（3747） | Publish:Thu, Jan 24, 2013 IR「BRIDGE REPORT」

BRIDGE REPORT
（3747）

スタンダード

INTERTRADE Co., Ltd. (3747)

Takahiro Ozaki,
President

Company	INTERTRADE Co., Ltd.
Code No.	3747
Exchange	Mothers Section, TSE
Industry	Information, Communications
President	Takahiro Ozaki
HQ Address	Tokyo, Chuo-ku, Shinkawa 1-17-21, Kayabacho First Building
Year-end	September
URL	http://www.itrade.co.jp/

Share Price	Shares Outstanding (ex. Treasury Shares)		Market Cap.	ROE (actual)	Trading Unit
¥22,200	71,847 shares		¥1.595 billion	0.3%	1 shares
DPS (Est.)	Dividend Yield (Est.)	EPS (Est.)	PER (Est.)	BPS (actual)	PBR (actual)
¥300.00	1.4%	¥2,922.88	7.6x	¥32,694.33	0.7x

* Share price as of closing on January 4, 2013. Number of shares outstanding as of most recent quarter end, excluding treasury shares.
Dividend yield is based on pre-stock split dividends of ¥300 per share.

Fiscal Year	Sales	Operating Profit	Current Profit	Net Profit	EPS (¥)	Dividend (¥)
September 2009	5,386	68	-26	-222	-	0.00
September 2010	3,856	-258	-277	-920	-	0.00
September 2011	3,335	47	66	172	2,472.38	0.00
September 2012	2,811	-129	-104	7	106.66	300.00
September 2013 Est.	3,250	300	290	210	2,922.88	3.00

* Estimates are those of the Company. A 100 for 1 stock split is expected to be performed in April 2013.

This Bridge Report provides details of the fiscal year September 2012 earnings and other details of INTERTRADE Co., Ltd.

Key Points

Company Overview

INTERTRADE develops and sells packaged software for front office operations of securities firms (Order information systems that support trading and dealing operations), proprietary trading systems, and foreign exchange (FX) margin transaction online trading systems, in addition to the provision of operational and maintenance services in its securities solutions business. INTERTRADE' s is also cultivating other businesses including the corporate software development and creation and health food manufacturing and sales businesses. The Group is comprised of INTERTRADE Co., Ltd., which provides securities solutions business, and three consolidated subsidiaries including BSJ Co., Ltd., which provides the packaged software "GROUP CATS" and other management solutions (66.7% of capital contributed by INTERTRADE, turned into a subsidiary in October 2012), Laboag Co., Ltd., which provides food service business (100% owned), and TRADEX Co., Ltd., which provides proprietary capital management system business.

INTERTRADE was established in January 1999 by the first President Kazuya Nishimoto, the current President Takahiro Ozaki and the former President Yukio Araki, all of whom worked at Nippon Kangyo Kakumaru Securities (Currently Mizuho Securities Co., Ltd.). The three founding members, Kazuya Nishimoto, Takahiro Ozaki and Yukio Araki, leveraged experiences gained at Nippon Kangyo Kakumaru Securities working in systems, dealing, and sales, respectively, to provide consulting services and later expand into the development of packaged software for dealing and trading operations.

In September 2000, INTERTRADE began sales of "TradeOffice-SX" packaged software system for securities companies' dealing operations and in February 2002 launched "TradeOffice-SX Trading Version." INTERTRADE is a pioneer in the realm of packaged software dealing systems, and has benefitted from rapid earnings growth due to the popularity of its packaged software, which are sought after by various securities companies seeking to supplement the deterioration in their own earnings resulting from the deregulation of commissions accompanying the elimination of the trading floor operations and floor traders at the Tokyo Stock Exchange (TSE) in end April 1999. In March 2003, the Company leveraged network technologies to widen its service menu and began providing an "information distribution service" (Distribution of market information for the TSE and other major exchanges). And in September 2004 INTERTRADE listed on the Mothers Section of the TSE. In addition, INTERTRADE has achieved strong results in the realm of back office systems for securities companies (Client information and account reserves management systems) and middle office systems (Risk management systems to measure risks of contract positions) as securities companies have grown to increasingly favor total solutions.

