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CAC Holdings Corporation (JP-4725) Tokyo Stock Exchange First Section ( I )

2018-12-04  提供機構:FISCO  作者:FISCO  點閱次數:2

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◆Summary

An IT & healthcare group that is aiming to create new value through advanced ICT. Expectations for the announcements of the new medium-term management strategy and action plan with a sense of preparedness.

1. Company outline and business description

CAC Holdings <4725> (hereafter, also “the Company”) was established in Japan in August 1966 and started in business as a pioneering, independent, specialist software company. It expanded its business area through an active M&A strategy, and today, it has become an IT & healthcare group that is aiming to take a dramatic leap forward in its overseas business (it conducts business through 20 consolidated subsidiaries under the holding company).

It has three reportable segment; the domestic IT business (including systems development and integration services, systems operation and management services, and human resource (HR) BPO, in the domestic subsidiaries), the overseas IT business (such as systems development and integration services, systems operation and management services, and maintenance services, in the overseas subsidiaries), and the CRO business (outsourcing and agency services for clinical trial operations at the time of drug development by a pharmaceutical company and operations after the drug’s manufacture and sale).

2. The financial base is solid and the FY12/18 results are trending within the initially expected range

Looking at the trends in the Company’s results in the period of the previous medium-term management strategy (FY12/15 to FY12/17), the growth in net sales was only 2% a year, and in this situation operating profit declined for three consecutive fiscal periods and the results for flow earnings were poor.

However, on looking at the trends in the representative indicators showing the stability of the Company’s financial structure, each are being maintained at sounds levels; specifically, the equity ratio at the end of FY12/14 was 54.3%→58.6% at the end of FY12/17, the current ratio was 257.8% at the end of FY12/14 →216.6% at the end of FY12/17, and net cash (cash and deposits-interest-bearing debt, plus cash in excess) was ¥3,133mn at the end of FY12/14 →¥4,080mn at the end of FY12/17.

In the FY12/18 1H consolidated results, net sales decreased 9.7% year-on-year (YoY) to ¥25,440mn, while operating income increased 31.6% to ¥534mn.

Although the rates of progress were low toward achieving the full fiscal year forecasts, which are net sales of ¥54,000mn (up 1.4% YoY) and operating profit of ¥1,600mn (up 129.1%), the results up to 1H trended within the initially expected range.

3. Greatest strength is its “transformational power”

The Company’s greatest strength is considered to be its “transformational power (corporate reforms),” of being able to transform itself in response to societal needs and issues that change with the times.

It is not content with growing as an independent, specialist software company, and recently it has evolved to become an IT & healthcare services company, while interweaving “business structural reforms through selection and concentration” with “business expansion through M&A.”

The aspects supporting this “transformational power” are “a corporate culture of positively taking on challenges (management’s intention),” “an excellent customer base as the core of business expansion,” and “a solid financial structure that makes possible a flexible financial strategy.”

4. Refining the medium-term management strategy it is focusing on

As the top priority issue of its management team, the Company is working to refine Determination 21, which is the new medium-term management strategy with FY12/18 as its first fiscal year.

In this medium-term management strategy, the Company sets out various measures, including 1) improving the earnings power of existing businesses, 2) creating and expanding new business domains, and 3) strengthening and revitalizing the Group. The strategy also indicates the numerical targets for its final fiscal year (FY12/21), of net sales of ¥70bn and operating income of ¥4bn.

This refining work, which is currently ongoing, is being progressed based on thorough discussions in the Board of Directors, and there is the feeling that there may even be a far reaching review of the initial plan. Going forward, we can expect it to create an action plan that further incorporates measures for “improving the earnings power of existing businesses.”

◆Company profile

An independent SIer pioneer that has continued to take on challenges for more than half a century. Has gone through periods of IT business expansion and CRO business development, and is taking on the challenge of creating further enterprise value.

