BRIDGE REPORT
OPTEX CO., LTD. (6914)
Toru Kobayashi Chairman, President and CEO
Toru Kobayashi
Chairman, President and CEO
Corporate Profile
Company
OPTEX CO., LTD.
Code No.
6914
Exchange
TSE 1st Section
Industry
Electric equipment (manufacturer)
President
Toru Kobayashi
HQ Address
5-8-12, Ogoto Otsu, Shiga
Business Description
Developing/marketing of Sensing products and systems using infrared rays
Year-end
December
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥1,971 16,549,384 shares ¥32,618 billion 8.2% 100 share
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥35.00 1.8% ¥111.78 17.6x ¥1,269.42 1.6x
* Stock price as of the close on November 7, 2014. Number of shares at the end of the most recent quarter excluding treasury shares.
 
Consolidated Earnings Trends
Fiscal Year   Net Sales   Operating Profit Ordinary Profit   Net Profit     EPS (¥)   Dividend (¥)
December 2010 17,395 1,705 1,761 981 59.30 30.00
December 2011 18,502 1,677 1,830 1,033 62.45 30.00
December 2012 20,699 1,398 1,680 825 49.88 30.00
December 2013 23,582 2,108 2,628 1,620 97.90 30.00
December 2014 Est. 26,700 2,900 3,000 1,850 111.78 35.00
* Estimates are those of the Company.
 
This Bridge Report presents OPTEX's earnings results for the 3rd quarter of fiscal year December 2014.
 
Key Points
 
 
 
Company Overview
 
OPTEX is a leading manufacturer of infrared ray sensors for security equipments and automatic doors. The company manufactures and sells security-related products such as outdoor sensors, for which it maintains top share of 40% in the global markets, automatic door sensors, for which it maintains a 30% share of the global markets and a 60% share of the domestic market, and environment-related products. OPTEX deals with sensors for industrial equipments through its subsidiary OPTEX FA CO., LTD. Other group companies include RAYTEC LIMITED (UK), which has attained the largest global share (about 50 %) for supplemental lights for CCTV, and FIBER SENSYS INC. (US), which deals with optical fiber intrusion detection systems. The company is also focusing on the development of solutions for large critical facilities (intrusion detection systems). The group seeks for the synergy effects from FIBER SENSYS and RAYTEC LIMITED, developing solutions for large critical facilities. OPTEX CO., LTD. has a competitive advantage in Japan and in EU, and same applies to FIBER SENSYS in North America centering US, and Middle and Near East, while RAYTEC'sales are mainly derived from UK and EU. In light of the business area, these three companies complement each other, gradually leading to the deployment in Middle East by OPTEX and development in North America, Latin America and Middle East by RAYTEC.
 
Business Description
The company is comprised of business segments such as Sensing (security-related, automatic door-related, others), FA(sensors used for industrial equipment), EMS (in Chinese factories) and Others, as follows,
 
 
 
Fiscal Year December 2014 3Q Earnings Results
 
 
Year-on-year increases of 8.8% in sales and of 12.8% in ordinary profit
Sales are ¥18,734 million, up 8.8% yoy (up 4.6% yoy in Japan, up 11.0% overseas). For the performance of each segment, the sensing (security-related), sensing (automatic door-related), and FA segments have been healthy. A positive impact from foreign exchange is ¥1,010 million. Without considering it, sales growth rate is 2.9%. Operating profit is ¥2,077 million, up 21.1% yoy. The augmentation of SG&A costs (increases of 194 million in personnel expenses, of ¥70 million in costs, of ¥132 million in expenditures for establishing a joint venture, and of ¥291 million in the effect of exchange rate change) is offset by the increase in gross profit (increases of ¥260 million in sales and of ¥654 million in exchange gain, and a decrease of ¥135 million in costs), but without considering the effect of exchange rate fluctuation, it is nearly equal to that for the same period of the previous year. Ordinary profit is ¥2,295 million, up 12.8% yoy, due to the decrease in exchange gain.
 
