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COMPANY RESEARCH AND ANALYSIS REPORT:Daikoku Denki Co., Ltd.- 6430-Tokyo Stock Exchange First Section and Nagoya Stock Exchange First Section( II )

2019-02-01  提供機構:FISCO  作者:FISCO  點閱次數:2

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◆Financial results trends

Actively invest in R&D aimed at future growth, even amidst weak performance trends while the industry moves towards a transitional phase

1. Performance over the past fiscal years

In FY3/11, the Company’s sales shrank YoY because of restrained consumer spending and the impact of the Great East Japan Earthquake. Its net sales rebounded in FY3/12-FY3/13, even though the pachinko industry continued to contract. This recovery was led by the Information System Segment, which holds high market shares for its products. Sales in this segment reached consecutive record highs in FY3/13-FY3/15, supporting the Company’s overall performance. However, sales have been contracting since FY3/16 due to various negative external factors, such as voluntary industry regulations, retrievals and removals of risky machines, and uncertainty related to new regulations.

The Information System Segment provides profits, and has maintained high profit margins as the Company’s performance recovered. Reflecting increasing investment in R&D for next-generation products since FY3/14, profit margins have declined, but considering the size of the investment, margins are still high. In particular, steady progress in conversion to a recurring-income business model, such as growth in MG service business, has been supporting income.

The Company’s equity ratio, a measure of financial stability, has risen, reflecting large retained earnings, reaching 67.1% in FY3/18. The current ratio, which indicates the ability to make payments in the short term, was 203.8% in FY3/18, mainly due to large holdings of cash and deposits. The ROE, a measure of capital efficiency, has been low since FY3/15 due to a deterioration of net income. In FY3/15, the Company suffered a loss due to the bankruptcy of a manufacturer customer. In FY3/16, because of the industry restrictions on risky machines, the Company launched fewer new pachislot machine models than planned, and its sales volume of these machines was far below the planned level. As a result, the Company suffered a loss due to the devaluation of parts and materials for its pachislot machines. However, conditions have been gradually recovering recently.

Profits rose sharply, despite sales decline from the impact of new regulations, in 1H; contributions to higher profits from curbing the discount rate and growth in service sales

2. Overview of 1H FY3/19 results

In 1H FY3/19, the Company recorded sharply higher profits on a decline in sales, posting net sales of ¥14,230mn (-20.9% YoY), operating income of ¥872mn (+132.6%), ordinary income of ¥1,005mn (+103.7%), and net income attributable to owners of the parent of ¥637mn (+115.3%). Sales came in below the Company’s initial forecast but earnings finished well above.

Sales dropped in the Information System Segment and Control System Segment on ongoing difficulty in market conditions with continued cautious customer stances toward capital investments because of uncertainty about the impact of new regulations*. Information System Segment, in particular, faced weak sales trends for major products, besides progress with deployments of information disclosure terminals and hall computers, amid significant declines in new pachinko hall openings and major renovations. Furthermore, Control System Segment sales slipped considerably on the absence of in-house developed pachislot machine sales and lower sales of control units and components for pachinko machines, albeit in line with expectations (modest upside).

* While amusement game manufacturers have announced pachinko machines with a settings feature (capable of setting the probability of major wins at up to six levels) and type-6 pachislot machines as amusement machines that comply with new regulations, the industry has not begun full-fledged deployment yet due to the limited number of certified models at this stage (because of time needed to obtain certification) and undecided market assessment of certified models. Halls continue to delay new openings and replacement investments because of this situation.

In profits, gross margin climbed by 6.3pt with support from curtailment of the discount rate. Additionally, SG&A expenses fell significantly on lower R&D expenses (including some delays), cutbacks in sales commissions, and other revisions. As a result, operating income surpassed the forecast with a sharp increase. The Company’s operating margin improved to 6.1% (compared to 2.0% in 1H FY3/18). We attribute this success to curtailment of the discount rate on fewer transactions with new halls and progress in high value-added proposal sales to existing halls.

In financial conditions, total assets declined 4.2% from the end of FY3/18 to ¥41,735mn reflecting declines in cash and deposits and notes and accounts receivable - trade. However, equity ratio increased to 70.5% (compared to 67.1% at the end of FY3/18) because total equity was roughly unchanged at ¥29,428mn (+0.6%).

(1) Information System Segment

Profit rose sharply on lower sales with sales falling 5.8% YoY to ¥11,077mn and segment income increasing 60.5% to ¥1,399mn. Sales were below the initial forecast and profits were higher than expected. Sales slumped for major products, besides higher sales of BiGMO PREMIUM Ⅱ information disclosure terminals and hall computers making inroads at major companies*, amid significant declines in new pachinko hall openings and major renovations. Yet demand for individual-machine calculating systems, an optional feature of CR units, is trending upward due to growing manpower shortages at pachinko halls. Replacements are advancing mainly for pachislot machines.

