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
Development and sales of products and systems using sensing technology
Year-end
December
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥2,170 16,568,271shares ¥35.931billion 8.7% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥45.00 2.1% ¥105.75 20.5x ¥1,455.28 1.5x
* Stock price as of the close on August 23, 2016. Number of shares at the end of the most recent quarter excluding treasury shares.
ROE and BPS from the last year-end.
 
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 25,678 2,558 3,043 1,897 114.68 35.00
December 2015 27,793 3,161 3,222 2,051 123.96 40.00
December 2016 Est. 32,000 3,300 2,900 1,750 105.75 45.00
* Estimates are those of the Company. From the current fiscal year, the definition for net profit has been changed to net profit attributable to owners of parent.
 
This Bridge Report presents OPTEX's earnings results for the second quarter of fiscal year ending December 2016.
 
Key Points
 
 
 
Company Overview
 
OPTEX is a leading manufacturer of infrared ray sensors for security equipment 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 equipment 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.
In collaboration with FIBER SENSYS and RAYTEC, the company offers solutions for large critical facilities (intrusion detection systems). Moreover, under its group structure in which OPTEX CO., LTD. has a competitive advantage in Japan and in EU, and same applies to FIBER SENSYS in North America centering US, Canada and Middle and Near East, while RAYTECs'sales are mainly derived from UK and EU, these three companies complement each other in terms of business areas. In addition, the group is achieving business results with activities including the deployment of RAYTEC's and FYBER SENSYS's products in Japan, Asia, Africa and the South America by OPTEX.
 
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,
 
 
Advantages :Diversified Technologies/Expertise on Sensing and Unique Sensing Algorithm
To produce stable and reliable sensors, it is essential to build on a number of elemental technologies and expertise, as well as 'algorithms' to control physical changes. The company takes advantage of its technologies/expertise suitable for intended applications and its unique sensing algorithm to secure the largest share in global market.
 
 
History
OPTEX was established in 1979 and developed the world's first automatic door sensors using infrared rays in the following year. Back then, most of the automatic doors were using pressure sensitive rubber mats, which contained sensors, and sensors using infrared rays were very innovative. The company also showed unrivaled abilities in product maintenance and implementation, and captured the top share in the automatic door sensors market in only three years since its inception (currently, about 60% share in the domestic market). The company expanded operations and listed on the over-the-counter market (equal to listing on JASDAQ) in 1991. Then it listed on the second section of Tokyo Stock Exchange in 2001 and moved to its first section in 2003.
Recently, it has been working on enhancement of solutions based on image processing technologies and high-end security systems. In 2008, it acquired ZENIC INC., which specialized in contracted development of IC/LSI for image processing systems. Furthermore, it acquired FIBER SENSYS INC. (US) in 2010 and RAYTEC LIMITED (UK) in 2012 respectively. In May 2016, the company reorganized CCS Inc. (6669, JASDAQ), which has the largest share in the global industrial LED lighting field, into a subsidiary. On Jan. 1, 2017, the company will shift to the holding company system, with the aim of advancing to next-generation management and pursuing group synergy.
 
 
 
OPTEX's ROE in FY12/15 was 8.7%, which was almost as same as the previous term. OPTEX sets a goal of ROE of 10% or more as an important management index. For further improvement of ROE, the company needs to capitalize on abundant cash in hand, including an increase in return to shareholders, and to fortify its profitability mainly by reducing fixed cost.
Major Group Companies
OPTEX CO., LTD. Development and sales of products and systems using sensing technologies
In Japan
OPTEX FA CO., LTD. Development, manufacturing and sales of photoelectric sensors, image inspection systems, measuring instruments
CCS Inc. Development, manufacturing, and sale of LED lighting devices and systems for image processing
SICK OPTEX CO., LTD. Development of general-purpose photoelectric sensors. A joint venture of SICK AG (Germany) and OPTEX FA CO., LTD.
GIKEN TRASTEM CO., LTD.  Development, manufacturing and sales of people counting systems, customer traffic counting/management systems
ZENIC INC. Contracted development of IC and LSI for image processing, and 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 sales of fiber-optic intrusion detection systems
FARSIGHT SECURITY
SERVICES LTD.(UK)
Security company providing remote video surveillance services
RAYTEC LIMITED.(UK) Development, manufacturing and sales of supplemental lighting for surveillance cameras
GARDASOFT VISION
LIMITED(UK)
Development, manufacturing, and sale of LED lighting controllers for machine vision
 
