Company Report
Construction machinery; TSE 1st Section
August 31, 2018

Coverage Analyst
Hidehiko Hoshino, CMA
Capital Goods Research & Advisory

NIKKO (6306)
Japan’s largest asphalt plant engineering company
with its sales to china rapidly growing•

Headquartered in Akashi-shi, Hyogo Prefecture, Nikko has approx. 70% and
30% domestic market shares respectively in asphalt plant (AP) and concrete
plant (BP) businesses. Net sales from these two segments accounted for
76% of the total net sales in the year ended March 2018. A recent rapid
increase in sales to China in AP business has caused the company’s
overseas sales ratio to 11.3%, a double-digit percentage for the first time
ever.

•

As part of its business model, Nikko has five core technologies, which are
the source of its competitiveness: heating (AP), mixing and kneading (BP),conveyance, control and maintenance. The company develops and operates
these technologies all in-house, which is the main factor contributing to its
high market share. Also, with its maintenance and services accounting for
34% of the net sales, a large percentage of its businesses are recurringbusinesses.

•

According to Nikko’s forecast for consolidated performance in the year
ending March 2019, net sales, operating profit, and net profit are projected
to be, respectively, JPY34.0 billion (3% down year-on-year), JPY2.15 billion(2% up year-on-year), and JPY1.55 billion (4% up year-on-year). The new
medium-term management plan will start in the year ending March 2020,
which is expected to attract attention.

•

The company’s customers for AP and BP plants include domestic roadpavement and ready-mix concrete companies, whose future growths are
expected to be sluggish. In response, considering changes in the futureneeds, Nikko is developing a range of products. The company will show
some of the development results at “Nikko Messe 2018,” an event to be heldat its headquarters toward its 100th anniversary in August next year, which
will be an important turning point.

Sources: Bloomberg and CGRA

Nikko (6306) August 31, 2018

CGRA Company Report1Key points about Nikko that 3 figures show
(1) Comparison with major roadpavement companies in operating
profit margin
Nikko’s operating margin for the year
ended March 2018 was 6%, decreasingfrom 7% in the year ended March 1995.
Major road pavement companies’ profit
margin increased significantly in thesame period. During this period, Nikko’s
market share rose to over 70%, partly
owing to the acquisition of the APbusiness from Niigata Engineering in
2002. The major road pavementcompanies are expected to cause thedemand for AP renewal to increase forthe coming few years. In response,
Nikko must improve its profitability
from AP-related business and thereby
increase its corporate value, along withthe commencement of operation of its
new customer service center (CSC).

Source: CGRA

(2) Overseas sales and sales ratio•

Construction investment is likely todecline after the Tokyo Olympic Games.
Hence domestic AP and BP plants are
forecast to decrease in medium to longterms. Against this backdrop, overseas
business expansion will be the key to
growth. Overseas sales ratio exceeded
10% in the year ended March 2018 forthe first time ever, led by AP in China.
The increasing need for improving
environmental impacts of AP in China is
forecast to boost the demand for Nikko’s
recycling and energy-saving
technologies. Going forward, diversity of
employees will be the key, too.

Net sales (mil. yen)

5,000

16%
13.4%

4,500

Percent of Group net sales

•

14%

4,000
12%
11.3%

3,500

10%

3,000

9.2%

8.5%

2,500

8.4%

9.0%

8.7%

8.3%

8%
4,570

2,000

3,965

1,500
2,088

1,000

2,262

2,825

2,668

2,980

6%

2,956

4%
2%

500
0

0%
FY2011FY2012FY2013

FY2014

Net sales

FY2015FY2016FY2017

Percent of Group net sales

FY 2018(E)

Source: Nikko(3) Dividends and total shareholder
return ratio•

Year-end dividends¥70

Nikko increased dividends andimplemented share buyback between
March 2017 and March 2018, increasing
its total shareholder return ratio to 47.3%
as of March 2018. Still, the company’s
shareholders equity increased to JPY30.3
billion. Net cash increased by JPY10.6
billion. Nikko intends to use cash for
growth investment and M&As andremaining cash for increasing
shareholder return, seeking to limit anincrease in shareholder equity as much aspracticable. These initiatives are
expected to improve ROE in a medium
term.

Nikko (6306) August 31, 2018

Interim dividends

106.9%

¥60
¥50

¥25
¥20
¥15

¥30

¥25

47.3%

¥15

34.2%
¥20

33.0%
¥20

¥2528.0%¥2522.1%

FY 2012FY 2013

FY 2014

FY 2015

80%
60%

¥20
¥10

120%
100%

¥25

¥40
¥30

Total return ratio

¥30

¥35

40%

29.8%
¥30

¥0

20%
0%

FY 2016

FY 2017

FY 2018 (E)Source: Nikko

CGRA Company Report2Contents
Key points about Nikko that 3 figures show

2 p.

(1) Overview and History of Nikko

4 p.

(2) Business environment and trends of related industries

7 p.

Asphalt plant-related business
Concrete plant-related business
Environment and transportation-related business
Other businesses(3) Financial analysis: Considering future strategy based on SWOT analysis

15 p.

Consolidated financial results for the year ended March 2018
Consolidated performance forecast for the year ending March 2019
Examination of the visibility concerning the performance forecast
Financial trend and the corporate policy
Comparison with competitors, and SWOT analysis(4) Non-financial analysis: Verifying the business model

24 p.

Changing the business model of maintenance and services with the New CSC
Governance system supporting the business model(5) Expectations towards the new medium-term management plan

28 p.

Stabilizing domestic business foundation: The key is Value Packages (VPs)
Domestic growth strategy: Expectation toward crusher plants, a new area
Overseas growth strategy: Increasing revenue from Chinese market
Key points of Nikko Messe 2018

This report is not intended to be used or considered as an investment solicitation, recommendation or advice. This reporthas been prepared for general information purposes based on our company’s own perspectives. Although the contents ofthis report are based on publicly disclosed information, its accuracy or completeness is not guaranteed. Capital Goods
Research & Advisory Co, Ltd (CGRA) owns the copyright of this report, citing from which without permission isprohibited. The contents of this report might be changed in the future without prior notice. CGRA or this report has noconcern with investors’ investment decisions. Accordingly, decisions concerning investment should be made bythemselves.

Nikko (6306) August 31, 2018

CGRA Company Report3(1) Overview and History of Nikko
Middle-scale construction manufacturer
founded in 1919, approaching its 100th
anniversary.

Headquartered in Akashi-shi, Hoygo Prefecture, Nikko is a medium-scaleconstruction machinery manufacturer. Founded on August 13, 1919, it willcelebrate its 100th anniversary next year. Nikko Group’s management
philosophy is as follows: “With the customer-comes-first principle as ourmanagement philosophy, we provide products and services that truly satisfy
customers. Our mission is to be a solution partner that will grow with customers
while building trust widely in the society. We will seek to improve ourselves
accordingly.”

AP and BP are its main businesses,
accounting for 76% of its net sales in theyear ended March 2018.

Nikko’s business started with the production of agricultural and civilengineering tools (such as shovels) with a dragonfly logo placed on them. It has
manufactured them since its inception in 1919 and still manufactures them
today. Production of its current flagship products—BPs and APs—were started
respectively 1956 and 1958, or slightly prior to the beginning of Japan’s rapid
economic growth period. As of the year ended March 2018, revenues fromasphalt plant-related business and concrete plant-related business accounted
for, respectively, 49% and 27% of the total revenue. Beside these businesses,
environment and transportation-related business and “other” businesses(including overlay equipment, agricultural tools, and import and sale ofgrinding mills) account for, respectively, 11% and 13%.

With 5 domestic and 1 overseas
production centers, Nikko produces mostof the core machines in-house.

There are presently 5 production centers in Japan including the plant at theheadquarters and 1 overseas production center in Shanghai, China. Most of theplant makers are engineering, procurement and construction (EPC) contractors
and therefore do not usually manufacture products in-house. However, Nikko
produces most parts of core equipment in-house including having AP/BP
control panels produced by its subsidiary, Nikko Electronics, while othercompanies purchase them externally. It conducts other Group-wide businesses
mainly through its subsidiaries. Nikko is recently active in M&As and business
transfers.
Fig. 1: Sales compositions by business segment(year ended March 2018)

Source: Nikko

Nikko (6306) August 31, 2018

CGRA Company Report4Fig. 2: History

Source: Nikko

Overseas business development was
relatively slow. But overseas sales ratio
exceeded 10% for the first time ever in theyear ended March 2018.

However, Nikko’s overseas business development has been relatively slow. It
started full-scale overseas business only after 1990. It made a capital investment
in Germany’s Benninghoven in 1993, and established Nikko (Shanghai)Construction Machinery in 2003. However, its overseas sales ratio was below
10% until the year ended March 2017.

Overseas sales ratio continues to increasein the year ending March 2019.

Nevertheless, Nikko Shanghai’s revenue, mainly from APs, increased 55% in
the year ended March 2018, which caused Nikko’s overseas sales ratio to reach
11.3%, a double-digit percentage for the first time ever. The overseas sales ratio
is expected to continue to rise in the year ending March 2019 (to 13.4%
according to the company’s projection). In China, Nikko once sought toincrease its sales from BP business through a joint venture with a local
company. However, it had to de facto withdraw due to low-priced copied
products supplied by other local companies. AP business has a higher
technological entry barrier than BP business and hence a lower risk of facingsuch competition. As to APs in China, users are increasingly becoming
conscious of environmental regulations, which might provide a tailwind for
Nikko given its superior recycling and energy-saving technologies.

Net sales (mil. yen)

5,000

16%
13.4%

4,500

14%

4,000
12%
11.3%

3,500

10%

3,000
8.5%

2,500

9.2%
8.4%

8.3%

8.7%

9.0%

Percent of Group net sales

Fig. 3: Changes in overseas sales and sales ratios

8%
4,570

2,000

3,965

1,500

1,000

2,088

2,262

2,668

2,825

2,980

6%

2,956

4%
2%

500
0

0%
FY2011FY2012FY2013

Net sales

FY2014FY2015FY2016FY2017

Percent of Group net sales

FY 2018(E)

Source: Nikko

Nikko (6306) August 31, 2018

CGRA Company Report5What is an asphalt plant?

