Alpha-Win Company Research Report
CUBE SYSTEM INC.
(2335 TSE First Section)● SummaryIssued: 6/28/2019

Research Dept., Alpha-Win Capital Inc.
http://www.awincap.com/

Business Description
・CUBE SYSTEM INC. (hereinafter, the “Company”) is an independent, mid-tier system integrator (SI) listedon the First Section of the TSE. Its main customers include Nomura Research Institute and Fujitsu Group. It
provides services and develops systems mainly for the finance, distribution, and telecommunicationsindustries. Founded in 1972, it has 47 years of history.
Current Financial Performance・With the exception of one fiscal year, the Company has been continuously increasing sales YoY for the past
18 years. During this period, its annual sales growth rate (simple average of the rate of increase in sales) was+6.4% and its annual recurring profit growth rate (simple average) was +6.0%; the Company has been steadily
expanding its business and keeping its business in the black over many years. Thanks to its committed efforts
in business development and management reform, the recurring margin has been stable at around 7% and theincrease in sales has been contributing directly to increases in profit, dividend, and market capitalization.
・Last fiscal year’s results were mostly in line with the Company’s plan; sales increased by 5.6% and operating
profit increased by 7.8%. Record-high sales were achieved for the sixth consecutive year and the profits havealso recovered to levels close to their record highs. This fiscal year, the Company plans to increase sales by
8.2%, achieve a double-digit profit growth, attain record highs for sales and each of the profits, and raise
dividend by Y2. With a generally positive business environment, the Company's efforts up until now have
paid off, leading to a strong growth of the orders received. Comparison of the Company and its twocompetitors’ financial forecasts for this fiscal year indicates that the Company's business is also strong on arelative basis. Given the current situation and the Company’s estimates, Alpha-Win Research Department
predicts that this fiscal year's financial performance will be mostly at the same level as predicted by theCompany and believes that record-high sales and profits are possible.
Competitiveness・Its strengths are its excellent customer base, extensive experience, strong trust from its customers, and theskill and know-how that it has built up over the years. Along with the development of business content anddomain, the Company has been improving its capacity to meet the needs of more projects, thus becoming
more competitive.
Business Strategy
・The Company has established a medium- to long-term management vision. With the “creation of a newservice lineup” as its goal, the Company currently aims for management targets of Y18.5 billion in sales,
Y1,776 million in operating profit (9.6% in O.P. margin), and 13% in ROE by FY 2021. Also, it is focusing
on new business fields such as blockchain, AI, and IoT, as well as steadily laying out the foundation for futurebusiness expansion through alliances, etc. Going forward, the key points would be the continued improvementof profit margins, monetization of businesses in new business domains, acquisition of new customers,
acquisition and training of human resources, M&A and alliance strategies, globalization, and incorporationof new technologies.
Forecast on Medium-Term Financial Results
・The Company’s business is affected by the financial performance and system investment trends of its
domestic corporate customers. However, Alpha-Win Research Department believes that the Company will
be able to continue to steadily increase both sales and profits by about 6-10% per year over the medium tolong term due to the expected growth of the Enhancement business (the Company’s strength), acquisition of
new customers, overseas development, and productivity improvement through various measures.
1/42This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

Shareholder Return
・The Company has been proactive in returning profit to shareholders. In fact, it has bought back its shares,
performed stock splits, and raised dividend in steps. When benefits from the shareholder benefit program areadded to dividend, the actual dividend yield is about 2.9% at maximum. The forecasted dividend payout ratio
is about 36%, which is around the average of its industry. With strong financial performance and ample cash,
we believe that the Company may decide to raise shareholder return in the future through various means suchas share buyback, increase in dividend, and enhancement of the shareholder benefit program.
Stock Characteristics and Stock Price
・The Company’s stock is a domestic-demand-related, defensive, stable growth stock, most likely to be seen as
a medium- to long-term investment target. Its valuation is about average for the industry. In the past ten years
or so, its stock price has increased by about four times and has been largely outperforming the TOPIX.
Regarding stock price, we should watch the Company’s development of new technologies and businesses,alliances with other companies, M&As, and increased shareholder return in addition to how it makes progresswith its financial performance during this FY, in the next FY, and onward.

(Note) CE= the Company’s estimate/forecast. E = Alpha-Win Research Dept.’s estimate/forecast. All fiscal years in this document
are March-ending.

(Note) Estimates/forecasts were made by Alpha-Win Research Dept.

[Performance]
PeriodReturn vs. TOPIX
1 month-14.0%-16.2%
3 months-1.8%
0.8%
6 months
31.7%
26.9%
12 months-16.0%-6.2%(Note) Reflects stock price and index
values up to the end of June 2019.

2/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

Contents
1．Company Overview ........................................................................................................................ P4
Independent, Mid-Tier System Integrator .......................................................................................... P4
Business Philosophy and Basic Management Policy ......................................................................... P6
2．Business Description and Business Model ................................................................................... P7
Three Lines of System Service .......................................................................................................... P7
Labor-Intensive Business Model Where Human Resources Are the Key ......................................... P9
Sales Composition that Is Well-Balanced by Industry .................................................................... P10
Stable Customer Base and Business with High Continuity ............................................................. P11
Future Areas of Growth and Foundation for Next-Generation Technologies ................................. P13
3．Shareholder Composition ........................................................................................................ P15
Change in Composition by Type of Shareholder ............................................................................. P15
Major Shareholder Composition ...................................................................................................... P15
4．ESG .................................................................................................................................................. P17
Environment, Society, and Governance ........................................................................................... P17
5．History of Growth ........................................................................................................................ P18
Company History ............................................................................................................................. P18
Past Transition in Financial Results ................................................................................................. P18
6．Business Environment ................................................................................................................. P21
History of the System Integration Business ..................................................................................... P21
Structure of the System Integration Industry ................................................................................... P21
Trends in Japan’s System Integration Market ................................................................................. P23
CUBE SYSTEM’s Market Position and Comparison with Competitors ........................................ P24
7．Last Fiscal Year’s Results and This Fiscal Year’s Forecast by the Company ....................... P26
Full-Year Financial Results for FY 2019 (last fiscal year) ................................................................ P26
CUBE SYSTEM’s Financial Results Forecast for FY 2020 (this fiscal year) .................................. P29
8．Growth Strategy ........................................................................................................................... P32
Medium- to Long-Term Management Vision “VISION 2020” ...................................................... P32
Management Indicator Targets and Areas of Focus ........................................................................ P32
Alpha-Win Research Dept.’s Financial Results Forecast for FY 2020 (this fiscal year) .................. P34
Alpha-Win Research Dept.’s Financial Results Forecast for the Medium Term ............................ P35
9．Analyst’s View .............................................................................................................................. P37
SWOT Analysis ............................................................................................................................... P37
Shareholder Return and Shareholder Benefit Program .................................................................... P38
Stock Characteristics/Price and Factors that May Affect Stock Price ............................................. P39

Note: Upon translating to English, when the page numbers differed from the original Japanese version, they were
adjusted to those of the English version of the Report.

3/42This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

1. Company Overview◆ Independent, Mid-Tier System Integrator
 An independent system
integrator with 47 years ofhistory in the industry.
Specialized and mid-tier.
Stable customer base withseveral blue-chipcompanies among its
customers.
(1) System integrator: a company
that conducts system integration.
Abbreviated as “SI” or “SIer.” A
general term for companies that
plan, design, develop, operate, andprovide other solutions for the IT
operation systems of customers
including companies and thegovernment.

 The Company’s group ismade of the Company andthree subsidiaries.
Consolidated-to-parentcompany sales ratio has
stayed around 1.1. Total
profit and loss of the three
consolidated subsidiaries
has also stably been asurplus.
(2) Offshore development:
providing services that meetcustomer needs, from systemdevelopment to maintenance, at alow cost using overseas/offshore
sites

CUBE SYSTEM INC. (hereinafter, the “Company”) is an independent
system integrator1 (a.k.a. SI). It is listed on the First Section of the TSE andis a mid-tier player in the system integration industry. Often as a
subcontractor of major SIs, the Company mainly develops the systems oflarge companies in the finance, telecommunications, and distribution
industries, as well as of the government. Its customer base is firm, having
expanded its business with its main customers over many years. The
Company has technological expertise and has earned strong trust from its
customers, with the four corporate groups Nomura Research Institute, Fujitsu,
Aeon, and Mizuho as its main customers and receiving outsourced jobs fromthe Tokyo Stock Exchange as well.
Founded in 1972 at the outset of the software industry, the Company has 47
years of history. The current president is one of the founding members.
The Company’s group consists of four companies: the Company and three
consolidated subsidiaries. The consolidated subsidiaries are as follows(Figure 1).
1. HOKKAIDO CUBE SYSTEM INC.
(Located in Sapporo, Hokkaido; founded in 1990 by the Company, whichowns 90.9% of the shares, for system development and sales reinforcementin the Tohoku and Hokkaido regions)
2. CUBE SYSTEM VIETNAM CO., LTD.
(Ho Chi Minh City, Socialist Republic of Vietnam; founded by the Company
in 2008 as a 100% owned subsidiary)
3. CUBE SYSTEM SHANGHAI CO., LTD.
(Shanghai, China; the Company established CUBE SHENYA SYSTEMSHANGHAI CO., LTD., as a joint company in 2009, and then acquired allshares in Dec. 2017 upon which the name was changed to the current one.)
The overseas subsidiaries were founded mainly to cut down on cost, toacquire human resources, and as system development sites (offshoredevelopment2).
[Figure 1] Locations of CUBE SYSTEM Group’s Subsidiaries and Offices
HOKKAIDO CUBE SYSTEM INC.
● Head office: Chuo-ku, Sapporo City
● Founded: December 1990
● Number of employees: 65

Sapporo

CUBE SYSTEM INC.
● Head office: Shinagawa-ku, Tokyo● Founded: July 1972
● Number of employees: 516

Tokyo
NagoyaCUBE SYSTEM INC. Nagoya OfficeOsaka● Location: Naka Ward, Nagoya City
● Founded: May 2019
● Number of employees: 3

Shanghai

CUBE SYSTEM INC. West Japan Solutions Headquarters

 All fiscal years discussed inthis Report are Marchending, unless otherwise
noted. For example, FY 2020ends in March 2020.

● Location: Chuo-ku, Osaka City
● Founded: April 1985
● Number of employees: 86

CUBE SYSTEM SHANGHAI CO., LTD.
Ho Chi Minh

●
●
●
●

Location: Tianzan Road, Shanghai, China
Founded: July 2009
Capital: CNY 6,500,000
Number of employees: 38 (1 stationed employee & 27 local employees)

CUBE SYSTEM VIETNAM CO., LTD●●●●

Location: Dist. 12, Ho Chi Minh City, Vietnam
Founded: March 2008
Capital: USD 600,000
Number of employees: 55 (2 stationed employees & 53 local employees)(Ref) The Company’s materials and data

4/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)
 Consolidated subsidiaries’

Issued: 6/28/2019

The consolidated-to-parent-company sales ratio has stayed around 1.1 for the
past 17 years, indicating that the parent company’s financial result issignificantly larger (Figure 2). Although the individual subsidiary’s profit andloss are not disclosed, the consolidated-to-parent-company recurring profit
ratio has been around 0.98 to 1.17 during the same period. Moreover, the total
profit and loss of the three subsidiaries, calculated by subtracting the parent
company’s recurring profit from the consolidated recurring profit, has been asurplus with the exception of the two periods FY 2011 and FY 2012 (Figure3). In the last three fiscal years, the overall financial performance of thesubsidiaries has also on the rise with regards to sales and profits.

as well as the consolidated
financial performance has
been on the rise withregards to sales and profits.
Consolidated-to-parentcompany ratios are greaterthan 1x for both sales andprofits.

[Figure 2] Ratio of Consolidated to Parent Company Sales (ratios shown on upper portion of graph)
Sales of parent company(Y mil)Consolidated sales minus parent company's sales

16,0001.08 1.08

1.08

1.07

1.11

1.10

1.10

1.08

1.06

1.06

1.08

1.08

1.08

1.07

1.09

921

857

1,084

1.09

14,00012,0001,151

Consolidated to1.13 parent company ratio

1,601

785

10,00012,724
506

8,000
504

6,000

439

478

784

751

777

679

12,409678
458

11,815
11,766534

11,606

4,000
5,805

6,097

6,566

FY
2003

FY
2004

FY
2005

7,172

7,139

7,358

7,730

8,027

FY
2006

FY
2007

FY
2008

FY
2009

FY
2010

8,660

7,974

8,564

FY
2012

FY
2013

10,432

2,000

0

FY
2011

FY
2014

FY
2015

FY
2016

FY
2017

FY
2018

FY
2019

[Figure 3] Ratio of Consolidated to Parent Company Recurring Profit (ratios shown on upper portion of graph)(Y mil)1,200

R.P. of parent company
1.06

1.07

1.07

1.06

1.07

1.03

Consolid ated R.P. minus parent company's R.P.
1.03

1.03

0.99

0.98

1.01

1.03

1.05

1.02

43

21

1.04

1.06

1.17

48

140

845

819

FY
2018

FY
2019

Consolidated to parent
company ratio

1,000

800

31
22

600

35

33

39

19

21
7

19

33
400

200

938

939

23

409

781

467

516

518

545

621

578

639

680
542

0

-8

-9

FY
2011

FY
2012

599

683

-200

FY
2003

FY
2004

FY
2005

FY
2006

FY
2007

FY
2008

FY
2009

FY
2010

FY
2013

FY
2014

FY
2015

FY
2016

FY
2017

(Ref) Both Figures 2 and 3 were prepared by Alpha-Win Research Dept. based on the securities report.
(Note) The estimates/forecasts are, unless otherwise noted, from the Company’s plan/forecast. Since we generally round off the decimal place,certain values may slightly differ from the Company’s official disclosed values and other values. These apply to the rest of this document.

 The Company’s wish isembedded in its name.

The company name CUBE comes from the first letters of “CU=Customer(customer first as the motto),” “B=Brain (exert high-level intellect andknowledge),” and “E=Emotional mind (solutions that move the heart). Also,
CUBE also has the meaning of a geometrical cube – it reflects the wish to
5/42This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

grow as a company with a cube-like multi-dimensionality (the six faces areinnovation, humanity, vitality, internationality, technology, andyouthfulness).
 Essentially debt-less, firmmanagement. Rich in
cash.

The Company’s finance is strong with essentially no debt. Its free cash flow(FCF) has also been stable and positive, and the cash and deposits aregradually accumulating (Figure 4). The Company has approximately Y3.1
billion in cash and deposits in addition to more than Y1 billion in highliquidity stocks and foreign bonds, totaling about Y4 billion in highly liquid
assets. In comparison, its debt is Y240 million (total assets = Y8.1 billion,
market capitalization = Y12.2 billion, and sales = Y14.3 billion). Its financial
ratios are also high and stable, with an equity ratio of 65% and current ratioof 273% (all values are those as of the end of March 2019).

