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

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

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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

Looking back on the performance in the past nine fiscal years, the Company's sales shrank YoY because of restrained consumer spending and the impact of the Great East Japan Earthquake in FY3/11. Its net sales rebounded in afterwards, even though the pachinko industry continued to contract. This recovery was mainly 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 (a decline in sales for the sixth consecutive fiscal terms) 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 becomes the source of 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 68.4% in FY3/19. The current ratio, which indicates the ability to make payments in the short term, was 213.9% in FY3/19, 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 a sales decline from the impact of new regulations, in FY3/19 as a result of contributions to higher profits from growth in service sales and a lull in R&D spending

2.Overview of FY3/19 results

In FY3/19, the Company recorded sharply higher profits despite of a decline in sales, posting net sales of ¥31,166mn (-8.6% YoY), operating income of ¥1,527mn (+28.1%), ordinary income of ¥1,748mn (+25.8%), and net income attributable to owners of the parent of ¥1,263mn (+60.9%). Sales came in below the Company's initial forecast but earnings finished well above.

Despite more than a year having passed since the enforcement of the new regulations, the market environment remains challenging as pachinko hall operators continue their cautious stance towards capital investment. Amid this environment, the Information System Segment is expected to secure sales almost on par with the previous fiscal year, due to the deployment of hall computers to large companies and the steady sales of CR units. On the other hand, in the Control System Segment, sales significantly undercut the forecast due to the 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 machine units sold in the industry overall.

In profits, gross margin increased by 2.8 percentage points YoY to 37.5%, thanks to growth in service revenue and high-value-added proposal-based sales among other factors. Additionally, SG&A expenses fell significantly on a lull in R&D expenses, the decline in sales commissions, and other factors. As a result, operating income increased significantly, surpassing the forecast. The Company's operating margin improved to 4.9% (compared to 3.5% in FY3/18).

In terms of financial conditions, total assets increased 0.4% from the end of FY3/18 to ¥43,729mn, which was roughly unchanged, while equity increased a small 2.2% to ¥29,898mn, due to the accumulation of retained earnings. As a result, the equity ratio was 68.4% (compared to 67.1% at the end of FY3/18), a minor improvement.

The results by segment were as follows.

(1)    Information System Segment

Profit rose on lower sales, with sales falling 1.4% YoY to ¥24,474mn and segment income increasing 11.9% to ¥2,725mn. Sales fell slightly short of the initial forecast while profits were much higher than expected. Amid the large decline in new pachinko hall openings and major renovations, sales of hall computers increased due to progress in introductions at major companies. Sales of information disclosure terminals* were roughly on par with the previous fiscal year. However, overall sales fell slightly due to the decline in sales of prize management systems and other key products.

*Sales of information terminals (call lights) for fans such as "BiGMO PREMIUM II" and "REVOLA," and of CR units such as "VEGASIA III," whose security offering, unique to our company, was highly regarded, were at the levels of the previous consolidated fiscal year.

As explained above, profit rose sharply and surpassed the forecast on the growth in highly-profitable service sales and high value-added proposal sales to existing halls which helped to improve gross margin, as well as a lull in R&D expenses for next-generation hall computers and other products.

Furthermore, despite weakness in overall equipment sales, service sales steadily improved 1.8% YoY to ¥10,603mn (including an increase of 3.3% YoY to ¥4,454mn 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

Sales declined 27.7% YoY to ¥6,740mn and segment income increased 12.7% to ¥488mn, though both undershot the initial forecast. Sales of display units for pachinko amusement equipment were solid. However, sales of control units and components declined because of revisions to sales plans by amusement equipment manufacturers due to the impact of new regulations, a rise in the reuse rate, and other factors. The absence of sales of in-house developed pachislot machines* was also a factor behind the decline in sales.*

*Approximately 5,500 units were sold in FY3/18

The decline in earnings due to the drop in sales resulted in profits falling short of the forecast.

Looking back at FY3/19 results in light of these trends including an impact by new regulations, 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 the Company having started business transactions with leading companies and achieving a large increase in profit due to the improvement in the gross margin as a result of growth in service revenue and proposal-based sales, as well as a lull in R&D expenses, along with other factors. We also think the strong situation with orders of VEGASIA III, a CR unit that includes innovative new services, is positive news 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

The FY3/20 forecast is for higher sales but lower profits due to depreciation and other factors. The Company aims for the early, widespread adoption of the industry’s first AI hall computer

For FY3/20, the Company forecasts an increase in sales but a decrease in profits, with net sales at ¥34,000mn (+9.1% YoY), operating income at ¥1,200mn (-21.5%), ordinary income at ¥1,250mn (-28.5%), and net income attributable to owners of the parent at ¥800mn (-36.7%).