An asphalt plant is a facility for producing bituminous mixture by measuringand mixing in the mixer necessary amounts of aggregate, fillers and asphalt. It
consists of dryers to heat and dry aggregate, kettle to melt asphalt, measuring
equipment, mixers to mix asphalt, aggregate etc. and other equipment. There
are small-sized mobile APs, but most of the plants with 10 ton/hour or morecapacity are stationary. Bituminous mixture is used for a range of pavement
works such as road construction, airport construction and private-sector
construction works. There are both newly produced and recycled heatedbituminous mixtures. Recycled heated mixtures account for 75% of the total
production in Japan. In response to this trend, demand for APs is also shiftingfrom new production to recycling. In FY2017, 67% of the units of APs installedin FY2017 were recycling plants while new mixture plants accounted for 33%.
Most of the users of APs are road pavement companies.
Fig. 4: Structure of an asphalt plant

R dryer
Surge bin
ScreenHot binAggregate measure

R measure
Mixer

New material
supplying route
Recycled material
supplying route

Source: Nikko

What is a batcher plant?

Nikko (6306) August 31, 2018

A concrete plant measures, mix and kneads pre-determined amounts of raw
materials—cement, water, sand, gravel, mixed materials, etc. There are two
types of concrete plants: batch plants and continuous plants. Most of the plants
in Japan are batch plants that are also called batcher plants. A plant consists oflayers of a storing part to receive materials, a measuring part, a mixing/kneading
mixer (including accessories), etc. Most of the plants’ operations are fully
automated or remote-controlled although there are also semi-automated andmanually operated plants. Many of the BP users are ready-mixed concrete
suppliers. BPs for the precast concrete industry are also available whereconcrete structures are manufactured at a plant and installed at the construction
sites. Recent labor shortage at construction companies is causing demand for
PC to increase. Ready-mixed concrete is used in a range of fields including
outdoor facilities for construction works, building frame construction works
and civil engineering works.

CGRA Company Report

6Characteristics of ready-mixed concrete:“Ready-mixed concrete” is the term used by Japanese Industrial Standards(JIS). It is commonly called, in abbreviated Japanese, “nama con” for nama
(fresh) concrete. Users place orders to nama con suppliers for ready-mixed
concrete with designated ratios of raw materials according to designed strengthof concrete. Ready-mix concrete is delivered to the construction site on aconcrete mixer and then injected to designated spots with a concrete pump fromthe concrete mixer. As quality of ready-mixed concrete changes with time (start
to set within 2 to 5 hours in general), injection is normally completed within 2hours (when outside temperature is 25 degree or below) or 1.5 hours (over 25
degree) from mixing/kneading. Ordering companies—construction or othercompanies—place orders taking into account traffic and other conditions.
Fig. 5: Structure of a concrete plant
Material receiving
chamber
Storage tankMeasuring tank

Inputting device

Mixer

Concrete hopper
Source: Nikko(2) Business environment and trends ofrelated industries
Asphalt plant-related businesses
Domestic road pavement project expenses
continue to decrease, but their breakdown
is changing.

First, the following is the demand structure of and environment surrounding
Japan’s road pavement industry, the main user of APs. AP users are roadpavement companies including NIPPO (TSE: 1881) and Maeda Road (TSE:1883). The keys to their capital expenditure are road budget (i.e. road pavement
expenditure) and bituminous mixture production volume. Japan’s road
construction expenditure peaked in FY1992 and declined until FY2008. It has
since remained flat, or slightly declined to, around 7,500 billion yen till today.
Road pavement expenditure, on the other hand, increased by over 6% until 2008
and further rose by 7–8% reflecting a supplementary budget and temporary
demand for reconstruction works after the Great East Japan Earthquake. Road
pavement expenditure includes repair and new installment. New installment
expenditure has declined since 2008 while repair expenditure has increased.
Presently, repair expenditure and new installment account for respectively
approx. 70% and 30% of the total pavement expenditure.
Bituminous mixture production volume in Japan peaked in FY1992 at 80,838
thousand tons and then declined along with the reduction in public investment.

Nikko (6306) August 31, 2018

CGRA Company Report7

Bituminous mixture production volumecontinues to decline in a medium term,too.

However, after it bottomed in FY2010, it modestly increased until FY2013
partly due to the Great East Japan Earthquake. But it has been declining again
since FY2014 down to 40,036 thousand tons in FY2017, a half of the volume
in FY1992. In FY2018, the volume is expected to be slightly below 40,000
thousand tons. It is hardly expected to grow in a medium term, too. Over 60%of the bituminous mixture is used for public works (roads), and approx. 30% isused by the private sector. Highway works and non-road public works use 5%
each. Out of the total bituminous mixture produced, recycled mixture and virgin
mixture respectively account for approx. 75% and approx. 25%.

Fig. 6: Changes in bituminous mixture production volume and the number of asphalt plants installed

Source: Japan Asphalt Mixture Association (FY2018’s number is Nikko’s estimate.)

Demand for APs has continued to be flat
since FY2015 at 40–45 units per year.

Along with these trends, the number of units of APs in place has declined. Afterit peaked at the end of FY1992 at 1,800 units (estimate by CGRA), it declined
to 1,030 units at the end of FY2017. Even when bituminous mixture production
volume increased, the number of units of APs in place slightly decreased insteadof increasing because the number of units scrapped exceeded the number ofunits newly installed. The demand for APs has remained flat since FY2015 in
the range between 40 to 45 units. Nikko projects the demand to be 42 units for
FY2018.

Characteristics of Japanese road pavementcompanies, and the industry’s structure:

Many of Japanese road pavement companies have their shares held by major
construction companies, which leads to oligopoly by major players. NIPPO,
Maeda Road, and Nippon Road (TSE: 1884)—respectively the largest, second
largest and third largest companies in terms of net sales—are listed companies.
On the other hand, Kashima Road, Obayashi Road and Taisei Rotec are nonlisted companies, including being a 100% subsidiary of the parent company.
Other players include Toa Road (TSE: 1882), Seiki Tokyu (TSE: 1898), Gaeart(Kumagaigumi’s 100% subsidiary), Sato-Watanabe (TSE: 1807) and Sumiken
Mitsui Road (TSE: 1776). Economic Census published by Statistics Bureau,
Ministry of Internal Affairs and Communications, estimates the number of roadpavement companies to be slightly less than three thousand. SMEs with 100
employees or less account for 99% of them. Major road pavement companies’
share is high also in terms of revenue from completed construction contracts.
As to profitability of road pavement companies, the largest NIPPO and Maeda
Road have close to 10% operating profit margin. On the other hand, Nippon
Road (net sales in the year ended March 2018: 140.7 billion yen), Toa Road
(98.2 billion yen) and Seiki Tokyu (81.6 billion yen) had less than 5%, slightly

Nikko (6306) August 31, 2018

CGRA Company Report8Road pavement companies’ performances
are recovering, though varying in profit
margins depending on sales sizes.

over 4%, and less than 8% OP margin, respectively. Sato-Watanabe (38.5
billion yen) had less than 4% OP margin. Sumiken Mitsui Road had slightly
over 4% OP margin. Thus the profitability differs significantly between the top
two players and the rest of the major players. Road pavement companies’
performances were generally sluggish between March 2011 and March 2012.
They then recovered due to the construction works following the Great East
Japan Earthquake and an increase in the ratio of expenditure allocated to roadpavement. However, in the year ended March 2018, the increase in raw material
prices caused their growths to slow down.

Recently-announced medium-term
management plans of road pavementcompanies:

Medium-term business plans were announced by NIPPO and Sato-Watanabe
recently and, in March 2017, by Toa Road and Obayashi Road. Many of thesecompanies project their revenue and operation profit to modestly grow from theroad pavement business, their core business. Many of them also expect theirAP-related capital expenditure to increase in the years ending March 2019–2021 from the total capital expenditure incurred in the years ended March
2016–2018, mainly for renewal investment. CGRA believes that this is likely
to lead to expansion of their businesses.

Major road pavement companies:
NIPPO and Maeda Road plan to makeproactive capital investment.

NIPPO plans to increase its capital expenditure by 50% to 60 billion yen in theyears ending March 2019–2021 from 40 billion yen spent in the years ended
March 2016–2018. Over 60% of NIPPO’s capital expenditure is believed to go
into AP-related facilities—including renewal investment for existing facilities
and strategic investment (probably including overseas capital expenditure).
Maeda Road projects its capital expenditure in the year ending March 2019 tobe 10.7 billion yen (excluding land investment), increasing from 8.7 billion yen
in the year ended 2018. This capital expenditure includes construction andexpansion of AP and crumbing plants, increasing the number of plants to 8 from
3 in the year ended March 2018. Out of these plants, 5 plants are AP plants, and3 plants are crumbling plants. Maeda Road plans to expand crumbling business,
too. Major road pavement companies do not only use bituminous mixture
internally but sell the product externally.
Fig. 7: Nippo’s cash flow in 3 years

Source: Nippo’s financial results presentation material

Medium-scale road pavement companies
are also making proactive capital
investment.

Nikko (6306) August 31, 2018

Toa Road does not disclose its medium-term management plan for the years
ending March 2018–2022 but plans to increase its capital expendituresignificantly to 3.9 billion yen in the year ending March 2019 from 2.1 billion
yen spent in the year ended March 2018. Seiki Tokyu projects its capital
expenditure to be 3.2 billion yen in the year ending March 2019, increasingfrom 2.1 billion yen spent in the preceding year. Obayashi Road aims to exceed
100 billion yen in both orders and net sales and to stably generate over 7 billionyen ordinary profit, according to its Medium-Term Management Plan 2021 (forthe period from the year ended March 2018 to the year ending March 2022). Its

CGRA Company Report9business enhancement policy emphasizes the “securing of stable revenue in asustainable manner in the changing construction market.” It plans to proactively
conduct capital investment towards the future including renewal of plantfacilities for improved efficiency, reduction of environmental impacts andimprovement of work environment (e.g. introduction of ICT). Sato-Watanabe’s
medium-term management plan (for the years ending March 2019–2021)
projects 3.5 billion-yen capital expenditure, increasing from 2.2 billion yen
spent in the years ended March 2016–2018, of which 1.0 billion yen will beallocated to renewal of APs and other facilities. Medium-scale road pavementcompanies’ stances are similar to these major companies’ stances.
Road pavement companies’ work-stylereforms could increase the importance of
maintenance and services.

