Tsuzuki Denki | 8157 (TSE Prime)
Company Report

Strategy Advisors, Inc.

Kenichiro YoshidaFebruary 21, 2024

Two-Way IT Company Aspires toEnhance Shareholder Value

Share Price and Volumes(Thou Shares)

(¥)
2,500

300

Founded in 1932, Tsuzuki Denki is a long-established ICT (Information& Communication Technology) company with top-class capabilities inboth SI (System Integration) and NI (Network Integration) in Japan.

2,000

200

1,500

100

Although the company stagnated in the 2000’s, management reforms
since the mid-2010’s and a favorable environment have helped the firm
regain growth momentum. In addition to organic growth through the
expansion of the cloud business and the highly profitable service
business, the company plans to grow through M&A by leveraging its
corporate DNA, "the ability to identify the next generation of ICT".

1,000

0

The past two mid-term plans have both exceeded their targets. The
long-term vision is aiming for ROE of 15% in FY03/2033 (currently
10%) and EPS CAGR of 7% for 10 years. In addition to steady earnings
growth, the company aims to raise shareholder value by reducing thecost of equity (currently 9%) through engagement with investors.
At the closing price of 2,354 yen on February 9, 2024, Tsuzuki Denki's
PBR is 1.1x and its expected PER is 8.8x. Considering that most listed
SI and NI companies are trading at P/B ratios of 2x or more and P/Eratios of around 20x, the company is clearly undervalued.
The TSE industry classification for the company was changed from
"Wholesale" to "Information and Communications" in 2018. With thesale of its electronic devices business, which accounted for 20% of its
sales, the company has transformed itself into a "pure player in ICT” asof 2024. With Tsuzuki Denki's aggressive growth strategy andimproving capital efficiency understood by the market, we expect it will
be re-evaluated.

Trading Volume (RHS)

Stock Price (LHS)

Source: Strategy Advisors

Key Indicators
Stock Price (24/2/9)

2,354

Year-to-Date High (24/2/8)

2,450Year-to-Date Low (24/1/26)

2,175

10-year High (23/9/7)

2,510

10-year Low (15/8/25)

415# of Shares on Issue (mn)18.0

(outstanding (million shares)
Market Capitalization (¥bn)

42.4(Billions of yen)
EV (¥bn)

29.1

Capital Adequacy Ratio

47.5(actual, %)FY3/2024 PER (CoE, Multiple)

8.8

12/2023 PBR (Actual, Multiple)

1.1

FY03/2024 Dividend Yield

3.8(Yield, %)Source: Strategy Advisors

Japanese GAAP – Consolidated
FY End

Sales

YoY

OP

YoY

RP

YoY

NP

YoY

EPS

DPS

(¥ mn)(%)(¥ mn)(%)(¥ mn)(%)(¥ mn)

(%)

(¥)

(¥)

FY 3/2020

125,366

5.5

4,457

34.3

4,577

31.0

3,155

42.6

182

55

FY 3/2021

120,004

-4.3

3,202

-28.2

3,361

-26.6

2,346

-25.6

134

46

FY 3/2022

119,316

-0.6

4,012

25.3

4,227

25.8

2,798

19.2

158

48

FY 3/2023

123,899

3.8

5,118

27.6

5,355

26.7

3,521

25.8

197

61

FY 3/3024 CoE

124,000

0.1

6,000

17.2

6,000

12.0

4,800

36.3

267

89

Source: Strategy Advisors, based on Company Data.

1

Tsuzuki Denki | 8157 (TSE Prime)
Table of Contents
1.

Transformation to be a Pure ICT Business Player from 2024 ...................................................... 6

2.

Tsuzuki Denki's Competitive Advantage and its Inimitability ....................................................... 8

3.

Earnings Trend of Information Network Solution Services Business ............................................. 11（１）

Service Business (45% of Net Sales) ............................................................................... 12（２）

Development and Construction (15% of Sales) ................................................................. 12（３）

Equipment (40% of Sales)............................................................................................. 12

4.

Comparison of Peer Companies in ICT Industry (SIer’s and NIer’s) ............................................. 14（１）

Competitive Situation between SIer’s and NIer’s................................................................ 14（２）

Tsuzuki Denki's Low Profitability and Historical Background ................................................. 15（３）

Exit from the Electronics Trading Company Mentality Will See a Reevaluation of the Stock Price 16

5.

History - High Growth Period (1932-2000) and Stagnation Period (2001 to mid-2010’s) ................ 17（１）

From the Foundation to the IT bubble ............................................................................. 17（２）2000 to the Mid-2010’s. ................................................................................................ 18（３）

Tsuzuki Denki's Strengths Seen in a Severe Environment .................................................... 22

6.

First Medium-Term Management Plan (FY03/2018/3 – FY03/2020) ............................................ 24（１）

Management Reforms Accelerated after Current President Isao EMori Took Office as President .. 24（２）

Balance Sheet Strengthened by the Disposal of Treasury Stock ............................................ 24

7.

Second Medium-Term Management Plan (FY03/2021 – FY03/2023) ........................................... 26

8.

Created “Purpose” in 2022, the 90th Anniversary of the Company's Founding .............................. 27

9.

Long-Term Vision and Mid-Term Management Plan “Transformation 2026 .................................... 28

10.

Profile of President Isao Emori ............................................................................................. 31

11.

Strategies and Outlook in Six Growth Areas ............................................................................ 33

12.

Shift to a Financial Strategy with a Strong

13.

ESG Considerations ............................................................................................................ 40

14.

Earnings Trends ................................................................................................................ 42

Awareness of Capital Markets ............................. 37(1) Cumulative Results for the Third Quarter of FY03/2024 ............................................................. 42(2) Full-Year Company Forecast for FY03/2024 ............................................................................. 42
15.

Valuation.......................................................................................................................... 44

16. Risk Factors ......................................................................................................................... 47

2

Tsuzuki Denki | 8157 (TSE Prime)
Executive Summary
Long-Established ICT
Company with Advanced
Technologies in Both SI andNI, Enters Growth Phase on
the Back of Increasing IT
Investments and DX Needs

Tsuzuki Denki is a long-established ICT (Information and Communication
Technology) company founded in 1932 and celebrating its 92nd anniversary
this year; is making serious efforts to enhance shareholder’s value with earnest
consideration of the stock market and investors. ICT market environment isfavorable for the company, which has advanced technology and a strong
customer base in both SI (system integration) and NI (network integration).
Since the mid-2010’s, the company has been working to improve its operating
margins and ROEs, in FY03/2020 it posted its highest profits in 20 years. The
company is in the midst of a renewed growth trend on the back of their steadily
growing cloud business, including its own solutions and expansion of its highmargin services business.

Value Creation Management
Initiatives Have Been in Full
Swing Since President Isao
Emori Took Office in 2017

The transformation of Tsuzuki Denki began with the appointment of Isao Emorias president in April 2017. Both the company's first medium-term management
plan (FY03/2018-FY03/2020) and the second medium-term management plan
(FY03/2021-FY03/2023), which were announced externally for the first time,exceeded profit targets; with ROE increasing from 3.4% in FY03/2016 to 10.4%
in FY03/2023. The company also worked to improve its stock market valuationby changing its TSE industry classification from "Wholesale" to "Information/
Communications" in 2018 and also moving its listing from the Second to theFirst Section of the TSE in 2020 and subsequently moving to the Prime Market
in 2022. Since President Emori took office, the company's market capitalization
has increased more than four-fold and the current share price has recovered toa P/B ratio of 1x. However, the PER remains around 10x, and the company is
not yet highly valued by the capital market.

Clear Shift of Management
Resources to Higher GrowthBusinesses, Targeting 7%
CAGR of EPS & 15% ROE(currently 10%) by
FY03/2033

The current mid-term management plan (FY03/2024-FY03/2026) is positioned
as the first stage of the company's "long-term vision" toward its 100th
anniversary in FY03/2033, which is the company's goal of 15% ROE and 7%
average annual growth rate of EPS over the next 10 years. As a concretemeasure to shift management resources to growth areas, which is one of thepillars of the long-term vision, the company sold its electronic devices business,
which it had been involved in for many years. While many companies haveannounced that they are reviewing their business portfolios, the sale of the corebusiness, which accounts for more than 20% of the company's total sales,
demonstrates the seriousness with which the management team is
implementing the change to value-enhancing management.

Strong Customer Base andHighly Skilled Engineers inBoth SI and NI Segments
are Difficult for Other ICT
Companies to Imitate

Tsuzuki Denki's competitive advantage lies in (1) its customer base of 20,000
companies, mainly large corporations and government agencies, to which it has
provided services for 20 to 30 years, (2) its system that allows it to selectoptimal solutions from global vendors and provide them on a one-stop basis,and (3) the knowledge of its engineers, who make up half of its workforce andfinally, its technology. In addition to its own solutions business with a highmarket share, such as cloud PBX and cloud-based call centers with AI-enhanced
functions based on the voice platform technology it has developed since its

3

Tsuzuki Denki | 8157 (TSE Prime)
founding, the company expects to grow with higher profit margins by expanding
earnings in expanding markets such as cybersecurity and DX support.
Current PER and PBR are
Half of Other Listed SI andNI Companies

At the closing price of 2,354 yen on February 9, 2024, Tsuzuki Denki's P/B ratiois 1.1x and its expected P/E ratio for the current term is 8.8x. Considering thatmost listed SI and NI companies are trading at P/B ratios of more than 2x and
P/E ratios of around 20x, the company sits at a low price. Strategy Advisors
believes this is because many investors are drawn by past memories and value
Tsuzuki Denki as an electronics trading company. Over the past 10 years, theP/E ratios of the electronics trading group have been around 10x, compared to
15-25x for the SIer group and 15-30x for the NIer group.

Valuations are Expected to
Shift Upward as Investors
Begin to Understand theCompany’s Transformation

The importance of the sale of the electronic devices business will gradually
spread in the capital markets starting during 2024, and that "Tsuzuki Denki hastransformed itself into a pure player in the ICT industry" will become more
widely understood. Strategy Advisors believes that if Tsuzuki Denki's businessstrategy of expanding its presence in growth markets and its financial strategy
of aiming for both EPS growth and capital efficiency improvement become morethan evident, mid to long-term valuation appreciation can be expected.

Figure 1 . Market Capitalization and Operating Profit (\ bn)
45.0

9.0

40.0

8.0

35.0

7.0

30.0

6.0

25.0

5.0

20.0

4.0

15.0

3.0

10.0

2.0

5.0

1.0

0.0

0.0

Market cap (adjusted for treasury stock, LHS)

OP (RHS)

Source: Strategy Advisors

4Tsuzuki Denki | 8157 (TSE Prime)
Figure 2: ROE and Operating Margin
14.0%

7.0%

12.0%

6.0%

10.0%

5.0%

8.0%

4.0%

6.0%

3.0%

4.0%

2.0%

2.0%

1.0%

0.0%

0.0%

ROE（LHS）

OP Margin（RHS）

Source: Strategy Advisors

5

Tsuzuki Denki | 8157 (TSE Prime)
1. Transformation to be a Pure ICT Business
Player from 2024
Sold Electronic Devices
Business for 13 billion yen,
Becoming a Company
Specializing in Information
Network Solutions from2024

Tsuzuki Denki’s net sales for the fiscal year ended March 31, 2023 increased
3.8% y-o-y to 123.9 billion yen, of which 93.9 billion yen (75.8% of total)came from the information network solution segment and 29.9 billion yen(24.2% of total) from the electronic device segment. Operating profit for thesame period was 5.118 billion yen (+27.6% y-o-y), consisting of 4.155 billion
yen (81.2% of the total) from Information Network Solutions and 954 million
yen (18.8% of the total) from Electronic Devices.
On September 29, 2023, the company announced that the electronic device
business would be sold to Restar Holdings Corporation (TSE Prime Code3156), an electronics trading company engaged in the procurement and saleof semiconductors/electronic components. The sale amount of the business
was said to be 12.97 billion yen.
The transfer of the electronic device business was executed on January 9,2024. As a result, from 2024, Tsuzuki Denki has transformed itself, both inname and reality, into a pure player in the ICT business, focusing on SI(system integration), NI (network integration) and their service businesses.

Low Asset Efficiency andLack of Synergies were theReasons Behind the Sale of
the Electronic Devices
Business

The low profitability and asset efficiency of the electronic devices segment has
been a longstanding issue for management. The business model of purchasing
and selling semiconductors and electronic components makes it difficult to add
value; and as the segment data in Figure 3 shows, the operating margin of
the electronic devices segment remained around 1% from FY03/2017 to
FY03/2021. Likewise, the returns on segment assets remained around 1%,
lower than the 6% of the Information Network Solution Services segment. In
addition, synergy effects with the Information Network Solution Services
remained weak.
The medium-term management plan "Transformation 2026" (FY03/2024FY03/2026), which started this fiscal year, aims to shift to a business modelwith a cost of equity exceeding 9% by reviewing the business portfolio andfocusing management resources on growth areas, which was implemented in
the first year of the plan.
In July 2021, the electronic device business was separated from the company
and spun off to clarify management responsibility. The subsequent earnings
recovery of the electronic devices business in FY03/2022and FY03/2023
against the backdrop of tighter global semiconductor supply and demand led
to the sale, as the company was able to reach an agreement with the buyer,
Restar Holdings, on an acquisition price roughly equivalent to the net asset
value of the business.

