Summary

NPD has a solid track record for business performance (10 year ROIC 16%).
Recently, Parking Lot business has been relatively stable, Ski resort business experienced short term headwinds, and Theme park business is just getting started.
Long term competitive advantage for NPD’s Parking Lot business is unclear and competition in the industry is only intensifying.
At today’s 155 yen per share, NPD isn’t a buy. However, I will revisit NPD at 100 yen per share, or at signs of meaningful improvement in NPD’s Parking Lot business’ competitive positioning.

Tearsheet

Introduction

Established in 1991, Nippon Parking Development (NPD) started as a consulting firm specializing in the parking lot business. Since then, NPD has expanded into parking lot management, sub leasing, and brokerage services. NPD lives by the “Happy Triangle” corporate philosophy. The idea is that everybody involved with the company finds happiness. The practical application of this philosophy is NPD’s general business strategy to increase utilization for underutilized assets. NPD has extended this philosophy into businesses outside of the parking lot industry. Today, NPD’s major reporting segments are: Domestic Parking Lot, International Parking Lot, Ski Resort, Theme Park, and Other (miscellaneous education, travel, and business services).

As of NPD’s August 2015 – July 2016 reporting period, 65% of revenues come from the parking lot business (domestic & international), 30% from Ski resort, and 5% from Theme park and other businesses. It is important to note that Japan had an unusually warm winter in 2015, which negatively impacted the Ski resort business. Additionally, NPD acquired the Theme Park business in May 2016. As such, the Theme Park segment has not gone through a full reporting cycle yet.

Parking Lot Industry In Japan

There are primarily two types of parking lot businesses in Japan:

Coin Parking (hourly rental of parking space)
Monthly Parking

Coin Parking

Typically, a coin parking lot is easy to setup and does not require a large amount of operating capital.

Here is what it looks like:

Source: Hatena Blog

According to Shared Research, there are two big players that make up 40% of the coin parking industry (as of 2014):

Park 24 (TYO: 4666)
Repark – subsidiary of Mitsui Fudosan (TYO: 8801)

The remaining 60% of the industry consists of mid to small size operators. This is largely due to the capital-light nature of the coin parking business. Historically, NPD has not been heavily involved in the coin parking industry.

A few observations on the coin parking business

Typically, coin parking lots are located in the city (basically any place with lots of traffic). Coin parking usage is dependent on the spontaneity and frequency of a driver’s visit to a given location. For example, people who frequently commute by car to the office are not likely to use a coin parking lot because they would have a monthly parking space contract. In contrast, someone with a semi annual dental check up would probably use a coin parking lot.

Coin parking lots are not the primary parking space for cars. Hence, coin parking lots compete with public transportation – if gas prices rise, people are more inclined to take public transportation, resulting in a decline of coin parking usage.

Depending on the location, coin parking lots are often converted into buildings and apartments as soon as the property owner has enough capital to invest. Therefore, from NPD’s perspective, the frictional costs for setup, teardown, admin etc do not always make the investment return particularly attractive.

Monthly Parking

The monthly parking business can take many forms – basically any parking space that has a monthly contract. Typically, monthly parking spaces can be an open lot, mechanical parking structure, extra parking space in an office building, etc. As the operator of Japan’s largest monthly parking space search website, NPD exerts its strength in this area.

Mechanical Parking

Here is an example of what a mechanical parking structure looks like:

Source: ASAP Parking System

Mechanical parking structures like these are typically seen in densely populated areas. Due to space constraints, things tend to be built higher in Japan. The useful life of these structures are roughly 20~25 years. Not that the whole structure needs to be torn apart and rebuilt at the end of the useful life, but just about every moving part in the structure needs to be replaced in that time span. Many of these structures were built during Japan’s 1980s bubble, which means a lot of them are due for overhauls.

As a side note, the mechanical parking structure shown in the picture is only one of many variations. To get an idea of all the different types of parking structures seen in Japan, click here.

Office Building Parking

On the surface level, there isn’t much to say about office building parking because it is simple. Office buildings typically have several floors of parking – some of which are rented out and some that are used by tenants. Interestingly, a Nikkei article published in 2012 (Japanese source) pointed out the need for increased parking space utilization, particularly when office space goes unoccupied. Put another way, when the commercial real estate market is strong and all office space is filled, no building owner is out looking for people to rent parking space. However, when occupancy declines, building owners look for ways to make up for lost revenues (and more parking spaces go unused!).

General Comments

It is important to note that Japan takes car parking seriously. There has been a long-standing “proof of parking” requirement for car owners. Put simply, car owners (particularly in major cities) are required to prove that their cars have a designated parking space. Street parking overnight is illegal in every major city (yes, your car will be towed after a day or two).