[Figure 4] Transition in Cash Flow (CF)
Unit: Y mil
Operating CF ①
Investing CF ②
Financing CF
FCF（①+②）
Cash and Cash Equivalents

FY 2010
283
-1
-144
282
1,618

FY 2011
622
309
-173
931
2,375

FY 2012
101
54
-125
155
2,405

FY 2013
451
-321
-151
130
2,382

(Note: FCF stands for free cash flow. Unit = Y mil)

FY 2014
317
-172
-188
145
2,338

FY 2015
503
-307
-439
196
2,098

FY 2016
534
25
-241
559
2,407

FY 2017
936
94
-610
1,030
2,822

FY 2018
388
28
-392
416
2,845

FY 2019
773
46
-531
819
3,130

(Ref) Prepared by Alpha-Win Research Dept. based on the financial results summary(Note) “Cash and cash equivalents” are not equivalent to “cash and deposits” on the B/S but are values from the “Statements ofConsolidated Cash Flows” in the financial results summary.

◆ Business Philosophy and Basic Management Policy
 The business philosophy /goal is to “create a worldclass company.” The basic management
policies are “Customer
First,” “Focus,” and “AllEmployee Sales.”(3) All-employee sales system: asystem where there is no
dedicated department for sales
but instead each project ismanaged as a whole fromreceiving an order to delivering
the product and confirming thepayment. The system engineer,
who is in charge of responding tocustomers, will materialize thesystemization needs of customers
through dialogues and carry out
projects with responsibility andauthority under a sales goal.

The Company’s business philosophy is as follows:
・A company flourishes with the people’s support. We must continue toexist to promise the well-being of the people including our employees. Rootof continuity and development is profit, and profit is brought by customers.
Under this philosophy, we will “create a world-class company.”
The following are the Company’s three basic management policies:
・Customer First: All decisions are based on our customers’ values and it is
our standard to think from our customers’ perspectives.
・Focus: The four main elements of a company are its people, assets, money,
and time. In order maximally utilize these elements, we will focus ourbusiness resources on the most important matters that have been decided
based on our customer-first policy.
・ All-Employee Sales: In order to provide user-oriented services, each
employee will work toward the development of the Company’s business as
independent business persons. (⇒has established a unique all-employee sales
system3)
Moreover, numbers such as sales, profits, and progress rate toward a goal forthe entire company as well as for each department are disclosed to all
employees. Thus, information is being shared in an open management system.

 Management goals andresults are shared among
all employees.

6/42This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

2． Business Description and Business Model◆ Three Lines of System Service
 Business is classified into

three categories. The
System Integration
Service, which is mainly
system development,
accounts for 70% of thesales. Profit margins of
the three categories areabout the same.
(4) System solution: solving issues
related to systems throughhardware, software, and services

As its business, the CUBE SYSTEM Group provides system solutions4.
Specifically, the Company provides a series of services dealing with theplanning/proposal, design, manufacture (by programming), testing, operation,and evaluation of systems for other companies or the government. Since thisis the Company’s single business, the business is further classified by the
informatization cycle of the customer into the following three categories(services lines).
1. System Integration Service (SIS)
2. System Outsourcing Service (SOS)
3. Professional Service (ProS)[Figure 5] Overview Diagram of the Processes in Each Service
System Solutions/Services
Planning/Proposal(5) Requirement definition:
defining the scope and target ofsystemization(6) Basic design: also called
external design, a part of the
upstream process where thebasics of the functions necessary
for a system from the user’s
perspective are designed (screen,
method of operation, security,etc.). The workflow is as follows:
basic design → internal design→ detailed design →manufacture (also called
programming or
implementation).

Systematization
Plan

System Operation/Evaluation

System Development

Requirement
Definition

Basic
DesignSystemProgramming

Testing

1. System Integration Service

SystemOperation/Evaluation

Migration

2. System Outsourcing Service

Business System Design/Development Services

Business Application Management

System Migration / Downsizing

System Operation/Management

Offshore Development

Offshore Enhancement

3. Professional Service
System Migration
System Consulting

On-Site Consulting
Database Management

IT Infrastructure Development / Private Cloud Development(Ref) Prepared by Alpha-Win Research Dept. based on the securities report Projects are diversified.

1. System Integration Service (SIS)
・The Company’s main business. Develops business operation systems thatmeet the needs of end users such as companies and the government(hereinafter collectively referred to as “corporate users”). Includes
requirement definition5, basic design6, programming, and testing (Figure 5).
・While the time it takes from receiving an order to delivering the productcan range from a few months at the shortest to about three years, most projects
are completed in the order of several months. Most orders are received anddelivered during the same fiscal year. The price can also range from several
million yen to several hundred million yen, but projects priced less than Y50
million are by far the most common.
・In general, engineers are stationed at the corporate user’s site and conduct
system development for each project in teams. However, to cut down on costand secure the necessary number of engineers, a part of the development is
outsourced to domestic and overseas subsidiaries or other companies in thesame business under supervision of the Company’s project manager.
7/42This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)
 System Integration

Services are based oncontracts. Project
management of the risks
and the profit/loss isimportant.
(7) Standard development
framework F@CE: The
Company’s unique generalframework for standardizing andstreamlining application
development. A tool for carryingout projects efficiently by
preventing operation errors oromissions.
(8) Enhancement Service:
Providing not just system
maintenance, management, anddevelopment services but also
improving system performanceand quality to increase the valueof the system. Or proposing ideas
for new businesses. Improves
customer satisfaction throughthese means. For the Company,
this service means continued
business with the customer.
(9) Business related to Oracle
Cloud: Cloud-related services
and proposals based on Oracle’s
database. The Company plans tocontinue to strengthen thisbusiness by increasing thenumber of certified employees.
Current sales are several hundred
million yen.

[Figure 6] Composition of Sales (outercircle) and Gross Profit (inner circle) by
Service Category in FY 2019
3. Professional
Service
1. System
Integration Sevice

14.8%
18.5%

2. System
Outsourcing
Service

Sales composition(outer circle)

16.4%
17.0%

Gross profit comp.
(inner circle)
64.4%
68.8%

(Ref) Prepared by Alpha-Win Research Dept.
based on the financial results summary

Issued: 6/28/2019

・Since the system development business is, in general, based on contract
agreements, the SI (the Company), who is the contractor, bears responsibility
for the products (systems). Therefore, management of the risks and the
profit/loss of projects and products is important.
・Projects are often obtained through proposals or by bidding. Estimates are
generally calculated based on [number of staff] x [number of months]. After
receiving an order, in developing a system, the Company employs knowledge,know-how, and fundamental technologies pertaining to various industries,
companies, and businesses that it has accumulated over the years, as well as
its standard development framework F@CE7, to reduce the risk and improve
quality, profitability, and efficiency.
・Since unexpected changes in specifications, additional work exceeding theinitial estimate, etc., would negatively affect profitability and may make theproject unprofitable, the Company is especially keen on improving its project
management skills. The Company is also active in providing theEnhancement Service8, where the Company works closely with corporate
users to make various proposals that will lead to new businesses (compact
system development).
2. System Outsourcing Service (SOS)・Services related to the operation and evaluation of systems. It provides two
solution services: System Operation & Management (development,
management, and evaluation of components of a system such as hardware,
basic software, database, network environment, etc.) and Business
Application Management (maintenance, management, and improvement ofbusiness applications and evaluation of management processes). The
Company also has a seamlessly linked service structure where new challenges
found and proposed during system maintenance and operation (SOS) can leadto a new Enhancement Service project (SIS).
3. Professional Service (ProS)
・Services that utilize the Company’s technologies to solve everything related
to the informatization cycle from planning, designing, and developing
infrastructure to operating/monitoring systems,
such as consulting,database improvement for greater efficiency, system monitoring,
management support, and IT strategies. High performance is realized bydevelopment tools and the skills of certified experts. The Company isespecially strong in database technologies, for which it has expert engineers(business related to Oracle Cloud9).
Breakdown of sales and gross profit by each of the three categories and theirtransition over the years are shown in Figures 6-8. The sales breakdown
shows that SIS accounts for about 70% of the total, and SOS and ProS almost
equally share the remaining 30% (outer circle of Figure 6). Over the past 18
years, total sales grew by 2.6x. Specifically, sales of SIS grew by 3.3x, SOS
grew by 2.3x, and ProS grew by 1.4x; SIS has been the main driver ofbusiness growth (Figure 7 on page 9).
Breakdown of gross profit is shown in Figure 6 (inner circle). The breakdown
is not very different from that of sales. Also, as indicated by the transition ingross margin shown in Figure 8 on page 9, although some years were marked
by a 5% difference at maximum, each category has generally stayed within
the range of 15% to 17%. However, the gross margin of ProS, which createshigh added-value, is 4-5 points higher than the other two categories. The
overall gross margin, though, depends on the gross margin of SIS since SIS
accounts for an extremely large percentage of the total sales (Figure 8).
8/42This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019[Figure 8] Transition in the Gross Marginof Each Service Category[Figure 7] Sales by Service Category(Y mil)16,00025.0%

14,00012,00010,000

20.0%

8,000
6,000

15.0%

4,000
2,000
10.0%

0
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20YF FY FY FY F Y FY FY F Y F Y FY FY F Y FY FY F Y F Y FY FY

1. SIS

2. SOS

3. ProS

Total

5.0%

ProS (3. Professional Service)
SOS (2. System Outsourcing Service)
SIS (1. System Integration Service)

0.0%
FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

(Ref) Prepared by Alpha-Win Research Dept. based on the securities report◆ Labor-Intensive BusinessResources Are the Key

 Labor-intensive business.

Acquisition and trainingof talented personnel is
the key to growth.

Model

Where

Human

Since most of the Company’s business is based on order-made systemdevelopment contracts, its business is strongly characterized as a labor-based,
single-product production model. Therefore, the acquisition and training oftalented personnel are key factors since human resources are the source ofcompetitive advantage and growth potential. Especially since systems are
becoming more advanced and complex, talented employees for roles such as
project managers in charge of overall project management and systemengineers are crucial in order to manage system quality, cost, deadlines, andprofit/loss. Currently, the Company has about 260 project managers, but thisnumber is somewhat short – this shortage is a bottleneck to further growth.
The change in the number of employees for the entire CUBE SYSTEM Groupis as shown in Figure 9. Every year, the Company has been adding up to
several dozens of new employees in preparation for business expansion.
However, due to the labor shortage in recent years, it seems to not have beenable to acquire enough employees for its business expansion (in FY 2019 inJapan, the employee turnover rate was 9.8%, the retention rate was 76.8%,
the net increase in the number employees compared with the previous fiscal
year was 15, and the rate of increase was 2.5%).
[Figure 9] Change in the Number of Employees in the Group(persons)

Number of employees in Japan
Number of overseas employees

800
700
600
500

501
(+59)

511
(+13)

539
(+28)

559
(+20)

588
(+29)

28

498
(-3)
32

(+6)

(+20)

(+4)

38

(+5)

473

466

473

481

496

(-7)

(+7)

(+8)

(+15)

(+22)

FY 2011

FY 2012FY 2013

FY 2014

FY 2015

(+19)

70

58

63

(+7)

518

638
(+50)
84

(+14)

656
(+18)
85

(+1)

694
(+38)
82

(-3)

720
(+26)
93

(+11)

400
300
200

(+40)

554
(+36)

571

612

(+17)

(+41)

FY 2017

FY 2018

627
(+15)

100
0
FY 2010

FY 2016

FY 2019(Ref) Prepared by Alpha-Win Research Dept. based on the securities report

9/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)(10) Agile development: anapproach to project
development. Unlike theconventional waterfall
development, it divides a system
into short phases and conducts
repeated implementation(programming) and testing to cut
down on development time.
“Agile” means dexterous andquick.

 Sales breakdown byindustry shows that the
top three industries areother > finance >distribution >telecommunications. The“other” industries beatfinance as the largest.

 Acquisition of new
customers anddiversification of industry
are in progress.

[Figure 10] Sales Breakdown by Industry
in FY 2019
Finance

Distribution

34.3%

Telecommunications

Other

27.9%

21.3%
16.4%

(Ref) Prepared by Alpha-Win Research Dept. based on
the financial results summary, etc.

Issued: 6/28/2019

With regards to cost structure, labor cost and subcontracting cost paid tobusiness partners (basically, mostly personnel expense) account for over 90%of the cost of sales (stand-alone percentage for FY 2019) (share of sales foreach cost is 26% and 51%, respectively). Therefore, the Company’s skill incontrolling these two costs may affect profitability, making project
management crucial.
Generally, the system integration business is one where rapid expansion byunique products and services is difficult. Additionally, although the sharing
and utilization of know-how is possible to some extent, currently there is alimit to improving productivity due to the reliance on manpower. Thisdifficulty with profit margin improvement is a characteristic of the industry
rather than just the Company. Faced by this challenge, the Company plans tocontinue to improve its profit margins by carrying out various measures that
do not rely heavily on manpower such as the adoption of agile development10,
use of a standard platform, project management reinforcement of theorganization as a whole, utilization of overseas subsidiaries, and reviewingof contracts (negotiating and proposing to change from payment based on thenumber of staff and months to payment in return for services).

◆ Sales Composition that Is Well-Balanced by Industry
Sales breakdown by industry is shown below (Figure 10). Sales for thefinance industry, which must process a massive amount of data and must to
be secure and reliable, had been the largest by industry type. However, while
the sales for the finance industry declined, sales for the “other” industries(industries excluding the three industries of finance, distribution, andtelecommunications) grew significantly, reversing the share of sales in FY
2019 (Figure 11 on page 11). After these two industries, the distribution
industry and the telecommunications industry follow, in the order ofdecreasing share of sales. HIMACS (TSE First Section: 4299) and Toho
System Science (TSE First Section: 4333), competitors whose business is
especially similar to the Company, specialize in business for the financeindustry, with sales for the finance industry being over 70% or 80% of thetotal, respectively. On the contrary, the Company is becoming morediversified through the expansion of business for the non-finance industries.
Concerning business for the finance industry, systems demand from mostly
megabanks had been the financial growth driver for many years, but in thelast few years, this demand is beginning to level off due weak earnings andthe completion of consolidations and alliances in the finance industry.
Meanwhile, the sales for telecommunications have been generally increasing,although with some fluctuations, under the influence of the system
investment cycle of telecom carriers, etc.
In the past few years, the “other” industries have become the most significant
growth driver since the business with the manufacturers, the government,
energy-related industries such as electricity, and the cloud-consulting-relatedindustry grew largely with the acquisition of new customers and newcontracts. As a result, the Company appears to have become more balanced
and diversified with regards to industry type, leading a greater stability inmanagement (Figure 11 on page 11).
The breakdown of gross margin by industry changes somewhat every year. It
was somewhat high for the telecommunications and distribution industries in
the recent fiscal year, but there is no significant trend or difference in margin(Figure 12 on page 11). We believe that this is because the differences in the
10/42

This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

profitability of each individual project, rather than the differences in thecharacteristics of each industry, are being reflected in the gross margin.
[Figure 11] Transition in Sales for Each Industry(Y mil)
6,000
5,000
4,000
3,000
2,000
1,000
0
FY
2002

FY
2003

FY
2004

FY
2005

FY
2006

FY
2007

FY
2008

Finance

FY
2009

FY
2010

Distribution

FY
2011

FY
2012

FY
2013

FY
2014

Telecommunications

Other

FY
2015

FY
2016

FY
2017

FY
2018

FY
2019

FY
2020
(E)

(Ref) Figures 11 and 12 were prepared by Alpha-Win Research Dept. based on the securities report and financial results briefing materials[Figure 12] Transition in Gross Margin by Industry
22.0%
20.0%
18.0%
16.0%
14.0%
12.0%
10.0%
FY FY FY FY FY FY FY FY FY FY FY FY FY FY2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Finance

Distribution

Telecommunications

Other◆ Stable Customer Base and Business with HighContinuity
 Stable business where

repeated contracts withthe existing customers
comprise a majority of thebusiness

Since the Company’s customers and end users are Japan’s leading corporategroups and its business deals with mission-critical operations, the Company
must be reliable, stable, user-friendly, secure, and continuously in business.
Moreover, for system development and operations, the Company must
accumulate business knowledge and know-how. Consequently, the Company
has a high contract continuity with its existing customers. The prime ratio(percentage of direct contracts made with end users in system development)
is 20 to 30% and many projects are outsourced from major SIs.

