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Advanex Inc. (JP-5998) Tokyo Stock Exchange First Section ( I )

2018-08-08  提供機構:FISCO  作者:FISCO  點閱次數:2

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◆Summary

Beginning volume production of new products during FY3/19

Advanex Inc. <5998> is a major specialty manufacturer of precision springs. Its market strategy focuses on auto­motive, medical, and infrastructure and home equipment applications as core areas and also targets rechargeable batteries and aircraft. The Company is entering an expansion phase in FY3/19 after finishing lengthy lead times.

1. Review of FY3/18 results

Automotive industry business, which accounts for just under 50% of sales, has a lead time from inquiry to volume production of 4-6 years, a longer period than the half year in office automation equipment and electric appliances and 2-3 months in mobile phones. Additionally, fixed-cost burden from investments, including personnel expenses, to maintain operations during the period from sample delivery through quality verification begins prior to volume production and has pressured the Company’s earnings in recent years. In FY3/18, net sales rose 13.6% YoY to ¥20,294mn, while operating income only increased 5.0% to ¥259mn. Ordinary income dropped 31.5%, including the impact of forex losses booked in non-operating costs. Net income attributable to the owners of the parent company fell 25.9% because of an impairment charge on goodwill for an acquired subsidiary.

2. Income improvement initiatives by plants

Plant income conditions differ depending on the number of years elapsed since launching or acquiring the particular plant. Plants with more than five years elapsed are generally profitable, and those at four years or less incur losses. While the Company reported ¥259mn in FY3/18 operating income, combined operating income from plants that are profitable is ¥1.2bn, the amount targeted for FY3/21 in the mid-term management plan. The Company is aiming for 10% annual growth at profitable plants and loss reduction and profitability at plants with deficits.

The Saitama plant, which had the largest deficit, is headed for accelerating volume output of new products and narrowing its losses given the prospect of obtaining certification for the ISO/IATF16949 automotive industry quality management system standard during FY3/19. The plant in Mexico is targeting profitability in FY3/20 after rein­forcement of operating assistance from Japan and the start of volume production for new products in FY3/19. The Chiba plant lost half of its mobile-related sales compared to 2015, but is seeking a rebound with the launch of volume production for contact probe parts in FY3/19. US plant income should improve on completion of ramp-up assistance for the Mexican plant from the previous fiscal year and the start of volume production for new medical products handled by the UK plant at the US site too. The Indonesia plant, which was acquired as a subsidiary, is taking steps toward earnings recovery through deploying the Company’s production technology and quality and delivery control system. It aims to handle volume production of new products from FY3/20 after acquiring new production technologies.

3. Strong reputation with customers

Recognition of the Company as a global Tier 2 supplier by Tier 1 suppliers has risen in the auto market. Its global supply operations have been well received, and customers are increasingly integrating orders placement on a global basis. The Company also seeks to obtain certification as a preferred supplier that lets it recruit orders of items slated for procurement on a priority basis.

◆History and company overview

Precision spring maker with a global network

1. History

The first-generation president founded a spring factory in Tokyo in 1930. In 1946, this factory was incorporated as Kato Spring Works Co., Ltd., and in 2001, the company name changed to Advanex Inc.

In 1964, the Company listed its shares on the Second Section of the Tokyo Stock Exchange, and in 2004, the shares were elevated to the First Section.

Since the 1980s, Advanex has released many products that have become global hits and has gained top shares of the markets for these products. Advanex has held a 70% share of the Japanese market for tape pads for audiotapes, a 50% share of the global market for flat springs for videotapes, an 80% share of the global market for shutters for 3.5-inch floppy discs, a 50% share of the global market for hinges for cellular phones, and a 90% share of the Japanese market for center hubs for optical discs. Advanex also holds a 60% share of the Japanese market for springs to protect needles implanted in the human body.