Another noteworthy fact is the regulatory requirement for parking lots in office buildings. The details differ from city to city, but there is a general requirement for new office buildings in designated areas to have a certain number of parking spaces. These “designated areas” can be roughly translated as business districts and generally busy areas of the city. This regulatory requirement often results in underutilized parking spaces as commuting by train is most common in Japan.

Silicon Valley is not the only birthplace of disruption. Competition in the Japanese parking industry is getting fierce, especially after the founding of “Akippa”. Akippa is an app that connects parking lot owners with people in need of parking space. The difference between an Akippa parking lot and a coin parking lot is infrastructure: Coin parking lots require things like payment machines and parking blocks while Akippa requires a smartphone. Akippa has mostly been eating into the coin parking industry, leveraging their low cost advantage to provide users with attractive daily rates. As of January 2016 (about two years after releasing their app), Akippa had a little over 4,400 registered parking lots (Japanese source).

NPD’s Parking Lot Segment Strategy

The core of NPD’s parking lot segment is the subleasing of parking lots. Other parking lot related services include parking lot management services, consulting, and more recently, car sharing/renting and coin parking.

Before we get into details about NPD’s strategy, here are a few terms to clarify:

Directly managed: refers to parking lot business where parking lots are leased by NPD and subleased to NPD customers, usually on a monthly basis. Some offer hourly rentals.
Management services: refers to parking lot business where NPD provides parking lot management services (usually for large buildings) – office buildings, hotels, business facilities, etc.

Historically, NPD’s parking lot subleasing business involved actually walking around the neighborhood and assessing the parking lot, speaking with the owner, and then searching for individuals and businesses that are interested in renting parking spaces on a monthly basis.

Internet And Margin Expansion

Currently, NPD’s parking lot subleasing business is in the middle of expanding their customer acquisition strategy. This strategy is being carried out by leveraging one of NPD’s biggest strengths: Their website. NPD’s subsidiary, Nippon Car Service (NCS), operates the largest monthly parking lot search site in Japan. NPD transferred the management of 11 directly managed properties to NCS, which resulted in a 5.3% increase in gross margin percentage (two months after transfer). This was due to website contracts driving higher revenues vs. non-website contracts. After the test, NPD decided to transfer the management of 234 properties (primarily in Osaka and Tokyo, two of Japan’s largest metros) by July 2017.

Here is NPD management’s gross profit estimate for the 234 properties:

Source: NPD 2016 Presentation (English added by yours truly)

NPD management expects gross profit to increase by 161M yen over 3 years for the 234 properties. As a reference, gross profit for the domestic parking lot segment during the 2016/07 period was 2,444M yen. As an additional reference point, the 234 properties are located in Tokyo (Kanto region) and Osaka (Kinki region). As of 2016/07 reporting, NPD had 570 directly managed properties in the Kanto region and 241 in the Kinki region – total for all regions is 1,110 directly managed properties. Directly managed properties accounted for 69% of parking lot segment revenues and 42% of total company revenue during the 2016/07 reporting period.

Little Traction In Car Sharing For NCS

NCS’s car sharing service has been mentioned as an avenue of margin expansion for directly managed parking lots. The basic idea is to remove the headaches of car ownership (proof of parking, parking spot, insurance, maintenance, etc) and offer an all-in-one package. NCS is targeting both individuals and institutional customers. While the idea is sound, other companies also have similar offerings, and growth for NCS has been disappointing.

According to Toyo Keizai, there are roughly 30 players in the Japanese car sharing market. Among the players, there is really only one (familiar) company that matters: Park24. As of March 2016, there were roughly 850,000 members registered to some form of car sharing service. Of the 850,000 members, Park24’s “Times Car Plus” car sharing service had 580,000 members (as of January 2016).

In the meantime, NCS had a goal of reaching 300 available cars for car sharing during the 2013/07 reporting period, and another goal of reaching 500 cars during the 2015/07 period. As of the 2016/07 reporting, NCS had 249 cars available, a 5 car increase YoY. In fact, the number of car sharing contracts has declined by almost 10% YoY (2,619 in 2015/07 vs 2,391 in 2016/07).

In simple terms, the higher margins gained through the NPD to NCS transfer of properties seems to be a function of website customers not engaging in price negotiations. Generally speaking, pricing information moving to the internet means increased price competition. It is unlikely that NPD can follow through with a 30% improvement in gross margins (for the 234 Tokyo and Osaka properties) over 3 years just by focusing on website-generated contracts. NPD needs to figure out a way to be more than just a vanilla parking lot rental service and so far, their car sharing service has not gained enough traction to move the needle.

