BRIDGE REPORT
(6914)

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OPTEX GROUP (6914)
Toru Kobayashi Chairman and CEO
Toru Kobayashi
Chairman and CEO
Isamu Oguni President and COO
Isamu Oguni
President and COO
 
Corporate Profile
Company
OPTEX GROUP Co., Ltd.
Code No.
6914
Exchange
TSE 1st Section
Industry
Electric equipment (manufacturer)
Chairman
Toru Kobayashi
President
Isamu Oguni
HQ Address
5-8-12, Ogoto Otsu, Shiga
Year-end
December
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥4,560 17,347,305shares ¥79,103 million 7.4% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥50.00 1.1% ¥161.42 28.2x ¥1,480.66 3.1x
* Stock price as of the close on Nov 13, 2017. Number of shares at the end of the most recent quarter excluding treasury shares.
ROE and BPS are from the last year-end.
 
Consolidated Earnings Trends
Fiscal Year Net Sales Operating
Profit
Ordinary
Profit
 Net Profit   EPS (¥)  Dividend (¥)
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 31,027 3,015 3,086 1,809 109.33 45.00
December 2017 Est. 36,300 4,200 4,250 2,800 161.43 50.00
* 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 GROUP's earnings results for the third quarter of fiscal year ending December 2017.
 
Key Points
 
 
 
Company Overview
 
OPTEX GROUP Co., Ltd. is a holding company centered around OPTEX Co., Ltd. that manufactures and sells outdoor sensors (top share of 40% in the global market), automatic door sensors (30% share of the global market and 60% share of the domestic market) and environment-related products.
OPTEX GROUP holds subsidiaries including OPTEX FA CO., LTD., which deals with FA related sensing business, CCS Inc. which holds the global top share in the LED lighting business for image processing, 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.
 
 
Business Description
The Company's business is composed of its main Sensing Solution (SS) business (security-related business, automatic door-related business, and EMS-related business), Factory Automation (FA) business (sensor for industrial machine), Machine vision lightning (MVL) business (LED lighting device and system for image processing), and Other business (operation of sport clubs). (The names and segment changed when the Company changed its system to a holding company.)
 
 
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 shifted to the holding company system, with the aim of advancing to next-generation management and pursuing group synergy.
 
 
OPTEX GROUP's ROE in FY12/16 was 7.4% and less than 8% for the first time in 4 terms.
The Company sets a goal of ROE of 10% or more as an important management index and aims for recovery to more than 8%.
 
 
Third Quarter of Fiscal Year December 2017 Earnings Results
 
 
Significant increase in sales and profit
Sales were 27,598 million yen, up 30.6% yoy. In addition to the healthy performance of the FA business, the reorganization of CCS into a subsidiary contributed. Domestic sales were 11,615 million yen, up 48.0% yoy, while overseas sales were 15,983 million yen, up 20.3% yoy.
Due to the reorganization of CCS into a consolidated subsidiary, SG&A expenses also augmented, but were offset by sales growth, and operating profit was 3,815 million yen, up 69.6% yoy. (There was an exchange loss amounting to 94 million yen.)
Ordinary profit rose 104.5% to 3,903 million yen, thanks to the increase in investment gain on equity method and the shrinkage of exchange loss.
 
 
Sales in the third quarter (July-September) were up 11.7% yoy, and ordinary profit increased 43.2% yoy. Compared to the previous term, sales fell by 3.0% and ordinary profit decreased by 23.2%.
 
 
 
 
 
◎SS business
(Security-related)
Japan: Sales dropped because sales of outdoor security sensors targeted at security companies were sluggish.
AMERICAs: Sales dropped because the demand for outdoor security sensors targeted at large-scale key facilities came to an end.
EMEA: Sales increased as sales of outdoor security sensors targeted at large-scale key facilities increased steadily.
Asia: Sales grew significantly due to healthy sales of security sensors targeted at Korea and Australia.
 