Road pavement companies also emphasize the importance of efficientutilization of management resources. NIPPO intends to implement its humanresources vision during the medium-term management plan period,
concurrently with proactive capital investment. Especially, implementation of“work style reform” is closely related to its maintenance and services. NIPPO
seeks to reduce the total working hours and increase the number of days off by
proactively utilizing ICT, promoting flexible approaches, changing operation
processes and operation spaces, and encouraging its employees to take leave.
Toa Road, too, seeks to improve work environment—including promoting
women’s contributions, taking measures for aging population, and reforming
work style—as part of its allocation of management resources for the next five
years. In a medium term, given that Japan’s population will be increasingly
concentrated in urban areas, its business bases will be consolidated, too. This
will make each business base having to cover a larger region than before. In
response, Toa Road will share information management and reform its
organizational structure. Sato-Watanabe, too, will proactively introduce ICT
and implement work style reform, aiming to improve its field capabilities.

The average ages of many of Japaneseroad pavement companies’ employees are
mid-40s.

As to average ages of listed road pavement companies’ employees, while
Maeda Road’s average age is 40.1 years old, other companies’ ages are mostly
mid-40s, as follows. NIPPO: 44.6 years old; Nippon Road: 43.5 years old; Toa
Road: 45.4 years old; Seiki Tokyu: 42.1 years old; Sato-Watanabe: 45.2 years
old; Sumiken Mitsui Road: 45.4 years old. Their average ages are around 2
years older than major construction companies’ employees. Their “work stylereform” might have a significant impact on management judgment. Statuses ofthe backlogs at listed road pavement companies at the end-March 2018 are as
follows. NIPPO: 15% up from end-March 2017 (with backlogs for pavement incivil engineering increasing 35%); Maeda Road: 20% up; Nippon Road: 33%
up; Toa Road: 29% up; Seiki Tokyu: 4% down; Sato-Watanabe: 15% down;
Sumiken Mitsui Road: 3% up. Given the increases at many of them, the overall
net sales for the year ending March 2019 are expected to be strong.

Proposals meeting new demand will beneeded.

Although it is unknown whether the road pavement companies’ capital
expenditure will be implemented 100%, CGRA projects a high level of demand
to be generated for renewing APs given that many of the existing APs were
produced in early 1990s and are becoming 30 years old. In addition, the roadpavement companies will seek to realize qualitative improvements throughwork style reform and other changes in work environment and the introductionof ICT in construction works. It is considered to be important for Nikko to makeproposals that meet such new needs.

Nikko (6306) August 31, 2018

CGRA Company Report10Nikko has over 70% share in domestic demand for APs. Together with thesecond largest player Tanaka Iron Works, a non-listed company, they dominate
the oligopolistic market. Nikko succeeded in further expanding its share in theindustry by acquiring the AP business from former Niigata Engineering in
2002. Nonetheless, the demand for APs declined sharply from 54 units in
FY2002 to 12 units in 2008 when the demand bottomed. The benefit from its
market share was then limited. Since FY2014, although bituminous mixture
production volume has continued to decline gradually, the demand for APs hasremained almost flat at 40–45 units. The medium-term management plans of
the major road pavement companies indicate an expected increase in renewal
demand. CGRA forecasts the demand for APs to rise to around 50–55 units inthree years. The keys to a further increase in Nikko’s share would be expansionof sales of Value-Package (VP) and mid-ship APs that Tanaka Iron Works does
not deal with and the new CSC’s contributions.

CGRA’s view:
Domestic demand for AP renewal could
rise in the coming 3 years.

100%

90

90%

84

85

72

80

75
67

70

64

63

67

60

65

60

67

71

80

70

73

78
72

80%

70
67

76
67

60%
60

57

56

40

50%
40%

30
28

29

27

30

29

20

23

20
20

20

24
18

18

0
2001

2002

70%

67

69

69

58

50

10

70

71

67

60
55

71

81

Nikko plant share

Industry number of plants

Fig. 8: Demand for asphalt plants and Nikko’s share
100

2003

2004

15

25

24

10

10

10

6

2005

2006

2010

2011

2012

(V) industry units

24

22

30%
20%

14

14

12
5

29

10

3
2007

18

9

2008

0

7

2009

(R) industry units

18

16

16

14

2015

2016

2017 2018 (E)

10

10%
0%

2013

2014

Nikko (V) share

Nikko (R) share

Source: Nikko

Concrete plant-related businesses
Japan’s construction investment remains
flat around 53 trillion yen.

Nikko (6306) August 31, 2018

Main users of BPs are companies in the ready-mixed concrete industry. Unlike
APs that are mainly used by large pavement companies, however, ready-mixed
concrete businesses are mainly conducted by local SMEs. Shipment of readymixed concrete and the number of ready-mixed concrete plants areproportionate to construction investment. Construction investment peaked in
FY1992 and then declined almost by half to 42 trillion yen in FY2010. Then, it
has recovered to the current level of 53 trillion yen, reflecting the demand
generated by the reconstruction work following the Great East Japan
Earthquake, the government’s national resilience plan, and construction works
being implemented toward the Tokyo Olympic Games.

CGRA Company Report

11Despite the sluggish growth of shipment
volume of ready-mixed concrete,increasing prices will help improve
operators’ profitability.

For the said reasons, shipment of ready-mixed concrete in Japan continued todecrease until FY2009. It then recovered until FY2013 and, again, modestly
decreased between FY2014 and FY2017. Recently, demand for ready-mixed
concrete is recovering especially in Tokyo region, including the demand forconstruction of facilities to be used for Tokyo Olympic Games. Demand in
FY2018 is expected to be 84,000 thousand m³, slightly increasing from
FY2017. On the other hand, despite the recovering demand for ready-mixed
concrete, the number of ready-mixed concrete plants continues to modestly
decrease because more plants are being scrapped than being renewed or newly
installed. Given the significant increase in ready-mixed concrete price in thesefew years, profitability seems to be secured even without an increase in plantutilization rate, which is perhaps causing the pace of scrapping to shrink
temporarily. The declining rate of the number of plants lags behind that ofdemands. There is a view that forecasts the ready-mixed concrete plants to beconsolidated and their number to be reduced to 2,700 (from 3,351 as of the endof FY2017).

¥14,630

18,00014,00016,000¥11,977

16,00014,00013,141

12,00011,18812,00010,000
9,210

10,000

8,370

8,400

Number of plants

Ready-mixed concrete shipped(10,000 cubic meters)

Fig. 9: Changes in shipment volume of ready-mixed concrete and the number of plants

8,000

8,000
6,000

4,291

4,046

3,456

3,351

3,335

6,000
4,000

4,000

2,000

2,000
0

0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
(E)
Ready-mixed concrete shipped (10,000 cubic meters)
Number of plants
Ready-mixed concrete price (nationwide)

Source: National Federation of Ready-Mixed Concrete Business Association; and“Survey on Distribution of Ready-Mixed Concrete (unit price),” Ministry of Economy, Trade and Industry (FY2018 figure is Nikko’s estimate.)

Domestic demand for BPs sees sluggish
growth in terms of units but remains highin terms of amount.

Nikko (6306) August 31, 2018

Demand for BPs in Japan bottomed in FY2010 at 48 units and then recovered
to 98 units by FY2015. It declined to 72 units in FY2017. However, theshipment amount including the revenue from maintenance and services and BPs
remained flat at 23.3 billion yen in FY2017. CGRA believes that this mainlyreflects the following factors: (1) ready-mixed concrete vendors conduct their
immediate tasks by increasing maintenance and services rather than renewing
the BP partly due to the rise in ready-mixed concrete price; (2) demand forsecondary products of concrete is increasing from the precast concrete (PC) andother industries other than ready-mixed concrete vendors. Out of Nikko’s
revenue from BPs in the year ended March 2018, although revenue from thesale of the plants remained flat, revenue from maintenance and services
increased 19%. Ready-mixed concrete for secondary concrete products is used
as construction materials for floors, walls, pillars, etc. and in civil engineering
concrete products such as piles, Hume pipes, utility poles, RC segments, andbox culverts. Given secondary concrete products can be assembled at theconstruction sites with cranes and thus help reduce construction periods andsave energy, demand for BPs is expected to increase in a medium term.

CGRA Company Report12In the domestic BP industry, Nikko has had the third largest static share, fallingbehind Koyo Industries (non-listed; business transferred from IHI) andKitagawa (TSE: 6317). However, in many of the past few years, its dynamic
share has been over 40%, the largest share, based on expansion of sales to the
PC industry and launch of new products. Its static share has also increased to
27% in the year ended March 2013 and close to 30% in the year ended March2018. Nikko’s competitive edge against the two competitors is in-houseproduction of control panels. It has been building a track record with the PC
industry, too, in these few years. Nikko aims to achieve 50% share by launching
new control panels and next generation mixers.

Japan’s BP industry sees competition
among the three major companies.
Nikko’s share is rising.

300

160

239 240

250

194

209

201

198

199

200

120

199

186

170

100

140

151
150

80

116 123140 140100

233 140

218

97

113

Total shipped units

Total demand (100 mil. yen)Fig. 10: Changes in units and amounts of BPs shipped

60

99

105

93

93

98

76
57

50

90

40

72
48

52

55

20

0

0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Total shipped units

Total demand (monetary amount)Source: Japan Construction Machinery Manufacturers Association (Amounts include maintenance and services.)

Fig. 11: Changes in static share in BPs
29.5%(units)

29.3%
3,500

29.0%

3,000

28.5%

28.7%
27.9%

2,500

t ena nce ser v ice cost s of Nikko, K it a ga wa Ir on Wor ks, a nd K YC Ma chine Indust r y .

2,480

2,459

2,448
27.8%

2,000
1,500

2,403

2,368

28.0%

27.5%

27.4%
27.0%

1,000
500

Nikko share

4,000

937

947

948

965

983

2013

2014

2015

2016

2017

0

26.5%

26.0%

Nikko shipped units

Other shipped units

Nikko share

Source: Nikko

Nikko (6306) August 31, 2018

CGRA Company Report13

Environment and transportation-related businesses
Technologies used in environmentconscious plants have their origins in APs
and BPs.

Nikko started its environmental products business about 20 years ago. Thisbusiness leverages heating technology for APs and mixing technology for BPs.
Nikko has delivered various products, especially drying and heating products,
to a range of businesses from utilities to blast furnace manufacturers in the pastnine years. Many of these products were produced in contract projects forresearch and development purposes. Nikko has a track record for soil
decontamination plants delivered to its joint venture with Shimizu Corporation.
It also deals with drying equipment used in the upstream process of biomass
power generation. The prices of a unit of plant range between 100 million yen
and 900 million yen.

Pay attention to recycling-related waste
gypsum board plants.