Advanex was early in entering overseas markets and set up its first overseas subsidiary in 1971 in the US. In following years, it established subsidiaries in Singapore, the UK, Hong Kong, Thailand, China, Vietnam, Mexico, Germany, and Indonesia. The UK subsidiary, founded in 1988, purchased a leading British maker of springs and now operates two plants. Advanex Europe Ltd. received the manufacturing division excellence award in the 2016 Nottingham State Business Awards sponsored by Nottingham Post. This was the subsidiary’s second award after the best company award received in 2012. Main products are precision springs for medical equipment and components to strengthen fasteners for automobiles and airplanes. The UK subsidiary received technology support from Japan for its product development activities, and it is the most profitable subsidiary in the Advanex group.

2. Business description

The Company is currently a specialty manufacturer of precision springs after the sale of the plastics business (only leaving areas with synergy effect), which it had previously acquired, in FY3/15. Advanex operates a single business segment, but discloses breakdowns of consolidated net sales by application and location. Net sales composition by market in FY3/18 was automotive at 46.6%, OA equipment at 17.9%, medical equipment at 7.6%, precision equipment at 5.4%, infrastructure and household at 4.6%, audiovisual equipment and electrical appliances at 3.5%, information and communication at 3.4%, airplane equipment at 2.6%, and others at 8.5%. The automotive market has been the largest destination since FY3/15.

Advanex has about 2,000 business counterparts and handles roughly 15,000 product types. It engages in transac­tions with German and Japanese auto parts manufacturers battling for global No.1 and No.2 positions.

Net sales composition by location consists of Japan at 38.5%, the Americas at 10.8%, Europe at 9.2%, and Asia at 41.5%.

◆Business strategy

Follows a “blue ocean” strategy as a top global niche supplier

1. Follows a “blue ocean” strategy as a top global niche supplier

Advanex is the only maker of many of its products, which has allowed it to earn high market shares in Japan and globally. Initially venturing into overseas business in 1971, the Company now has many plants and sales offices in the Americas, Europe and Asia. It has developed its automobile products business and medical equipment businesses globally, and it targets global manufacturers in a timely fashion. Advanex identifies areas where it can obtain a global niche top position, and extracts target customers. It formulates the business strategy by area, customer, field, and processing technology and product in order to strengthen its positioning. The Company is now stressing four businesses in which it is very competitive and for which the markets are growing rapidly: automobile products, medical equipment, housing equipment, and infrastructure products.

Advanex pursues a blue ocean strategy of priority development of markets with few rivals where it can leverage strengths. In the automotive spring market, major domestic spring firms specialize in chassis springs and other large products and have minimal direct competition with Advanex in precision springs. Advanex’s rivals are over 500 small and very small firms. These companies generally lack the resources to enter overseas markets.

Global Tier 2 parts manufacturer accommodating mega suppliers

2. Characteristics of automotive-related business

(1) Parts procurement difficulty from Tier 2

Automotive business involves R&D outlays, capital investments, and other costs and requires a lengthy amount of time until sales are booked. These aspects create difficult conditions for liquidity at small and very small manufacturers. Customers also request rigorous quality control because of risk to human life, dictating passage of certifications. They expect fulfillment of supply responsibility and continually ask for cost reductions. Nevertheless, once a supplier is selected, demand remains stable and continuous as long as the vehicle model stays in pro­duction. Small Japanese spring manufacturers with low-volume output at cheap prices are not rivals in the global market, and Advanex has fostered segmentation from large spring manufacturers mainly delivering large springs.

Automakers are increasingly producing suitable amounts in appropriate regions for the purpose of curtailing forex fluctuation risk and also raising local procurement rates to obtain beneficial treatment. Volume production takes place overseas even if new vehicle development and prototyping occurs in Japan. Parts manufacturers participate in new vehicle development projects by finished vehicle firms as a “design-in” process and develop parts alongside of the overall development. They must collaborate with the R&D headquarters in Japan from the early phase of development.

