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Daikoku Denki Co., Ltd. (JP-6430) Tokyo Stock Exchange First Section ( I )

2018-09-07  提供機構:FISCO  作者:FISCO  點閱次數:7

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◆Summary

Posted higher profits on a decline in sales amid a transition phase in the industry, achieving successes in forward-looking initiatives

Daikoku Denki Co., Ltd. <6430> (hereafter, “the Company”) has two main businesses: one that develops, manufactures and sells computer systems for pachinko (Japanese slot machines) parlors and halls, and the other that develops, produces and sells display and control units for pachinko and pachislot machines. The Company holds the leading market share, approximately 35%, of the Japanese market for hall computers, reflecting an information management method that is the de facto standard for the industry. Furthermore, the industry’s leading membership-based information provision service Daikoku Denki Strategic Information System (DK-SIS) to support the operations of pachinko hall associations forms a network of approximately 3,700 pachinko and pachislot halls.

Japan’s pachinko market has been shrinking for several years. In response, the Company seeks to reform its businesses over the medium to long term. Reforms include developing a next-generation hall computer, shifting to a business model more reliant on services that provide recurring revenue, and developing and commercializing in-house developed pachislot machines. In particular, the next-generation hall computer (including peripheral equipment), in which the Company has invested aggressively, will operate on a cloud server and be capable of advanced analysis of large quantities of data. It will be far superior to any competing computer and should allow the Company to increase its market share of the Japanese market for these machines. Recently, however, with revisions to regulations (including controlled ball payouts and measures against gambling addiction) having brought the industry to a major turning point, uncertainty about the future promises to keep sales and earnings under pressure in the near term.

The Company reported higher profits on a decline in sales in FY3/18 with net sales down 16.3% year on year (YoY) to ¥34,093mn and operating income gaining 13.8% to ¥1,192mn. Sales dropped in both the Information System Segment and Control System Segment on ongoing difficulty in market conditions with cautious customer stances toward capital investments because of uncertainty about the impact of “new regulations” (*). Information System Segment sales were substantially lower than forecasts due to impacts from declines in new pachinko hall openings and major renovations. Furthermore, Control System Segment sales undershot forecasts on delays in development schedules and equipment release timing ahead of new rules in an environment of sluggish new sales volume for the amusement equipment market as a whole. Profit rose, despite weakness caused by the decline in sales, thanks to revisions in the “next-generation system” development plan that reduced development costs. Growth in MG service business provided support. The Company is making steady progress in shifting to an income structure that is not affected by market conditions (recurring-income model). We think releases of novel products and services should also contribute to future business expansion.

* Partial Revision of Regulations Regarding the Enforcement of the Act on Control and Improvement of Amusement Business, etc., and Regulations Regarding the Certification of Game Machines and Examination of Model officially promulgated on September 4, 2017 with an enforcement date set for February 1, 2018 (details are given below).

The Company forecasts stronger sales and profits in FY3/19 with gains of 2.7% YoY in net sales to ¥35,000mn and 9.0% in operating income to ¥1,300mn. While Control System Segment sales are likely to weaken again, the overall outlook calls for a boost from the Information System Segment with pick-up in sales of new products and services driving growth in the second half of the fiscal year. In earnings, the Company expects improvement in operating margin on the higher sales effect and better efficiency in the development process (Control System Segment). We think the Company is capable of attaining its targets, even with continuation of difficult market conditions, on likely strengthening of replacement demand in peripheral equipment with customer draw amid market deployment of amusement equipment that meets new regulations. However, it is important to recognize that the outlook is skewed toward 2H (factoring in a 16.7% YoY decline in 1H sales).

The Company is currently promoting the “Next 50 Chapter One” medium-term management plan with FY3/20 as the final year. It hopes to improve growth potential and profitability by expanding market share with next-generation products, and creating new value through utilization of data analysis and planning and development capabilities. While it is likely to be difficult to attain quantitative goals due to various external factors, we think the Company is steadily advancing in a strategic direction that factors in change in the industry structure.

We also expect calibration in timing of market release of the next-generation hall computer to responses to “addiction measures” as a new industry issue and market environment trends. Peripheral equipment steadily released prior to then, meanwhile, should contribute to income by tapping into replacement demand with flexible response to market changes. Major transition in the industry offers a business expansion opportunity to the Company as well. For the time being, we expect growth at the Company itself that leverages an overwhelmingly attractive position from a longer-term perspective, despite lingering uncertainty in the market environment, and initiatives to stimulate the industry.

◆Description of businesses

Holds the No. 1 market share in hall computers and peripheral equipment for the pachinko industry with support from provision of the industry’s main information control method

While emphasizing development, production and sales of computer systems for pachinko halls, the Company also manufactures and sells display and control units for pachinko machines and develops, manufactures and sells in-house developed pachislot machines.

