TT-401 -- Gaba IPO, ebiz news from Japan

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A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, November 26, 2006 Issue No. 401


- What's new
- News
- Candidate roundup/Vacancies
- Upcoming events
- Corrections/Feedback
- News credits

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English-teaching school, Gaba, is to IPO on Mothers on
December 1st. The company will be offering 14,200 shares
at JPY265,000, giving the company a market cap of
JPY11.39bn (US$97.4m). The company in its current form was
created as recently as June 1994, through a management
buy-out. It expects to record sales of JPY7.75bn (US$66.2m)
and net profit of JPY808m (US$6.9m) through December this
year, quite a turn-around from 2005, which saw sales of
JPY5.52bn (US$47m) and net profit of minus JPY2.87bn
(US$24.5m), thus resulting in a notional PER of -3.7.

Actually, with such negative numbers last year, we're
surprised that Gaba didn't wait an extra year to go public,
so that the PER would look normal. But we presume that with
the extent of the turn-around, management expects that
shareholders will look forward for similar results in
coming years, rather than looking at what is in the past.
Given the current downwards trend in stock market IPOs, as
well as removal of shareholder tax breaks (more in NEWS
section below) maybe they're right in taking the risk. This
could well be their best chance to do a reasonably priced
IPO for some time to come.

Anyway, while the Gaba folks are no doubt excited about the
prospect of being able to tap public funds, we believe that
it will be difficult for the company to maintain a decent
stock price going forward. The reason for this is less a
reflection of Gaba, although the school comes in for plenty
of criticism from the English teacher fraternity for its
low salaries, and more due to the problematic nature of the
English teaching sector in Japan in general. While we won't
name names, several of the biggest schools in the nation
are rumored to be on the verge of bankruptcy, and for one
school in particular, the losses are so great one wonders
how it stays afloat.

You would think that the English teaching business, known
as "Eikaiwa", in Japan would be good. The Nikkei says that
the industry is worth about JPY700bn (US$5.98bn) a year, of
which JPY280bn (US$2.39bn), or 40%, represents English
language schools for adults. Students are obviously paying
high rates and the top four companies operate 1,500
branches between them. Nova for example has 600+ schools,
GEOS has 500+, and Aeon and ECC about 500 together. No one
seems to know just how many adult learners of English there
really are in Japan, but it's safe to say it is a lot. The
numbers indicate somewhere about 2m-3m people at any one
time, with the average student paying out about JPY100,000
(US$854) a year in fees.

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Unfortunately, the industry has acquired an almost yakuza
(gangster) reputation over the last few years, due to the
heavy-handed sales tactics used by some schools. There are
numerous stories in the media and Internet about people on
the street being accosted by "catch sales" people, who
pressure their prospects to sign up for lessons then
accompany them down to the nearest ATM to make the first
payment. This has resulted in some recent high profile
consumer protection court cases against even major
companies who in the past have been reluctant to give

Catch sales is a financially productive technique for those
schools which are good at it and we were told by an insider
that one well-known school has just 4 schools and 200 (not
a typo) sales people! Needless to say, they do well
commercially and are no doubt interested in the results of
Gaba's IPO. The same person also told us that another large
school is most likely connected to a large consumer finance
firm and so while it loses money each year, the value of
the student loans allow the finance firm to keep the school
afloat. The average student loan is apparently large enough
to take several years to pay off.

It isn't just the students that are getting stiffed either.
English teaching is now considered by most foreigners in
Japan as a low-paying temporary job and an industry which
doesn't mind hiring unqualified workers. The schools may
deny it, but anonymously English teachers claim to be getting
as little as JPY1,400 for a 40-minute class (actually these
were ex-Gaba teachers) and with a complex scheduling
system, new teachers are unlikely to make much more than
JPY250,000 per month. Further, since 40-minute classes mean
that teachers are not working a full week, they are
classified as part-timers, thus freeing the schools (not
just Gaba) of the usual social insurance and other
obligations that workers in other sectors enjoy as a matter
of course.