The Company was founded in August 1966 as Computer Applications Co., Ltd. (CAC) as a pioneering, independent, specialist software company in Japan. Its founding philosophy was “to construct user-oriented information systems from a neutral standpoint independent of hardware manufacturers,” and this philosophy has been handed down for more than half a century and continues in the present day.

Looking back on the Company’s history of more than half a century, we see that has sensitively ascertained and responded to the changes of the times and continued to take on the challenge of creating new value, while also developing and cherishing its core competencies.

1. As an independent SIer pioneer, went through an expansion period for its IT business, for which it has built an excellent customer base

Soon after its foundation in 1966, CAC expanded its business to become a systems integrator (SIer) that undertakes various operations, including planning, construction and support for systems development and integration. In 1988, it acquired certification from the Ministry of International Trade and Industry (currently, the Ministry of Economy, Trade and Industry) in the Systems Integrator Registration and Certification System at the same time as this system was launched.

It has continued to expand its business area as a group. This includes that in 1971, it invested in Nippon System Service Co., Ltd. (SSK), from the idea that “specialist companies should operate and manage information systems in order to support customers’ businesses,” as the first company in Japan specializing in outsourcing services, and then in 1973, it established System Utility Co., Ltd. (SUC), whose main operations were information processing and filing services.

In 1994, the above three companies (CAC, SSK, and SUC) merged to become CAC Co., Ltd., putting in place a system that in name and reality was able to provide all services, from planning and development and integration through to management, and it entered a period of IT business expansion.

During this IT business expansion period, in addition to organic growth, the Company actively expanded the business even further through M&A, which it has conducted since it was listed (public share offering as over-the-counter shares in 1999, then listed on the 1st Section of the Tokyo Stock Exchange in 2000).

Specifically, it made subsidiaries of ARK Systems Co., Ltd., in 2000; YUASA KNOWLEDGE INDUSTRY Co., Ltd., in 2002 (currently CAC Knowledge Co., Ltd.); and ORBIS CORPORATION (currently CAC ORBIS CORPORATION) and MARUHA SYSTEMS CORPORATION (currently CAC MARUHA NICHIRO SYSTEMS CORPORATION) in 2003. These companies are IT subsidiaries with leading companies as their customers, and they can be said to be good examples in terms of showing the Company’s position as seen from customers.

The Company has strongly focused on providing services optimized for various industries from its position as the prime contractor.

In a prime contractor agreement, the Company is responsible for product liability, so the risk is greater compared to a delegation-type contract or a second-receiver contract. However, it makes it possible for it to accurately and directly ascertain the needs of end customers (as a result, if it meets customer needs, it can obtain higher profits), and this type of agreement is consistent with its founding philosophy of being customer oriented.

These good relations with its customers as the prime contractor led to the expansion of the outsourcing business through M&A and it entering-into the CRO (pharmaceutical BTO) area.

2. Utilizing an M&A strategy in the CRO business development period from 2006 to 2016

Within its domestic IT business, the Company’s CRO business has a long history, having acquired major pharma­ceutical companies as its leading customers.

The Company started input operations for clinical trial data in the 1970s, and then in 1990, at which time the business term “CRO” did not yet exist, it began data management, which is one CRO operation. Therefore CAC Croit Corporation, which is responsible for the CRO business in the Company’s Group, is proud to be “in actual terms, Japan’s first CRO.”

The Company is also expanding the CRO business by utilizing an M&A strategy.

Looking at the CRO-related M&A results since 2006, we see that the one company after another has been incorpo­rated into the Group, and that it has expanded its service lineup for drug development support. Starting with Arm Systex Co., Ltd., in 2006, these include Medical Ecology Co., Ltd., in 2007; MIC Medical Corp., and clinical trust Co., Ltd., in 2009; and Sogo Rinsho Holdings Co., Ltd., and the CRO business of Moss Institute Co., Ltd., in 2010.

