Precision Sector

05 December 2012 Asia Pacific/Japan Equity Research Office Electronics (Precision (Japan)) / MARKET WEIGHT Precision Sector Research Analysts SECTOR REVIEW Yu Yoshida 81 3 4550 9815 [email protected] Ricoh remains top pick for 2013 amid ongoing consolidation in office-equipment market Figure 1: HW / NHW average LC base sales growth rate (2011-12): Relatively positive for Ricoh Average LC base sales growth rate (2011-2012) (1) Winners of 8% (3) Limited impact consolidation effect from consolidation 6% Lexmark Konica Minolta 4% Brother Ricoh 2% 0% -8% -6% -4% -2% 0% 2% 4% 6% 8% -2% Canon (Laser Fuji Xerox printer) Canon (Copier) Non-hardware Fuji Xerox -4% (Copier) (Laser printer) -6% (4) Unable to offset the (2) Losers of -8% consolidation effect impact from consolidation Hardware Note: × shows copier makers and △ shows laser printer makers Source: Company data, Credit Suisse ■ Summary: The labor equipment ratio (machines in force ÷ number of employees) for office equipment (printers + laser printers) is declining, especially the ratio for single-function laser beam printers (LBPs). In this report, we examine the 2013 office-equipment demand outlook and the positioning of individual companies in the current market environment. ■ Focal points: The office labor equipment ratios for the US and Western Europe are diverging as the ratio has been falling in the US since 2010 while holding near peak levels in Western Europe. The divergence is related to regional differences in (1) the number of large enterprises, (2) the speed of tablet PC diffusion, and (3) the ratio of color multifunction printers. However, tablet PC diffusion in Western Europe is likely to pick up in 2013, raising the probability of a change in office environments that should push down the region’s labor equipment ratio. In the US, meanwhile, improving employment figures (i.e., increase in employed workers) will likely stem the decline in the US labor equipment ratio. Overall, we expect to see improving trends in MIF and shipments in 2013, which should at minimum prevent a rise in concerns about structural instability during the year. ■ Stock call: For 2013, we continue to recommend Ricoh (7752, OUTPERFORM, TP ¥1,300) as our top pick among office-equipment makers. Addition to the recent restructuring effect as emphasized in past reports, we believe Ricoh is best positioned to come out on top amid ongoing market consolidation thanks to a steadily growing non-hardware business aided by MPS knowhow secured via the IKON acquisition. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION™ Client-Driven Solutions, Insights, and Access 05 December 2012 Table of contents Growing gap in US-Euro labor equipment ratios 3 Regional differences in office environments reflect different speeds in consolidation, paperless trends 3 Calculation of labor equipment ratio 3 US-Euro ratio gaps by printer type: Europe high for color multi-function devices, US ratio dragged down by decline in LBPs 4 Factors behind US trend toward consolidation of office equipment 6 Differences in company size 6 Differences in tablet PC penetration 7 Differences in the ratio for color multi-function devices 8 Emerging-economy’s labor equipment ratios still low 9 Current expansion in MIF should continue 9 Office equipment makers’ positioning in consolidating market 10 Ricoh’s firm underfooting: MPS driving PV growth, IKON acquisition not a mistake 10 Original dependence on large corporates has backfired 11 Little consolidation impact on companies focused more on SMBs 12 2013 outlook for office equipment market 13 US ratio nearing a bottom while Western Europe heads into downtrend 13 Lower unemployment rates could foster easing of consolidation trend 13 2013 should be void of concerns about structural instability 14 Stock calls 15 Ricoh our top pick again in 2013; reiterating OUTPERFORM rating 15 Limited downside in Canon’s office-equipment business 15 Konica Minolta, Brother have strong long-term growth prospects but risks outside office equipment 15 Precision Sector 2 05 December 2012 Growing gap in US-Euro labor equipment ratios Regional differences in office environments reflect different speeds in consolidation, paperless trends When forecasting office-equipment demand, we focus on the labor equipment ratio. In the Gap in US-Euro labor US, this ratio has been declining since 2010, especially for single-function LBPs. In equipment ratios has Western Europe, however, it has held rather steady near peak levels. We believe the widened since 2010 owing cause of this rather clear divergence can be explained by regional differences in three to differences in 1) numbers factors: (1) the number of large companies, (2) changes in office environment caused by of large companies, 2) the use of tablet PCs (=paperless trend), and (3) color ratio in multi-function devices, speed of tablet PC diffusion, which could be a hub in office. 