Expand Investment in
Growth Areas (Cloud
Services, Security, DX

While many companies talk about reviewing their business portfolios, theactual decision to sell its core businesses, which accounts for around 20% of
the company's total sales and profits, shows the seriousness of the6Tsuzuki Denki | 8157 (TSE Prime)
Support) Based on theMedium-Term Plan

management team in its efforts to improve profitability and asset efficiency.
The company has generated a large amount of cash from the sale of thebusiness and the sale of fixed assets in Q2 FY03/2024, which is expected to
be used for investment in focused growth business areas (cloud-based
services, security products, and DX products) and for strategic investments
including M&A.

Figure 3: Net Sales, Operating Income, Total Assets and Number of Employees by Segment
Fiscal Year

3/20173/20183/20193/20203/2021

3/2022

3/2023

Information Network Solutions

80,80282,32093,704102,104

97,84892,31993,905

Electronic Devices

24,34729,652

25,16823,261

22,15526,99629,993

Consolidated

105,149

111,973

118,872

125,366

120,004

119,316

123,899

2,093

2,248

3,054

4,289

2,960

3,400

4,155

Electronic Devices

38

276

260

163

242

592

954

Elimination and corporate

10

13

3

4

0

18

8

2,142

2,538

3,318

4,457

3,202

4,012

5,118

Information Network Solutions

37,99041,87647,99846,47145,251

63,86864,719

Electronic Devices

21,492

23,583

20,415

18,636

19,25820,92021,860Elimination and corporate

11,584

10,71010,52912,341

11,691-5,563-3,372

Consolidated

71,06876,16978,94477,44876,20079,226

83,207

Information Network Solutions

2.6%

2.7%

3.3%

4.2%

3.0%

3.7%

4.4%

Electronic Devices

0.2%

0.9%

1.0%

0.7%

1.1%

2.2%

3.2%

Consolidated

2.0%

2.3%

2.8%

3.6%

2.7%

3.4%

4.1%

Net Sales (Millions of Yen)

Operating Income
Information Network Solutions

Consolidated
Assets (Millions of Yen)

Operating Margin

Return on Assets (Operating Profits/Assets)
Information Network Solutions

5.6%

5.6%

6.8%

9.1%

6.5%

6.2%

6.5%

Electronic Devices

0.2%

1.2%

1.2%

0.8%

1.3%

2.9%

4.5%

Consolidated

3.1%

3.5%

4.3%

5.7%

4.2%

5.2%

6.3%

1,814

1,775

1,847

1,873

1,933

1,916

1,907

Electronic Devices

157

150

187

183

167

117

164

Corporate and others

305

361

302

303

308

349

257

2,276

2,286

2,336

2,359

2,408

2,382

2,328

Number of Employees at End of Fiscal Year
Information Network Solutions

Consolidated

Source: Prepared by Strategy Advisors

7

Tsuzuki Denki | 8157 (TSE Prime)
2. Tsuzuki Denki's Competitive Advantage and its
Inimitability
The Source of Competitive
Advantage Lies in its 90Year Business History andContinuous Investment in
Human Capital

Tsuzuki Denki's competitive advantages are as follows. All of these have been
built on a 90-year history of business development and human capital
investment since the company's founding and are difficult for other companies
to easily imitate.
①Top-class technical capabilities in the ICT industry held by both SI andNI②

Trusted relationships with global vendors that can provide optimal
systems to client companies as a multi-vendor and the internal humanresources to provide these systems.

③

A one-stop shop capable of providing all services necessary forcorporate clients.

④

A customer base of 20,000 companies, mainly large corporations, built
over a long history of business relationships

SI and NI Two-Way Player
was Born from Sales andMaintenance of Telephone
Equipment Since theCompany's Inception andEntry into the Computer
Business in the 1950’s

In the ICT industry, there are many companies that are either SIer (system
integrators) with strength in software development or NIer (network
integrators) with strength in network construction, but Tsuzuki Denki is uniquein having industry-leading technology in both fields. As mentioned below, thecompany was founded in the sales, installation, and maintenance of telephoneswitching equipment, and in the 1950s it expanded its business to computersales, followed by operational support and software development.

Providing Optimal Products
and Services from Global IT
Vendors as a Multi-Vendor

Tsuzuki Denki is not bound to any manufacturer, but selects the best hardware,
software, and services for its customers from domestic and overseas IT vendors
and suppliers. The company's partners include Microsoft Azure for cloudservices, Cisco Systems for network equipment and security services, Oracle
for databases and VMWare for virtualization. The company has been working
with companies that have the world's top share of products in their respective
fields. In the area of contact centers, where the company is strong, it offers
products from Avaya and Genesys; and in PCs and servers, it sells products
from Fujitsu, HP, and Dell, according to the needs of its clients.

One-Stop Service from
Upstream Consulting toSystems Development,
Maintenance & Operations

The company can also provide a one-stop shop for all ICT services necessaryfor enterprise clients, from upstream DX consulting to proposals for thedevelopment and construction of necessary systems, equipment procurement
and implementation, and post-implementation maintenance and operational
support. Having installed and maintained Fujitsu's large computers for many
years, the company has a particularly strong reputation for system maintenanceand operation. Maintenance and operations are available 24 hours a day, 365
days a year, covering the entire country with 78 bases and 8 group companies.
They often start with operations and maintenance, which is one of theirstrengths, to find issues for customers and make proposals thereafter.

8

Tsuzuki Denki | 8157 (TSE Prime)
More than 500 Engineers in
the Parent Company and
600 Engineers in
Subsidiaries

These are supported by the human capital held by the group, with over 500
engineers in the parent company and over 600 in subsidiaries. In recent years,
the company has been focusing on strengthening its upstream consulting
function, and the number of DX Associates certified by the company has
increased from 119 at the end of FY03/2022 to 147 at the end of FY03/2023,
with plans to further increase the number to 240 by the end of FY03/2026. Its
cyber security technology is also highly regarded, and Tsuzuki Denki is often in
charge of network construction, operation, and cyber security for importantintergovernmental conferences held in Japan.

A Variety of Industries as
Customers

Sales of 123.9 billion yen in FY03/2023 consist of 20% from manufacturing,
15% from services industries, 15% from information/communications, 10%
from healthcare/public sector, 10% from wholesale/retail/restaurants, 10%
from transportation/construction, 10% from finance/insurance and 10% fromother industries (real estate, power, gas, water, etc.). There is no bias towardspecific industries and a wide range of industries are represented.

Strong Customer Base,
Many of Them are Industry
Leaders

The company has over 20,000 clients, of which around 400 companies accountfor 70~80% of total sales. The company's strong relationships built over its
long history are its strong point. Many of the 400 companies have been doing
business with the company for 20 to 30 years and some for more than 50 years.
Because of the long history of business relationships, many of the clientcompanies have built such a strong trust in Tsuzuki that they say, "Tsuzuki's
staff understands our operations better than we do.
Since the company was founded in Nagoya, not surprisingly it has a long historyof business with the Toyota Group. In addition, the company still has arelationship with the Mitsubishi Group since its founder Takeichi Tsuzuki, worked
for Mitsubishi Corporation and established a sales office in Marunouchi, Tokyoin 1958 to expand sales channels to various companies in the Mitsubishi Group.
Three major convenience stores in distribution and megabanks are major clientsof the company. In addition, the company continues to have a strong
relationship with Yamazaki Baking Company started over 50 years ago.

Network Integration
Customers are in Railroads,
Finance, Electric Power, Gas
Etc

Unlike its peers Net One Systems and ITOCHU Techno-Solutions, its network
integration clients do not undertake projects related to the construction offacilities for the three major telecommunications companies. Many of Tsuzuki
Denki’s clients are railroad companies such as East Japan Railway, finance,electric power, and gas companies. In particular, network equipment for
railroads and optical transmission equipment for Shinkansen bullet trains are
long-term projects. These are stable businesses, with additional orders comingin when lines are extended and replacements coming in when they become
obsolete. System integration also includes PC, server, and smartphone sales,
and the company provides these services to a wide range of customers,
including distribution, retail, the public sector, and financial institutions.

9Tsuzuki Denki | 8157 (TSE Prime)
Tsuzuki Denki's Corporate
DNA

Strategy Advisors believes that Tsuzuki Denki's corporate DNA lies in its "ability
to identify the next generation of ICT" and its "corporate culture that thoroughly
values customers and employees," as described below.

Figure 4. Net Sales and Operating Income (Unit: Million Yen)
160,000

12,000OP（RHS）

140,000
120,000
100,000
80,00060,00040,00020,0000(20,000)(40,000)

Sales（LHS）

11,00010,000
9,000

8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
(1,000)(2,000)(3,000)Source: Prepared by Strategy Advisors

10Tsuzuki Denki | 8157 (TSE Prime)
3. Earnings Trend of Information Network Solution
Services Business
IT Consists of 3 Businesses:
Equipment, Development/
Construction and Services

The Information Network Solution Services segment consists of three subsegments: (1) equipment, (2) development/construction and (3) services; withsales of 93.9 billion yen in FY3/2023, with equipment, development/
construction, and services, comprising 40.4%, 14.7% and 44.9% ofrespectively.
Since the mid-2010’s, the company has been focusing on raising the sales
composition ratio of its services, with the sales composition ratio of its
information network solution services business as a whole having increased
from 36.9% in FY03/2020 to 44.9% in FY03/2023.

Operating Margin Improved
1.4% over the Past Two
Years

In addition to the growth in sales of the high-margin services business, adecrease in unprofitable development and construction projects and measures
to improve the efficiency of procurement costs for equipment and other items
have helped increase the operating profit margin of the information network
solution services business to 3.0% in FY03/2021, 3.7% in FY03/2022, and4.4% in FY03/2023. The operating profit margin in the information network
solution services business has increased to 3.0% in FY03/2021, 3.7% in
FY03/2022 to 4.4% in FY03/2023.

Figure 5: Sales Breakdown of Information Network Solution Services
and Operating Margin of the Segment (Millions of Yen)
120,000

5%

100,000

Equipment(LHS）

4%Development &80,0003%

Construction（LHS）

60,0002%Services（LHS）

40,0001%

20,000Operating
0

0%
19/3

20/3

21/3

22/3

23/3

Margin(RHS)

Source: Prepared by Strategy Advisors

11Tsuzuki Denki | 8157 (TSE Prime)（１） Service Business (45% of Net Sales)
Provide System Operationand Maintenance as well as
Cloud Services including InHouse Solutions

The services business includes system operation, maintenance, and support forclient companies, as well as monitoring of established communication networks
and provision of security services. As described below, the company has seen
significant growth in cloud services over the past few years, particularly incontact centers and PBXs, and offers its own solution, the "CT-e1/SaaS" cloudbased contact center, and the "TCloud series" specialized for specific markets
such as the logistics and fruit and vegetable market.
Private Branch Exchange (PBX) is a device and system that handles incoming
and outgoing calls to and from corporate extensions and external lines, as wellas the transfer of these calls. Traditionally, equipment was installed on-premise
at companies, but with the support of cloud PBX, sales in the Information
Network Solution Services business are shifting from equipment to services.
（２） Development and Construction (15% of Sales)

Design, Development/
Construction of Business
Systems andCommunication Networks

Development and Construction handles development and implementation
services for the design and construction of client companies' business systems,
communication networks and other IT infrastructure. First, through businessconsulting to the user company, the company defines system requirements(clarifying required functions and performance, etc.) and designs the system.
Based on the design, it proceeds with the actual development, including the
procurement of hardware and the acquisition of software and application
licenses. After implementation, in addition to regular maintenance andoperational support, the company provides ancillary services such as IT
infrastructure management and data processing to be built on a cloud platform,
leading to ongoing revenue.

Large Number of Projects in
Customizations and
Implementation AssistanceTailored to Customer Needs

Most development projects are less than 5 million yen per project, such as
customization and implementation support tailored to customer needs. There
are also projects worth 100 million yen or more that are developed fromscratch, but the company does not work on many of them. In recent years,
with the acceleration of the shift to cloud computing, an increasing number ofcases are being replaced by service projects. The company also provides
development and implementation support for KitFit (industry-specific software
for fruit and vegetable markets, movie theaters, etc.), a solution developed inhouse and cloud services.
（３） Equipment (40% of Sales)

Sells about 100,000 PC’s Per
Year to Corporate
Customers

The company sells equipment such as PCs, servers, storage, PBXs, network
construction equipment (routers and switches) and business cell phones forcorporate customers. The company sells about 100,000 PCs per year, valued atabout 10 billion yen, mainly to megabanks and other large corporations; and12

Tsuzuki Denki | 8157 (TSE Prime)
its strength as a multi-vendor means that it also sells many products fromcompanies other than Fujitsu, such as HP and Dell.
Special Demand Occurs
Every 4-5 Years Due to the
End of Windows OS Support
and PC Replacement Cycles

In PCs, there is a replacement cycle for major customers due to the cessationof support for the Windows OS and special demand occurs every few years.
Most recently, the end of support for Windows 7 generated special demand in
FY03/2020. With support for Windows 10 expected to stop in October 2025,
and the replacement cycle expected to coincide with the end of support for
Windows 10, we expect this to lead to an increase in PC sales from FY03/2025
to FY03/2026.