It seems that the spread between JPY8,000/lesson (factoring
in text books and other costs) charged to students and
JPY1,400/lesson paid to teachers would result in a pretty
good profit margin for the schools. So one wonders why they
find it difficult to make money. In fact, Gaba has proven
that you can do it, so we can only assume that either
mismanagement or inability to respond to changing
competition and demographics are the real reasons for poor
results in other firms.

Indeed, our insider has told us that he thinks lack of IT
and business efficiency, mainly due to the old fashioned
autocratic management, are the major contributing factors.
As an example, he mentions that despite the usually juicy
profits of a catch sales organization, one such
autocratically run school, Nippon NCB, the nation's tenth
largest English school at the time, went bankrupt in
January of this year.

Perhaps it is a bit much to blame just the schools for the
woes of the English teaching sector in Japan. Clearly the
education system has a part to play. The simple fact is
that many Japanese kids learn early to hate English. In
middle and high schools around the nation, the hardest exam
is English. The curriculum focuses on rote learning of what
essentially is not a logical language, and the rigidity of
the system thus offers little of the incentive that most
foreign language learners gain when opening what should
be a magical door to other cultures and worlds.

In addition to the education hurdles, Japanese kids and
their parents seem to have gotten soft about their desire
to use English as a tool to get ahead. According to a
report by Deutsche Bank published in September this year,
just 1.5% of Japanese university students go on to study
abroad, extremely low by international standards. In Korea,
the number is more like 12% and in fact Korea, despite
having only 1/3 of the population of Japan, spends about
triple the amount on English education for its kids than
the Japanese do.

Against this background, Gaba is probably doing about as
well as is necessary for a young firm trying to muscle its
way into a mature or even declining industry. By using IT
and unpopular but effective hard-nosed cost cutting, they
have found a way to produce a net profit that approaches
10% -- about what is typical for a service industry
business in Japan.

The only other way we could see another firm do as well or
better than this would be to discover some way of making
subliminal learning work -- or to use the business as a
front for some more lucrative downstream business, such as
loan sharking or high-pressure sales of other services. In
any case, if Gaba's IPO goes well, we're sure that we will be
seeing a lot more eikaiwa IPOs (one of the big four is
rumored to have one in the works) coming out over the next
couple of years...

This issue's feedback is a reader's example of how someone
in Kasumigaseki is asleep at the spending controls, noting
just how much is spent on return airfares for foreign
students studying in Japan, and how no one seems to care.

...The information janitors/


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+++ NEWS

- Combined water/power mega project
- IPOs slump
- Tax cut elimination to be tempered
- Old men are less social
- Tsutaya starts slow path to VOD

-> Combined water/power mega project

Mitsubishi has joined with Gulf Investment of Kuwait and
ACWA Power Projects of Saudi Arabia to win a JPY230bn
combined power and water desalinization complex in Saudi
Arabia. The mega project is a first for a Japanese firm in
the country and will produce 850Mw of power and 178m liters
of drinking water a day. Similar power/water utility
complexes are being constructed by Mitsui in Qatar and
Marubeni/Sumitomo in Bahrain. The oil countries are
experiencing rapid population growth and are building out
their essential infrastructure while oil revenues remain
high. ***Ed: We wonder why the states on the east coast of
Australia, experiencing one of the worst droughts in that
country's recent history, don't consider putting in
complexes like this. Australia certainly has the energy
resources to operate them.** (Source: TT commentary from, Nov 23, 2006)

-> IPOs slump

Investors have clearly tired of the spikey nature of
start-up pricings and are focusing more on larger, more
stable stocks. As a result, 5 of the 10 stocks that began
trading in November have had initial trading prices lower
than their IPO prices. An example of just how badly new
issues are faring is electronics parts maker/trader KFE
Japan, which at one point was selling for JPY111,000 per
share just a day after the IPO where the initial IPO price
was JPY190,000. ***Ed: This massive slide of 42% shows twin
factors at work. Not only are companies going to have to be
more realistic with their IPO pricing, but also we're also
in a small-cap market slump. The KFE shares at JPY111,000
were priced with a PER of just 10.3, clearly too low for a
company that appears to be financially sound.** (Source:
TT commentary from, Nov 22, 2006)

