Comsys Holdings / 1721
COVERAGE INITIATED ON: 2013.12.03 LAST UPDATE: 2020.08.07
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Research Coverage Report by Shared Research Inc. Comsys Holdings / 1721 RCoverage LAST UPDATE: 2020.08.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
INDEX
How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report.
Executive summary ------3 Key financial data ------5 Recent updates ------6 Highlights ------6 Trends and outlook ------8 Business ------25 Business description ------25 Strengths and weaknesses ------35 Market and value chain ------36 Strategy ------41 Historical performance ------42 Other information ------54 History ------54 News and topics ------55 Major shareholders (as of end-March 2020) ------56 Other ------56 Company profile ------57
02/58 Comsys Holdings / 1721 RCoverage LAST UPDATE: 2020.08.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Executive summary
One of the largest telecom construction companies. Also expanding into other areas
◤ Comsys Holdings Corporation (Comsys) is a major telecommunications construction company, with over fifty years of history. The holding company structure was established in September 2003, when shares of Nippon Comsys Corporation, Sanwa Elec Co., Ltd., and Tosys Corporation were transferred to Comsys Holdings, which became the 100% parent company. In April 2010 it acquired Tsuken Corporation. In October 2018, Comsys acquired NDS Co., Ltd. (TSE1: 1956), SYSKEN Corporation (TSE2: 1933), and Hokuriku Denwa Kouji (Telephone Construction) Co., Ltd. (TSE2: 1989) making them wholly owned consolidated subsidiaries.
◤ Core segments are related to telecommunications—namely NTT Engineering and NCC Engineering. The company also has an IT Solutions and a Social Systems and Other segment. In FY03/20, NTT Engineering accounted for the largest share of the company’s sales, at 44.7% (versus 47.1% in FY03/19), followed by NCC Engineering at 7.8% (versus 8.9% in FY03/19). While the proportion of consolidated sales accounted for by these two telecom-related businesses is on the decline, together they still accounted for 52.5% of group sales in FY03/20 (versus 56.0% in FY03/19). (See the Business section for details.)
Earnings performance
◤ In FY03/20, orders totaled JPY590.7bn (+16.9% YoY) and sales increased to JPY560.9bn (+16.4% YoY). Orders brought forward totaled JPY212.9bn (+16.3% YoY). Operating profit rose 10.5% YoY to JPY39.0bn and recurring profit rose 11.1% YoY to JPY40.1bn. Net income attributable to owners of the parent fell 7.2% YoY to JPY26.0bn. Orders increased in all businesses excluding NCC Engineering, and sales increased in all businesses. Comsys focused its operations on the field of social systems and IT solutions, which has been positioned as a growth business, through responding to public and private investments related to the development of ICT for the “smart society” and renewable energy activities, such as the construction of solar and biomass power generation facilities. GPM fell 0.4pp YoY to 13.1%, and the SG&A to sales ratio remained unchanged YoY at 6.2%. Operating profit margin declined 0.4pp YoY to 6.9%. Profit margins were weighed down by lower margins at three companies that were recently acquired and have been included in the scope of consolidation and by changes in the sales mix. In addition to targeting early realization of merger synergies, the company allocated staff to growth business areas and took steps to improve profitability by promoting work-style reforms, aiming to improve construction efficiency and reduce expenses. Net income declined 7.2% YoY as FY03/19 saw JPY5.2bn in extraordinary profit from negative goodwill due to the merger.
◤ FY03/21 is the second year of the company’s new medium-term vision (explained in further detail later). For FY03/21, Comsys forecasts orders of JPY565.0bn (-4.4% YoY), sales of JPY560.0bn (-0.2% YoY), operating profit of JPY38.0bn (-2.4% YoY), recurring profit of JPY38.5bn (-3.9% YoY), and net income attributable to owners of the parent of JPY25.5bn (-1.9% YoY). The company plans to pay an annual dividend of JPY80 per share (up from JPY75 in FY03/20); this represents a dividend payout ratio of 39.8% (versus 37.0% in FY03/20). The company expects FY03/21 orders to decline YoY due to the absence of large and up-front orders received in FY03/20. It forecasts sales and profits to decline slightly YoY as, while it expects to benefit from the expansion of 5G networks and increased social infrastructure and ITC investments, the NTT fixed-line business is expected to decline. FY03/21 forecast assumes limited impact from COVID-19, but the company has indicated that if the situation significantly changes from its expectations and requires forecast revisions, it will make timely announcements.
◤ The company plans to push ahead with its new management plan, COMSYS VISION NEXT STAGE 2023, ending in FY03/24. Under the new plan, the company targets FY03/24 consolidated sales of at least JPY600.0bn (versus JPY560.9bn in FY03/20) and operating profit of at least JPY50.0bn (versus JPY39.0bn in FY03/20). It guides for an operating profit margin of at least 8.0% (versus 6.9% in FY03/20) and a total shareholder return ratio of 70% (versus 67.5% in FY03/19). With its move to an internal company system, Comsys looks to promote work-style reforms, move forward with new renewable energy businesses, pursue more mergers and acquisitions, and actively reallocate employees within the group.
03/58 Comsys Holdings / 1721 RCoverage LAST UPDATE: 2020.08.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Strengths and weaknesses
In Shared Research’s view, Comsys’ strengths lie in the stability of the core business that is positioned to benefit from the development of advanced telecommunications, a healthy financial position and stable cash flow, and a favorable cost management system. Weaknesses include a high dependence on the capex of telecom carriers, limited top line growth potential in the core business, and a vulnerability to demand for price cuts. (See the Strengths and weaknesses section.)
04/58 Comsys Holdings / 1721 RCoverage LAST UPDATE: 2020.08.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Key financial data
Income statement FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Sales 293,086 315,480 295,851 316,092 331,341 328,631 320,654 334,163 380,024 481,783 560,882 560,000 YoY -8.7% 7.6% -6.2% 6.8% 4.8% -0.8% -2.4% 4.2% 13.7% 26.8% 16.4% -0.2% Gross profit 32,791 31,052 31,117 41,226 45,770 47,938 43,389 45,723 53,433 65,253 73,612 73,000 YoY -12.5% -5.3% 0.2% 32.5% 11.0% 4.7% -9.5% 5.4% 16.9% 22.1% 12.8% -0.8% GPM 11.2% 9.8% 10.5% 13.0% 13.8% 14.6% 13.5% 13.7% 14.1% 13.5% 13.1% 13.0% Operating profit 12,540 11,785 12,592 22,547 27,570 27,674 23,849 25,036 30,347 35,267 38,953 38,000 YoY -19.7% -6.0% 6.8% 79.1% 22.3% 0.4% -13.8% 5.0% 21.2% 16.2% 10.5% -2.4% OPM 4.3% 3.7% 4.3% 7.1% 8.3% 8.4% 7.4% 7.5% 8.0% 7.3% 6.9% 6.8% Recurring profit 13,113 12,140 12,969 22,914 28,078 28,121 24,223 25,341 30,706 36,071 40,064 38,500 YoY -23.5% -7.4% 6.8% 76.7% 22.5% 0.2% -13.9% 4.6% 21.2% 17.5% 11.1% -3.9% RPM 4.5% 3.8% 4.4% 7.2% 8.5% 8.6% 7.6% 7.6% 8.1% 7.5% 7.1% 6.9% Net income attrib. to owners of the parent 7,097 9,543 7,173 13,284 16,389 16,767 15,420 14,485 20,390 28,018 25,994 25,500 YoY -29.5% 34.5% -24.8% 85.2% 23.4% 2.3% -8.0% -6.1% 40.8% 37.4% -7.2% -1.9% Net margin 2.4% 3.0% 2.4% 4.2% 4.9% 5.1% 4.8% 4.3% 5.4% 5.8% 4.6% 4.6% Per share data Shares issued (year-end; '000) 145,977.9 145,977.9 145,977.9 145,977.9 145,977.9 145,977.9 141,000.0 141,000.0 141,000.0 141,000.0 141,000.0 - EPS 55.2 73.9 55.5 106.8 136.1 142.7 136.8 130.0 178.6 230.1 203.0 201.1 EPS (fully diluted) 55.2 73.8 55.4 106.4 135.3 141.9 136.2 129.5 177.9 229.2 202.5 - Dividend per share 20.0 20.0 20.0 20.0 25.0 30.0 35.0 40.0 50.0 60.0 75.0 80.0 Book value per share 1,039.7 1,108.2 1,127.4 1,401.1 1,514.7 1,682.7 1,764.1 1,848.3 2,008.4 2,318.4 2,424.8 - Balance sheet (JPYmn) Cash and cash equivalents 23,713 18,424 33,548 23,710 31,036 33,496 28,930 20,961 29,144 28,618 35,992 Total current assets 129,035 149,858 141,646 149,593 156,495 151,878 155,551 167,166 182,246 247,013 257,080 T angible fixed asset s 57,313 63,769 63,575 67,444 70,353 72,295 72,878 86,968 102,748 135,744 138,612 Investments and other assets 19,065 21,129 19,110 19,239 20,117 32,201 30,645 25,563 29,983 47,561 46,507 Int angible fixed asset s 6,395 2,677 3,802 4,324 3,594 7,643 6,990 4,669 10,063 9,606 7,842 Total assets 211,809 237,436 228,135 240,602 250,561 264,019 266,066 284,367 325,042 439,926 450,043 Accounts payable 42,023 46,716 39,891 44,456 45,039 44,675 49,191 55,577 59,749 77,685 80,289 Short-term debt 11 8,124 1,520 1,660 1,270 100 114 113 106 8,543 7,038 Tot al current liabilities 53,581 65,921 55,482 59,238 63,720 60,791 61,225 71,289 82,836 116,125 118,042 Long-term debt ------5 3,212 1,107 Tot al fixed liabilities 6,458 9,746 8,078 7,951 7,426 9,189 8,296 10,134 10,441 22,340 21,307 Tot al liabilities 60,040 75,667 63,560 67,190 71,147 69,980 69,522 81,423 93,274 138,466 139,349 Net assets 151,768 161,768 164,574 173,411 179,414 194,038 196,543 202,943 231,767 301,459 310,694 Total interest-bearing debt 11 8,124 1,520 1,660 1,270 100 114 113 111 11,755 8,145 Cash flow statement (JPYmn) Cash flows from operating activities 10,055 -1,585 31,734 3,963 24,185 26,575 13,089 12,545 28,831 8,964 37,496 Cash flows from investing activities -9,257 -3,418 -4,015 -7,554 -6,228 -11,882 -7,303 -9,940 -13,896 -11,550 -9,919 Cash flows from financing activities -7,669 -364 -11,901 -6,489 -10,511 -12,199 -11,307 -12,178 -12,499 -15,382 -19,819 Financial ratios ROA (RP-based) 6.1% 5.4% 5.6% 9.8% 11.4% 10.9% 9.1% 9.2% 10.1% 9.4% 9.0% ROE 4.7% 6.1% 4.4% 7.9% 9.4% 9.0% 7.9% 7.3% 9.4% 10.6% 8.6% Equity ratio 71.2% 67.7% 71.7% 71.6% 71.1% 73.0% 73.4% 70.9% 70.8% 67.8% 68.3% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.
05/58 Comsys Holdings / 1721 RCoverage LAST UPDATE: 2020.08.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Recent updates
Highlights
On August 7, 2020, Comsys Holdings Corporation announced earnings results for Q1 FY03/21; see the results section for details.
On the same day, the company announced the acquisition of Asahi Setsubi Kogyo K.K. through a simple share exchange.
Comsys resolved to make Asahi Setsubi Kogyo a wholly owned subsidiary through a share exchange. The share exchange agreement was signed on August 7, 2020, the general meeting of shareholders of Asahi Setsubi Kogyo is scheduled for September 29, 2020, and the effective date of the share exchange is scheduled for October 1, 2020. Comsys plans to conduct the share exchange without obtaining approval at a general meeting of shareholders, in accordance with Article 796 (2) of the Companies Act.
Purpose of the share exchange
▷ The fierce competition for customers among telecoms carriers is shifting from a period of competing to expand infrastructure facilities to competing for better service and content, and capital investment in infrastructure construction has already started
to fall. Additionally, the company expects to face increasing requests from telecoms carriers for cost reductions to strengthen price competitiveness going forward. ▷ To ensure further growth and development while responding swiftly to changes in the market structure, the company needs to maintain and improve its high-quality construction technology to keep up with technological innovation. It also needs to strengthen its market competitiveness and expand its management base by rebuilding a more productive construction system. ▷ Based on these circumstances, Comsys decided to proceed with the share exchange in anticipation of expanding operations in a wide range of areas by leveraging the strengths of NDS Co., Ltd., its group company, and Asahi Setsubi Kogyo, and realizing synergies through coordinating management resources. ▷ The NDS group is engaged in the construction of telecommunications infrastructure networks for the NTT group and other telecoms carriers primarily in the Tokai area. In addition to the Tokai area, the group has focused on expanding businesses in the Tokyo metropolitan, Kansai, and Hokuriku areas. Its businesses include public and private sector construction contracting services in the communications equipment, electrical, and civil engineering areas, as well as ICT, semiconductor manufacturing
equipment installation and maintenance, information system development, and transportation e-money payment settlement businesses. ▷ On the other hand, Asahi Setsubi Kogyo is based in Gifu Prefecture and is mainly engaged in pipe work and water facility construction. The company is one of the top-rated local contractors in the region and has earned the trust of Gifu Prefecture and other government agencies and major companies. ▷ Through the share exchange, NDS and Asahi Setsubi Kogyo aim to maximize synergies to expand operations in a wide range of areas and coordinate management resources by leveraging strengths in target regions centered around the Tokai region and business domain of each company. Comsys plans to further enhance its corporate value by aggressively executing its growth strategy as a group.
On June 29, 2020, Shared Research updated the report following interviews with the company.
06/58 Comsys Holdings / 1721 RCoverage LAST UPDATE: 2020.08.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
On May 13, 2020, the company announced earnings results for full-year FY03/20; see the results section for details.
On the same day, the company announced the details of a new share buyback program.
Details of share buyback program
▷ Type of shares to be purchased: Company’s common stock ▷ No. of shares to be purchased: 1,500,000 (upper limit, 1.18% of outstanding shares) ▷ Maximum purchase amount: JPY3.0bn ▷ Buyback period: May 14, 2020 to March 31, 2021
For previous releases and developments, please refer to the News and topics section.
07/58 Comsys Holdings / 1721 RCoverage LAST UPDATE: 2020.08.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Trends and outlook
Quarterly performance
Quarterly performance FY03/19 FY03/20 FY03/21 FY03/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 Sales 82,270 95,584 126,449 177,480 111,906 131,118 131,745 186,113 104,703 YoY 28.7% 8.3% 38.3% 30.1% 36.0% 37.2% 4.2% 4.9% -6.4% Gross profit 10,034 12,721 17,622 24,876 13,699 16,694 16,856 26,363 12,084 YoY 17.1% 3.5% 37.4% 26.0% 36.5% 31.2% -4.3% 6.0% -11.8% GPM 12.2% 13.3% 13.9% 14.0% 12.2% 12.7% 12.8% 14.2% 11.5% SG&A expenses 5,990 5,790 8,832 9,373 8,723 8,711 8,657 8,567 8,446 YoY 18.1% -4.0% 53.8% 50.3% 45.6% 50.4% -2.0% -8.6% -3.2% SG&A ratio 7.3% 6.1% 7.0% 5.3% 7.8% 6.6% 6.6% 4.6% 8.1% Operating profit 4,043 6,931 8,790 15,503 4,976 7,983 8,199 17,795 3,637 YoY 15.7% 10.7% 24.1% 14.8% 23.1% 15.2% -6.7% 14.8% -26.9% OPM 4.9%7.3%7.0%8.7%4.4%6.1%6.2%9.6%3.5% Recurring profit 4,248 6,984 9,204 15,635 5,511 8,120 8,588 17,845 4,182 YoY 16.0% 10.5% 29.0% 15.0% 29.7% 16.3% -6.7% 14.1% -24.1% RPM 5.2%7.3%7.3%8.8%4.9%6.2%6.5%9.6%4.0%
Net income attrib. to owners of the parent 2,785 4,344 11,143 9,746 3,509 5,346 5,604 11,535 2,891 YoY 6.7% 3.4% 125.5% 12.9% 26.0% 23.1% -49.7% 18.4% -17.6% Net margin 3.4% 4.5% 8.8% 5.5% 3.1% 4.1% 4.3% 6.2% 2.8% Cumulative Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of Est. FY Est. Sales 82,270 177,854 304,303 481,783 111,906 243,024 374,769 560,882 104,703 18.7% 560,000 YoY 28.7% 16.9% 24.9% 26.8% 36.0% 36.6% 23.2% 16.4% -6.4% -0.2% Gross profit 10,034 22,755 40,377 65,253 13,699 30,393 47,249 73,612 12,084 16.6% 73,000 YoY 17.1% 9.1% 19.9% 22.1% 36.5% 33.6% 17.0% 12.8% -11.8% -0.8% GPM 12.2% 12.8% 13.3% 13.5% 12.2% 12.5% 12.6% 13.1% 11.5% 13.0% SG&A expenses 5,990 11,780 20,612 29,985 8,723 17,434 26,091 34,658 8,446 24.1% 35,000 YoY 18.1% 6.1% 22.3% 29.9% 45.6% 48.0% 26.6% 15.6% -3.2% 1.0% SG&A ratio 7.3% 6.6% 6.8% 6.2% 7.8% 7.2% 7.0% 6.2% 8.1% 6.3% Operating profit 4,043 10,974 19,764 35,267 4,976 12,959 21,158 38,953 3,637 9.6% 38,000 YoY 15.7% 12.5% 17.4% 16.2% 23.1% 18.1% 7.1% 10.5% -26.9% -2.4% OPM 4.9%6.2%6.5%7.3%4.4%5.3%5.6%6.9%3.5% 6.8% Recurring profit 4,248 11,232 20,436 36,071 5,511 13,631 22,219 40,064 4,182 10.9% 38,500 YoY 16.0% 12.5% 19.4% 17.5% 29.7% 21.4% 8.7% 11.1% -24.1% -3.9% RPM 5.2%6.3%6.7%7.5%4.9%5.6%5.9%7.1%4.0% 6.9% Net income attrib. to owners of the parent 2,785 7,129 18,272 28,018 3,509 8,855 14,459 25,994 2,891 11.3% 25,500 YoY 6.7% 4.6% 55.4% 37.4% 26.0% 24.2% -20.9% -7.2% -17.6% -1.9% Net margin 3.4% 4.0% 6.0% 5.8% 3.1% 3.6% 3.9% 4.6% 2.8% 4.6% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. Company forecast is based on the most recent figures.
Quarterly sales and operating profit
(JPYmn) Sales Operating profit (right axis) (JPYmn)
200,000 20,000 177,480 186,113 180,000 18,000 17,795 15,503 160,000 136,414 16,000 140,000 131,118 131,745 14,000 13,509 126,449 120,000 111,906 12,000 104,703 95,584 100,000 88,252 91,422 10,000 82,270 80,000 8,000 63,936 8,790 7,983 8,199 60,000 7,084 6,931 6,000 6,260 40,000 4,976 4,000 4,043 3,637 20,000 3,494 2,000
0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY03/18 FY03/19 FY03/20 FY03/21
Source: Shared Research based on company data
On seasonality: A high proportion of projects are completed and delivered in Q4 so sales tend to be higher compared to Q1–Q3.