Tier 2 suppliers come under four groups. Companies that already have an overseas presence, such as Advanex, can collaborate during development in Japan, supply products through local production, do not require significant efforts or time prior to beginning supply, possess price responsiveness, and guarantee quality and reliability. Theses suppliers are the most effective source of parts procurement for Tier 1 firms compared to the other three groups. When Tier 1 firms bring along Tier 2 suppliers without an overseas presence, the second group, additional time is required to make decisions, such as ramping up a new plant, and pricing must be adjusted in exchange for bringing them along. When overseas sites procure parts from plants in Japan, the third group, pricing becomes an issue because of forex rate fluctuation risk as well as tariffs and transportation costs. Development and cultivation of local suppliers, the fourth group, takes effort and time in technology guidance and certification, has difficulties in rapid collaboration with R&D headquarters in Japan, and still confronts concerns in quality and reliability.

(2) Structural changes in the automotive industry

Electronic equipment production shifted from “coordinated technology” in the analog era to “combined technology” with interface standardization in PCs and digital home electronics. This change enabled emerging economies with little technology accumulation to manufacture electronic equipment. In the automotive industry with elec­tronic systems making steady inroads, we expect advances in combinations of standardized modular parts as the mainstream production format for electric vehicles (EVs). Developing and producing individualized parts by model faces issues in the development period, capital investments, and manufacturing costs. To simultaneously diversify auto models and lower costs, auto firms are likely to standardize and share platforms, develop common components (parts), standardize designs, and extensively adopt modules that can be shared. With component sharing, usage of modular parts will transcend chassis sizes and types.

Discussions are taking place toward industry standardization of technologies used in automated driving and connected cars. Automobiles utilize about 30,000 parts, and commodity parts comprise half of overall costs. Commodity parts offer low pricing because of the large production volume. Wider usage hence contributes to cost savings. Automakers have unique parts on the scale of a few hundreds of thousands versus a much larger order of a few million for commodity parts. Added value from parts is shifting from automakers to parts firms through standardization and modularization. Global Tier 1 parts firms are emerging as mega-suppliers to multiple car manufacturers, in contrast to their previous role as sub-contractors to specific firms.

Advanex aims to be a Tier 2 supplier that deals directly with Tier 1 mega-suppliers. The Company thinks that while a certain number of the few hundred Tier 1 firms have 10 or more overseas sites, very few of the few thousand Tier 2 firms possess this type of presence.

Mega-supplier formation is more advanced in the US and Europe than in Japan. Global No.1 and No.2 Germany-based Robert Bosch and Continental have sales at 2.1x and 1.7x the level at top Japanese supplier Denso <6902> respectively.

(3) Advanex’s global production operations

Advanex’s global production operations consist of five domestic sites and 17 overseas sites. It is expanding domestic and overseas production capacities and opening new sites to bolster the sales network in accordance with the medium- to long-term plan.

We review trends from the past few years. Advanex acquired Funabashi Electronics Co., Ltd., which specializes in deep drawing technology, in April 2015 and absorbed the Chiba and Miyagi plants. It merged the Miyagi plant, which was fairly small, into the Chiba plant in March 2017. Advanex started operating the Saitama plant, a new “smart factory” with emphasis on labor savings and automation, for automotive business in April 2016 (Honjo City, Saitama).

Outside of Japan, it acquired PT. Yamakou Indonesia, which is based in Indonesia and manufactures and sells precision metal presses and insert molded parts, and converted it to a consolidated subsidiary in January 2017. This acquisition secured a production site in Indonesia and also obtained a list of a few tens of customers, including Japanese auto parts firms. In Latin America, Advanex began operations of a new plant in Mexico, its second in this country, in April 2016. The Queretaro (Mexico) plant aims to acquire business from Japanese and US/European automotive parts manufacturers located in Mexico, in contrast to the existing Nogales (Mexico) plant that targets US demand. It curtailed initial investments by leasing an existing building. Advanex also acquired operations from Electronic Stamping Corporation, a manufacturer of automotive press parts located in California (US), in September 2016. This plant is near Advanex’s existing plant and is being positioned as the No.2 plant in the US. The transfer included facilities and other assets and a customer base of about 30 companies. Human resources can be utilized to support the Mexican plants. In Europe, the Germany-based sales companies stared operations in April 2016. In 2018, the Company is scheduled to begin operations at the India plant (2,157m2 in floor area) in July, the Czech plant (7,700m2) in the fall, and the Vietnam plant (8,000m2) in December.