After an appropriate period of organizational consolidation and restructuring, in 2016 it founded CAC Croit as a pioneering company that combines CRO and IT, which brings its history up to the present day.

3. Acquisition of an Indian company opened the curtain on a period of the fully fledged development of the overseas IT business

The Company’s overseas business development passed through a few stages, of 1) entering-into the U.S. in 1989 and Europe in 1990 in response to the overseas business development of customer companies, and 2) entering-into the Asia region (China in 2000 and India in 2010) with the aim of reducing development costs. In 2014, it entered a new stage, of taking on the challenge of the fully fledged development of its overseas business through an M&A strategy.

Specifically, to strengthen its overseas support capabilities, in 2014 it invested more than ¥1.5bn in Accel Frontline Limited (below, AFL), which has bases in the U.S., the U.K., the Middle East, and elsewhere, and made it a subsidiary. Then in 2015, it made a subsidiary of Sierra Solutions Pte. Ltd. (below, Sierra), which is a Singapore IT company that conducts a business for medical institutions in the Asia region (sold in 2017).

◆Business description

Conducts the domestic IT business, the overseas IT business, and the CRO business

In the situation of the Company changing its business portfolio to reflect the needs of the times, in 2018 it changed its reportable segments, from the previous segments of “systems development and integration services, systems operation and management services, and BPO/BTO services” to the new segments of “the domestic IT business, the overseas IT business, and the CRO business.”

It has also been conducting an M&A strategy since 2014, and a direct reason for the review of the reportable segments was the fact that net sales from the overseas IT business had reached 20% of total net sales. We can expect the Company, which up to the present time has used overseas markets as its growth frontier, to take on the new challenge of growing in overseas markets.

1. The domestic IT business has a prime contractor rate of 90%

The domestic IT business, which provides 57% of Company-wide net sales (FY12/17), is the Company’s mainstay business, and through its domestic subsidiaries, it conducts operations that include systems development and integration services, systems operation and management services, and HR BPO services.

As the prime contractor and from the neutral standpoint of an independent SIer, the Company focuses on accurately and directly ascertaining user needs and strengthening its provision of optimal services to customers.

In fact, CAC, which is responsible for the core of the domestic IT business, has around 300 customer companies, and in this situation, it is keeping the prime contractor rate at around 90% and securing a gross margin at the time of ordering of 25%.

(1) Strength is in systems development and integration services for banks and trusts

In systems development and integration services, the Company totally develops and integrates companies’ information systems, from the planning of information systems through to their design, development, testing, introduction, and maintenance. Among its top ranking customers in terms of net sales are several financial institutions and major trust banks.

As a prime contractor for over half a century, the Company has accumulated highly specialized operational knowledge and experience. As a result, it has strengths in market- and overseas-related systems for megabanks and in pension-related systems for trust banks, and it boasts high market shares.

(2) Advancing Cloud support for systems operation and management services

The origins of the systems operation and management services can be found in the investment in the specialist outsourcing services company (SSK) in 1971. The Company provides total services for the necessary functions for systems management, and currently these include operations process management, operations management, user support, client equipment management, application management, and infrastructure management.

The Company’s strengths include the management expertise it has accumulated through providing comprehen­sive services to major pharmaceutical companies and that through M&A, it directly meets the needs of various industries (manufacturing industry, trading companies, fishery and foods).

Also, for AWS (Amazon Web Services), it is focusing on aspects such as systems integration and applications development and has accumulated many achievements as a result of this focus, such as being certified as an “APN advanced consulting partner.” The Company is also strengthening its Cloud support at a rapid pace.

The acceleration of the shift to the Cloud has the aspect of causing existing businesses to contract for IT vendors. But the Company considers this negative aspect to be small and instead, it is positioning the shift to the Cloud as a new business opportunity and is actively conducting measures for it.