2Q of Fiscal Year December 2016 Earnings Results
 
 
FA business is healthy, but the sensing business is sluggish. Sales and profit dropped, and the forecast has been revised downwardly.
Sales were ¥13,003 million, down 6.6% yoy. Excluding the effects of exchange rates (minus 638 million yen), the sales dropped 2.1% yoy.
The sales of both the crime prevention and automatic door businesses declined from the previous year inside and outside Japan. FA was healthy inside and outside Japan.
Operating profit was 1,497 million yen, down 8.3% yoy. Cost rate improved, the favorable effect of exchange rates on SGA emerged, and so on, but they did not offset the augmentation of costs for R&D, M&A, etc. Profit increased 0.2%, when taking into account the effect of exchange rates (minus 139 million yen).
On Jul. 22, 2016, the forecasts for the second quarter and the full term were revised while considering these circumstances. (The details will be described later.)
 
 
 
 
 
 
◎Sensing Business
(Security-related)
Japan: The sales of outdoor security sensors for general facilities were sluggish, as the demand for large-scale projects including mega-solar power ones ebbed and the season of the replacement of products started.
AMERICAs: Sales declined, as the sales of peripheral security sensors for important facilities were healthy, but the sale in Latin America was delayed.
EMEA: Sales decreased due to the effects of exchange rates, although the sales of outdoor security sensors in southern Europe were favorable.
Asia: The sales of security sensors targeted at Oceania started recovering in 1Q, but could not offset the downturn in the entire Asia in 2Q.

(Automatic door-related)
Japan: The sales of sensors for sheet shutters were healthy. The sales of sensors for automatic doors are recovering.
AMERICAs: The OEM sales toward leading automatic door manufacturers were sluggish, amid the season of product replacement before the enforcement of new standards.
EMEA: The OEM sales toward leading automatic door manufacturers were stagnant, due to the slowdown of the European economy. The sales toward the Middle and Near East grew.
 
◎FA Business
Japan: The sales of LED lights for quality testing, image sensors and displacement sensors targeted toward the organic EL, solar panel, semiconductor, rechargeable battery, and electronic component industries were favorable.
EMEA: Although the sales of versatile sensors were sluggish, the sales of displacement gauges were healthy.
Asia: The sales of displacement gauges in the Chinese markets of smartphones and solar panels were favorable.
 
◎EMS Business
Due to the decrease of entrusted projects, sales and profit declined.
 
 
Current assets increased 3.1 billion yen, due to the growth of accounts receivable and inventory assets, etc.
Due to the increase in intangible fixed assets through the reorganization of Gardasoft Vision Limited in the U.K. into a subsidiary, fixed assets grew 3.7 billion yen, and total assets rose 6.9 billion yen to 37,774 million yen.
As the debts of the company were included in the consolidated results and so on, total liabilities augmented 5 billion yen to 10,333 million yen.
Due to the yen appreciation, foreign currency translation adjustment became negative, and non-controlling shareholders' equity increased. Consequently, net assets grew 1.8 billion yen to 27,441 million yen.
As a result, equity ratio dropped by 16.9% from 78.0% at the end of the previous term to 61.1%.
 
 
Operating CF increased further, as accounts payable increased, income taxes paid decreased, and so on.
Investing CF decreased further due to the expenditure for acquiring the shares of a subsidiary, which changed the scope of consolidation, while free CF became negative.
Financing CF became positive, due to the augmentation of short-term debts.
The cash position improved.
 
(4) Topics
◎ Acquired 100% Ownership of Gardasoft Vision Limited in the U.K.
In May 2016, the company wholly acquired Gardasoft Vision Limited which specializes in LED lighting controllers for machine vision (image processing) of factory automation in the United Kingdom and strobe lights for vehicle license number recognition cameras.
Sales of Gardasoft Vision Limited are about 3 million pounds (about 470 million yen).