13

Tsuzuki Denki | 8157 (TSE Prime)
4. Comparison of Peer Companies in ICT Industry(SIer’s and NIer’s)（１） Competitive Situation between SIer’s and NIer’s
Numerous Sier’s and NIer’s
in Japan

There are numerous SIer’s (System Integrators) and NIer’s (Network
Integrators) in Japan, but as shown in Figure 6, they are listed companies andhave similar business activities to those of Tsuzuki Denki, sometimes competing

Figure 6: Comparison of Sier’s and NIer’s (Millions of Yen, %)TickerFiscalNet

ROIC
Business

CapitalAssets

ROE

Equity2023/03

123,899

19.5

5,118

4.1

7.1

12.2

10.4

42.0

4307

2023/03692,165

34.6

111,832

16.2

12.9

21.9

20.7

47.6

4768

2022/12

861,02221.4

54,768

6.4

12.1

36.5

12.9

61.1

NA

2023/03

570,93424.4

46,473

8.1

9.6

15.8

11.8

56.6

TIS

3626

2023/03

508,400

27.9

62,328

12.3

11.6

19.0

18.8

64.2

SCSK

9719

2023/03445,91226.4

51,361

11.5

10.5

16.5

14.4

62.4

BIPROGY

8056

2023/03339,898

26.3

29,673

8.7

11.4

22.0

15.0

49.9

1973

2023/03

320,80220.7

22,751

7.1

10.0

16.1

10.0

52.9

NS Solutions

2327

2023/03291,68822.6

31,738

10.9

10.1

24.3

11.1

62.7

Net One Systems

7518

2023/03

209,680

24.0

20,635

9.8

13.3

19.3

20.0

42.4

4812

2022/12129,054

36.3

18,590

14.4

18.9

51.8

18.1

60.6

5036

2023/09112,800

11.6

4,192

3.7

10.5

13.8

16.0

44.8

NSD

9759

2023/03

77,982

22.5

12,525

16.1

15.0

49.7

19.3

80.3

JBCC Holdings

9889

2023/03

58,144

31.0

3,764

6.5

13.2

26.1

14.1

55.3

Otsuka Shokai
ITOCHU TechnoSolutions

NEC Networks &System Integration

Dentsu ResearchInstituteJapan Business
Systems

MarginROIC
Invested

8157

Institute, Ltd.

Profits

OP

Year

Nomura Research

MarginOperating

Code
Tsuzuki Denki

Sales

Gross

Ratio

Source: Prepared by Strategy Advisors

14Tsuzuki Denki | 8157 (TSE Prime)
on a project-by-project basis. Other players with solution sales exceeding 2
trillion yen include Fujitsu, NEC, NTT Data and Hitachi, Ltd.
Most of them have SI as their core business, but ITOCHU Techno-Solutions(CTC), Net One Systems, and NEC Networks & System Integration havestrength in network construction.
Some of the major integration companies have absolute strengths in specificindustries, such as Nomura Research Institute's securities industry and TIS's
credit card industry. However, most major players provide technology to a wide
range of industries, including manufacturing, services, finance, retail, and public
sector. Tsuzuki Denki also has a widely dispersed client base, as shown in its FY
03/2023 sales by industry.
Daily Competition, but
Constant Shortage of IT
Personnel and Market
Growth Ensure Margins for
the Industry as a Whole

Competition in the traditional SI business routinely occurs in situations such ascompetitions to determine which integrator receives order when a company
builds a new or updated information system or network. A customer analyzes
and judges the proposals submitted by several companies, including the
breakdown of system development, maintenance and operation policies, andrelated costs, selects an ordering party, and signs a contract. In many cases,
development and maintenance/operation are ordered from different
companies. Although competition is fierce on a day-to-day basis, the constantshortage of IT personnel and the expansion of the market have ensured thatthe major integrators have been able to maintain stable margins since the mid2010’s.
（２） Tsuzuki Denki's Low Profitability and Historical Background

Profitability is Not as Good
as Other Companies in theSame Industry

Tsuzuki Denki's information network solution services business, excluding its
electronic devices business, posted sales of ¥93.9 billion in FY03/2023, lessthan ¥100 billion, as shown in Chart 3, and not large compared to other listed
SIer’s and NIer’s. In addition, the business's operating profit margin in
FY03/20233 was 4.4%, which, as noted above, was higher than the 3.0% in
FY03/2021, but still low compared to other integration companies. Many of the
major players in the industry have an operating profit margin of over 10%. The
only company with a lower operating profit margin than Tsuzuki Denki is Japan
Business Systems, whose core business is the resale of Microsoft productlicenses and related equipment.

The Legacy as an Electronics
Trading Company Has Beena Historical Drag

Many SIer’s started out in the information systems divisions of large
corporations and have been involved in development and construction since
their inception. On the other hand, as will be discussed in the next chapter,
Tsuzuki Denki was established as a special distributor of Fujitsu telephoneswitching equipment and has come a long way as a computer dealer.
Historically, Strategy Advisors believes that the company's strong corporate
culture as a "trading company" that purchased equipment from vendors andsold it to customers, where low margins were acceptable, is behind its lower
profit margins than those of other SIer’s.

15

Tsuzuki Denki | 8157 (TSE Prime)
In FY03/2023, the operating profit margins of electronics trading companies
were 6.0% for Macnica Holdings, 3.0% for Restar Holdings, 5.3% for Kaga
Electronics and 2.9% for Tomen Devices. Although the semiconductor business
was strong in the previous year, the operating profit to sales ratios of electronics
trading companies over the past 10 years have all been in the low single digits,
and Tsuzuki Denki's ratio was close to that of its peers.
（３） Exit from the Electronics Trading Company Mentality Will
See a Reevaluation of the Stock Price
Higher Operating Margins
Will Lead to a Reevaluationof the Stock Price

With the change in TSE industry affiliation from "Wholesale" to "Information
and Communications" in 2018 and the sale of the electronic device business,
Tsuzuki Denki's business structure and corporate constitution are steadilytransforming. Management is well aware of its low profitability compared toother SIer’s and NIer’s and has been working to reduce losses from unprofitableprojects since FY03/2017 and to improve productivity and gross profit margin
by standardizing development processes. Furthermore, in order to increase its
presence in the contact center domain, where it has a strength, the company
has also implemented initiatives to increase its competitiveness, such as making
ComDesigin, which has the second largest market share in the industry forcloud-based contact centers, a subsidiary.
The current medium-term management plan (FY03/2024-FY03/2026) calls foran operating profit margin of 5.0% in the information network solution services
business, a 0.5point increase over three years. As mentioned below, further
improvement is expected, if the cloud services and SaaS businesses, which
includes in-house solutions with high profit margins and growth capability.
Strategy Advisors believes that profit margins approaching those of peer SIer’s
and NIer’s will serve as a guidepost for the company to break away from a P/E
ratio of around 10x, the same as the current level of listed electronics trading
companies.

16

Tsuzuki Denki | 8157 (TSE Prime)
5. History - High Growth Period (1932-2000) andStagnation Period (2001 to mid-2010’s)
90 years of History Broken
Down into 3-Stages

Although Tsuzuki Denki has a history of more than 90 years, Strategy Advisors
believes it can be divided into three stages: (1) from its establishment throughthe high growth era to the IT bubble in 2000, (2) a period of stagnant
performance due to delays in responding to structural changes in the domestic
ICT market in the 2000s, and (3) a period of re-growth through the full-scale
expansion of its cloud computing business and service business from the mid2010’s.
（１） From the Foundation to the IT bubble

Established in 1932 in
Nagoya as a Special
Distributor of Fuji Electric
Telephone Switching
Equipment

In 1932, Tsuzuki Shoten was established as the sole distributor of Fuji Electric
Manufacturing Co. The founder, Mr. Takeichi Tsuzuki, graduated and afterworking for Mitsubishi Corporation and other companies, he was commissioned
by Fuji Electric's Nagoya branch office in 1931 to handle sales oftelecommunications equipment. Communications equipment had an importantfunction that became central to the nervous system of the national economy,
and the purpose of the company's founding was to increase its utilization andthereby contribute to society.
In 1935, three years after Tsuzuki Shoten was established, Fujitsu wasestablished, and it has become the largest business partner for the company.

Began Selling Computers asa Fujitsu Dealer in 1958,
and Launched Maintenance,
Operation and Software
Development Businesses
around 1970

In 1958, the company began selling computers and related parts under aspecial distributor agreement with Fujitsu, and in 1963 its shares wereregistered as over-the-counter shares with the Japan Securities Dealers
Association. In 1969, in response to the growing importance of computer
maintenance, the company established Tsuzuki CE Center Co. In addition to thesale of stand-alone communication devices, the company began selling systems
that combine various types of equipment.
The company expanded its customer base by accumulating a track record ofdelivering communications equipment to various large corporations,
government offices, and universities, including city banks, manufacturers,
electric power companies, railroads and distributors. As a Fujitsu computer
dealer, the company also developed maintenance services and trained systemengineers (SEs) to hone their skills and increase sales.

In 1972 Shogo Tsuzuki
Became the Second
President

In 1972, when President Takeichi Tsuzuki turned 70 and the company
celebrated its 40th anniversary, he himself transitioned to chairman and hiseldest son, Shogo Tsuzuki, became president. After graduating from university,
Shogo Tsuzuki worked for Fujitsu for seven years before becoming a director of
Tsuzuki Denki in 1960.

17

Tsuzuki Denki | 8157 (TSE Prime)
Steadily Expanding
Customers with a Tailwind
of OA & Data
Communication Market
Expansion

The high growth period of the Japanese economy ended in the mid-1970s, but
the spread of telephone lines and the development of communications
technology led to increased demand for data communications, including theestablishment of online banking and office automation (OA). During this period,
many large corporations, municipalities, and government agencies renewed
their communication facilities and shifted to OA, further expanding Tsuzuki
Denki's customer base. This has led to the company's current customer base,which is centered on large corporations.

Owner-Management
Ended in 2007

In 1998, Mr. Shogo Tsuzuki retired and his second son, Togo Tsuzuki, became
the third president. After completing a graduate school, Mr. Togo worked for
Fujitsu as an engineer before becoming a director of Tsuzuki Denki in November
1968. Mr. Togo Tsuzuki continued as president until the age of 73, but in 2007,
Mr. Moriichi Torigata, who was not from the Tsuzuki family, became president,
ending the owner-management of the company. Since then, an employee fromoutside the Tsuzuki family has been appointed president.

（２） 2000 to the Mid-2010’s.
Sales on a Declining Trend
After Peaking at a Record
High in FY03/2001

Although the domestic information and telecommunications market continued
to grow with the spread of personal computers, the advent of the Internet age
and the expansion of cell phone services, Tsuzuki Denki's sales growth since the
21st century has been unable to surpass its peak in FY03/2001.

Global Financial Crisis (GFC)and Subsequent Great East
Japan Earthquake Led to a
Decline in IT Investment

The company's consolidated net sales of 134.9 billion yen, which it posted in
FY03/2001 due to its response to the Y2K response and the IT bubble, havenot been exceeded to this day. Sales fell to less than 100 billion yen from FY
03/2009 to FY03/2012 due to the decline in IT investment because of the Global
financial crisis and the Great East Japan Earthquake. Operating profit from
FY03/2010 to FY03/2013 was less than 1 billion yen. The company's
performance remained challenging until the mid-2010’s, with operating profit
exceeding the 4.351 billion yen recorded in FY03/2000 to 4.457 billion yen in
FY03/2020, 20 years later.

18

Tsuzuki Denki | 8157 (TSE Prime)
Figure 7 History of Tsuzuki Denki
1932

Established in Nagoya as Tsuzuki Shoten and began installation and maintenance of
telephone switching equipment as a Fuji Electric distributor.

1941

Reorganized as a joint stock company and renamed Tsuzuki Denwa Kogyo Co.

1945

Head office building burned down in air raid.

1958

Begins sales of computers and parts under a special distributor agreement with Fujitsu.

1961

Company name changed to Tsuzuki Denki Kogyo Co.

1963

Shares registered with the Japan Securities Dealers Association (industry: commercial)

1967

Established Toshin Electric (later Tsuzuki Densan Co. Ltd.)1970

Established Tsuzuki Software Co., Ltd. in response to the growing importance of software in
the technological innovation and increasing popularity of computers.

1972

Shogo Tsuzuki appointed president.

1986

Listed on the Second Section of the Tokyo Stock Exchange

1988

Became a system integrator certified by the Minister of International Trade and Industry.

1991

Company name changed to Tsuzuki Denki Co. Ltd.

1991

Agency agreement signed with Lucent Technology (now Avaia).

1998

Togo Tsuzuki appointed president.

1999

Tsuzuki Densan Co., Ltd. listed on the Second Section of the Tokyo Stock Exchange.

2007

Morikazu Torigata appointed president.

2010

Hajime Ando appointed president
Conducted tender offer (TOB) for listed subsidiary Tsuzuki Densan Co.

2012

Merged with Tsuzuki Densan Co.
Hideki Hiura appointed president

2016

Announced new management philosophy and logo

2017

Isao Emori appointed president

2018
2020

Changed its industry affiliation on the Tokyo Stock Exchange from "Wholesale" to"Information and Communication".
Listed on the First Section of the Tokyo Stock Exchange
ComDesign Inc., a company with unique contact center solutions, becomes a subsidiary.

2021
2022

Spun off the electronic device business as a separate company, Tsuzuki Embedded
Solutions Co.
Certified as a DX Certified Business by the Ministry of Economy, Trade and Industry
Shifted to Tokyo Stock Exchange prime issue
Established Purpose and renewed management philosophy

2023

Sold electronic devices business (transferred shares of four consolidated subsidiaries)

Source: Prepared by Strategy Advisors

19

Tsuzuki Denki | 8157 (TSE Prime)
Structural Changes in the IT
Industry,
Including Deregulation of
the Telecommunications
Market, Shift to IP and
Collapse of the NTT Family

The biggest factor was the loss of competitiveness of Fujitsu, which had been
Tsuzuki Denki's largest supplier of telecommunications equipment andcomputers. 1985 saw the privatization of the Nippon Telegraph and Telephone(NTT) and the introduction of competition policies in the telecommunications
market, leading to the collapse of the NTT family of companies: Fujitsu, NEC,
Hitachi, and Oki Electric. With the rapid spread of the Internet since the 1990s,
the analog/fixed telecommunications equipment market has expanded toinclude a diverse range of entities, including emerging carriers and ISP carriers.
Products also diversified from conventional telephone switching equipment torouters and servers and so on.
At the same time, a structural change in computer systems, known as "Ne・O・
Da・Ma," was underway. The term was coined by combining the initial letters ofeach of the four keywords: "Ne" stands for network, "O" for open system, "Da"for downsizing, and "Ma" for multivendor.
In the networking field, the market environment changed drastically with the
emergence of global vendors such as CISCO and ORACLE, etc. While the market
environment was changing drastically with Windows 95 as the catalyst,
Japanese computer makers, which were mainly engaged in host computers,
could not compete and had no choice but to follow suit. The PBX market, which
had been dominated by on-premise systems with switching equipment installed
in offices, saw the spread of software PBX, followed by cloud PBX, but Fujitsu
and other companies were behind the curve because they were not serious
about it, such evidenced through their subsidiary companies.