(3) Human resource BPO services

Human resource (HR) BPO services utilize IT to conduct human resource operations and other business processes on behalf of the responsible managers in companies. One feature of these services is that the outsourced opera­tions are not limited to work such as general payroll calculations, but also include personnel system management and labor management, welfare management, and other HR operations in general.

2. Taking on the challenge of the overseas IT business as the growth frontier

The overseas IT business is conducted by the 11 overseas companies in the Group (as of April 1, 2018), and it includes systems development and integration services, systems operation and management services, and maintenance services.

From an early stage, the Company understood overseas markets to be its growth frontier, such as preceding its industry peers in entering-into them in the 1970s. It has also actively conducted M&A and other measures, and since 2015, the overseas sales ratio has exceeded 20% (22% in 2017, of which, Asia contributed 74%), and during the period of 2015 to 2017, it grew in scale to be larger than the CRO business.

In terms of the organization and personnel also, it has been noticeable that the Company has been strengthening its global business development capabilities, such as having a ratio of foreign directors of 25% and a ratio of foreign employees of 62%.

Conversely, in a situation of requiring a rapid expansion in scale, the issues for the M&A strategy (due diligence and PMI) have become clear, including the occurrence of unexpected losses in the companies acquired and being forced to separate the business, even at an early stage.

For its overseas IT business, the Company recognizes that it is shifting from the main stage, of global support for its customers of Japanese companies and offshore utilization of overseas Group companies, to a stage of focusing on India and China due to their enormous local markets.

On this point, AFL, which it made a subsidiary in 2014, has excellent customers at each of its bases, including in the U.S., the U.K., and the Middle East, as well as manufacturing company and financial institution customers at its main base in India, and it is worthy of attention as a bridgehead to enter-into local overseas markets.

Also, AFL has a track record in Japan and elsewhere of sales of hundreds of millions of yen in relation to the growth field of ADAS (Advanced Driver-Assistance System). Its incorporation into the Group is extremely significant in terms of acquiring a foothold for a business for vehicles, which, despite being an enormous industry, the Company has a scarce track record in up to the present time.

In the ADAS field, there is enormous scope for utilizing the emotional recognition AI technologies of Affectiva of the U.S., in which the Company has invested and concluded a sales agency agreement, and we can expect developments in the future.

With regards to the overseas IT business that has both growth potential and issues, in the refined version of Determination 21, the new medium-term management strategy, just as the name suggests, it incorporates an action plan with a sense of preparedness for the future.

3. The CRO business has grown to be one of the two pillars of earnings

The CRO (Contract Research Organization) business entails conducting clinical trial operations at the time of drug development by the pharmaceutical company, and outsourcing and agency services after the drug’s manufacture and sale. It provides 21% of total net sales (FY12/17), but in terms of profit scale, it has grown to be one of the two pillars of earnings, competing with the domestic IT business to be the leading earner.

(1) The slogan of “All You Need is CRO x IT”

The direct operations in the CRO business are undertaken by CAC Croit (below, Croit). With the pioneering, inde­pendent SIer as the parent body and under the slogan of “All You Need is CRO x IT,” it provides comprehensive services from the three directions of “operations support, IT, and consulting.”

Croit provides support to its 170 customer companies in a range of operational fields; specifically, it conducts pharmacovigilance services (percentage of total net sales in FY12/17, 48.8%), clinical trial operations (23.9%), operations after the drug’s manufacture and sale (10.0%), application-related operations (5.4%), and other oper­ations (4.1%). Within them, it has acquired the leading track record in Japan in terms of results for its mainstay pharmacovigilance services (accumulation of information on the side effects of pharmaceuticals and applications to the authorities) and application-related operations.

The “CRO x IT” approach is expressed in the skill sets of Croit’s employees. On the one hand, it employs many specialists such as doctors, pharmacists, and labor and social security attorneys as well as specialist with the skill sets required for CRO operations, including pharmacovigilance, DM and statistical analysis, clinical development, and applications. But on the other hand, approximately 30% of all employees are ICT personnel.

