFP Group is the largest forest industry holding of the Russian Far East and the Company believes that Russia has the potential to become Japan's fastest growing source of biomass fuel.

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Renewable Energy - New Business Project: Wood Pellet Production for Biomass Power Generation Location: Russia Partner: RFP Group

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Advisory Board - Established for the purpose of obtaining opinions from external experts who have thorough insight into financial, administrative and legal matters in developing multifaceted business strategies for the future. Members: • Masamoto Yashiro – former Chairman of Shinsei Bank • Taro Kiritani – Former Managing Executive Officer of Sumitomo Mitsui Trust Bank • Bill Wilder – Former President and CIO of Nikko Asset Management • Yasuo Shida – Attorney, former official of Ministry of Finance • Mackenzie Clugston* – Former Ambassador of Canada to Japan

* Joined the advisory board on April 1, 2018

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