■Company Overview

3. Features and strengths

Reso Education ＜4714＞ has various features and strengths, but we believe that the two features are that our business performance has been expanding almost consistently over a long period of time and that we have achieved high profit margins. I believe that these two features are due to the advantageous business model that the company has built, and I believe that understanding these will increase the level of understanding and confidence in the company's medium- to long-term growth scenarios.

The company's sales recorded 163 million yen for the fiscal year ending 1986/6, which is the first year of establishment, and sales continued to increase until the 2013/2 fiscal year (sales declined due to 8 months of irregular settlement due to changes in the fiscal period, but actual increase was achieved when converted to 12 months). Since the 2014/2 fiscal year, growth has temporarily slowed for several periods due to the effects of prioritizing efforts to rebuild internal management systems due to the discovery of inappropriate accounting processing issues, and growth trends have continued over the long term, with the exception of a decline in sales in the 2021/2 fiscal year due to the effects of the COVID-19 pandemic.

What is important is that growth has continued in major businesses (TOMAS, Meimonkai, Shinmekai) even as competition for student acquisition intensifies due to the progress of the declining birthrate and the increase in participating companies. The number of elementary, middle, and high school students, which is the company's main target, declined at an annual rate of 1.2% from 12.91 million in fiscal 2018 to 12.14 million people ※ in fiscal 2023, but sales of the three main businesses in the same period, on the contrary, grew at an annual rate of 4.6%. As uncertainty about the future increases, it is thought that accurately incorporating exam preparation needs in response to changes in the market environment, such as an increase in the number of students applying to private schools and an increase in educational expenses per person, has led to sustainable growth.

*Total number of students enrolled in elementary schools, middle schools, and high schools according to the Ministry of Education, Culture, Sports, Science and Technology's “Basic School Survey.”

Also, the company's operating profit margin has remained stable at around 10%, with the exception of the fiscal year ending 2021/2, which fell to 4.0% due to the effects of the COVID-19 pandemic. If you take a bird's-eye view of the cram school/prep school industry, the operating margin level of around 10% is higher than the average. Among other companies in the same industry that are listed, there are multiple companies that have achieved higher operating margins than the company, but these are companies that have obtained loyalty income through FC business development based on group guidance as the core business model. There are very few other companies in the same industry that have achieved the same level in business categories such as the company that mainly focuses on individual instruction in directly managed classrooms, or where groups and individuals are developed in half.

In this way, we believe that the company's two characteristics, stable sales growth and high profitability, are due to the same thing. Mr. Iwasa, the current chairman of the board, took two major hints from China's one-child policy when starting the company. There are two points: the progress of the declining birthrate due to the one-child policy, and the increase in education expenses per child as a result of the declining birthrate. Based on this hint, constructing a business model assuming a declining birthrate from the beginning has led to growth up to now, and by predicting that education expenses per child will increase, it can be said that they have succeeded in changing the declining birthrate to a tailwind rather than a headwind.

There are two important points for turning the declining birthrate into tailwind: providing high-quality educational services through complete one-on-one individual guidance, and putting that purpose (goal) in academic guidance. These two are also common elements in various business categories, starting with the current “TOMAS.” Currently, there are no other places where individual instruction combining these two is being developed in earnest. The general model in the current tutoring cram market is 1 to a few (2 to 3 people) “tutoring”, and there are many supplementary lessons for school classes. The main reason why other companies do not adopt the company's model is clear, and the business risk is high. Fees are inevitably raised in order to achieve monetization through complete individual instruction, but “supplementary lessons for classes” cannot justify that high fee. Since there is a harsh reality that only a track record of going on to difficult schools is what justifies high tuition fees, there are almost no new companies entering the market with a business model similar to the company, which is the reason why they have established a high brand power and position as a preparatory school with complete individual guidance.

The company aims to provide high-quality individual guidance, and has been focusing on providing a high level of customer satisfaction under the awareness that “the Gakushuku industry is a service industry.” A high level of customer satisfaction in the cram school and prep school industry is nothing but passing the school of your choice. Since its establishment, the company has consistently maintained an awareness of the service industry until now, and the biggest management goal is to pursue academic progress as a service provider's mission. This “academic track record pursuit type” business model is the source of the company's strength, and it is thought to be a factor that can achieve the first two factors: a stable increase in sales and a high profit margin.

As an example showing that the company operates with a high level of awareness of the service industry, there is a style where the company's full-time employees focus on management. As mentioned above, the “TOMAS” instructors are part-time workers for students and working adults, and full-time employees enrolled in each classroom are dedicated to coordinating between such instructors, students, and their parents. Specifically, it is a task of 1) drawing out the real purpose and goal (goal) of students and parents, 2) creating a curriculum after firmly sharing it with the lecturer in charge, and 3) fulfilling accountability to parents about progress and subsequent teaching policies, etc. after class starts. By repeating this series of cycles, while maintaining a high level of customer satisfaction, it ultimately leads to maximum customer satisfaction by finally passing the school of choice.

As for whether the company's stable growth and high profit margin situation is sustainable in the future, we believe there is a high possibility that it will continue on a time axis of 5 to 10 years, depending on how the investment period and scale are set. First, it can be mentioned that there is always a fixed amount of demand for the business model (high price/high quality service) developed by the company even as the declining birthrate progresses. Next, the entry of other companies into that market becomes a key point, and I see that the risk of falling into excessive competition is small in this regard as described above. This is because there is a high business risk in order to follow up and reproduce the business model that the company has built for many years since its establishment. The company's high entry barrier to the company's academic track record pursuit type business model is the company's third characteristic and can be said to be its strength.

(Author: FISCO Visiting Analyst Joe Sato)