Company Research and Analysis Report FISCO Ltd. http://www.fisco.co.jp Daikoku Denki Co. 伪 Establishing overwhelming superiority that its 6430 Tokyo Stock Exchange First Section competitors cannot match Daikoku Denki <6430> (hereafter, “the Company”) has two main segments, the Information System Segment, which develops, manufactures, and sells computer systems for pachinko (Japanese pinball) 31-Jul.-15 parlors or halls, and the Control System Segment, which develops, manufactures, and sells display and control units and pachinko slot machines. The Company holds the top share, or approximately 35%, of the Japanese market for hall computers, reflecting an information management method that is the de facto standard for the industry. Meanwhile, the Company’s membership information service Important disclosures called the Daikoku Denki Strategic Information System (DK-SIS) gathers, processes and analyzes and disclaimers appear the daily operational information of pachinko halls with customer associations and gives feed-back to at the end of this document. the managers of these halls to improve their operations. It is the only such system in Japan and the customer network built up upon this service supports the Company’s business base. The system was used by 3,719 pachinko and pachinko slot halls at FYE3/15. It has also made a fully fledged entry FISCO Ltd. Analyst into the manufacture and sale of in-house developed pachinko slot machines. Ikuo Shibata As Japan’s pachinko market has been shrinking for several years, the Company is pursuing three main reforms to achieve growth over the medium to long term: 1) development of a next-generation hall computer, 2) shifting to a stock-type revenue model, and 3) expansion of in-house developed pachinko slot machines. Over the next few years, the Company will continue to advance its plan to invest about ¥10bn to develop a hall computer (including peripheral equipment) that will operate on a cloud server and be capable of advanced analysis of Big Data. It will be far superior to any competing computer and should allow the Company to increase its share of the Japanese market for these machines. In FY3/15, both sales and profits declined; sales were down 5.1% y-o-y to ¥54,043mn, and operating profit declined 73.3% to ¥1,425mn. Sales were largely in-line with the forecast, but while it had been anticipated that profits would be kept down by R&D expenses and other factors, temporary cost factors, such as the loss following the bankruptcy of a pachinko machine manufacturer client, put further downward pressure on profits. So if we put to one side these temporary factors and look at the growth of peripheral equipment, which the Company is focusing on, and on the steady launch of its in-house developed pachinko slot machines, its results seem to be basically progressing in-line with targets. For FY3/16, the Company is forecasting an 11.0% y-o-y rise in sales to ¥60,000mn and a 40.3% increase in operating profit to ¥2,000mn. Although there are concerns about the effects of self * Industry self regulation to limit regulation in the industry,* which is forecast for the H2 of the fiscal year, the Company intends for the machines highly conducive to fully fledged deployment of its own brand of pachinko slot machines to be the driving force behind gambling is going to be applied to pachinko machines from November its results. 2015 and to pachinko slot machines from December 2015. At FISCO, we consider that the Company’s results will be dictated by the effects of industry self regulation and trends in the sales of pachinko slot units. But taking into consideration its results up to the present time and the assumptions for its targets, we judge that it will be possible for it to achieve its results forecasts. 伪 Check Point • No.1 market share in pachinko hall computers • The Information System Segment achieved record high sales for the third consecutive fiscal year • The Company expects contribution from the fully fledged deployment of its own brand pachinko slot machines We encourage readers to review our complete legal statement on “Disclaimer” page. 1 㼀㼞㼑㼚㼐㼟㻌㼕㼚㻌㻲㼡㼘㼘㻙㼥㼑㼍㼞㻌㻾㼑㼟㼡㼘㼠㼟 㻔¥㼙㼚㻕 㻔¥㼙㼚㻕 㻿㼍㼘㼑㼟㻌㻔㼘㼑㼒㼠㻌㼍㼤㼕㼟㻕 㻻㼜㼑㼞㼍㼠㼕㼚㼓㻌㼜㼞㼛㼒㼕㼠㻌㻔㼞㼕㼓㼔㼠㻌㼍㼤㼕㼟㻕 㻣㻜㻘㻜㻜㻜 㻤㻘㻜㻜㻜 㻡㻤㻘㻤㻢㻝 㻢㻜㻘㻜㻜㻜 㻡㻢㻘㻥㻡㻠 㻣㻘㻜㻜㻜 㻢㻜㻘㻜㻜㻜 㻡㻠㻘㻜㻠㻟 㻣㻘㻜㻞㻟 㻡㻘㻟㻟㻤 㻢㻘㻜㻜㻜 Daikoku Denki Co. 㻡㻜㻘㻜㻜㻜 㻠㻣㻘㻜㻥㻢 6430 Tokyo Stock Exchange First 㻡㻘㻜㻜㻜 㻠㻜㻘㻜㻜㻜 Section 㻟㻠㻘㻠㻤㻟 㻟㻘㻡㻞㻡 㻠㻘㻜㻜㻜 㻟㻜㻘㻜㻜㻜 㻟㻘㻜㻜㻜 㻞㻘㻜㻜㻜 31-Jul.