BRIDGE REPORT
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
Address
5-8-12, Ogoto, Otsu, Shiga Prefecture
Business Description
Holding company centered around OPTEX that manufactures and sells outdoor sensors, automatic door sensors and environment-related products. The company expands FA related business and Machine vision lightning business, too.
Year-end
December
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥5,720 17,346,960shares ¥99,224 million 12.6% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥30.00 1.0% ¥113.42 25.2x ¥1,680.79 3.4x
* Stock price as of the close on February 23, 2018. Number of shares at the end of December 2017 excluding treasury shares. ROE and BPS are the results from the last year-end. On April 1, 2018, a 2-for-1 stock split will be implemented. For DPS, the stock split is taken into account. Share exchange will be implemented on July 1, 2018. For EPS, the stock split and issuance of new shares upon share exchange are taken into account.
 
Consolidated Earnings Trends
Fiscal Year Net Sales Operating
             Profit
Ordinary
          Profit
 Net Profit   EPS (¥)   DPS (¥)
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 31,027 3,015 3,086 1,809 109.33 45.00
December 2017 37,504 4,885 5,036 3,386 195.25 55.00
December 2018 (Est.) 40,500 5,300 5,400 3,600 113.42 30.00
* 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 the parent company. The same shall apply hereinafter. On April 1, 2018, a 2-for-1 stock split will be implemented. For DPS, the stock split is taken into account. Share exchange will be implemented on July 1, 2018. For EPS, the stock split and issuance of new shares upon share exchange are taken into account. Both EPS and DPS are not revised retroactively.
 
This Bridge Report presents OPTEX GROUP's earnings results for fiscal year ended December 2017 and earnings estimates for fiscal year ending December 2018.
 
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.
 
 
1-1. 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).
 
 
1-2. 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.
 
 
1-3. 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 foundation (currently, about 60% share in the domestic market). The company expanded operations and got listed on the over-the-counter market (equal to listing on JASDAQ) in 1991. Then it got 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 January 1, 2017, the company shifted to the holding company system, with the aim of advancing to next-generation management and pursuing group synergy. In order to further strengthen the group's capabilities, it is planning to convert CCS Inc. into a wholly owned subsidiary in July 2018.
 
 
ROE in the FY 12/17 achieved "10% or more" as targeted, for net income margin improved significantly owing to favorable performance.
 
 
Fiscal Year Ended December 2017 Earnings Results
 
 
Significant increase in sales and profit. Both sales and profit marked record highs.
Sales for the FY 12/17 were 37,504 million yen, up 20.9% yoy. All major businesses performed well. Especially, the FA business was healthy. The reorganization of CCS into a subsidiary also contributed to the sales. Domestic sales were 15,830 million yen, up 27.4% yoy, while overseas sales were 21,674 million yen, up 16.5% yoy. Due to the reorganization of CCS into a consolidated subsidiary, SG&A expenses augmented, but it was offset by sales growth, and operating profit was 4,885 million yen, up 62.0% yoy. Both sales and profit marked record highs. The results were better than the forecasts that were modified for the second time in November 2017.
 
Quarterly Financial Results
 
Sales in the fourth quarter (October - December) increased by 0.2% yoy, and ordinary profit decreased by 3.8% yoy. In comparison with the previous term, sales increased by 9.0% and ordinary profit increased by 0.5%.
 
 
 
 
 
◎SS business
(Security-related)
Japan: Although sales dropped until the third quarter, they turned to an increase as a result of the healthy sales of outdoor security sensors targeted infrastructure development and large-scale key facilities.
AMERICAs: Although sales dropped until the third quarter, they turned to an increase as a result of high demand for outdoor security sensors targeted infrastructure development and financial institutions in North America.
EMEA: Sales increased thanks to steady growth of the sales of outdoor security sensors targeted at large-scale key facilities in the Middle East.
Asia: Sales increased significantly thanks to the healthy sales of security sensors in South Korea and Australia.
 
(Automatic door-related)
Japan: Sales increased as the sales of sensors for automatic doors and factory shutters increased steadily.
AMERICAs: Although sales dropped until the third quarter, they turned to an increase as the sales of sensors for automatic doors targeted at major clients in North America increased steadily.
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 its 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 lightings for image inspection.
EMEA: Due to the effect of sales promotion toward OEMs, the 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. Consequently, sales increased significantly
 
◎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 by 4,171 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 283 million yen, and total assets rose by 3,888 million yen to 41,569 million yen.
Due to an increase in accounts payable, etc., total liabilities rose by 536 million yen to 9,562 million yen.
Net assets grew 3,352 million yen to 32,006 million yen, as capital surplus and retained earnings increased, while non-controlling shareholders' interest decreased.
As a result, the equity ratio rose by 5.1% from 65.0% at the end of the previous term to 70.1%.
 
 
The surplus of operating CF grew because of an increase in profit.
The deficit of free CF decreased because there was no expenditure to acquire shares of a subsidiary in relation to the change of range of consolidation that happened in the previous term, and the surplus of free CF grew.
The deficit of investing CF augmented as a result of decreasing short-term debt.
The cash position improved.
 