Expansion of business opportunities from the EV shift

(4) Expanding and deepening technologies

Although Advanex, which accumulated processing technologies in its effort to become a comprehensive metal processing company, sold the group company that handled its plastics business in March 2015, it retains the insert moldings business, which combines metal pressing and extruded plastic moldings. Meanwhile, Europe offers extensive demand for thin deep-drawn products. The Company obtained this production technology through its acquisition of Funabashi Electronics. It currently has wire spring, leaf spring, insert mold, deep drawing, and other processing technologies. It plans to transfer processing technologies from Japan required for products in specific areas and markets. The Company utilizes a four-firm global operation. The UK is the technology center for Europe. The UK subsidiary will ramp up and give technology assistance to the Czech plant, similar to the way in which the US subsidiary provided personnel support to the Mexican plant.

(5) Automotive parts and the Company’s field

Advanex pursues a business strategy of extending reach in areas, customers, fields, and processing technology and products and thereby expanding its business “coverage.” It has broadened scope in the automotive market by entering areas where it can leverage strengths and with a high difficulty and quality strictness hurdles.

When it first entered the automotive market in 2000, Advanex was supplying products only to optional car navigation systems and other car electronics and antennas. Its area scope was Japan and Thailand. Advanex broadened market areas to instruments and interior from 2005, powertrains from 2010, and safety and control (advanced driver assistance system; ADAS), HVs and EVs, and automated driving from 2015.

Potential demand for the Company’s products viewed in terms of the vehicle drive format is larger per vehicle for HVs than existing internal combustion engine (ICE) vehicles and even more for EVs. Based on use of the Company’s products in ICE vehicles as 100, the estimated level expands to 120 in HVs and 125 in EVs. Engines, radiators, cranks, shafts, frames, suspensions, seats, and bodies required by ICE vehicles do not come under the Company’s scope. Safety and control ADAS, meanwhile, is a common feature in ICE vehicles, EVs, and EVs and offers demand for the Company in all of the drive formats. While ICE vehicles mainly utilize wire springs and other simpler products, added value is higher for EV products since they use multiple processing technologies, such as forming and insert mold.

Inquiries are increasing for parts used in devices with large electric currents found in HVs and EVs. These parts utilize insert-molding technology for integration formation metals and resins. Products from other companies use a plate for the metal portion. Advanex, meanwhile, excels in wire processing with proprietary forming technology and holds advantages in simplified wiring and costs for large electric currents. The Company’s demand opportunities increase with EVs because of their use of storage batteries in multiple ways besides just drive. Rechargeable battery parts include deep-drawn cases, pressed terminals, internal structure, and insert mold terminals. Charger equipment also comes under the Company’s scope. The Company does not need to recruit new customers because it has existing transactions with rechargeable battery manufacturers.

Advanex has seen a steep rise in inquiries for sensor parts that use deep drawing technology obtained from absorbing Funabashi Electronics. Position sensors and speed sensors are leading examples. We expect steadily rising demand for onboard sensors due to increase in vehicle models equipped with automatic braking and other ADAS features and growing sophistication in the automotive industry. Advanex supplies parts for not only sensors, which correspond to the input portion of electronic control in automobiles, but also valves, pumps, injectors, and other mechanical parts that are the output portion. Full-fledged income contributions from deep-drawn products should begin around FY3/21 when volume production of new products ramps up.