3) ratio of color MFPs in use Figure 2: US & Western European labor equipment ratio: Gap since 2010 Labor equipment ratio - Total office equipment 24.0% 22.0% 20.0% 18.0% 16.0% US Western Europe 14.0% 12.0% 10.0% 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 Source: IDC, Census Bureau, Eurostat, Credit Suisse Calculation of labor equipment ratio The normal labor equipment ratio is calculated as tangible fixed assets divided by an average figure for employee numbers. In this report, however, our focus is limited to office equipment, which we define even more narrowly as printers and laser printers. We therefore calculate our labor equipment ratio as the number of machines in force (MIF) divided by the number of employees. According to this calculation, an labor equipment ratio of 20% means that 1 machine is being shared by, on average, five office workers. We calculate an approximate MIF figure using cumulative shipment numbers and assuming a replacement cycle of about five years. In the text and figures in this report, we use the following terms to refer to the various types of printers: copiers are copy machines, including multi-function copiers, which now are nearly 100% of the copier market; MFPs refer to multi-function laser printers; and LBPs refer to single-function laser printers. Precision Sector 3 05 December 2012 Figure 3: US office equipment pseudo-MIF trend Figure 4: Western Europe office equipment pseudo-MIF trend 35,000 (000) US office equipment MIF 45,000 (000) Western Europe office equipment MIF 30,000 40,000 35,000 25,000 30,000 20,000 25,000 15,000 20,000 15,000 10,000 10,000 5,000 5,000 0 0 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 B/W MFP Color LBP B/W MFP Color MFP B/W Copier Color Copier B/W LBP Color LBP B/W MFP Color MFP B/W Copier Color Copier Source: IDC, Credit Suisse Source: IDC, Credit Suisse Figure 5: Rest of World office equipment pseudo-MIF Figure 6: Worldwide office equipment pseudo-MIF trend trend 140,000 (000) Rest of World office equipment MIF 200,000 (000) WW office equipment MIF 180,000 120,000 160,000 100,000 140,000 80,000 120,000 100,000 60,000 80,000 40,000 60,000 40,000 20,000 20,000 0 0 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 B/W LBP Color LBP B/W MFP Color MFP B/W Copier Color Copier B/W MFP Color LBP B/W MFP Color MFP B/W Copier Color Copier Source: IDC, Credit Suisse Source: IDC, Credit Suisse US-Euro ratio gaps by printer type: Europe high for color multi-function devices, US ratio dragged down by decline in LBPs In Figure 2, we have graphed the US and Western Europe labor equipment ratios for all Through 2008: ratios rose printer types based on our approximations of the total employed workforces in the two on increasing information regions. The graph shows the ratios rose steadily in both regions through 2008, as offices volume increased the number of printers in an effort to improve efficiency amid sharply growing 2009: flattening trend as information volumes. Around 2009, however, the ratios in both the US and Europe leveled companies grew more cost- off at 22–23%, most likely because companies in both regions became more cost- conscious following Lehman conscious during the economic crisis following the Lehman Brothers’ collapse. The crisis uptrend for the overall rate thus flattened off. In Figures 7–12, we break down the overall labor equipment ratio into the ratios for each Ratios for color copiers, type of copier/printer. These graphs reveal that the ratios for color copiers, color MFPs and color MFPs, and B/W MFPs black & white (B/W) MFPs continue to rise, despite the maturing of the US and European continue to climb copier/printer markets. On the other hand, after ratios for B/W copiers declined early on, the ratios for color and B/W LBPs entered downturns from around 2010.

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