In a medium term, Nikko is focusing on recycling-related environmental
products which to be developed as future core products, paying attention torecycled waste gypsum boards as part of such products. Waste gypsum boards
are generated in the process of demolition of buildings. Momentum might
emerge for recycling them. Nikko has already delivered close to 10 small-sizedplants (with 1–2 tons/hour processing capacity). If gypsum boards get certified
as Designated Construction Materials, the needs for recycling them will rise
rapidly.

It seems difficult to have transportationrelated business grow significantly.

As to transportation-related business, Nikko deals with conveyers and otherproducts. Its market is expanding in logistics and other areas. In the 200 billionyen transportation market, Nikko’s revenue is only over 2 billion yen. It needs
to expand its business from the sale of units of conveyers alone to engineering.

Earnings vary significantly depending on
profitability of environment-conscious
plant projects.

The revenue from environment and transportation-related business accounted
for 11.2% of Nikko’s total revenue in the year ended March 2018. The
breakdown of revenue from the business by product is as follows:
environmental products: 40.0%; transportation products: 57.4%; transportation
services: 2.6%. In terms of environmental plants, there were 3 large spot sales
transactions including a scale dryer for a blast furnace manufacture, whichcaused the relevant revenue to increase by 2.5 times from the year ended March2017. There were large-scale transportation product projects, too, as reflected
to 16.9% increase in revenue. In the environment and transportation-related
business, maintenance and services account for only less than 3%. Therefore,
its performance fluctuates significantly depending on environment plant
projects and profitability. In terms of profitability, operating profit margin wasaround 20% in the years ended March 2012 and 2015 but was 7.8% in the year
ended March 2018 due to the low profitability of a large environment plant
project.
Other businesses“Other” businesses enjoy stableprofitability. Overlay equipment accounts
for the largest ratio.

Nikko (6306) August 31, 2018

The revenue from the “other” businesses accounts for 12.8% of the total
revenue. Most of these businesses are conducted by the subsidiaries.
Breakdown of products was as follows: overlay equipment (Nikko Sec): 1.51
billion yen; floodgates and water-proofed boards (Nikko Machinery): 980
million yen; agricultural farming tools (Tombo Industry): 720 million yen;crushers (Maekawa Kogyosho): 410 million yen; development sales and realestate: 380 million yen; electronics (external sales; Nikko Denshi): 310 million
yen; and renovation and insurance (Nikko Kosan): 160 million yen. Whileelectronics and development sales and real estate businesses grew significantly,
respectively by 80.9% and 42.8%, overlay equipment decreased 3.4%. Crushers
business handled by Maekawa Kogyosho grew robustly by 14.6%. The “other”
businesses’ operating profit margin is stable around 10%, supporting Nikko’s
profitability.

CGRA Company Report14(3) Financial analysis: Considering future strategy
based on SWOT analysis
Consolidated financial results for the year ended March 2018
In terms of consolidated performance inthe year ended March 2018, BPs’maintenance and services were strong,covering APs’ and environment-related
products’ underperformance.

Consolidated financial results for the year ended March 2018 were as follows:orders received: 33.61 billion yen (1.5% down from the year ended March2017); net sales: 35.11 billion yen (7.3% up); operating profit: 2.10 billion yen(8.2% up); ordinary profit: 2.23 billion yen (12.3% up); net profit attributableto owners of the parent: 1.49 billion yen (11.2% up). These results were roughly
in line with Nikko’s initial projection (net sales: 34.5 billion yen; operating
profit: 2.1 billion yen; and net profit: 1.5 billion yen). By segment, however,AP-related business slightly underperformed the company’s expectation.
Environment and transportation-related business also underperformed thecompany’s projection in terms of operating profit. On the other hand, BPrelated business outperformed the company’s projection. Regarding AP-related
business, while Nikko Shanghai’s sales of plant bodies increased sharply, thedomestic sales from the profitable maintenance and services declined. As toBPs, although the domestic sales of plant bodies were flat, the domestic revenue
from maintenance and services increased 19% partly due to the increase in
ready-mixed concrete market prices. Reduction in the sales of unprofitableconcrete pumps was a factor contributing to the profitability. In terms ofenvironment and transportation-related business, there were 3 large-scale
projects, which helped increase the revenue but lowered profitability.
Consolidated performance forecast for the year ending March 2019

Consolidated performance for the year
ending March 2019 is forecasted to see adecrease in revenue but an increase inprofit owing to revised prices of services
for APs and other factors.

Nikko projects its consolidated performance for the year ending March 2019 to
be as follows: orders: 34.0 billion yen (1.1% up year-on-year); net sales: 34.0
billion yen (3.2% down); operating profit: 2.15 billion yen (2.2% up); ordinary
profit: 2.30 billion yen (2.7% up); and net profit attributable to owners of theparent: 1.55 billion yen (4.0% up). Projections by segment are as follows. As to
AP-related businesses, sales from China and other overseas markets are
expected to increase. The cost rate in maintenance and services is expected to
improve. The operating profit is projected to increase by 160mn yen year-onyear to 1.51 billion yen. Regarding BPs, on the other hand, both revenue andprofit are forecast to decline due to an expected decrease in the sales of plantbodies. As to the environment and transportation-related business, while theprevious fiscal year had the 3 large-scale spot projects, the current fiscal year
will have no such large-scale projects. Consequently, although the sales will
decrease significantly, the degree of a decline in operating profit will beinsignificant. The “other” businesses are expected to be strong owing to theimport and sale of crushers and real estate property leasing.

Fig. 12: Nikko’s revised performance outlook
FY 2017
1Q
actualNet sales

1H
actual

FY 2018
Full year
actual

1Q
actualYoYchangeChangerate

Full year
forecast

6,179

16,15335,114

5,415

(764)

Operating income

48

808

2,103

(26)

(74)

Operating margin

0.8%

5.0%

6.0%

-0.5%

-1.3%

5.9%

6.3%

Ordinary income

161

925

2,239

87

(74)

-46.0%

1,050

2,300

130

(52)

-28.2%

750

1,550

Net income attributable toowners of parent-12.4%

1H
forecast-

16,00034,000

950

2,150

182

743

1,490

New orders
received

5,896

21,82933,616

5,693

(203)

-3.4%

16,00034,000Order backlog

11,346

11,40910,132

10,409

(937)

-8.3%

10,132

10,132120.19132.21

127.19132.32+12.13+10.1%

130.0

132.5

16.43

16.90

16.63

17.03

+0.60

+3.7%

17.0

17.0

Exchange rate
(EUR/JPY)
Exchange rate
(RMB/JPY)

In millions of yen, or yen; Source: Nikko

Nikko (6306) August 31, 2018

CGRA Company Report15

Fig. 13: Revised performance outlook by business segment
FY 2017
1Q actual
Net sales

Asphalt plantrelated
business

Concrete
plant-related
business

Environmentand conveyorrelated
business

Otherbusiness

2,768

1H actual

FY 2018
Full year
actual7,432

17,1791Q actual

2,361

Operatingincome

100

450

1,348

42

Operatingmargin

3.6%

6.1%

7.8%

1.8%

Net sales

2,236

5,606

9,521

1,671

Operatingincome

145

669

1,015

66

Operatingmargin

6.5%

11.9%

10.7%

3.9%

Net sales

407

1,453

3,931

462

Operatingincome

24

101

308

59

Operatingmargin

5.9%

7.0%

7.8%

12.8%

YoY change

(407)
85.3%
(57)
42.0%

(565)
74.7%
(79)
45.5%

+54
113.3%+35
245.8%+154
120.2%(1)
95.5%

1H forecast

Full year
forecast

8,800

17,800

750

1,510

8.5%

8.5%

4,200

9,000

420

900

10.0%

10.0%

1,300

2,600

130

260

10.0%

10.0%

1,700

4,600

170

520

Net sales

766

1,660

4,480

921

Operatingincome

22

107

462

21

Operatingmargin

2.9%

6.5%

10.3%

2.3%

10.0%

11.3%

(244)

(519)

(1,031)

(216)

(520)

(1,040)

Corporate expenses

In millions of yen; Source: Nikko

Factor analysis of changes in ordinary
income in the year ending March 2019:

The attribution analysis of the increase/decrease in ordinary profit expects thecontribution from the improved cost ratio to be positive at 480 million yen.
Factors in the contribution include the price revision that has been implemented
since April and concentration purchasing of products purchased. The 150
million-yen increase in SG&A expenses mainly reflects costs associated with
Nikko Messe 2018 which to be held at the headquarters from October 22, manyof which are temporary costs.

Review of the results in 1Q in the year
ending March 2019:

The consolidated financial results have been announced for the 1Q of the year
ending March 2019 as follows: orders received: 5.69 billion yen (3.4% down
year-on-year); net sales: 5.41 billion yen (12.4% down); ordinary profit: 90
million yen (46.0% down); and net profit: 130 million yen (28.2% down).
Although the quarterly results slightly underperformed Nikko’s internal
projections, the 1Q results tend to be low due to seasonality. After announcing
the 1Q financial results, Nikko made no revision in its performance projection
from the beginning of the fiscal year.

Fig. 14: Quarterly revenue and operating profit

In millions of yen; Source: Nikko

Nikko (6306) August 31, 2018

CGRA Company Report

16

Examination of the visibility of the performance forecasts
Visibility for performance forecast(operating income) is becoming relatively
stable.

The following findings have been indicted as CGRA examined Nikko’s
performance visibility by comparing the company’s projection (made at the
beginning of fiscal years) and results in terms of operation profit over the past
10 years (the years ended March 2009–2018). It indicated that there were 7
upward revisions and 3 downward revisions. The downward revisions weremade in the years ended March 2016, 2015 and 2009. Except the revision in theyear ended March 2009, the degrees of revisions were small: the projections forthe years ended March 2016 and 2015 were revised downward respectively by
4.2% and 3.6%. Upward revisions were mostly made within 15% except theyears with low operating profits (1 billion yen or less) and the years ended
March 2014 and 2013 when the projections were revised upward respectively
by 87.4% and 48.2%. Maintenance and services account for around 35% of
Nikko’s total revenue, which contribute to the stability of the company’s
revenue. The revenue from plant bodies is within 1 billion yen. Therefore, thevisibility of Nikko’s performance forecasts is considered relatively high.

Fig. 15: Nikko’s operating profit forecast at the beginning of the fiscal year; and results(billion yen)(fiscal year)

Source: CGRA

Financial trend and the corporate policy
FCF increased significantly in the last five
years, with net cash doubling.