Thereafter, INTERTRADE fortified its packaged software lineup with the sales launch of the proprietary trading system "ITMonster" in January 2005, and the release of a foreign exchange margin trading system in August 2007. With the objectives of fortifying its core businesses and cultivating new businesses, the Company began undertaking M&A activities with the acquisition of Arts Asset Management Co, Ltd. (Currently Laboag Co, Ltd.) in April 2006, and Arts Securities Co., Ltd. (Sold in September 2012) in June 2006 as consolidated subsidiaries to provide various financial products that match the needs of customers and are based on the knowledge base acquired in the realm of financial technologies. In April 2007, INTERTRADE acquired Bradea Co. Ltd., one of its competitors and the creator of a high performance and highly reliable trading system called "TIGER," as a consolidated subsidiary (Merged into INTERTADE in October 2008) to expand its share of the front office systems market. In August of 2008, a next generation securities dealing and trading system fusing the strengths of both INTERTRADE and Bradea called "TIGER Trading System" was released.

In addition, "TIGER" achieves the highest levels of performance within the industry due to its unique architecture called "Bradea Distributed Architecture," which is based on bountiful experiences developing and operating systems used by front offices of foreign brokerage houses. In addition to Deutsche Securities Inc., this system has been implemented and is operating at the offices of other participants in the Tokyo Stock Exchange.

INTERTRADE' s business can be divided between the four segments of the securities solutions business where design, development, sales, maintenance and operation of packaged systems for securities and foreign exchange margin trading applications are provided (99.1% of fiscal year September 2012 sales), the IT solutions business where design, development and sales of packaged systems for operations management applications are provided (0.6% of fiscal year September 2012 sales), the food service business where manufacture and sales of sparassis crispa (A type of mushroom with health enhancing properties) is provided by the subsidiary Laboag Co., Ltd. (0.1% of fiscal year September 2012 sales), and the proprietary fund management business where capital management confirmation systems are provided by the subsidiary TRADEX Co., Ltd. (No sales, and only costs booked during fiscal year September 2012). (INTERTRADE retreated from the asset management business, where ¥5 million in sales were booked, during the fourth quarter of fiscal year September 2012.)

Furthermore, sales can be divided into the implementation of new systems, including one-off sales of "package sales," "hardware sales," and "consigned development sales," in addition to repeat business of maintenance fees for which monthly fees are received. This split between sales derived from implementation and repeat businesses contributes to stability in INTERTRADE' s earnings, with repeat business accounting for 81.4% of fiscal year September 2012 total consolidated sales (79.2% in FY9/11). Repeat business is derived primarily from the securities solutions business (Including a small amount of sales from the asset management business) and its stable earnings is used as a resource to cultivate new businesses (Including the IT solutions and food services businesses) started during fiscal year September 2012.

Superiority of the "TIGER Trading System"

・ Gigabase Network

A network for dealing, trading, with gigabase capability for all networks including client company, data center, and communication lines (Allow large volumes of information transmission).

・ Connected User Numbers

Customers total 38, advanced knowhow and facilities Cost of switching to services of other competitors is high

"TIGER Trading System"
Implementation Merits

・ Customers

"Acquire new earnings opportunities," "highly accurate investment decisions," "full transactions"

Market Operators (PTS, FX-OTC, others)

Increasing liquidity through connectivity offered by our systems to numerous customers using our systems
(Source: INTERTRADE)

Growth Strategy

The operating environment surrounding the domestic securities industry remains severe, with the number of participating members of the Tokyo Stock Exchange declining by 8 from the end of September 2011 to 93 at the end of September 2012. This difficult environment for securities companies is impacting INTERTRADE' s earnings because of its sales of front office application packaged software, and contributed to the 15.7% year-over-year decline in sales during fiscal year September 2012 (Third consecutive year of declines) and the current loss of ¥104 million (A current profit of ¥66 million was recorded in FY9/11). Therefore the Company is pursuing a strategy of fortifying the earnings structure of its securities solutions business and cultivating new clients.

INTERTRADE seeks to make a shift within the securities solutions business from its current focus upon package sales to an ASP business model that can help raise the cost effectiveness of and strengthen their relationships with clients. In addition, the Company seeks to reduce the cost of its development and maintenance services through optimization of its work in these realms. While the difficult conditions are expected to continue in the near term, securities companies will still need to invest in systems. Therefore INTERTRADE can be expected to continue to capture this demand for systems and see stable income due to its repeat business. Specifically, the Company will endeavor to capture sales and orders for not only ASP related services, but also for front, middle and back office systems and renewal of existing systems. Furthermore, INTERTRADE will pursue cost reductions and diversification in its securities solutions business, in addition to allocating IT technicians within the Group to newer business endeavors. As part of this strategy, the IT solutions business was started with the goal of deriving synergies with the securities solutions business. Furthermore the food service business was started as a new business based on totally new thinking and concepts.