08/58 Comsys Holdings / 1721 RCoverage LAST UPDATE: 2020.08.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Q1 FY03/21 results (out August 7, 2020)
Overview
▷ In Q1 FY03/21, orders totaled JPY129.9bn (-7.0% YoY) and sales were JPY104.7bn (-6.4% YoY). Orders brought forward amounted to JPY238.1bn (+13.0% YoY). Operating profit was JPY3.6bn (-26.9% YoY), recurring profit was JPY4.2bn (-24.1% YoY), and net income attributable to owners of the parent was JPY2.9bn (-17.6% YoY). The company was affected by the slowdown in socio-economic activity triggered by the COVID-19 outbreak, which led to a drop in ordering opportunities, as well as extension of construction periods due to temporary access restrictions to construction sites and delays in construction material deliveries. ▷ Progress versus forecast: Versus full-year FY03/21 targets, orders reached 23.0% (23.6% of full-year FY03/20 result in Q1 FY03/20), sales 18.7% (20.0%), operating profit 9.6% (12.8%), recurring profit 10.9% (13.8%), and net income 11.3% (13.5%). ▷ Orders received down 7.0% YoY, sales down 6.4% YoY: Orders were down YoY in the NTT Engineering and Social Systems and Other businesses, while sales were down across the board. ▷ Operating profit down 26.9% YoY: GPM fell 0.7pp YoY to 11.5%, and the SG&A to sales ratio increased 0.3pp YoY to 8.1%. As a result, operating profit margin declined 0.9pp YoY to 3.5%. ▷ The company maintained its full-year FY03/21 earnings forecast.
External environment and company initiatives In the information and communications industry, there is a push to build networks that support the accelerated implementation of society-wide digital transformation such as digital technology, automation, and AI. The industry also faces the need for the installation of base stations and upgrading of mobile networks driven by the full-scale implementation of 5G services.
In addition, Comsys expects the public and private sectors to increase investment in social infrastructure, including measures to strengthen national resilience such as those to prevent and mitigate increasingly devastating natural disasters and renewable energy policies. The company also anticipates investment to expand in ICT fields, including remote services such as teleworking, online education, and online medical consultations, and services related to GIGA School Program. To grow its top line, the company strengthened sales efforts in renewable energies (construction of solar and biomass power generation facilities) and IT solutions (services related to GIGA School Program). To optimize group-wide operations, the company will thoroughly deliberate the integration of IT platforms and optimal allocation of functions, and leverage digital technologies to continue improving the group’s productivity.
Sales and orders by segment NTT Engineering
▷ Orders totaled JPY54.6bn (-13.9% YoY); 23.8% of the full-year target (24.8% of full-year FY03/20 result in Q1 FY03/20) ▷ Sales were JPY47.1bn (-4.3% YoY); 19.5% of the full-year target (19.6%)
NCC Engineering
▷ Orders totaled JPY10.6bn (+17.8% YoY); 20.8% of the full-year target (20.7% of full-year FY03/20 result in Q1 FY03/20) ▷ Sales were JPY7.9bn (-14.1% YoY); 16.5% of the full-year target (21.1%)
IT Solutions
▷ Orders totaled JPY28.6bn (+1.4% YoY); 27.8% of the full-year target (28.0% of full-year FY03/20 result in Q1 FY03/20) ▷ Sales were JPY17.0bn (-14.1% YoY); 16.8% of the full-year target (20.2%)
09/58 Comsys Holdings / 1721 RCoverage LAST UPDATE: 2020.08.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Social Systems
▷ Orders totaled JPY35.9bn (-7.5% YoY); 19.7% of the full-year target (20.3% of full-year FY03/20 result in Q1 FY03/20) ▷ Sales were JPY32.5bn (-3.0% YoY); 19.1% of the full-year target (19.9%)
Sales and orders by segment, orders carried over Orders and sales by segment FY03/19 FY03/20 FY03/21 FY 03/ 21 Cumulative (JPYbn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of Est. FY Es t . Orders NTT Engineering 44.8 88.9 164.5 222.9 63.4 134.3 195.3 255.4 54.6 23.8% 229.0 YoY -2.0% -6.1% 16.6% 20.8% 41.5% 51.1% 18.7% 14.6% -13.9% -10.3% % of total 45.9% 46.8% 45.4% 44.1% 45.4% 42.1% 43.1% 43.2% 42.0% 40.5% NCC Engineering 8.4 17.3 33.5 46.5 9.0 18.2 31.6 43.4 10.6 20.8% 51.0 YoY 9.1% 1.2% 19.6% 18.6% 7.1% 5.2% -5.7% -6.7% 17.8% 17.5% % of total 8.6% 9.1% 9.3% 9.2% 6.4% 5.7% 7.0% 7.3% 8.2% 9.0% IT Solutions 17.7 33.5 58.5 80.9 28.2 53.6 76.5 100.8 28.6 27.8% 103.0 YoY 28.3% 14.3% 29.1% 33.9% 59.3% 60.0% 30.8% 24.6% 1.4% 2.2% % of total 18.1% 17.6% 16.2% 16.0% 20.2% 16.8% 16.9% 17.1% 22.0% 18.2% Social Systems 26.6 50.3 105.4 155.0 38.8 112.6 149.4 190.9 35.9 19.7%182.0 YoY 119.8% -2.7% 37.4% 31.4% 45.9% 123.9% 41.7% 23.2% -7.5% -4.7% % of total 27.2% 26.5% 29.1% 30.7% 27.8% 35.3% 33.0% 32.3% 27.6% 32.2% Total 97.7 190.1 362.1 505.6 139.6 318.8 453.0 590.7 129.9 23.0% 565.0 YoY 23.0% -1.5% 24.4% 25.7% 42.9% 67.7% 25.1% 16.9% -6.9% -4.4% Sales NTT Engineering 38.7 80.6 141.5 226.8 49.2 105.7 163.8 250.4 47.1 19.5% 241.0 YoY 7.2% 1.3% 14.6% 22.0% 27.1% 31.1% 15.8% 10.4% -4.3% -3.8% % of total 47.0% 45.3% 46.5% 47.1% 44.0% 43.5% 43.7% 44.7% 45.0% 43.0% NCC Engineering 7.3 16.2 27.5 43.0 9.2 19.3 29.8 43.7 7.9 16.5% 48.0 YoY 21.7% 11.0% 17.0% 20.4% 26.0% 19.1% 8.4% 1.6% -14.1% 9.8% % of total 8.9% 9.1% 9.0% 8.9% 8.2% 7.9% 8.0% 7.8% 7.5% 8.6% IT Solutions 11.0 26.3 44.0 75.0 19.8 43.2 66.8 98.1 17.0 16.8% 101.0 YoY 11.1% 15.4% 23.6% 27.1% 80.0% 64.3% 51.8% 30.8% -14.1% 3.0% % of total 13.4% 14.8% 14.5% 15.6% 17.7% 17.8% 17.8% 17.5% 16.2% 18.0% Social Systems 25.0 54.5 91.1 136.7 33.5 74.6 114.2 168.5 32.5 19.1% 170.0 YoY 113.7% 55.7% 49.6% 37.8% 34.0% 36.9% 25.4% 23.3% -3.0% 0.9% % of total 30.4% 30.7% 29.9% 28.4% 29.9% 30.7% 30.5% 30.0% 31.0% 30.4% Total 82.3 177.8 304.3 481.8 111.9 243.0 374.8 560.8 104.7 18.7% 560.0 YoY 28.7% 16.9% 24.9% 26.8% 36.0% 36.7% 23.2% 16.4% -6.4% -0.1% Balance carried forward NTT Engineering 79.5 81.7 96.4 69.5 83.6 98.0 101.0 74.5 82.0 YoY -5.9% -9.2% 4.2% -5.3% 5.2% 20.0% 4.8% 7.2% -1.9% % of total 45.4% 47.6% 44.4% 38.0% 39.7% 37.9% 38.7% 35.0% 34.4% NCC Engineering 9.5 9.5 14.4 11.9 11.7 10.8 13.7 11.5 13.7 YoY 43.9% 26.7% 51.6% 40.0% 23.2% 13.7% -4.9% -3.4% 17.1% % of total 5.4% 5.5% 6.6% 6.5% 5.6% 4.2% 5.2% 5.4% 5.8% IT Solutions 21.7 22.3 29.5 20.9 29.3 31.2 30.5 23.6 35.2 YoY 24.0% 10.9% 26.6% 39.3% 35.0% 39.9% 3.4% 12.9% 20.1% % of total 12.4% 13.0% 13.6% 11.4% 13.9% 12.1% 11.7% 11.1% 14.8% Social Systems 64.0 58.2 76.9 80.7 86.0 118.6 115.9 103.1 107.0 YoY 45.1% -3.6% 29.2% 29.1% 34.4% 103.8% 50.7% 27.8% 24.4% % of total 36.6% 33.9% 35.4% 44.1% 40.8% 45.8% 44.4% 48.4% 44.9% Total 175.0 171.8 217.3 183.1 210.8 258.9 261.3 212.9 238.1 YoY 14.5% -3.6% 17.5% 14.8% 20.5% 50.7% 20.2% 16.3% 13.0% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.
For details on previous quarterly and annual results, please refer to the Historical performance section.
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Full-year company forecast for FY03/21
FY03/19 FY03/20 FY 03/ 21 (JPYmn) 1H Act. 2H Act. FY Act. 1H Act. 2H Act. FY Act. FY Est.
Sales 177,854 303,929 481,783 243,024 317,858 560,882 560,000 YoY 16.9% 33.4% 26.8% 36.6% 4.6% 16.4% -0.2% Cost of sales 155,099 261,431 416,530 212,631 274,639 487,270 487,000 Gross profit 22,755 42,498 65,253 30,393 43,219 73,612 73,000 YoY 9.1% 30.5% 22.1% 33.6% 1.7% 12.8% -0.8% GPM 12.8% 14.0% 13.5% 12.5% 13.6% 13.1% 13.0% SG&A expenses 11,780 18,205 29,985 17,434 17,224 34,658 35,000 SG&A ratio 6.6% 6.0% 6.2% 7.2% 5.4% 6.2% 6.3% Operating profit 10,974 24,293 35,267 12,959 25,994 38,953 38,000 YoY 12.5% 18.0% 16.2% 18.1% 7.0% 10.5% -2.4% OPM 6.2% 8.0% 7.3% 5.3% 8.2% 6.9% 6.8% Recurring profit 11,232 24,839 36,071 13,631 26,433 40,064 38,500 YoY 12.5% 19.9% 17.5% 21.4% 6.4% 11.1% -3.9% RPM 6.3% 8.2% 7.5% 5.6% 8.3% 7.1% 6.9% Net income attributable to owners of the parent 7,129 20,889 28,018 8,855 17,139 25,994 25,500 YoY 4.6% 53.9% 37.4% 24.2% -18.0% -7.2% -1.9%
Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. Net income is net income attributable to owners of the parent.
Overview FY03/21 is the second year of the company’s new medium-term vision (explained in further detail later). For FY03/21, Comsys forecasts orders of JPY565.0bn (-4.4% YoY), sales of JPY560.0bn (-0.2% YoY), operating profit of JPY38.0bn (-2.4% YoY), recurring profit of JPY38.5bn (-3.9% YoY), and net income attributable to owners of the parent of JPY25.5bn (-1.9% YoY). The company plans to pay an annual dividend of JPY80 per share (up from JPY75 in FY03/20); this represents a dividend payout ratio of 39.8% (versus 37.0% in FY03/20).
▷ Due to the spread of COVID-19, there is an increasing sense of uncertainty going forward including risks of further deterioration in the domestic and world economies, as well as financial market volatility. Being a provider of an essential part of social infrastructure—telecommunications facilities—the company plans to continue business operations to meet the needs of society while paying close attention to the safety and health of its own and partner company employees by adopting measures
to prevent the spread of COVID-19 that are in line with those of the government. ▷ The company expects FY03/21 orders to decline YoY due to the absence of large and up-front orders received in FY03/20. It forecasts sales and profits to decline slightly YoY as, while it expects to benefit from the expansion of 5G networks and
increased social infrastructure and ITC investments, carrier-related business is expected to decline. ▷ FY03/21 forecast assumes limited impact from COVID-19, but the company has indicated that if the situation significantly changes from its expectations and requires forecast revisions, it will make timely announcements.
Impact of COVID-19 Telecommunication networks are regarded as critical social infrastructure in Japan, and construction operations have therefore not been suspended during the COVID-19 pandemic.
Potential negative impact
▷ Delayed events may push back scheduled telecommunications infrastructure engineering projects
▷ Corporate investment in ICT may slow down due to uncertainty over, or a deterioration in, economic conditions
▷ Disruptions in part supply may affect construction
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Potential positive impact
▷ Acceleration in projects related to the GIGA School Program (see paragraph below)
In 2H FY03/20, Comsys built LAN systems and supplied computers to over 200 elementary and junior high schools in Ichikawa
City, Chiba Prefecture.
Although related profit margins are not necessarily high, the company says it can generate profits after receiving orders.
Comsys will target expansion in collaborative projects with major system integrators and partners such as NTT East and West.
▷ Promotion of telework and cloud usage could lead to growth in orders.
Increased data traffic is expected to drive up demand for data centers and cybersecurity measures for cloud usage.
GIGA School Program
▷ The GIGA School Program is a government initiative that aims to uniformly provide educational-use computer devices to every
student in Japan and establish high-speed, high-capacity communication networks at schools across the nation. GIGA stands
for “Global and Innovation Gateway for All.”
▷ The Japanese government set up the GIGA School Realization Promotion Headquarters in December 2019 to realize the vision
of the program. It passed a JPY231.8bn supplementary budget (breaking down into JPY129.6bn for network construction,
JPY102.2bn for computer devices) in FY2019. It had aimed to provide a computer device to each student in 2020 via budget
measures in the local allocation tax system, but this initiative produced few tangible results. Consequently, the government
decided to roll out the GIGA School Program as an urgent measure to ensure Japan does not fall behind in ICT education.
▷ Under the program, the government will aim to supply one in three elementary and junior high school classes with educational-
use computer devices (to realize one device per student, it will provide a subsidy of up to JPY45,000 per device). It hopes to
achieve a distribution of one device per student by FY2023. At the same time, it will promote the construction of high-speed,
high-capacity communication networks.
▷ In its emergency economic measures to cope with COVID-19 (Cabinet decision on April 7, 2020), the government proposed
to allocate a total of JPY229.2bn in its FY2020 supplementary budget to rapidly realize an environment that ensures all children
can continue to learn through ICT solutions in the event of an emergency that shuts down schools such as a natural disaster or
pandemic. The budget allocation includes JPY195.1bn for the rapid realization of one computer device per child, and JPY7.1bn
for the establishment of networks at all Japanese schools. The budget for the rapid realization of one computer device per child
extends the funding provided for fifth- and sixth-year elementary students and first-year junior high school students in the
FY2019 supplementary budget, by also including first- through fourth-year elementary students and second- and third-year
junior high school students (new budget allocates up to JPY45,000 per student).
▷ According to a survey by the Ministry of Education, Culture, Sports, Science and Technology (MEXT), Japan had a total of
9.6mn elementary and junior high school students as of end-March 2019, and the number of education-use computer devices
(after excluding devices for teachers) available to such students stood at roughly 1.8mn (penetration rate of 18.5%, ratio of
one device per 5.4 students). This implies demand for another JPY7.8mn devices to realize the objective of one computer
device per student.
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Segment forecasts Orders and sales forecasts by business are outlined below. Orders Sales (JPYbn) FY03/19 FY03/20 FY03/21 FY03/19 FY03/19 FY03/21 Act. Act. Est. YoY Act. Act. Est. YoY
NTT Engineering 222.9 255.4 229.0 -10.3% 226.8 250.4 241.0 -3.8% NCC Engineering 46.5 43.4 51.0 17.5% 43.0 43.7 48.0 9.8% IT Solutions 80.9 100.8 103.0 2.2% 75.0 98.1 101.0 3.0% Social Systems 155.0 190.9 182.0 -4.7% 136.7 168.5 170.0 0.9% Consolidated total 505.5 590.7 565.0 -4.4% 481.8 560.9 560.0 -0.2% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.
NTT Engineering
▷ Orders received: JPY229.0bn (-10.3% YoY)
Comsys forecasts a reactionary decline following the booking of large projects and front-loaded orders in FY03/20.
The company expects the overall decline in orders received to be driven by a continued pullback in capex at the NTT group,
the booking of front-loaded orders for general construction for access work in FY03/20, and an uncertain capex outlook for
mobile engineering despite the rollout of 5G services.
▷ Sales: JPY241.0bn (-3.8% YoY)
The parts shortages that caused construction delays in mobile engineering in FY03/20 have come to an end, and Comsys
accordingly looks for sales to increase in FY03/21.
However, the company expects general construction for access work to decline.
* Company initiatives: Concentrate on early realization of merger synergies. Focus on reducing costs by eliminating overlapping operations following the acquisitions.
Comsys will work to reduce costs and enhance productivity via reforms that replace optimization at the level of individual
group companies with group-level optimization. Specifically, it will drastically reform its business organization (consolidation
and elimination of overlapping functions within certain regions, and consolidation of sales and back-office functions), and
implement a policy of reforming operations through integrated IT platforms and promoting digital transformation (DX).
The company will strengthen its organization to capture outsourced maintenance projects and power-related projects going
forward. Specifically, it will build the necessary organization to respond to various requests by the NTT group, such as taking
on outsourced maintenance projects and accelerating smart energy business, and accordingly expand its businesses.
NTT Engineering breakdown
▷ NTT Engineering (access work and network engineering) sales (simple sum for eight companies): Sales forecast of JPY172.5bn
(-6.7% YoY), down from JPY184.9bn in FY03/20 (+18.5% YoY). The breakdown is as follows.
Access work: Sales forecast of JPY149.5bn (-7.1% YoY) in FY03/21, down from JPY160.8bn in FY03/20 (+20.3% YoY).
Network engineering: Sales forecast of JPY23.0bn (-4.6% YoY) in FY03/21, down from JPY24.1bn in FY03/20 (+7.7% YoY).
Comsys expects a drop in capex at NTT East and West (see paragraph below), and a reactionary decline in sales from FY03/20.
* NTT East and West forecast FY03/21 capex of JPY480.0bn, down from JPY522.5bn in FY03/20. The companies aim to fully migrate* their land-line Public Switched Telephone Network (PSTN) to an internet protocol-based (IP) network—marking the final phase of the anticipated transition to an IP-based network—by January 2025.
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* NTT East and West are planning to fully migrate their landline-based PSTN to an IP-based network by 2025; the changeover is due in large part to the expected life of their current switching equipment, which is only expected to last until about 2025. In conjunction with this, call dialing from landlines is scheduled to be switched over to an IP-based network starting in January 2024, and the entire landline-based network is scheduled to be completely switched over to an IP-based network by January 2025. After fully migrating to the new IP-based network, NTT East and West are thinking that they will be able to continue using existing metal cables and equipment that accommodates those metal cables (current subscriber switching equipment), and will be able to charge the same base rate for phone service as they do for their current landline-based phone service, assuming the operating environment does not change dramatically for the worse. After switching to the IP-based network, NTT East and West are looking to take advantage of the unique properties of the new network and set a uniform price of JPY8.5 per three minutes for domestic phone calls between any two points, regardless of the distance. The switch to the IP-based network will not require any installation work inside of homes and will not require any change in household telephone equipment.
▷ NTT mobile business: Sales forecast of JPY63.5bn (+3.6% YoY; simple sum for eight companies), up from JPY61.2bn in FY03/20
(-9.9% YoY).
NTT Docomo will step up the rollout of 5G base stations, but its plans are not entirely clear. Although 4G part shortages are
expected to dissipate, Comsys suspects NTT Docomo may curb capex as it shortens the equipment installment process by
installing 4G alongside 5G equipment.