(2) Continues to work to improve productivity

On considering the data that the Japan CRO Association publishes on its members, we can note the following three points for Croit’s industry position; 1) its industry share is trending at the slightly low level of around 7%, 2) its net sales per capita is below the industry average, and 3) the increase rate of its net sales per capita (labor productivity) is higher than the industry average.

The point to be aware of here is that the Croit’s portion from monitoring operations is small.

In monitoring operations, the CRA (Clinical Research Associate) is responsible for a range of work, including visiting the medical institution that is participating in the clinical trial and talking directly with the doctors in charge, explaining the contents of the protocol (the trial implementation plan), confirming the progress made in the trial, and requesting entries into the trial tables and collecting and checking them. Therefore, a feature of it is that on the one hand the value-added per capita is large, but on the other hand it strongly has the aspect of being labor-intensive work.

The annual growth rate of net sales from monitoring operations in the last two years was 11.3%, which was above the rate for the industry as a whole of 9.3%, and they provided 60% of total net sales. The differences in the operations-composition ratios would seem to be the main reason for the low industry share and the small net sales per capita.

Conversely, even on taking into consideration the differences in the operations-composition ratios, Croit’s labor productivity improvement rate appears to be high.

Croit’s labor productivity improved by slightly less than 9% in 2016,when the company was established and continued to improve in 2017 also, by slightly more than 5%. In contrast to this, the labor productivity of the industry as a whole for monitoring operations was unchanged in 2016 and 2017, while for operations other than monitoring operations, it improved by slightly less than 2% in 2016 and worsened by slightly less than 8% in 2017, which makes Croit’s improvement rate even more remarkable.

The factors behind the improvement in Croit’s labor productivity would seem to include that 1) it actively utilizes nearshore bases in the IT business because in the mainstay pharmacovigilance services, the ratio of operations that can be responded to within each business office is high, and 2) it leverages to the greatest possible extent the fact that it has an independent SIer as its parent body and is making progress in improving efficiency and precision through utilizing ICT, such as RPA (Robotic Process Automation).

With regards to the effective use of nearshore bases, we should not overlook the fact that as of the start of 2018, within the total number of employees of 1,480 people, 716 were mate employees (employees of cooperating companies).

(3) Launch of a compound sharing library business

Croit is aiming to connect the excess capacity it has created in its CRO operations through utilizing ICT to grow a business peripheral to CRO.

Specifically, it is working on and achieving results for a compound sharing library business, in which Croit consol­idates, manages, and creates a database of the drug discovery and research compounds and information that the pharmaceutical companies individually own and manage.

The actual recording of sales will likely start from 2019, while it seems that its use by three to five companies has already been confirmed and that its annual contribution to results will be in a range of ¥300mn to ¥500mn.

A feature of this business we should pay attention to is the fact that it is a typical example of CSV (social contribution through a Creating Shared Value business), which the Company’s Group emphasizes.

The effects expected from sharing the use of the database with organizations like pharmaceutical companies, academia, and bio-ventures are greatly reducing the time period and costs for new drug development and increasing drug discovery opportunities. With the arrival of the aging society in Japan, it can be said that improving the efficiency of drug development, which will contribute directly to keeping down the rising medical expenses, is precisely a CSV type of business.

Croit has also started working on utilizing real world data.

Real world data refers to data as a whole that is based on actual medical practices. It includes medical fee receipts data and DPC data (various types of data related to medical expenses in hospital wards), electronic medical records data, and medical examination data.

If real world data can be prepared and utilized as a database, it will clarify aspects such as the efficacy and safety of pharmaceuticals in actual medical treatment and costs versus benefits, which will make it possible to improve the quality and efficiency of medical-treatment services.

The launch of a business relating to real world data can naturally be said to be a model ICT-utilization and CSV-type business, and we shall be paying attention to developments in the future from measures typical of Croit

 

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