-> Tax cut elimination to be tempered

The government has announced that it plans to temper the
elimination of the temporary tax break that has been in
place for the last 3 years, allowing share market investors
to be taxed at only 10% of capital gains. The rate after
the tax break expires in early 2007 is supposed to be 20%.
The "tempering" factor is that investors will now enjoy an
"over-hang" of the lower 10% rate on capital gains earned
up to the end of 2007, even if the investor sells the
stocks after that time. ***Ed: Clearly with IPOs starting
to sag and the market in general sitting in a narrow band,
the government is worried about a general stock sell-off at
the end of this year. As they should be. Putting the tax
back up is a bad idea in our opinion.** (Source: TT
commentary from, Nov 22, 2006)

-> Old men are less social

We all know the jokes about cranky old men being
anti-social, well now research in Japan proves it.
Apparently 41.3% of aged men living alone don't have any
close friends, and 25% don't even have contact with their
neighbors. Just over half this number of women, 22.4% said
they had no close friends, while only 7.1% had no contact
with their neighbors. ***Ed: This is a pretty sad
indictment on how aging is occurring in Japan. Right now,
20.7% of the nation's 128m people, about 26.5m people is
aged 65 and over, and by 2014, the number will be 25%, or
around 32m people.** (Source: TT commentary from, Nov 22, 2006)

-> Tsutaya starts slow path to VOD

One wonders why it is taking so long in coming, especially
given the move to VOD in the USA, but at long last, the
nation's leading video rental chain, Culture Convenience
Club, has announced that from next spring it will introduce
a movie download service via subsidiary Tsutaya Discas. The
movies will be available by both streaming and download
services. Initially there will be 1,000 titles, both
Japanese and foreign. ***Ed: The numbers for Tsutaya
membership are pretty impressive. The Discas subsidiary has
1.74m members renting CDs and DVDs online, while the parent
company has 19.3m members. These members rented 416m titles
last year, from 1,275 stores throughout Japan. In
comparison, some 160m theater tickets were sold nationwide
over the same period.** (Source:, Nov 17, 2006)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.


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Japan is home to the highest density of vending machines in
the world, with about 5.6m machines, or one for every 23
people. You can buy almost anything, and the Japanese do,
with about JPY6.67trn (US$56bn) being spent every year.

Yet, apart from the obvious players such as major soft
drinks companies, there have been no foreign owners of this
massive direct sales medium - until now.

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October, 2006, it has built a network of 1,000 vending
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In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to editors at

-> TT 399. We ran an article that included comments about
JITCO and that the organization's role is possibly a case
of the fox getting to guard the chicken coop.

*** Reader response [Edited]: Reading about foreign
trainees brought to Japan reminds me of a similar misuse of
official position and funds by another entity dealing with
foreigners. In early 2006 a scholarship student friend was
given a homeward bound one-way ticket to Eastern Europe,
courtesy of the Ministry of Education, after his university
course finished. The price printed on this ticket was
somewhere over the 400,000 yen mark.

It doesn't take much checking around travel agencies to
realize this is at least double the rate of standard air
tickets, leading one to wonder where the ticket was bought,
and who is making the high profit margin.

My friend did in fact ask, and was told that the ticket was
bought 3 years earlier (??!!) when the student first came
to Japan. [Ed: Wait, weren't oil prices cheaper back
then?]. My friend tried cashing in the ticket, as students
are want to do, and was told that the ticket was fixed and
couldn't be refunded or exchanged.

*** Our response: If you tried to add up all the ways
bureaucracy wastes tax payer money, in any country, you'd
soon have an ulcer. And especially in Japan, even if you
were to report the wastage it is unlikely that anyone
would care anyway. Sometimes you just have to go with the
flow. We hope your friend's 3 years here were well spent.

...The information janitors


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Written by: Terrie Lloyd (terrie at

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