As a pioneer in the development of hall computers, which assist in the management of pachinko halls, and holder of the top market share in the Japanese market, the Company won halls’ trust and satisfied pachinko players by proposing a management method which puts emphasis on data management, introducing innovative peripheral equipment for its hall computers and providing the industry’s leading membership-based information provision service.

The Company’s hall computer is utilized at roughly 3,700 stores (giving it a share of about 35%) and in around 1,900,000 installed amusement machines (about 42%).

The Company’s two main businesses are the Information System Segment and the Control System Segment, but the Information System Segment provided approximately 72.7% of its total sales in FY3/18 and was the main source of stable profit

1. Information System Segment

The Information System Segment offers a complete line of information equipment and services to support sales and operational management at pachinko halls. Hall computers are the core of the system used at pachinko halls, and these computers are supported by peripheral equipment, such as prize management systems and information display systems. The segment also offers various services such as hall management support services through information equipment and the membership-based information provision service DK-SIS, which is the leading service in Japan that provides strategic information about associated halls.

Hall computers are the core systems for supporting pachinko hall operations. These computers display the operating conditions and sales of each machine in a hall. As mentioned above, these computers are supported by peripheral equipment, such as prize management and information display systems. They also serve as the foundation of the membership-based information provision service. Peripheral equipment and support services are often sold with hall computers as a package deal. The Company has been aiming to transition to a recurring revenue business model and strengthen its aftersales commission fee-based services such as management support services and the membership-based information provision service.

2. Control System Segment

The Control System Segment produces and sells displays and control units, as well as components used for pachinko and pachislot machines. Applying the knowledge obtained from analyzing data from pachinko machines as a hall computer manufacturer of many years, the segment functions beyond the scope of a machine manufacturer and proposes specs based on the trends of popular models and acquires copyrights for popular characters.

Since FY3/14, the Company’s consolidated subsidiary Daxel Co., Ltd. has been producing and selling pachislot machines developed by Daikoku Denki under the Daxel brand name. It steadily releases hit products with unique value that place emphasis on gaming features, including Magical Suite Prism Nana, Sasamisan@Gambaranai Slot, and Pachislot Hyakkaryoran Samurai Girls. These successes have solidified the Company’s brand image of high-quality animation. In FY3/18, Daxel has released two more models, Sora-no-Otoshimono Forte and Yuki Yuna is a Hero.

◆Company strengths

Track record of creating new opportunities for the industry and provides added value for hall management in various aspects

1. Growth model based on market expansion through innovation

Since its establishment, the Company has consistently planned and developed new categories of goods and services, thereby developing the pachinko market and achieving growth. It has not just developed machines with superior functions but emphasized the importance of data management and the need for information disclosure. Thus, it has been able to present ideas with added value to the various aspects of management of pachinko halls.

Launched in 1974, the Company’s first hall computer enabled the managers of pachinko halls to introduce a hall management method based on data management. Previously, pachinko halls accumulated only basic information, but with the introduction of hall computers, data-based hall management became the de facto standard. In subsequent years, the Company developed other kinds of information equipment with revolutionary functions. One such piece of equipment was the Data Robo terminal, which provides information about different models of pachinko and pachislot machines to the players of these machines. This equipment has increased the satisfaction of pachinko players and the efficiency of pachinko hall management, as well as the profitability of pachinko halls.

A newer business being pursued by the Company is development, production, and sales of in-house developed pachislot machines that differ from previous pachinko and pachislot machines, which tended to be chosen based on their gambling appeal. The Company is committed to creating machines with thorough quality by adopting original characters produced by popular illustrators and focusing on character animation and voices. This has won accolades from fans of anime, and the Company has again established a new market for amusement equipment.

2. Strong network of pachinko halls

Another advantage the Company has is its membership-based information provision service, DK-SIS. This service creates a network connecting the Company and member pachinko halls, and gathers, processes and analyzes the daily operational information of pachinko halls recorded by hall computers and gives feedback to hall managers to improve their operations. It enables the managers to conduct effective hall operation based on nationwide pachinko machine information, operational data broken down by machine model and other valuable external information. At the same time, this strong network made up of members also supports the Company’s business foundation. Additionally, it occupies an industry think-tank role and helps improve the Company’s brand as a leading company, and its strategic proposal and sales contacts with amusement equipment manufacturers. Membership totaled 3,638 stores at the end of March 2018 with 1.46mn managed machines (32.8% share) and ¥9.2trn in data scale (annual sales). While member volume has peaked amid a recent decline in overall pachinko halls, DK-SIS enjoys a large share in managed machines, mainly at large sites.