11/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019[Figure 13] Sales Breakdown by Customer Group in FY 2019
 Sales breakdown by

customer shows that
Nomura ResearchInstitute is the largest,
followed by Fujitsu, Aeon,
and Mizuho. These fourgroups account for
greater than 70% of thetotal.

Other
27.7%

NRI
37.5%

(Ref) Prepared by Alpha-Win Research
Dept. based on the securities report.
Mizuho
3.8%
Aeon
6.3%

Fujitsu
24.7%

As shown by the sales breakdown by customer group (Figure 13), Nomura
Research Institute (hereinafter, “Nomura Res. Inst.” or “NRI”) is the largest
customer, followed by Fujitsu, Aeon, and Mizuho. These four corporategroups account for greater than 70% of the total. Thanks to the success of the“account” strategy (a strategy where marketing activities are conducted in aconcentrated manner by a person in charge) toward the four main clientgroups, total sales for the four groups have been great, having increased by
2.8% YoY to Y10,351 million (increase of Y281 million).
In addition, sales for clients other than the four main groups have been
increasing at a high rate in recent years (increased by 13.9% or Y484 million
YoY in FY 2019). As a result, the share of sales of the four groups is gradually
decreasing (Figure 14 on page 13).

(11) e-e Partner: an especiallyclose partner among all partnersof NRI. Of the “e Partners”(approx. 150 companies) withhighly specialized business knowhow and IT skills and high-level
IT security, e-e Partners
cooperate with NRI not only inthe operation of specific projects
but also in the cooperative
promotion of innovative activities
in the Enhancement business; inthe strategic reinforcement ofHR, quality, and IT security; andin the creation of a mutuallyprosperous business model thattakes advantage of each other’s
expertise. NRI has only
announced three companies (theCompany, HIMACS, and Toho
System) as its e-e Partners.

Looking at the long-term changes, we can see that the sales for Nomura Res.
Inst. Group had increased by approx. Y4.5 billion from approx. Y900 million
in FY 2002 to approx. Y5.4 billion in FY 2019 thanks to the expansion ofbusiness field from the initially focused distribution industry to otherindustries such as finance. During this period, the Company’s overall sales
grew by approx. Y8.7 billion from approx. Y5.6 billion to approx. Y14.3
billion, owing to the NRI Group for greater than half of this growth (52%).
Similarly, Fujitsu Group contributed slightly less than Y1.8 billion in sales,
which is 21% of the total, thanks to its expansion of telecommunications,electrical power infrastructure, and government-related businesses. Having
raised sales over the long term for each of the major corporate groups, theCompany has excellent trust from its customers and great contract continuity.
In fact, the Company is one of the few companies that are partnered with
Nomura Res. Inst. (NRI) as an e-e Partner11. In this partnership, the Company
is in a close relationship with NRI, partnered not only in business but also
making mutual investments and exchanging human resources. Looking at thetransaction with each company, we can see that NRI is also the largest bytransaction size, at approx. Y4 billion or 27.7% (share of sales for FY 2019).
Second largest is the transaction with Fujitsu at Y2.9 billion or 20.2% (shareof sales for FY 2019).
In addition, in February 2019, the Company was awarded the Best Partner
Award by AEON IBS, whose share of sales is third from the top (Y850
million or 6.0%) and with whom the Company has been in a business
relationship for 30 years. Indeed, the Company’s customer satisfaction levelis high (it has also been awarded by several other business partners).
Transactions with Hitachi, Ltd., the fourth largest partner regarding the share
12/42

This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019of sales, has also increased significantly, by about five times from theprevious fiscal year to Y830 million (5.8% of total sales).
[Figure 14] Transition in Sales by Customer Group (G) and Shares of the Top 4 Groups(Note: information on sales of Mizuho G before FY 2003 and of Aeon G before FY 2007 is not available)(Y mil)
10000

(%)

9000

80

8000

78

82

7000

76

6000

74

5000

72

4000

70

3000
2000

68

1000

66

0

64

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20YF FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY
NRI GAeon G
Other

Fujitsu G
Mizuho G
Top 4G's share (right axis)(Ref) Prepared by Alpha-Win Research Dept. based on the securities report and financial results briefing materials◆ Future Areas of Growth and Foundation for NextGeneration Technologies

 Upfront investment ingrowth areas of focus
such as blockchain, cloud,agile development, AI,
and IoT(12) Cloud solution service: atype of service where applications
are used as a “service” via web
browsers, etc.
(13) Blockchain: distributed
network where information is
synchronized, recorded, andaccumulated among many
computers(14) AI: artificial intelligence(15) IoT: Internet of things. A
system that connects all devices
around us by the Internet.

Alongside its own R&D activities, the Company has been forming allianceswith companies with advanced, new technologies (Figure 15 on page 14).
Thus, the Company is steadily building the foundation for developing
businesses that use next-generation technologies. The total R&D cost in FY
2019 was Y68 million, which may appear small since it is only approx. 0.5%of sales. However, the R&D cost is also actually separately recorded as“personnel expense for developers” under “periodic profit and loss.”
The Company is especially focused on technology investment in cloud
solution services12 including Oracle-related services; participation in proof
experiments of the Blockchain13 Collaborative Consortium; capital andbusiness alliances with companies with know-how on AI technology14, IoT
technology15, and blockchain; alliance in agile development; development ofa corporate currency platform using blockchain technology; and creation of
new solutions. These investments are aimed at acquiring and sharing
knowledge and information on advanced technologies, human resources
development, joint development and proposals, and creation of new
businesses.
Furthermore, the Company created the Technology Strategy Office within its
organization in 2016. Members of the Office are both dedicated members andmembers who also work for the marketing department. The role of the Office
is to catch up to leading-edge technologies and conduct R&D and businessdevelopment based on the newest core technologies. Although it may takeseveral years for those technologies and new businesses to begin to makesubstantial contribution to the financial results, their progress should be
followed.
13/42

This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019[Figure 15] Summary of News Release Related to Recent New Technologies, Alliances, and Key Businesses
Date announced

May 2018

July 2018

August 2018

January 2019

April 2019

Announcement

Details

Formed an alliance with CA Technologies Japan, the Japan subsidiary of CA
Agile development with CA Technologies Technologies (NASDAQ: CA) of USA, and began agile development using theJapanproducts and services of the CA Group. Will thus establish a more high-speed andhigh-quality software development method and create a new service model.
Capital and business alliance with
Tripleize Co., Ltd.

Cooperation in proposal activities making use of know-how and techniquqes related
to AI, IoT, and blockchain, etc. Through third party allotment, the Company
acquired 4.7% of Tripleize's shares.

Service related to Oracle Cloud

The Company won 1st place in the "Oracle Cloud Platform (Paas/Iaas) Certification"section of the 2018 Oracle Cloud Certification Award which acknowledges companies
that made great efforts to acquire Cloud certifications. In addition, for themonitoring of the Oracle Cloud system, the Company began providing monitoring
system development services using Zabbix.

Cube System Shanghai Co., Ltd., the Company's consolidated subsidiary, signed acore-partner contract with iVision, a major business partner for business toward local
The Company's consolidated overseas
Japanese companies. This alliance will strengthen the cooperation between the two
subsidiary in Shanghai formed a businesscompanies in their aim toward further expanding both of their businesses toward local
alliance with iVision, a local company
Japanese companies, which have been in progress in parallel with the offshorebusiness.

Certified as Cybozu, Inc.'s official
partner

The Company was certified as Cybozu's official partner. In order to meet thecustomer needs for cloud-based business solutions, which are rapidly becoming
popular, the Company plans to provide a solution service to its customers that merges
a new business scheme based on Cybozu's cloud service kintone (cloud service forcreating business apps) with the Company's Enhancement Service (its strong point)
and offshore service based on overseas sites of its corporate group.

(Ref) Prepared by Alpha-Win Research Dept. based on the news release on the Company’s website

14/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

3． Shareholder Composition◆ Change in Composition by Type of Shareholder
With regards to shareholder composition by type of shareholder as of the endof March 2019 (Figure 16), “individuals, etc.” is by far the largest, owning
approx. 77% of the total. Second to this is “financial institutions, etc.,”
owning 18%. Together, these two types of shareholders own 95% – most of
the outstanding shares. “Foreign corporate entities, etc.” is low, owning 1.5%.
Over the years, shares of “individuals, etc.” have somewhat decreased andshares of “financial institutions, etc.” have increased.

 “Individuals, etc.” ownslightly less than 80% of
all shares.

[Figure 16] Change in Shareholder Composition by Type of Shareholder (unit: %)
(%)

100
90
80
Individuals, etc.

70

●

1

2

3

4

5

6

7

8

Financial institutions, etc.

25
Other corporate entities

20
15

Overseas corporate entities, etc.

105Financial instrument business operators

0
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019at year-end(Ref) Prepared by Alpha-Win Research Dept. based on the securities report◆

Major Shareholder Composition

The Company’s major shareholder composition has been stable and has not
greatly changed. The major shareholders as of the end of March 2019 areshown in Figure 17 on page 16. The following is supplemental information.
 The employee stock
ownership plan andcurrent and former
directors are the mostsignificant by size among
the major shareholders.

 Through share buyback,the treasury shares rose
to about 11% of allshares.

・Since the amount of shares owned by the employee stock ownership plandecreased, the first and second place in the shareholder ranking switched, andthe current president Sakiyama became the largest shareholder. Possessing alittle less than 12% of all shares, he owns slightly more than the employee
stock ownership plan at second place.
・ The third largest shareholder Ms. Onuki is the Company’s previous
president. The fifth largest shareholder Mr. Uchida is the Company’s current
director.
・The purpose and identity of the investor under the name of a trust bank who
has risen up the ranking through purchases to fourth place are unknown.
・The sixth largest shareholder The Master Trust Bank of Japan is the BIP
trust account for the Company’s director remuneration (stock-remunerationtype director incentive plan).
・ The eighth largest shareholder is the Company’s former executive
managing director Mr. Sato.
・The ninth largest shareholder Mizuho Bank probably owns shares for the
15/42This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

purpose of cross-shareholding.
・The tenth largest shareholder MUFJ Bank is a correspondent financial
institution.
・Of the top ten shareholders, the employee stock ownership plan and the
directors/employees (including former members), plus the treasury shares,
add up to about 40% of the total. The Company has been actively buying backits shares. Its treasury shares, including the BIP trust account, are approx.
11.3% of the total as of the end of FY 2019.
[Figure 17] Major Shareholders’ Status(Ref) Prepared by Alpha-Win Research Dept. based on the securities report Uses a portion of treasury

shares as an incentive fordirectors

 Bought back approx.

Y300 million’s worth of its
own shares

Twice in the past, the Company has issued a portion of its treasury shares to
its directors as an incentive. In FY 2016, the Company terminated its old
director retirement benefit plan and instead started the stock-remuneration
type (BIP trust) director incentive plan where the Company’s treasury sharesare issued and granted according to his or her position and achievement ratewith respect to the medium-term management goals. The plan is renewed
every three fiscal years, or the span of a medium-term management plan, andthe actual right to the shares is granted upon a director’s retirement.
Also, in September 2018, when the Company made a transition to a new stepin the medium-term management plan, it issued another portion of thetreasury shares to its directors as limited-transfer stock-based remunerationas part of the new system. Prior to this, direct ownership of shares by thecurrent management team members was limited. Therefore, this new stock
remuneration system should be effective in raising the incentives of directors
with regards to management and financial results and aligning theirdirections with the shareholders’ profit.
In addition, in February 2019, the Company bought back approximately 348
thousand of its shares (equivalent to 2.8% of outstanding shares excluding
the treasury shares) for a total of approximately Y300 million (averageacquisition price: Y863). The purpose of this buy-back was to improve
capital efficiency and margins and to maintain the ROE at 10% or greaterover the long term. As a side note, the total return ratio in FY 2019 was 91.3%,
including the share buyback in addition to the dividend.
The Company has not decided on how to make use of the remaining treasury
shares, but some possibilities include using them for stock remuneration as
another director incentive, for stock cancellation, or for a stock-swap in a tieup or an M&A.
16/42

This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

4． ESG◆ Environment
 Works on continual
improvement ofenvironmental
performance (energy andresource conservation)

Although the Company’s business does not harm the environment, under thepolicy of “practicing environment-friendly management through continual
improvement in environmental performance (energy/resource conservation),”the Company engages in environment-friendly activities (obtained ISO14001
certification). Specifically, the Company works on reducing electricity andpaper usage, reducing waste, implementing “cool biz” and “warm biz,”promoting green purchasing, and planting trees in Vietnam.

◆ SocietyAs a key industry necessary for the infrastructure supporting the economy
and the society, the CUBE SYSTEM Group believes its mission is tocontribute to the further development of the IT society and the strengtheningof its customers’ competitiveness. It aims to create a more prosperous andconvenient society through the power of IT systems.

 Actively engaged in
activities that support thedevelopment of the next
generation of humanresources

To help develop the next generation, the Company holds the “DonatedSeminar on Local Region, IT, and Energy” (Toyo University) to support thedevelopment of individuals with problem-solving skills who can contributeto globalization and the local region. It also holds the “Family Day” as anopportunity for its employees’ family members to learn about companies andcareers. Additionally, the Company supports cleanup and beautification
activities and activities where children of the local region can visit theworkplace to nurture ideas about the meaning of work and their future careers.

◆ Governance Of the 10 directors andauditors, five are fromoutside the Company.
(16) SDGs (Sustainable
Development Goals):International goals for the period
from 2016 to 2030 described in“The 2030 Agenda for
Sustainable Development” that
was adopted at the UN Summit
in September 2015. Consists of
17 goals and 169 targets andpledges to “leave no one (onearth) behind.”

As a company with auditors, the Company has set up the Nomination andCompensation Advisory Committee and the Integrated Risk Committee(which directly controls the Compliance Committee, the Internal Control
Committee, the Security Committee, the Working Style Reform Committee,
and other committees). The Company has also adopted the executive officer
system in order to reinforce corporate governance. To deliberate on importantmatters related to the general management of the Company, a management
meeting is held twice a month. The deliberated matters are communicated toeach department via the Corporate Planning Office. The Company has also
set up an internal hotline system for compliance-related matters. It has not
adopted any anti-takeover measures.
The management team is made up of seven directors (of which two are
outside directors) and three auditors (all are outside auditors from Mitsubishi
Corporation and have overseas business experience). Four of the directors are
dedicated members, two are from Nomura Research Institute, and one is alawyer. All directors as well as executive officers are men, with no female
member or member with a foreign nationality. Going forward, the Company
plans to create opportunities for women and assign appropriate roles toappropriate individuals based on their skills and abilities.
Also, under the health management policy, the Company is working on
improving and maintaining the mental and physical health of its employees
and creating a comfortable working environment (won a silver award as a
Health Management Outstanding Organization in May 2018). In April 2019,it newly created the Sustainability Promotion Committee and has beenworking on social issues such as the SDGs16.
17/42

This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

5． History of Growth◆ Company History
 Founded under the
anticipation that theimportance and potentialof computer systems willgrow. Specialized in thesystem integration
business.
 Its main customers are theleading blue-chipcompanies of Japan.