Figure 8: Consolidated Sales of Tsuzuki Denki, Fujitsu, and NEC (Billions of Yen)
6,000

160
140

5,000

120

4,000

100

3,000

80
60

2,000

40
1,000

20

0

0

Fujitsu（LHS）

NEC（LHS）

Tsuzuki（RHS）

Source: Prepared by Strategy Advisors

20

Tsuzuki Denki | 8157 (TSE Prime)
Fujitsu and NEC Lose
Competitiveness. Global
Vendors such as CISCO &ORACLE Emerge

Major Japanese IT providers were unable to respond to these structural changes
and lost the domestic market to global vendors, such as CISCO. As Figure 8
shows, Fujitsu and NEC's sales peaked in FY2000/3. Due in part to thedivestures of businesses, Fujitsu's sales declined from 5.484 trillion yen in
FY03/2000 to 4.381 trillion yen in FY03/2013, while NEC's sales also declined
from 5.410 trillion yen to 3.072 trillion yen.

Financial Position Also
Deteriorated Due to TOB ofMore than 10 billion Yen in
Treasury Stock

Tsuzuki Denki was also in a difficult financial situation. Shareholders' equity
declined from 27.504 billion yen at the end of FY03/2012 to 17.586 billion yen
at the end of FY03/2013 and the equity ratio declined from 41.2% at the endof FY03/2012 to 28.2% at the end of FY03/2011. This was due to theacquisition of 13,393,525 shares (52.16% of the then outstanding shares)
through a tender offer from March 26, 2012 to April 20, 2012 for 770 yen per
share or 10.313 billion yen in total. The tender offer was made on the premisethat Tower Investment Management, which held 46.19% of the outstanding
shares at the time, would purchase the shares of Tsuzuki Denki.

Figure 9: Shareholders' Equity, Interest-Bearing Debt and Equity Ratio (Millions of Yen, %)50,00050.0

45,00045.0

40,00040.0

35,00035.0

30,00030.0

25,00025.0

20,00020.0

15,00015.0

10,000

10.0

5,000

5.0

0

0.0
04/3 05/3 06/3 07/3 08/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/3 18/3 19/3 20/3 21/3 22/3 23/3
Shareholder's Equity（LHS）

Interest-Bearing Debt（LHS）

Equity Ratio（RHS）

Source: Prepared by Strategy Advisors

21

Tsuzuki Denki | 8157 (TSE Prime)（３） Tsuzuki Denki's Strengths Seen in a Severe Environment
As mentioned above, the business situation from 2000 to the mid-2010’ was
not good, but we would like to point out two things when considering Tsuzuki
Denki's future competitive advantage.
Maintained Employee Size
Even During the Post-2000
Downturn

The first is that the number of employees remained stable, even in a situation
where sales growth remained sluggish since 2000. The number of employees
at Tsuzuki Denki remained at about the same level from 2,542 at the end of
03/2001 to 2,300 from the end of 03/2014 to 03/2018 but has recovered to
the 2,300 level in response to the revenue increases. The stability is noticeable
compared to Fujitsu and NEC, which have significantly reduced their number of
employees.

Employee-Oriented,
Communal Management has
been the Company's Motto
Since its Establishment

Since its establishment, Tsuzuki Denki has upheld the company motto of"Kaitaku Mugai" (meaning that there is unlimited room for business and market
expansion) as well as "Wa wo motte Tattoshi to nasu" (meaning "to harmony
is of top priority") and has emphasized employee-oriented management. The
company rewards its employees with higher salary levels than its peers andmaintains a low turnover rate of 1-3%. Needless to say, human capital is thegreatest asset in the ICT business, and Strategy Advisors believes that thecompany's corporate culture and high level of employee loyalty will be acompetitive advantage during its future growth phase.

Highly Resilient Operationand Maintenance Businessand Strong Customer BaseSupport Performance

Second, even though sales fell 40% from the peak, the company has remained
profitable without reducing personnel expenses, its single largest fixed cost.
Strategy Advisors believes that this is due to the company's strength in theresilient but not flashy, operation and maintenance business and the solid clientbase that supports this business. As discussed below, maintenance andoperations are one of the cores of the services business, and if development /construction or equipment grows, its sales will follow.

Sales Recovery Trend from
FY03/2013

The company's sluggish performance was halted in FY03/2013, when Hideki
Hiura became the 6th president and sales reached 100.6 billion yen, which was
the first time in five years that the company has exceeded more than 100billion
yen. IT investments by Japanese companies have been growing again, and thecompany has responded to customer needs by strengthening its multi-vendor
capabilities, while in-house service businesses such as KitFit and cloud
integration have begun to emerge.

22Tsuzuki Denki | 8157 (TSE Prime)
Figure 10. Number of Employees for Tsuzuki Denki, Fujitsu, and NEC
200,000

3,000

180,000

2,700

160,000

2,400

140,000

2,100

120,000

1,800

100,000

1,500

80,0001,200

Fujitsu（LHS）

NEC（LHS）

Tsuzuki（RHS）

Source: Prepared by Strategy Advisors

23

Tsuzuki Denki | 8157 (TSE Prime)
6. First Medium-Term Management Plan
(FY03/2018/3 – FY03/2020)（１） Management Reforms Accelerated after Current President Isao E
Mori Took Office as President
First Announced Mid-Term
Management Plan Exceeded
Sales, Operating Income
and ROE

2017 was a major turning point for Tsuzuki Denki. The current president, Isao
Emori, became the seventh president in April 2017 and the company's first
medium-term management plan was formulated and published in May 2017,
and the first financial results briefing for investor analysts was held in June
2018.
The first medium-term management plan, "Make New Value 2020," covers thethree-year period from FY03/2018 to FY03/2020, and calls for net sales of 106
billion yen, operating income of 2.8 billion yen and ROE of 8% or higher. The
company exceeded all three of its numerical targets.

Significant Decrease in
Project Losses from
Unprofitable Projects

In terms of improving profitability in the core business, which had been apriority measure, the strengthening of measures to prevent unprofitableprojects made a significant contribution. Project losses from unprofitableprojects decreased significantly from 1.099 billion yen in FY03/2016 to 477
million yen in FY03/2017, 178 million yen in FY03/2018, 166 million yen in
FY03/2019, and 121 million yen in FY03/2020. Although it took about 5 years
to improve the quality of such operations, the number of unprofitable projects
from FY03/2021 onward was almost zero, contributing significantly to theimprovement in profitability.

Stricter Estimation
Judgments and a Decreasein Contracting Agreements
Contributed to the Decline

As a specific measure, the company started to make decisions on systemdevelopment, network construction and other projects after careful
examination by a "projects review board" and a "profitability review board". In
terms of contract types, the number of "work contracts," in which completionof the project is a prerequisite for payment, was reduced, and the number of"quasi-consignment agreements," in which payment is made for work
performed without an obligation to complete the project, was increased. In
addition, work standardization and manuals were developed and the newly
established "Assurance Office" began to manage risks such as process delays
during the project period.
（２） Balance Sheet Strengthened by the Disposal of Treasury Stock

4.5 million Shares ofTreasury Stock were
Allocated to Aso Corp in
2017, Raising ¥3.4 billion

The company's financial position deteriorated as a result of a 10 billion yen
share buyback in FY03/2013. In 2017, the company disposed of 2.3 million
treasury shares in January and 2.2 million shares in November through a thirdparty allotment to Aso Corporation. The disposal price was 556 yen in January
and 966 yen in November, raising 1.279 billion yen and 2.125 billion yen,respectively.

24

Tsuzuki Denki | 8157 (TSE Prime)
As a result, Aso Corporation became the largest shareholder and continues tohold the company. Aso was top shareholder at the end of FY09/2023 with
24.19% of voting rights. Aso engages in medical, cement, and real estatebusinesses, with net assets of 45.017 billion yen at the end of FY09/2023.
Hidetoshi Takinaka, Aso's senior managing director and general manager of theMedical Business Division, has been appointed as an outside director of Tsuzuki
Denki.
Accumulation of Profits has
also Increased Equity Ratio

In addition to the funds raised through the third-party allotment to Aso
Corporation, the company's shareholders' equity increased from 19.506 billion
yen at the end of FY03/2016to 29.629 billion yen at the end of FY03/2020 due
to the accumulation of profits, and the equity ratio recovered from 30.7% to38.4% at the end of FY03/2020 over the same period.

TSE - Changed its Industry
Affiliation from Wholesale toInformation/
Communications

Efforts to raise awareness of stock prices have gradually begun, and in 2018,
the industry sector to which Tsuzuki Denki belongs on the Tokyo Stock Exchange
was changed from "wholesale" to "information and communications".

25

Tsuzuki Denki | 8157 (TSE Prime)
7. Second Medium-Term Management Plan
(FY03/2021 – FY03/2023)
Record Operating Profit andDouble-Digit ROE of 10.4%
in FY03/2023

The management targets for the FY03/2023 in the second medium-term
management plan "Innovation 2023" were net sales of 126 billion yen,operating income of 4.6billion yen, operating margin of 3.7% and ROE of 9%,
but the actual results were net sales of 123.8 billion yen, operating income of
5.118 billion yen, operating margin of 4.1% and ROE of 10.4%. ROE was
10.4%. Although net sales fell short of the plan, operating income reached arecord high and the operating margin and ROE exceeded the plan.
The record-high profit was contributed to by an increase in the gross profit
margin from 18.4% in FY03/2020 to 19.5% in FY03/2023. This was due to (1)expansion of the high-margin service business and (2) cost reductions throughoptimization of procurement and subcontracting costs, and so on.

Published Framework for
Systematizing Solution
Services

In October 2021, Tsuzuki Denki created ‘Total SolutionService Framework(TSF)’, which systematizes all the solutions it provides, from upstream
consulting to midstream services and downstream maintenance and operations(Figure 11). The TSF is an effective sales tool for eliciting customer needs
because it conveys at a glance the variety of services the company can provide
and their diversity.
In September 2020, the company acquired a 50% stake in ComDesign
Corporation (ComDesign), which has its own cloud-based contact center
solution, CT-e1/SaaS and made it a subsidiary. The number of contracted seatsincreased rapidly, coupled with the growing need for home-based services dueto the Covid-19. Tsuzuki Denki has a wealth of experience in on-premise contact
centers with 40,000 seats, but has added "CT-e1/SaaS" to its menu, which has
strength in small to medium-sized scales of 10 to 200 seats.

Transferred to the TSE 1st
Section in 2020 and to the
TSE Prime Market in 2022

In June 2020, the company was reassigned from the Second Section to the First
Section of the Tokyo Stock Exchange and is currently in the Prime Market
following a market reclassification in April 2022.
Figure 11. Menu and Flow of Service Systems Provided by Tsuzuki Denki

Source: Company Data

26

Tsuzuki Denki | 8157 (TSE Prime)
8. Created “Purpose” in 2022, the 90th
Anniversary of the Company's Founding
Established Purpose in
2022, the 90th Anniversaryof the Company's Founding

In June 2022, the 90th anniversary of its founding, Tsuzuki Denki developed its
management philosophy and established purpose. The management philosophy
consists of "Purpose," which verbalizes the company's values and ideal state,and "Values," which defines the values and action guidelines that should becherished.
The company's purpose is "Bring to society "yohaku" filled with possibilities,
through people, knowledge, and technology.” “People, knowledge, andtechnology" are non-financial capital that Tsuzuki Denki has accumulated over
the years and are the source of value creation. The convenience and efficiency
created by technological advance gift provides society with yohaku: room for
growth, time, and other resources to spare, and peace of mind to relax andenjoy. the company's customers and society as a whole with room to spare androom to play. “Together" means walking forward together with stakeholders.
The plan for the 100th anniversary was formulated by holding workshops withrepresentatives of diverse ages, positions, and jobs, after quantitatively andqualitatively capturing the thoughts of employees based on the results of asurvey of over 1,000 people.
The Values continue those formulated in 2016 with Facing, Building,Connecting, Challenging, Enjoying, Supporting, and Working Through.