The following findings have been indicted as CGRA looked into the changes in
Nikko’s balance sheets between the year ended March 2013 and the year ended
March 2018 when the company’s performance and free cash flow improved
significantly. While shareholders equity ratio slightly increased from 65.3% to67.1%, net positive cash doubled from 5.20 billion yen to 10.56 billion yen.
During this period, Nikko strengthened its shareholder return including
increasing the dividend from 35 yen to 60 yen and implementing a 1.25 billionyen share buyback. Still net cash increased substantially. It conducted capital
investment since the year ended March 2014 at the level exceeding thedepreciation cost—spending 1.26 billion yen in the year ended March 2017.
Still the increase in cash exceeded the spending. Although ROE was only 5.0%
in the year ended March 2018, it is worth noting that the shareholders equity
has exceeded 30.3 billion yen. Nikko will implement 1.2 billion-yen capital
expenditure in the year ending March 2019 including for the construction of thetechno center. The capital expenditure is expected to return to its ordinary level
after the year ending March 2019.

Nikko’s capital policy is to use excess
cash for strengthening shareholder return.

Under these circumstances, Nikko will use its cash for M&As and expansion of
its overseas production bases. Going forward, it will keep its net assets at thecurrent level, slightly over 30 billion yen, and will not have it increasesignificantly from this level. Its policy is to allocate excess cash to shareholder
return. Nikko’s dividend payout ratio has been basically around 30% so far.
CGRA believes that the company is likely to increase its payout ratio.

Nikko (6306) August 31, 2018

CGRA Company Report17Fig. 16: Nikko’s balance sheet
Nikko (6306 JP)
JPY, billion (without numbers per share)
12 months

FY 2011

FY 2012FY 2013

FY 2014

FY 2015

FY 2016

FY 2017

FY 2018

03/31/2011

03/31/2012

03/31/2013

03/31/2014

03/31/2015

03/31/2016

03/31/2017

03/31/2018

6.6
6.3
0.3
8.8
3.0
0.6
1.6
0.8
0.8
19.2
3.7
12.8
9.1
5.1
4.8
0.2
0.2
1.5
2.1
1.1
13.6
32.9

6.8
6.8
0.0
10.1
4.1
0.9
2.4
0.8
0.7
21.7
3.6
13.0
9.4
5.2
4.5
0.1
0.1
1.1
2.1
1.2
13.3
35.0

8.0
8.0
0.0
10.8
3.6
0.9
2.3
0.5
0.8
23.3
3.5
12.9
9.4
6.5
4.0
0.1
0.1
0.9
1.8
1.2
14.0
37.3

9.0
8.6
0.4
11.6
3.8
0.9
2.3
0.5
1.1
25.4
4.1
13.8
9.7
7.4
3.5
0.1
0.1
0.5
1.7
1.1
15.0
40.3

9.3
8.8
0.5
11.0
5.3
1.2
3.2
0.9
1.0
26.7
4.3
14.3
10.0
7.7
3.3
0.3
0.3
0.6
1.2
1.1
15.3
42.0

10.1
9.9
0.3
13.4
5.5
1.1
3.0
1.3
0.8
29.8
4.6
14.8
10.2
7.0
1.9
0.3
0.3
0.5
0.0
1.0
13.4
43.2

13.1
12.7
0.4
11.4
5.4
1.0
2.8
1.5
0.9
30.8
5.2
14.8
9.6
7.1
1.9
0.3
0.3
0.5
0.0
1.1
14.2
45.0

12.4
12.2
0.2
12.6
5.1
1.1
3.3
0.6
0.8
30.8
5.3
15.1
9.8
7.1
1.9
0.3
0.3
0.5
0.0
1.1
14.3
45.1

2.0
2.0
—
—
2.8
2.8
—
2.2
2.2
7.0
0.1
0.1
2.6
2.7
9.7
17.0
—
—
0.1
—
7,808.0

3.2
3.2
—
—
2.8
2.8
—
3.0
3.0
9.1
0.0
0.0
2.6
2.6
11.7
17.0
—
—
0.1
—
7,808.0

3.1
3.1
—
—
2.7
—
—
4.4
4.4
10.2
0.2
—
2.6
2.8
12.9
17.0
—
—
0.1
—
7,808.0

3.8
3.8
—
—
2.1
2.1
—
5.5
5.5
11.4
0.1
0.1
2.7
2.8
14.2
17.0
—
—
0.1
—
7,808.0

3.5
3.5
—
—
2.2
2.2
—
5.6
5.6
11.3
0.0
0.0
2.8
2.9
14.1
17.0
—
—
0.1
—
7,808.0

3.5
3.5
—
—
2.0
2.0
—
5.8
5.8
11.3
0.4
0.4
3.0
3.4
14.7
17.0
—
—
0.1
—
7,808.0

8.1
3.8
0.7
3.7
1.6
1.5
0.1
2.8
2.8
12.5
0.4
0.4
3.0
3.4
15.9
17.0
9.2
7.8
1.1
10.9
2,297.0

7.3
3.6
0.3
3.4
1.6
1.5
0.1
2.5
2.5
11.5
0.2
0.2
3.1
3.4
14.8
17.0
9.2
7.8
0.6
11.2
2,673.0

23.1

23.3

24.4

26.2

27.8

28.5

29.1

30.3

Total assets+ Cash, cash equivalents and STIs
+ Cash and cash equivalents+ Short-term investments (STIs)+ Accounts and notes receivable+ Inventory+ Raw materials+ Work in process+ Finished products+ Other current assets
Total current assets+ Net fixed assets+ Total fixed assets- Accumulated depreciation+ Total long-term investments+ Other fixed assets+ Total intangible assets+ Other intangible assets+ Deferred income tax asset+ Investment in affiliates+ Other fixed assets
Total non-current assets
Total assets
Liabilities and equity+ Accounts payable and accrued expenses+ Accounts payable+ Tax payable+ Other accounts payable and accrued expenses+ Short-term liabilities+ Short-term debt
+ Long-term debt due within 1 year
+ Other current debts+ Other current debts
Total current debts+ Long-term liabilities+ Long-term debt
+ Other non-current debts
Total non-current debts
Total liabilities+ Shareholders equity and paid-in surplus+ Common stocks+ Paid-in surplus- Treasury stocks+ Surplus+ Other equity
Equity before deduction of equity
attributable to the minority interest+ Equity attributable to the minority interest and equity
attributable to the non-controlling interest
Net assets
Total assets (liabilities + equity)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

23.1
32.9

23.3
35.0

24.4
37.3

26.2
40.3

27.8
42.0

28.5
43.2

29.1
45.0

30.3
45.1

JP GAAP
8.4
0.0
2.1
2.29
3,516
-3.7
-16.0070.20
2.75
155.81792

JP GAAP
8.4
0.0
2.1
2.21
3,355
-3.9
-16.8266.43
2.38
161.95775

JP GAAP
8.4
0.1
2.1
2.58
4,169
-5.2
-21.3065.21
2.29
152.14763

JP GAAP
8.4
0.1
2.1
4.63
3,129
-6.7
-25.7764.73
2.22
131.15767

JP GAAP
8.4
0.1
2.3
4.72
3,212
-7.1
-25.6466.08
2.37
151.94796

JP GAAP
8.4
0.1
2.3
4.55
2,500
-7.8
-27.2365.79
2.64
157.78803

JP GAAP
7.8
0.7
2.2
5.77
2,335
-11.1
-38.1064.41
2.46
165.22797

JP GAAP
7.7
0.3
2.0
9.20
2,145
-10.6
-34.8666.92
2.69
145.83807

Note:
Accounting standard
No. of shares issued
No. of company's own shares
Pension liabilities
Foreign ownership
No. of shareholders
Net debt
Net debt/capital ratio
Tangible equity capital/tangible asset ratio
Current ratio
Cash conversion cycle
Total no. of employees

Source: Bloomberg, and CGRA

Nikko (6306) August 31, 2018

CGRA Company Report18

Fig. 17: Changes in balance sheet

In millions of yen; Source: Nikko

Fig. 18: Changes in dividends and total shareholder return ratios

In millions of yen; Source: Nikko

Comparison with competitors, and SWOT analysis
Comparison in profitability with themedium-scale construction machinery
manufacturers; and SWOT analysis:

Nikko (6306) August 31, 2018

Next, based on comparing and identifying the relative positioning of Nikko’s
profitability in the year ended March 2018 with that of eight medium-scaleconstruction machinery manufacturers, CGRA has conducted a SWOT analysis
and considers measures for improving Nikko’s growth and profitability. The
SWOT analysis was developed by Albert Humphrey, who was at Stanford
University, in the 1960s as a strategic corporate evaluation tool. It is still today
used widely as a corporate analysis approach. “S” stands for strength, aninternal factor. “W” stands for weakness an internal factor. “O” stands foropportunities, future potentials and opportunities found in the external
environment. “T” stands for threat, future risks and threats identified in theexternal environment. Thus “S” and “W” refer to internal factors while “O” and“T” refer to external factors. It is important to utilize the SWOT analysis as a
strategic management tool by incorporating both aspects of it.

CGRA Company Report19Profitability looks weaker compared to the
8 medium-scale construction machinery
manufacturers.

The analysis compared Nikko’s profitability with the simple average of 8
medium-scale construction machinery manufacturers: Giken Industrial (fiscal
year ending Augusts), Aichi Corporation, Hokuetsu Industries, Kitagawa, Kato
Works, Sakai, Okada, and Maeda Seisakusho. Nikko’s operating profit marginof 6.0% is 4.0 percentage points below the eight companies’ average profit
margin of 10.0%. This is reflected to other profitability indicators as follows(Numbers in parentheses are the eight companies’ averages.): ROA: 3.3%
(5.4%); ROE: 5.0% (10.0%); and ROC: 4.8% (7.9%). Operating profit margins
of four companies—Giken Industrial, Hokuetsu Industries, Aichi Corporation,and Sakai—exceed 10%. Operation margins of only two companies—Maeda
Seisakusho and Kato Works—are below Nikko’s operating profit margin.

Improvement in profitability seems
weaker than the average improvement inroad pavement companies’ profitability.

In terms of Nikko’s long-term profitability (since the year ended March 1995),
the operating profit margin peaked around 7% and has not exceeded this level.
However, the operating profit margins of the users of Nikko’s APs, major roadpavement companies, improved significantly from 2% in the year ended March
1995 to 7–8% in the year ended March 2018. CGRA is paying attention to thefact that their profitability improved significantly despite insignificant growthof their net sales in the past ten years.

Adequate operating profit ratio seems 9–10%, considering major road pavementcompanies’ behaviors.