In 1972, the Company was founded as Customer Engineers Corporation by
its founding members, which included the current president, for the purposeof software development and system operation/management (changed its
name to the current one in 1990). As computers became popular in theJapanese society, IT investments increased and the system development
market grew. The Company has been specializing in the system integration
business and has been earning trust and building its track record. One after
another, it has increased the number of contracts with leading Japanesecompanies – its current main customer group. As those companies increased
their IT investment and outsourcing of system development/operation, theCompany expanded its business domain as well as business in general at a
steady pace.
Regarding stock, the initial offering was made in the JASDAQ market in
2002. In 2006, the Company became listed on the Second Section of the TSE,
and then became listed on the First Section on March 2014.

 Changed its listing fromTSE Second Section to theFirst Section in March2014◆ Past Transition in Financial Results
From foundation until now, the Company has been improving its financial
performance as a specialist (SI) in the development and operation of systems
outsourced from other companies and the government. Long-term transitionin financial performance is shown in Figure 18. The following are details on
the financial results in chronological order.

[Figure 18] Long-Term Transition in Financial Results(Ref) Prepared by Alpha-Win Research Dept. based on the securities report and financial results summary. E = the Company’s estimate/forecast.

18/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

 Has been growing
steadily and continuing
to increase sales overmany years. Profit
margins have stayedabout the same.
 Sales decreased only for
one fiscal year during thepast 18 years.
 Rate of change infinancial results has been
low and stable.

Issued: 6/28/2019

・ On a consolidated basis, with the exception of only a single fiscal year
(FY 2012), the Company has achieved an year-on-year increase in sales every
fiscal year for the past 18 fiscal years. This stable growth trend is noteworthy.
・During this period, the annual sales growth rate (simple average of theannual rate of increase in sales) was +6.4% and similarly the recurring profit
growth rate was +6.0%, showing how the Company has been steadily
improving its financial performance over the long term.
・Although recurring profit decreased in five out of the 18 fiscal years, thelargest annual drop stayed within the range of approx. -20%, and theCompany has been able to always stay in the black with regards to net profit
for the year.
・As for the statistical analysis, the Company’s standard deviation for the rateof change in financial result and variation coefficient (= standard deviation /average; shows relative dispersion; also called relative standard deviation)
are low, indicating that the volatility of the Company’s fundamentals is low(see Figure 19 for a comparison with similar-sized competitors for the mostrecent 15 fiscal years).
・Furthermore, because the Company’s operating margin has been stable ataround 7% (Figure 20 on page 20), an increase in sales has been directly
correlated with increases in profit, dividend, and market capitalization.

[Figure 19] Performance Volatility Analysis for the Most Recent 15 Years (% YoY change for sales and R.P.)
Note: non-consolidated for Toho System only, actual values for FY 2005 - FY 2019
Target of Analysis
FY 2005 - FY 2019Market: TSE 1st sec.
n=15 fiscal years
Standard deviation
Average
Coefficient of variation% Change in Sales (YoY %)
Cube
2335
CS
6.20
5.51
1.13

HIMACS
4299
HM
8.05
3.09
2.60

Toho System
4333
TSP
17.81
9.39
1.90

% Change in Recurring Profit (YoY %)
Cube
2335
CS
13.72
5.37
2.56

HIMACS
4299
HM
32.67
6.05
5.40

Toho System
4333
TSP
333.48100.26
3.33(Ref) Prepared by Alpha-Win Research Dept. based on the securities report and financial results summary Increased transaction

with the major fourgroups has helped theCompany growsignificantly.
 Even right after the
Lehman shock, sales wereincreased for threeconsecutive fiscal years.
 In FY 2012, due to theGreat East Japan
Earthquake, sales
decreased for the firsttime since becoming
listed. Operating profit
decreased by 20%.

External environmental factors, such as active IT investments by Japanesecompanies and the government, were not insignificant to the Company’s
growth to date. However, much of the Company’s success is thought to havebeen brought by its efforts to improve its expertise, earn trust from its
customers, build a strong customer base, and consistently produce results.
Although it is an independent company, it has strengthened its relationshipwith the four major groups NRI, Fujitsu, Aeon, and Mizuho and succeeded
in developing long-term business relationships; this success was its major
growth driver.
The financial performance for the most recent 11 years or so is as follows.
・In FY 2009 when the Lehman shock occurred, the economy was sluggish
and customers became more cautious about IT investments. However, theCompany was able to continue to increase its sales owing to the continued
business with the existing customers mainly for systems in the finance anddistribution industries, as well as the entry of companies into the bankbusiness leading to projects for operation expansion.
・The economic recession continued into FY 2010 and FY 2011. Systemdevelopment plans continued to be postponed, terminated, or shrunk down,
companies continued to hold off on IT investments, and competition overprice and between companies became intense. However, thanks to thebusiness with the existing customers and the expansion of business with life
insurance companies, banks, and manufacturers, the Company continued to
19/42This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

 Business environment
improved thanks to
Abenomics and theCompany began toincrease sales again.

 Record highs achievedfor both operating profit
and recurring profit in FY
2015

 Sales have been hitting
record highs for six fiscal
years in a row, but profit
has been fluctuating
inside a boxed range due
to increased cost.

Issued: 6/28/2019

increase its sales. With increased sales, fluctuation in the operating profit for
the three fiscal years following the Lehman shock stayed within a small range.
･On the contrary, the Great East Japan Earthquake had a large negative
impact on the Company in FY 2012. Amidst the difficult situation, sales
decreased by approx. 8%. Sales of all industries excluding
telecommunications declined, with an especially large decline for thebusiness toward manufacturers and the government. This was the single
instance in which sales had decreased in the history of the Company from FY
2002 to the previous fiscal year. Similarly, during this period, the Company
experienced the largest drop of -20.9% YoY in operating profit, but a net
profit was maintained.
・Then, IT investments by companies and the government recovered fromtheir previous inclination to hold off or postpone thanks to factors such as the
economic recovery brought by Abenomics since December 2012, recoveryof company employment and performance, redevelopment of IT
infrastructure due to M&As, smartphone-related telecommunications
infrastructure, business related to the liberalization of electrical power retail,and increased investment in the field of social securities. With this recovery,
the Company’s return to a trend of rising sales became a more definite one.
・Regarding profit, in FY 2015, since sales increased due to the developmentof businesses with existing customers and the acquisition of new customers
and productivity improved due to the reinforcement of project management,
etc., a record-high operating profit and a recurring profit of Y964 million andY980 million were recorded, respectively (net profit for the year also hit arecord high in the following year or FY 2016, at Y629 million).
・Since then, the Company has been consecutively posting new record-highsales every fiscal year. However, due to increased cost and intensified pricecompetition, the Company’s gross margin and operating margin have been
gradually decreasing over the long term (Figure 20).
・The operating margin especially decreased due to the increased cost of sales(subcontracting cost and labor cost), upfront investment cost, and SG&A
expenses (especially personnel expense; as a reference, the SG&A expenses
ratio changed from 7.9% in FY 2014→8.5% in FY 2015→9.5% in FY
2016→9.3% in FY 2017→11.0% in FY 2018→10.6% in FY 2019), but it
began to improve in FY 2018. In the previous fiscal year (FY 2019), althoughnone of the profits quite reached their all-time-highs, they have recovered toa close level.
・However, even with an improving economic environment, the Company
has not yet been able to improve its profit margins beyond a boxed range.
Gross Margin

Operating Margin

(%)

20.0

[Figure 20] Long-Term Transition in
the Company’s Gross Margin andOperating Margin

18.0

18.3
17.1

17.1
15.9

16.0

16.6

16.7

17.7

16.7

16.7

16.7
15.5

16.2

15.5

17.3

17.1

6.1

6.3

6.4

FY
2016

FY
2017

FY
2018

17.0
15.4

13.9

14.0
12.0
10.0

(Ref) Prepared by Alpha-Win Research Dept.
based on the financial results summary. E = theCompany’s estimate/forecast.

8.7

8.2

8.0

7.5

7.9

7.1

7.4

8.0

7.7

7.3

7.2

7.7
6.2

6.5

FY
2011

FY
2012

6.0

7.5

5.9

7.0

4.0
2.0
0.0

FY
2001

FY
2002

FY
2003

FY
2004

FY
2005

FY
2006

FY
2007

FY
2008

FY
2009

FY
2010

FY
2013

FY
2014

FY
2015

FY
2019

20/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

6． Business Environment◆ History of the System Integration Business
The system integration business is said to have begun in the 1960s when the
US military industry outsourced its system development. In the US,
companies (users) tended to use packaged software or, when they needed todevelop their own systems, conduct everything from system development tooperation in-house. Meanwhile, the system integration business began inJapan when Nippon Telegraph and Telephone Public Corporation DATA
Communications Bureau (now known as NTT DATA) was founded in 1967
and conducted system development for the Regional Bank Association ofJapan, large-scale system development projects for the government, etc.

 As the outsourcing ofsystem development
became popular, SIs grewby taking thoseoutsourced systemdevelopment jobs.

 Order-made systemdevelopment is popular inJapan.

Previously, the IT system department of each company was in charge ofsystem integration. However, as systems became more advanced and wererequired to be more efficient and rational, their in-house operation andmanagement became difficult. Consequently, more companies started tooutsource all or a part of the planning, development, management, andoperation of systems. As a result, system integration outsourcing became
popular and, as the contractor, system integrators (SIs) expanded theirbusiness.
In Japan, the proportion of outsourced system development is much higher
than packaged software compared to the US (Figure 21).
[Figure 21] Ratio of Software Type in Japan and the USA
Japan

USA

Packaged

11.7%
Packaged

46.2%

Outsourced
development

Outsourced
development

53.8%

88.3%

(Source) Ministry of Internal Affairs and Communications: “Report on Current Status of Japan’s ICT”

◆ Structure of the System Integration Industry

 The industry is in a mild
oligopoly. Entry barrier isrelatively high.

Japan’s system integration industry has no monopolistic player but is instead
often described as being in a mild oligopoly (the top five sellers account for
about 40% of the total shares). This situation is probably due to the fact thatsince this business deals with order-made system development, unlike the
manufacturing and sales of products (general-purpose, mass-produced goods),
one cannot meet the requirements for a monopoly such as technology
protection and differentiation by means of patents and expansion of sharesthrough mass production. Additionally, because of the language barrier andthe uniqueness of business, entry of foreign companies into the Japanesemarket has been limited. On the flip side, aside from offshore development,
full-scale entry of Japanese companies into foreign markets is also difficult.
While the competition is intense, there should not be large changes in theshares since the demands for system reliability and continuity make the entry
barrier relatively high.
21/42This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section) The system integrationindustry has a verticallylayered structure.

Issued: 6/28/2019

This industry has a vertically layered structure where its players often share
work, cooperate in work, and take contractor- or subcontractor-like roles
among themselves. The players are mostly able to exist alongside one anotherby taking strong positions in niches differentiated by industry, size, andcorporate group of the users including companies and the government, or by
the business function of the system. Due to this structure, profitability as wellas the risks generally tend to increase for direct contracts with end customers(prime contract) or as one moves further upstream in the development process.
Japanese companies (corporate users) prefer IT systems that are order-madeand tend to outsource system development to other companies. Generally, therole of Japanese SI companies is to develop systems based on therequirements set by corporate users. Consequently, ownership of theintellectual property related to the system developed under an outsourcing
contract belongs to the corporate user. This means that productivity cannot
be easily boosted by selling the system to other customers or reusing it.
Moreover, as described above, since the industry has a layered structure andis labor-intensive, profitability and global competitiveness are generally nothigh.
As a growth strategy, SIs may choose to secure human resources and expand
business by means of M&As, capital and business tie-ups, and M&A
following a carve-out of the systems division of clients. Indeed, alliances andmergers are increasing.

 SIs can be categorized
into three types:
independent (theCompany belongs here),manufacturer, and user.

System integrators (SIs) can mainly be categorized into the following three
types.
1. Independent: Founded as a system integrator. A fully independentcompany. If it is a mid-tier player or smaller, it often takes ondevelopment works, etc., as a subcontractor for other SIs in addition toits own business with end customers. The Company belongs to this type.
Whether or not it can develop a firm relationship with growing blue-chipcustomers is the key to success (company examples: TIS, Fujisoft,
Otsuka Corporation, NSD, etc.).
2. Manufacturer: Manufacturer in the business of producing and selling
hardware such as computers, or a company that was previously suchmanufacturer’s systems division or software development division but
had been separated. Or a company belonging to a manufacturer’s
corporate group (e.g. Fujitsu, NEC, Hitachi, IBM Japan, their ITspecialized subsidiaries, etc.).
3. User: Founded as a system integrator by major corporate players inindustries such as finance, telecommunications, and trading. Or the IT
systems subsidiary of such major company that was previously that major
company’s IT systems division before it become independent. Sells
mostly to capitally-tied companies within the corporate group (e.g.
Nomura Res. Inst., NTT DATA, NS Solutions, SCSK, etc.).
(Reference) Other: category for those that do not fit into the above.
・Trading company: Started out as an equipment distributer, etc. Sells mostly
to companies within the corporate group (e.g. Itochu Techno-Solutions, etc.).
・Telecommunications company: (e.g. NTT Communications, etc.)
・Accounting auditor or consulting company: (e.g. Accenture, etc.)

22/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)
 Although slowly, the system
integration market is
growing. Meanwhile,elimination andenlargement of companies
are in progress.
(17) Survey of Selected Service
Industries: Nation-wide survey ofcompanies on the current activity
and business management status ofindustries in the service industry
sector with high needs for statistics
from both govt. and economic
perspectives. Includes the IT
services industry, which is further
divided into software dev. (includes
SI), assigned system management,
etc.

Issued: 6/28/2019◆ Trends in Japan’s System Integration Market
Looking at ”Sales by category of business, number of establishments, andnumber of permanent employees for the information services industry,” thesurvey result from the ”Survey of Selected Service Industries”17 by the
Ministry of Economy, Trade, and Industry, we find that the sales of ordermade software, as well as the sales of system integration which makes up
more than half of order-made software, have been increasing with the
exception of the few years after the Lehman shock (Figures 22 and 23).
According to the same data, from 2010 to 2017, sales for system integration
had increased by about 2.1% per year (simple average). The current market
size is about Y4.5 trillion. The number of establishments (mostly
synonymous with the number of companies) in the IT services business has
been gradually decreasing every year since 2003 (simple average of approx.
-1.2% per year). In contrast, the number of permanent employees has been
increasing with the exception of 2010 to 2012 (from 144 thousand in 1998 →333 thousand in 2017), indicating that the elimination and expansion ofcompanies are the industrial trend (the number of employees per
establishment: 107.2 in 1998 → 135.5 in 2017).