BD1 (Business Division 1) and BD2 (Business Division 2) are responsible for dealing and trading systems (Front office systems), and foreign exchange margin systems (Market place systems) respectively.

(1) IT Solutions Business

The IT solutions business was established along with the consolidation of BSJ Co., Ltd. (Shinjuku, Tokyo) as a subsidiary and is being deployed along with the management package systems realm and INTERTRADE' s managed service provider (MSP) and system engineering service (SES). During fiscal year September 2013, sales are expected to reach ¥485 million.

① MSP and SES

MSP is a solution designed to reduce the work load and cost of system management, in addition to reducing the need for system maintenance. At the same time it is designed to help optimize customers' operations, reduce security risks, reduce operating costs, and leverage various resources. Currently, these tasks are achieved through the use of system integrators to create systems, and the ability of INTERTRADE' s system to achieve these goals is a unique characteristic of this service. While systemization is being actively promoted in overseas markets, it has only just begun within Japan. However, INTERTRADE has already built up a track record in systems for securities industry operations in its securities solutions business. The bountiful experience with securities company systems has led to a high level of trust and strong reputation, and has led to reduction in times and ease of orders by other companies using INTERTRADE systems (A successful seminar for MSP was held on September 12, 2012).

Furthermore, SES is designed to support creation of networks and servers, and as part of this goal the dispatch of engineers has been started from the previous term. Despite its limited marketing capabilities, INTERTRADE is expected to begin with activities targeting regional government bodies and educational institutions. And as with MSP, the Company' s experiences in developing and operating systems for the highly demanding financial industry and subsequent high quality project management capabilities has been received favorably and is leading to strong inquiries.

② Group Management Solutions

Group management solutions are primarily provided by BSJ Co., Ltd. through its package called "GROUP CATS," and efforts to cultivate new clients are being conducted in addition to those to fortify relationships with its existing high quality clients. "GROUP CATS" is designed to make easy assessment of management conditions at various companies within a group through consolidation of accounting and financial information to optimize accounting and cash flow related tasks. This product has been implemented by numerous publicly traded corporations with sales of over ¥100 billion because its ability to make group management more efficient matches the need of these large corporations. And while being a packaged software, it is different than other simple consolidated accounting software and is comparable to multifunctional products sold by companies like SAP of Germany. The low cost of this product has also been a factor in its numerous implementations. In the future, INTERTRADE will continue to grow its businesses by leveraging its resources including both capital and engineers. At the same time, INTERTRADE will promote efforts to expand its customers outside of the financial industry through BSJ, and seek to derive synergies with MSP and other newer services and products.

Furthermore, INTERTRADE will leverage the knowhow and technologies developed through "GROUP CATS" to provide solutions in the creation of infrastructure to support comprehensive management solutions and systems, and operational systems.

BSJ Co., Ltd. Turned Into Subsidiary

BSJ Co., Ltd. was turned into a consolidated subsidiary in October 2012 (84 shares were acquired from President of BSJ, Masaru Ishida and an additional 260 shares through a third party private placement, bringing total ownership to 66.7% of issued shares).

BSJ is a vendor of software that develops and provides maintenance for "GROUP CATS" group management solutions package (Earnings and cash management). This company was established in November 2009 and has already built up a track record with numerous implementations of "GROUP CATS" primarily with listed companies. While profitability has become stable, securing resources needed to expand this business had been difficult. However, the capital ties with INTERTRADE has enabled BSJ to access resources including both capital and engineers of the group, and contributed to a fortification of the ability to customize products to match the needs of customers (The consolidation of BSJ as a subsidiary has enabled INTERTRADE to access customers outside of the financial industry).

(2) Food Service Business

The food service business was started with the manufacture and sales of sparassis crispa related products in August 2012. The start of operations at the plant in Yamanashi Prefecture contributed to sales of ¥2 million during fiscal year September 2012, and profitability is expected to be achieved during fiscal year September 2013 on the back of the acquisition of sales channels and establishment of full production. (Sales of ¥200 million anticipated). Furthermore, this business was transferred to the consolidated subsidiary Laboag Co., Ltd. in October 2012, and efforts are being made to create a network with pharmaceutical companies, manufacturing partners, retail, and other companies.