3. Stable profit base that supports investment for the future

The Company’s main source of competitiveness is its proactive upfront investment eyeing future growth, including its R&D expenditure. Over the past few years, the Company has developed unique pachislot machines, a next-genera­tion hall computer (and peripheral equipment), and other products to drive its sales and profit growth hereafter. The stable revenue stream provided by the high-margin Information System Segment makes this investment possible. In particular, the management support services which have been nurtured by the Company to promote a recurring revenue business model have grown to provide enough profit to maintain funding investment in R&D at a high level, limiting investment risk. The Company’s ability to balance large profits from its existing businesses with heavy investment in businesses of the future allows it to produce value on a continuing basis. The Company revised its “next-generation system” development plan in FY3/18 and R&D expenses are declining.

◆Industry environment

The industry is approaching a major turning point with enforcement of new regulations and other factors. While the outlook remains uncertain in the near term, we see opportunities for growth over the medium term

Japan’s pachinko industry has been shrinking for years, reflecting a decline in the overall number of pachinko players, a trend toward playing games with low rental costs for balls, increases in Japan’s consumption tax, and other factors. The self-regulatory action taken by the industry in 2015 (tightening restrictions on both pachinko and pachislot machines with strong gambling elements) left the whole industry in a slump in 2016 as it started to grapple with the problem of collecting and removing all pachinko machines that may perform differently from certified standards. In 2017, the industry was hit yet again, this time by the new regulations*. With the pessimistic view towards the industry and uncertainty about the future, the industry remains in a state of flux.

* Among the new regulations are restrictions on the maximum number of balls that can be paid out and clearly defined standards for “controlled machines.” Older models that do not meet the new standards will remain in pachinko halls alongside new models for at least a while longer. Pachinko hall operators are worried that their earnings will continue to decline and they will be faced with difficult decisions about the timing of equipment replacement and other matters. It can be said that these lingering uncertainties have diminished their investment appetite.

According to surveys by the National Police Agency, the number of pachinko and pachislot halls in Japan declined at an average annual rate of 2.4% from 2011 to 2017. In 2017, the number of halls was 10,596 (down 390 YoY). It is estimated that the Company served about 3,700 of these halls based on the fact that it held approximately 35% of the Japanese market for hall computers. The Company’s customer halls are often the top locations in the area and exceed the market average in size (*). Average amusement machine volume per store is 512 machines, surpassing the average at other companies (369 machines) by about 40%. The customer base hence is fairly resilient to economic fluctuations and possesses healthy investment resources. We expect an excellent opportunity for the Company to expand business once investment appetites recover mainly at large halls (after uncertainty fades and market activity picks up).

* The Company holds a roughly 53% share in mid-sized to larger sites (501 to 1,000 machines) and around 70% in large sites (1,001 or more machines). Its market presence is higher at large sites.

However, the National Police Agency reports that while the number of pachislot machines has increased, the number of pachinko machines has declined, so the combined number of pachinko and pachislot machines has remained fairly constant. Since the number of pachinko and pachislot halls decreased over the same period, the average size of halls has increased. As discussed above, larger pachinko and pachislot halls that command economies of scale are the Company’s main segment and this trend should benefit the Company with its ability to realize robust investment return through advanced functionality and added value.

According to the Company, Japan’s combined market size for pachinko and pachislot games, as measured by the gross profit earned by all halls nationwide, has fallen each year, similar to the decline in the number of halls. This value has also declined on a per-machine basis. Thus, even though pachinko and pachislot halls are increasing in average size, they continue to operate in a challenging business. Additionally, Japan passed the Integrated Resort Facilities Promotion Act* on December 15, 2016. Given this change, the government is promoting measures to deal with gambling and related addictions, a new challenge for the industry. Past curtailment of machines with strong gambling features led to temporary customer losses and sustained difficult market conditions for roughly a year. Recent developments are also having a major impact on the industry. However, we think the current situation offers a transition to hall management that does not rely on gambling, and will lead to a cleansing of the industry. The Company projects recovery toward a ¥4trn market over the longer term because there have been bottoms and recoveries 2-3 years after past profit slowdowns. This outlook takes into account possible fading of the deflation economy ahead of the Tokyo Olympics too.

* It is officially named the Act on Promoting Development of Areas for Specified Integrated Resort Facilities. The act stipulates that the government must prepare necessary legal measures to allow for the establishment of integrated facilities with casinos, meeting halls, hotels, and other features by private-sector businesses with permits at “specified integrated resort zones” within a year from it taking effect. Since its passage, the government has been promoting measures to broadly address gambling and related addictions for pachinko and publicly operated races.

 

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