(Background and Purposes of Subsidiary Acquisition)
OPTEX Group focuses on the machine vision lighting business in quality control and automation used in the production lines of factories, and as stated in the previous report, it wholly acquired CCS Inc. (listed on JASDAQ: #6669).
In image processing, LED lights and precision of their power supply control play an important role that influences performance of machine vision systems as a whole. The acquisition of the products and technology of Gardasoft Vision Limited enables OPTEX Group to supply comprehensive systems and achieve more reliable image sensing.
In addition, the group is going to expand its business by effectively and efficiently using management resources such as outlets and networks in the industry other than the products and technology. Through which, the group aims to make it to the top in the global field of machine vision lighting.
Moreover, OPTEX Group strengthens the business of lighting for vehicle license number recognition cameras to extend its business operations in this area, starting with the U.K., by integrating the technology and outlets of Gardasoft Vision Limited.
 
◎ Established a Subsidiary in Thailand
In July 2016, OPTEX established a subsidiary in Bangkok, Thailand, aiming to enhance its businesses such as the security related business and automatic door related business in the Southeast Asian regions.
It predicts that the security industry in Thailand will make a shift from security by human to mechanical security due to rising personnel expenses and labor shortage.
Through expansion of its business in the Thai market by enhancing its sensor systems and technical support, OPTEX aims to grow and develop the subsidiary as a base in Southeast Asia that conducts businesses other than security and automatic door related ones and explores new markets in the future.
 
 
Fiscal Year December 2016 Earnings Estimates
 
 
Earnings forecast revised downwardly
As mentioned above, the full-year earnings forecast was revised downwardly, while considering the recent business conditions and exchange rate trend.
Sales are estimated to be 32 billion yen, up 3.2% yoy. The sales of about 5.1 billion yen (the second half) by the subsidiaries CCS Inc. and Gardasoft Vision Limited contributed. Operating profit is estimated to be 3.3 billion yen, up 4.4% yoy. Ordinary profit is estimated to be 2.9 billion yen, down 10.0% yoy.
The dividend forecast has not been revised. The dividend amount is estimated to increase by 5 yen/share to 45 yen/share. Payout ratio is projected to be 42.6%.
 
(2) Measures for the second half
The progress of each business and the measures for the second half are summarized as follows.
 
 
 
 
 
 
Shift to the Holding Company System
 
On August 3, 2016, OPTEX announced the shift to the holding company system and acquisition of 100% ownership of OPTEX FA Co., Ltd., its consolidated subsidiary.
 
(1) Acquisition of 100% Ownership of OPTEX FA Co., Ltd.
OPTEX Co., Ltd. wholly acquires OPTEX FA Co., Ltd., a consolidated subsidiary (the current ratio of shareholding by OPTEX is 54.3%) by share exchange.
 
(Background and Purposes)
OPTEX founded OPTEX FA Co., Ltd. in January 2002 to clarify business management and expeditiously spend its capital on growing businesses, and entrusted OPTEX FA Co., Ltd. with the industrial equipment business. Since then, each company, independently of the other, has proceeded with technical development and provided products and services for their customers. In 2005, OPTEX FA Co., Ltd. got listed, focused on new product development, and entered the industrial LED lighting business.

However, because the business environment has changed considerably, it is time for both companies to greatly revolutionize their business models, and thus, the 2 companies have reached the conclusion that their competitiveness can be enhanced by cooperating with each other in creation of business infrastructure such as technological development and expansion of markets.
They also thought that, in making investment including M&A, collaboration between the 2 companies would enable more dynamic action in terms of the investment scale, etc. than taking independent action with management resources of each company, and corporate value of both companies would further increase.

Both companies concluded and decided that, to pursue the group synergy, it was appropriate to make OPTEX FA Co., Ltd. a wholly-owned subsidiary of OPTEX in conjunction with the transition of OPTEX to a holding company.
The reasons why they selected share exchange over acquisition by cash are that, in further expanding the industrial equipment business, they seek to accelerate corporate value improvement through continuous support by the shareholders of OPTEX FA Co., Ltd. as those of OPTEX Group and aim to further increase interests of shareholders.
 
(Summary of Allocation)
0.34 shares of OPTEX (a 100% parent company for share exchange) are allocated to a share of OPTEX FA Co., Ltd. (a 100% subsidiary for share exchange).
Although shareholders have the right to receive dividends of shares less than one unit, such shares cannot be sold on the market; therefore, shareholders are allowed to demand that OPTEX purchase shares less than one unit by the purchasing system. OPTEX will make payment corresponding to fractions of shares.
 