Against this backdrop, the Comsys group aims to secure earnings from businesses that support the nationwide rollout of 5G
services, start operating a mobile engineering business system within the group (including at the three recently acquired
companies) in FY03/22, and reduce costs while improving productivity.
* NTT Docomo has not disclosed its capex budget for FY03/21. It reported capex of JPY572.8bn in FY03/20 (-3.5% YoY).
NCC Engineering
▷ Orders received: JPY51.0bn (+17.5% YoY)
Comsys expects KDDI to maintain its policy of prioritizing 4G LTE networks in FY03/21.
At the same time, the company expects aggressive growth in orders received from Rakuten Mobile, which launched its 4G
service in April 2020 and looks to expand its network across the country (the company aims to expand its share of base
station construction in tandem with Rakuten Mobile’s nationwide rollout of 4G service). In addition, Softbank is steadily
upgrading its 4G networks with an eye toward utilizing them for 5G service. Comsys expects continued strong capex at
Softbank, and looks to translate this into firm orders.
▷ Sales: JPY48.0bn (+9.8% YoY)
Comsys expects sales to KDDI will shrink due to a continuation of the company’s policy of prioritizing 4G LTE networks and to
a decline in construction for 700MHz bandwidth TV reception.
At the same time, the company forecasts growth in sales to Rakuten Mobile and Softbank.
* For more details on telecom carriers’ capex in FY03/20 and their capex plans in FY03/21, please refer to the Market and value chain section.
IT Solutions
▷ Orders received: JPY103.0bn (+2.2% YoY)
The company will expand orders by developing software and coordinating further on sales execution within the group under
its IT virtual company model.*
It will cultivate new business opportunities (such as corporate DX, IoT and AI, and local 5G) to establish new foundations for
growth.
▷ Sales: JPY101.0bn (+0.3% YoY)
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At end-FY03/20, orders brought forward stood at JPY23.6bn. The company plans to complete these in FY03/21, and looks for
sales to increase YoY accordingly.
Company initiatives: The company targets growth by pursuing projects related to the GIGA School Program, accelerating the conversion to fiber optics (particularly in the public sector, at educational institutions, and at hospitals), and concentrating on recurring-revenue businesses such as maintenance and operation. It will also aim to improve profit margins by making optimal use of internal group resources.
* IT virtual company model: Model under which the group operates as a single virtual company for each business segment, with each such company encompassing related operations of all group companies.
Social Systems and Other
▷ Orders received: JPY182.0bn (-4.7% YoY)
In FY03/21, Comsys will aim to expand orders for electrical construction and water supply and sewerage works, but it expects
orders received to fall due to a reactionary decline from the booking of a large solar power project in FY03/20.
▷ Sales: JPY170.0bn (+0.9% YoY)
At end-FY03/20, orders brought forward totaled JPY103.1bn. The company plans to complete these in FY03/21, and looks
for sales to increase YoY accordingly.
From FY03/21, the company will record a project that was previously booked under the “electricity and telecommunications”
field under the “infrastructure & other” field. As a result, it expects sales in the “electricity and telecommunications” field to
hold steady YoY.
* Company initiatives:
. In the infrastructure, electricity, and telecommunications fields, Comsys will pursue a virtual company model (see
explanation above), and aim to grow orders for high-margin projects.
. In the renewable energy field, the company targets steady sales growth supported by robust construction of “mega-
solar” projects in Kyushu.
. As a post-solar power project, the company is looking into the development of a hydrogen energy business. The newly
launched hydrogen energy demonstration project (aims to locally produce hydrogen for local consumption) operated
by the New Energy and Industrial Technology Development Organization (NEDO) is an example of such a project, and
the company is keen to expand into such a new energy business.
. The company will strengthen its foundations to support growth by expanding its business areas and fields through M&A
activity.
. The company will enhance productivity and improve profit margins by adopting new technologies and methods.
Realizing merger synergies
▷ The company will innovate operations by promoting DX, and pursue optimization for the group as a whole.
Innovate operations through DX: The Comsys group has thus far promoted IT adoption at its worksites, and it has streamlined
operations by integrating its construction systems. It will continue such initiatives, and fully take advantage of IT and digital
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technologies to branch into the field of DX, which aims to drastically overhaul existing business models. It will analyze cost
reductions and process standardization based on data not only for individual businesses but group companies as a whole,
and ensure its management decisions are data-driven. The ultimate goal is to support DX at customers in the future.
Pursuit of optimization for group as a whole: The individual group companies have thus far executed a full range of functions
across a full range of sites, and operations have essentially been optimized at the company level. Going forward, the group
will pursue optimization at the group level through the following measures.
. Consolidate sales functions and locations.
. Further pursue the virtual company model, and unify business operations across the group.
. Streamline administrative support tasks.
. Leverage regional brand of various business companies, further polish construction capabilities, and specialize in
construction in various regions.
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Outlook New medium-term vision: COMSYS VISION NEXT STAGE 2023 Overview The company unveiled its medium-term vision “COMSYS VISION NEXT STAGE 2023” spanning the period through FY03/24 (summary released on May 10, 2019, and numerical targets for the final year on May 17).
The company had achieved the targets of its previous plan, COMSYS VISION 2020, a year ahead of plan*, driven by the success of its efforts implementing structural reforms, expanding private sector projects, and increasing top-line gains through M&A. Accordingly, aiming for the next stage of growth, it formulated COMSYS VISION NEXT STAGE 2023, which covers the period through FY03/24.
* For the medium to long term, Comsys aims to improve the profitability of carrier-related business and expand sales of non-carrier-related business. Under COMSYS VISION 2020, it had aimed to reach JPY400bn in sales and JPY30bn in operating profit sometime during the next decade. In FY03/19, the company posted sales of JPY481.8bn and operating profit of JPY35.3bn, achieving the targets of COMSYS VISION 2020 two years ahead of plan. As a result, at its FY03/19 results presentation, management unveiled the COMSYS VISION NEXT STAGE 2023, a new medium-term plan to guide the company in its next stage of growth and development through FY03/24.
Targets for the plan’s final year (FY03/24)
▷ Sales: JPY600.0bn or more ▷ Operating profit: JPY50.0bn or more (OPM of 8% or higher) ▷ Shareholder returns: Continue to a target total return ratio of 70%
At NTT Engineering and NCC Engineering, the company looks for synergies arising from the integration of the recently acquired companies to lead to higher earnings by increasing productivity and efficiency. In this area, the company is also looking to push ahead with structural reforms aimed at increasing efficiency and IT platform sharing. At IT Solutions and Social Systems, the company looks to grow sales by expanding business in existing fields, moving into new areas, and additional mergers and acquisitions The IT Solutions and Social Systems businesses have been designated as growth businesses, with the company looking to increase combined sales from these two areas up to at least 50% of total sales.
IT Solutions: Comsys looks to increase sales by at least 30% over its FY03/20 target of JPY82.5bn
Social Systems: Comsys aims to increase sales by at least 20% over its FY03/20 target of JPY166.5bn
COMSYS VISION NEXT STAGE 2023’s main policies
▷ Promote internal company system ▷ Promote work-style innovations ▷ Move forward with the M&A strategy ▷ Promote personnel exchange among group companies
5G opens up additional business opportunities With companies in Japan starting to gear up for the long-awaited 5G services in 2019 and beyond, there will be a number of different ways for Comsys to meet the related needs of client companies, including network upgrades, base station upgrades/additions, edge data center construction, proposals for public testing, verification, and usage scenarios, construction, inspection, and maintenance/repair. By combining the strengths of its various business (NTT Engineering, NCC Engineering, IT Solutions, and Social Systems), the company looks to capture the growing number of business opportunities offered by the advent of 5G in the years ahead.
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Not only will the Comsys group be able to build 5G networks for telecommunications companies, it will also be able to serve as a one-stop solutions provider for 5G service providers (ranging from businesses to local governments). For example, the group will be able to leverage its technology and expertise in handling the needs of telecommunications companies and the relationships built with local government through its IT Solutions and Social Systems businesses as it goes after new construction orders.
5G coming to Japan There are three major distinguishing characteristics of 5G*: enhanced mobile broadband, ultra-reliable and low latency communications, and massive machine-type communications. This makes 5G an essential, core technology underlying the Internet of Things (IoT), which will allow all devices to connect to the internet.
The allocation of 5G frequency bands** by the Ministry of Internal Affairs and Communications in April 2019 marked the long- awaited coming of 5G to Japan. Of the four mobile service providers to whom frequency bands were allocated, NTT Docomo plans to start 5G service in Spring 2020, KDDI(au)/Okinawa Cellular in March 2020, Softbank in or around March 2020, and Rakuten Mobile in or around June 2020. Before the start of commercial service in 2020, NTT Docomo, KDDI/Okinawa Cellular, Softbank, and Rakuten Mobile will begin 5G service in selected areas during 2019 or before the end of FY03/20.
*Under mobile telecommunication technology standards, 1G was analogue, 2G was digital (GSM overseas and PDC in Japan), 3G was the International Mobile Telecommunication-2000 or IMT-2000, using W-CDMA (UMTA overseas), CDMA2000 X1. 4G uses IMT-Advanced (LTE, etc.), and now we are up to 5G.
The 5G system combines high and low frequencies to realize ultra-high speed communication (over 10Gbps)—the low frequency bands providing the connectivity and the mobility; the high frequency bands providing efficient, high-speed transmission over a wide spectrum (for further details, see discussion under "Heterogeneous Networks" below). By using high frequency bands not used by existing mobile networks (for example, above 10GHz), 5G networks will be able to provide reliable connections at heretofore unattainable transmission speeds of 10Gps for tens of thousands of devices in concentrated areas.
**The recent spectrum allocation broke up the frequency bands into six bands at 2.7GHz/4.5GHz (five at 3.7GHz and one at 4.5GHz, with each band 100MHz wide) and four bands at 28MHz (with each band 400Mhz wide). The 5G frequency band allocations were follows: NTT Docomo: 3,600MHz-3,700MHz (100MHz), 4,500MHz-4,600MHz (100MHz) and 27.4GHz-27.8GHz (400MHz) KDDI/Okinawa Cellular: 3,700MHz-3,800MHz (100MHz), 4,000MHz-4,100MHz (100MHz) and 27.8GHz-28.2GHz (400MHz) Note that the 3,600MHz-3,700MHz (100MHz) and 27.8GHz-28.2GHz (400MHz) are likely to be the standard bands used for 5G communications and referred to as “eco bands” in Japan. Softbank: 3,900MHz-4,000MHz (100MHz) and 29.1GHz-29.5GHz (400MHz) Mobile: 3,800MHz-3,900MHz (100MHz) and 27.0GHz-27.4GHz (400MHz)
Changes that will be brought about by 5G The key technologies for 5G systems are ultra-high speed transmission exceeding 10Gps (100 times more than the high-speed, high- capacity transmission of 4G); over-the-air latency time of one millisecond or less (or less than one-tenth the latency time of highly reliable 4G-LTE); and the ability to handle connection for 100,000 devices per square kilometer (100 times more than the high- speed, high-capacity transmission of 4G). Technologies used in 5G networks include Massive MIMO (which make use of several dozen antennas); beamforming (which is used to direct radio waves to a target); millimeter-wave frequencies; waveforms and adjustments that allow frequency sharing; and core networks with software defined networks (SDN) that create the wireless network that allows such low latency times to be achieved.
Heterogeneous networks for creating Non-Standalone (NSA) mode of 5G These technologies provide connectivity for 5G networks using some types of existing 4G technology (LTE, LTE-Advanced) and frequency bands already in use by 4G networks (using heterogeneous networks to operate in non-standalone mode*)
Heterogeneous networks are designed to provide flexible services depending on the use case and, as such, are able to handle different wireless technologies and operate on frequency bands that are already used by 4G networks (including 700MHz, 800MHz, 900MHz, 1.5GHz, 1.7GHz, 2.1GHz, 3.4GHz, 3.5GHz, and others) as well as LTE-Advanced and WiFi networks. Depending on the device, they are able to deploy the optimal base station from the low-power base stations in the area covered by small cells (micro-cells covering several hundred meters or pico-cells covering the inside of buildings) in the area covered by a high-power base station (macro-cells covering several kilometers).
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Control/User plane separation Inside of micro-cells, the control plane (or C-plane) handles the control signals for call processing for frequency bands that are already being used; the user place (U-plane) handles large amounts of data using high frequency milli-waves that can easily maintain a broadband within a small cell and thus allow users to manipulate large amount of data. By separating the control plane and the user plane, networks are able to provide mobility as well as consistent quality.
Network slicing Network slicing technology (which allows a network operator to provide dedicated virtual networks with functionality specific to the service or customer over a common network infrastructure) gives network operators the flexibility to be able to roll out core networks, wireless access networks, and other types of networks to support the various types of services envisaged in 5G.
Mobile edge computing Mobile edge computing refers to running services that used to be based in the cloud on servers that are closer to the user; with mobile edge computing, 5G networks further reduce the end-to-end latency.
Making use of the unique features of mobile edge computing technology, a wide variety of services can be expected to hit the market, such as the transmission of high-resolution images and VR/AR video with file sizes of only 4-8K, self-driving automobiles, telemedicine (including remote surgery with tactile interfaces), remote control of construction equipment, the Industrial Internet of Things (IIoT), and remote operation of vending machines and surveillance cameras equipment using communication devices.
Designated 5G base station installation plans According to the 5G-related business plans of NTT Docomo, KDDI, Softbank, and Rakuten Mobile that accompanied the 5G spectrum applications they submitted to the Ministry of Internal Affairs and Communication, the four mobile network operators plan to invest a combined total of roughly JPY1.66tn in designated 5G base stations and related equipment by the end of FY03/25 (see tables below). Call quality promises to be even more important than call rates when it comes to competition in 5G services, and the level of telecommunications technology and capital spending will ultimately be what determines that quality. Judging from the expected progress rate for the four companies’ 5G infrastructure building plans, construction of 5G networks will be getting up to full speed by 2021.
Comsys and other telecommunication engineering companies will naturally take up a portion of the capital spending budget that goes to construction. Unlike years past, however, there will be no break in capital spending by carriers (due to the discontinuation of old technology while transitioning to new technology), as capital spending on 5G networks will follow the four carriers’ investments in 4G networks without interruption.
NTT Docomo, KDDI, Softbank, and Rakuten Mobile: activation plans for designated 5G base stations KDDI / NTT Docomo Softbank Rakuten Mobile Okinawa Cellular Telephone Requested frequency bandwidth (requested frames) (1) 3.7GHz and 4.5GHz bands [100MHz × 6 frames] 200MHz (2 frames) 200MHz (2 frames) 200MHz (2 frames) 200MHz (1 frame) (2) 28GHz band [400MHz × 4 frames] 400MHz (1 frame) 400MHz (1 frame) 400MHz (1 frame) 400MHz (1 frame) Service launch Spring 2020 March 2020 Around March 2020 Around June 2020 Investments on specific base stations * Approx. JPY795.0bn Approx. JPY466.7bn Approx. JPY206.1bn Approx. JPY194.6bn 5G base coverage rate ** 97.0% (nationwide) 93.2% (nationwide) 64.0% (nationwide) 56.1% (nationwide) Number of specific base stations (excluding indoor) (1) 3.7GHz and 4.5GHz bands 8,001 30,107 7,355 15,787 (2) 28GHz band 5,001 12,756 3,855 7,948 No. of MVNO [no. of MVNO contracts] 24 companies [8.5mn] 7 companies [1.19mn] 5 companies [0.2mn] 41 companies [0.706mn] Source: Shared Research, based on data from Ministry of Internal Affairs and Communications Note: Capital spending plans, 5G infrastructure activation rates, designated base stations, and number of MVNOs/MVNO subscribers reflect individual company targets by the end of FY03/25 * Capital spending related to base station construction, switching equipment installation, and transmission equipment installation ** Ratio of number of meshes containing designated 5G base station versus the number of regional (secondary) meshes nationwide (4,464) for individual companies
*Under Japan’s Radio Act, a designated base station is defined as a base station that uses certain designated frequencies. Designated base stations can be located anywhere in Japan, provided authorization is received from the Ministry of Internal Affairs and Communications. Base stations are obligated to use the technology needed to improve the reception efficiency of radio waves and facilitate the efficient operation of wireless equipment.
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Reduction in cell size and its impact on related construction Radio waves can be propagated in different ways depending on their frequency (wave length). Low frequency signals (long waves) are capable of going around obstacles such as buildings and are therefore able to travel long distances; low frequency signals are also relatively unaffected by weather conditions, such as rain. In contrast, the high frequency signals (short waves) that are used in 5G networks travel largely in straight lines and, because they are deflected by obstacles such as buildings, they can only travel short distances; they are also easily affected by weather conditions such as rain or fog. On the plus side, high frequency bands have very wide bandwidths and are therefore capable of transmitting large amounts of data.
As previously explained under heterogeneous networks, within the areas covered by 5G network’s high-power base stations (a macro-cell base station covering several kilometers), there are low-power base stations that cover small cells (including micro- cells that cover several hundred meters and pico-cells that cover the inside of buildings), and the choice of which base station to use to establish a connection depends on conditions of the devices in that area. Inside of a mesh (which is 10 kilometers in every direction), carriers offering 5G services are able to put up advanced designated base stations (multiple base stations, or slave stations, that have high-capacity fiber optic cable connected to the core network to provide ultra-high speed lines) along with multiple slave stations and smaller base stations that together can provide coverage of the entire mesh.
Utilizing the radio wave properties discussed above, a single base station in a macro-cell in a 4G (LTE, LTE-Advanced) network covers a radius of 2-3 kilometers; in contrast, the coverage area of small cells (the cells used to handle high-volume data send by users) in 5G networks is 100 meters or less. This means 5G networks will need to build many more base stations than 4G networks. Because Comsys and other telecommunication construction companies will likely need to complete more construction projects in a given period of time, construction efficiency will be a major challenge. In this relation, the company noted that installation sites will vary greatly, ranging from the outsides of building, to utility poles and street lamps, to traffic lights.
Locations where small base stations are expected to be installed include the rooftops and outside surfaces of medium-rise buildings, in the windows of low-rise buildings, billboards, telephone poles and street lamps, and traffic lights*. Because there is not much space left in cities to put up steel towers, installing base stations on building rooftops is the norm; indeed, there are already many in place. (*According to an article appearing in the Nikkei in June 3, 2019, local governments have agreed to free up roughly 200,000 traffic signals for use by the four domestic mobile network operators as base stations. A number of cities are expected to begin field-testing in FY03/21 ahead of a nationwide rollout planned for FY03/24.)
5G spectrum allocation and progress towards covering population In contrast to the many countries where 5G spectrums have been auctioned off, in Japan, the Ministry of Internal Affairs and Communications has allocated 5G spectrum based on its examination of individual network operators and their 5G plans. During this process, one of the things the carriers had to disclose was their building plans for designated base stations (base stations that handle frequencies designated under Japan’s Radio Act); for example, it was necessary for 4G service providers, whose networks operate at 700MHz, to provide service coverage of an area that contains 80% or more of Japan’s population before March 31, 2019. As of the end of March 2019, the 3.5GHz network construction plans show NTT Docomo’s network providing coverage for an estimated 55.5% of the population (versus 51.3% at the end of June 2018), KDDI/Okinawa Cellular’s network providing coverage for 51.4% (versus 30.3% at the end of June 2018), and Softbank’s 3.5GHz network providing coverage for 50.5% (versus 34.6% at the end of June 2018). Under the terms of the 4G spectrum allocation set in April 2018, NTT Docomo and Softbank, which were allocated 3.4GHz spectrum bands, each have to build 4G networks providing coverage for at least 50% of the population within five years while KDDI and Rakuten Mobile, which were allocated 1.7GHz spectrum bands, each have to build 4G networks providing coverage for at least 80% of the population within eight years. To meet these service mandates, companies must put network construction plans in place and make capital investments accordingly.