 
Quarterly Financial Results
 
In the first quarter (Jan-Mar), sales and profits increased due to the rush demand before the consumption tax hike, but in the second quarter (Apr-Jun), sales declined in the wake of the consumption tax hike. SG&A costs augmented, but the costs for the establishment of headquarters in Americas and EMEA (Europe, Middle East, and Africa), the security-related exhibitions in the U.S. and the U.K., and the foundation of a joint venture in China by a subsidiary were all temporary, and so in the third quarter (Jul-Sep), sales and profits increased. (SG&A costs: ¥2,558 million for the 1st quarter, ¥2,792 million for the 2nd quarter, and ¥2,619 million for the 3rd quarter)
 
 
Sensing Business
Sales are ¥13,116 million (up 9.4% yoy), and operating profit is ¥1,386 million (up 21.6% yoy). As for the breakdown of sales, the security-related business earned sales of ¥9,513 million (up 8.5% yoy), while the automatic door-related business achieved sales of ¥3,106 million (up 9.7% yoy).
The domestic sales of the security-related business decreased 5.1% yoy. The number of orders from security firms has been healthy, but the number of orders from nuclear power-related organizations reached a peak and then declined. As for overseas sales, there were year-on-year increases of 6.3% in North America, of 14.1% in Europe, and of 23.1% in Asia. The sales for outdoor security sensor for residential market in southern Europe and the sales subsidiary in South Korea increased steadily.
The domestic sales of the automatic door-related business increased 4.0% yoy. Performance has been healthy, as the sluggishness after the consumption tax hike was not so significant and the construction field has been lively. Outside Japan, sales increased 15.8% yoy in North America, and 23.0% yoy in Europe. The sales toward large automatic door manufactures have been healthy.
 
FA Business
Sales are ¥3,862 million (up 14.6% yoy), and operating profit is ¥192 million (down 13.1% yoy).
Domestic sales increased 17.1% yoy, thanks to the active equipment investment in the fields of distribution, electronic parts, and automobiles. Outside Japan, sales were preferable in Europe where the products are sold to mainly SICK in Germany, and in China where a joint venture was established (up 6.3% yoy in Europe; up 52.8% yoy in Asia).
Profits declined, as profit margin decreased due to the change in the composition of sales and SG&A costs increased due to the full-scale operation of the joint venture in China.
 
EMS Business
Sales declined by 15.5% yoy to ¥611 million, while the segment profits surged by 64.9% yoy to ¥221 million. The decrease in orders led to a drop in sales but the improvement in the cost ratio pushed up the profits.
 
 
Total assets as of the end of September 2014 expanded to ¥28.728 billion, an increase of ¥1.196 billion compare to the end of previous term. On the asset side, Inventories and Marketable/investment securities increased by ¥534 million and by ¥532 million respectively. On the liability side, Net Assets increased by ¥1.044 billion due to increase of retained earnings. Capital ratio was unchanged at 76.3% compare to the end of previous term.
 
 
According to 'Aggregated summary of financial results' published by Tokyo Stock Exchange, which lists up ROEs of all the companies listed on the first section, the second section and Mothers of TSE for the term FY3/14, ROE for all the sectors except financial was 8.65% (4.99% in FY3/13), manufacturing sector was 8.55% (4.53% in FY3/13) and non-manufacturing was 8.79% (5.67% in FY3/13). OPTEX's ROE in FY12/13 was 8.24%, which was a significant improvement from 4.65% in the previous term. This was driven by the higher profitability due to the correction to yen exchange rate. The company achieved almost the same level of ROE as the average of all the non-manufacturing companies listed on TSE both in FY12/12 and FY12/13. To attain even higher ROE, the company needs to capitalize on abundant cash in hand (for example, increasing return to shareholders), while consistently achieving its sales targets (¥30 billion for FY12/15 and ¥50 billion for FY12/19).
 
(4) Topics
◎ 15 models of auxiliary projectors for cameras added to the lineup.
The company released 15 models of the Raytec Vario Series of auxiliary projectors for cameras (*) in Sep. 2014.