Regularly Measure the Levelof Employee Understandingof the Corporate Philosophy
for Deeper Penetration

The company does not only create the purpose, but also makes employees
aware of it and embodying it in their daily work. Specifically, the company
conducts a fixed-point observation of the level of understanding of its corporate
philosophy through an annual employee survey. Based on the results of thesurvey and the vision of the company, the PDCA cycle of planning,
implementing, evaluating, and improving measures is used to ensure steadypenetration of the philosophy.
Figure 12. Purpose of Tsuzuki Denki

Source: Company Data

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Tsuzuki Denki | 8157 (TSE Prime)
9. Long-Term Vision and Mid-Term Management
Plan “Transformation 2026
Through the past two three-year medium-term management plans, Tsuzuki
Denki’s operating profit margin increased from 2.0% in FY03/2017 to 4.1% in
FY03/2023, and ROE increased from 5.9% to 10.4%. As a result, market
capitalization (adjusted for treasury stock) increased from 9.443 billion yen at
the end of FY03/2017 to 28.009 billion yen at the end of FY03/2023 and 43.196
billion yen as of the end of January 2024.
Long-Term Vision andMedium-Term Management
Plan Announced in May
2023

On May 12, 2023, the company announced its long-term vision and mediumterm management plan, “Transformation 2026. The plan sets targets for the
fiscal year ending March 31, 2033, which marks the 100th anniversary of thecompany’s founding: these are, 150 billion yen in net sales, 10 billion yen in
operating income, 6.7% operating margin, 15% ROE and 7% average annual
growth rate of EPS. The company has stated that it will evolve from its current
position of “being close to customers” to “a partner that leads customers” andtransform itself into a “Growth Navigator (a group that navigates growth andcreates together)” in 10 years-time.

Aiming for 7% CAGR of EPS
over the Next 10 Years &15% ROE in FY2033/3

The 10-year period through FY03/2033 is divided into three stages: 1) shift
resource to growth areas (FY03/2024-FY03/2026), 2) scale growth areas anddevelop new business areas (FY03/2027-FY03/2029) and 3) make growthareas into core business and expand new areas (FY03/2030-FY03/2033). With
this the roadmap to achieve the long-term vision has been created. The ongoing
medium-term management plan “Transformation 2026” is positioned as thefirst stage. The business strategy consists of (1) expanding growth areas, (2)improving the profitability of existing businesses and (3) reviewing the businessportfolio.

Proceeding Ahead of
Schedule, Including the Saleof the Electronic Devices
Business this Fiscal YearAs for (1), as described in the next section, the company will set 6 growth areas
and actively expand its business. Regarding (2), the company will actively
allocate resources through analysis and visualization of sales management data,etc., and aim to substantially raise prices by providing value-added services
such as consulting and data science. In addition, the company will promotereform of its sales style through the use of digital marketing and online tools.
As for (3), as mentioned in the previous paragraph, the company plans to sell
its electronic devices business in FY03/2024, its first year of operations, andwill also review its service menu and also its business domains in the
Information Network Solution Services business.

CO2 Emission Reduction
Targets for the Next 3-Years
are also Disclosed

Consolidated financial targets for FY03/2026 are 130 billion yen in net sales,
6.5 billion yen in operating income, and ROE of 10% or more. The new target
this time is to reduce non-consolidated CO2 emissions (sum of Scope 1 and 2)
from 613 tons in FY03/2023 to 532 tons in FY03/2026, a 13.2% reduction.

Profit Target for FY03/2026
Unchanged Despite Sale ofElectronic Devices BusinessIn the May 12, 2023 announcement, the company’s target in FY03/2026 weresales of 102.2 billion yen (+9% over FY03/2023) and operating profit of 5.5
billion yen (+31% over FY03/2023) for Information Network Solution Services

28

Tsuzuki Denki | 8157 (TSE Prime)and 27.8 billion yen (-7% over FY03/2023) and 1 billion yen (+5% over
FY03/2023) for Electronic Devices.
Although the sale of the electronic devices business will remove the portion of
the original plan, the company declared that the financial targets of the longterm vision and the medium-term management plan will remain unchanged
when it presented its financial results for the first half of the fiscal year and thefollow-up to the medium-term plan on November 8, 2023. The reason is thatthe growth of the ICT market is accelerating and further improvement in the
profitability of existing businesses is expected. Furthermore, the company plans
to use the proceeds from the sale of the electronic devices business not only
for growth areas, but also for M&A to improve the competitiveness of existingareas (conventional SI, infrastructure construction, and equipment sales) where
the company has reaffirmed its potential and to strengthen its earnings base.
Accelerating Growth Rate ofDomestic IT InfrastructureMarketAiming to Further Increase
Value from a P/B Ratio ofover 1x

Committed to Stable
Dividends with theIntroduction of 3.5% DOE

According to Tsuzuki Denki, the “Domestic IT Infrastructure Market Forecast”
by IDC has been significantly raised from a CAGR of 3.2% (FY03/2023FY03/2027) in the 2022 forecast to a CAGR of 8.4% (FY03/2024-FY03/2028)
in the 2023 forecast. IT investment is recovering due to the cessation of Covid19 and labor-saving and automation needs have increased due to the severelabor shortage. Furthermore, sales of higher-spec PCs than before are expected
to grow as generative AI becomes widely used.
In the Integrated Report 2023, President Isao Emori clearly states, “With anawareness of return on capital, including ROE, as indicators of corporate valueenhancement, we will achieve a P/B ratio that is consistently over 1x.” Heintends to achieve this through the three pillars of “business growth” (averageannual EPS growth rate of 7% over 10 years), (2) improvement of capitalefficiency (ROE of 15%) and (3) strengthening of management capital(enhancement of human capital and other non-financial values), as shown in
Figure 13. In addition, the company is reviewing its shareholder return policy,
improving governance, strengthening investor relations and enhancing tools forengagement with investors. These measures are intended to raise thecompany’s share price, which should be seen as an indicator of the seriousnessof the top management.
In addition to raising the dividend payout ratio from 30% to 40%, the company
has introduced a dividend on equity (DOE) ratio of 3.5%, which is the lower
limit of the payout ratio. The company had initially planned to pay a dividend of
76 yen per share for FY03/2024, up from 61 yen per share in FY03/2023, but
at the time of the announcement of 3Q results on January 31, 2024, thecompany announced an upward revision of the earnings and raised the dividend
forecast to ¥89 per share.

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Tsuzuki Denki | 8157 (TSE Prime)
Increased Equity
Percentage in Directors
Compensation

In strengthening governance, the ratio of cash to equity in director
compensation was changed from 90%:10% to 80%:20%, increasing the ratioof equity. As a communication tool for dialogue with investors, the first
integrated report for Tsuzuki Denki was released on September 4, 2023.
Furthermore, the company is strengthening its IR activities through the
publication of external analyst reports.

Figure 13: Long-Term Vision for Increasing Corporate Value

Source: Company Data

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Tsuzuki Denki | 8157 (TSE Prime)
10.

Profile of President Isao Emori

Transformation Began with
the Appointment of
President Emori in April
2017

Since Mr. Isao Emori took over as president in April 2017, Tsuzuki Denki has
undergone major changes. In order to change its previously inward-looking
corporate structure, the company announced its medium-term management
plan for the first time, publicly announcing management target figures,
including ROE and expressing its determination to the outside world bydemonstrating the commitment of the top management itself. President Emoripursued a variety of actions to achieve a 100% employee health checkup rate
and remained focused on numbers and results without giving up. In order tostabilize its financial position and strengthen its business strategy, the company
entered into a capital and business alliance with the Aso Group through a thirdparty allocation of new shares. The first investment in ComDesign, which later
became a subsidiary, was made in October 2017.

Clearly Positive Attitude
Toward the Stock Market

The company's approach to the stock market has also changed. Until recently,
the company did not have a department dedicated to IR and was limited to only
the statutory disclosure required of listed companies. However, in June 2018,
the company held its first financial results briefing and thereafter began holding
regular briefings when full-year and second-quarter financial results areannounced. The company also proceeded with procedures to change its
industry affiliation on the Tokyo Stock Exchange, changing from "Wholesale" to"Information and Communication" in October 2018. As mentioned above, in
September 2023, the company issued its first integrated report, "TSUZUKIREPORT 2023-Transformation," clearly stating its commitment to improving
corporate value and stock market valuation through proactive information
disclosure and dialogue with investors.
President Emori was born in Yokohama in January 1959. after joining Tsuzuki
Denki in 1981, he served as Hokkaido Branch Manager in 2004 and General
Manager of East Japan Sales in 2008. During his time as Branch Manager, hecontributed to the growth of the municipal business. After becoming Director in2009 he was in charge of the sales department and in April 2017 he assumed
the position of President and Representative Director.

He is a Man Who Takes
Pleasure in Being the First
to Do What Others Don't Do

Since his youth, he has always been of the disposition to "take pleasure in being
the first to do what others are not doing". He was the first to install a LAN (Local
Area Network) in Tsuzuki Denki by himself at a time when there were no
manuals in Japanese. He was also the first to install an Internet terminal in thecompany. He wanted to be the first to experience the new things that werecoming out in the world, so that customers could see them and build new
businesses. Tsuzuki Denki has a culture in which employees are free to do
whatever they want and Mr. Emori himself has been challenging himself to do
new things because he likes it.

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Tsuzuki Denki | 8157 (TSE Prime)
President Emori Embodies
Tsuzuki Denki's DNA of "The
Ability to Identify the Next
Generation of ICT" and "aCompany that Thoroughly
Values its Customers andEmployees

Strategy Advisors believes that the DNA of Tsuzuki Denki is "the ability toidentify the next generation of ICT" and "a corporate culture that thoroughly
values customers and employees" and President Emori is a leader who truly
embodies this. In 2021, the Tokyo office was renovated, with the company
creating a working group of about 20 young employees to discuss and work on
the project with freedom to infuse their own ideas. The introduction of anadvanced and modern work style has allowed employees to experience Tsuzuki
Denki's DX initiatives and has led to many customer tours and sales promotions.
The organizational reform has flattened the company and eliminated theconcept of branch offices. The Tokyo office (formerly the head office) and the
Osaka office (also an Osaka branch) are re named respectively. Since employees
can go to work anywhere, the concept of working at home has been eliminated.
Neither work nor telework is mandatory and employees are left to their own
work style. As a result, employee productivity has increased, leading to higher
gross profit margins. Current employee salary levels are listed in top tier among
the listed companies, but further increases are being considered.

President Emori's Passion
for Change is Growing Even
Stronger

Seven years have passed since he became president, and he has achieved
results through various reforms, but in an interview with Strategy Advisors, Mr.
Emori himself said, "I haven't even achieved half of what I want to do," and"We are still a Showa-style company, so I want to destroy and rebuild the old
way of doing things".

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Tsuzuki Denki | 8157 (TSE Prime)
11.
Plan for Sales of 16 billion
Yen at a 3-Year CAGR of
21% in 6 Areas Where
Market Growth is Expected
and Tsuzuki Denki has
Strengths.

Strategies and Outlook in Six Growth Areas

In its current medium-term management plan, Tsuzuki Denki has identified thefollowing six areas of growth: (1) Contact Center Systems, (2) Cloud
Communications, (3) Managed Services, (4) Security, (5) Market-specific DX
Services, and (6) DX Consulting. All of these areas are expected to see market
expansion and are business groups in which the company has technologicalstrengths and has already released existing services and received positive
feedback from customers.
The sales targets for the six growth areas are shown in Figure 14 and thecompany aims to achieve sales of 9 billion yen in FY03/2023 to 16 billion yen
in FY03/2026 for the six areas as a whole. Gross profit margins in the five areas,
excluding managed services, are around 40%, higher than the 30% of theoverall services business and expansion in these areas is expected to contributeto higher profit margins.

Aiming for No.1 Share inContact Center Systems andCloud Communications
Based on Tsuzuki Denki's
Voice Platform Technology

The contact center system area and the cloud communications areas are where
the company has established over 80 years with PBX and other products basedon "voice platform technology," which is the company's ancestral business.
Voice platform technology refers to the basic technologies utilized in the voice
and communication market, such as voice "transmission, compression,
processing, recognition, and synthesis". Voice has various possibilities as theultimate interface that does not involve special operations, and the market is
expected to expand further with the use of advanced technologies such as
generative AI for voice recognition, automatic response, and text mining.
Tsuzuki Denki aims to be a leading company in this market and by pursuingsynergies with new technologies, it aims to expand its Communication 2
business and achieve the No. 1 market share.
Figure 14: Sales Targets for Six Growth Areas
FY03/2023

FY03/2026(Millions of Yen)

ActualTargets

CAGR

Contact Center Systems

4,500

6,100

11%.

Cloud Communication

1,100

3,000

41%.

Managed Services

2,800

3,800

11%.

Security

300

1,500

71%

Market-Specific DX Services

100

600

81%

DX Consulting

200

1,000

82 %

9,000

16,00021%

Total of 6 Growth Areas
Source: Prepared by Strategy Advisors

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Tsuzuki Denki | 8157 (TSE Prime)
Contact Centers System
No. 2 Market Share for
Cloud-Based Contact
Centers, Enhancing
Functions Through the useof AI and CRM Integration.