Moreover, sparassis crispa belongs to the family of large white edible mushrooms. This mushroom has attracted wide spread attention because it contains beta glucans more than three times well-known Agaricus, which activate macrophage, NK, T, and killer-T cells (These cells have the ability to attack infected and cancerous cells, and the affect of heightening the immune and resistance functions).

Fiscal Year September 2012 Earnings Results

Sales Fall 15.7%, Current Loss of ¥104 Million Recorded

Sales fell by 15.7% year-over-year to ¥2.811 billion. The securities solutions business declined in reflection of the severe operating environment, and the subsidiary providing proprietary capital management and asset management business (Retreated from August 2012) was unable to produce results. In light of the lower sales, efforts to reduce operating expenses, including outsourcing fees, labor costs, and other personnel expenses, were successful and contributed to a reduction in costs to ¥2.941 from ¥3.281 billion. However the lower sales and startup costs associated with the IT solutions and food services businesses caused operating losses of ¥129 million to be realized after an operating profit of ¥47 million in the previous term. Improvements in non-operating income derived from reductions in interest bearing liabilities and ¥152 million in extraordinary profit derived primarily from ¥133 million in cancellation penalty income allowed net profit of ¥7 million to be realized. A dividend of ¥300 per share is expected to be paid for the first time since fiscal year September 2008.

Securities Solution Business: Design, Development, Sales, Operation, Maintenance of Package Systems for Securities and Foreign Exchange Margin Trading Applications

Sales and operating income fell by 16.0% and 0.8% year-over-year to ¥2.786 billion and ¥338 million respectively. Sales of this division are divided into implementation and repeat business, and each fell by 27.3% and 13.0% year-over-year to ¥504 million and ¥2.287 billion respectively. While new sales of packages to new clients nearly doubled on the back of the implementation of a US hedge fund system called "TIGER Trading System" and another system to the Kansai Commodities Exchange, they were not enough to offset declines in system integration sales. The decline in system integration sales is attributed to the lack of large scale projects such as the "JGATE" new derivative transaction system implemented by the Osaka Securities Exchange in the previous term. Another factor in the lower sales was the decline in hardware sales due to the provision of "TIGER Trading System" as an ASP service (While the decline in hardware sales affected sales, the impact upon profits was small). At the same time, repeat business sales fell due to the negative influence of the retreat of securities companies from dealing operations upon license and customer support sales.

In light of the severe operating environment, INTERTRADE issued a downward revision to its earnings in May 2012. In response to these conditions, the Company implemented new measures to further improve efficiency of its operations and successfully reduced order related expenses by 40% from the fourth quarter (July to September) to the first quarter (October to December). Cuts in compensation to directors and managers also enabled operating income to remain basically in line with the previous term despite the 16% year-over-year decline in sales.

Orders fell by 15.6% year-over-year to ¥2.422 billion. While orders for packages grew on the back of the implementation of "TIGER Trading System" and systems for the Kansai Commodities Exchange, other orders declined.

IT Solutions Business, Food Services Business

The IT solutions business was started in June 2012 and realized sales of ¥16 million and an operating loss of ¥31 million. While the bulk of this division' s activities entailed the development of new customers and products, transactions with corporate clients were also launched. The food service business was launched in August 2012 and it recorded sales and operating losses of ¥2 and ¥40 million respectively. In addition to construction of a plant in Yamanashi Prefecture for sparassis crispa and preparations for its production, staffing of personnel was conducted, and purchasing routes were established. While this business was started in August, only a small amount of sales were realized because initial shipments were first made in September. Furthermore, this responsibility for business has been transferred to the consolidated subsidiary Laboag Co., Ltd. as of October 1, 2012.

Aside from these developments, INTERTRADE withdrew from the asset management business in August 2012, and therefore no proprietary capital management sales were realized.

At the end of the current term, total assets declined by ¥470 million to ¥3.108 billion. Funds raised from the sale of marketable securities and shares of affiliated companies were used for anticipatory investments in new businesses and to reduce interest bearing liabilities. Furthermore, the amortization of goodwill resulting from M&A activities in fiscal year September 2007 were completed during the first half of the current term (¥469 and ¥234 million in fiscal year September 2011 and 2012 respectively). In addition, progress made in reducing the size of the balance sheet contributed to a 10.2% improvement in equity ratio from the previous term to 75.6%. And while earnings were negatively impacted by the severe operating environment, net inflows of cash were seen in both operating and free cash flows. Furthermore, the balance sheet remains in good standing with adequate reserves for working capital, bountiful liquidity, and no net debt.