(4) Topics
◎ Converting CCS, Inc. into a wholly owned subsidiary
The company decided to convert CCS Inc., which operates the MVL business, into a wholly owned subsidiary on July 1, 2018.
It will try to promote cooperation between OPTEX FA and CCS in the LED lighting business for image processing, and work on concentration and selection of management resources to streamline the management. Furthermore, in order to promote more effective M&A and alliances, the company thought it would be necessary for the OPTEX Group and CCS to cooperate in the whole optimal viewpoint.
The company chose the share exchange for making CCS as a wholly owned subsidiary, because it was aiming to further focus on the image processing-related business in FA as the OPTEX Group. It was also because the company was aiming to further enhance corporate value and maximize shareholder return by seeking continuous support from CSS shareholders as OPTEX Group's shareholders as the entire OPTEX Group utilizes the LED technology to contribute to the business performance.
Considering the 2-for-1 stock split that the OPTEX Group is planning to implement on April 1, 2018, it will issue 1.4 shares of the OPTEX Group common stock to one share of CCS common stock. Before considering the split, it was 0.70 shares.
The last trading day of CCS Inc. will be June 26, 2018, and their stocks will be delisted on June 27.
 
◎Implementation of stock split
With the aim of improving the liquidity of stocks and expanding the investor base, it is planning to implement a 2-for-1 stock split on April 1, 2018.
The purchase price by the minimum unit is expected to be less than 500,000 yen.
At the same time, the company decided to introduce a system that increases the purchase of odd-lot shares to shareholders who owned less than one unit (100 shares).
 
 
Fiscal Year December 2018 Earnings Estimates
 
 
Both sales and profit increased.
The company estimates that both sales and profit will continue to grow due to the favorable external environment in the FY 12/18. Sales are projected to increase in all segments and to be 40.5 billion yen, up 8.0% yoy. Operating profit is estimated to rise by 8.5% to 5.3 billion yen. The dividend is to be 30 yen/share. The estimated payout ratio is 26.5%.
 
 
(3) Growth strategies
① Market environment of each business and growth strategies
◎ Security-related: Incorporation of surveillance cameras and sensors
(Market environment)
Detecting abnormality just by a sensor has various issues in terms of accuracy. To address the issues, in the UK, for example, 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 key 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 outdoor surveillance sensor market will grow from about 30 billion yen at the current level to 50 billion yen.

(Strategies to strengthen the business)
As a specific 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.
It is also planning to launch a new product of its own in 2018.

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)," which is promoted by the company, in the high-end market and the residential market.

◎ FA Business
(Market environment)
As a result of labor shortage and soaring labor costs, the labor saving and automation demands of the factories will increase and the "robot-related market" will further expand.
In addition, in the US market, the demand for capital investment is expanding as the manufacturing industry returns to the country along with IT-related demands.

(Strategies to strengthen the business)
The company will further strengthen sales of cameras for robot vision, displacement sensors, LED lighting for image inspection, etc. both in Japan and abroad.
In March 2018, in the US, it will establish a sales subsidiary "OPTEX FA Inc." Following Europe and China, it will try to increase sales by fully entering the FA market in the US where further growth is expected in the future to expand sales network, developing new markets including automobile industry (acquire new customers), and developing field-oriented sales. The company also plans to switch from its conventional agency sales to direct selling to scoop up detailed needs of customers and to further strengthen the trusting relationship with them.

◎ MVL Business
(Market environment)
Automation of inspection process is accelerating due to a sudden rise in labor cost. The demand from the "semiconductor, electricity, electronic components industry" continues to be strong, and the demand for high-quality and advanced LED lightning for inspection is also increasing.

(Strategies to strengthen the business)
Customers are not asking for devices such as lighting and power supply, but they want the state that the inspection object is "well visible."
Therefore, the company will expand solutions including cameras, lenses and image processing.
It will also increase the number of testing rooms as the facilities to expand solutions and make effective use of the OPTEX Group's overseas network, which has bases in 15 countries around the world.

② Management benchmarks and performance goals
The management benchmarks 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. 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, it 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 for 2019 are sales of 50 billion yen and an operating profit of 7.5 billion yen. It is planning to implement M&A worth about 5 to 6 billion yen for 4 to 5 companies for boosting sales.
 
 
Conclusion
 
In the fiscal year ended December 2017, the FA and MVL businesses continued to be healthy, and the SS business, which was sluggish until the third quarter, also recovered, resulting in the performance exceeding the forecasts. It is planning to increase both in sales and profit again in the current fiscal year, but the forecasts at the beginning of the fiscal year show that the growth rate is only one digit for both sales and profits. From this term onwards, the simple contribution of converting CCS into a subsidiary will be lost, and therefore, from the viewpoint of the rate change expected by investors, the company's capability concerning "Post-Merger Integration (PMI)" that makes "1 + 1 = more than 2" will be tested. We also want to see how the implementation of the next M&As, which are currently underway, will progress.
 
 
<Reference: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) 2018 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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