(2) Transition to the Holding Company System
A transition to the holding company system will be made on January 1, 2017, and the corporate name will be changed to the holding company "OPTEX Group Co., Ltd."
The holding company "OPTEX Group Co., Ltd." will be launched with 4 consolidated subsidiaries including "OPTEX Co., Ltd. (business of current OPTEX Co., Ltd. will be succeeded; a wholly-owned subsidiary)," " OPTEX FA Co. Ltd. (a wholly-owned subsidiary)," "CCS Inc. (the ratio of shareholding is 66.7%)," and "Opal OPTEX Co. Ltd. (a wholly-owned subsidiary)."
 
 
 
(Main Functions of the Holding Company and Operating Companies)
The holding company proposes the use of management resources to streamline the organizational structure, and maximize group strategy and synergy, and its major functions include group strategy planning, information systems, accounting, intellectual property management, and IR.
On the other hand, each operating company advances self-reliant management, and specializes in functions that enable acceleration of growth through optimum business execution and strategic mobility such as development, R&D, marketing and sales, as well as production.
 
(5 Aims of Organizational Transition to a Holding Company)
The company enumerated the following 5 keywords as the aims of this organizational transition:
 
 
Of these aims of the transition to the holding company system, President Kobayashi emphasizes particularly the importance of "change of the organization and corporate culture" and "mutual enhancement, competition and growth."

Key points from the interview with President Kobayashi are as follows:
Transition to the next-generation management proceeds steadily. Each of the current directors and executive officers started to expand their operating scopes 4 years ago and continues the expansion until today to secure career path formation. They will keep propelling dynamic and expeditious management under the holding company structure.
It can be said that the principal purpose of this transition to the holding company is to lay the foundation for cultivation of human resources of the generation following the next generation.
Our company occupies the largest share in the global markets of security and automatic doors and owns plenty of cash position, which allows us to maintain a stable business foundation.
This is a great advantage; however, I myself am exceedingly frustrated with the current secure situation because we cannot fully exert our entrepreneurial mind and challenge the status quo.
If we continue to hold our company's strength, "the top company in the niche market," agile management of smaller organizations is more appropriate and efficient than management of a larger organization.
For example, if an employee with an entrepreneur mind suggested a business idea and the management determined that the idea was full of promise, we would establish a subsidiary under the holding company as an intra-venture business and let the employee challenge himself or herself.
Although the management has to assess such venture businesses after a certain period of time to determine whether they should be continued and developed or discontinued, I expect that other employees will be inspired and motivated to challenge themselves if the number of such activities increases from the bottom up. In several years, a lot of intra-venture businesses may be launched as subsidiaries under the holding company.
I am in high hopes that, for cultivation of management of the generation following the next generation, the mind of "mutual enhancement, competition and growth" will become widespread among employees.
We cannot say that our current business results are not successful; however, with this transition to a holding company organization as a great turning point, we would like to strive to improve the corporate value of OPTEX Group through continuing growth and creation of business in niche markets where we can make it to the top in the world.
 
 
Conclusion
 
Despite the effects of exchange rates, quarterly sales and ordinary profit decreased yoy for the second consecutive term. Accordingly, the share price of the company dropped, hitting a year low.
However, the timing difference of domestic crime prevention and overseas automatic doors is expected to be solved in the second half, and the yen appreciation will reduce cost. Therefore, in the short term, we would like to pay attention to the variations in sales and profit rate from the third quarter. In the medium term, we would like to see what kinds of qualitative and quantitative effects will be exerted by the shift to the holding company system, including the synergy between OPTEX FA Co., Ltd. and CCS Inc..
 
 
<Reference1:Future Business Strategies (from the previous Bridge Report) >
 
The Company has adopted the management policy of "creating something new", and is applying themselves to "creating a new business" as well as continuing with expanding their core business in order to realize a consolidated sales of ¥50 billion by FY 2019.
 
◎Change to Business Model - Ongoing Flow of Income
Including the traditional business model of selling out individual sensor products, the company will expand the business into system solutions, sale of consumable goods etc. and improve the ongoing flow of income.
 