Disruption, Silicon Valley Style

NCS’s parking lot search site (P-king) is currently the largest website in Japan for monthly parking lot searches. However, a simple Google search for “Parking lot search” (the exact term I used was “駐車場検索”) puts NCS’s website in the #8 spot. Both Park24 (“Times”) and Mitsui Fudosan Realty (“Repark”) websites come out ahead.

Akippa has shaken up the short term parking industry. The biggest change Akippa brought to the industry is removing the hurdle for parking lot renting. If you have an open lot at home, you can create an account on Akippa and rent your parking lot out… even if it’s only 3 hours. For coin parking users, this means price cuts, especially since Akippa just opened the floodgates for unused parking space. It’s also important to point out that Akippa is partnered with Toyota (but Toyota is basically partnered with everybody – including Park24 and NPD).

Fortunately, the supply side of NPD’s directly managed parking lots are mostly businesses. This means stickier contracts and relationships. In comparison, Park24 and Repark have their core business in coin parking, where parking lots are generally small and owned by individuals. Instead of lot owners looking to Park24 or Repark for business, they now have the option to rent their parking lot out on Akippa. NPD is not immune to disruptive innovation, but probably has more time than Park24 and Repark to shift strategies, simply because they deal with businesses and larger parking lots on the supply side.

Coin Parking Payment Infrastructure (Point Park Program)

NPD recently formed a partnership with Rakuten (TYO: 4755), Japan’s largest internet mall. The partnership was setup to target the 60% of the coin parking market that is not part of Park24 or Repark. Smaller players don’t have the money to spend on developing payment systems and reward programs for their parking lots. This is what NPD calls opportunity.

Rakuten has a well-known rewards program called Rakuten point card. This program is similar to any other reward program: Spend money, gain points, exchange points for something valuable. In NPD’s case, members use their “Rakuten Super Points” to pay for parking space. The idea is to have a unified payment infrastructure for smaller coin parking operators.

Source: NPD 2016 Presentation

According to a NPD press release dated October 28, 2015 (Japanese Source), the Point Park program was scheduled to roll out across approximately 1,000 locations (primarily in major cities) starting in the summer of 2016. Their quarterly report (US SEC 10-Q equivalent, Japanese source) released December 12, 2016 confirmed the start of the Point Park program, though there was no mention of how many locations successfully rolled out.

Ski Resort Industry In Japan

The Ski resort industry is largely separated into two seasons in Japan: Green season (no snow) and snow season. Green season typically starts in June and ends in November while the snow season starts in December and ends in May. These are ballpark dates and can fluctuate greatly depending on the weather and location of the ski resort. Needless to say, a big part of running a successful ski resort in Japan revolves around limiting the losses during green season and maximizing revenue/gross profit during the snow season.

At first glance, the ski resort industry in Japan appears to be dying. Here is a look at the number of Japanese people engaged in ski and snowboarding activities:

Source: Japan Tourism Agency (Japanese Source, English additions by yours truly)

The Japanese population engaged in skiing or snowboarding hit a peak in 1998 at 1.8M people. Since then, there has been a rapid decline down to 770K people in 2013.

Sales on ski and snowboard related equipment had a similarly sharp decline:

Source: Japan Tourism Agency (Japanese Source, English additions by yours truly)

Interestingly, the decline in sales figures for ski and snowboard equipment appears to be directly in line with Japan’s asset price bubble burst (1991). After reaching a peak in 1991 (429B yen), sales steadily fell until 2010 (110B yen), then flat-lined thereafter.

According to Laurent Vanat (independent consultant), the global snow sport population appears to be growing – currently at an estimated 125M people.

Here are a few more useful charts from Mr. Vanat’s report:

That was a lot of information. If you are interested in developing a well-rounded understanding of the global snow sports industry, Mr. Vanat’s full report will get you there in an afternoon. Here are the nuts and bolts as it relates to NSD:

Korea already has modern ski resort infrastructure.
China is pretty much caught up as well.
Growth in Asian/SE Asian economies will likely increase traffic to Korean and Japanese ski resorts.
Australian ski resort traffic to US largely shifted to Japan after 9/11 attacks in 2001.
Japan’s snow sport participation has flat-lined for the past several years after two decades of post-bubble decline.
According to the Journal of Ski Science, there were 763 ski courses in Japan (479 operating, 284 closed) as of 2012.
Companies have gained interest in revitalizing the ski resort industry in Japan over the past several years.
Japanese ski resort market is largely fragmented with the largest player operating 34 ski resorts (MACEARTH).
Other key players include (about 3 ~ 15 resorts each):
- Tokyu Resort Service (subsidiary of Tokyu Land Corp – ticker 3289)
- Prince Hotel (subsidiary of Seibu Holdings – ticker 9024)
- Kamori Kanko
- Suzuki Shokai
- NSD (TYO: 6040, 66.67% owned by NPD)
- NC Resort Group
- Hospitality Operations
- Hoshino Resort

NPD’s Ski Resort Segment Strategy

NPD’s ski resort segment actually consists of 66.67% ownership of Nippon Ski Development (NSD), which is also traded on the Tokyo exchange under ticker symbol 6040. To be clear, the rapid increase in minority interest in NPD’s balance sheet over the past 4 years is largely attributable to NSD. NSD’s revenues account for roughly 30% of NPD’s 2016/07 revenues (not adjusted for minority interest). Currently, NSD operates 8 ski resorts.

Both revenue and gross profit suffered greatly in the 2016/07 winter season due to an abnormally warm winter in Japan. Revenues in the ski segment fell 5% YoY despite the acquisition of one ski resort and improvements in off season revenues. Gross profits fell by 88% YoY, largely as a result of the revenue drop:

Source: NPD 2016 Presentation (English added by yours truly)

After two decades of rapid decline, domestic snow sports participation roughly flat-lined over the past couple of years. More recently, global snow sports participation saw a little bit of growth. Japan has underutilized ski resorts and companies are starting to regain interest in the industry. There are several things industry participants need to figure out in order to build a successful business. Broadly speaking, NSD and their competitors need to revitalize snow sport popularity among the aging and declining Japanese population, attract foreign snow sport participants, and/or figure out another way to monetize/utilize ski resorts.

NSD has several strategic focal points:

Extending snow season
Value added offerings
Improving green season monetization
Attracting foreign visitors

Extending Snow Season

There are roughly 300 snow cannons placed at NSD’s 8 ski resorts. However, the 2015/07 – 2016/07 winter was unusually warm, and even the snow cannons weren’t enough to open the resort up for much of the snow season. To prevent this from happening again in the future, NSD plans to invest in higher end snow cannons.

Value Added Offerings

These aren’t intended to be the core of NSD’s business, but contributes to margin improvement. The offerings range from simple things like having a Burger King or Subway somewhere in the ski resort to installing a gate entrance system to prevent waiting lines. Recently, NSD also opened up a ski equipment rental shop as well.

Improving Green Season Monetization

Driving revenues during downtime is an interesting ordeal in the ski resort industry. The only thing strategically unified that I can observe about NSD’s approach to green season monetization is the use of local landscape. Typically, ski resorts are surrounded by an abundance of nature. Basically what NSD does is create activities that revolve around nature – like hiking and kayaking.

Attracting Foreign Visitors

Although NSD takes the initiative to drive organized tour programs with international tourist agencies, a lot of the attraction seems to come from simply existing. In Europe, your destination is somewhere around the Alps. In Asia, you’re either going to S. Korea or Japan. As SE Asian countries experience rapid growth, they seem to look to Japan and Korea for their ski experience. NSD showed a breakdown of foreign visitors to their Hakuba Valley area ski resorts (4 resorts) in 2016:

Theme Park

At this point, it is still too early to tell where NPD is going with their Theme Park segment. That said, management has mentioned that part of the reason for entering the theme park business was to balance the seasonality of the whole business group. NSD primarily operates between December and May while remaining mostly quiet between June and November. The theme park business could more or less neutralize the seasonality since the money-making season for theme parks generally happen during NSD’s off season.

The theme park that NPD acquired is called “Nasu Highland Park”. It is the largest theme park in eastern Japan. Nasu Highland Park was founded in 1969 and takes in roughly 400,000 visitors annually. Unlike Tokyo Disneyland, Universal Studios Japan (Osaka), or Sanrio Puroland (Tokyo), Nasu Highland Park does not own well-known IP characters.

Similar to the Ski resort industry, many theme parks were built during the economic bubble. After the collapse, many facilities have shut down or seen a decline in business. It’ll be interesting to see what NPD plans to do with this segment – so far they’ve been sticking to what seems to be their company motto: Increase utilization for underutilized assets.