[Figure 22] Changes in the System Integration Market[Figure 23] Rate of Change in the SI Market(annual sales: Y100 mil)(rate of change in sales: %)80,00015.0

70,00010.0

60,00050,0005.0

40,0000.0

30,00020,000-5.0

10,000

1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

Order-made software

Of which is by system integrator (SI)

1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

-10.0

0

Order-made software

Of which is by system integrator (SI)(Ref) Prepared by Alpha-Win Research Dept. based on data from 2017 Survey of Selected Service Industry by the Ministry of Economy, Trade and Industry(18) DX (Digital Transformation):
The transformation brought about
by the penetration of IT(information technology)
everywhere in the society. Not only
the businesses, but the industrial
structure and social infrastructure
are said to also become affected.

Since large-scale projects in system development (such as businesscombinations by megabanks) have reached their peak and are beginning to
decline, cost control is becoming a prominent issue and competition isstarting to intensify. However, IT investments by companies and thegovernment should continue to steadily increase due to the structurally
inherent lack of manpower, demands for improvement in operation efficiency,
and great business conditions. In fact, we predict that the market size shouldgrow at about 2-3% per year as companies strategically develop new
businesses and technologies in various industries and fields in order toincrease their competitiveness and as the demand for more advanced systems
and DX18 increases.

23/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019◆ CUBE SYSTEM’s Market Position and Comparison
with Competitors
In the system integration industry, there are about 220 companies defined bygeneral terms as a SI whose sales can be confirmed through disclosed
securities reports, etc. Among them, the Company is estimated to be ranked
at around 80th to 90th place from the top by sales volume. Additionally, theCompany’s share in the Japanese market is estimated to be approx. 0.3%.

 Middle-ranking in theindustry by sales, at 80th
to 90th place from the top.
Its share of sales in theentire system integration
market is estimated to beabout 0.3%.

Some of the Company’s competitors are HIMACS (TSE First Section: 4299)
and Toho System (TSE First Section: 4333), which are similar in size andwhich the Company uses as its benchmark. They are both e-e Partners of
Nomura Research Institute and are similar to the Company in market positionand size. Meanwhile, several of the largest SI players such as Nomura
Research Institute and Fujitsu are the Company’s partners and allies rather
than direct competitors.

 Its benchmark companies

are HIMACS and Toho
System. Both are Nomura
Research Institute’s e-ePartners and their market
positions are very similar.

Comparison of the long-term transition in the operating margin of the threemajor listed companies including the Company (hereinafter, the Company isabbreviated as CS in the graphs; similarly, HM for HIMACS and TS for Toho
System) is shown in Figure 24. Compared to the other two companies, theCompany’s operating margin is stable and is in no way inferior. Similarly,
comparison of ROE (Figure 25) shows that the Company’s ROE has been thehighest of the three companies during the most recent two years, having
recovered greatly from one point in time and maintaining the target ROE
value of greater than 10% for five consecutive fiscal years.

 No significant difference ineach of the profit margins
between the threecompanies. The
Company’s O.P. margin
has not changed, but its
ROE has greatly improved.

[Figure 24] Comparison of O.P. Margin for Three Mid-Tier
Listed Companies (the Company, HM, and TS)
(%)

(%)
13.0

CS

11.3

HM

11.0

10.1
8.1
7.3

7.0
5.0

7.7

5.9

7.3
7.2

4.9

7.7

7.6

8.4
7.7

24.0

TS

9.2
9.0

[Figure 25] Change in ROE for the Three Companies

7.7

6.9

6.2

7.6
6.5
5.5

5.9

7.6

7.5

6.1

8.1

7.3
6.0

6.4

8.4
7.0

18.0

6.8

TS

8.0
6.0
4.0
2.0

1.0

0.0
-2.0

0.1
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020(E)

17.2 16.8
15.4 15.5 15.3

16.3
14.6

14.2

13.8

14.0
10.0

5.3

16.4

16.0
12.0

3.0

-1.0

HM

20.0

9.6
7.5

7.7

CS

22.0

11.3

11.1

10.9

10.0

12.4
6.7
5.2
4.3

8.6

8.7

8.8

8.6

9.2

8.5

5.4

6.2

4.4
4.3

8.4

7.1

12.1
9.1
8

13.2

11.4

13.5 14.1
11.6

11.9

10.7
9

11.4
9.8

9.8

9.6

9.8

5.3
3.8
-0.9

3.0

FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

(Ref) Figures 24 and 25 were prepared by Alpha-Win Research Dept. based on the financial results summary

24/42This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019[Figure 26] Company Overview and Management Indicator Comparison for Three MidTier Listed Companies (the Company, HM, and TS)
Company Name

CUBE SYSTEM (CS)HIMACS (HM)Toho System Science (TS)

Code

2335

4299

4333

Characteristics

Independent. Mainly sys. dev. for finance,
distribution, telecom, and other industries(makers & gov. excluding the above 3
industries). Sales for finance are a little
less than 30% of total sales. Sharp growthof "other industries" category.

FoundedListed Date (JASDAQ→TSE 2nd→TSE 1st)
Sales Categories/Breakdown (FY 2019)

Director Composition

Major Clients/Customers (Y mil, % of sales)

Began as Toho Mutual Life Insurance
Independent. 70% of sales comes from the Co.'s affiliate but is now indep.
finance industry. Sales for insurance
Specialized in software dev. for financecompanies are espcially high - greater than (insurance, securities, etc.) - greater than40%.
80% of total sales. Also develops
software for the telecom industry.

July 1972

May 1976

June 1971

10/2002→11/2006→03/2014

03/2001→03/2004→03/2015

06/2001→03/2007→03/2014

・System Integration 68.8%
・System Outsourcing 16.4%
・Professional 14.8%

・System Solution 53.7％
・System Maintenance 46.3％

・Software Development 97.4％
・IT System Service, etc. 2.6％

・Directors (5; 2 outside)・Directors (7; 2 outside)・Directors (7; 3 outside)・Auditors (4; 2 outside)・Auditors (3; all outside)・Auditors (4; 2 outside)・Executive officers (9; 1 woman =・Executive officers (13; no woman = 0.0%) ・Executive officers (10; 1 woman = 10.0%)
11.1%)

1. NRI 3,979 (27.8％ )1. NRI 6,292 (42.4％)

1. NRI 3,506 (27.4％ )-2. Fujitsu 2,903 (20.3％)

2. SCSK 1,425 (11.1％ )Sites (including consolidated subsidiaries)

・Head office: Shinagawa-ku, Tokyo・West Japan Solutions Headquarters:
Osaka & Nagoya
・3 subsidiaries

・Head office: Yokohama, Kanagawa
・Minatomirai Office: Yokohama
・1 subsidiary・Head office: Bunkyo-ku, TokyoManagement Goals (indicators)

・ROE: ≥10%
・Consolidated O.P. margin: ≥10.0%
・Consolidated sales per domestic
employee: ≥Y25 mil
・O.P. (same as above): ≥Y2.5 mil
Mid-term goal: Sales Y18.5 bil, O.P.
margin 9.6%, ROE 13% in FY 2021

Medium term management plan, final FY:
In FY 2023,
・Sales Y22 bil・O.P. margin ≥10%
・ROE ≥12%

Medium-term management plan, final
FY: In FY 2023,
・Sales Y20 bil
・O.P. Y2 bil・O.P. margin ≥10%
・ROE ≥15%

・As a key industry necessary for
infrastructure supporting economy andsociety, contribute to further dev. of the IT
society and enhancement of the customers'competitiveness・Become "a company selected as its
customers' best partner" and create "acorporate culture where employees and thecompany grow together and sharehappiness and wealth"・Business dev. in Japan or overseas
・Invest in new businesses and tech・Strengthen business foundation topromote growth・Contribute to the dev. of the IT society byenhancing the customers' competitivenessas their best partner
・Further dev. the existing and related biz,focusing on main clients・Further enhance & expand businesstoward the 6 main industries (goal: sales
share of business with non-financeindustries ≥30%)
・Increase transaction with end users (goal:
business with end-users ≥30%)
・Create new biz & overseas biz
・Conduct M&As and create capitalalliances for business expansion

・A company that works together withcustomers to create and realize values
needed by the customers
・Traditional IT business (maintain &expand SI business)
・Digital IT business (a challenge)
・Create-IT business (dev. a serviceproviding business)・Strengthen business foundation (HR,work satisfaction, internal control)

15,500
8.2
1,090
18.3
14.4
4.2

15,000
1.1
800
-18.9
-25.0
3.3

13,500
5.4
1,130
9.6
18.7
4.6

68.4

62.8

57.8

41.3
65.4
766
20.2
1.4
11.3
4.2
1.8

34.5
74.5
820
18.3
1.0
9.7
4.8
1.5

12.2
65.6
534
25.3
2.1
9.8
5.1
1.3

Management Policy/Strategy (summary)Sales (Y mil) CE for FY 2020
Sales Growth Rate, YoY (%) CE for FY 2020
Operating Profit (Y mil) CE
O.P. Growth Rate, YoY (%) CE
EPS (CE) for FY 2020, YoY (%)
DOE (%) Actual
Past 10 Years’ Sales Growth Rate (FY 2019 result div. by
FY 2009 result: %)O.P. Growth Rate (same condition as above)
Equity Ratio (%) Actual# of Domestic/Overseas Employees, Actual
Est. Sales Per Employee (Y mil / person)
Est. O.P. Per Employee (Y mil / person)

ROE (%) Actual for FY 2019 A=B×C×D
N.P. Margin (N.P. for the year / sales : %) B
Total Asset Turnover Ratio (sales / ave. total asset) C
Financial Leverage (ave. total asset / ave. owner's equity)
1.5
D
ROA (R.P. / total asset : %) E=F×G
12.9
R.P. Margin (%) Actual F
7.1
Total Asset Turnover Ratio (sales / ave. total asset) G
1.8
Italics show each company’s estimates/forecasts (CE) for FY 2020. Others are actual values for FY 2019.

1.3

1.5

10.1
6.7
1.5

10.2
8.1
1.3

(Ref) Prepared by Alpha-Win Research Dept. based on each company’s securities report, financial results briefing, briefing materials, website,
interviews, etc.

25/42This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

7． Last Fiscal Year’s Results and This Fiscal
Year’s Forecast by the Company
 Last fiscal year, the results
were slightly below the
Company’s initial planand our forecast, but
sales increased for theseventh consecutive fiscal
year and profit increased
for the second
consecutive fiscal year.

◆ Full-Year Financial Results for FY 2019 (last fiscal year)

 Sales hit a record high foranother consecutive fiscal
year. Profits also
approached their record
highs.

Our forecast on last fiscal year’s sales was Y14,600 million, which was asomewhat cautiously made prediction compared to the Company’s forecast(Y14,700 million), but the actual results were below our prediction. Also, we
had predicted that each of the profits will be about the same as the Company’s
forecast. The largest difference between our profit forecast and the actual
result was for the gross margin; we had predicted that it will improve by 0.1
point from 17.3% in FY 2018 to 17.4% in FY 2019, but it actually worsenedby 0.2 point to 17.1%. This decline is explained by the recording of atemporary but unexpected unprofitable project(s) and rising labor andsubcontracting costs as part of the manufacturing cost.

 Both the orders and theorder backlog increased.

Consolidated financial results for FY 2019 (hereinafter referred to as “theprevious fiscal year” or “last fiscal year”) were as follows: sales of Y14,325
million (+5.6% YoY), an operating profit of Y921 million (+7.8% YoY), a
recurring profit of Y959 million (+7.5% YoY), and a net profit attributable toowners of the parent of Y596 million (+5.1% YoY; hereinafter “net profit”).
As the first year of the medium-term management plan “V2020 3rd STEP”(2018 - 2020), it appears to be a generally good start.
Sales have been increasing and hitting record-high values for sevenconsecutive fiscal years since FY 2013. Each of the profits has also been
growing for two consecutive fiscal years and has recovered to a level close to
their all-time-highs. Sales were 2.6% lower and net profit was 6.9% lower
than the ambitious targets set in the Company’s initial plan (= first year’s planfor the medium-term management plan) (Figure 27).

Meanwhile, orders received increased by Y1,106 million (8.1%) fromY13,643 million → Y14,750 million (from last fiscal year to the current
fiscal year; the same order applies below). The order backlog similarly
increased by Y345 million (9.5%) from Y3,650 million → Y3,996 million.
[Figure 27] Comparison of Initial Forecast and Actual Result for FY 2019 (last FY)
Initial Forecast Forecast byby the Company Alpha-Win

Unit: Y mil
Sales
Gross Profit
Gross Margin
SG&A Expenses
SG&A Expenses Ratio
Operating Profit
O.P. Margin
Recurring Profit
Net Profit

14,700

1,010
6.9%
1,010
640

14,600
2,540
17.4%
1,540
10.5%
1,000
6.8%
1,000
635

ActualResult14,325
2,449
17.1%
1,527
10.7%
921
6.4%
959
596

Difference from theCompany's forecast

Percent Achieved Compared to
the Company's Initial Forecast

-375

97.4%

-89

91.2%

-51
-44

95.0%
93.1%

-0.5pt(Ref) Prepared by Alpha-Win Research Dept. based on the financial results summary

The Company's overall increase in sales was Y765 million YoY. Sales
increased for each of the three service categories by Y200 to 300 million each
(Figure 28 on page 27).
As for the gross margin of each service category, the gross margin of SIS
26/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

decreased by 1 point from 17.0% → 16.0% due to decreased profitability asa result of the project scale down for supermarkets, banks, and life insurance.
On the other hand, SOS’s gross margin improved from 15.2% → 17.7%
thanks to projects for convenience stores, etc., and ProS’s gross margin
improved from 21.0% → 21.4% due to the strong performance of cloudconsulting. As SIS’s sales account for about 70% of the total, the overall grossmargin fell from 17.3% → 17.1%. However, thanks to increased sales, thegross profit itself increased by Y104 million (4.4%) from Y2,344 million →Y2,448 million.
[Figure 28] Contribution of Each Service Category toSales in FY 2019 (last fiscal year)[Figure 29] Contribution of Each Service
Category to Profit in FY 2019

(Y mil)16,00013,55914,00014,325(+ 765)9,854(+ 290)Gross
Profit(unit: Ymil)
Gross
Margin(unit: %)12,00010,000
9,564

8,000
6,000
4,000
2,000
0

2,079

2,352

(+272)

1,915

2,118

(+ 202)

03/2018

03/2019

Total
SIS
SOS
ProS
Total
SIS
SOS
ProS

FY 2018
2,344
1,625
316
402
17.3%
17.0%
15.2%
21.0%

FY 2019
2,448
1,577
417
453
17.1%
16.0%
17.7%
21.4%

Diff.
% Diff.
104
4.4%
-48
-3.0%
101
32.0%
51
12.7%
-0.2%
-1.0%
2.5%
0.4%

(Ref) Figures 28 and 29 were prepared by Alpha-Win Research Dept. based on thefinancial results supplemental reference materials

ProS (Professional Service)
SOS (System Outsourcing Service)
SIS (System Integration Service)・ By industry, compared to the overall sales increase of Y765 million (YoY),
the “other” industries increased by Y1,494 million (+43.6%) YoY. This
increase largely contributed to the total sales, compensating for the decreasein the sales of finance by Y562 million, distribution by Y95 million, andtelecommunications by Y70 million due to a reduction in the number of major
system development projects.
・ Similarly, the gross profit decreased for both finance andtelecommunications by Y146 million and Y19 million, respectively, but wasoffset by the Y263 million increase for the “other” industries.
・ The strong sales of the “other” industries are a result of the Company’s
consistent efforts in achieving results, accumulating know-how, andimproving sales that have led to a successful acquisition of new customers
and orders for large projects. Increased sales from the system development
for manufacturers such as construction machinery and food manufacturing
companies and from the increased number of orders for the consulting
business had especially contributed to the increase in profits.