 
◎Creation of New Business: "IoS" Service
The center of this ongoing flow of income business model is the "IoS (Internet of Sensing Solution) service."
By connecting the sensors into a network and utilizing the company's strengths in "area detection organization", "sensing algorithm", "low power consumption", "environment resistance capabilities" etc., the company will be able to provide a new added value and solution to the clientele in the form of "anti-crime/security/disaster prevention", "environmental monitoring", "operation management" and "facility/asset management".

In particular, the company's sensing algorithm, used in all sensors such as security sensors, driving behavior sensors, automatic door sensors, has high detection capabilities meaning it will react precisely to necessary pieces of information.
By utilizing this strength, the clientele will consist of system operators, and the company will be able to develop applications and sensors to handle different tasks.

In comparison to the general "IoT" service, which is intended for processing large amounts of big data, the "IoS (Internet of Sensing Solution)" service is unique in that it extracts smart data, which are definite sources of information that have been sorted out via an application sensor.
 
◎Three Categories of IoS
At the company, services are provided under the following three categories:
① Complete Solution Package- "sensors, operation servers, supply of operation and services" are all managed by the company
② Alliance Solution Package - "connection to an operation/service provider"
③ Terminal Unit Sale Package - sensors etc. are sold
 
 
① Complete Solution Package
The company will use "Remote Monitoring Service (Cloud Visual Verification)" as a representative example.
This uses the company's sensors with the world's largest camera manufacturer, Axis' IP camera to conduct 24-hour surveillance on all types of facilities such as car dealers and construction sites through an online connection to a monitoring center. All sensors, cameras, services and operation will be managed by the company group.
UK subsidiary, Farsight Security Services Ltd., which has experience in long-distance surveillance released the world's first bundled service in the UK in June 2015.
The company is anticipating results this term or in the next, and is expecting to open it up to regions outside of the UK in the latter half of the next term.

②Alliance Solution Package
As a representative example, introduced in the last report was the "careful driving cashback service", the first ever new type of automobile insurance which Sony Assurance Inc. had started selling in February 2015 in Japan.

The user (insurance policyholder) installs the "Drive Counter", a device that utilizes the OPTEX driving behavior sensing technology to measure the driver's characteristics, in their vehicle, and drives for a fixed duration of time. The Drive Counter uses OPTEX's unique driving behavior measurement technology which has accelerometers embedded to record instances of dangerous driving.
At the end, the user sends the Drive Counter to Sony Assurance Inc. If they score 60 or over, then they receive a cashback in accordance with their grade.

Sony Assurance Inc. has thought that in order for this type of insurance to be made mainstream, "the installation of the measuring device and usage need to be simple", "operation costs including the cost of the device need to be low" and "the device must be highly reliable", but the OPTEX Drive Counter uses high precision sensing technology, does not use the telematics system, which has communications functions, and does not have any running costs, meaning that it had met all of their criteria which is why Sony Assurance Inc. evaluated it highly and after 4 years of conclusive data, they went into industrialization.

In addition, the company is progressing with the development of a simple water quality measurement solution via the Alliance package.
Water quality measurement data gathered on-site, user data, usage data etc. will be managed by the operation/service company via the IoS platform. Furthermore, including the system, the company has developed a reagent to conduct simple and prompt measurements of water quality and started selling it in April 2015. The company is aiming for an ongoing flow of income via reagent and system sales. The company believes as a company that has been working on water quality measurement sensors from before as an environment-related business, the company has taken a major step forward in expanding the enterprise.

③IoS Terminal Unit Sale Package
The company provides near-infrared ray sensors, far-infrared ray sensors, ultrasonic sensors, distance image sensors, fiber sensors, accelerometers, laser sensors etc. through correspondence with an open system which has all the sensor essentials.
Outside of the terminal unit, the partners control the system. However, the company understands all of the specifications of the service and operation of the sensors and thus, will provide the clientele with the optimal specifications.
The company will have a different clientele to that of the past, and therefore, is anticipating an expansion to the business in the future.
 
 
<Reference2:Regarding Corporate Governance>
 
 
◎ Corporate Governance Report
The company submitted a latest corporate governance report on Jul. 15, 2016.
 
 
 
 
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 come 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.
Copyright(C) 2016 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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