-15 㻞㻜㻘㻜㻜㻜 㻝㻘㻠㻞㻡 㻞㻘㻜㻜㻜 㻝㻜㻘㻜㻜㻜 㻞㻞㻢 㻝㻘㻜㻜㻜 Important disclosures 㻜 㻜 and disclaimers appear 㻲㼅㻟㻛㻝㻝 㻲㼅㻟㻛㻝㻞 㻲㼅㻟㻛㻝㻟 㻲㼅㻟㻛㻝㻠 㻲㼅㻟㻛㻝㻡 㻲㼅㻟㻛㻝㻢㻱 at the end of this document. FISCO Ltd. Analyst Ikuo Shibata 伪 Business Description No.1 market share for Pachinko hall computers Daikoku Denki develops, manufactures, and sells computer systems for pachinko halls as its core business. It also manufactures and sells display and control units for pachinko machines and pachinko slot machines, and pachinko slot machines developed in-house. As the pioneer in the development of hall computers, which assist the management of pachinko halls, the Company won hall’s trust and pachinko fan’s satisfactions by providing the management system which put emphasis on data management, introduction of innovative peripheral equipment for its hall computers, and utilization of the only membership information service in the pachinko industry; and it holds the top share of the Japanese market for hall computers. Its hall computers are installed in about 4,100 pachinko halls in Japan, primarily high-end halls, giving it an approximately 35% share of the market. The Company’s two main businesses are the Information System Segment and the Control System Segment, but the Information System Segment provided 68.6% of its total sales in FY3/15 and is the main source of stable profit. (1) Information System Segment The Information System Segment offers a complete line of information equipment and services to support sales and operational management at pachinko halls. Hall computers are the core of the system used within halls, and these are supported by peripheral equipment, such as prize customer management systems and information display systems. For consolidating and analyzing the data recorded by this equipment, the Segment offers services such as a hall operational support service and a membership information service unique in the industry and serves as a strategic tool. Hall computers display the operating condition of each machine and sales data, and are the core systems for supporting pachinko hall operations. As mentioned above, these computers are supported by peripheral equipment, such as prize customer management systems and information display systems; and also serve as the foundation of the DK-SIS system, the membership information service. The major strengths of this business are that peripheral equipment and support services are often sold with hall computers as a package deal. Other than the sales of its information system equipment, the Company is shifting to a stock-type revenue model by reinforcing regular fee income business from after-sales management support service and information supply service. We encourage readers to review our complete legal statement on “Disclaimer” page. 2 ■ Business Description Hall computers and the main peripheral equipment Daikoku Denki Co. 6430 Tokyo Stock Exchange First Section 31-Jul.-15 Important disclosures and disclaimers appear at the end of this document. FISCO Ltd. Analyst (2) Control System Segment Ikuo Shibata The Control System Segment produces LCD display units, control units, switches and motors to makers of pachinko and pachinko slot machines. Applying the expertise obtained in hall computers during many years of analyzing data from pachinko machines through its DK-SIS, the Segment is serving as a developing partner to machine manufacturers by proposing specifications based on trend analysis of popular machines, and involved in contents business by obtaining the rights to use popular characters, beyond the Segment’s position as a unit manufacturer. Daikoku Denki began manufacturing and selling in-house developed machines on a full scale from FY3/14 through the brand of DAXEL Inc., its consolidated subsidiary (subsequently, “own brand”). The Company has had a series of hit products with original value creation that has more emphasis on entertainment, like the pachinko slot game machines Magical Suite Prism Nana and Sasami-san@ Ganbaranai Slot, and has established a high quality brand image specialized in anime. Results of in-house developed pachinko slot machines Magical Suite Sasami-san@ Prism Nana Ganbaranai Slot Launched January Launched September 2013 2014 4,000 units sold 6,000 units sold Ⓒ2012 prismnana ⒸAkira, Shogakukan / Production Committee@Ganbaranai ⒸDAXEL We encourage readers to review our complete legal statement on “Disclaimer” page. 3 伪 Company Strengths Introduce information equipment that is the first of its kind in the industry and open up new markets through original characters Daikoku Denki Co. (1) By offering valuable innovations, the Company established market development type 6430 Tokyo Stock Exchange First growth model Section Since its establishment, Daikoku Denki has consistently planned and developed new categories of goods and services, thereby developed the pachinko market and achieved growth. It has not just developed machines with superior functions but emphasized the importance of data management 31-Jul.-15 and the need for information disclosure. Thus, it has been able to present ideas with added value to the various aspects of management of pachinko halls. Important disclosures Launched in 1974, the Company’s first hall computer enabled the managers of pachinko halls to introduce a hall management method based on data management. Previously, pachinko halls and disclaimers appear accumulated only basic information, but with the introduction of hall computers, data-based hall at the end of this document. management became the de facto standard. In subsequent years, the Company introduced other kinds of information equipment with revolutionary functions.