Generating synergies from the integration of recently acquired companies For FY03/24, the company has set a consolidated sales target of at least JPY600.0bn and an operating profit target of at least JPY50.0bn. To meet the operating profit target of JPY50.0bn or more by FY03/24, the company must generate at least JPY12.0bn in additional operating profit over its forecast of JPY38.0bn in FY03/21. Of the JPY12.0bn in additional operating profit, half is expected to come from the increase in sales resulting from optimizing the use of management resources (to be detailed later)
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and half from efficiency gains stemming from major structural reforms and a new IT platform, which together are expected to increase the operating profit margin* by at least 1.0pp over the 7.0% margin expected in FY03/20 (i.e., 1% of FY03/24 sales target of JPY600bn yielding JPY6bn).
After logging a consolidated operating profit margin of 7.3% in FY03/19, the company sees its operating profit margin coming down to 7.0% in FY03/20 as the lower margins of its three recent acquisitions—NDS, SYSKEN, and Hokuriku Denwa Kouji—temporarily depress the operating profit margin for the group as a whole. This is expected to be fully rectified by FY03/24, when the company is looking for a consolidated operating profit margin of 8.0% or better thanks to the increase in sales resulting from optimizing the use of management resources and cost-savings and efficiency gains stemming from major structural reforms.
Major structural reforms Specific initiatives under the major structural reform program include the following.
▷ Eliminating redundant operations in the access, network, and mobile businesses of group subsidiaries operating in the same region ▷ Consolidating back-office functions ▷ Reorganizing and consolidating subsidiaries ▷ Eliminating the use of multiple subcontractors ▷ Increasing construction efficiency with more cross-training of technicians ▷ Undertaking joint IT investments across the group and promoting joint use of IT tools
By increasing efficiency through major structural reforms, the company will be able to shift some of the people involved in construction work for telecommunications companies to other businesses that are major growth drivers, such as its IT Solutions and Social Systems businesses.
In order to efficiently handle the large number of small-scale construction projects that building 5G networks will entail, Comsys is looking to take steps towards integrating the mobile businesses of its individual subsidiaries so as to be able to optimize the resource allocation across all group companies and businesses.
IT platform construction Comsys plans to take the following steps with respect to the construction of a new group IT platform:
▷ Within three years, go from its current IT system, under which each group company has its own IT system, to a single, best- practices IT system that is shared by all group companies. By virtue of that, raise productivity; enhance IT investment returns; and reallocate resources nationwide.
Core systems: Increase efficiency in the reporting process by using common document management tools, and cut costs by
handling routine tasks with robotic process automation (a technology that employs using software robots to automate
administrative task performed by white-collar workers).
. For example, in the area of personnel management, Comsys is planning to build a comprehensive personnel data
base and move to a next-generation enterprise resources planning (ERP) system.
Operating systems: Further increase the efficiency of construction project management.
. For example, in addition to improving operational efficiency by using AI to handle photographic inspections, the
company is also considering putting wearable devices to use at construction sites.
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Growth drivers: IT Solutions and Social Systems
IT Solutions segment Company targeting average annual sales growth of 7–8% Under its new medium-term vision (COMSYS VISION NEXT STAGE 2023), the company looks to increase sales at the IT Solutions segment by at least 30% over its FY03/20 forecast of JPY82.5bn. This is the highest projected growth rate of the company’s four business segments, representing management’s belief that sales in this area can grow an average of some 7–8% per annum.
▷ The company’s outlook for growth at individual business units with the IT Solutions segment are as follows. Software development business (roughly 30% of segment sales of JPY75.0bn in FY03/19): Sales growth of 12% YoY in FY03/20; its FY03/24 sales target represents a 39% increase over its forecast for FY03/20 Server/storage business (roughly 30% of segment sales in FY03/19): Sales growth of 23% YoY in FY03/20; its FY03/24 sales target represents a 28% increase over its forecast for FY03/20. Network/infrastructure business (roughly 30% of segment sales in FY03/19): Sales growth of 2% YoY in FY03/20; its FY03/24 sales target represents a 40% increase over its forecast for FY03/20. Maintenance (less than 10% of sales in FY03/19): Sales growth of 19% YoY in FY03/20; its FY03/24 sales target represents a
78% increase over its forecast for FY03/20. ▷ In addition to putting more efforts into winning new customers, the company also plans to focus on moving from existing business areas into new business areas.
With regard to new customers, the company is looking to strengthen relationships with long-standing partner companies,
including overseas-affiliated hardware/software vendors and system integrators, and also increase joint projects centered on
cross-layer projects going from network/infrastructure to AI, cloud systems, and the Internet of Things (IoT). By using an
alliance model* across group companies, Comsys aims to develop new customers while at the same time expanding sales
through alliances.
In addition to expanding its recurring revenue businesses in systems maintenance and contract operations, Comsys is also
looking at developing new solutions services, primarily related to cloud services, data centers, IoT, and cybersecurity. ▷ By using an internal company system (under which all group companies within a particular business segment are treated as though they were a single company), Comsys aims to establish a business alliance model and also optimize resource allocation
Each of the companies that has joined the Comsys group not only have relationships with NTT East and NTT West, they also
have close relationships with numerous local governments and local companies. Using an internal company system, other
companies in the Comsys group would be able to tap the local area knowledge and relationships built up by other group
companies by getting reciprocal referrals for solutions services, thereby expanding the value offered by the Comsys group
from the perspective of the client company. ▷ Through careful examination of proposals being put together by the internal companies at the national level, Comsys is looking to muster resources at the group level in order to win orders that it would otherwise have difficulty handing using the resources of only the group companies that are located in that region.
An alliance business model in this case refers to a business model in which a Comsys group company handles the procurement of goods, sales, and the installation work for a client (such as a local company or large corporation) that was procured through the marketing efforts of the alliance partner company. This is similar in many respects to the sales agency model and, even though the orders obtained in this manner might not necessary be very profitable, the order would open the door for the Comsys group to build a relationship with the client and, after the project is finished, can lead to direct orders for support services, maintenance services, and expansions/upgrades.
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Social Systems segment Company targeting average annual sales growth of 4-5% Under its new medium-term vision (COMSYS VISION NEXT STAGE 2023), the company looks to increase sales at the Social Systems segment by at least 20% over its FY03/20 forecast of JPY166.5bn. This is the second highest projected growth rate of the company’s four business segments, reflecting its belief that sales in this area can growth an average of 4–5% per annum.
▷ The company’s outlook for growth at individual business units with the Social Systems segment are as follows:
Telecommunications business unit (roughly 20% of segment sales of JPY136.7bn in FY03/19): Sales growth of 56% YoY in
FY03/20; its FY03/24 sales target represents a 39% increase over its forecast for FY03/20
Renewable energy business unit (roughly 30% of FY03/19 segment sales): Sales growth of 10% YoY in FY03/20; its FY03/24
sales target represents a 4% increase over its forecast for FY03/20.
Infrastructure/other business unit (more than 50% of segment sales in FY03/19): Sales growth of 13% YoY in FY03/20; its
FY03/24 sales target represents a 16% increase over its forecast for FY03/20. ▷ At each business unit within the Social Systems segment, the company looks to expand the geographical area covered and establish a nationwide presence while at the same time moving into new business areas. To accomplish this, the company will consider additional acquisitions. Detailed plans are as follows:
Electricity and telecommunications
▷ Moving into new business areas: In addition to current business areas (telecommunications, road work, heating/air conditioning systems, and security), the company is looking to move into new areas including cleaning/sanitation services, and building and warehouse construction. ▷ Extending existing businesses into new geographic regions: Only the electric power and telecommunications businesses have a nationwide footprint at this time; its road work, heating/air conditioning systems, and security businesses are currently confined to major metropolitan areas but plans call for expanding these businesses nationwide. ▷ Initiatives: In addition to pursuing more new projects in conjunction with general contractors, the company also plans to acquire and expand businesses in peripheral areas
Renewable energy
▷ Moving into new business areas: In addition to current business areas (solar, biomass, and wind power), the company is looking to move into new areas including hydropower, geothermal energy systems, and other types of renewal energy. ▷ Extending existing businesses into new geographic regions: Only the solar power business has a nationwide footprint at this time; its biomass and wind power business are currently confined to major metropolitan areas but plans call for expanding these businesses nationwide. ▷ Initiatives: In addition to improving competitiveness in terms of costs and time to completion, the company is also looking to expand from a simple EPC (engineering, procurement, and construction) business model to a total-business model that includes operations and maintenance services as well. In terms of new businesses, plans call for development new renewable energy businesses.
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Infrastructure/other businesses
▷ Moving into new business areas: In addition to current business areas (civil engineering, water/sewer systems, gas utility services, road paving, and river engineering services), under the company is looking to move into new areas including agricultural water supply and bridge-related engineering. ▷ Extending existing businesses into new geographic regions: Only the civil engineering and telecommunications pipeline construction businesses have a nationwide footprint at this time; its water/sewer systems, gas utility services, road paving, and river engineering businesses are currently confined to major metropolitan areas but plans call for expanding these businesses nationwide. ▷ Initiatives: The company plans do more in the area of public-private partnerships (PPP)/private finance initiatives (PFI) projects* and concessions, wherein a private sector company acquires the right to operate and collect fees for use of publicly owned facilities. (See boxed comment below for details on its experience with trial PFI projects.) Going forward, the company is planning to participate in PFI projects are as part of a nationwide effort to get rid of above-ground utility poles by moving lines underground, and also participate in PFI initiatives related to the operation of water/sewer systems and educational facilities. Through these efforts, the company is looking to bolster its construction track record in strategic areas in order to increase its competitiveness and also use the experience to train employees.
* Public-private partnerships (PPP)/private finance initiatives (PFI) refer to arrangements wherein private capital, management, and technological expertise is used to build, maintain, and operate publicly owned facilities. By utilizing private capital, management, and technological expertise, national and local governments are able to provide the public with services more efficiently and more effectively than they would be able to do on their own. The aim of such initiatives is to lower operating costs while providing high-quality services to the public. In Japan, the Public Private Partnership/Private Finance Initiative Promotion Act (the "PFI Act") was enacted in July 1999. This was followed in March 2000 by the establishment of a set of basic principles that would serve as guidelines for the type of PFI projects that should be undertaken and how they should be implemented; these guiding principles were drafted by the Prime Minister following deliberations of a special committee to promote activities utilizing private sector funds.
Test-cases of PFI projects by the Comsys Group During March 2019 Comsys received two orders that will serve a test-cases of the economic viability of PFI projects, one JPY1.4bn order for work in the city of Yasugi, Shimane Prefecture, and one order worth JPY2.0bn for work in the city of Matsuyama, Aichi Prefecture. The projects are part of a nationwide effort to get rid of above-ground utility poles by moving lines underground. Comsys will be part of a three-company consortium that handle the planning and maintenance, construction, and management, with Comsys handling the construction. The PFI projects were contracted through the Chugoku and Shikoku regional offices of the Ministry of Land, Infrastructure, Transport, and Tourism.
*Government promotion of removal of above-ground utility poles: Following the enactment of the Utility Pole Removal Act in 2016, the Ministry of Land, Infrastructure, Transport, and Tourism put together plans to promote the removal of above-ground utility poles (in favor of underground line conduits) with the goal of removing utility poles over a total of 1,400 kilometers within three years, starting in FY2018. In addition to encouraging public-private partnership arrangements, the government also provided funds to support the effort.
Returns to shareholders
▷ Counting both dividends and share buybacks, the company aims to keep its total shareholder return ratio at 70%.
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Business
Business description
Comsys Holdings Corporation (Comsys) is a major telecommunications construction company, with over fifty years of history. The holding company was established in September 2003 as Comsys Holdings Corporation, the 100% parent of Nippon Comsys Corporation, Sanwa Elec Co., Ltd., and Tosys Corporation. In April 2010 it acquired Tsuken Corporation (see Organizational structure). In October 2018, Comsys acquired NDS Co., Ltd. (TSE1: 1956), SYSKEN Corporation (TSE2: 1933), and Hokuriku Denwa Kouji (Telephone Construction) Co., Ltd. (TSE2: 1989) making them wholly owned consolidated subsidiaries.
Main businesses
In addition to the communications-related businesses of NTT Engineering and NCC Engineering*, main business segments also include IT Solutions and Social Systems and Other.
*NCC stands for New Common Carrier, and refers to the new Type I telecommunications operators to enter the market upon liberalization in 1985. KDDI (TSE1: 9433) and Softbank (TSE1: 9984) are examples of NCCs.
In FY03/20, NTT Engineering accounted for the largest share of the company’s sales, at 44.6% (versus 47.1% in FY03/19), followed by NCC Engineering at 7.8% (versus 8.9%). Despite the declining trend, these two communications-related businesses still accounted for 52.4% (58.3%) of all sales. IT Solutions accounted for 17.5% (versus 15.6%) of sales and Social Systems and Other accounted for 30.0% (versus 28.4%).
Segment details
Segments Details Main clients NTT group (NTT East, NTT West, NT NTT Engineering Telecoms infrastructure engineering Communications, NTT Docomo, etc.)
NCC Engineering Telecoms infrastructure engineering KDDI group, Softbank group, Rakuten Mobile Private companies, government agencies, local IT Solutions Total IT solutions municipalities, other
Construction of electricity and civil engineering Private companies, government agencies, local Social Systems and Other related to public infrastructure municipalities, other
Source: Shared Research based on company data
NTT Engineering (44.6% of sales in FY03/20 versus 47.1% in FY03/19) The segment is the core of Comsys’s business and includes a wide range of telecommunications infrastructure construction services to the Nippon Telegraph and Telephone Corporation group (TSE1: 9432, NTT hereafter): laying telephone lines and building switching facilities, wireless relay base stations and so on. Customers are NTT’s subsidiaries such as NTT East Corporation and NTT West Corporation (NTT East and West), NTT Communications Corporation (NTT Communications), and NTT Docomo Inc. (TSE1: 9437, NTT Docomo). NTT Engineering is Comsys Holdings’ core business, accounting for more than half of consolidated sales.
The Nippon Comsys group is the main company responsible for NTT Engineering work, with the Tosys group carrying out work in the Shin-Etsu region (Nagano, Niigata and Yamanashi prefectures), the Tsuken group in Hokkaido, the NDS group in the Tokai region, and SYSKEN group in Kyushu, and the Hokuriku Denwa Kouji group in the Hokuriku region.
NTT Engineering is divided into access work (including urban civil engineering, conduit work, and connecting customer premises to the optical fiber network); network engineering, which covers the transmission system; and mobile engineering, mainly for NTT Docomo. For NTT East and West, telecommunications infrastructure engineering is divided up on a region-by-
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region basis, with specific companies assigned to handle particular territories; the contractors change from time to time, but not frequently (see Competition).
The buildings (also known as station buildings) that house telecommunications infrastructure for NTT East and West and other telecom operators, contains switching equipment, storage battery facilities, in-house power generating equipment, and wireless equipment. Cables for telephone lines pass through underground cable tunnels to conduits and via manholes and telephone poles to subscriber premises. As shown in the chart below, the work related to external equipment and customer premises equipment is referred to as access work; the work that takes place in the station premises is referred to as network engineering.
NTT’s Telephone Network (Internal, External, Customer Premises
Source: Shared Research based on NTT data
NTT Engineering’s revenue composition ratios for FY03/20 were: 65% access work (versus 63% in FY03/19), 10% network engineering (versus 11%), and 25% mobile engineering (versus 26%) (figures based on number of orders individually received by the eight group companies).
The five companies are Nippon Comsys Corporation, Sanwa Elec Co., Ltd., Tosys Corporation, Tsuken Corporation, and Comsys Joho System Corporation, Co., Ltd., SYSKEN Corporation, and Hokuriku Denwa Kouji Co., Ltd. The above figures are based on the number of orders individually received by these companies.
Access work Access work involves engineering for NTT East and West conducted outside the carrier’s buildings or stations. Specifically, this entails the laying, connecting and comprehensive testing of telecommunications cables and connecting fiber optic cables to customer premises through tunnels, manholes and shared phone line trenches (which carry utilities including electricity, telephone lines, water and gas) under roads.
Optical fiber cable installation
Source: Shared Research based on company data
Access work is either integrated services construction or general planned construction, depending on how sales are accounted for. Integrated services construction comprises work whereby NTT specifies a unit price per telephone pole, or per B FLET’S (FTTH services) installation in a household, for example, so the volume of work multiplied by unit price equals revenue. General
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planned construction involves work where NTT develops an urban plan (large-scale projects such as replacing all the telephone poles in a certain area); these are generally comparatively long-term projects done for a lump sum, which becomes sales for the company.
Replacing the subscriber lines that connect telephone circuits (the access network) from NTT East and West’s premises to the customer premises with optical cable comprised approximately half of the access business for the company in FY03/20. Apart from this, the bulk of work in the sub-segment was classified as general planned construction—mainly existing facility and equipment maintenance and constructions to expand the optical fiber network.
Network engineering Network engineering refers to work done setting up infrastructure facilities within NTT East and West’s premises. Examples of such work include power supply wiring; installation and maintenance of exchange and transmission equipment; design, installation, and maintenance of power and IP network equipment inside NTT East and NTT West facilities.
Sales are dependent on NTT group’s capital investments. As of May 2014, the company was primarily working on projects related to NTT’s transition to an IP-based telephone system from the conventional switchboard system. These projects involve the installation of smaller equipment at NTT East and NTT West offices to reduce power consumption. Such work began in the Tokyo metropolitan area and is now expanding nationwide.
Although NGN*-related work contributed to sales through FY03/13, Shared Research anticipates that in the network engineering business there is unlikely to be any more major NGN-related orders until 2020.
As fixed telephone revenue shrinks, there has been a worldwide trend since the early 2000s to replace the switching equipment used in telephone networks (which is costly and requires installation by qualified personnel, and is complex to maintain) by low- cost routers and other devices using Internet Protocol (IP) technology. Following this trend, the NTT group announced in November 2005 plans to build a Next Generation Network (NGN) as part of the migration of its core network to IP technology. NTT East and West began offering commercial NGN services from March 2008.
*NGN stands for Next Generation Network. By rebuilding a telephone network using IP technology it is possible to create a comprehensive IP network that can provide flexible telephone or videoconferencing, streaming, and various other services while maintaining the security and handiness of the telephone network.
According to NTT, the integration of the NGN and regional IP networks (networks NTT East and West built on a prefecture-by- prefecture basis) was completed in FY03/13. Remaining NGN-related work includes the integration of the NGN and the public switched telephone network (PSTN), which connects each home to telephone poles that carry copper wires. This work is planned to be carried out from 2021 to 2025 (changeover ends January 2025; see Full-year forecast for FY03/20 section for further details).
Work to expand FLET’S equipment
Source: Shared Research based on company material
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Mobile engineering This business provides services to NTT Docomo relating to base station design through construction and testing, consulting services and negotiations to secure the use of necessary land, and post-construction maintenance. For example, the company constructs mobile phone base stations, installs antennas and equipment, and lays cables inside subway stations.
Base station: mobile operators have established base stations (equipment for relaying radio waves) across the nation. Radio waves from a mobile phone are delivered to the nearest base station to the user, and are transmitted to the receiver. The communication signal from the caller is transmitted to the mobile phone terminal on the receiver side by radio waves from the nearest base station.