Financials & Business Performance

NPD’s revenue and gross profit chart looks like one that came out of a business textbook as an example of a phenomenal company:

However, net income shows a different story as NSD struggled through an unusually warm 2015-2016 winter:

It’s important to note that NPD’s parking lot business set record high revenues and gross profits in 2016/07. Additionally, NSD improved off season monetization as well as in-season gross margins. This suggests that the major drop in gross profits was almost purely a warm-winter revenue problem.

For a Japanese company, NPD shows uncharacteristically high ROE, ROA, and ROIC… again, until 2016/07’s warm winters came around. Without diving into details, my best guess is that ROE, ROA, and ROIC will all recover from the sharp drop, but not all the way back to historical levels. NPD’s ski and theme park segments require heavy capital investment, unlike the asset-light parking lot business.

NPD’s balance sheet has been strengthening over the past decade and has mostly remained stable over the past 3 or so years.

Valuation

Unlike many perfectly healthy Japanese companies that go unloved, NPD has a history of gaining investor love:

Now, NPD has a solid history of business performance. However, we are concerned about how the business will perform in the coming years and how much we are willing to pay for that performance.

NPD’s track record is more than decent, but I have concerns about the sustainability of their business performance. NPD management seems confident that the parking lot business will see significant margin improvements through gaining web-based contract leads. This seems odd since NPD’s customers will only have more access to pricing information and will likely be making price comparisons before actually contracting a parking lot. While margins may improve over the near-term, increased access to pricing information for the customer will probably drive down margins for NPD over the long-term, unless NPD can figure out a value-added service that can maintain or improve margins. This leads us to NPD’s car sharing business, where we are hoping to find the extra margins, except NPD’s car sharing business track record is… bad (I’m not sure they’ve ever actually reached a single goal they’ve set for this business).

In the meantime, NPD competitors like Park24 and Akippa have established their competitive forces. For Park24, they have leveraged internally-developed IoT tools to scale their car sharing business and largely cornered the Japanese car sharing market. Akippa unleashed even more underutilized parking spaces by invading individual homes. People can use their smartphone to make a little extra cash by renting out their unused home parking space. NPD’s parking lot business doesn’t seem to have any obvious strength aside from their website.

Here is a simplified approach to estimating NPD’s value. First, let me provide a few relevant data points:

According to 2016/07 reporting, total invested capital is around 13,400,000,000 yen. According to Nikkei, NPD (TYO: 2353) has a market capitalization of 54,001,000,000 yen as of end of day 3/13/2017. Based on these data points, we can come up with several simple scenarios:

The next table computes (Net Income * PE Ratio) / Current Market Cap.

The next table shows the value in terms of share price:

Now for a little bit of discussion.

P/E of 10 is about absolute worst case for NPD (9.1x in 2013 was lowest in 10 years). If we’re only looking at historical business and market performance, the 10-year average figures puts NPD at roughly 185 yen per share and 5-year average figures puts NPD at about 193 yen per share.

Frankly, the most likely outcome is that NPD will continue with its strong business performance and investors will continue to assign high pricing metrics to NPD shares. That said, my big question is the overall direction of NPD. The core parking lot business does not have a clear competitive advantage, and that’s a problem. Much like US retail industry’s game is all about “Amazon Proofing”, Japanese Parking Lots are about “Akippa Proofing” and NPD has not figured out a solution just yet.

NPD has been a growth story so far, but without having a clear competitive advantage, I wouldn’t call NPD an interesting investment at its current price. If NPD manages to establish a value-added service that differentiates itself from being a vanilla parking lot rental company, the current price would be interesting. Alternatively, NPD would be an interesting investment if shares trade around 100 yen per share. Considering NPD shares’ historical price volatility, this is an entirely probable scenario.

The upside is certainly attractive, but the downside can be a slippery slope if or when NPD’s growth story crumbles. It’s also worth noting that NPD’s ski and theme park businesses are dependent on a healthy economy, unlike the parking lot segment.

Conclusion

For investors that are less concerned about risk, NPD at 155 yen per share is probably more than interesting. However, I’d wait and see if NPD management can figure out a real way to improve margins for the core parking lot business. Current NPD business at below 100 yen per share would create an attractive risk/reward profile.

As for near-term performance, NPD’s ski business will likely post record sales and gross profit if Japan experiences an average winter in 2017/07. This will primarily be driven by what was masked by the steep gross profit decline in the 2015/07 – 2016/07 season – the acquisition of 1 new resort, margin improvement during winter season, and improved off season monetization. I’m not yet convinced that NPD’s parking lot business will meaningfully improve margins for any prolonged period only by driving contract leads through the NCS operated website.

I will revisit NPD when shares trade below 100/yen per share or if I come across news that NPD management has gained some traction in establishing some form of competitive advantage.