Fiscal Year September 2013 Earnings Estimates

Cultivation of New Businesses, Promotion of Cost Reductions Lead to Strong Earnings Recovery

INTERTRADE estimates for fiscal year September 2013 call for sales to rise by 15.6% year-over-year to ¥3.250 billion. Many of INTERTRADE' s main customers of securities companies are expected to continue to see severe operating environment due in part to structural reforms, and their investments in systems are expected to remain cautious. As a result, the securities solutions business is expected to continue to suffer from difficult conditions. However, the contributions from BSJ, which was turned into a subsidiary in October 2012, to the IT solutions business and the full scale production of sparassis crispa to the food service business are expected to offset the weakness in the securities solutions business.

With regards to profits, the completion of amortization of goodwill (¥234 million in fiscal year September 2012), and improvements in labor efficiencies through reallocation of management resources of the securities solutions business to other parts of the INTERTRADE Group are expected to contribute to profits. Combined with the higher sales, the ¥129 million operating loss recorded in fiscal year September 2012 is expected to recover to ¥300 million operating profit in fiscal year September 2013.

A yearend dividend of ¥3 per share is expected to be paid. Also, a stock split of 100 shares to 1 to shareholders as of April 1, 2013 is expected to be implemented, and the minimum trading lot is expected to be reduced from 100 shares to 1 share. Therefore the effective dividend after the stock split is the same as in the previous term.

Securities Solutions Business: Sales Expected to Fall 8.8% Year-Over-Year to ¥2.540 Billion

Sales of BD1 (Dealing, trading systems) are expected to decline, but profits are expected to rise by a large margin on the back of cost reductions. At the same time, the BD2 (Market place systems) is expected to benefit from new systems demand from the merger of the Tokyo Stock Exchange and Osaka Securities Exchange on January 1, 2013.

The decline in sales of BD1 is due mainly to declines in repeat business sales. However optimization of development and maintenance tasks through the offering of the trading platform "TIGER Trading System" as an ASP service is expected to lead to reductions in outsourcing fees and overall operating expenses (Including contribution of improvements of cost effectiveness of ASP services for customers). Furthermore, fortification of value added information and product lineup provided through the "TIGER Trading System" is expected to raise customer loyalty and increase repeat business.

At the same time, increases in both sales and profits of BD2 are expected to arise from transactions with large customers. By building a solid track record of stable operations during the coming term, INTERTRADE seeks to acquire new orders from fiscal year September 2014 forward. In addition, efforts to internalize development and maintenance activities are being promoted and to raise labor efficiency.

IT Solutions Business, Food Service Business

Aside from the securities solutions business, the IT solutions business is expected to record ¥485 million in sales (Compared with ¥16 million in FY9/12). The food service business is expected to achieve ¥200 million (Compared with ¥2 million in FY9/12), and the proprietary capital management business ¥25 million (No sales in FY9/12). Efforts to fortify the collaboration between the proprietary capital management and securities solutions businesses, and applications in the foreign exchange margin trading realm are expected to allow INTERTRADE to leverage systems it provides to increase profitability and feedback with the securities solutions business.

Conclusions

While earnings are expected to continue to encounter difficult conditions, INTERTADE is expected to remain stable over the near term due to its stable earnings driver of repeat business and strong financial position based on high levels of liquidity. However, longer term uncertainties have yet to be eliminated, and it is imperative for the Company to secure and cultivate new sources of earnings. This is the reasoning behind the establishment of the "IT solutions" and "food service" businesses during the previous term. Of these two businesses, the "IT solutions business" is a niche field, but the strengths of the parent company and its subsidiary will be leveraged to focus upon applications where differentiation can be achieved. In addition, it will focus its effort upon realizing cost reductions and improving management efficiencies for its customers. At the same time, the "food service business" represents a totally new approach in a totally new realm for INTERTRADE, and is designed to capture business opportunities presented by the increasing health consciousness of consumers. While this business represents a deviation from INTERTRADE' s traditional businesses, strict rules defining conditions to retreat from businesses are in place to reduce the risk of new challenges. If INTERTRADE is able to achieve its fiscal year September 2013 earnings estimates, the outlook for fiscal year September 2014 and beyond will grow even more positive.

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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