(Automatic door-related)
Japan: Sales increased as sales of sensors for automatic doors and factory shutters increased steadily.
AMERICAs: Sales dropped because sales of sensors for automatic doors targeted at major clients in North America were sluggish.
EMEA: The sales of sensors for automatic doors targeted at major clients in Europe were sluggish.

Outside Japan, the company lost ground to the new products of competitors.
 
◎FA business
Japan: Sales grew significantly due to healthy sales of semiconductors, secondary batteries, flat-panel displays, electronic parts, displacement sensors for the food industry, image sensors, and LED lamps for image inspection.
EMEA: Due to the effect of sales promotion toward OEMs, sales of displacement sensors were steady. Consequently, sales grew significantly.
Asia: As the investment in labor-saving equipment was active in China, the sales of displacement sensors, especially those for the smartphone industry, were steady.

The shipments of products, especially electrical appliances, machinery, and secondary batteries for automobiles, to SICK in Germany remained healthy.
 
◎MVL lighting business
Japan: Sales expanded steadily, as solutions were enriched and proposals were strengthened.
AMERICAs: Performance was healthy, as there were large-scale orders for smartphones and continuous transactions in North America.
EMEA: The semiconductor market in Europe was healthy, and sales toward major clients continuously expanded.
Asia: Sales dropped as the joint venture in China was discontinued, but the sales in emerging countries, such as Malaysia, increased.
 
 
Current assets increased 1,882 million yen, due to the rise in cash and deposits, accounts receivable and inventory assets through sales growth. Because of the decrease in intangible assets, fixed assets dropped 337 million yen, and total assets rose 2,541 million yen to 40,222 million yen.
Due to an increase in accounts payable, total liabilities increased 239 million yen, to 9,265 million yen.
Net assets grew 2,302 million yen to 30,956 million yen, as non-controlling shareholders' interest decreased, but capital surplus and retained earnings increased.
As a result, the equity ratio rose by 5.1% from 65.0% at the end of the previous term to 70.1%.
 
 
Fiscal Year December 2017 Earnings Estimates
 
 
Double-digit increase in sales and profit
Although the progress rate is high for both sales and profits, there is no change in the earnings forecast at this time.
Sales are projected to be 36.3 billion yen, up 17.0% yoy. Business performance is healthy as a whole, but in the FA business, the company expects that smartphone-related sales, which were favorable in the first half, will tail off. In the MVL business, the company will redevelop the business in China.
Operating profit is estimated to rise 39.3% to 4.2 billion yen. Cost rates are forecasted to increase because projects in the first half with high profit rates will decrease. The company will also actively conduct upfront investment, including the establishment of a U.S. distributor of OPTEX FA.
The dividend is to be 50 yen/share. The estimated payout ratio is 31.0%.
 
 
The high progress rates of the FA business in EMEA and Asia, and the MVL business in EMEA and Asia are eye-catching.
 
 
Conclusion
 
Although the full-year earnings forecast remains unchanged, the progress rate is high for both sales and profits as compared to past results, and we would like to pay attention to just how much it will increase in the fourth quarter.
However, rather than focusing on the current term, it seems that investors are shifting their gaze to whether or not it is feasible to achieve the "sales of 50 billion yen, and an operating profit of 7.5 billion yen" already mentioned as the performance targets for the next term and in 2019. We hope to see the emergence of a synergistic effect of the reorganization of CCS into a subsidiary in addition to sales and profit increases. Also, we expect the implementation of the second and third M&As.
 
 
 
<Reference1:Future Growth Strategy>
 
"Security" and "Factory Automation" are 2 pillars of its growth strategies.
 
(1) Growth strategies
◎Security-related: Incorporation of surveillance cameras and sensors
There is a problem with detecting abnormality just by a sensor from an accuracy point of view (e.g. triggering a false alarm). In the UK, the police rushes to the site only after the sensor detects abnormality and a camera image is confirmed. In the USA, some states impose a fine on false alarms.
Furthermore, not only for residential use, the need for high-end visual verification is increasing in emerging countries where infrastructure development for important facilities is accelerating amid frequent terrorist attacks in the world.