The Company is forecasting higher sales in 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 complying with the new regulations. In particular, with the June 2019 release 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 attract and keep 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 to all pachinko game machines.

* The Company initially planned to release it as a product system accompanied by hardware, but in order to ensure a quick, widespread adoption with users curbing initial investments, the Company changed course and made it so that it could be used with a system upgrade to an existing hall computer. As a result, we can expect earnings to decline more than forecast in the short term, but over the medium to long term we can expect an increase in sales of MIRAIGATE services due to higher market share (increase in stable earnings).

Meanwhile, the forecasted large decline in profits is due to replacements of core systems, sales promotion costs, as well as depreciation in conjunction with the release of the AI hall computer “X (Kai).”

While difficult market conditions will continue, we think that the Company can achieve its results forecasts because of gradual activation of replacement demand for peripheral 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 sufficient capital, growth in orders for new products equipped with innovative features, a surge in demand ahead of the consumption tax rate hike, and other factors. On the other hand, concerns include the fact that approximately 180,000 pachislot machines are expected to be replaced by December 2019 (the certification of machines based on old regulations will expire), and in conjunction with this there is a possibility that investments in the Company’s products (peripheral equipment, etc.) will be put off. Still, the Company has conservatively factored the impact of this into results forecasts.

The biggest focus of attention will be on how the Company can quickly get the AI hall computer “X (Kai)” to be used on a widespread basis, targeting business growth in FY3/21 and beyond. The Company's unique data utilization contributes to more efficient and labor-saving hall operations management, and this leads to solving manpower shortages and cost reductions, while the change to a delivery system that lowers users’ initial costs could also provide significant support for early adoption. In addition, if the Company can make progress in attracting and keeping customers, especially with large companies (increased market share), this would likely provide a foothold for sales of new products equipped with innovative features. Accordingly, we will keep a close watch on progress made with respect to expanding market share and enhancing profitability.

◆Future strategic direction

In addition to increasing market share with the AI hall computer “X (Kai),” the Company aims to solidify an earnings structure unaffected by the market environment

The Company has been promoting a medium-term management plan with FY3/20 as the final year. However, because the market environment continues to be more challenging than expected due to a number of external factors (such as the series of regulatory revisions), and negative impacts on near-term results due to the change in the approach to delivering the next-generation hall computer (the switch to a delivery approach that will keep users’ initial costs down), the Company lowered its quantitative targets* for the final fiscal year of the medium-term management plan (FY3/20). (Refer to the FY3/20 results forecast for revised quantitative targets.)

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

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 and development capabilities, in addition to increasing market share with the AI hall computer “X (Kai)” and next-generation products.

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 and an expansion of MG services. Through the provision of MG services in particular, the Company will provide assistance to increase competitiveness and reduce labor costs for pachinko hall operators, and secure its customer base while 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) including the expansion of various services to provide information to players.

(3)    The Company will reform its business model by deploying the AI hall computer "X (Kai)" that comply with the new regulations in the market and promoting its widespread use, and by continuing to promote investment aimed at helping pachinko hall operators boost efficiency and save labor.

2.Control System Segment

In addition to a growing demand for reduced development costs for pachinko and pachislot machines, demand for proposals to cope with environmental changes in market in the future and product planning is becoming increasingly important in the current 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, reduce in-house costs, ensure fast development, and build a stronger quality assurance system, as well as contribute to shortening customers' development period, reduce costs, and improve quality.

(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.

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 as 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 industry’s first AI hall computer “X (Kai)” 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 medium to 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 pachis- lot fans, amusement fans, and new fan segments (including provision of member information via a smartphone app and initiatives that bring people to halls) as well as with pachinko halls and amusement equipment manufacturers.

◆Shareholder returns

Plans to pay a ¥40 annual dividend in FY3/20 (same as in FY3/19); likely to have room to raise the dividend over the medium-term accompanying profit growth

In FY3/19, the Company decided the annual dividend of ¥40 per share for the full year (¥10 interim and ¥30 year-end) as the initial forecast. The Company plans to pay a ¥40 annual dividend in FY3/20 (¥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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