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【FISCO】Daikoku Denki (JP-6430) Tokyo Stock Exchange Frist Section and Nagoya Stock Exchange First Section ( I )

2019-08-06  提供機構:FISCO  作者:FISCO  點閱次數:1

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◆Summary

In FY3/19, sales declined due to the impact of new regulations, but profits rose considerably. The Company released the industry’s first AI hall computer “X (Kai).” The Company is aiming to expand market share by helping hall operators boost efficiency and save labor.

1. Business overview

Daikoku Denki Co., Ltd. <6430> (hereafter, “the Company”) has two main businesses: one that develops, man- ufactures 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 3,592 pachinko halls and supports the Company's business foundation.

Japan’s pachinko market has been shrinking over the years. In response, the Company has been working 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 in-house developed pachislot game machines. However, with the series of revisions to regulations (including controlled ball payouts and measures against gambling addiction) having brought the industry to a major turning point, current earnings remain difficult due to the impact of uncertainty about the future. In April 2019, the Company transitioned to a new management system (including appointing a new president) in order to respond to the major changes in the business environment. In June 2019, the Company finally released the AI hall computer “X (Kai),” the first of its kind in the industry, as the Company started in earnest on its efforts targeting future business expansion. In addition to helping hall operators improve efficiency and save labor, the Company is aiming to increase its market share and boost profitability.

2.FY3/19 results

In FY3/19, the Company’s sales were ¥31,166mn (-8.6% YoY), but it recorded sharply higher profits, with operating income up 28.1% YoY to ¥1,527mn. The market environment remains challenging with customers taking a cautious stance on capital investments because of uncertainty about the impact of new regulations.* The Information System Segment was able to secure sales roughly on par with the previous year by introducing hall computers to large companies and with solid sales of CR units and other products, but the Control System Segment saw a large decline in sales of control units and components due to the revisions to sales plans by amusement machine manufacturers, higher reuse rates, and other factors, amid the low number of new amusement game machine units sold in the amusement machine industry overall. Meanwhile, in terms of profits, the gross margin improved thanks to service revenue growth and high-value-added proposal-based sales, along with other factors. Additionally, SG&A expenses fell significantly due to a lull in R&D expenses, the decline in sales commissions, and other factors, resulting in a higher-than-forecast increase in profits.

* Partial Revision of Regulations Regarding the Enforcement of the Act on Control and Improvement of Amusement and Entertainment 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).

3.     FY3/20 forecast

For FY3/20, the Company is forecasting higher sales and lower profits. Specifically, the Company is forecasting a 9.1% YoY increase in net sales to ¥34,000mn and a 21.5% decline in operating income to ¥1,200mn. An increase in net sales are forecast for both the Information System Segment and the Control System Segment. In the Information System Segment, the Company will launch products equipped with a variety of contents to comply with the new regulations. In particular, with the quick and widespread adoption of the AI hall computer "X (Kai)" used as a base for hall operational management, the Company will gain a foothold on the introduction of new products, and will attract and retain customers. Meanwhile, the Control System Segment plans to create attractive gaming features suitable for the new regulations, and to extend planning and product proposals utilizing new technology for all pachinko game machines. Still, the large decline in profits is expected as a result of factors including core system replacement, exhibits and other sales promotion costs, and depreciation in association with the release of the AI hall computer.

4.     Future strategic direction

The Company has been promoting a medium-term management plan with FY3/20 as the final year, but because the market environment continues to be more challenging than expected due to a number of external factors (such as a series of regulatory revisions), the Company has lowered its quantitative targets for FY3/20, the final year of the plan. However, there has been no major change in the future direction. The Company is aiming to improve its growth potential and profitability by creating new value utilizing data analysis and planning development capabilities, in addition to increasing market share with next-generation products. While consolidation in the pachinko hall industry is expected, we will pay close attention to how the Company contributes to the revitalization of the pachinko hall industry by attracting and securing customers with the industry's first AI hall computer "X (Kai)" and by providing new value through data utilization.

◆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 on development, production and sales of computer systems for pachinko halls, the Company also develops, manufactures and sells display and control units for pachinko machines and 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 3,517 halls (giving it a share of about 35.0%) and around 1,873,000 amusement machines are installed (about 43.5% share).

The Company's two main businesses are the Information System Segment and the Control System Segment, but the Information System Segment provided 78.5% of its total sales in the previous fiscal year and has been the main source of stable profit in the past few years.

1.Information System Segment

The Information System Segment offers a complete line of information equipment and services necessary to support operational management at pachinko halls. It sells hall computers, which are the core of the system used at pachinko halls, and peripheral equipment, such as prize management systems and information disclosure systems. The segment also offers 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 oper- ating conditions and sales of each machine in a hall. These computers are supported by peripheral equipment, such as prize management system and information disclosure system. They also serve as the foundation of the membership-based information provision service. Introducing a hall computer provides the advantage that peripheral equipment and support services can be sold as a package deal. The Company has been aiming to transition to a business model that provides recurring revenue by collecting membership fees such as its aftersales management support services and information provision service in addition to information equipment sales.