LTE base station construction FOMA base station maintenance work
Source: Shared Research based on company materials
Revenues for this business are not only affected by NTT Docomo’s capital expenditure size but also the type of spending. In FY03/20, the bulk of Comsys’ mobile engineering revenues were LTE (LTE-Advanced)-related. (See Wireless telecommunications infrastructure).
NCC Engineering (7.8% of sales in FY03/20 versus 8.9% in FY03/19) The segment includes a wide range of activities, such as design, construction, coordination, testing and maintenance, for telecom carriers outside the NTT group. The bulk of the company’s work in this area is done by Sanwa Comsys Engineering group. The main customers (in order of sales levels) are KDDI Corporation, Softbank Corp. (subsidiary of SoftBank Group Corp.), and Rakuten Mobile, Inc. Sales in this segment are heavily influenced by capex trends at telecom carriers.
IT Solutions (17.5% of sales in FY03/20 versus 15.6% in FY03/19) In it the company caters to private-sector companies other than telecom carriers. Main services include solutions business (includes network integration such as setting up LANs and WANs, and system integration such as setting up servers and embedded systems), software development business, and maintenance business.
IT Solutions represented around 10% of revenue for the Nippon Comsys group; 10% for the Sanwa Comsys Engineering group, and around 20% for the Tsuken group in FY03/14. The Comsys Joho Systems group primarily develops software on a contract basis.
According to Comsys, its strength in this area lies in the combination of technical capabilities in installation work—cultivated as a nationwide telecoms network construction specialist—and its ability to integrate software. This segment’s sales are primarily driven by corporate capex. In FY03/20, solutions business accounted for roughly 70% of the segment’s sales. In particular, construction projects undertaken in alliance with partner companies are increasing.
28/58 Comsys Holdings / 1721 RCoverage LAST UPDATE: 2020.08.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Social Systems and Other (30.0% of sales in FY03/20 versus 28.4% in FY03/19) The segment’s main operations are civil engineering, water supply and sewerage works, solar power photovoltaic (PV) generating system construction, electrical and telecommunication systems-related construction for expressways and airports. Although the Nippon Comsys group is the main actor in the segment, other groups are also involved. The segment’s sales are driven by the volume of public works investment and capex from the private sector. Over the medium- to long-term, the company is looking to grow sales from work on electric power facilities and other infrastructure projects. Shared Research also sees additional contributions to sales coming from maintenance work on the aging Tokyo Metropolitan Expressway and the government’s initiative to eliminate utility poles and move electric power lines underground.
Solar Power (Photovoltaic) Generating System Construction The Act on Special Measures Concerning Procurement of Renewable Electric Energy by Operators of Electric Utilities (often abbreviated as “FIT Act”) was passed in Japan in April 2012, and from July 2012 electric power companies were obliged to purchase all of the output of industrial solar-power generators with capacity of 10kW or greater. Thanks to this new feed-in tariff system, a large number of sellers entered the solar-generated electricity business. Comsys also fully entered the solar power generation business in FY03/12 with private-sector businesses as its main customers. As of FY03/19, the company was involved in the solar power generation business in two ways. First, it operates a large-scale solar power generating business as an independent power producer (IPP; in Japan solar parks are often referred to as “mega-solar”). Here Comsys leases land, invests in plant and equipment, and sells electricity itself. Second, Comsys started providing engineering services (as engineering, procurement, and construction (EPC) business) to third parties involved in solar power generation during FY03/13.
Comsys had expected solar power projects to peak in FY03/18 and orders to wind down in FY03/19 but, contrary to expectations, it continued to receive orders for solar power projects, including large orders (that take roughly two years to complete). Solar power project demand peaked in FY03/20.
Source: Shared Research based on company data
Organizational structure
Comsys Holdings adopts a holding company structure and operates eight business groups, each given the autonomy to formulate and execute their own business strategy.
The eight business groups operating in different segments are led by the Nippon Comsys group, Sanwa Comsys Engineering group, Tosys group, Tsuken group, NDS group, SYSKEN group, Hokuriku Denwa Kouji group, and the Comsys Joho System group. Comsys Shared Service Corporation was established in October 2003 as a strategic component aimed at increasing efficiency and is responsible for the group’s personnel, finance and general affairs.
Nippon Comsys group (FY03/20: 50.3% of sales and 53.5% of operating profit) (These figures are based on the total for the groups as reported in the company’s securities report. Composition ratios below were also obtained in the same way.)
Nippon Comsys group is involved in telecommunications infrastructure engineering, mainly for the NTT group, and is led by Nippon Comsys Corp., which has 18 consolidated subsidiaries in the Kansai, Kyushu, Shikoku and Tohoku regions.
29/58 Comsys Holdings / 1721 RCoverage LAST UPDATE: 2020.08.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Sanwa Comsys Engineering group (FY03/20: 10.3% of sales and 14.8% of operating profit) Sanwa Comsys is mainly involved in telecommunications infrastructure engineering for the NCCs. Spearheaded by Sanwa Comsys Engineering Corp., (known as Sanwa Elec. until April 2005), with four consolidated subsidiaries.
Tosys group (FY03/20: 5.2% of sales and 3.9% of operating profit) Tosys is involved in telecommunications infrastructure engineering in the Shin-Etsu region (Nagano, Niigata and Yamanashi prefectures), with headquarters in Nagano Prefecture, and led by Tosys Corp. (East Japan System Construction until October 2012). The group has five consolidated subsidiaries, including an automobile maintenance company.
Tsuken group (FY03/20: 9.1% of sales and 9.2% of operating profit) Tsuken is mainly involved in telecommunications infrastructure engineering in the Hokkaido region, with headquarters in Sapporo and led by Tsuken Corporation. The group has nine consolidated subsidiaries, including systems and leasing businesses. Tsuken became a subsidiary of Comsys Holdings in October 2010 through an exchange of shares.
NDS group (FY03/20: 14.9% of sales and 10.8% of operating profit) Engaged in telecommunications infrastructure engineering in the Tokai region (Achi, Gifu, Mie, and Shizuoka Prefecture). With its head office in Nagoya (Aichi Prefecture), group leader NDS Co., Ltd. has a total of 21 subsidiaries and four affiliates. The NDS group was acquired by Comsys in October 2018 via a share exchange and are now subsidiaries.
SYSKEN group (FY03/20: 5.7% of sales and 3.3% of operating profit) Engaged in telecommunications infrastructure engineering in the Kyushu area. With its head office in Nagoya (Kumamoto Prefecture), group leader SYSKEN Corporation has eight subsidiaries and four affiliates. The SYSKEN group was acquired by Comsys in October 2018 via a share exchange and are now subsidiaries.
Hokuriku Denwa Kouji group (FY03/20: 2.4% of sales and 0.9% of operating profit) Engaged in telecommunications infrastructure engineering in the Hokuriku area (Ishikawa, Fukuyama, and Fukui Prefecture). With its head office in Kanazawa (Ishikawa Prefecture), group leader Hokuriku Denwa Kouji has five subsidiaries and two affiliates. The SYSKEN group was acquired by Comsys in October 2018 via a share exchange and are now subsidiaries.
Comsys Joho System group (FY03/20: 2.1% of sales and 3.5% of operating profit) Comsys Joho System offers services spanning all aspects of information systems, from consulting, planning and design to development, construction, testing, maintenance and operation. The group has two consolidated subsidiaries: Comsys Joho System Corp., which is involved in systems development; and Comsys Techno Co., Ltd., which offers IT services and temporary staffing solutions.
30/58 Comsys Holdings / 1721 RCoverage LAST UPDATE: 2020.08.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Sales and operating profits by group FY03/17 FY03/18 FY03/19 FY03/20 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Act. Act. Act. Act. % of total % of total % of total % of total Nippon Comsys Group Orders 245,501 262,661 270,033 306,317 64.3% 66.5% 65.6% 53.6% Sales 213,754 245,302 272,780 281,132 63.7% 64.2% 64.8% 56.8% Operating profit 18,314 20,621 21,384 20,549 77.1% 73.9% 68.8% 60.7% OPM 8.6%8.4%7.8%7.3%---- Sanwa Comsys Engineering Group Orders 44,502 58,150 58,081 57,604 13.2% 12.1% 14.5% 11.5% Sales 42,209 53,084 55,605 57,855 13.1% 12.7% 14.0% 11.6% Operating profit 1,833 4,201 4,929 5,688 5.0% 7.4% 14.0% 14.0% OPM 4.3%7.9%8.9%9.8%---- Tosys Group Orders 22,841 22,300 23,386 29,372 7.6% 6.2% 5.6% 4.6% Sales 22,527 23,195 23,839 28,895 7.4% 6.8% 6.1% 5.0% Operating profit 1,231 1,390 1,425 1,501 4.6% 5.0% 4.6% 4.0% OPM 5.5%6.0%6.0%5.2%---- Tsuken Group Orders 47,960 48,263 49,269 52,072 12.7% 13.0% 12.0% 9.8% Sales 46,116 47,873 50,133 50,799 13.7% 13.8% 12.7% 10.4% Operating profit 2,632 2,801 3,168 3,548 10.5% 10.6% 9.4% 9.0% OPM 5.7%5.9%6.3%7.0%---- NDS Group Orders - - 58,677 83,636 - - - 11.6% Sales - - 43,536 83,522 - - - 9.1% Operating profit - - 2,028 4,141 - - - 5.8% OPM --4.7%5.0%---- SYSKEN Group Orders - - 25,444 34,334 - - - 5.0% Sales - - 16,723 31,832 - - - 3.5% Operating profit - - 604 1,283 - - - 1.7% OPM --3.6%4.0%---- Hokuriku Denwa Kouji Group Orders - - 8,493 14,277 - - - 1.7% Sales - - 7,076 13,633 - - - 1.5% Operating profit - - 424 349 - - - 1.2% OPM --6.0%2.6%---- Comsys Joho System group Orders 8,351 9,258 10,581 11,438 2.3% 2.3% 2.3% 2.1% Sales 8,515 8,976 10,497 11,545 2.3% 2.6% 2.4% 2.2% Operating profit 760 940 1,272 1,338 2.8% 3.1% 3.1% 3.6% OPM 8.9%10.5%12.1%11.6%---- Source: Shared Research based on company data Note: Ratios are based on simple totals for the five groups
Group company details Main business by group company Social Systems Group name, segment name NTT Engineering NCC Engineering IT Solutions and Other
Nippon Comsys group 〇 〇 〇
Sanwa Comsys Engineering group 〇 〇 〇
Tosys group 〇 〇 〇
Tsuken group 〇 〇 〇
NDS group 〇 〇 〇 〇
SYSKEN group 〇 〇 〇 〇
Hokuriku Denwa Kouji group 〇 〇 〇 〇
Comsys Joho System group 〇 〇
Comsys Shared Services Corp. 〇 Source: Shared Research based on company data Note: Comsys Shared Service Corp. conducts common operations for the group (general affairs, human resources, finances, salaries, insurance, etc.) and dispatching business.
31/58 Comsys Holdings / 1721 RCoverage LAST UPDATE: 2020.08.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
(For reference) Earnings improvement after move to holding company structure
With the three-way merger between Nippon Comsys, Sanwa Electric (now Sanwa-Comsys Engineering) and East Japan Systems Construction Co. (now TOSYS), a pure holding company was established in the form of Comsys Holdings, which then quickly moved forward with a slate of initiatives aimed at bringing about synergies as it maintained the management organization and authority of each core group company to speed up integration. The company then worked to achieve benefits from this seemingly loose integration. The initiatives are described below. While the gradual pace of the reforms despite their obviousness may surprise non-Japanese readers, the company was dealing with an old, complex, and entrenched system, built to deal with a similarly complex organization and demands of the early-days NTT. NTT was a government-owned telecommunication monopoly. Everything, from labor contracts, to supplier relationships, to subcontractor chains of command, needed to be untangled without compromising operations. The company thinks that the pace of change was fast and results dramatic given the existing culture and traditional ways of doing the “NTT business”.
Initial merger benefits (FY03/04-FY03/07) From FY03/04 through FY03/07, the company implemented organizational changes, integrated common activities, reduced outsourcing costs, and centralized procurement. In January 2005, Nippon Comsys took over the NTT Engineering work being done by Sanwa Comsys; and in April of that year, the NCC Engineering segment of Nippon Comsys was integrated with that of Sanwa Comsys. Nippon Comsys became responsible for NTT Engineering work; Sanwa Comsys was responsible for NCC Engineering work; and Tosys became responsible for the Shin-Etsu area. In this way the business was restructured so that each of the core operating companies had a particular area of responsibility. In addition to integrating internal company systems, Comsys Shared Service Corporation was set up to handle common services within the group.
According to the company, over the four years from FY03/04 through FY03/07, cost savings from integration totaled 5.4 billion yen: personnel costs 700 million yen; business expenses 1.4 billion yen; outsourcing 700 million yen; and materials 2.6 billion yen. Overall savings were 2.3 billion yen in FY03/04-FY03/05, 2.4 billion yen in FY03/06, and 800 million yen in FY03/07.
Group Innovation 2010 (FY03/10-FY03/11) The second wave of reforms included further integration of common activities, group-wide bulk purchasing of materials, review of regional businesses’ operations management (some regional subsidiaries were merged into parent entities or otherwise restructured), and the introduction of a new management system comstar for cost reduction efforts.
Comsys also took a second look at multilayered relationships with contractors. The traditional way of doing business for Comsys and its peers was very similar to that of the Japanese construction industry. The prime contractor would get a project and then immediately subcontract the entire work to a primary subcontractor who would then place orders with secondary subcontractors (who would often give individual pieces of work to their subcontractors). The roles of the prime contractor and primary subcontractor were unclear, with duplicated activities and inefficiency.
In April 2010, the company changed the subcontracting system in its Tokyo metropolitan operations (Nippon Comsys group). The core operating subsidiary (Nippon Comsys) placed orders with an outside subcontractor directly, creating a simpler two- tiered structure. By FY03/14 all other group companies also switched to this structure.
The cost reductions from these initiatives over the two years from FY03/10 through FY03/11 totaled 5.0 billion yen—mainly through one-off amortization of software, sales of idle assets, and headcount reductions.
Comsys Way (FY03/12-FY03/13) The next step was Comsys Way, a plan to extend and enhance structural reform. The Comsys Way provided additional cost savings in FY03/12 and FY03/13 and was a starting point for new business developments.
Comsys reduced its employees and assets in FY03/11. These measures helped the company raise its operating profit by JPY2.1bn in FY03/12. During that year, Comsys also improved productivity and efficiency by introducing an IT tool, an effort that raised
32/58 Comsys Holdings / 1721 RCoverage LAST UPDATE: 2020.08.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
operating profit by another JPY500mn. At the same time, a reduction in SG&A expenses led to an additional operating profit increase of JPY200mn. In FY03/13, structural reform and other efforts to improve productively raised the company’s operating profit by JPY6.4bn.
The 10 years of the reforms have boosted the company’s operating profit margins from 4.7% in FY03/05 to 8.3% in FY03/14. Over the same period, gross profit margin rose from 12.2% to 13.8% and the SG&A-to-sales ratio fell from 7.3% to 5.5%.
Progress of Structural Reform
Source: Shared Research based on company data
In FY03/14 and thereafter the company is focusing on the implementation of “Comsys Wayα”, a new plan aimed at growing the top line as well as further boosting profitability. (See the outlook section for detail.) In FY03/14, the merger of Tsuken group subsidiaries, as well as other structural reform and productivity efforts, helped raise the company’s operating profit by JPY2.8bn. The company continues to adopt reforms, which contributed JPY1.8bn to profits in FY03/15 and JPY2.3bn to profits in FY03/16.
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Profitability snapshot: Comparison with main competitors
Profitability comparison Comsys HD Kyowa Exeo Mirait HD (JPYmn) FY03/18 FY03/19 FY03/20 FY03/18 FY03/19 FY03/20 FY03/18 FY03/19 FY03/20 Sales 380,024 481,783 560,882 312,669 423,727 524,574 312,967 375,911 441,166 YoY 13.7% 26.8% 16.4% 4.6% 35.5% 23.8% 10.5% 20.1% 17.4% Gross profit 53,433 65,253 73,612 43,354 58,337 68,327 39,761 46,988 52,174 GPM 14.1% 13.5% 13.1% 13.9% 13.8% 13.0% 12.7% 12.5% 11.8% SG&A expenses 23,085 29,985 34,658 17,732 26,620 37,226 23,046 26,289 30,181 SG&A-to-sales ratio 6.1% 6.2% 6.2% 5.7% 6.3% 7.1% 7.4% 7.0% 6.8% Operating profit 30,347 35,267 38,953 25,621 31,716 31,100 16,715 20,699 21,993 OPM 8.0% 7.3% 6.9% 8.2% 7.5% 5.9% 5.3% 5.5% 5.0% Recurring profit 30,706 36,071 40,064 26,448 33,431 30,669 17,838 21,992 23,207 RPM 8.1% 7.5% 7.1% 8.5% 7.9% 5.8% 5.7% 5.9% 5.3%
Net income attributable to parent company shareholders 20,390 28,018 25,994 17,993 40,219 15,603 11,504 25,711 15,220 Net margin 5.4% 5.8% 4.6% 5.8% 9.5% 3.0% 3.7% 6.8% 3.4% Total assets 325,042 439,926 450,043 261,305 416,483 444,905 234,489 331,462 352,134 Shareholders' equity 230,120 298,374 307,555 175,574 263,897 266,453 137,258 196,436 215,423 Equity ratio 70.8% 67.8% 68.3% 67.2% 63.4% 59.9% 58.5% 59.3% 61.2% ROA (RP-based) 10.1% 9.4% 9.0% 10.5% 9.9% 7.1% 7.9% 7.8% 6.8% ROE 9.4% 10.6% 8.6% 10.8% 18.3% 5.9% 8.8% 15.4% 7.4% Source: Shared Research based on company data Net income refers to net income attributable to owners of the parent
Comsys has one of the highest operating profit margins of the three major telecommunications construction companies. Comsys Holdings was formed by the merger of three companies in 2003; Kyowa Exeo Corporation (TSE1: 1951) took over Wako Engineering Corp. and Daiwa Densetsu Corporation in 2004; Mirait Holdings (TSE1: 1417) started in 2010.
Comsys had a better OPM than Kyowa Exeo until FY03/17 due to a higher gross profit margin. The gap began to emerge in FY03/12 as Comsys proved more successful at adopting a two-tier contractor relationship instead of the traditional multi-tier system, and also made its construction work more efficient with the use of information technology. The high gross margin notwithstanding, the SG&A expense ratio of Comsys is a bit on the high side.
Comsys had the highest operating profit margin in the industry until FY03/18, when its 8.0% operating profit margin was surpassed by the 8.2% margin reported by Kyowa Exeo. This was largely due to its acquisition of Kando Co., Ltd., and the operating profit margin of 8.4% excluding the impact of acquiring Kando still shows Comsys coming out on top.
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Strengths and weaknesses
Strengths
◤ Can benefit from the development in advanced telecommunications: The telecommunications industry is in a state of continuous technological change driven by rising data transmission capacity demand. As such, accompanying installation and construction can be expected. The barriers to entry are high, and the industry is oligopolistic. Comsys, which has expanded nationwide as one of the largest industry players, is in an ideal place to benefit from such developments.