 Weak toward the financeindustry, but strong
business with the “other”
industries – contributing
to sales and gross profit.

[Figure 30] Contribution of Each Industry toSales in FY 2019 (last fiscal year)[Figure 31] Contribution of Each Industry toProfit in FY 2019

(Y mil)16,00014,00013,55912,00014,325(+765)

4,002(-562)

4,565

Finance

10,000
3,050
8,000

2,353

6,000
4,000
2,000

(-95)

Distribution

3,146

(-70)
Telecommunications

2,423
4,918
3,424

0
03/2018

03/2019(+1,494)

Other

Total
Gross
Finance
ProfitDist.
(unit: Y
Telecom.
mil)
Other
Total
Gross
Finance
MarginDist.
(unit: %) Telecom.
Other

FY 2018
2,344
806
536
460
540
17.3%
17.7%
17.0%
19.0%
22.3%

FY 2019
2,448
660
543
441
803
17.1%
16.5%
17.8%
18.7%
34.1%

Diff.
104
-146
7
-19
263
-0.2%
-1.2%
0.8%
-0.2%
11.8%

% Diff.
4.4%-18.1%
1.3%
-4.1%
48.7%

(Ref) Figures 30 and 31 were prepared by Alpha-Win Research Dept.
based on the financial results supplemental reference materials

27/42This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

An analysis of the factors contributing to the change in the overall operating
profit is as shown in Figure 32. An increase in the number of projects for
manufacturers and the services industry in the “other” industries category
contributed significantly to the increase in profit, compensating for thedecreased number of projects for finance as well as increased personnel andengineer training expenses (+Y277 million YoY) and subcontracting costs(+Y357 million YoY).
The SG&A expenses ratio improved by 0.3 point from 11.0% to 10.7%, as
the SG&A expenses had been suppressed to an increase of only 2.6% YoY.
This improvement offset the 0.2-point decline in gross margin, resulting in aslight improvement in the operating margin from 6.3% to 6.4%. Combinedwith the effect of the sales increase, operating profit rose by 7.8%. As for
non-operating profit and loss, a profit of Y38 million was recorded, which isabout the same as the previous fiscal year. There was no extraordinary profit
or loss, and net profit increased by 5.1%.
[Figure 32] Reasons for Increased Profit in FY 2019 (last fiscal year) (unit: Y mil)Increase

Decrease

Dec. in dev.
projects forfinanceindustry+1,494
Inc. inpersonnel
exp. & skill
training
Inc. insubcontracting
cost

- 740

Inc. in rent
expense

- 277

+33

+15
855

- 357
Dec. in R&D
investment(progress ismostly in linewith plan)

Inc. in dev.
projects formakers andservices
industry

FY 2018

Diff. from last FY:- 35

Dec. inretirement
benefitexpense+Y118 million

Inc. inother
expenses

921- 70

FY 2019(Ref) Financial results supplemental reference materials

28/42This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)◆ CUBE SYSTEM’s Financial Results Forecast for FY 2020
(this fiscal year) This FY, planning to keepincreasing sales and profits
and achieve record highs insales and profits. Will again
aim for Y1 billion in both
operating and recurring
profit.

This fiscal year, the Company is predicting a consecutive achievement ofrecord-high sales as well as an achievement of record highs for each of the
profits (operating, recurring, and net); it predicts sales of Y15,500 million(+8.2% YoY), an operating profit of Y1,090 million (+18.3% YoY), a
recurring profit of Y1,090 million (+13.6% YoY), and a net profit of Y684
million (+14.6% YoY). In continuation from the previous fiscal year, theCompany will again aim to raise operating and recurring profit so that theyeach exceed Y1 billion for the first time (Figure 33).

[Figure 33] Forecast for FY 2020
(this FY)
Unit: Y mil
Sales
Gross Profit
Gross Margin
SG&A Expenses

Full-year
Forecast(FY 2020)% YoY
Change15,5008.2%

In general, by making full use of its strength, the Company plans to increase
sales through the following measures.
1. Expand the existing business domain by strengthening its sales capability
toward major accounts (clients).
2. Develop businesses in new markets, channels, and areas (utilization of newtechnologies, central Japan, energy business, industrial sectors, DX-related
businesses).
3. Create new services (sophistication, expansion, and continuation of newservices)

Not disclosed

SG&A Exp. Ratio

Operating Profit
O.P. Margin
Recurring Profit
Net Profit

Issued: 6/28/2019

1,090 18.3%
7.0% up 0.6pt
1,090 13.7%
684 14.6%(Ref) Prepared by Alpha-Win Research Dept.

・ By industry, the Company expects sales for telecommunications todecrease by Y177 million (-7.5%) YoY as projects for telecom carriers will
be finished. On the contrary, regarding the distribution industry, new orders
for large-scale projects, DX-related projects using AI technology, and neworders related to the adaptation to the consumption tax are expected to
become the growth drivers. In fact, sales are expected to increase by Y937
million (+30.7%) YoY for this industry, contributing significantly to an
overall increase in sales: 80% of the total increase of Y1,175 million.
・ Concerning the finance industry, sales are expected to bottom out andincrease by Y314 million (+7.8%) through the acquisition of new projects orthe expansion of existing projects related to Internet banking, credit, anddirect life and non-life insurance.
・ For the “other” industries, business toward the government and theservices industry is expected to be strong. In addition, the expansion ofbusiness in new areas such as blockchain and AI and new businesses
developed through the establishment of the Nagoya Office (presumably
related to automobiles and electric power) are expected. Consequently, sales
are predicted to increase by Y100 million (+2.0%).

 By industry, thedistribution industry is
expected to make asignificant contribution tosales. Finance will bottom
out. The “other” industries
will continue to grow in
new areas and domains.

[Figure 34] Predicted Contributions to Sales in FY 2020 (this fiscal year) by Industry(the Company’s plan) (unit: Y mil)
(Y mil)

6,000

4,918

5,000
4,000

4,317

4,002

5,019

3,988
3,050

3,000

2,353

2,176

2,000
1,000
0

03/2019 (A)03/2020 (P)Finance

03/2019 (A)03/2020 (P)Distribution

03/2019 (A)03/2020 (P)Telecommunications

03/2019 (A)03/2020 (P)Other(Ref) Prepared by Alpha-Win Research Dept. based on the financial results briefing material. A = actual value. P = planned value.

29/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

As for the gross margin, the Company expects a significant improvement
during this fiscal year. The Company also expects its operating margin to
improve to 7.0% and its operating profit to grow at a double-digit rate for thereasons listed below (reference: the operating margin was 6.1% in FY 2017
→ 6.3% in FY 2018 → 6.4% in FY 2019). For operating profit, theCompany has not disclosed targets for each industry or service category.

 Planning to further
improve margins

1. Improvement of profitability and ensuring of profit through a moreadvanced Enhancement Service for the existing businesses.
2. Cross-cutting functions across the Company, quality control on a perproject basis, and prevention of unprofitable projects from arising
3. Development of new business domains through continued active
engagement in R&D (cloud service, agile, blockchain, AI, etc.)
4. Effect of the sales increase, in addition to improved productivity andtransition from orders based on the number of staff and months to a serviceproviding business model (expansion of the consulting business, switching toorders based on the unit price per service, etc.)
For this fiscal year, no significant non-operating profit/loss or extraordinary
profit/loss is expected.

 Planning to increase sales

and profits year on year in
H1 as well as H2. The planis highly dependent on
H2, during which
profitability is expected tolargely improve.

In the first half (H1) of FY 2020, the Company plans to achieve sales ofY7,437 million (+8.5% YoY), an operating profit of Y424 million (+18.3%
YoY), a recurring profit of Y424 million (+12.5% YoY), and a net profit ofY250 million (+10.9% YoY).
Simply subtracting the forecasted values for H1 from the full-year forecast,
the predicted values for the second half (H2) of this fiscal year are as follows:sales of Y8,063 million (+7.9% YoY), an operating profit of Y666 million(+18.2% YoY), a recurring profit of Y666 million (+14.2% YoY), and a net
profit of Y434 million (+14.6% YoY).
The balance between H1 sales and H2 sales for this fiscal year is expected to
be about the same as in FY 2019; the H1/H2 ratio is predicted to be 48/52.
The ratio is expected to be 39/61 for operating profit. The operating margin
is expected to improve by 0.5 point from 5.2% in H1 of last fiscal year →5.7% in H1 of this fiscal year. Similarly, it is predicted to improve by 0.8
point from 7.5% → 8.3% for H2. The Company believes that, in H2, thestrengthening of the Enhancement business, positive effects from the creationof services, contribution to results by large-scale projects, and theimprovement of productivity are highly likely to be realized.
[Figure 35] The Company’s Financial Results Forecast for H1 and H2 andComparison with the Previous Fiscal Year
Unit:: Y mil

Sales
Gross Profit
Gross Margin
SG&A Expenses
SG&A Expenses Ratio
Operating Profit
O.P. Margin
Recurring Profit
Net Profit

Last FY
Last FY(2019) H1 (2019) H2
6,852
1,131
16.5%
773
11.3%
358
5.2%
377
225

7,473
1,318
17.6%
754
10.1%
563
7.5%
582
371

This FY (2020) H1
Initial Forecast% YoY
ChangeThis FY (2020) H2
Initial Forecast% YoY
Change

7,437

8.5%

8,063

7.9%

424
5.7%
424
250

18.3%
up 0.5pt
12.5%
10.9%

666
8.3%
666
434

18.4%
up 0.7pt
14.4%
17.1%

(Ref) Prepared by Alpha-Win Research Dept. based on the financial results briefing materials

30/42This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

As a reference, the average H1/H2 ratio for the past 18 fiscal years on aconsolidated basis is 48.2/51.8 for sales and 44.7/55.3 for operating profit.
Similarly, the average operating margin for the same period is 6.6% for H1
and 1.1 point higher in H2 at 7.7% (see Figure 36 for recent half-yearlytransitions in operating margin).
In the last seven fiscal years, the difference in operating margin between H1and H2 has expanded to about 1-3%. This difference seems to have beencaused by the fact that in recent years the deadlines of many project have been
in March, leading to sales in H2 that are 12.7% greater on average than in H1(during the same seven fiscal years) and greater profitability in H2. In
addition, the dependence of the full-year results on the H2 results concerning
profit tends to be high due to the seasonal variability of sales and theincurrence of costs in advance, such as the recruitment cost that is recordedin H1 and the upfront investment costs for R&D, etc.
[Figure 36] Transition in Half-Year or Full-Year Operating Margin (this FY’s values
are from the Company’s plan) (unit: %)
(%)

H1

H2

Full year

10.0
9.0
8.0
7.0
6.0
5.0
4.0

FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(E)(Ref) Prepared by Alpha-Win Research Dept. based on the financial results briefing materials andfinancial results summary

31/42This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

8． Growth Strategy◆ Medium- to Long-Term Management Vision “VISION
2020”

 Declared to expand its
service lineup in themedium-term
management plan

 In the organizational
reform, specialized
departments were
established for the areasof focus.

The Company has established “VISION 2020,” a medium- to long-term
management vision for 2012 to 2020. This target span is divided into threestrategy steps. The Company is currently in the final stage – the 3rd STEP
(the three years from FY 2019 to FY 2021). The 1st STEP was focused on
the enhancement of its strengths, and the 2nd STEP made progress with thecreation of new SI businesses.
The goal of the 3rd STEP is to “maximize customer value by contributing to
the growth of the customers’ businesses through the expansion of serviceproviding and SI businesses, creation of a new service lineup, anddevelopment of the service business” (details are as shown in Figure 37).
An organizational reform was conducted in April 2019 for the purpose ofaccelerating business development to achieve the goals and strengthening thebusiness foundation. The DX Promotion Office, Financial Digital Strategy
Office, Nagoya Office, Overseas Business Promotion Office, etc., were
newly established, and a system was established to allocate management
resources to the areas of growth.
[Figure 37] Summary of the Medium- to Long-Term Management Vision“VISION 2020”: Contents of the 3rd STEP
1. Domestic Business / Overseas
Business
Stronger Earnings Base with a businessmodel reform
Business development in Growth Fields
using its strengths
Global business development focused in Asia

2. New Businesses Development/ Technology Investment
Active Technology Investment toCreate Services that are optiumum unique and new with high added value

3. Business Foundation
Raise customer satisfaction throughInnovation in Business Processes
Promote growth through Improvementof Governance System(Ref) Prepared by Alpha-Win Research Dept. based on an excerpt from the financial results briefing material

 Of the four management

indicator targets, the one
for ROE has beenachieved.

◆ Management Indicator Targets and Areas of Focus
The following are the CUBE SYSTEM Group’s long-term management
indicator targets. Currently, only the ROE target has been achieved, but theother indicators are also beginning to improve. The Company plans toimprove its productivity and profitability by streamlining its operation andreinforcing training/education.
・ROE: greater than or equal to 10% (FY 2018 → FY2019: actual results wereboth 11.4%. The same order applies below.)・Consolidated operating margin: greater than or equal to 10% (6.3%→6.4%)

・Consolidated sales per employee in Japan (excludes employees of overseas
subsidiaries): greater than or equal to Y25 million (Y22.2 million → Y22.8
million; progress rate of 88.6%→91.4%)
・Consolidated operating profit for the same condition as above: Y2.5 million(Y1.40 million → Y1.47 million; progress rate of 55.9% → 58.8%)
32/42This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)
 In the medium-term plan,
the Company aims forconsecutive increases insales and profits and a
new record-high profit. It
aims to achieve sales ofY18.5 billion, O.P. marginof 9.6%, and ROE of 13%
by FY 2021, the final fiscal
year of the plan.

Issued: 6/28/2019

The Company has disclosed its forecast for the medium-term financial results
up through FY 2021. As its goals, the Company aims to increase sales byapprox. 10% per year and largely increase profit by 30% per year (Figures 38
and 39).
Additionally, the Company has disclosed its sales goals for each of its threebusiness segments – existing businesses, growth field, and new businesses(however, actual sales for each segment in FY 2019 have not been disclosed).
Sales of its existing businesses are expected to annually increase by 9.8%.
The growth field’s sales are expected to increase by 6% in FY 2020 and 20%
in FY 2021. Sales of the new businesses are expected to annually increase by
about 30%. Operating margin is predicted to improve by at least 1 point every
year, eventually rising to about 10%, the Company’s current goal, by the final
year of the plan.
However, for the current fiscal year, which is the second year of mediumterm plan, the Company has decided to revise its forecast upon evaluating last
fiscal year's results and the current situation. At present, there is no change inthe predicted values for FY 2021.