In response to the expansion of the needs for visual verification, it is expected that the global surveillance camera market, including network security cameras, will grow at an annual rate of 15% until 2018.

As a concrete action to take in such demands, the company had a tie-up with a leading security manufacturer in the global residential market in July 2017 and released a new product that is equipped with a ''sensor'' to detect, a ''camera" to shoot images and a "wireless" function to send that signal.
This integrated camera has fused the company's strong points, after accumulating the know-how of outdoor sensing over many years.
As the company is the only one that possesses an outdoor integrated model as a product, starting from this new product, it will promote sales of new solutions for "outdoor advance security" which they occupy the top share in the global market under the concept of "Internet of Sensing Solution (IoS)," in the high-end market and the residential market.
 
◎Factory automation-related: pursuit of synergy
In the field of Factory Automation (FA), the company will pursue a synergetic effect of the "sensor business" of OPTEX FA and the "machine vision lighting business" of CCS.

(FA Business)
In present America, the demand for capital investment is expanding as the manufacturing industry returns to the country along with IT-related demands.
Considering this business environment as an opportunity, an American sales company is to be established in 2018 Jan that aims at expanding the sales of highly-competitive "displacement sensors" further.
Its sales system is to be shifted from having sales distributers to direct selling.
The company plans to scoop up detailed needs of customers by direct selling, and to strengthen the trusting relationship with them.

(MVL Business)
The LED lightning market for image processing has been expanding in China too.
As its background, in addition to the acceleration of automation of inspection process due to a sudden rise in labor cost and the growth of electricity and electronic components-related demands, rising demands for high-quality and advanced LED lightning for inspection due to the advance of the Chinese manufacturing sites cannot be overlooked.
CCS Inc. had set up a joint venture with a local capital in 2014, but it was dissolved in June 2017, while it established a 100% subsidiary "CCS China."
Along with launching a local brand to respond swiftly to the local needs, it will implement a multi-brand strategy and pursue the increase in its share in the Chinese MVL market. The company is aiming for sales of 1 billion yen in 3 years.

(Synergetic effect)
They already started a joint purchase of components, but they are expecting a maximum synergy effect from sharing the customer base.
The FA sensor of OPTEX FA has its major customers in "three industries", i.e., food, pharmaceuticals and cosmetics, while LED lighting and power sources for image inspection of CCS has its major customers in electricity, electronics, semiconductor and automobile industries.
By utilizing sales routes that each possesses, they will aim more expansion of domestic FA business.

Also, the OPTEX group has its bases in 15 countries around the world and supplies its products and services to approximately 80 countries. It will promote CCS to use this overseas network.
For example, in case CCS sets up a testing room for LED lighting abroad, the OPTEX group can make use of the facilities of its subsidiaries and second-tier subsidiaries overseas. In addition, since it has various sales channels and information networks, CCS can make use of them to save time and effort for expansion of the overseas MVL business that currently holds a 20% share.
 
(2) Management benchmarks and performance goals
The management benchmarks for the OPTEX GROUP are "a sales growth rate of over 15%," "an operating profit margin of over 15%" and "an ROE of over 10%."

To speed up the sales expansion, the company will work for the overall growth of the group by spinning off companies and setting up new companies, and in addition, it will continue to implement the M&A strategy for security-related and factory automation-related businesses under a medium-term policy of "aiming for a corporate group full of venture spirits."
To raise operating profit margin, the company will continuously work on reducing costs and minimize the influence of exchange rates by increasing domestic sales ratio and expanding the overseas manufacturing system.

The goals of the company for 2019 are sales of 50 billion yen and an operating profit of 7.5 billion yen. It is planning to carry out M&A worth about 7 to 8 billion yen for 4 to 5 companies for boosting sales.
 
 
<Reference2:Regarding Corporate Governance>
 
 
◎ Corporate Governance Report
The latest revision date: April 10, 2017
 
 
 
 
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) 2017 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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