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Japan-Update

Toho lowballs profit, but holds promise at box office

Japanese studio reaps big margins on in-house hits, cinema operations

Japanese studio Toho will help produce anime film "Mary and the Witch's Flower" this fiscal year.

TOKYO -- Japanese film studio Toho projects a 19% decline in operating profit for the year through February 2018, but high margins on in-house movies and theater operations suggest the company may beat its estimate once again.

The studio expects consolidated operating profit of 40.9 billion yen ($376 million) for fiscal 2017, Toho said Friday, down from a record 50.2 billion yen in the recently ended fiscal year driven by the megahit anime film "Your Name." Toho sees movies as a fluid business and tends to forecast earnings conservatively. The studio surpassed its initial operating profit outlook in each of the past five years.

In-house hits

"Our strategy of building up our in-house film lineup bore fruit," Nobuyuki Tako, a managing director at Toho, said Friday at a news conference when asked how the studio achieved record profit last fiscal year.

Toho had a hand in producing two box-office smashes in that 12-month period: "Your Name," the second-highest-grossing Japanese film ever, and "Shin Godzilla." High production fees make backing movies risky, but hits promise big profit margins.

Toho's success rate with in-house films is one of the company's strengths. Of the 30 movies Toho helped produce in fiscal 2016, 10 surpassed 1 billion yen at the box office. Such hits generally lead to upgraded earnings forecasts. The studio also enjoys reliable earnings from staple series such as "Detective Conan" and "Yo-kai Watch."

This fiscal year, Toho plans to invest in movies such as the anime "Mary and the Witch's Flower." The studio has high hopes for its roster, but appears to have priced only average box-office performance into its earnings forecast.

High-margin theaters

Toho also has worked to raise margins on cinema operations. The studio in 2015 introduced "MX4D" systems at some theaters, which offer real-world effects such as moving seats, wind and mist. These systems continue to pull in moviegoers despite tickets costing roughly twice as much as for standard features. Operating profit from cinemas climbed from around 9 million yen in the year through February 2013 to just over 16 million yen in the just-ended fiscal year.

Toho's share price has dropped 10% from a 2017 high set Jan. 6, as many investors would agree with Mitsushige Akino of Ichiyoshi Asset Management, who said the company's earnings last year were "too good." But even the studio's conservative full-year forecast represents a 24% lift over the previous year's initial outlook of 33 billion yen. Taken as a show of Toho's confidence, this suggests the stock soon may appear undervalued.

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