In June 2019, the Company finally released the industry's first AI hall computer "X (Kai)" for the first time in 12 years. Based on the concept of a "hall computer that teaches," the main feature of this AI hall computer is that it will guide pachinko hall operators to the optimal solutions by utilizing the Company's big data and having AI automatically analyze the data. By helping pachinko hall operators improve their operating efficiency and save labor, the Company aims to expand its market share and increase its profitability.

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 for amusement equipment manufacturers. Applying the knowledge obtained from analyzing data from pachinko machines as a hall computer manufacturer for many years, the segment serves as a development partner for the content as well, moving beyond the scope of a machine manufacturer by proposing specs based on the trends of popular models and acquiring 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. However, from FY3/19, the development plans were revised based on the market environment and other factors, and the Company is taking a cautious stance.

◆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 necessity for information disclosure. Thus, it has been able to provide added value from various aspects to 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 data, but with the introduction of hall computers, data-based hall management became the de facto standard. In subsequent years, the Company has been introducing information equipment with revolutionary functions which is the first of its kind in the pachinko industry consecutively. 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, and hereby improved the profitability of pachinko halls.

In June 2019, the Company released the industry's first AI hall computer "X (Kai)." This AI hall computer will greatly help pachinko hall operations, for which shortage of manpower is an issue, by improving operating efficiency and reducing necessary labor by having AI automatically analyze big data that the Company possesses.

2.Strong network of pachinko halls

Another advantage the Company has is its membership-based information provision service, DK-SIS. This service creates an information network connecting the Company and member pachinko halls, and processes and analyzes the daily operational information of pachinko halls recorded by hall computers and gives feedback to hall managers to help their operations. It enables the managers to conduct effective hall operation utilizing valuable external information, including nationwide pachinko machine information and operational data broken down by machine model. At the same time, this strong network made up of members also supports the Company's business foun- dation. Additionally, it occupies an industry think-tank role and contribute to improve the Company's brand as a leading company, and utilized to its strategic proposal and sales activities to amusement equipment manufacturers. Membership totaled 3,592 halls at the end of March 2019 with 1.47mn managed machines (34.3% share in managed machines) and ¥9.1tn 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-genera- tion 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 (hereafter, "MG services") which have been promoted by the Company as a recurring revenue business model have grown and enabled funding of R&D at a high level while maintaining stable segment operating income, and investment risk has been limited. The Company's ability to balance large profits from its existing businesses with heavy investment in businesses for the future growth allows it to produce value on a continuing basis. The Company revised its "next-generation system" development plan for FY3/18 onwards and R&D expenses are declining because of a lull in its costs.

◆Industry environment

The industry is approaching a major turning point with the impact 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. Since the Regulations Regarding the Certification of Game Machines and Examination of Model (enforced on February 1, 2018, hereafter, “new regulations”) were officially announced on September 4, 2017, the industry has remained in a state of flux due to a pessimistic view and uncertainty toward the industry. While amusement equipment manufacturers is announcing pachinko machines with a settings feature which is 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 and undecided market assessment of certified models. However, we expect increased investments by halls targeting survival (customer draw) amid market releases of new-standard machines as the industry advances in removal of former-standard machines. Manpower shortages have worsened for hall operations too. This is likely to spur deployment of facilities and equipment that provide labor savings.

*Among the new regulations are restrictions on the maximum number of balls that can be paid out and clearly defined standards for “controlled machines.” However, although more than one year has passed since the enforcement of the new regulations, there are still a large number of machines based on the old regulations. Pachinko hall operators are worried that their earnings will decline and they will be faced with difficult decisions about the timing of equipment replacement and other matters. This has likely prolonged their diminished investment appetite (cautious stance).

According to surveys by the National Police Agency, the number of pachinko halls in Japan declined at an average annual rate of 2.7% from 2011 to 2018. In particular, there is a noticeable decline in new hall openings due to the impact of the new regulations and other factors. In 2018, the number of halls was 10,060 (down 536 YoY). It is estimated that the Company served about 3,517 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 high-end, large pachinko halls that are the top performers in their respective local market which exceed the market average in size*. Average amusement machine volume per store is 533 machines, surpassing the average at other companies (371 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 54.2% share in mid-sized to larger sites (501 to 1,000 machines) and around 75.0% in large sites (1,001 or more machines). Its market presence is higher at large sites.

Meanwhile, although the number of amusement machines is on a downward trend (the decline in pachinko machines is particularly striking), the number of machines per hall is increasing, indicating that halls are becoming larger. As discussed above, larger pachinko 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.

 

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