[Figure 38] The Company’s Medium-Term Plan, Actual Results, and Forecast
FY 2019

FY 2018
Unit: Y mil, %ActualSales
Growth Rate
Operating Profit
O.P. Margin
ROE

Plan

13,559
5.1%
855
6.3%
11.4%

Actual

14,700
8.4%
1,010
6.9%
12.1%

Plan

14,325
5.6%
921
6.4%
11.4%

16,300
10.9%
1,323
8.1%
13.0%

FY 2020
FY 20201
Company
Difference
Planforecast
15,500-800
18,500
8.2%
-2.7%
13.5%
1,090
-233
1,776
7.0%
-1.1%
9.6%
13.0%

(Ref) Prepared by Alpha-Win Research Dept. based financial results briefing material[Figure 39] Sales Breakdown in the Medium-Term (Company) Plan
(Y mil)20,00018,0002,000

16,00014,00012,000

1,500
1,150
2,350

2,500

11,20012,3003,000

10,0008,000
6,000

13,500

4,000
2,000
0
FY 2019
Existing Business

FY 2020Growth Field

FY 2021
New Business(Ref) Prepared by Alpha-Win Research Dept. based on the financial results briefing materials

33/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019◆ Alpha-Win Research Dept.’s Financial Results Forecast

for FY 2020 (this fiscal year)
We revised our financial results forecast for the current and the next fiscal
year and added a new forecast for FY 2022 as shown in Figure 40. We had
previously predicted that the sales for this fiscal year will be Y15,800 million,
but the new forecast has been revised to about the same level as theCompany’s forecast (Y15,500 million) (our forecast: Y15,400 million).

 Our previous financial
results forecast for this FY
was revised to about thesame level as theCompany’s plan.

In terms of profit, the previous forecast was revised slightly downward toabout the same level as the Company’s forecast. Since the overall economy
is increasingly unpredictable and various costs are on the rise, we reevaluatedthe SG&A expenses and the effect of improved gross margin slightly morestrictly than in the previous forecast. Following these revisions, the forecaston the operating margin was revised from the initial 7.3% to 7.0%.
[Figure 40] Alpha-Win’s Forecast on Financial Results for This Fiscal Year and Over the Medium Term
(CE = the Company’s estimate/forecast; E = Alpha-Win Res. Dept.’s estimate/forecast; A = Actual)
Unit: Y mil, %Sales
Gross Profit
Gross Margin
SG&A Expenses(% over sales)

Operating Profit(% over sales)

Recurring Profit(% over sales)

Net Profit(% over sales)

FY 2019 A
14,325
2,449
17.1%
1,527
10.7%
921
6.4%
959
6.7%
596
4.2%

Sales (% YOY growth)Gross Margin (% YOY diff.)
SG&A Expense (% growth)

Operating Profit (% growth)
Recurring Profit (% growth)
Net Profit (% growth)

5.7%
-0.2%
2.6%
7.8%
7.5%
5.1%

FY 2020 CE FY 2020 New E FY 2020 Old E FY 2021 New E FY 2021 Old E
15,50015,40015,80016,50017,300
2,700
2,800
2,930
3,100
17.5%
17.7%
17.8%
17.9%
1,620
1,650
1,720
1,760
10.5%
10.4%
10.4%
10.2%
1,090
1,080
1,150
1,200
1,340
7.0%
7.0%
7.3%
7.3%
7.7%
1,090
1,080
1,150
1,200
1,340
7.0%
7.0%
7.3%
7.3%
7.7%
684
680
730
750
851
4.4%
4.4%
4.6%
4.5%
4.9%
8.2%

18.3%
13.7%
14.8%

7.5%
0.4%
6.1%
17.3%
12.6%
14.1%

10.3%
0.6%
8.0%
24.9%
19.9%
22.5%

7.1%
0.2%
11.1%
11.1%
11.1%
10.3%

9.5%
0.2%
6.7%
16.5%
16.5%
16.5%

FY 2022 E
17,800
3,180
17.9%
1,900
10.7%
1,320
7.4%
1,320
7.4%
825
4.6%
7.9%
0.1%
10.5%
10.0%
10.0%
10.0%

(Ref) Prepared by Alpha-Win Research Dept. based on the securities report Average difference
between the past 16
years’ initial forecasts andactual results has been
generally small.
 The macro environment issomewhat unpredictable,
but the Company isreceiving orders at astrong pace.

As a reference, the differences between the Company’s initial forecast andthe actual results for the past 16 years have been analyzed and are shown in
Figure 41 on page 35. During this period, on a simple average, the actual sales
were 1.3% below the initial forecast and both the operating and recurring
profits were 4 to 5% below the forecast. However, neither profit was evermore than 30% lower than the forecast. This company tends to announce
ambitious forecast values that are within a generally realistic range.
Since the Company is receivng orders at a strong pace, although the situation
would also be affected by the project deadlines and the overall success ofproject management, at this point it seems unlikely that the results will
deviate largely from the Company’s initial forecast unless sudden changes inthe environment occur or an unexpected large loss is recorded for a project.
While there may be some fluctuations, we believe that increases and record
highs in sales and profits are possible.

 We predict that increases
and record highs in sales
and profits are possible
for this FY.
34/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019[Figure 41] Comparison of (the Company’s) Initial Forecast for Consolidated Financial Results with
the Actual Results in Chronological Order
Consolidated
Unit: Y mil

Sales
InitialForecast

ActualOperating Profit

Recurring Profit

InitialForecast

InitialForecast

ActualActualNet Profit Attributable to
Owners of the Parent (N.P.)

InitialForecast

Actual

FY 2001
4,806
387
FY 2002
5,598
485
445
246
FY 2003
6,244
510
432
235
FY 2004
6,900
6,575
491
522
500
284
280
FY 2005
7,000
7,100
558
532
551
287
315
FY 2006
7,800
7,767
549
600
551
340
312
FY 2007
8,300
7,923
590
570
584
330
324
FY 2008
8,300
8,109
605
645
610
643
336
342
FY 2009
8,500
8,507
680
652
685
597
350
308
FY 2010
8,800
8,706
660
637
670
660
350
349
FY 2011
9,200
9,166
675
662
680
672
263
208
FY 2012
9,300
8,431
665
524
675
533
350
118
FY 2013
9,000
9,242
620
601
630
606
350
338
FY 2014
10,00011,217
700
665
700
702
380
387
FY 2015
12,00012,527
840
964
840
981
480
594
FY 2016
13,00012,623
1,000
949
1,020
960
600
629
FY 2017
14,00012,899
920
781
940
811
450
551
FY 2018
14,30013,559
1,060
855
1,080
893
650
567
FY 2019
14,70014,325
1,010
922
1,010
960
640
597
FY 2020
15,500
1,090
1,090
684
Simple average of diff. (unit: %), calc. for longest period with data on both sales and profits→
Number of times revised up:down from init. forecast →Green highlight: record-high value

Sales

O.P.

R.P.

N.P.

% Diff. from Initial Forecast

Sales

O.P.

R.P.

% YoY Change for Actual Result

-4.7%
1.4%
-0.4%
-4.5%
-2.3%
0.1%
-1.1%
-0.4%
-9.3%
2.7%
12.2%
4.4%
-2.9%
-7.9%
-5.2%
-2.5%

6.6%
-4.1%
-3.5%
-1.9%
-21.2%
-3.1%
-5.0%
14.8%
-5.1%
-15.1%-19.3%
-8.8%

-4.3%
3.5%
-8.2%
2.4%
5.4%
-12.8%-1.5%-1.2%-21.0%
-3.8%
0.3%
16.7%
-5.9%
-13.7%-17.3%
-5.0%

-1.5%
9.7%
-8.3%
-1.8%
1.9%
-12.1%-0.3%-20.9%-66.4%
-3.5%
1.7%
23.8%
4.8%
22.4%
-12.8%
-6.8%

16.5%
11.5%
5.3%
8.0%
9.4%
2.0%
2.3%
4.9%
2.3%
5.3%
-8.0%
9.6%
21.4%
11.7%
0.8%
2.2%
5.1%
5.7%

-1.3%
5 ： 11-5.5%
2 ： 10-4.1%
5 ： 11-4.4%
6 ： 10

6.4%
4.7%
6.0%
12.5%
↑ Simple average for each FY

5.2%
-3.7%
13.6%
-1.6%
7.4%
9.4%
1.1%
-2.3%
4.0%
-20.9%
14.8%
10.6%
45.0%
-1.6%
-17.7%
9.5%
7.8%

15.0%
-2.9%
15.7%
10.2%
0.0%
5.9%
10.2%
-7.1%
10.6%
1.8%
-20.7%
13.7%
15.8%
39.7%
-2.1%
-15.5%
10.1%
7.5%(Ref) Prepared by Alpha-Win Research Dept. based on the financial results summary

 Revised the financial
forecast for the medium
term, taking into accountthe changes in themacroeconomic
environment Over the medium term,
we believe that sales andprofits will increase by 610% per year.

N.P.

◆ Alpha-Win Research Dept.’s Financial Results Forecast
for the Medium Term
Upon considering the Company’s estimates/assumptions for this fiscal year,
potential downturn of the domestic/overseas economy, and changes in the
momentum of Japanese companies' financial performance, we revised ourprevious forecast slightly downward and prepared a forecast for the threefiscal years ending in FY 2022 (Figure 40 shown previously on page 34). We
predict that, for the meantime, sales and profits will continue to increase by
about 6-10% per year for the following reasons.
Factors and assumptions for predicting increased sales
・Development of the Enhancement business with the major customers basedon the technological expertise and trust that the Company has built up over
the years
・Strengthening and development of the capacity to complete large-scale
projects
・Acquisition of new customers (acquire customers in the “other” industries
such as manufacturers)
・Development of new businesses and new business fields – specifically,energy-related, consulting, and new solutions (cloud, blockchain, etc.)
businesses
・Overseas development (mainly toward overseas Japanese companies)
・ However, sales increase from large-scale M&As, etc., have not beenreflected in the forecast (same for profit)
Factors and assumptions for predicting increased profit
・The gross margin is expected to gradually improve due to various measures(transition to service-based contracts, improved productivity, reviewing
subcontracting cost, etc.), although at a slower pace than initially expected.
・Rise in profit from the new businesses have not been reflected in theforecast for the time being.
35/42

This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

-4.4%
18.9%
12.5%
-1.0%
3.9%
5.7%
-10.1%
13.4%-40.4%-43.4%
186.7%
14.5%
53.7%
5.9%
-12.4%
2.9%
5.2%

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

・General and administrative expenses are predicted to annually increase ata somewhat high rate (6 to 10%) due to the reinforcement of businessfoundation for future growth (expansion of HR, organization, and sites), therise in costs (personnel expense, logistics expense, subcontracting cost, etc.),
and continued upfront investment on new technology and business research.
・Consequently, the estimated improvement in the operating margin for next
fiscal year and onward has been changed from 0.4-0.5 point per year (initial
estimate) to about 0.1-0.3 point per year (current estimate).
・No expectation for extraordinary profit or loss
Compared to the Company’s medium-term target values (FY 2021 as the finalyear), our predictions are conservative. While the Company’s targets are
somewhat ambitious, our prediction took into account the risk factors listed
below. However, if the measures are carried out in line with the Company'splan and if business conditions are just right (orders for large-scale or new
projects, overseas development, new business development, successfulacquisition of companies, etc.), then the targets may be achievable over the
medium to long term, although with some delays in the year achieved.
・For the macroeconomic environment, the uncertainty in the global economy
due to the US-China trade war, etc., is a risk factor. We also anticipate an
economic downturn and a decline in the financial performance of companies
after the consumption tax rate is raised as planned in October 2019 and after
the Tokyo Olympics in July to August of 2020.
・At this point, we cannot predict what will happen to the Company’s mainusers’ industry trends and situations, contribution of new businesess andbusiness domains to results, M&A strategy, rate of rise in cost, recruitment,
etc., in the future.

36/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019

9． Analyst’s View
◆ SWOT Analysis
The Company’s SWOT analysis result is shown in Figure 42.
[Figure 42] SWOT Analysis

Strength・ Long history in the industry and extensive experience・ Stable and excellent customer base・ Technological expertise / unique know-how / staff with expertise / organization (businesstype / project management）
・ Entry barrier actually high; business with high continuity
・ Firm financial standing

Weakness・ Consulting-based sales through direct sales activity; Enhancement
・ Low-cost development system using overseas subsidiaries
・ Relies heavily on certain customers
・ Needs to secure and acquire more talented personnel
・ Industry structure where profit margin is hard to improve
・ Takes a long time for next-generation growth products and services to gain momentum

Opportunity

・ Specialized in domestic demands; overseas development difficult
・ Increased demand for systems due to HR deficit and the need to streamline operation
・ New products, new services, and technology innovations leading to increased demand forsystems
・ Upstream processes, niche areas, and shifting to large-scale dev. projects; reinforce
Enhancement business・ Business expansion following the global entry of customers
・ Strengthening of alliance・ Reduced IT investment, less demand for renewed contract, and intensified pricecompetition during recession
・ Emergence of alternatives (popularization of AI or packaged software for business use),
lagged product development, and product defects

Threat・ Risk of loss in project management
・ Information management and leakage risks
・ Increased personnel expense and subcontracting cost(Ref) Prepared by Alpha-Win Research Dept.

 Many years’ worth oftrust, track record, andtechnological expertiseare its strengths.
Acquisition of talented
employees is thebottleneck to further
growth.

Describing the strengths listed in Figure 42 in more detail, the Company has
a high business continuity and stability because of its excellent customer baseowing to its long years of business during which it has earned trust and built
technological expertise. Moreover, the Company’s strength lies in the factthat it is in a market position close to the end users, such that it can propose
related or derived systems to customers and obtain new development andservice jobs (Enhancement).
On the other hand, looking at its weaknesses in more detail, for theCompany’s industry in general, the profit margins do not change or areslightly decreasing over the long term, and the profits tend to not increase
without an increase in the sales. New business domain development and newcustomer acquisition are indeed necessary to raise sales, but the Company isalso experiencing a deficit in human resources, especially for project
managers, which is a bottleneck to further growth. Due to the nature of thesystem integration business, since there are only limited ways to improve
productivity or largely reduce cost, fundamental improvements in the profit
margins would probably take a long time.

37/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019◆ Shareholder Return and Shareholder Benefit Program
The Company’s policy is to raise shareholder asset value by improving its
financial results in order to conduct stable dividend payments and increase
market capitalization. So far, it has been taking a proactive stance withregards to improving shareholder return, conducting incremental dividend
hikes, share buyback, stock splits, enhancement of shareholder benefit
program, etc.

 Proactive stance withregards to shareholder
return Actual annual (maximum)
yield including theshareholder benefit
program is about 2.9%.

The Company’s consolidated dividend payout ratio was 39.4% in FY 2018and 37.0% in FY 2019 and is forecasted to be 36.3% in FY 2020 (theCompany’s forecast), all meeting the target of 35%. The Company raised its
dividend from Y14 to Y16 in FY 2018 and kept it the same in FY 2019, but
it has announced that it will raise the dividend by Y2 to Y18 in FY 2020
(Figure 43). Over the medium term, since profit growth is expected, we
believe that incremental rises in the dividend at intervals of a few years are
possible.