◤ Healthy balance sheet and stable cash flow: The company’s business model entails upfront expenditures so it requires a certain amount of working capital, but its equity ratio is high, and it has very little interest-bearing debt. In addition, the company’s NTT Engineering segment provides relatively steady cash flow. Although the environment surrounding this segment is harsh, it is highly unlikely that segment sales will drop, and it should continue to generate cash flow. The company has a stable customer base of telecom providers, which it has built up over many years. As transactions with this customer base are expected to continue, the company has relatively low risk. The company’s clean balance sheet and steady cash flow smooth the way for any new investments or businesses, and enable it to withstand deterioration in the external environment.
◤ Adept at controlling costs: Comsys has shown itself adept in continuous cost reductions. It was ahead of its industry peers in terms of industry consolidation and the first to implement sweeping organizational changes and centralize buying. It identified inefficiencies in systems, processes, and costs, and continued to cut costs. As a result, the company had the highest OPM among the three largest telecommunications construction companies in Japan in FY03/20, at 6.9%. The company was seeking to streamline its construction work with the use of IT systems as of March 2018. Shared Research thinks that the company will continue to make efforts to reduce costs and further improve earnings. Weaknesses
◤ High dependence on telecom capex: The NTT group accounted for over 60% of the company’s sales in FY03/13 and other telecom carriers accounted for the remainder. In FY03/20, sales to the NTT group accounted for 45% of the company’s overall sales. NTT’s overall capital spending is on a long-term downtrend. Further, while the telecom construction market is oligopolistic, it is not monopolistic and therefore firms like Comsys and MIRAIT are price takers and not price makers and have to yield to pricing pressures. The company has a window of opportunity for the next several years, while the mobile carrier capex offsets declines in the fixed-line infrastructure. It needs to identify and grow future earners before that window closes.
◤ Limited top line growth potential in core business and lack of experience in other areas: Comsys is captive to the slowing telecom construction market. The company had the largest market share in FY03/20. Share gains are unlikely due to antitrust issues and business practices where NTT determines what the share will be. The company is keen to expand in new areas such as IT solutions and social infrastructure business. One problem is that it has little experience in building sizeable business outside its traditional core.
◤ Vulnerable to demands for price cuts: According to Comsys, as all the major telecommunications construction companies are certified by NTT, there is little to differentiate them in terms of technology. As Comsys is reliant on certain customers for a large proportion of its sales, the company does not have much pricing power when it comes to negotiating with them. As a result, Comsys is vulnerable to demands for price cuts, in Shared Research’s view. The company concedes that prices for engineering work are on a downward trend under pressure for cost cuts from NTT group companies.
35/58 Comsys Holdings / 1721 RCoverage LAST UPDATE: 2020.08.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Market and value chain
Market overview Telecom markets As telecom technology is rapidly evolving, uses are enjoying benefits such as high speed, broadband, and low unit transmission prices. For these benefits, it is indispensable to update and upgrade communication facilities and software in addition to their daily operation. In the field of fixed communication, migration of the land-line PSTN (Public Switched Telephone Network) to an IP network is process of migration to IP networks and is expected to be completed in January 2025. In the field of mobile communication, LTE-Advanced (4G), which is characterized by carrier aggregation for using multiple frequencies in one bundle and by MIMO (Multiple Input Multiple Output) for using multiple transceiving antennas, is becoming widespread. The four mobile network operators received their spectrum allotments for 5G in April 2019, started pre-service in 2019, and launched full- scale commercial services in March 2020. The 5G mobile communication system, which comes next to LTE-Advanced, is under research and development toward practical use in 2020. The 5G system combines high and low frequencies to realize drastically high-speed communication (over 10Gbps). This technology is directed toward allowing users to comfortably enjoy ultrahigh- definition (4k/8k) streaming videos even in a crowded event site or in urban areas. This technology is also to realize at low cost and with low power consumption large-capacity communication resistant to an explosive increase in traffic that is expected in the IoT age. (For further details on 5G, see discussion under "COMSYS VISION NEXT STAGE 2023 (FY03/20–FY03/24)" in Outlook section.)
* NTT East and NTT West are planning to fully migrate their landline-based Public Switched Telephone Network (PSTN) to an internet protocol-based network by 2025; the changeover is due in large part to the expected life of their current switching equipment, which is only expected to last until about 2025. In conjunction with this, call dialing from landlines is scheduled to be switched over to an IP-based network starting in January 2024, and the entire landline-based network is scheduled to be completely switched over to an IP-based network by January 2025. After fully migrating to the new IP-based network, NTT East and West are thinking that they will be able to continue using existing metal cables and equipment that accommodates those metal cables (current subscriber switching equipment) and will be able to charge the same base rate for phone service as they do for their current landline-based phone service, assuming the operating environment does not change dramatically for the worse. After switching to the IP-based network, NTT East and West are looking to take advantage of the unique properties of new network and set a uniform price of JPY8.5 per three minutes for domestic phone calls between any two points, regardless of the distance. The switch to the IP-based network will not require any installation work inside of homes and will not require any change in household telephone equipment.
Fiber optic services Fiber optics use light signals to transmit data. Their key advantages versus traditional copper wires are higher data-transmission speeds and less signal loss over long distances, making them suitable for video transmission over the Internet. The uptake of fiber-optic services continues to increase, although the rate of growth has slowed in recent years. Demand is falling for fixed line services as users of mobile devices and high-speed mobile data increase.
The main companies providing fixed optical lines are NTT East and West, KDDI, K-Opticom Corp. (subsidiary of Kansai Electric Power Co. [9503]), and UCOM. However, NTT East and West are the biggest players, accounting for a combined market share of roughly 70%
NTT East and West had promoted the sales of optical fiber access line services, particularly its own brands. Then in 2014 it announced the start of optical fiber access services offered at wholesale with the aim of promoting the spread of optical fiber services. In light of this since spring 2015, various companies have been participating in new services that combine their own services with the wholesale optic fiber access service of NTT East and West (so-called “Hikari Collaboration Model”). For example, even mobile carriers such as NTT Docomo and Softbank began providing services packaging their mobile lines with this wholesale optic fiber access service (Hikari Collaboration) starting in spring 2015.
NTT East and West had a total of 20,053,000 optic fiber access service subscribers in FY03/17, 20,533,000 in FY03/19, 21,079,000 in FY03/19, and 21,678,000 in FY03/20; of these, Hikari Collaboration made up 43.6% (8,744,000) in FY03/17, and that share steadily rose to 54.1% (11,117,000) in FY03/18, 60.2% (12,690,000) in FY03/19, and further to 64.1% in FY03/20 (13,888,000).
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NTT subscribers FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 ('000 contracts) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Total 46,489 45,330 44,085 42,342 41,050 40,002 39,202 38,850 38,071 37,441 36,802 YoY -2.1% -2.5% -2.7% -4.0% -3.1% -2.6% -2.0% -0.9% -2.0% -1.7% -1.7% Telephone subscribers 33,238 30,271 27,521 25,042 23,000 21,286 19,943 18,797 17,538 16,363 15,144 YoY -8.6% -8.9% -9.1% -9.0% -8.2% -7.5% -6.3% -5.7% -6.7% -6.7% -7.4% Fiber-optic subscribers 13,251 15,059 16,564 17,300 18,050 18,716 19,259 20,053 20,533 21,078 21,658 YoY 19.0% 13.6% 10.0% 4.4% 4.3% 3.7% 2.9% 4.1% 2.4% 2.7% 2.8% Source: Shared Research based on various data NTT East, NTT West: capex FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYbn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Investment 845.9 779.6 784.1 754.9 690.7 626.6 583.4 547.9 549.6 541.0 522.5 YoY -4.4% -7.8% 0.6% -3.7% -8.5% -9.3% -6.9% -6.1% 0.3% -1.6% -3.4% Fixed line services 523.9 484.6 480.1 463.9 427.7 402.6 406.4 391.9 395.6 380.0 372.5 YoY -8.9% -7.5% -0.9% -3.4% -7.8% -5.9% 0.9% -3.6% 0.9% -3.9% -2.0% Fiber-optic services 322.0 295.0 304.0 291.0 263.0 224.0 177.0 156.0 154.0 161.0 150.0 YoY 3.9% -8.4% 3.1% -4.3% -9.6% -14.8% -21.0% -11.9% -1.3% 4.5% -6.8% Source: Shared Research based on various data
Overall traffic on Japan’s fixed-line broadband services (FTTH, DSL, CATV, FWA) has risen sharply in recent years as the traffic per average user has soared. As of the end of November 2019, overall download traffic was 12.7 terabytes per second (+15.2% YoY). The daily average was 137 petabytes. The average download traffic per user was roughly 309.5 kilobytes per second (+12.5%), which works out to an average of roughly 3.3 gigabytes per day, according to calculations by Japan’s Ministry of Internal Affairs and Communications.
Wireless telecommunications infrastructure Smartphones and tablets have revolutionized the wireless telecommunications market. Smartphones generate 10 to 20 times as much data traffic as traditional mobile phones. As the use of bandwidth-hungry content accelerates, data volumes swell. How to deal with the surge in traffic is a pressing issue, creating demand for network infrastructure that can handle higher data volumes and speeds.
Telecom companies are focusing on developing and diffusing high-speed large-capacity communication services using LTE- advanced or a new frequency band as one means used to cope with the traffic surge. 5G pre-service kicked off in 2019, and was followed by the launch of regular 5G commercial services in March 2020. (For further details on 5G, see discussion under "COMSYS VISION NEXT STAGE 2023 (FY03/20–FY03/24)" in Outlook section.)
In Japan as well, mobile traffic has increased rapidly due to the popularity of smartphones. The Cisco Visual Networking Index from US-based Cisco Systems, Inc., forecasts that this trend will continue, such that the 676 petabytes (1015 bytes) of mobile data traffic per month in 2017 will swell some 3.6x to 2.4 exabytes (1018 bytes) per month in 2022.
According to statistics from the Ministry of Internal Affairs and Communications on telecommunications traffic in Japan, as of September 2019 download traffic at Japan’s telecommunications carriers was roughly 3.08 terabytes per second (+20.2% YoY). The daily average was roughly 33 petabytes (these figures do not include voice traffic or traffic on wireless LANs). The combined download and upload traffic as of the end of September 2019 was 3.5 terabytes per second (+20.1%), the average traffic per user was roughly 19.467 kilobytes per second, which works out to an average of 210 megabytes per day.
Mobile carrier capex trends Looking at the actual mobile carrier investment trends, each company has been investing more in new technologies and new frequency bands in order to increase capacity and expand services. After cutting back on capital spending through the end of FY03/17, mobile phone service providers began slowly stepping up capital spending starting in FY03/18. One example is investment in LTE, a new communications technology. NTT Docomo (TSE1: 9437) has increased its number of LTE base stations from 24,400 at end-March 2013, to 55,300 at end-March 2014, 97,400 at end-March 2015, 138,100 at end-March 2016, 161,900 at end-March 2017, 185,000 at end-March 2018, 208,500 at end-March 2019, and 228,100 at end-March 2020.
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Telecom companies have largely rolled out LTE nationwide, but in advance of expanding LTE-advanced* are still upgrading their systems with investments in carrier aggregation and MIMO and increasing spending to handle 3.5GHz and 700MHz bandwidths. In addition to more spending to handle the 3.5MHz and 700MHz bandwidths, telecommunications companies will also be investing heavily in equipment to handle new bandwidths such as 1.7GHz and 3.4GHz. Adding to this is the capital spending by Rakuten to support the start of its new service as an MNO (a mobile service provider that owns its own lines), which together with the launch of 5G will underpin continued growth in investment spending by carriers in the years ahead. (For further details on 5G, see discussion under "Medium-term vision COMSYS VISION NEXT STAGE 2023" in Outlook section.)
*The wireless communications standard that follows LTE
Technical note: The acceleration of telecommunication speeds under LTE Advanced will be enabled by adding various technical elements to existing LTE technology. Two elements will be important in boosting telecommunications speeds: upgrading the multiple-input and multiple-output (MIMO) technology used in spatial multiplexing, and carrier aggregation, which will enable bandwidth expansion.
Capex by company FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYbn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Est. NTT Docomo 686.5 668.5 726.8 753.7 703.1 661.8 595.2 597.1 577.0 593.7 572.8 - YoY -6.9% -2.6% 8.7% 3.7% -6.7% -5.9% -10.1% 0.3% -3.4% 2.9% -3.5% - KDDI 518.0 441.8 421.6 467.0 571.8 667.7 531.4 519.4 560.8 601.8 615.0 610.0 YoY -9.9% -14.7% -4.6% 10.8% 22.4% 16.8% -20.4% -2.3% 8.0% 7.3% 2.2% -0.8% SoftBank 222.9 392.6 474.1 631.6 712.5 583.7 412.6 320.6 350.1 381.6 369.7 400.0 YoY -14.0% 76.1% 20.8% 33.2% 12.8% -18.1% -29.3% -22.3% 9.2% 9.0% -3.1% 8.2% SoftBank ------187.1 - YoY ------Source: Shared Research based on various data The KDDI capex figures for FY03/15 and later include amounts related to the consolidation of UQ Communications. Domestic telecoms carriers only.
Evolution of Telecommunications Technology
5G
スムーズなSmooth introduction4G導入 of 4G 4G LTE‐Advanced
シ ス Long-term3Gの⻑期的発展 development of 3G テ ム Super 3G LTE 性
能Systemperformance
3.5GHｚ HSPA
3G W‐CDMA
2000 2010 2020
Source: Shared Research based on various data
Network maintenance and management Telecommunication network maintenance and management currently comprise a small proportion of the company’s sales, but the business can be expected to grow and become a steady source of earnings in the medium to long term as sales grow.
NTT East and West have large numbers of baby boomers in their workforces. As these baby boomers retire over the next few years, the number of employees engaged in network maintenance and management is likely to fall dramatically. Therefore, there is a strong possibility that NTT East and West will outsource network maintenance and management to telecommunications construction firms such as Comsys. The margin on work for SoftBank Mobile is expected to improve as, with certain exceptions, SoftBank Mobile is moving away from using reverse auctions to award orders.
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The graph below shows why NTT East and West were expected to increase outsourced network maintenance and management since FY03/13. The companies had large numbers of employees nearing 60, which was the mandatory retirement age. However, NTT East and West changed their mandatory retirement policy, and from October 2013, those who wish may continue working until the age of 65. Although Comsys has steadily expanded sales from network maintenance and management operations, Shared Research understands sales for maintenance and management projects from NTT East and West only took off from 2018.
Employee numbers at NTT East and West and their subcontractors
Source: Shared Research based on NTT materials Note; Employee numbers for East Outsourcing Companies include the consolidated prefectural outsourcing companies (incl. NTT EAST-TOKYO), NTT-ME and NTT EAST SOLUTIONS, while figures for West Outsourcing Companies include the consolidated regional outsourcing companies (incl. NTT WEST-KANSAI), NTT MARKETING ACT (outsourcing company in management and marketing), NTT NEOMEIT (outsourcing company in facilities and equipment) and NTT WEST-HOMETECHNO. Figures for the outsourcing companies include the number of employees who retired or will retire at the end of a fiscal year and who were rehired or will be rehired at the beginning of the next fiscal year (at the age of 50 and 60 – on annually renewable fixed-term contracts).
Barriers to entry
In NTT Engineering, barriers to entry are high as technical certification by the procurer (bidding credentials) is necessary. Barriers to entry in the NCC business are not as high as for NTT, but contractors need to be able to offer services nationwide, a substantial hurdle for aspiring entrants.
Competition in the NTT Engineering Business NTT East and West assign contracts to specific companies to carry out construction work in specific territories. The contractors rarely change. For civil engineering projects such as manhole installation, qualified bidders join the process, which determines who carries out the work. Because NTT certifies all the firms, there are almost no differences in technology. Their strength in particular regions wins the business.
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Competition in the NCC Engineering Business Shared Research understands that different mobile carriers have different priorities when ordering project works. Therefore, competitive conditions for the main contractor differ according to which mobile carrier is doing the procurement.
A mobile telecoms operator such as Softbank, which has concentrated on installing base stations in certain spots in high population density urban areas, places importance on cost rather than the presence of an office network. It is likely that competition will become fierce. Further, it is Shared Research’s understanding that Softbank Mobile uses a reverse auction system to select telecoms construction contractors, and consequently profit margins on work done for Softbank Mobile are lower compared with work done for other telecoms carriers.
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Strategy
Strategy centers on expanding revenues in the NTT Engineering segment in the face of a long-term decline in the NTT group’s capex. Comsys is trying to address this issue in two ways. First, it has been improving margins in the existing businesses through better operational efficiencies—an ongoing theme since the three-way merger in 2003 that gave birth to today’s Comsys. Second, the company is looking to grow non-NTT revenues by pursuing any opportunity to apply its core competence of managing electric and telecommunications engineering projects of any size, profitably and nationwide.
The company’s efforts to streamline operations and reduce costs have significantly improved its profitability over the past 10 years, with operating profit margin increasing to 8.4% in FY03/15 from 5.1% in FY03/05. The company will probably continue to regroup its subsidiaries, reorganize its regional offices, and consolidate outposts among group companies. Comsys was making efforts to make its management of construction processes and construction work more efficient with the use of information technology in FY03/20. (See the Outlook section for details.)
On the other hand, the company is seeking to increase sales composition ratios of non-NTT projects by expanding into new business fields. Although Comsys acquired Tsuken in April 2010, the company generated 44% of its sales from businesses other than NTT installation projects in FY03/15, almost unchanged from 43% for FY03/05. Shared Research thinks that Comsys should increase sales of IT Solutions and Social Systems operations. Excluding NTT Engineering, the proportion of sales rose to 55% in FY3/20.
According to the company, it is keen to buy growth in new areas using its treasury shares but needs to see synergies with the existing businesses and expertise. That narrows potential acquisition targets to firms or businesses involved in some way in engineering and construction. As mentioned, further consolidation in the existing business is likely limited as any significant combination would spark antitrust issues.
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Historical performance
Full-year FY03/20 results (out May 13, 2020)
Overview
▷ In FY03/20, orders totaled JPY590.7bn (+16.9% YoY) and sales increased to JPY560.9bn (+16.4% YoY). Orders brought forward totaled JPY212.9bn (+16.3% YoY). Operating profit rose 10.5% YoY to JPY39.0bn and recurring profit rose 11.1% YoY to JPY40.1bn. Net income attributable to owners of the parent fell 7.2% YoY to JPY26.0bn.
FY03/20 results for existing group companies (excluding three recently acquired companies*): Orders received of JPY458.4bn
(+JPY45.5bn YoY), sales of JPY431.8bn (+JPY17.4bn YoY), operating profit of JPY33.0bn (+JPY400mn YoY), and OPM of 7.7% (-
0.2pp YoY). ▷ Progress versus forecast: Sales were 103.9% of FY03/20 full-year targets, operating profit 102.5%, recurring profit 104.1%, and net income 101.9%. Sales and each profit category firmly exceeded company targets.
As the first year of the medium-term vision “COMSYS VISION NEXT STAGE 2023” (which calls for sales of at least JPY600.0bn
and operating profit of JPY50.0bn in FY03/24), FY03/20 marked a strong start to the period covered by the vision, according
to the company.
Consolidation effects for newly acquired companies pushed up earnings. Excluding such effects, existing group companies
also recorded organic growth in orders, sales, and operating profit. The IT Solutions and Social Systems and Other segments,
which are the growth businesses of the company, contributed to the results.
At existing group companies, orders received and sales finished JPY39.4bn and JPY3.3bn above the respective forecasts.