During the same period, considering the fact that Nikko’s market share rose toover 70% after acquiring the AP business from Niigata Engineering, its profit
margin should improve to 9–10%. Based on 9.5% hypothetical operating profit
margin (3.3bn yen operating profit) for the previous fiscal year, adding 1.2
billion yen—the difference from the actual 2.1 billion-yen operating profit fromthe AP-related business—would lead to close to 15% operating profit. This
number differs significantly from the actual 7.8% operating profit margin fromthe AP-related business. According to Nikko, while mid-1990s saw strong salesof standardized APs, today’s APs are mostly customized. Also, Nikko has beendeveloping AP technologies jointly with major road pavement companies.
These factors make it difficult to realize a high margin. However, major roadpavement companies plan to increase AP renewal investment in the coming
three years. Improving profit margin during this period would have asignificantly positive impact on corporate value.

Fig. 19: Revenue and operating profit from AP-related business

Source: Nikko

Nikko (6306) August 31, 2018

CGRA Company Report20

Fig. 20: Operating profits of Nikko andmajor road pavement companies

Source: CGRA

Improving profitability of AP businessnecessitates improved quotation accuracy.

CGRA is paying attention to a significant gap between the quotations number(and amount) proposed to domestic AP users and the actual number (andamount) of orders received, where the proposed quotation number includes
bodies, control panels and components. Nikko proposed 231 quotations
amounting to a total of 31.14 billion yen in the year ended March 2018. In
actuality, however, it received only 49 orders amounting to a total of 4.15
billion yen. Even considering some of the quotations proposed for products to
be delivered after the year ended March 2018, the 21% conversion rate (13% inamounts) seems too low for the top manufacturer with over 70% market share.
Given the rich AP customer data that Nikko has accumulated and the new
CSC’s future contributions, CGRA believes that Nikko should aim for 40%
conversion rate. The conversion rate for BPs is also low at 21%, but thecompany’s share in BPs is not as high as in APs.

Improving quotation accuracy perhaps
necessitates changing the compensation
system for sales reps.

For example, reducing the number of proposed quotations to 150 and thereby
receiving 60 orders would improve productivity and reduce cost significantly.
In order to improve the conversion rate (the ratio of orders received toquotations proposed), it might be effective to set an efficiency-related KPI for
performance assessment of sales representatives and link it to theircompensation. Also, in addition to improving the conversion rate, it is necessary
to make efforts to narrow the gap between the quoted prices and the ordered
prices. To this end, instead of emphasizing the price of plant body alone, it isimperative to focus on a comprehensive proposal to road pavement companies,
including the new CSC. As the AP price leader in Japan, it also needs measures
for improving (recovering) sales prices. Provided that these aims are fulfilled,
CGRA does not consider it difficult for Nikko to achieve 15% operating profit
margin. The coming three years would be the key period to Nikko’s improved
profitability, when the domestic road pavement companies’ investment
sentiment is forecast to be high.

Nikko’s “SWOT” factors
in CGRA’s view:

In considering Nikko’s management strategy, CGRA suggests three factors tobe addressed in each of the “SWOT” attributes. Although there could be other
SWOT factors, this report focuses on general ones and attempts to develop thecompany’s future strategies that could be assumed on their multiplication:

Nikko (6306) August 31, 2018

CGRA Company Report21-S (strength):(1) Over 70% share in the domestic market; (2) In-house production of AP
and BP core equipment and control panels; (3) A high ratio of
maintenance and services-

W (weakness):(1) The low overseas sales ratio and concentration to China; (2) Low
research and development ratio; (3) Lack of diversity of employees-

O (opportunities):(1) An increase in domestic AP users' renewal investment; (2) Domestic
AP/BP users’ work-style reform; (3) Increasing environmental needs in
China’s AP market-

T (threat):(1) A decrease in construction investment after the Tokyo Olympic
Games; (2) A decrease in the number of domestic AP/BP factories; (3)Intensifying competition in China

3 elements each in “S,” “W,” “O” and “T”
identified by CGRA.

It is necessary to expand in new areas andoverseas business while domestic renewal
investment is made at a high level.

In terms of “S” (strength), in CGRA’s view, few other companies have the same
three strengths of Nikko. However, it seems that its 6% operating profit margin,
the result of its strengths, is not yet a differentiating factor but remains only agood thing. Nonetheless, implementing new initiatives enhancing all threefactors, (1) to (3), might lead to differentiation. As to “O” (opportunities), as
mentioned above, CGRA believes that the expected increase in domestic users’
renewal investment in the coming three years and the users’ work-style reforms
are likely to crate business opportunities for Nikko. In overseas markets,environmental awareness is forecast to increase in China, Nikko’s main
overseas market, the market needs are likely to shift from the quantitative
expansion stage to the qualitative improvement stage, which would lead tocreating business opportunities for Nikko that has strengths in recycling andother environment-friendly technologies.

Nikko’s effective measures for “W” and“T” will be also important.

Regarding “W” (weakness), Nikko’s currently low overseas sales ratio needs toincrease given that the domestic AP/BP-related market is not expected to growin a medium term. Presently 80% of its overseas sales come from China in theyear ended March 2018. Diversifying its business into other countries in Asiaetc. is necessary. This initiative necessitates improved diversity of its
employees. As to “T” (threat), a significant decline in Japan’s construction
investment after the Tokyo Olympic Games could fuel consolidation ofdomestic AP/BP manufacturers. Nikko is currently developing new products
and initiatives toward this. The point is whether the company could get these
initiatives on track. Given that, in China, an increasing number of local
companies are forecast to enter the high-end AP market, Nikko needs
differentiation in recycling and energy-saving technologies.

It is necessary to increase future growthand profitability based on “S” and “O.”

Based on “O” and “S,” CGRA believes that it is important for Nikko to
implement a proactive growth strategy, including: (1) expanding sale of VP, a
new product, for AP renewal investment, (2) expanding sale of crusher plants
in new areas, (3) supporting users’ adoption of ICT and providing new services
based on the new CSC and new control panels, and (4) rolling out in full scale
its recycling, energy-saving and other environment-related technologies toChinese AP market that it has accumulated in Japan.

Nikko (6306) August 31, 2018

CGRA Company Report

22

“T” and “W” need to be addressed fromperspectives differing from conventional
perspectives.

To avoid a fatal damage from its “T” and “W,” it is important for Nikko toincrease its share in the existing areas and develop new areas anticipating
decreases in construction investment and in the number of APs and BPs after
the Tokyo Olympic Games. Regarding the existing areas, however, increasing
its share in the domestic AP market is difficult although there still is room for
an increase in the domestic BP market. It is uncertain whether this effort willlead to improved profitability. CGRA believes that important factors in newarea development include an increase in research and development expenses,
M&As, and diversity of employees who have perspectives differing fromconventional perspectives.

It is necessary to strengthen allocation of
resources to R&D and diversity in a
medium term.

Nikko’s R&D expense to sales ratio is 0.8% in the year ended March 2018. It
has 13 employees in R&D, whose average age is 38.3. (Registered patents
number: 240; registered utility models number: 7; registered designs number:
64; registered trademarks number: 87) Although its R&D expense ratio is not
relatively low compared to its competitors, some of which have around 1%
R&D expense ratio, it is desirable to increase its R&D expense from its current
level of 300 million yen along with the establishment of the new techno center
to enhance differentiation and new area development. Diversity of employees
should be improved, too. Nikko has 17 women employees, only 3% of the total
employees, as of the end of the year ended March 2018 on a non-consolidated
basis. It has 101 foreign employees, or 12.5% of the total employees, as of thesame date, indicating an insignificant increase relative to the increase inoverseas sales ratio.

The key to “T” and “S” is a differentiation
strategy; that for “O” and “W” is an
improvement strategy.

In terms of “T” and “S,” concrete initiatives are needed for implementing
Nikko’s differentiating strategy. A risk in its external environment is a possible
decline in construction investment in Japan after the Tokyo Olympic Games.
Also, in response to the expected consolidation of AP and BP factories, Nikko
needs a strategy leveraging its strengths. If it can expand sale of AP Value
Packages (VPs) based on the new CSC business model and bundle sale of new
crusher plants to road pavement and other companies, it will be able tominimize the impact of the worsening external environment. Regarding “O”
and “W,” the key is an improvement strategy. Management needs to avoid asituation where the company’s weaknesses prevent achievement of results
despite business opportunities it has. In this regard, employees and management
diversity is important, to which attention should be paid. Nikko also needs tochange its R&D structure and implement M&As.

Fig. 21: SWOT analysis and strategy

Source: Prepared by CGRA based on Jissen SWOT Bunseki (SWOT Analysis in Practice)

Nikko (6306) August 31, 2018

CGRA Company Report23

(4) Non-financial analysis:
Verifying the business modelMedium and long-term investors
increasingly need non-financial
information disclosure for their analysis.

In recent few years, investors increasingly require environmental, social andgovernance (ESG) and other non-financial information along with financial
information. Especially for long-term investment, non-financial information
analysis is considered relatively valid. Non-financial information is importantin following senses: (1) it is imperative for medium and long-term improvementof corporate value based on corporate philosophy; (2) it is linked to the businessmodel and helps develop and enhance the company’s unique model; and (3)management strategy is the key. Moreover, corporate governance needs tosupport the validity of these factors, (1) to (3). Investors are also increasingly
requesting disclosure of non-financial information, of which framework should
be considered.

Points in business model disclosure:

CGRA believes the core non-financial information to be disclosed is thebusiness model. Among listed Japanese companies, there is significant room
for improvement in this regard. Although the business model is conceptuallyshared internally, companies’ challenge is to disclose in clear language thebusiness model’s strengths and readiness for risks. They need to explicitly
describe business strategy for developing and enhancing their unique models,valid measures to respond to risks and changes that could weaken their models,and KPIs that indicate the progress of strategy. In this process, the company
might need to decide on allocation of management resources or withdrawal or,in some cases, to change its business model. “E” and “S” factors areincorporated into the business model. It is important that the board of directors
and other “G” functions supervise the executive members from an objective
perspective and guide them to sustainable improvement of corporate value.
Fig. 22: Nikko’s business model

Source: Nikko

Nikko (6306) August 31, 2018

CGRA Company Report24A point in a business model is to describe the following elements in a simple
and clear manner: (1) competitiveness and the sources of it, (2) factors indriving profits, (3) targeted business results, (4) positioning in the market
competitive landscape, and (5) relations with various stakeholders that support
its competitiveness. In terms of “(1),” Nikko’s competitiveness is demonstrated
by its over 70% share in APs with a significant difference from the second
largest Tanaka Iron Works that has less than 25% share. CGRA believes thatthe source of Nikko’s competitiveness is its maintenance and services.
Maintenance and services also play a significant role as a factor in driving
profits. Items to be taken into account in considering Nikko’s business model
are: its sound financials (67.1% shareholder equity ratio), unique technologies
contributing to the high entry barrier, R&D system which to respond to
customer needs, trust from customer companies (as their solution partner), andpartnerships with suppliers.