* This includes transactions with a major chain operator that started in FY3/18.

Profit rose sharply and surpassed the forecast on successful high value-added proposal sales to existing halls that strengthened gross margin and lower R&D expenses, as explained above.

Furthermore, despite weakness in overall equipment sales, service sales steadily improved to ¥5,241mn (including ¥2,206mn in sales for the MG service, to which the Company is particularly focusing its efforts) and are contrib­uting to profit stability.

(2) Control System Segment

Both sales and profits declined with sales falling 49.3% YoY to ¥3,173mn and segment income declining 10.4% to ¥335mn, though both surpassed the forecast. Sales of display units for pachinko amusement equipment were healthy. However, sales for control units and components weakened due to revisions to sales plans of amusement equipment manufacturers with the impact of new regulations, a rise in the reuse rate*, and other factors. Another major setback was the absence of sales of in-house developed pachislot machines (compared to market deployment of about 5,500 units in 1H FY3/18).

* Reflecting reuse of secondhand amusement equipment

While profit fell because of the effect of weaker sales, it still outpaced the plan on decline in R&D expenses (though this includes postponements) and other factors.

Looking back at 1H results in light of these trends, sales dropped amid an ongoing tough market environment with steep declines in new hall openings and major renovations, but we have a favorable view of a larger profit gain than planned on improved gross margin with proposal sales to existing halls and the contribution of MG service growth to stabilizing income. We also think favorable trends in orders of VEGASIA III, a CR unit that includes innovative new services, offers a positive catalyst going forward.

* The most distinguishing feature of VEGASIA III is its built-in facial recognition camera that allows pachinko hall managers to get a good handle on player trends. In particular, customers have highly praised the realization of ideal model composition through data analysis and enhanced security features.

◆Outlook

Maintained FY3/19 forecast for sales and profit gains, VEGASIA III (including new services) likely to drive 2H results

1. Company forecasts for FY3/19

For FY3/19, the Company has left the initial forecast unchanged, projecting increase in sales and profits, with net sales at ¥35,000mn (+2.7% YoY), operating income at ¥1,300mn (+9.0%), ordinary income at ¥1,400mn (+0.7%), and net income attributable to owners of the parent at ¥800mn (+1.9%).

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 on reinforced activities in new products and services* in the second half of the fiscal year. In earnings, the Company expects to achieve an increase in operating income through the effect of higher sales and improvements to the gross margin, despite an increase in SG&A expenses due to advertising and promotion costs.

* Feature enhancements that place emphasis on “understandability and easy viewing” in BiGMO PREMIUM II, REVOLA, IL-X3, and other machines that disclose information, and Fan-SIS (data disclosure service on nationwide fan trends) proposals, which have seen an increase in orders, and reinforced sales of the VEGASIA III CR unit required in deployment of this service

We believe the Company is capable of attaining its targets, despite likely continuation of difficult market conditions, because 1H results (profit) outpaced the plan and orders of VEGASIA III, a CR unit that includes innovative new services, are still rising. Our primary focus is the extent of progress with milestones for earnings expansion from FY3/20, including trends in amusement equipment that complies with new regulations (release pace and post-release market assessment) and related timing of pick-up in pachinko hall activity (recovery of investment appetite).

2. FY3/20 outlook

While difficult market conditions might continue in FY3/20 too, we expect clarification of at least a path to earnings expansion during FY3/20 because of gradual activation of replacement demand for related equipment aimed at attracting customers as amusement machines that comply with the new regulations enter the market, positive results in high value-added proposal sales mainly targeting large chains with capital resources, and the need for even pachinko halls that had been delaying investments to address changes in the market environment (such as regulatory responses, recruiting new fan segments, manpower savings, and enhanced security) by investing in order to survive. We think the Company is examining actions (sales measures) for when pachinko halls start investing again and it is important to closely monitor these trends going forward.

◆Future strategic direction

Seeking to boost market share with next-generation products and solidify an earnings structure unaffected by the market environment

The Company is currently promoting the Next 50 Chapter One medium-term management plan that lasts through FY3/20. Despite uncertainty in the current market environment, the Company is taking steps to bolster the busi­ness foundation to address market changes (acquisition of fans with more emphasis on gaming) and contribute to pachinko hall management reforms (making strategic decisions based on data analysis) assuming moderate recovery over the medium term. It aims to lift market share with next-generation hall computers (including peripheral equipment) that it has actively developed up to now and enhance growth potential and profitability through creation of new value that leverages 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’s steady advances in the strategic direction described below are positive.

* The Company presented FY3/20 goals of ¥57.0bn in net sales, ¥4.0bn in operating income, and at least 7.0% ROE.

1. Information System Segment

The pachinko market’s appetite for new investments is likely to remain depressed for at least a while longer. However, equipment demand is gradually stirring due to replacement of game machines in response to the new regulations, and Daikoku Denki intends to develop new products and services that will help it bring in new players, and increase its market share, while maintaining the flexibility needed to respond to changing market conditions. More specifically, the Company has set forth three key measures, as detailed below.