In 2020, Tsuzuki Denki increased its stake in ComDesign to 50% and made it asubsidiary. The company's cloud-based contact center, CT-e1/SaaS, offers theadvantages of cloud services, being low cost and with no need for dedicatedhardware, as well as a high level of customization. In addition to basic functions,
it also offers advanced functions not available from other services, such as AIbased voice recognition and emotion analysis. The cloud contact center market
has expanded rapidly due to factors such as the growing demand for homebased services during the Covid-19 pandemic, and the number of CT-e1/SaaS
installed seats has increased from 23,000 at the end of March 2021 to over
31,000 at the end of March 2023, with a cumulative customer base of 1,550
companies.
Currently ranked No. 2 in the industry (No. 1 BIZTEL), the company plans tofurther increase customer satisfaction by strengthening integration with CRM
such as Salesforce. According to IDC Japan, the contact center market is
expected to continue growing at 5% per year. Tsuzuki Denki targets 4.5 billion
yen in FY03/2023 and 6.1 billion yen in FY03/2026.
Cloud Communications

Cloud-Based PBX with
Telework Support and Cost
Rationalization for
Customers

In the cloud communications area, the company will offer TCloud for Voice(TCV), a PBX that can be used in the cloud, from October 2021. TCloud for
Voice was jointly developed by Tsuzuki Denki and NextGen and while onpremise PBXs have been the mainstream, cloud-based PBXs eliminate the needfor customers to own their own equipment, thereby reducing installation costs.
Another strength is the ability to answer incoming calls to the office with asmartphone or PC while teleworking, as telecommuting is expanding. By
strengthening sales channels through partners, the company aims to increase
sales in the cloud communication domain from 1.1 billion yen in FY03/2023 to
3 billion yen in FY03/2026.
Managed Services

Growth by Capturing
Customers' Needs for
Outsourcing of Operations

The market is expected to expand further as the shortage of IT personnel
increases the need for help desks and other outsourcing services and the spreadof cloud services makes it easier to provide operational services from external
environments. Tsuzuki Denki, which has traditionally excelled in operation andmaintenance, is developing services centered on ICT operation outsourcing
under the brand "TManaged Service" and has supported 320 companies.
IDC Japan estimates the market's CAGR at around 3%, but Tsuzuki Denki plans
to increase the sales of managed services from 2.8 billion yen in FY03/2023 to
3.8 billion yen in FY03/2026. IDC Japan is a leading provider of system
operation services. Tsuzuki Denki sometimes regards system operation as its

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Tsuzuki Denki | 8157 (TSE Prime)
starting point. During the process, the company analyzes and discover thecustomer issues, leading to upstream improvement proposals.
Security
Refining Technology to Meetthe Growing Cybersecurity
Market and Launching
Services for External
Customers

As cloud computing and remote working become more common, the conceptof "zero trust" is gaining ground as cybersecurity becomes increasingly
important. Zero Trust means that no matter which network a PC, smart device,or other device is connected to, it is assumed to be zero-trust when accessing
critical information and systems within the company and security measures are
put in place.
As part of product evaluation and engineer training centered on Zero Trust
Security, Tsuzuki Denki first migrated to a Zero Trust environment on its own
and is accumulating practical know-how on environment construction andoperation, etc. From September 2022, it will visualize its customers'
cybersecurity response status and support effective future plans. The company
has launched an external service to help customers visualize the status of theircybersecurity response and make effective plans for the future. In order todeliver optimal security to customers, the company is also collaborating withpartners such as NRI Secure Technologies, a company specializing in
information security in the Nomura Research Institute Group.
IDC Japan forecasts a CAGR of 6% for the security market. Tsuzuki Denki aims
to sign contracts with 200 companies for cyber security management support
services by the end of March 2026, targeting ¥1.5 billion in FY03/2026 from¥300 million in FY03/2023. The company hopes to expand overall network
integration revenues through its approach from security measures along with
consulting services.
Market-Specific DX Service

Developed SaaS for SCM
Using Know-How
Accumulated Through 20
Years of Developing
Solutions for Major Logistics
Companies

Over the years, Tsuzuki Denki has been engaged in industry-specific in-house
software development and has accumulated know-how while responding to thedifferent needs and challenges of each industry. In particular, the company has
worked with over 500 customers in the logistics industry for more than 20
years. The systems it has developed for three major convenience store chains
and Yamazaki Baking to optimize vehicle routes and improve inventory
management have shortened delivery times and reduced transportation costs.
Utilizing this know-how, the company released "TCloud for SCM" in December
2022, a comprehensive cloud service for the logistics industry for mid-sizetransporters that can be used even with smartphones, targeting 12,000 licenses
by the end of March 2027 at ¥1,250 per license per month for SaaS. The
company aims to sell 12,000 licenses by the end of March 2027. The company
aims to help solve social issues faced by the logistics industry as a whole, suchas driver shortages and reductions in CO2 emissions.

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Tsuzuki Denki | 8157 (TSE Prime)
Develop DX Business inSpecific Markets Where theCompany have Strengths,
such as Fruit and Vegetable
Markets and Amusement

In other industries, the company has a great deal of know-how in the fruit andvegetable market, real estate and amusement (movie theater) industries anddevelops and provides software for production and sales management as
proprietary products. In the fruit and vegetable market, the company has
expertise accumulated through 40 years of experience and its market share is
the second largest in the industry. By accelerating the shift to cloud computing,the company aims to lower prices and expand its customer base, targeting salesof 100 million yen in FY03/2023 and 600 million yen in FY03/2026.
DX Consulting

Support Client Companies in
Developing DX Talents andProvide Solutions

Although corporate awareness of DX is growing, many companies are facing
challenges in developing in-house digital talents and formulating DX strategies.
D-VUE® DX Implementation Service, the main service in the DX consulting
domain, is provided to (1) support client companies in developing DX talentsand (2) provide DX professionals from Tsuzuki Denki. IDC Japan forecasts a
CAGR of 9% for the DX consulting market, and Tsuzuki Denki is targeting salesof 200 million yen in FY3/2023 and 1 billion yen in FY3/2026.
Through business expansion in these six areas, the company aims to strengthen
the entire value chain of the Total SolutionService Framework (TSF). Each ofthese areas can be categorized into upstream (DX consulting), midstream(contact centers, cloud communications, security, and market-specific DX
services), and downstream (managed services). The company intends toenhance the upstream, which is the entry point to business, the midstream,
which is a group of services that meet those needs, and the downstream, whichis the customer contact point, The company intends to increase TSF's overallprofitability by expanding and strengthening the entire value chain.

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Tsuzuki Denki | 8157 (TSE Prime)
12.

Shift to a Financial Strategy with a Strong
Awareness of Capital Markets

The three main components of the financial strategy of the current mediumterm management plan are: (1) financial management with an awareness ofthe cost of capital, (2) creation of funds for growth through balance sheet
optimization and (3) optimization of capital allocation.
Although ROE targets have been in place since the first medium-term
management plan (FY03/2018-FY03/2020), the current financial strategy,
along with the disclosure of the cost of capital, has a strong focus on corporate
value. This is also the first time for the company to disclose its capital allocationplans.

Financial Management with Cost of Capital in Mind
Financial Strategy based on
9% Cost of Equity and 6%
WACC

In this mid-term management plan, for the first time for Tsuzuki Denki, the costof equity was released at 9%. The company has chosen ROE as an indicator ofshareholders’ value creation and has stated that it will promote managementwith an awareness of how to sustainably increase the equity spread. Since the
WACC was set at 6%, the hurdle rate was raised from the previous 5% to 7%.
ROE is targeted at 15% in the 10-year long-term vision, and for the current
medium-term plan period the target was set at 10% or more above the cost ofequity.
Generate Growth Capital Through Balance Sheet Optimization

Balance Sheet with Equity
Ratio of 40-50% and D/E
Ratio of 0.4x

For financial safety, the company has set KPIs of an equity ratio of 40-50% anda D/E ratio of less than 0.4x, and as of the end of March 2023, the equity ratio
was 42.0% and the D/E ratio was 0.31x, well within the company's range. Given
that the upper limit of the equity ratio was set at 50%, it is believed that thecompany has a policy of not holding excess capital above that level.
The sale of the electronic devices business in FY03/2024 has resulted in thestreamlining of more than 20 billion yen, or one-fourth of total assets. The
company is also continuing to reduce its cross-shareholdings and is making
steady progress in generating capital and improving the efficiency of its balance
sheet.

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Tsuzuki Denki | 8157 (TSE Prime)
Figure 15: Capital Allocation Plan for the Current Medium-Term Plan

Source: Company Data

Capital Allocation Optimization
3-Year Cash Inflow Forecast
is 10 billion Yen fromOperating CF and Proceedsfrom Asset Sales

The plan for capital allocation during the period of the medium-term
management plan is shown in Figure 15. As for cash-in, the company expects
to earn 10 billion yen as total operating cash flow from FY03/2024 to
FY03/2026. This will be supplemented by the disposal of non-operating assets
and improvements in the cash conversion cycle (CCC). As mentioned earlier,the sale of the electronic devices business generated a large amount of cash.

M&A Activity of over 10
billion Yen also Planned

The company plans to invest 8 billion yen in growth over three years as a cash
outflow. The breakdown of the targeted investments includes: (1) technology(R&D investment, development of new service products, and value-adding toexisting services), (2) human resources (training investments to develop ideal
talent portfolio, compensation improvement and recruitment of external expert
talent) and (3) internal DX (ERP system updates and business processtransformation and advancement).

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Tsuzuki Denki | 8157 (TSE Prime)
The company plans to aggressively invest in M&A with the aim of achieving
inorganic growth. The company will target companies with services andtechnologies that can create synergies with the company in growth areas andcompanies that can acquire new capabilities. In existing areas, the company
intends to aggressively consider M&A in areas that will strengthen its
competitiveness. At the time of the announcement of the medium-term
management plan, the company planned to invest 10 billion yen, but since italso acquired funds from the sale of its electronic device business, the amountis likely to be in the 10 to 20 billion yen range.
Although many M&A deals are introduced by financial institutions, the basic
principle is to consider deals that come from the internal personals andbusiness synergies with Tsuzuki Denki are a prerequisite for M&A.
Evolution of Shareholder Return Policy
Introduced DOE and Raised
Dividend Payout Ratio,
Considering Share Buybacks

Kazuhisa Oyama, Director and Senior Managing Executive Officer, stated in the
Integrated Report, "Companies have a variety of stakeholders, and it isimportant for corporate management to maintain a balance between them.
However, it is the shareholders who bear the greatest risk, making shareholder
returns a critical management issue.”With steady growth in operating cash flow expected, Strategy Advisors believes
that the company is now in a position to provide stable shareholder returns byadopting a policy of not holding excess capital and pursuing strategic growthinvestment strategy that is cost of capital conscious.
As mentioned above, the company raised its dividend payout ratio from 30% to
40% and introduced a 3.5% dividend on equity (DOE), which is calculated as
ROE multiplied by the dividend payout ratio, made possible by the rounding upof the ROE level. The company also indicated that it would consider sharebuybacks, which would allow it to flexibly return capital to shareholders.

39

Tsuzuki Denki | 8157 (TSE Prime)
13.

ESG Considerations

Endorsement of TCFD in
May 2022

In April 2021, Tsuzuki Denki identified three materialities for promoting
sustainability. One of them is "to contribute to harmonious coexistence bycapturing changes in people, society, and the global environment," and thecompany is working to reduce its environmental impact. As part of its activities,
the company expressed its endorsement of the TCFD in May 2022.

Compared to FY03/2014,
Reduced Greenhouse Gas by
35% in FY3/2023,
Half in FY03/2031 &Zero in FY03/2051

Greenhouse gas production (Scope 1 and 2) for FY03/2023 was 719 tons, a 35% reduction compared to the benchmark of 1,113 tons in FY03/2014. With
the reduction of company cars, office renewal and efficiency improvement, thecompany plans to achieve 532 tons in FY03/2026, which is the final year of thecurrent mid-term plan. Furthermore, in FY03/2031, the company aims to halve
the FY03/2014 levels and to achieve zero emissions in FY03/2051.

Aiming for 5.0% Female
Management Ratio in
FY03/2026

The ratio of women in management positions at Tsuzuki Denki was 2.2% in
FY03/2023, up from 1.5% in FY03/2021 and 1.9% in FY03/2022. Although thecompany aims to achieve 5.0% in FY03/2026, the final year of the current midterm plan, the hurdle to achieving the government's target of 30% by 2030 isextremely difficult.
The main reason for this is the late start of hiring women for career-track
positions, which began in 2010. First, the company aim to increase the ratio of
women in management positions by promoting company-wide D&I (Diversity& Inclusion) and improving the working environment, while raising the ratio of
women in regular employees (14.5% in FY3/2023) and career-track positions(10.7% in FY3/2023). In July 2023, the company received a 2-star certificationfrom the Ministry of Health, Labor and Welfare's "Eruboshi" program.

Health and Productivity
Management and Human
Resource Investment are
Actively Implemented

Regarding human capital management, Tsuzuki Denki is actively promoting
health and productivity management, because its management philosophy ofvaluing employees since the founding and human capital is most important for
an ICT company. Since President Emori took office in 2017, the company has
been selected for the sixth consecutive year as a "Certified Health & Productivity
Management Outstanding Organization (White 500)" by the Ministry of
Economy, Trade and Industry.
The company is focusing on the development of leaders and professionals todeliver high-quality services and cutting-edge technology to customers. To
develop leaders, the company plans to increase the number of participants in
the TLF (Tsuzuki Leaders Forum (next-generation management personnel
development training)) from 34 at the end of March 2023 to 65 at the end of
March 2026. In addition, the company aims to increase the number of certified
DX associates from 147 to 240, in order to strengthen professional experts
those are capable of providing consulting services.

40

Tsuzuki Denki | 8157 (TSE Prime)
4 out of 10 Board Members
are Independent, External
Directors

The Board of Directors for the fiscal year ending March 31, 2024 consists of 10
members, 3 internal (Isao Emori, Kazunori Yoshii, Kazuhisa Oyama) and 7
externals. Four of the outside directors are independent: Kunio Matsui(university professor), Noriyuki Moriyama (chairman of a medical institution),
Hideki Wachi (former president of a foreign company's Japan branch), andSunao Ogasawara (certified public accountant). Non-independent outside
directors are Hidetoshi Takinaka (major shareholder: Aso), Tomoko Tsukahara(major shareholder: Fujitsu) and Toshihiro Murashima (legal counsel). With
40% independent outside directors and a 10% female ratio.
The Nomination and Compensation Committee consists of three outside
directors and President Emori and is chaired by an independent outside director.
No takeover defense measures have been introduced.

41

Tsuzuki Denki | 8157 (TSE Prime)
14.