The subsidiary Raytec's auxiliary projectors for security cameras for intruders have been distributed to be used for security at important facilities, including power plants, factories, and airports, inside and outside Japan, and their global share is 50%.
The projector Raytec Vario series added to the lineup can illuminate a broad area homogeneously at a long distance. The angle, range, distance, etc. of light can be selected and combined freely according to the setting environment and camera specs, and these products can meet the diversified demand for cameras, including the monitoring for preventing disaster and keeping safety.
The company will cultivate markets while assuming the following use of purpose.
Anti-disaster surveillance: water volume in dams and rivers, snow depth meters, volcanoes, landslide
Safety surveillance: traffic record, railroads
Others: a system for reading number (license) plates, and improvement of the surveillance performance of existing cameras
 
 
Since the awareness of security is growing inside and outside Japan, the camera market is growing with an annual rate of about 10%. In addition, image processing and recognition technologies are being advanced, through the shift from analog cameras to network cameras and the growth of demand for taking wide-range pictures with a PTZ or omnidirectional camera, or the like. Considering the surveillance camera-related market as promising, the company is developing and supplying products actively, and with the Raytec Vario series, the company aim to achieve total annual sales of ¥500 million for the foreseeable future.
 
(※) What is the supplementary lighting for cameras?
High-resolution surveillance cameras are now available due to recent technological innovation, but when a picture is taken in the dark, the light amount on each pixel decreases, and so the image becomes vague. By combining a projector and a surveillance camera, it is possible to offer optimal illuminance according to the angle of view and imaging distance of the camera, bring out the potential of the camera at night, and obtain clear images.
 
 
Fiscal Year December 2014 Earnings Estimates
 
 
The earnings forecast has not been revised. The double-digit increases in sales and profits are expected.
The earnings forecast has not been changed. As for the sales in each segment, sales are estimated to be as healthy as ¥13,612 million for the security-related segment (up 14.6% yoy), ¥4,198 million for the automatic door-related segment (up 7.0% yoy), ¥5,306 million for the FA segment (up 13.7% yoy), and ¥3,584 million for others (up 15.1% yoy). The second half will see double-digit increases in sales and profits from the first half. Dividend per share will be an annual total of ¥35, composed of a ¥20 interim dividend, including the ¥5 dividend for commemorating the 35th anniversary of foundation, and a ¥15 term-end dividend. Estimated payout ratio is 31.1%.
 
 
Conclusions
 
With this financial statement, it is confirmed that the drop in sales and profits in the second quarter (Apr-Jun) was temporary. The progress rate with respect to the full-year earnings forecast as of the 3rd quarter seems steady.
However, it is concerned about the fact that the effects of exchange rate change on sales and profits are large and when excluding the effects, the performance has not improved from the same period of the previous year.
According to the interview with the company, they are well aware of this problem, and plan to strengthen its earning system by reducing fixed costs further.
In the short term, it is expected that corporate structures will be fortified, while considering the effects of the recent yen depreciation. In the medium term, it is expect the outcomes of the cultivation of the security camera market, for which the product lineup has been enriched.
 
 
<reference : Progress in Business Strategies>
 
The company has been conducting businesses under the business segment structure, but it has made organizational changes at the beginning of FY12/14. It has now moved to a cross-business and cross-regional matrix where four Sales Head Quarters -- EMEA(Europe/Middle East/Africa), Americas, Asia and Japan-- deal with Security-related, Automatic door-related and new businesses cross-functionally. The purpose of these changes was to seek for further synergies and to facilitate efficient management and, by further localizing regional strategies, the company intends to promote global businesses as a whole group.
 
 
Under the new organization, the company shares resources within the group such as technologies, products and distribution channels and seeks for synergies in order to enhance technical and sales capabilities and to expand its business field. Its short-term target is to achieve sales of more than ¥30 billion and ordinary profit of more than ¥4.1 billion in FY12/15.