An analysis of Nikko’s business model:

5 core technologies supporting Nikko’sbusiness model:

Nikko has five core technologies: heating in APs, mixing and kneading in BPs,
maintenance and services supporting both types of plants, IoT-oriented control,
and transportation utilized in a range of areas. Its core business, AP and BP
business, has a high entry barrier; there has been no new entrants to the market
for many years. Nikko has manufactured its core products in-house and soldthem directly to users, thereby developing new products before its competitors
and together solving the users’ issues including improving their profitability.

In the new medium-term management
plan, changing maintenance and services
would contribute to increasing corporate
value.

In announcing the business strategy for developing and enhancing its uniquebusiness model as part of its new medium-term management plan, which tocommence in the year ending March 2020, it is imperative to describe changes
and contributions of maintenance and services. The new medium-term
management plan will have to explain them to investors in a concrete manner.
In addition to setting KPIs which to show the progress of strategy, it will needto indicate effective measures to address risks and changes. Lastly it will haveto indicate the company’s policy concerning distribution of profits based on
performance results. Generally speaking, Japanese companies’ medium-term
management plans tend to overemphasize the last fiscal year’s financial targets,
which need to be re-considered in the future.

Fig. 23: Revenue from maintenance and services and its composition ratio
40.4

41.9

45%

41.2

Net sales (mil. yen)

38.3

39.1
39.2%

12,0003,436
10,000
8,000

39.5%

3,575

36.7
3,847

37.6
3,530

2,800
2,528

2,780

34.3

35.0

35%
3,773

3,720
30%

2,175
2,311

25%
20%

6,000
4,000

40%

9,111
7,513

6,857

7,636

7,087

7,818

8,559

8,756

8,664

8,277

8,167

Percent of Group net sales

14,000

15%
10%

2,000

5%

0

0%
FY 2008

FY 2009

FY 2010

Domestic APS

FY 2011

Domestic BPS

FY 2012FY 2013

FY 2014

FY 2015

FY 2016

MS sales percentage of Group net sales

FY 2017

FY 2018(E)

Source: Nikko

Nikko (6306) August 31, 2018

CGRA Company Report25Changing the business model of maintenance and services with
the New CSC
Growth of revenue from maintenance andservices has been sluggish.

The revenue from maintenance and services in the year ended March 2018 was
12.05 bn yen, accounting for 34.3% of Nikko’s total revenue in Japan on a nonconsolidated basis. Though the revenue from maintenance and services
comprises relatively a high percentage, its growth has been slow since the year
ended March 2015. This is also the case for profit margin. This tendency has
been more visible with APs than with BPs. According to Nikko, factors in thesluggish growth include renewal of plant bodies that eliminate revenue frommaintenance and services. BPs generally generate a higher maintenance andservice revenue than APs because of the higher price of the plant body and useof heat.

Details of maintenance and services:

Revenues from maintenance and services consist of those from (1) components,(2) emergency repairs, (3) planned repairs, (4) systems (sold as a stand-aloneunit), (5) projects and (6) remote maintenance. Out of them, the largest revenue
comes from planned repairs, which is followed by systems and components inboth APs and BPs. APs’ gross profit margin is considered close to 7 percentage
points lower than BPs’ because APs are mainly sold to road pavementcompanies, a more competitive market. BPs’ maintenance is priced higher thanAPs’ maintenance, but BPs’ cost is lower than APs’ cost. BPs, therefore, havea higher impact on earnings. Another factor is BPs’ customers. Most of them
are ready-mixed concrete companies, most of them are small-sized companies;
few of them are large companies.

Strengthening support for AP/BP users
with the new CSC.

Nonetheless, Nikko is implementing initiatives towards improved profitability
including revising AP maintenance and service prices in April to pass on theincrease in cost and establishing the new CSC at the headquarters. Specifically,
it plans to commence the operation of the new CSC for maintenance on October
1, increasing the personnel by 50% and expanding the floor area by 50% to 100
m² on the first floor of the headquarter building. (The CSC’s operation hours
will remain unchanged—from 7:00 to 19:00.) The existing CSC has assumed
only a back-up function, playing a passive role of communicating users’
consultation and related information to the sales representative. Nikko seeks toeventually transform the CSC from a cost center to a profit center.

Shift the business model from posteriori
maintenance to preventive maintenancewith the new CSC.

To this end, Nikko needs to adequately understand the users’ challenges they
face at the plant and to change its passive response approach that has been
conventionally based on consultation over the phone and emails. It should shift
its function from posteriori maintenance to preventive maintenance byproactively proposing components replacement and services. It thereby shouldseek to reduce opportunity losses in users’ plant operations and receive acompensation or part of their revenues. Nikko has accumulated big data
concerning operations of APs etc. for over 10 years. It is important to leveragethem for solving issues and thereby to monetize them. Nikko provides remote
maintenance for 60–70% of its BP users. On the other hand, there are few casesof remote maintenance of APs given that in many cases road pavementcompanies outsource AP operations.

Nikko (6306) August 31, 2018

CGRA Company Report

26

The new CSC will support road pavementcompanies’ plant operation.

Over 200 partnering companies
throughout Japan are the source ofNikko’s differentiating competitiveness.

AP users usually have no excess on-site personnel for operating the plant. In
the case of an AP installed in a metropolitan area, they have a person always
stationed on-site. Troubles sometimes occur. Nikko’s new CSC will support theon-site personnel to help increase their productivity by 20–30%. AP users are
expected to increasingly utilize IoT and outsource plant operations given thework-style reform and labor shortage. Nikko intends to benefit from this trend
by receiving compensations by providing relevant services. The point here
would be that the users see added value in services that Nikko provides inrelation to such outsourcing. Furthermore, if Nikko conducts regular “healthchecks” of the users’ plants and suggest the timing of components replacement
and risks concerning productivity decline, that will lead to proposals for plant
body renewal. While the profit margin from BP maintenance and services isrelatively high, Nikko will seek to further improve the margin bycommunicating the effectiveness of the new CSC among the local ready-mixed
concrete companies. Nikko’s business model should center around maintenanceand services.
Tanaka Iron Works, Nikko’s competitor in APs, provide services on its own.
On the other hand, Nikko provides services through over 200 partnercompanies along with its own sales reps. This is a differentiating factor.
According to Nikko, consultations regarding simple maintenance and services
are handled and completed by the partner-companies alone without Nikko’s
sales reps accompanying them. Nikko’s approach is more efficient. Along withthe commencement of the operation of the new CSC for improving, Nikko
intends to improve and standardize the partner-companies’ skills. Goingforward, it will change its system and internally share information collected
through the new CSC to enable orders for components to be placed not only by
the person in charge of service but by other members. Quality of services differs
significantly between experienced members and junior members. Nikko intends
to overcome this issue with the operation of the new CSC.

Fig. 24: Headquarters permanent exhibition hall after renovation; and the new CSC

Source: Nikko

Nikko (6306) August 31, 2018

CGRA Company Report27Governance system supporting the business model
Governance supporting the progress ofbusiness strategy:

Roles of governance are to implement business strategy for driving progress
and growth and monitor its effectiveness vis-à-vis related risk factors andchanges. In terms of Nikko’s corporate governance, Nikko is a “company withboard of company auditors.” It has 4 company auditors, of whom 3 are outsidecompany auditors (including 1 independent officer), 7 directors, of whom 2 areoutside directors, and 5 executive officers. One of the 5 executive officers is
concurrently a director.

Comment by CEO Nishikawa:Nikko’s CEO Nishikawa stated that “we have always addressed user needs
straight (earnestly) and taken good care of our customers. We will maintainthese efforts in corporate governance, too.” Nikko seeks to be a company thatis reliable and indispensable for the users. According to Mr. Nishikawa, BPs
are not considered as reliable as APs. The company seeks to improve thissituation.

Nikko proactively addressing diversity, agovernance issue.

As to Nikko’s present governance, there seems room for improvement
including age composition and other elements of diversity of directors.
According to CEO Nishikawa, Nikko promotes employees who indicate
potential for becoming a director in the future to the regional head in their early40s. (Usually employees promoted to the said positions are over 45 years old.)
They can also assume a position to manage a large branch office. Promotion ofan employee to a management position is considered based on his/hersupervisor’s recommendation but is also discussed with other departments.

(5) Expectations towards the new medium-term
management plan
3 areas Nikko is emphasizing in thecurrent medium-term management plan:

Nikko’s current medium-term management plan (FY2016–2018) describes
three priority areas: (1) stable domestic business base, (2) domestic growthstrategy, and (3) overseas growth strategy. In the following, CGRA identifies
factors important for Nikko’s domestic business base and domestic/overseas
growths and describes key points concerning past progress and future outlook.
Nikko’s targeted consolidated net sales and operating profit margin for the year
ending March 2019, the last year of the said medium-term management plan
period, respectively 32 billion yen and 7%, are forecast to be roughly achieved.

What CGRA wants to see in the new
medium-term management plan:

Concerning the new medium-term management plan for the period
commencing in the year ending March 2020, CGRA would like to see, in
addition to financial targets, such items as: (1) indication of businessenvironment towards the last year in the said period, (2) establishment of KPIs
indicating improvement of corporate value, and (3) linkage between last fiscal
year’s results and management members’ compensations. CGRA believes that
KPIs should include not only financial information—such as the ratio of VPs
and mid-ship plants to AP bodies, revenue from crusher plants, ratio ofrecycling plants in China, BP’s domestic share, profit margin from maintenanceand services with commencement of the operation of the new CSC—but also
non-financial information such as diversity of employees and contribution toenvironment and society. Such KPIs will clearly indicate a pathway to
improved corporate value and be appreciated by the stakeholders.

Nikko (6306) August 31, 2018

CGRA Company Report28

Stabilizing domestic business foundation:
The key is Value Packs (VPs).
VPs and mid-ship plants together
accounted for 20% of the domestic salesof AP bodies in the year ended March2018.