(1) As before, the Company plans to work at growing its market share and transforming its earnings structure by increasing sales of CR units, information disclosure terminals, and other equipment. Coupling this with an expansion of MG services, the Company also aims to shift to a business model that is more reliant on services that produce recurring revenue. The expansion of MG services in particular, because they help pachinko hall operators increase their competitiveness and reduce labor costs, is expected to help the Company secure its customer base while at the same time stabilizing its own sales and earnings.

(2) The Company plans to make timely introductions of new products and services that have the flexibility needed to meet the changing needs of the market following the new regulations. The Company will also be looking to take advantage of the business opportunities created by the changes in the industry by developing new products and services that will help attract new players (winning back former players as well as attracting new players). One example here would be the expansion of various services to provide information to players.

(3) After reviewing product development plans to comply with the standards set forth under the revised regulations, the Company plans to continue actively investing in R&D to create a new generation of systems. Along with the changes in the market environment, the Company will make additional technical adjustments and alter its product development process to comply with the new rules and regulations. The Company also plans to step up its efforts to provide products and services that will help pachinko halls improve their operating efficiency and reduce labor costs. In terms of the timing of new product and service introductions too, the Company will keep a close watch on market trends and respond flexibly.

2. Control System Segment

In addition to a growing demand for reduced development costs for pachinko and pachislot machines, product planning is becoming increasingly important at the manufacturing level as the need grows for new ideas that will help clients cope with the changes in the market environment. In response, Daikoku Denki intends to closely coordinate the efforts of its Control System and Information System segments in order to further differentiate itself from competitors, assure rapid response to changes in the market environment, and raise operating efficiency. Towards this end, the company has laid out three specific measures it intends to implement, as outlined below.

(1) Contribute to the healthy operations of pachinko halls by emphasizing the entertainment aspect, and focus on revitalizing the game environment through creation of games that comply with new rules.

(2) Promptly respond to the requests of game machine manufacturers to shorten customers’ product development period and contribute to cost reduction and quality improvement, while at the same time leading to lower in-house costs.

(3) Utilize Information System Segment’s DK-SIS data and Fan-SIS data to help implement project proposals that will create new “game value” and help expand business territory of the Control System Segment.

Even though the pachinko industry is approaching a major turning point and this is weighing heavily on near-term performance, over the medium to longer term, we believe the years Daikoku Denki has spent actively developing next-generation hall computers and related peripheral equipment will give it a major advantage over competitors. In particular, we see the Company’s MG services and value proposal through its unique services and data analysis putting it in a strong position to meet the changing needs of the industry. Even assuming the pachinko market continues to contract for a while longer, we believe it will be possible for Daikoku Denki to sustain growth with the help of a full-scale rollout of a high value-added lineup of next-generation products that will capture the replacement demand of existing pachinko hall operators. Additionally, polarization is likely to proceed further in the pachinko hall industry with survival mainly by firms with extensive capital resources. These conditions are likely to work favorably for the Company in its efforts to increase market control with the next-generation hall computers and raise market share.

We believe it is necessary to cautiously assess sales growth, which is readily affected by the external environment, for the time being, but are focusing on improvement in profitability through development of products and services that respond to changes in the market environment and expansion of MG service. From a longer-term perspective, we also anticipate growth for the Company that leverages its dominant position and initiatives seeking to bolster the overall industry. We intend to monitor Company’s activities that directly engage with pachinko and pachislot fans, amusement fans, and new fan segments (including provision of member information via a smartphone app and initiatives that bring people to halls), and not only with pachinko halls and amusement equipment manufacturers.

◆Shareholder returns

Plans to pay a ¥40 annual dividend in FY3/19 (same as in FY3/18); likely to have room to raise the dividend over the medium term accompanying profit growth

In FY3/18, the Company lowered the dividend by ¥10 to ¥40 per share for the full year (¥10 interim and ¥30 year-end), taking into account uncertainty about the future market environment. The Company plans to pay a ¥40 annual dividend in FY3/19 (¥10 interim, ¥30 year -end), the same as in the previous fiscal year.

Given the Company’s policy of supplementing its minimum dividends with dividends dependent on earnings, FISCO foresees the likelihood of increases in annual dividends as the Company’s profits grow over the medium term.

To make its shares more attractive to investors and to encourage shareholders to keep their holdings over the medium-to-long term, the Company has adopted a system of awarding gifts to shareholders. Shareholders (owning 100 or more shares) as of September 30 each year receive points that can be exchanged with products (such as food, beverages, electronic equipment, travel or experiences, or donations to social contribution activities) in accordance with the number of shares owned and length of ownership. The Company’s IR official explains that this program has been highly praised by individual shareholders.

 

 

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