Strategies for each business are as follows:
 
Security-related Business
Two pillars of business strategies in EMEA (the company's main focus area) are 1) to maintain the largest share in the outdoor security sensor market and 2) to enter into Middle East and African markets. On the back of heightening security consciousness, outdoor security sensor has now become fast-growing market with high potential. Demand for high-end sensors for oil-related facilities is rising in Middle East, while many projects are in progress in African countries.
Americas are the second important area after EMEA for the company, where it intends to focus on Visual Verification. In US, police normally dispatches its officers to actual sites after confirming intruders on security cameras (some states have revised the legislation in that way), so demand for alarm systems equipped both with a sensor and a camera is growing.
Meanwhile, in Japan, the company focuses on expanding sales of high-end security products for solar power companies as well as promoting system using LED lighting to parking lots and car dealers. In Asia, it tries to enhance sales of high-end products to meet an increasing demand created by infrastructure building as well as self-protection products for residential markets.

According to the company, the security market is worth ¥10 trillion worldwide, of which ¥8 trillion is dominated by cash transport and call for services and the remaining ¥2 trillion is the equipment market. Within the latter, the market for security camera system is said to be worth ¥800 billion and the alarm system ¥300 billion, of which intrusion sensors account for ¥100 billion (¥30 billion for outdoor sensors). Honeywell keeps the largest share of 18.5% within the intrusion sensor market followed by tyco (11.5%), United Technologies (10.0%), OPTEX (7%), and BOSCH (6%). OPTEX plans to meet demand for overall security system by reinforcing products such as sensor cameras and lighting for cameras.
 
Automatic Door-related Business
EMEA is the prime area for the company's automatic door-related business and it focuses on enhancing the product line-up which is compliant to European safety/product standards (enhancement of the product line-up for major sensors have completed). It now plans to enhance peripheral equipments and to build relationships with automobile makers based on trust by sharing business road maps. In Americas, another important area along with EMEA, the company tries to differentiate itself by its superior infrared technology. Specifically, it highlights the reliability of its infrared technology by installing 'doorway detection function' to all models.
Furthermore, the company plans to launch appropriate products to maintain high level of customer satisfaction. And in Asia, where products with high quality and reliability have become widespread, it strives to work together with local makers in order to improve efficiency in sales activities.
 
New Business Fields
The company drives forward its growth strategy in accordance with 'Matrix of Business Development', using matrices of market development and product development to achieve four strategic goals: 'expansion of core businesses', 'development of new application', 'development of newly emerging markets' and 'entry into new business fields'. New business fields include electric railway, public transport and vehicle detecting and the actual business plans for these fields are currently being drawn up in US and UK.

In UK, an increasing number of laser scan sensors have been installed to prevent accidents at railroad crossings.
Meanwhile, sensors for parking meters are under the proving tests in US.
 
 
※ FA Business (scope of business of consolidated subsidiary OPTEX FA Co., Ltd.)
OPTEX FA aggressively offers solutions to automobile, semiconductor, electric/electronics, food/pharmaceutical/cosmetics, logistics and other industries to acquire new customers in Japan and overseas (particularly in emerging markets). As a part of this effort, it intends to reinforce the existing partnership with Mitsubishi Electric and explores other collaboration opportunities in Japan. In China, where production automation is under way, the local distribution company (joint venture) has officially started operation.
Leading Companies in OPTEX Group
OPTEX Co., Ltd. Development and distribution of products and systems using sensing technologies.
In Japan
OPTEX FA Co., Ltd. Development, manufacturing and distribution of photoelectric sensors, image inspection systems,measuring systems
SICK OPTEX Co., Ltd. Development of general-purpose photoelectric sensors. A joint venture of SICK AG (Germany) and OPTEX FA Co.,Ltd.
GIKEN TRANSTEM Co., Ltd.    Development, manufacturing and distribution of people counting systems, customer traffic counting systems
ZENIC Inc. Contracted development of IC and LSI for image processing, design and sales of FA systems
O'PAL OPTEX Co., Ltd. Membership-based outdoor sports club and welfare facility for OPTEX employees
Overseas
FIBER SENSYS INC.(US) Development, manufacturing and distribution of fiber-optic intrusion detection systems
FARSIGHT SECURITY
SERVICES LTD.(UK)
Security company providing remote video surveillance services
RAYTEC LIMITED.(UK) Development, manufacturing and distribution of supplemental lighting for surveillance cameras
 
Disclaimer
This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.

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