However, operating profit missed its target by JPY400mn, and OPM fell short of plan by 0.1pp. Management plans to review
the causes of the shortfalls and improve performance in the future. ▷ Orders received up 16.8% YoY, sales up 16.4% YoY: Orders increased in all businesses except NCC Engineering and sales increased in all businesses. Comsys focused its operations on the field of social systems and IT solutions, which has been positioned as a growth business, through responding to public and private investment related to the development of ICT for the “smart society” and renewable energy activities, such as the construction of solar and biomass power generation facilities. ▷ Operating profit up 10.5% YoY: GPM fell 0.4pp YoY to 13.1%, and the SG&A to sales ratio remained unchanged YoY at 6.2%. Operating profit margin declined 0.4pp YoY to 6.9%. GPM fell due to changes in sales mix. In addition to targeting early realization of merger synergies*, the company allocated staff to growth business areas and took steps to improve profitability by promoting work-style reforms, aiming to improve construction efficiency and reduce expenses. ▷ Net income declined 7.2% YoY as FY03/19 saw JPY5.2bn in extraordinary profit from negative goodwill due to the merger.
*The company made NDS Co., Ltd., SYSKEN Corporation, and Hokuriku Denwa Kouji Co., Ltd. consolidated subsidiaries from Q3 FY03/19.
External environment and company initiatives
▷ In the information and communications industry, the company’s main business area, mobile networks were upgraded to handle the large volumes of surging traffic due to expanding value added content services, digital technology, and big data utilization. ▷ In addition, the public and private sectors are expected to increase investment in social infrastructure, including measures to strengthen national resilience such as those to prevent and mitigate increasingly devastating natural disasters and renewable energy policies, as well as in ICT fields such as cloud technology, IoT, AI, and 5G (Fifth-Generation Mobile Communications
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System). Comsys focused its operations on the field of social systems and IT solutions, which has been positioned as a growth business, through responding to public and private investment related to the development of ICT for the “smart society” and renewable energy activities, such as the construction of solar and biomass power generation facilities. ▷ The company aimed to realize early merger synergies, and worked to improve profit by streamlining construction efficiency and reducing costs through the promotion of work-style reforms that leverage ICT.
Orders received ▷ Orders received totaled JPY590.7bn in FY03/20 (+16.8% YoY), amounting to 110.0% of the FY03/20 target of JPY537.0bn. The outcome reflected a combination of organic growth in orders in growth fields (such as the IT Solutions and Social Systems and Other segments) and contributions from consolidation effects from acquisitions. ▷ By business, the JPY85.2bn YoY increase in orders received (+16.8% YoY) broke down as follows (in order of size of contribution): +JPY35.8bn YoY for the Social Systems and Other segment (+23.1% YoY), +JPY32.5bn YoY for the NTT Engineering segment (+14.6% YoY), +19.9bn YoY for the IT Solutions segment (+24.6% YoY), and -JPY3.1bn YoY for the NCC Engineering segment (-6.7% YoY). ▷ The company’s initiatives in new business areas connected to increased public investment and ICT investment geared toward renewable energy business and the realization of a smart society, also contributed.
Sales
▷ Sales came to JPY560.9bn in FY03/20 (+16.4% YoY), amounting to 103.9% of the FY03/20 target of JPY540.0bn. The outcome reflected a combination of organic growth in sales and contributions from consolidation effects from acquisitions. ▷ By business, the JPY79.1bn increase in sales (+16.4% YoY) broke down as follows (in order of size of contribution): +JPY31.7bn for the Social Systems and Other segment (+23.3% YoY), +JPY23.6bn for the NTT Engineering segment (+10.4% YoY), +JPY23.0bn for the IT Solutions segment (+30.8% YoY), and +JPY600mn for the NCC Engineering segment (+1.6% YoY). ▷ The company’s initiatives in new business areas connected to increased public investment and ICT investment geared toward the realization of a smart society, also contributed.
Sales and orders by segment NTT Engineering
▷ Orders received totaled JPY255.4bn (+14.6% YoY); 109.8% of the full-year target
Merger effects contributed, and access work and mobile engineering operations were strong.
The company booked front-loaded orders for large projects involving general construction in the telecommunications and civil
engineering fields (such as repairs of service tunnels and upgrades of concrete utility poles).
In mobile engineering, negotiations for 5G base station construction increased. ▷ Sales were JPY250.4bn (+10.4% YoY); 101.6% of the full-year target
In mobile engineering, supply shortages for high-tension bolts caused construction delays, but corresponding adverse impact
was offset by merger effects.
NCC Engineering
▷ Orders received totaled JPY43.4bn (-6.7% YoY); 90.4% of the full-year target
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Down 6.7% YoY, 9.5% short of full-year target. This was mainly attributable to a decline in orders from au as KDDI curbed
4G-related investment to minimum levels in line with its policy of prioritizing 4G LTE network facilities.
New orders from Rakuten Mobile and orders from Softbank aimed at upgrading its 4G network were not sufficient to offset
the drop in orders from au.
▷ Sales were JPY43.7bn (+1.6% YoY); 98.2% of the full-year target
Sales from au declined due to KDDI’s policy of prioritizing 4G LTE network facilities.
However, the drop in sales to au was offset by merger effects and new sales to Rakuten Mobile. As a result, sales rose JPY600mn
YoY, but came in JPY700mn below the full-year target.
IT Solutions
▷ Orders received totaled JPY100.8bn (+24.6% YoY); 115.9% of the full-year target
The outcome was driven by contributions from merger effects and organic growth (acquisition of large government orders
and large software development orders). ▷ Sales were JPY98.1bn (+30.8% YoY); 118.9% of the full-year target
Reflecting the trend in orders received, sales expanded YoY and exceeded the full-year target thanks to contributions from
merger effects and organic growth (completion of large projects).
Social Systems
▷ Orders received totaled JPY190.9bn (+23.1% YoY); 112.6% of the full-year target
The largest contribution came from an order for a major solar power plant in Kyushu worth roughly JPY40.0bn.
Orders related to expressways and large data centers were also strong. ▷ Sales were JPY168.5bn (+23.3% YoY); 101.2% of the full-year target
Reflecting the trend in orders received, sales expanded YoY and exceeded the full-year target thanks to contributions from
merger effects and organic growth (completion of large projects).
Cumulative Q3 FY03/20 results (out February 7, 2020)
Overview
▷ Cumulative Q3 FY03/20, orders totaled JPY453.0bn (+25.1% YoY) and sales increased to JPY374.8bn (+23.2% YoY). Orders brought forward totaled JPY261.3bn (+20.2% YoY). Operating profit rose 7.1% YoY to JPY21.2bn and recurring profit rose 8.7% YoY to JPY22.2bn. Net income attributable to owners of the parent fell 20.9% YoY to JPY14.5bn. Synergies created by the October 2018 business integration supported YoY growth in orders, sales, and operating profit. The IT Solutions and Social Systems segments particularly contributed to orders and sales growth. The strong growth in orders and sales (up more than 20% YoY) was not matched by operating profit, which rose only 7.1% YoY. While orders were strong at previously existing group companies’ mobile-related businesses, delays in the supply of construction materials slowed project progress, pushing back the posting of sales of these high margin projects. ▷ Progress versus forecast: Sales were 69.4% of FY03/20 full-year target (63.2% of FY03/19 result in Q3 FY03/19), operating profit 55.7% (56.0%), recurring profit 57.7% (56.7%), and net income 56.7% (65.2%).
Orders and sales are ahead of plan owing to strong orders growth as well as some orders being brought forward.
Despite delays in mobile engineering, the company is committed achieving its full-year operating profit target of JPY38.0bn.
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▷ Orders received increased by 25.1% YoY, and sales increased by 23.2% YoY: Orders increased in all businesses excluding NCC Engineering, which was negatively affected by the cautious capex stances of some mobile telecom companies. Sales increased in all businesses. Mobile engineering projects for some mobile telecom carriers faced delays (delays in the supply of materials set back construction at mobile carrier A while carrier B’s project was pushed back to FY03/21 for strategic reasons. The company made efforts to expand into new business areas responding to increased public investment and ICT investment aiming for renewable energy businesses and a “smart society,” and also implemented initiatives to grow sales through M&A. ▷ Operating profit increased by 7.1% (JPY1.4bn) YoY: GPM fell 0.7pp YoY to 12.6%, and the SG&A to sales ratio rose by 0.2pp to 7.0%. Operating profit margin declined 0.9pp to 5.6% due to (above-mentioned) changes in sales mix and the impact from business integration. On top of targeting early realization of merger synergies*, the company allocated staff to growth business areas, and took steps to improve profitability by promoting work-style reforms, aiming to improve construction efficiency and reduce expenses.
According to the company, the JPY1.4bn YoY increase in operating profit was driven by an approximate JPY1.8bn increase in
operating profit related to the business integration and a JPY0.4bn decrease in related costs. These positives were partially offset
by a decline of about JPY9mn in operating profit at previously existing group companies, which reflected a combined JPY6mn
increase in SG&A expenses at the IT Solutions and Social Systems owing to strengthening of their marketing resources and a
net JPY3mn profit decline related to changes in product mix (JPY5mn increase in sales – JPY8mn profit decline owing to product
mix deterioration). ▷ Net income attributable to owners of the parent declined 20.9% YoY as FY03/19 saw JPY5.2bn in extraordinary profit from negative goodwill due to the merger. ▷ No changes have been made to the company’s FY03/20 full-year forecast.
*The company made NDS Co., Ltd., SYSKEN Corporation, and Hokuriku Denwa Kouji Co., Ltd. consolidated subsidiaries in Q3 FY03/19.
External environment and company initiatives As new entrants and changes to the Telecommunications Business Act cause competition in services between mobile carrier companies to intensify, value added services such as contents have expanded. The overall information and communications industry, the company’s main area of business, has begun improving mobile networks environment to handle the large volumes of surging traffic.
In addition, the public and private sectors are expected to increase ICT investment. The goal of this investment is to prevent and mitigate increasingly devastating natural disasters, support other measures aimed at strengthening national resilience, and establish renewable energy policies and social infrastructure needed for the Tokyo Olympic and Paralympic Games, as well as to produce new innovations in fields such as cloud technology, IoT, AI, and 5G (Fifth-Generation Mobile Communications System). Comsys engaged in renewable energy activities, such as the construction of solar and biomass power generation facilities, and is looking at ways of driving its top line by developing new business areas and implementing M&A in response to increased public investment and development of ICT for the “smart society.” Comsys also expects to improve profits by quickly generating merger synergies, allocating staff to growth business areas, and promoting work-style reforms to improve construction efficiency and reduce costs.
Sales and orders by segment NTT Engineering
▷ Orders totaled JPY195.3bn (+18.7% YoY); 84.0% of the full-year target
Fixed-line related orders for the segment’s eight companies totaled JPY143.6bn (+23.7% YoY), with access work accounting for JPY125.0bn (+26.5% YoY; 83.4% of the full-year FY03/2020 target) and network engineering JPY18.6bn
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(+7.7% YoY; 103.9% of the full-year plan). As the numbers show, orders for both access work and network engineering were up YoY and ahead of plan, with network engineering orders achieving the full-year plan in cumulative Q3. Fixed- line related orders were negatively affected by continued reductions in capital spending and new fiber-optic line installation by NTT. However, the consolidation had a significant positive impact on overall orders. Going forward, the company sees the revision of its operations structure as the key to improving its operating profit margin. It also plans to reduce costs by cutting IT expenditures and improving productivity through process standardization. Mobile-service related orders of the segment’s eight companies totaled JPY48.2bn (+4.0% YoY; 80.2% of the full-year FY03/2020 target). Consulting services for commercial 5G-related negotiations continue. Construction orders related to the new 3.4GHz frequency band for 4G networks started to be received in 2H, and 5G-related work is progressing on the same site (simultaneous installation of two antennas—one for the 5G network and the other for the 4G network’s new 3.4 GHz band). However, in the 3.7GHz band, which is one of the 5G frequency bands, radio interference from satellite broadcast receiving equipment that use the same band was found to be greater than initially expected, complicating capex plans more than expected. NTT Docomo’s capex (telecom business) in cumulative Q3 FY03/20 was down 13.2% YoY, and the major mobile telecom carrier plans to spend YoY 5.5% less on capex in FY03/20.
▷ Sales were JPY163.8bn (+15.7% YoY); 66.5% of the full-year target Fixed-line related sales for the segment’s eight companies (based on simple sum) totaled JPY122.2bn (+27.8% YoY), with access work accounting for JPY108.2bn (+30.3% YoY; 71.2% of the full-year FY03/20 target) and network engineering JPY14.0bn (+10.6% YoY; 68.4% of the full-year plan). Mobile-service related sales of the eight companies (based on simple sum) totaled JPY38.5bn (-12.7% YoY; 56.6% of the full-
year FY03/20 target). Telecommunications construction companies, including Comsys, were negatively affected by delays in the supply of construction parts (high-tension bolts) for 4G network construction projects (but the situation has slightly improved since February 2020).
NCC Engineering
▷ Orders totaled JPY31.6bn (-5.7% YoY); 65.8% of the full-year target ▷ Sales were JPY29.8bn (+8.4% YoY); 67.0% of the full-year target KDDI (au): Some orders are expected to be pushed back to FY03/21 owing to KDDI’s policy of prioritizing 4G LTE network
facilities. Softbank: Orders were strong as Softbank continued to aggressively invest in upgrading its mobile network. Softbank plans to use 4G frequency bands for 5G and is therefore focusing on upgrading and enhancing its 4G network infrastructure.
Rakuten Mobile: Although the start of full service was postponed (original plan to start service in October 2019 was replaced by a trial startup for 5,000 subscribers to a Free Supporter Program), Rakuten Mobile has made progress with building the core network and base stations. Comsys received orders for these work, evidently winning the leading share of orders for work on the core network. The company intends to aggressively pursue order expansion while remaining selective about the orders it accepts.
IT Solutions Orders totaled JPY76.5bn (+30.7% YoY); 87.9% of the full-year target Sales were JPY66.8bn (+51.9% YoY); 81.1% of the full-year target
▷ Orders and sales were sharply above previous-year levels, with the main growth drivers being software development and server/storage-related work. Orders and sales on pace to exceed the company’s full-year plan. In 1H, alliances with system integrators helped Comsys win orders for public-sector projects, including for upgrades of on-campus networks and PC systems at universities and for municipal intra-school LAN system construction. Work on these projects continues. In Q3,
46/58 Comsys Holdings / 1721 RCoverage LAST UPDATE: 2020.08.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Comsys and its partners won collaborative projects for LAN construction and PC deployment at public elementary and junior high schools. The company was responsible for construction and kitting. ▷ Comsys is promoting collaboration among group companies (virtual company) to maximize the use of the group’s software development and system construction resources. For example, large projects centered in the Tokyo metropolitan area are using nearshore development to tap into software development resources of Group companies in Hokkaido, Tohoku, and Hokuriku as well as in Tokyo. In the server/storage business as well, Comsys plans to create nationwide service networks.
Social Systems
▷ Orders totaled JPY149.4bn (+41.6% YoY); 88.2% of the full-year target ▷ Sales were JPY114.2bn (+25.3% YoY); 68.6% of the full-year target Sales from the two large solar panel generation projects in Kyushu (combined order value of JPY36.6bn) that Comsys won in 1H will be recorded on a percentage of completion method over a three-year construction period. The lighting equipment renovation project being undertaken for NEXCO Central Nippon Expressway is proceeding with the work on expressway facilities expanding to a wider area. Projects won in 1H are proceeding on schedule. These include water/sewer system construction projects necessitated by existing systems’ deterioration over time, PFI projects to move electric power lines underground, reconstruction work from
the Tokyo Bureau of Sewerage, and construction work on the Chikuma River from the Ministry of Land, Infrastructure, Transport and Tourism (order value JPY 250mn). Promoting virtual company model to strengthen ability to win orders and optimize use of construction resources for large
projects.
1H FY03/20 results (out November 8, 2019)
Overview
▷ In 1H FY03/20, orders totaled JPY318.8bn (+67.7% YoY) and sales increased to JPY243.0bn (+36.6% YoY). Orders brought forward totaled JPY258.9bn (+50.7% YoY). Operating profit rose 18.1% YoY to JPY13.0bn and recurring profit rose 21.4% YoY
to JPY13.6bn. Net income attributable to owners of the parent jumped 24.2% YoY to JPY8.9bn. Performance of existing group companies (excludes contributions from NDS, SYSKEN, Hokuriku Denwa Kouji, which became consolidate subsidiaries in October 2018): Orders: JPY250.1bn (+31.5% YoY); sales: JPY183.4bn (+3.1% YoY); operating
profit: JPY11.1bn (+0.9% YoY). ▷ 1H FY03/20 orders surpassed the company’s 1H FY03/20 target by 18.5%, sales by 5.7%, operating profit by 12.7%, recurring profit by 16.5%, and net income attributable to owners of the parent by 18.1%. Performance of existing group companies: Orders surpassed plan by 20.9%, sales by 3.6%, and operating profit by 14.4%. ▷ Orders received increased by 67.6% YoY, and sales increased by 36.6% YoY: Orders and sales increased in all businesses backed by robust new orders thanks to the consolidation effect of the newly acquired three subsidiaries. The company made efforts to expand into new business areas responding to increased public investment and ICT investment aiming for renewable energy businesses and a “smart society,” and also implemented initiatives to grow sales through M&A. ▷ Operating profit increased by 18.1% YoY: Primarily owing to the consolidation, GPM fell 0.3pp YoY to 12.5%, and the SG&A to sales ratio rose by 0.6pp to 7.2%. Operating profit margin declined 0.9pp to 5.3%. The company allocated staff to growth business areas, and made efforts to improve construction efficiency and reduce expenses, as well as aiming to accelerate synergies.
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▷ No change to FY03/20 targets: Although 1H results exceeded plan, management cited two main reasons for not changing its full-year targets: 1) it expects orders in 2H to be lower than initially expected because orders from growth areas (IT Solutions and Social Systems) came in ahead of schedule in 1H, and 2) it expects construction-related sales to two mobile carriers to fall short of plan owing to a delay in the supply of construction materials for one company and a strategic decision to postpone construction to next year by the other company. ▷ Progress versus forecast: Sales were 45.0% of FY03/20 full-year target (36.9% of FY03/19 result in 1H FY03/19), operating profit 34.1% (31.1%), recurring profit 35.4% (31.1%), and net income 34.7% (25.4%).
External environment and company initiatives As competition in services between mobile carrier companies intensifies, value added services such as contents have expanded. The overall information and communications industry, the company’s main area of business, has begun improving mobile networks environment to handle the large volumes of surging traffic accompanying the diversifying and increasing functions of smartphones and tablets.
In addition, the public and private sectors are expected to increase ICT investment. The goal of this investment is to prevent and mitigate increasingly devastating natural disasters, support other measures aimed at strengthening national resilience, and establish renewable energy policies and social infrastructure needed for the Tokyo Olympic and Paralympic Games, as well as to produce new innovations in fields such as cloud technology, IoT, AI, and 5G (Fifth-Generation Mobile Communications System).
Comsys engaged in renewable energy activities, such as the construction of solar and biomass power generation facilities, and is looking at ways of driving its top line by developing new business areas and implementing M&A in response to increased public investment and development of ICT for the “smart society.” Comsys also expects to improve profits by quickly generating merger synergies, allocating staff to growth business areas, and promoting work-style reforms to improve construction efficiency and reduce costs.
Sales and orders by segment NTT Engineering Orders totaled JPY134.3bn (+51.1% YoY); 57.8% of the full-year target.
