Oki Electric Industry / 6703
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Oki Electric Industry / 6703 COVERAGE INITIATED ON: 2017.04.21 LAST UPDATE: 2019.07.26 Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg. Research Report by Shared Research Inc. Oki Electric Industry / 6703 RCoverage LAST UPDATE: 2019.07.26 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp INDEX Executive Summary -------------------------------------------------------------------------------------------------------------------- 3 Key financial data----------------------------------------------------------------------------------------------------------------------- 5 Recent updates -------------------------------------------------------------------------------------------------------------------------- 6 Highlights ------------------------------------------------------------------------------------------------------------------------------------------ 6 Trends and outlook -------------------------------------------------------------------------------------------------------------------- 7 Quarterly trends and results ----------------------------------------------------------------------------------------------------------------- 7 Full-year company forecasts --------------------------------------------------------------------------------------------------------------- 13 Medium-term strategy (as announced in May 2017) ----------------------------------------------------------------------------- 14 Business, market and value chain ----------------------------------------------------------------------------------------------- 16 Business overview ----------------------------------------------------------------------------------------------------------------------------- 16 Business segments ---------------------------------------------------------------------------------------------------------------------------- 19 Strengths and weaknesses ------------------------------------------------------------------------------------------------------------------ 35 Historical results and financial statements ----------------------------------------------------------------------------------- 36 Income statement ----------------------------------------------------------------------------------------------------------------------------- 36 Balance sheet ----------------------------------------------------------------------------------------------------------------------------------- 37 Cash flow statement -------------------------------------------------------------------------------------------------------------------------- 39 Historical results ------------------------------------------------------------------------------------------------------------------------------- 40 Other information -------------------------------------------------------------------------------------------------------------------- 54 News and topics ------------------------------------------------------------------------------------------------------------------------------- 54 Corporate governance, environmental, and CSR information (as of March 2018) -------------------------------------- 56 Top Management ----------------------------------------------------------------------------------------------------------------------------- 57 Dividend policy -------------------------------------------------------------------------------------------------------------------------------- 58 Major shareholders --------------------------------------------------------------------------------------------------------------------------- 58 Employees --------------------------------------------------------------------------------------------------------------------------------------- 58 Profile ---------------------------------------------------------------------------------------------------------------------------------------------- 59 02/60 Oki Electric Industry / 6703 RCoverage LAST UPDATE: 2019.07.26 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Executive Summary Core business ◤ Since manufacturing the first domestic telephone in 1881, when it was founded, Oki Electric Industry Co., Ltd. (OKI) has focused on developing domestic telecommunication technology instead of relying on foreign products. OKI was one of four members of the Nippon Telegraph and Telephone (NTT) family (formerly a Japanese government-owned telecommunications monopoly, privatized in 1952). OKI’s sales within the NTT family have shrunk following the privatization of NTT, the opening of the domestic telecom market, and the shift of telecom networks to IP (internet protocol) technology, but the company has successfully built a customer base spanning national and local government bodies to general corporations by leveraging its audio technology in the telecom field. ◤ In the ICT segment, the company provides telecom systems and solutions to a range of industries and government agencies. The ICT segment is fueled by replacement demand from major companies. In the Mechatronics Systems segment, the company has a high domestic market share of cash-recycling ATMs (machines that use deposited cash for future withdrawals) for financial institutions and retailers. It is focusing on cash-handling machines and tapping into emerging markets overseas. In the Printers segment, key products are single and multifunction printers for the office printer market, but given the company’s low market share and high fixed costs, OKI is shifting its earnings structure to focus on specialty and professional printing markets. In the EMS segment, the company offers reliable, high-end electronics manufacturing services (EMS), while maintaining segment OPM of 5%. It expects continued EMS growth on expanded production bases and sales channels via acquisitions. While the ICT segment is the main earnings source, the company is stepping up efforts to expand the ATM business in emerging markets and pursue high-end domestic demand in the EMS segment. ◤ The company’s four segments are Information and Communication Technology (ICT), Mechatronics Systems, Printers, and Electronics Manufacturing Services (EMS). Oki works to further develop the ICT and EMS segments where the earnings base is stable, while simultaneously advancing structural reforms in the Mechatronics Systems and Printers segments. Earnings trends ◤ By segment, ICT and EMS generate stable earnings, while Mechatronics Systems and Printers tend to be more volatile. In FY03/19, OKI had sales of JPY441.5bn (+0.8% YoY), operating profit of JPY17.5bn (+126.9% YoY), recurring profit of JPY15.5bn (+81.8% YoY), and net income attributable to owners of the parent of JPY8.4bn. Lower sales in Mechatronics Systems and Printers were balanced by higher sales in the ICT and EMS segments. In the ICT segment, sales related to social infrastructure and telecom carriers were robust, along with sales to some government agencies. In the EMS segment, sales were helped by the consolidation of OKI Electric Cable (delisted from TSE1 on March 2018). Operating profit improved YoY in all segments except the Other segment. In particular, structural reforms supported the Mechatronics Systems segment’s move into the black while improvements in fixed cost structure and impact from exchange rates contributed largely to improved operating profit in Printers. ◤ For FY03/20, the company forecasts sales of JPY450.0bn (+1.9% YoY), operating profit of JPY18.5bn (+5.6% YoY), recurring profit of JPY17.0bn (+9.8% YoY), and net income attributable to owners of the parent of JPY14.0bn (+66.6% YoY). The forecast for improvement in operating profit is based on increased profitability due to restructuring of the Mechatronics Systems and Printers segments. Medium-term strategy ◤ The company is looking to sustain growth over the medium to long term by channeling more management resources into growth areas. Under its new medium-term business plan (released in May 2017), the company is looking to increase its earning capacity and, as key performance indicators, is targeting an operating profit margin of 6% and equity ratio of at least 30%. In terms of sales and earnings, the plan calls for sales of JPY500bn and operating profit of JPY30bn; the company is also looking to get the shareholders equity on its balance sheet up to JPY120bn and pay a stable dividend. Although the ICT segment is stable primarily due to replacement demand, the market is mature, so OKI aims to use IoT to develop social 03/60 Oki Electric Industry / 6703 RCoverage LAST UPDATE: 2019.07.26 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp infrastructure-related areas into a growth market. In Mechatronics Systems, the company expects growth through overseas expansion, particularly in emerging markets. In EMS, OKI plans to grow by increasing the number of client companies and sectors, and improving value-added. In Printers, as demand in the office printer market shrinks, OKI aims to shift to a business structure with a lighter fixed cost burden.