Earnings Trends(1) Cumulative Results for the Third Quarter of FY03/2024
Operating Income for theFirst Nine-Months of thisFiscal Year Increased 2.8x
YoY

Tsuzuki Denki announced on January 31, 2024, a double-digit increase in sales
and a substantial increase in profit for the first nine months of FY03/2024, with
net sales of 93.013 billion yen (+12.7% YoY) and operating income of 3.938
billion yen (2.8 times YoY). The gross profit margin improved by 0.8% from
18.9% to 19.7%, and the operating profit margin improved by 2.5% from 1.7%
to 4.2%, due to the impact of increased sales, selective orders, and priceincreases.

Operating Margin Increased
to 4.2% from 1.7% in theSame Period YoY

On a cumulative level in the first 3 quarters of the year, the Information Network
Solution Services segment posted sales of 70.679 billion yen (+16.9% YoY) andoperating profit of 3.423 billion yen (+5.3 times YoY), a significant increase inprofit. Sales in all three businesses were up: equipment sales of 29.107 billion
yen (+39.1% YoY), development/construction sales of 10.415 billion yen(+18.6% YoY) and services sales of 31.156 billion yen (+1.3% YoY).
Net income attributable to owners of the parent for the first 3 quarters
amounted to 4.187 billion yen (4.3 times that of the same period last year),which included a 1.854 billion yen gain on sales of fixed assets.
(2) Full-Year Company Forecast for FY03/2024

Upwardly Revised Company
Forecast for FY03/2024

Based on Q3 results and the sale of electronic devices, the company revised its
forecasts for FY03/2024 from 126.5 billion yen (+2.1% YoY) to 124.0 billion
yen (+0.1% YoY), operating profit from 5.3 billion yen (+3.6% YoY) to 6.0
billion yen (+17.2% YoY) and net income attributable to owners of the parent
from 4.45 billion yen (+26.4% YoY) to 4.8 billion yen (+36.3% YoY). Net
income attributable to owners of the parent increased from 4.45 billion yen(+26.4% YoY) to 4.8 billion yen (+36.3% YoY).
The deconsolidation of the electronic devices business from the fourth quarter
will have a negative impact of approximately 7 billion yen on net sales, but thisis expected to be partially offset by an upturn in information network solution
services. On the other hand, profits are expected to exceed the initial forecast
as the effect of improved profitability is expected to continue.

Dividend Forecast Raised
from \76 to \89

The upward revision to earnings led to an increase in the dividend forecast from76 yen at the beginning of the period to 89 yen, a 45% increase from 61 yen
in FY03/2023 and the amount of the projected dividend was determined bymultiplying the net income from the business segment, which excludes a gainon sales of fixed assets of approximately 1 billion yen after tax, by a dividend
payout ratio of 40%.

42

Tsuzuki Denki | 8157 (TSE Prime)
Expect Further
Improvement in Profitability

Tsuzuki Denki's profitability is steadily improving, with the company forecasting
an operating profit margin of 4.8% in FY03/2024, up from 4.1% in FY03/2023.
The operating profit margin for electronic devices for the cumulative Q3 was
low at 2.2%, and if this effect is excluded, the operating profit margin for
information network solution services alone is expected to be 5.4%.
Nevertheless, as mentioned above, it is still low compared to listed SIer’s andNIer’s, and further improvement is expected.

Figure 16: Quarterly Results Trends (in Millions of Yen)
Fiscal Year

3/2022

Quarter
Total Sales(YoY change)

3/20233/2024

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

27,84138,37524,60930,43727,49941,354

28,12832,75932,1263.7%-4.4-0.9%.

7.6%-1.2%.

7.8

14.3%

7.6%

16.8%

Information Network Solution

20,552

31,745

17,851

22,66819,93533,451

20,44525,20825,026(YoY change)-0.9%.

-6.5%.

-2.9%.

4.7%

-3.0

5.4%

14.5%

11.2%

25.5% (

Equipment

7,396

15,832

5,540

9,154

6,228

17,021

7,172

10,77911,156(YoY change)

-8.8

-7.0

-8.1

16.3%

-15.8

7.5%

29.5%

17.8

79.1%

3,619

4,668

2,575

3,429

2,777

5,059

2,687

3,813

3,915
41.0%

Development/Construction(YoY change)

21.4

11.5%.

4.1%

-8.3

-23.3

8.4%

4.3%

11.2%

Services

9,538

11,244

9,734

10,086

10,93011,371

10,584

10,617

9,955(YoY change)-1.2%.

-3.4-1.4%.

0.5%

14.6%

1.1%

8.7%

5.3%

-8.9%.

Electronic Devices

7,288

6,630

6,758

7,768

7,565

7,902

7,683

7,550

7,100

(YoY change)

19.3%

6.8

4.9%

17.1%

3.8%

19.2%

13.7

-2.8

-6.1

Gross Profit

5,224

7,498

4,527

5,951

5,132

8,568

5,346

6,436

6,527

(Gross profit margin)

18.8%

19.5%

18.4%

19.6%

18.7%

20.7%

19.0%

19.6%

20.3%

SG&A

4,684

4,824

4,730

4,727

4,746

4,857

4,648

4,793

4,930

541

2,673

-202

1,223

386

3,711

698

1,643

1,597
313.7%

Operating Income(YoY Change)

940.4%

-8.7

NM

15.4%

-28.7%

38.8%

NM

34.3%

1.9%

7.0%

-0.8

4.0%

1.4%

9.0%

2.5%

5.0%

5.0%

Information Network Solution

335

2,533

-392

913

119

3,515

472

1,458

1,493

Electronic Devices

187

139

179

304

257

214

216

176

95

(Operating Profit Margin)

Elimination or Corporate

18

0

10

5

11

-18

9

9

9

Non-Operating Income (Loss)

149

8

93

40

102

2

-25

45

34

Ordinary Income

690

2,682

-109

1,263

488

3,713

673

1,688

1,631

(YoY Change)

265.1%

-8.8

NM

16.4%

-29.3%

38.4%

NM

33.7%

234.2%(Ordinary Income Margin)

2.5%

7.0%

-0.4%

4.1%

1.8%

9.0%

2.4%

5.2%

5.1%

Extraordinary Income/Loss

30

171

-1

-3

0

229

0

1,816

-7

Income Before Income Taxes

719

2,854

-111

1,260

489

3,941

673

3,504

1,624

Income Taxes

227

943

-13

362

157

1,338

172

1,000

305

Net Income

492

1,910

-97

896

333

2,602

501

2,504

1,319

43

54

49

50

59

55

52

47

37

449

1,857

-147

847

273

2,548

448

2,458

1,281

Net Income to Minority Interests
Net Income Attributable to
Owners of the Parent Company

Source: Prepared by Strategy Advisors

43

Tsuzuki Denki | 8157 (TSE Prime)
15.

Valuation

Based on Tsuzuki Denki's closing price of 2,354 yen on February 9, 2024, P/B
ratio is 1.1x and based on the company's expected EPS of 267.1 yen for thecurrent term, PER is 8.8x. The company's EPS forecast for the current term
includes an extraordinary gain from the sale of fixed assets and taking this into
account, the PER is 10.6x based on the forecast EPS of 222.5 yen.

P/B Ratio of 1.1x & PER of
8.8x Based on the Closing
Price on February 9, 2024

As shown in Figure 17, all of the major listed SIer’s and NIer’s have P/B ratios
above 2x, which is undervalued considering that their expected P/E ratios areabove 20x. Tsuzuki Denki's forecast EV/EBITDA multiple for the current fiscal
year is 3.8 times, which is below 4x, whilst many of its peers are over 10x.

Figure 17: Comparison of Valuations with Peers
FiscalCode
Tsuzuki

8157

Denki
Nomura Research

4307

Institute
Otsuka Shokai
TIS
SCSK
BIPROGY
NS Solutions
NSD
NEC Network &

4768
3626
9719
8056
2327
9759
1973

System Integration
Net One Systems
JBCC Holdings
Dentsu Research

7518
9889
4812

InstituteJapan Business
Systems

5036

year

Market

Stock

EV

Cap.

Price

(\bn)

(\bn)

(\)

EPS

PER

BPS

PBR

EBITDA

EV/

(\)

(X)

(\)

(X)

(\bn)

EBITDA(X)

2023/03

28.0

1,563

18.1

197.5

7.9

1,950.1

0.8

7.3

2024/03

42.4

2,354

29.1

267.1

8.8

2,143.8

1.1

7.7

2.5
3.8

2023/03

1813.5

3,065

1924.9

128.9

23.8

674.3

4.5

156.9

12.3

2024/032372.34,1212529.7

140.5

29.3

646.1

6.4

167.5

15.1

2022/12

787.8

4,155

593.9

250.3

16.6

1,684.5

2.5

70.9

8.4

2023/121146.1

6,045

924.7

125.7

48.1

1,809.7

3.3

76.4

12.1

2023/03

844.6

3,490

771.8

227.1

15.4

1,227.4

2.8

78.2

9.9

2024/03

793.2

3,294

740.1

174.2

18.9

1,313.6

2.5

81.2

9.1

2023/03

604.4

1,935

560.9

119.4

16.2

870.6

2.2

72.0

7.8

2024/03

834.0

2,670

777.9

126.4

21.1

911.8

2.9

77.7

10.0

2023/03

326.6

3,250

321.0

201.1

16.2

1,391.9

2.3

45.9

7.0

2024/03

451.6

4,492

431.7

233.9

19.2

1,517.0

3.0

51.5

8.4

2023/03

323.9

3,540

247.1

240.5

14.7

2,191.6

1.6

44.4

5.6

2024/03

442.4

4,835

355.2

249.2

19.4

2,442.5

2.0

45.7

7.8

2023/03

183.3

2,384

145.1

132.3

18.0

711.7

3.3

13.4

10.9

2024/03

205.9

2,670

182.0

127.3

21.0

755.0

3.5

16.8

10.8

2023/03

240.6

1,615

184.3

92.7

17.4

948.2

1.7

27.2

6.8

2024/03

353.3

2,372

305.1

94.0

25.2

948.6

2.5

28.2

10.8

2023/03

260.1

3,165

261.2

176.0

18.0

920.1

3.4

22.9

11.4

2024/03

205.8

2,596

217.5

136.3

19.0

886.4

2.9

18.2

11.9

2023/03

34.2

2,169

23.7

170.6

12.7

1,262.8

1.7

4.2

5.6

2024/03

62.9

4,040

55.0

205.5

19.7

1,331.9

3.0

4.9

11.2

2022/12

255.4

3,925

203.6

193.5

20.3

1,134.8

3.5

21.7

9.4

2023/12

361.1

5,550

301.8

225.9

24.6

1,216.5

4.6

24.4

12.4

2023/09

54.9

1,204

62.4

74.0

16.3

487.6

2.5

5.0

12.5

2024/09

68.2

1,497

75.8

75.7

19.8

487.6

3.1

5.9

12.9

Note: Share prices are based on closing price on February 9, 2024
Source: Prepared by Strategy Advisors

44

Tsuzuki Denki | 8157 (TSE Prime)
Strategy Advisors believes that the main reason for Tsuzuki Denki’s low PER isthat the company is not yet recognized as a player in the ICT industry. Figures
18, 19, and 20 show the historical P/E ratios of Tsuzuki Denki and electronics
trading companies, system integrators, and network integrators, respectively,
over the past 10 years.
PER Range Over the Past 10
Years for Listed SI Firms is15-25x, While NI Firms are
15-30x.

The P/E ratios of the three system integrators (TIS, SCSK, and NS Solutions)have ranged from 15x to 25x over the past 10 years, while those of the three
network integrators (Net One Systems, NEC networks & system integration,and ITOCHU Techno-Solutions) have ranged from 15 to 30 times. On the other
hand, Tsuzuki Denki’s PER has been moving in the same range of 5x to 15x as
the three electronics trading companies (Macnica, Kaga Electronics, and Restar
Holdings) and is still at that level.

PER Levels of Electronics Tra
ding Companies are Expecte
d to Break Away from Trend

As previously mentioned, the company has been transforming itself into apure player in the ICT industry since early 2024 with the sale of its electronic
devices business, and Strategy Advisors believes that if the company's
ongoing transformation to value-enhancing management continues and it
successfully incorporates growth areas. As such, Strategy Advisors believes
that there is more than enough room for the company to be revalued in thestock market.

Figure 18: Historical PER of Tsuzuki Denki and Electronics Trading
Companies

20.0

15.0

10.0

5.0

0.0
14/1

15/1

16/1

Tsuzuki Denki

17/1

18/1

MACNICA

19/1

20/1

21/1

Kaga Electronics

22/1

23/1

Restar HD

24/1

Source: Prepared by Strategy Advisors

Figure 19: Historical PER for Tsuzuki Denki and System Integrators

45

Tsuzuki Denki | 8157 (TSE Prime)
30.0

25.0

20.0

15.0

10.0

5.0

0.0
14/1

15/1

16/1

17/1

Tsuzuki Denki

18/1

19/1

TIS

20/1

SCSK

21/1

22/1

23/1

24/1

NS Solutions

Source: Prepared by Strategy Advisors

Figure 20: Historical PER Trends for Tsuzuki Denki and Network
Integrators
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
14/1

15/1

16/1

17/1

18/1

19/1

20/1

21/1

22/1

Tsuzuki Denki

Net One Systems

ITOCHU Techno-Solutions

NEC Networks & System

23/1

24/1

Source: Prepared by Strategy Advisors.