▷ In addition to the consolidation effect of the new subsidiaries, orders for access work, network engineering, and mobile engineering all achieved YoY gains and sharply exceeded plan. ▷ Fixed-line related orders were negatively affected by continued reductions in capital spending and new fiber-optic line installation by NTT (in 1H, capital spending by NTT East and NTT West fell 5% YoY, with spending on fiber-optic cable falling 7% and new FLET’s connections down 2%). However, the consolidation had a significant positive impact on overall orders. Going forward, the company sees the revision of its operations structure as the key to improving its operating profit margin. It also plans to reduce costs by cutting IT expenditures and improving productivity through process standardization. ▷ In the mobile-service related business, the company expects to see in 2H the start of consulting services for commercial-5G- related negotiations and orders for construction related to the new 3.4GHz frequency band for 4G networks.
Sales were JPY105.7bn (+31.1% YoY); 42.9% of the full-year target.
▷ Fixed-line related sales for the segment’s eight companies (based on simple sum) totaled JPY79.1bn (+53.9% YoY), with access work accounting for JPY70.0bn (+54.2% YoY) and network engineering JPY9.1bn (+14.7% YoY). ▷ Mobile-service related sales of the eight companies (based on simple sum) totaled JPY24.7bn (-7.0% YoY). Telecommunications construction companies, including Comsys, were negatively affected by delays in the supply of construction parts (high-tension bolts). Capital spending by NTT Docomo was down 14.4% YoY in 1H and the full-year plan is
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for a 4.0% YoY reduction. Comsys expects the construction parts supply problem to be resolved by February and still aims to achieve its full-year sales target of JPY68.0bn (largely the same as in FY03/19).
NCC Engineering Orders totaled JPY18.2bn (+5.2% YoY); 37.9% of the full-year target. Sales were JPY19.3bn (+19.1% YoY); 43.4% of the full-year target.
▷ KDDI (au): Some orders are expected to be pushed back to FY03/21 owing to KDDI’s policy of prioritizing 4G LTE network facilities. ▷ Softbank: 1H orders were strong as Softbank continued to aggressively invest in upgrading its mobile network. ▷ Rakuten Mobile: Although the start of full service was postponed (original plan to start service in October 2019 was replaced by a trial startup for 5,000 subscribers to a Free Supporter Program), Rakuten Mobile has made progress with building the core network and base stations. Comsys received orders for these work, evidently winning the leading share of orders for work on the core network. The company intends to aggressively pursue order expansion while remaining selective about the orders it accepts.
IT Solutions Orders totaled JPY53.6bn (+60.0% YoY); 61.6% of the full-year target. Sales were JPY43.2bn (+64.3% YoY); 52.4% of the full-year target.
▷ Orders and sales were sharply above previous-year levels, with the main growth drivers being software development and server/storage-related work. ▷ Software development: Orders expanded steadily, supported by orders for contracted development for upgrades of large systems, such as corporate pension and health insurance systems (orders received = JPY760mn), and for the development of product inspection systems. Management expects expanded orders for software development, IT Solutions’ most profitable
business, would help boost the segment’s sales and profit margin. ▷ Server/storage business: Orders and sales expanded steadily as alliances with system integrators helped Comsys win orders for public-sector projects, including for upgrades of on-campus networks and PC systems at universities and for municipal intra-
school LAN system construction. ▷ Network/infrastructure business: Steady orders growth was driven by orders for airport network construction and for construction of event-related video monitoring systems (orders received = JPY 1.28bn). ▷ Comsys is promoting collaboration among group companies (virtual company) to maximize the use of the group’s software development and system construction resources. For example, large projects centered in the Tokyo metropolitan area are using nearshore development to tap into software development resources of Group companies in Hokkaido, Tohoku, and Hokuriku as well as in Tokyo. In the server/storage business as well, Comsys plans to create nationwide service networks.
Social Systems Orders totaled JPY112.6bn (+123.9% YoY); 66.4% of the full-year target. Sales were JPY74.6bn (+36.9% YoY); 44.8% of the full-year target.
▷ Infrastructure: In addition to steady progress with water/sewer system construction projects necessitated by existing systems’ deterioration over time, Comsys is focusing on PFI projects to move electric power lines underground. During 1H, the
company won orders for reconstruction work from the Tokyo Bureau of Sewerage and construction work on the Chikuma River from the Ministry of Land, Infrastructure, Transport and Tourism (orders received = JPY 250mn).
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▷ Although Comsys had assumed orders for “mega-solar” projects were winding down, a last minute rush demand led to two orders for construction of large solar power generation projects in Kyushu (combined order value of JPY 36.6bn). Sales will be recorded on a percentage of completion method over a three-year construction period. Also in 1H, Comsys began construction of a biomass power plant in Makurazaki City in Kyushu. ▷ Electricity & telecommunications-related work: Won an order for from NEXCO Central Nippon Expressway for a lighting equipment renovation project and is expanding the area where it conducts work on expressway facilities. Comsys is also receiving orders for installation of electrical equipment at local government water purification plants. ▷ Promoting virtual company model to strengthen ability to win orders and optimize use of construction resources for large projects.
5G: NTT Docomo and Softbank announce acceleration of 5G base station network construction
▷ NTT Docomo has moved up its plan to complete its base station network for its nationwide (47 prefectures) 5G mobile
communication system by nine months from end-March 2021 to end-June 2020 (announced at pre-commercial service
briefing in September 2019; exact timing based on NTT Docomo’s FY03/20 Q2 results briefing materials). The wireless carrier
plans to have 10,000 base stations operating by end-June 2021 (one year and nine months ahead of previous plan).
▷ According to the Nikkei, Softbank has moved up its plan to complete installation of about 11,000 5G base stations across Japan
by two years, from end-March 2025 to end-March 2023.
▷ According to an article on the Asahi Shimbun Digital website on November 14, 2019, to accelerate the launch of 5G networks
the Japanese government and ruling parties have begun to consider reducing corporate and property taxes from the next fiscal
year for wireless carriers that accelerate their plans to install 5G-related facilities. The tax reduction plan prepared by the
Ministry of Internal Affairs and Communications (MIC) and the Ministry of Economy, Trade, and Industry (METI) proposes the
reductions be applied for three years, with 5% of investment in 5G networks to be deducted from carriers’ corporate tax, and
property tax on 5G base stations to be halved for the first five years following their certification. According to a November 15
Nikkei article, the ruling Liberal Democratic Party’s General Affairs Subcommittee regards the MIC’s 5% tax credit as insufficient
for accelerating the launch of 5G networks and reportedly has asked the party’s tax policy committee to request a 30% tax
deduction.
Impact of recent typhoon
▷ In October 2019, Typhoon Hagibis brought record heavy rains down on the Kanto-Koshin and Hokuriku regions of Japan, resulting in flooding and tremendous damage. Electric power poles were knocked down and telecommunications equipment swept away in many parts of Chiba Prefecture, Nagano Prefecture, Tohoku and other regions. The company dispatched mobile power-supply vehicles and mobile radio base stations as part of emergency recovery efforts, which are still underway in some areas. The emergency response has been followed by the emergence of special demand for rebuilding destroyed facilities. The recovery efforts will affect the original new construction plans of telecom companies and Comsys, but the company does not expect its earnings to be negatively affected. ▷ Countermeasures against typhoons and other natural disasters are expected to include lengthening the time that emergency backup power sources can power wireless network base stations and the development of proprietary power grids by telecommunications companies.
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Q1 FY03/20 results (out August 7, 2019)
Overview
▷ In Q1 FY03/20, orders totaled JPY139.7bn (+42.9% YoY) and sales increased to JPY111.9bn (+36.0% YoY). Orders brought forward totaled JPY210.8bn (+20.5% YoY). Operating profit rose 23.1% YoY to JPY5.0bn and recurring profit rose 29.7% YoY to JPY5.5bn. Net income attributable to owners of the parent jumped 26.0% YoY to JPY3.5bn. Performance of existing group companies (organic growth) improved YoY for orders, sales, and operating profit. With the addition of the three newly acquired companies*, overall orders, sales, and operating profit fared well. ▷ Orders received increased by 42.9% YoY, and sales increased by 36.0% YoY: Orders and sales increased in all businesses. The company made efforts to expand into new business areas responding to increased public investment and ICT investment aiming for renewable energy businesses and a “smart society,” and also implemented initiatives to grow sales through M&A. Existing group companies (organic growth): Orders grew about 10% YoY while sales grew 2–3% YoY. ▷ Operating profit increased by 23.1% YoY: GPM was flat YoY at 12.2%, and the SG&A to sales ratio improved by 0.5pp YoY to 7.8%. Operating profit margin declined 0.5pp YoY to 4.4%. Although OPM deteriorated by 0.5pp YoY as the three recently acquired companies are heavily exposed to the NTT’s Engineering business, the OPM still came in above forecast. The company allocated staff to growth business areas, and made efforts to improve construction efficiency and reduce expenses, as
well as aiming to accelerate synergies. Existing group companies (organic growth): Operating profit grew 7–8% YoY, and OPM improved 0.3pp YoY. ▷ Progress versus forecast: Sales were 48.7% of 1H FY03/20 target (46.3% of 1H FY03/19 result in Q1 FY03/19), operating profit 43.3% (36.8%), recurring profit 47.1% (37.8%), and net income attributable to owners of the parent 46.8% (39.1%). Versus full-year FY03/20 targets, sales reached 20.7% (17.1% of the full-year FY03/19 result in Q1 FY03/19), operating profit 13.1% (11.5%), recurring profit 14.3% (11.8%), and net income 13.8% (9.9%). ▷ Q1 FY03/20 performance easily outpaced company forecast for the period. Sales for IT Solutions and Social Systems came in above forecast. Meanwhile, NCC Engineering sales were in line with expectations and NTT Engineering sales were weaker than projected. ▷ FY03/20 company forecast: No changes have been made.
*The company made NDS Co., Ltd., SYSKEN Corporation, and Hokuriku Denwa Kouji Co., Ltd. consolidated subsidiaries in Q3 FY03/19.
External environment and company initiatives As competition in services between mobile carrier companies intensifies, value added services such as contents have expanded. The overall information and communications industry, the company’s main area of business, has begun building the mobile network environment to handle the large volumes of surging traffic accompanying the diversifying and increasing functions of smartphones and tablets.
In addition, the public and private sectors are expected to increase ICT investment for disaster prevention and mitigation and other measures to strengthen national resilience, renewable energy policies, social infrastructure needed for the Tokyo Olympic and Paralympic Games, and in new innovations such as cloud technology, IoT, AI, and 5G (Fifth-Generation Mobile Communications System). Comsys engaged in renewable energy activities, such as the construction of solar and biomass power generation facilities, and is looking at ways of driving its top line by developing new business areas and implementing M&A in response to increased public investment and development of ICT for the “smart society.” Comsys also expects to improve profits by quickly generating merger synergies, allocating staff to growth business areas, and promoting work-style reforms to improve construction efficiency and reduce costs.
51/58 Comsys Holdings / 1721 RCoverage LAST UPDATE: 2020.08.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Results by segment NTT Engineering
▷ Orders totaled JPY63.4bn (+41.3% YoY); 27.3% of the full-year target
Of the JPY18.5bn in YoY order growth, about one-sixth was contributed to existing group companies (organic growth) and five-sixth to the three newly acquired companies. Orders at existing group companies increased YoY in all categories (access work, network engineering, and mobile engineering). Network engineering orders expanded YoY in Q1 FY03/20 as an order for the construction of a major data center came in earlier than expected While mobile engineering orders were weak in Q1 FY03/19, Comsys saw YoY growth from new projects and expedited projects, Additionally, the company received transmission tower repainting projects which were not included in initial forecast. For 5G-related projects, the company landed pre-service construction projects as well as negotiations for obtaining necessary land to build base stations and consulting services. Although NTT’s capital investment for Q1 FY03/20 increased 2.9% YoY to JPY330.7bn, mobile communications investment declined 21.7% YoY to JPY97.9bn and regional communication investment declined 13.2% YoY to JPY88.6bn. Hence, although the company’s NTT Engineering orders grew in Q1 FY03/20, near-term future order movements are unclear. As a reference, NTT’s capital investment for FY03/20 is JPY570.0mn (-4.0% YoY) for mobile communications and JPY520.0bn (-3.9% YoY) for regional communications according to the company’s full-year FY03/20 forecast.
▷ Sales were JPY49.2bn (+27.1% YoY); 20.0% of the full-year target
Sales grew by JPY10.4bn YoY. Sales at existing group companies declined about 10% YoY, but the three newly acquired companies more than offset the decline, resulting in YoY growth. Although orders at existing group companies grew steadily, sales fell as a result of construction delays in all categories (access work, network engineering, and mobile engineering). In order to complete construction projects according to schedule, the company will improve communication with NTT Docomo, NTT East, and NTT West. Sales for the three newly acquired companies fared well.
NCC Engineering
▷ Orders totaled JPY9.0bn (+7.2% YoY); 18.9% of the full-year target
Orders grew by JPY600mn YoY. Orders at existing group companies declined about 10% YoY, but the three newly acquired companies more than offset the decline, resulting in YoY growth. The order decline at existing group companies is attributed to one mobile communications company deferring orders. On a positive note, the company originally expected 700MHz bandwidth TV reception failure prevention work to decline significantly in FY03/20, but received orders worth roughly JPY1.0bn.
▷ Sales were JPY9.2bn (+25.4% YoY); 20.8% of the full-year target
Of the JPY1.8bn in YoY sales growth, about one-sixth came from existing group companies (organic growth) and five- sixth from the three newly acquired companies. The relatively small sales contribution from existing group companies was attributed to deferred orders by a mobile communications company. On the other hand, 700MHz bandwidth TV reception failure prevention work contributed to sales growth.
IT Solutions
▷ Orders totaled JPY28.2bn (+59.2% YoY); 32.5% of the full-year target
Of the JPY10.5bn in order growth, a little less than 60% was attributed to existing group companies (organic growth) while a little over 40% came from the three newly acquired companies. The company received a large government order. Taking a partnership approach for system and network development projects paid off.
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▷ Sales were JPY19.8bn (+79.3% YoY); 24.0% of the full-year target
Of the JPY8.7bn in sales growth, a little less than 60% was attributed to existing group companies (organic growth) while a little over 40% came from the three newly acquired companies.
Social Systems
▷ Orders totaled JPY38.8bn (+46.1% YoY); 22.9% of the full-year target
Of the JPY12.2bn in YoY order growth, about one-sixth came from existing group companies (organic growth) and five- sixth from the three newly acquired companies. The company originally expected large solar related orders to reach a peak in FY03/19, but now expects large orders to continue in FY03/20, having already received JPY10.0bn in orders in Q1 FY03/20. However, the orders were not booked in Q1 FY03/20 as the company anticipated and will instead be booked in Q2 FY03/20.
▷ Sales were JPY33.5bn (+33.9% YoY); 20.2% of the full-year target
Of the JPY8.4bn in sales growth, which was a result of stacking projects, about 10% came from existing group companies (organic growth) while about 90% was from the three newly acquired companies.
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Other information
History Nippon Comsys Corporation December 1951 The Nippon Telecommunications Construction Co., Ltd. established August 1952 Received certification as the first Grade 1 general contractor in Japan by NTT for wires, equipment, and wireless transmission November 1972 Listed on First Sections of Tokyo Stock Exchange and Osaka Securities Exchange August 1982 Received order for first optical fiber cable engineering in Japan July 1990 Changed name from Nippon Telecommunications Construction Co., Ltd. to Nippon Comsys Corporation
Comsys Holdings Corporation September 2003 Comsys Holdings Corporation established through share transfers from three companies: Nippon Comsys Corporation, Sanwa Elec Co., Ltd., and Tosys Corporation January 2005 Merged Sanwa Elec’s NTT information and communications engineering business into Nippon Comsys Corporation April 2005 Sanwa Elec changed its name to Sanwa Comsys Engineering Corp. Merged Nippon Comsys Corporation’s carrier-related telecommunications engineering business operations into Sanwa Comsys Engineering Corp. October 2005 Made Kokusai Densetsu Co., Ltd. (now “WINTIQ Co., Ltd.”) a wholly owned subsidiary through an exchange of shares; on the same day, made it a wholly owned subsidiary of Nippon Comsys Corp. April 2007 Acquired Comsys Shared Services Corporation as a wholly owned subsidiary from Nippon Comsys Corporation and clarified its role as an outsourcing company for shared operations within the Comsys Group April 2009 Moved software development operations within Nippon Comsys Corporation’s IT solutions business into Comsys Joho System Corp., which was established through an incorporation-type company split; on the same day, made Comsys Joho System Corp. a wholly owned subsidiary October 2010 Made Tsuken Corporation a wholly owned subsidiary through an exchange of shares October 2012 Tosys Corporation assumed its current name February 2013 Merged Tohoku Densetsu Co., Ltd. into Tsuken Corporation October 2013 Merged Tsuken Heartec, Tsuken Central Hokkaido Engineering, Tsuken Northern Hokkaido Engineering, Tsuken Eastern Hokkaido Engineering, and Tsuken Southern Hokkaido Engineering into Tsuken Corporation October 2018 Made NDS Co., Ltd., SYSKEN Corporation, and Hokuriku Denwa Kouji (Telephone Construction) Co., Ltd. wholly owned subsidiaries through an exchange of shares
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News and topics November 2019 On November 8, 2019, the company announced the details of a new share buyback program.
Details of share buyback program
▷ Type of shares to be purchased: Company’s common stock ▷ No. of shares to be purchased: 1,200,000 (upper limit, 0.94% of outstanding shares) ▷ Maximum purchase amount: JPY3.0bn ▷ Buyback period: November 11, 2019 to March 31, 2020
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Major shareholders (as of end-March 2020)
Shareholding Top shareholders Shares held ratio
The Master Trust Bank of Japan, Ltd. (Trust account) 28,285,400 22.30% Japan Trustee Services Bank, Ltd. (Trust account) 15,640,500 12.33% Nippon Life Insurance Company 3,247,179 2.56% Trust & Custody Services Bank., Ltd. (Investment trust account) 2,982,300 2.35% Comsys Holdings Employees Shareholding Association 2,085,778 1.64% The Nomura Trust and Banking Co., Ltd. 2,066,900 1.62% JP Morgan Chase Bank 385151 1,978,512 1.55% Japan Trustee Services Bank, Ltd. (Trust account 5) 1,958,900 1.54% Japan Trustee Services Bank, Ltd. (Trust account 7) 1,737,000 1.36% Sumitomo Realty & Development Co., Ltd. 1,661,900 1.31% Shares outstanding (excl. 14,164,947 shares of treasury stock) 126,835,053 100.00%
Source: Shared Research based on company data
Other Glossary NGN Acronym for “next-generation network.” It uses internet protocol technology to rebuild the telephone network. While maintaining the security and convenience of the telephone network, it offers a comprehensive IP network that can provide flexible telephone or videoconferencing, streaming, and various other services.
Platinum band Refers to the 700-900MHz part of the radio frequency spectrum. Able to carry large amounts of data, with wide coverage area, making it easier to route around obstacles. Suitable for mobile phone use.
WAN Acronym for “wide-area network.” Covers a wider area than LANs (not just urban areas but suburbs, prefectures, or even international areas). Using telephone or dedicated lines, enables HQ and branches and other geographically isolated offices to connect computers and exchange data.
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Company profile
Company Name Head Office 17-1, Higashigotanda 2-chome, Shinagawa-ku, Comsys Holdings Corporation Tokyo, 141-8647, Japan Phone Listed On
+81-3-3448-7100 Tokyo Stock Exchange 1st Section Established Exchange Listing September 29, 2003 September 29, 2003 Website Financial Year-End http://www.comsys-hd.co.jp/english/index.html March IR Web http://www.comsys-hd.co.jp/english/ir/index/index.html
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