 Have been gradually
increasing dividend,raising it every few years

Dividend yield is 2.3% when calculated based on a stock price of Y785
(closing price as of the end of June 2019). The Company conducts IR
activities toward individual investors, one of its major types of shareholders.
It has a shareholder benefit program where JCB Gift Cards are given to
shareholders based on the number of shares they own (Figure 44 on page 39).
When this benefit program is taken into account, the actual dividend yield
increases to approx. 2.9% at maximum (for the optimum number of shares
owned). The Company plans to continue to maintain its stable dividend
payment and raise the EPS to enhance shareholder return. Under the same
conditions, the actual annual yields of its competitors are approx. 2.8% for
HIMACS (no shareholder benefit program) and approx. 3.1% for Toho
System (shareholder benefit program taken into account).
 Has been proactive in
conducting stock splits
and share buybacks

Since becoming listed on the market, the Company has performed a total ofsix stock-splits, including a 1-to-2 split in April 2010, a 1-to-1.5 split in April
2011, and a 1-to-2 split in October 2014. It has also conducted six sharebuybacks, including the approx. 350,000 shares (Y300 million) bought backin February of this year, acquiring a total of approx. Y650 million’s worth ofshares (acquisition price at the time of acquisition). Since the Company has agreat financial standing and is rich in cash, depending on the level of the stock
price, additional share buybacks may be possible – we should keep an eye out
for this.

[Figure 43] Change in Dividend and Dividend Payout Ratio
(%)

(Y)

60.0

30.0

Dividend (right axis)
51.2

50.0

Commemorative dividend (right axis)

48.9

25.0

Dividend payout ratio (left axis)
42.7

41.2

40.0

39.4
36.3

35.2
30.1

35.8

37.0

36.3

30.0

15.0

20.0
10.0

20.0

32.4

2.5

2.5

8.3

8.3

8.3

8.5

8.5

8.5

期
2009/3FY
2009

期
2010/3FY
2010

期
2011/3FY
2011

期
2012/3
FY 2012期
2013/3
FY 2013期
2014/3
FY
2014

14.0

14.0

14.0

期
2015/3
FY 2015期
2016/3
FY 2016期
2017/3
FY
2017

16.0

16.0

18.0

10.0
5.0

0.0

0.0
期
2018/3
FY 2018期
2019/3
FY 2019期予2020/3
FY
2020(E)(Ref) Prepared by Alpha-Win Research Dept.

38/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019[Figure 44] Shareholder Benefit Program and Actual Net Yield
Number of Shares Owned
Shareholder Benefit (JCB
Actual Net(less than)
Dividend: Y(greater than or equal to)
Gift Card: Y)
Yield: %
200
400
1,000
18
2.9
400
1,000
2,000
18
2.9
1,000
3,000
18
2.7
Actual net yield* = (dividend + benefit value) / (stock price)*Calculated for the min. (optimum) amount of stock owned in each range
Stock price assumed to be at: Y785 (closing price on the last day of June 2019)(Ref) Prepared by Alpha-Win Research Dept. based on the Company’s website◆ Stock Characteristics/Price and Factors that May Affect
Stock Price A defensive, domestic-

Over the past approximately ten years, the Company’s stock price rose by
about four times, largely outperforming the TOPIX by more than 200%
(calculated with stock splits taken into account; as of the end of June 2019;
Figure 45). This growth reflects the Company’s strong fundamentals andfirm growth in financial results over the long term. The Company isoutperforming the TOPIX this fiscal year as well; this may be reflecting how
the Company is becoming recognized as a domestic-demand-related growthstock with firm financial results despite the rising consumption tax, exchange
rate fluctuations, trade war, and the increasing volatility of the stock market
due to the anticipation of a downturn in corporate performance. Its stock
price soared in February of this year when it announced a share buy-back andin May when it received reappraisal as an AI-related stock with a strong
financial performance, but in the most recent period the stock price hasstabilized to around Y800.

demand-related growthstock. Stock priceincreased by approx. fourtimes over the past ten
years or so, largely
outperforming the TOPIX.

[Figure 45] Long-Term Return on the Company’s Stock (CS) and TOPIX (change in the past ten years’monthly stock prices)
450%
400%
350%

CS%

300%

TPX%

250%
200%
150%
100%
50%
0%
-50%
04/2009

04/201004/201104/201204/201304/201404/2015

04/2016

04/2017

04/2018

04/20192019/4

Note: CS stock price and TOPIX at the end of April 2009 set at 0% as the start point(Ref) Prepared by Alpha-Win Research Dept.

The Company’s stock is characterized as defensive with a relatively stablefinancial performance. This attribute of the Company may help it receive
high evaluation in the stock market when the domestic or overseas economy
faces a recession in the future.
39/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

 Stock valuation is on thehigh side relative to theaverage of the First
Section of the TSE, but isabout average or slightly
low for its industry.

Issued: 6/28/2019

The major valuation indicators of the Company were compared to theaverages of the First Section of TSE and the indicators of its competitors thatare also listed on the First Section. The Company’s dividend yield is 2.3%,
which is close to the average of the First Section (the simple average is 2.1%
and the weighted average is 2.5%). For P/E, the Company’s P/E is approx.
15.8 (based on the Company’s predicted EPS for FY 2020) while theSection’s average is approx. 13.4. The Company’s P/B, which is 2.0, is also
greater than the average, which is 1.1, indicating that the Company isreceiving appropriate evaluation from the market.
Compared to its competitors (HIMACS and Toho System), the Company’svaluation is about the same or slightly high but not expensive (Figure 46). In
addition, its liquidity is relatively high (trading value).

 Looking at the valuation,

we can see that theappropriate evaluation is
being reflected in thestock price. Goingforward, we should watch
for this FY and next FY’s
financial performance,development of new
businesses, andenhancement ofshareholder return.

On the other hand, relative to a universe of the leading 33 SI companies listed
mainly on the First Section of the TSE (including the Company; the total
market cap of the 33 companies is Y9 trillion and total sales are Y6.8 trillion),
the Company’s stock valuation is about average or slightly low for the SI
sector (Figures 47, 48, and 49 on page 41). Within the same sector, there
seems to be a positive correlation between the forecast for this fiscal year’s
operating margin (from the companies’ plans) and P/E and between sales andmarket capitalization (Figure 49 on page 41 and Figure 50 on page 42). In
the future, we believe that if the Company’s operating margin improves andits sales increase, then its valuation (P/E, etc.) may rise and the market
capitalization may also increase.
Going forward, we should keep note of the following factors or events that
may affect stock price.
・Achievement rate toward targets during this fiscal year or FY 2020 andfinancial performance during next fiscal year or FY 2021 (especially thetargets announced in the forecast at the beginning of the fiscal year)
・Progress with the growth strategy including the expansion of businessdomain, M&As, and tie-ups
・Progress in increasing new customers (at the Nagoya site, overseas, etc.)
・Fully committed start of new-technology businesses such as blockchain,cloud, AI, IoT, and agile development that are currently in the R&D orinvestment phase. The contribution of these businesses to sales and profit.
・ Share buyback, dividend hike, stock split, and enhancement ofshareholder benefit program[Figure 46] Comparison of Valuation Indicators and Liquidity of Three Same-Business Companies(Ref) Prepared by Alpha-Win Research Dept. based on the financial results summary

Company Name
Code
Stock Price (at 6/28 closing)Market Cap (Y mil)P/E (price-to-earnings ratio)
P/B (price-to-book ratio)
Dividend Yield (%)
EV/EBITDA
P/S (price-to-sales ratio)
Ave. Daily Traded Amount in Past 6 Months (Y mil)

CUBE SYSTEM(CS: consolidated)

HIMACS(HM: consolidated)Toho System Science(TS: non-consolidated)

2335

4299

4333

785
11,995
15.8
2.0
2.3
9.1
0.8
40

1,795
11,141
16.3
1.1
2.8
5.5
0.7
6

964
13,367
15.1
1.7
2.6
5.6
1.0
7

Market cap= (shares outstanding) x (market share price [at 6/28/2019 closing])
The companies' planned EPS and dividend values for FY 2020 were used in all P/E and dividend yield calculations.
Actual BPS values of FY 2019 were used in P/B calculations.
EV/EBITDA=(market cap + interest bearing debt - cash&deposits)/(O.P. + depreciation + intangible fixed asset amortization)
P/S=market cap / sales [the companies' forecasts for FY 2020]

40/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019[Figure 47] Comparison of Major Stocks in the SI Sector(Note: major companies that have disclosed a forecast for this FY and have not posted and are not expected topost a large extraordinary loss or profit during last FY or this FY)
Code
9613
4307
4684
4768
4739
9719
3626
8056
2327
9749
9759
1973
9682
4812
4722
9692
3844
4674
4719
9739
4725
9640
3784
9600
9717
4662
4333
4828
2335
4284
4299
4761
9753

Company NameNTT DATA
Nomura Research Institute
OBIC
Otsuka Corporation
Itochu Techno-Solutions
SCSK
TIS
Nihon Unisys
NS Solutions
Fujisoft
NSD
NEC Networks & System Int.
DTS
ISID
FutureCEC
COMTURE
CRESCOALPHA SYSTEMSNIPPON SYSTEMWARE
CAC Holdings
SAISON INFORMATION
VINX
I-NET
JASTEC
Focus Systems
Toho System

Market Cap.
2,012,588
1,301,778
1,215,120
823,659
662,880
552,164
481,962
396,434
323,890
159,064
146,941
136,828
113,298
111,951
101,191
89,15061,823
41,52039,347
38,68030,792
29,468
21,102
19,117
17,812
13,751
13,367
12,21011,995
11,882
11,141
10,427
8,680
273,394

Toyo Business Engineering

CUBE SYSTEMSOLXYZHIMACSSAKURA KCSIX Knowledge
Simple Average
Simple Average (excl. OBIC)
Note: Units for market cap., sales, and O.P.: Y mil
P/E, P/B, and P/S are ratios and are unitless

Stock Price
1,435
1,727
12,200
4,335
2,762
5,300
5,490
3,615
3,420
4,720
3,115
2,749
2,246
3,435
2,123
2,371
3,835
3,460
2,800
2,596
1,499
1,819
1,191
1,177
974
844
964
2,035
785
886
1,795
931
775

Sales
2,240,000
530,000
80,000803,000
480,000
380,000
425,000
307,000
280,000
210,500
65,500295,000
93,50093,00043,50051,50020,00037,88030,30038,00052,00024,00026,50030,00017,00521,80013,50016,00015,50014,00015,00023,00018,014O.P.
O.P. Margin Actual ROE (%)
148,000
6.6%
10.7
76,00014.3%
12.3
41,00051.3%
15.5
50,400
6.3%
15.2
39,000
8.1%
11.5
41,00010.8%
14.6
40,000
9.4%
11.5
23,000
7.5%
13.1
27,2009.7%
12.3
11,700
5.6%
6.2
9,300
14.2%
12.6
13,000
4.4%
8.7
10,000
10.7%
13.9
8,500
9.1%
10.5
6,400
14.7%
15.7
5,150
10.0%
12.2
2,880
14.4%
26.0
3,400
9.0%
14.6
3,200
10.6%
6.2
3,500
9.2%
12.5
2,000
3.8%
4.4
2,500
10.4%
16.5
1,350
5.1%
5.8
2,450
8.2%
10.9
2,060
12.1%
9.9
1,420
6.5%
9.6
1,130
8.4%
9.8
1,330
8.3%
21.7
1,090
7.0%
11.4
800
5.7%
2.8
800
5.3%
9.8
610
2.7%
2.5
840
4.7%
13.1
9.8%
11.6
8.5%
11.5

Est. P/E Actual P/B Est. Dividend Yield
21.9
2.2
1.3%
22.0
1.0
1.7%
33.6
5.0
1.1%
24.0
3.6
2.1%
23.6
2.9
2.0%
19.7
2.8
2.5%
16.9
2.0
1.5%
22.7
3.2
1.8%
17.4
2.2
1.8%
22.0
1.4
0.8%
20.8
2.8
2.9%
15.3
1.3
2.9%
15.1
1.0
2.2%
19.7
2.2
2.0%
21.8
3.3
1.8%
23.7
2.8
1.4%
29.6
6.6
1.5%
15.7
2.3
2.0%
18.3
1.2
1.8%
16.1
2.0
1.2%
18.8
0.9
3.3%
14.0
2.3
4.7%
25.6
2.5
0.8%
11.8
1.3
3.7%
12.1
1.0
3.1%
13.7
1.4
2.4%
15.1
1.7
2.6%
14.6
2.7
1.9%
15.8
2.0
2.3%
24.5
1.9
1.4%
16.3
1.1
2.8%
23.7
0.7
1.3%
13.1
1.7
1.9%
19.4
2.2
2.1%
18.9
2.1
2.1%

P/S
0.9
2.5
15.2
1.0
1.4
1.5
1.1
1.3
1.2
0.8
2.2
0.5
1.2
1.2
2.3
1.7
3.1
1.1
1.3
1.0
0.6
1.2
0.8
0.6
1.0
0.6
1.0
0.8
0.8
0.8
0.7
0.5
0.5
1.6
1.2

Stock price is closing price on June 28, 2019

(Ref) Figures 47 to 50 were prepared by Alpha-Win Research Dept. based on the securities report and stock data

[Figure 48] Valuation of Major Stocks in the SI Sector:
Actual P/B (x-axis) vs. Predicted P/E (y-axis)

40.0[Figure 49] This FY’s Predicted Operating Margin (x-axis: unit
= %) vs. Predicted P/E (y-axis) for Major Stocks in the SI Sector

40.0

35.0

35.0
y = 2.7301x + 13.335
R² = 0.4232

30.0

30.0

25.0

25.0

20.0

20.0

15.0

15.0

y = 30.781x + 16.339
R² = 0.2373

10.0

10.0

CUBE
SYSTEM

5.0

0.0
0.0

1.0

2.0

3.0

4.0

5.0

CUBE SYSTEM

5.0

6.0

7.0

0.0
0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

41/42
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.

60.0%Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 6/28/2019[Figure 50] Sales (x-axis: unit = Y mil) vs. Market Cap (y-axis: unit = Y mil) for Major Stocks in the SI Sector
2,500,000
y = 0.9486x + 78213
R² = 0.7218
2,000,000

1,500,000

1,000,000

500,000

CUBE
SYSTEM00500,000

1,000,000

1,500,000

2,000,000

2,500,000＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊

Disclaimers
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-WinCapital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in this Report.
This Report is not to be construed as a recommendation or solicitation of investment. Alpha-Win
shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make theirown decisions on all investment matters and take full responsibility regarding their investment.
This Report has been prepared with a focus on objectivity and neutrality based on the analysis of generally
accessible public information and supplemental information including interview(s) by the analyst. AlphaWin, the writer, and/or other persons involved in the publication of this Report may already hold, or buy
and sell in the future, the stock of the company presented in this Report.
Contents of this Report are based on information current as of the issue date and are subject tochange without notice. We do not warrant or represent that the information in this Report isaccurate, reliable, complete, appropriate, or fit for any purpose and do not accept any responsibility
or liability.
Copyright of this Report belongs to Alpha-Win and no part of the publication may be copied, photocopied,cited, or translated without our consent.
For inquiries regarding this Report, please send us an e-mail to info@awincap.com. However, Alpha-Win
and the writer of this Report do not have any obligation to reply to inquiries.
PFV20190717-17

42/42This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility
regarding their investment. Intellectual property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without
our consent.