(6) National support for an EV shift

The Japanese government views wider adoption of next-generation vehicles as an important issue in automotive industry policy. In the “Japan is BACK Revised Strategy 2015,” it sets a goal of raising the next-generation vehicle percentage of new vehicle sales from 50% to 70% by 2030. In particular, it is putting emphasis on EVs and PHVs because of the high CO2 reduction effect and ability to be use as emergency power sources in a disaster. METI’s “Automobile Industry Strategy 2014,” presents goals of lowering the conventional (ICE) vehicle share of new vehicle sales from 65.2% in 2016 to 30-50% in 2030 and raising hybrid vehicles from about 30% to 30-40% and EVs and PHVs from less than 1% to 20-30%.

3. Strategic products and priority areas

(1) “Insert collars”

Insert collars are used to strengthen plastic fastenings. As global regulations on fuel efficiency have been tightened, automakers have increased their use of plastic components to lighten automobiles. Insert collars are metallic components used to strengthen the parts of plastic components into which bolts are affixed. A single automobile uses hundreds of insert collars. Insert collars are the main strategic product made at the Company’s new Saitama factory. Insert collars are important strategic products at the Saitama plant that specializes in automotive parts.

(2) Medical equipment parts

Advanex’s sales of products for the medical equipment market in FY3/18 were ¥1,539mn, 7.6% of total sales. The medical equipment market seems appropriate for the Company, as it aims to be a top provider for global niche markets. As the global population and global medical expenditures are increasing, the global market for medical equipment is likely to grow steadily. Furthermore, the trend of increase in self-administered health care indicates that the demand for disposable medical products is likely to increase. Medical equipment has a long product life cycle, few model changes, and provides large profits. On the other hand, the cost of developing medical equipment and producing it on a trial basis is high, this equipment must be tested for a long time before it can be commercialized, and the plan for developing and commercializing a piece of medical equipment may be abandoned. If these negative factors, which constitute barriers to entry, can be overcome, medical equipment can provide large profits consistently.

(3) Continuity testing tool parts

Probes (continuity testers), a continuity testing tool, use many contact probes. The Company successfully manufactured barrels, a contact probe part, with a deep drawing process. While it is estimated that a few tens of manufacturers make barrels by cutting pipe, only one US-based firm makes them with a deep-drawn process that has cheaper manufacturing costs. The Company is the second firm to obtain this capability and offers a line-up of products with outside diameter ranging from 0.3mm to 1.5mm. Probe firms are accelerating shift in orders placement from the US-based firm that had previously monopolized the market to the Company. There are roughly five major probe manufacturers. The Company hopes to obtain a high share in the future thanks to its advantages in quality, cost, and delivery (QCD).

(4) Standardized parts

Advanex focuses on sales of standardized parts with broad applications and large demand potential. Its main standardized parts are tangless inserts used to strength screw holds in soft materials, such as aluminum, and LockOne devices that prevent loosening of bolt-nut connections. Advanex developed these items leveraging its technology advantages. They offer better cost performance and operational efficiency than existing products and cannot be easily replicated by other firms.

a) Tangless wire inserts for strengthening screw holes

Tangless wire inserts are used to strengthen screw holes in soft materials, such as aluminum. Airplanes are made of light materials, such as aluminum and carbon fiber-reinforced plastic. Screw holes in these materials must be reinforced, and a single airplane may require reinforcement for from several ten thousands to several hundred thousands of screw holes. Tangless wire inserts have been replacing other kinds of reinforcement for several years now. Tangless wire inserts have many characteristics for which they are more highly valued than conventional products. They are also highly profitable because they do not use more materials or steps to produce than conventional reinforcements. They are projected to increase their share of the market for airplane screw hole reinforcements.

b) LockOne device to prevent loosening of bolt-nut connections

A promising product for housing equipment and infrastructure is the “LockOne” spring that prevents loosening of nut-to-bolt connections and failures. The “LockOne” spring targets use in railways, condominiums and other buildings, highways, electric power equipment, and other areas. However, the spring must be certified, which lengthens time to adoption. It is already being used by subway systems. Specialty trading companies for each market handle sales.

 

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