46

Tsuzuki Denki | 8157 (TSE Prime)
16. Risk Factors
Although there are no major risks to watch at this point, the following threerisks can be identified as areas that may prevent the company's performancefrom growing as much as planned.
(1) During the current mid-term management plan period, the company plans
to increase the sales of six growth areas to ¥16 billion in FY03/2026 from ¥9billion in FY03/2023. All of these areas are expected to grow at a higher rate
than the market, and that is the case if the company's assumptions are notmet.
(2) The company had assumed that the electronic devices and components
business would contribute 27.8 billion yen in net sales and 1 billion yen in
operating income in FY03/2026. In the case where the loss of this portion
cannot be covered by the addition of the Information Network Solution
Services business, it is likely that organic growth will be sufficient to cover theloss in terms of profit, but net sales will need to be added through M&A andother means.
(3) Unexpected events (e.g., earthquakes, geopolitical conflicts, etc.) that
may cause a significant drop in IT investment or supply chain disruptions atclient companies.
In terms of share price, Fujitsu, the second largest shareholder with a 12.8%
stake in the company, is in the process of selling its listed shares and Tsuzuki
Denki may become a target in the future. In that case, the company will need
to appeal to institutional investors, especially foreign investors, whose
shareholding ratio is only 1.3% as of the end of March 2023. The company
has 23.7 billion yen in cash and cash equivalents as of the end of December
2023 and it also gained a large amount of cash from the sale of its electronic
devices business, so it should be able to respond with a share buyback.
Even if Fujitsu sells its shares, we do not believe there will be any impact off
the back of the transaction, as Fujitsu has been a multi-vendor in the past.

47

Tsuzuki Denki | 8157 (TSE Prime)
Figure 21: List of Major Shareholders as of September 30, 2023

Rank

Major Shareholders# of Share

Shareholding(‘0000 Shares)

Ratio (%)

1

Aso Corporation

4,500

24.14

2

Fujitsu Limited

2,402

12.88

991

5.32

777

4.17

3

4

The Master Trust Bank of Japan (Trust
Account)
Tsuzuki Denki Employee Shareholding
Association

5

Fuso Dentsu Inc.

766

4.11

6

The Bank of Mitsubishi UFJ, Ltd.

296

1.59

7

Sumitomo Mitsui Banking Corporation

296

1.59

8

Mizuho Bank, Ltd.

296

1.59

9

Japan Custody Bank (Trust Account)

256

1.37

10

HT Holdings, Inc.

200

1.07

10,78357.83

Total Amount
Source: Prepared by Strategy Advisors

48

Tsuzuki Denki | 8157 (TSE Prime)
Figure 22. Consolidated Income Statement (Millions of Yen)
Fiscal Year

3/20173/20183/20193/20203/2021

3/2022

3/20233/2024CoE

Total Sales

105,149

111,973

118,872

125,366

120,004

119,316

123,899

124,000(YoY Change)

-0.4

6.5%

6.2%

5.5%

-4.3%

-0.6

3.8%

0.1%

80,80282,32093,704102,104

97,84892,31993,905

101,667

3.2%

1.9%

13.8

9.0%

-4.2%.

-5.7%

1.7%

8.3%

-Equipment

39,39144,79044,207

37,12737,943(YoY change)

NA

13.7

-1.3%.

-16.0

2.2%

17,665

19,66814,51814,501

13,840Information Network Solutions(YoY change)-Development/Construction(YoY change)-Services(YoY change)

NA

11.3%

-26.2%

-0.1%

-4.6%

36,64737,645

39,122

40,69042,121

NA

2.7%

3.9%

4.0%

3.5%

Electronic Devices

24,34729,652

25,16823,261

22,15526,99629,993

22,333(YoY change)

-4.8%

21.8%

-15.1%.

-7.6%

-4.8%

21.9%

11.1%

-25.3%

Gross Profit

18,442

19,45921,496

23,075

21,46522,511

24,178(Gross Profit Margin)

17.5%

17.4%

18.1%

18.4%

17.9%

18.9%

19.5%

SG&A

16,29916,92018,177

18,61818,263

18,49819,060Operating Income

2,142

2,538

3,318

4,457

3,202

4,012

5,118

6,000

(YoY Change)

20.8%

18.5%

30.7%

34.3%

-28.2%

25.3%

27.6%

17.2%

(Operating Margin)

2.0%

2.3%

2.8%

3.6%

2.7%

3.4%

4.1%

4.8%

Information Network Solutions

2,093

2,248

3,054

,289

2,960

3,400

4,155

5,486

Electronic Devices

38

276

260

163

242

592

954

487

Elimination or Corporate

10

13

3

4

0

18

8

27

Non-operating income /loss

97

74

176

120

158

214

237

Ordinary Income

2,240

2,612

3,494

4,577

3,361

4,227

5,355

6,000

(YoY Change)

21.0%

16.6%

33.8

31.0%

-26.6％

25.8％

26.7%

12.0%

(Ordinary Income Margin)

2.1%

2.3%

2.9%

3.7%

2.8%

3.5%

4.3%

4.8%

Extraordinary Income/Loss

-128

-150

14

-261

-122

203

225

Income Before Income Taxes

2,111

2,463

3,509

4,317

3,238

4,430

5,579

Income Taxes

790

947

1,296

1,161

817

1,453

1,844

(Effective Tax Rate)

37.4%

38.4%

36.9%

26.9%

25.2%

32.8%

33.1%

Net Income

1,321

1,515

2,212

3,155

2,419

2,976

3,734

72

178

213

Minority Interests
Net Income Attributable to
Owners of the Parent(Y-o-Y Change)

1,321

1,515

2,212

3,155

2,346

2,798

3,521

4,800

84.2%

14.7%

46.0%

42.6%

-25.6%

19.3%

25.8

36.3%

Source: Prepared by Strategy Advisors

49

Tsuzuki Denki | 8157 (TSE Prime)
Figure 23. Consolidated Balance Sheet (Millions of Yen)
Fiscal Year

3/20173/20183/20193/20203/2021

3/2022

Cash and Deposits

17,61016,016

15,457

18,473

15,944

Accounts Receivables

28,02932,25633,37229,92731,765Inventories

7,037

6,807

8,087

8,484

Other Current Assets

2,427

2,538

2,255

Current Assets

3/2023

12/2023

19,162

20,877

23,70332,75732,24827,539

7,618

7,483

11,683

13,562

1,355

1,413

1,793

2,388

2,346

55,10357,617

59,171

58,23956,74061,19567,196

67,150Property and Equipment

3,779

3,856

3,912

3,974

3,465

3,949

3,926

1,801

Other Tangible Fixed Assets

1,605

3,695

3,398

2,908

2,799

1,479

578

583

Tangible Assets

5,384

7,551

7,310

6,882

6,264

5,428

4,504

2,384

Intangible Assets

1,658

1,833

3,040

3,057

2,967

3,072

2,610

2,828

Investment Securities

4,901

5,279

4,643

3,770

4,766

4,096

3,471

3,909

Other Investment Assets

4,020

3,888

4,779

5,499

5,462

5,432

5,425

5,092

Investments and Other Assets

8,921

9,167

9,422

9,269

10,228

9,528

8,896

9,001

Total Fixed Assets

15,965

18,552

19,772

19,20819,46018,03016,011

14,215

Total Assets

71,06876,16978,94477,44876,20079,226

83,207

81,365

Accounts Payable

17,683

20,74418,60917,863

15,87515,307

17,144

12,766

Short-Term Debt

6,634

8,686

13,483

6,265

6,483

10,695

5,882

5,439

Provision for Bonuses

2,486

2,323

2,567

2,536

2,415

2,303

2,513

1,243

Other Current Liabilities

4,860

5,015

6,479

6,785

5,264

6,581

7,521

8,870

Current Liabilities

31,66336,76841,13833,44930,03734,88633,06028,318Long-Term Debts

9,507

6,155

3,392

6,995

6,364

1,810

5,109

4,960

Net Defined Benefit Liabilities

5,698

5,520

5,434

6,805

7,959

8,531

8,826

8,183

Other Long-Term Liabilities

140

145

263

445

668

798

825

858

Long-Term Liabilities

15,345

11,8209,089

14,245

14,991

11,13914,76014,001

Total Liabilities

47,00948,58850,22847,69545,02946,02647,82042,319

9,812

9,812

9,812

9,812

9,812

9,812

9,812

9,812

Capital Stock
Capital Surplus

3,274

3,100

3,100

2,581

2,581

2,581

2,581

2,756

Retained Earnings

17,084

18,28819,97321,021

21,15023,01825,60728,415

Treasury Stock-8,223-5,875-5,816-3,785-2,472-2,257-1,979-2,052

Shareholder’s Equity

21,94925,326

27,07029,62931,07233,15536,02238,932

2,109

2,254

1,646

123

-137

-307

-1,076

-315

236

352

441

429

Other Comprehensive Income
Noncontrolling Interest
Total Net Assets

24,05927,58028,71629,752

31,17133,19935,38739,046

Total Liabilities & Net Assets

71,06876,16978,94477,44876,20079,226

83,207

81,365

Source: Prepared by Strategy Advisors

50

Tsuzuki Denki | 8157 (TSE Prime)
Figure 24: Consolidated Statement of Cashflows (Millions of Yen)
Fiscal Year

3/20173/20183/20193/20203/2021

3/2022

3/2023

Income before Income Taxes and Others

2,111

2,463

3,509

4,317

3,238

4,430

5,579

Depreciation and Amortization

1,293

1,299

1,919

2,247

2,408

2,531

2,124

45

90

90

2,438

-1,653-860

587

Amortization of Goodwill
Decrease (Increase) in Accounts Receivables

1,005-4,297-820

Increase (Decrease) in Accounts Payable

615

3,084

-2,153-74-2,057

-621

1,817

Decrease/(Increase) in Inventories

416

205

-1,265

-447

891

173

-4,188Other Operating Cashflows-1,292

-986

-338

-456

-2,123-183-1,746

Cash Flows from Operating Activities

4,148

1,768

852

8,025

749

5,560

4,263

Purchases of Property, Plant and Equipment-1,996-3,103-1,789-917-1,245-1,061-283

Proceeds from Sales of Property, Plant and Equipment

1,569

1,400

2,193

1,297

791

908

266

Purchase of Intangible Assets

-156

-688

-1,127-1,258

-945

-812

-807

451

314

255

290

52

-72

-89

-43

-38

-98

-24
741

Proceeds from Sales of Intangible Assets
Purchase of Investment Securities-44

Proceeds from Sales of Investment Securities

104

60

238

413

113

765

Others

-31

-67

263

186

-202

4

94

Cash Flows from Investing Activities-554-2,470140-8-1,271-4

39

Net Increase (Decrease) in Borrowings-1,274-1,825166-2,728

464

50

-514

-914

-956

-1,248-1,625-1,590-1,609-1,318

-1

-757

0

0

-664

0

-5

Proceeds from Disposal of Treasury Stock

1,360

2,970

59

113

854

215

283

Dividends Payments

-225

-311

-527

-709

-1,093-1,006

-932

-62

-124

Repayment of Lease Obligations
Acquisition of Treasury Stock

Dividends Paid to Non-Controlling Interests
Cash Flows from Financing Activities
Free Cash Flow

-1,056-880-1,551-4,950-2,029-2,413-2,612

3,594

-702

992

8,017

-522

5,556

4,302

Source: Prepared by Strategy Advisors

51

Tsuzuki Denki | 8157 (TSE Prime)
Figure 25. Stock Price Index and ROE
Fiscal Year

3/20173/20183/20193/20203/2021

3/2022

3/20233/2024CoE

EPS (\)

101.7

96.1

128.9

182.1

134.1

158.5

197.5

267.1

BPS (\)

1,626

1,613

1,667

1,706

1,761

1,854

1,950

2,144

Dividend Per Share (\)

18.0

29.0

39.0

55.0

46.0

48.0

61.0

89.0

Dividend Payout Ratio

17.7

30.2%

30.3%

30.2 %

34.3%

30.3%

30.9%

33.3%

Share Price (\)

638

874

851

1,100

1,657

1,480

1,563

2,354

PER (x)

6.3

9.1

6.6

6.0

12.4

9.3

7.9

8.8

PBR (x)

0.4

0.5

0.5

0.6

0.9

0.8

0.8

1.1

Number of Shares Issued (1,000)

25,67824,67824,67822,17820,17820,17820,17820,178

Number of Treasury Stock (1,000)

10,878

7,574

7,450

4,740

2,610

2,458

2,258

2,165

14,80017,104

17,22817,43817,56817,72017,92018,013Market Capitalization (\mn)

9,443

14,94914,661

19,182

29,11026,22628,00942,403Equity Ratio

33.9%

36.2%

36.4%

38.4%

40.6%

41.5%

42.0%

47.5%

Interest-Bearing Debt (\mn)

10,399Number of Shares of Treasury
Stock Excluded (1,000)

16,141

14,841

16,875

13,26012,847

12,505

10,991

D/E Ratio

0.67

0.54

0.59

0.45

0.42

0.38

0.31

0.27

Enterprise Value (\mn)

7,974

13,774

16,07913,96926,013

19,56918,12329,099

EBITDA (\mn)

3,435

3,838

5,237

6,704

5,656

6,634

7,333

7,700
3.8

EV/EBITDA (x)

2.3

3.6

3.1

2.1

4.6

2.9

2.5

ROE

5.9%

5.9%

7.9%

10.8%

7.7%

8.8%

10.4%

ROIC (Capital Invested)

3.4%

3.9%

4.6%

7.4%

5.5%

5.7%

7.1%

ROIC (Business Assets)

5.4%

6.7%

7.7%

11.7%

8.5%

9.2%

12.2%

Number of Employees

2,276

2,286

2,336

2,359

2,408

2,382

2,328

Note: Stock price indices for FY3/2024 are based on February 9 204, and balance sheet items are as of December 31, 2023
Source: Prepared by Strategy Advisors

52

Tsuzuki Denki | 8157 (TSE Prime)
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