The key to stabilization of the domestic business is expansion of sales of VPs.
(Refer to Fig. 4.) VPs are designed for small and medium-sized plants with 50–
100 thousand ton production capacity. They meet various present and futureneeds concerning bituminous mixture. Minimum production capacities of a VP
and a mid-ship plant are, respectively, 50 thousand tons and 100 thousand tons.
According to Nikko, net sales from VPs and mid-ship plants for the year ended
March 2018 were, 580 million yen (2 units) and 400 million yen (1 unit),
totaling to 980 million yen (3 units). They together accounted for 20% of thedomestic revenue from AP bodies (5 billion yen) and 10% of the unit sales.
Nikko forecast the revenue from them together to be 1.26 billion yen for theyear ending March 2019, of which revenue from VPs to be 920 million yen.
They are expected to comprise an increased percentage in the total revenue.

VPs have 4 characteristics—including
being the first of the kind mainly using
recycled mixture materials.

VPs have four major characteristics. They (1) are structured to use mainly
recycled materials; (2) consider environmental impacts and safety; (3) arespace-saving; and (4) have value prices. In relation to “(1),” in today’s
bituminous mixture shipment, recycled materials used account for about 75%.
It is rather odd that there had been no such structure before. In the past,according to Nikko, the company was increasing the percentage of recycledmaterials by adding a recycled bituminous mixture unit to a plant otherwise
using 100% new materials. Although VPs are highly productive and energyefficient, road pavement companies seldom replace their existing plant with a
VP as long as they can use the existing plant. We would like to see whether
Nikko could come up with a strategy that changes this situation.

VPs are products that meet today’s needs.

As to the characteristics “(2),” consideration of environment impacts and safety,
this could be a significantly positive point, especially when road pavementcompanies are emphasizing work-style reforms in the field. As described above,road pavement companies must immediately implement work-style reforms
including shortening field work hours, considering the high average age of theiremployees and long work hours.

Fig. 25: Stabilization of domestic business base

Source: Nikko

Nikko (6306) August 31, 2018

CGRA Company Report29Regarding the characteristics “(3),” space-saving, a VP’s footprint has been
reduced 20% compared to the conventional type—from 216 m2 (conventionaltype) to 173 m2 (VP)—with the AP body stacked underneath the recycling unit.
This contributes to improved efficiency in the use of the premises, securing
separate routes for dumper trucks and excavators and thereby securing spaces
for safe operations of heavy machinery. In terms of “(4),” value prices, on-site
construction periods are reduced with the body and the recycling unit placed ina single frame. In addition, structure application related procedures could be
reduced. Besides, Nikko started selling “mid-ship” APs, with a larger capacity
in the same concept, as part of the same series with VPs.

Domestic growth strategy:
Expectation toward crusher plants, a new area
Crusher plant business, which Nikko is
newly entering, is expected to generatesynergy with AP business.

As part of the domestic growth strategy described above under “(2),” thecrusher business is expected to be value-creating in terms of products. In the
crusher plant market, Nakayama, a non-listed company, has about 90% share.
Although Nakayama had 3 crusher plants installed in the past few years, they
were purchased products with limited value added. There are 650 APs equippedwith crusher facilities. Apart from them, there are approx. 900 crushed stone
suppliers in Japan. Therefore, approx. 1,550 plants are Nikko’s target plants for
new business. It plans to start producing crushers in-house in the year ending
March 2019 and to conduct the crusher plant business in full scale from the year
ending March 2020. The average price of a crusher plant is approx. 130 million
yen. A larger plant could be priced over 200 million yen. Along with in-houseproduction of crushers, it will seek to expand revenue from both the plant bodies
and maintenance and services, including equipping the crusher plants withsensors to shift from on-site monitoring to remote monitoring.

Fig. 26: Domestic growth strategy

Source: Nikko

Nikko (6306) August 31, 2018

CGRA Company Report30

Achieving 30% share in crusher plants
could add approx. 2 billion yen to therevenue.

Nikko has over 70% market share in APs. If it can sell APs and crusher plants
in a bundle, it will be able to generate significant synergy including increased
revenue from maintenance and services and improved efficiency. Demand for
40-50 crusher plants per year is anticipated. If, for example, Nikko can secure
30% share, its revenue from crusher plants and maintenance and services forthem would be about 2 billion yen. In its “other” business segment, too, Nikko
imports and sells crushers made by Kleemann, German’s Wirtgen Groupsubsidiary. The company is increasing its focus on crusher business.

Overseas growth strategy:
Increasing revenue from Chinese market
Characteristics of Nikko Shanghai’s Aps:

The key to growth strategy for Nikko’s overseas business, the priority area“(3),” is to increase revenue from Chinese market. Nikko’s overseas sales
reached 3.965 billion yen in the year ended March 2018 (up 34% year-on-year),with its overseas sales ratio reaching 11.3%, a double-digit percentage for the
first time ever. The increase in revenue from Nikko Shanghai reaching 3.299
billion yen (up 55% year-on-year) accounted for all of the increase in theoverseas revenue. Nikko Shanghai’s revenue is expected to be 3.36 billion yen
in the year ending March 2019, with its revenue growth slowing down.
Nevertheless, Nikko forecasts its overseas revenue to reach 4.57 billion yen,with the overseas sales ratio increasing to 13.4%.

There are some 4 Chinese competitors in
the high-end AP market.

There are 3 models of APs for Chinese market: 320 tons/hour, 240 tons/hour
and 400 tons/hour. The 320 ton model sells the most. Its local sales price is 8.30
million RMB (approx. 140 million yen). Nikko has bigger production capacity,
and a less number of models, in China than in Japan. In the past, 120 and 160
ton models used to sell the most. However, with tariffs imposed on them,
China’s local companies have become the main players for these models.
Today, in the high-end market that Nikko is in, there are four competitors—2
Chinese and 2 European companies.

Fig. 24: Overseas growth strategy

Source: Nikko

Nikko (6306) August 31, 2018

CGRA Company Report31High-end APs’ ratio is forecast to increasein China in a medium-term partly due tothe environmental regulations.

China’s AP market is the world’s largest with about 500 units per year. Approx.
50 companies are anticipated to be in the market. In this market, there areapprox. 115 units of high-end APs, accounting for only 23% of the total units.
In the high-end AP market, China’s D&G has the largest share, 30 units,
followed by Switzerland’s Ammann and Italy’s Marini, with 25 units each, andXi’an Road, with 20 units. Nikko Shanghai presumably has the 5th largest
share, with 15 units. In terms of amounts, however, Ammnan has the largest
share, followed by Nikko Shanghai and Marini, which have similar shares.
D&G and Xi’an Road seem to have 10–15% lower share than Nikko Shanghai.
Amman has its components shipped from Switzerland.

Reasons of high evaluation on Nikko
Shanghai’s APs compared to its peers(environmental measures, etc.)

According to Nikko, the reasons for the higher evaluation on Nikko Shanghai
over its peers in China include: (1) urban-type plants, which process dust andlampblack in double-layered internal and external treatment facilities, (2)recycling units, which control temperature control, prevent contaminations, andreduce maintenance work, and (3) electric tanks, which can be flexibly
positioned, unlike European, mainly heavy-oil, tanks with fixed positions.
Electric tanks incur less running costs than heavy-oil tanks, too.

China’s tightening environmental
regulations is expected to provide a tailwind for Nikko.

In recent years, China is becoming increasingly interested in environmentconscious products. Presently recycled mixture materials account only for 10%
in China, a percentage equivalent to the percentage in the early 1990s in Japan.
China’s highways have to use new materials 100%. However, first-tier andsecond-tier roads can use recycled mixture materials for their middle and lower
layers though not for their surface layers. Regional and non-trunk roads, parking
lots and on-premises pavement can use recycled mixture materials, too.
Presently, Chinese road pavement companies use recycled materials mainly forthe cost reduction purpose. In a medium term, however, when the ratio of roadrepairs increases compared to new road pavement, and if tighter environment
regulations are introduced, demand for APs is forecast to increase that can use
both new and recycled mixture materials.

The ratio of Nikko Shanghai’s APs using
recycled materials will increase in a
medium-term, too.

In line with these trends, unit sales of Nikko Shanghai’s APs for recycled
mixture materials are increasing. While in the year ended March 2015 Nikko
sold 3 units of APs for recycled materials, it sold 6 units in the year ended March2018. Recycled materials used account for over 30% of the total materials,
which is forecast to increase further.
Fig. 28: Nikko Shanghai’s AP unit sales(Plants)

25
20
8

15

1

1

1
3

10
14
5

14

9

1

3

2
1

4

3

8

8

9

6

12

13

0

FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
(E)
VirginRecycled
Virgin & recycled
Source: Nikko

Nikko (6306) August 31, 2018

CGRA Company Report32Key points of Nikko Messe 2018
Nikko Messe 2018 is expected to trigger
Nikko’s growth toward and beyond its
100th anniversary.

Nikko will hold Nikko Messe, a commemorative event, from October 22
through November 2 at its headquarters towards its 100th anniversary in 2019.
According to Nikko, 1,200 people are expected to participate from its user
companies excluding distributors. (800 people attended a previous similar
event.) A range of products will be exhibited. AP products to be exhibited
include VPs, crusher plants, new control panels, and mobile crushers.
Machinery-related products to be exhibited include heat-related products,
crusher-related products, and other products useful for operation andmaintenance of plants in place. Control-related products to be exhibited include
IoT-related products contributing to improved efficiency of customers’
operations and system products enhancing effectiveness of maintenance. Selfpropelled crushers, conveyers, soil improving apparatuses etc. will be exhibited
also, given an expected medium-term shift in demand from stationery
equipment to mobile equipment.
Furthermore, by the time when Nikko Messe 2018 is held, the new CSC andthe Techno Center (the R&D building) will commence operations. The new
CSC will be fully glass-walled and located in the center of the headquarters’
permanent exhibition hall, which is now undergoing a renovation. The Techno
Center will be located next to the headquarters building. These and otherchanges are expected to occur.

Fig. 29: Main exhibitions at Nikko Messe 2018
AP (asphalt plant-related) products

BP (concrete batching plant-related) products◼ New model asphalt plant
Value-Pack•

Newly designed plant forrecycled mixture◼ Crusher plant•

Impact crusher for use inasphalt plants◼ New model batching plant
DASH-Progress◼ Batching plant for tunnels◼ Next-generation mixer• Prototype mixer with new kneadingmechanism◼ Compact plant for construction workand disaster recovery◼ New BP operations console• Plant operation and provision oferror information and equipment
information from server• Operations console settings andoperation log, etc. can be checkedfrom tablet

Mobile products◼ Self-propelled jaw crusher◼ Self-propelled conveyer Trackstack◼ Self-propelled soil improver Mobix

Other products:◼ Beverage container sorter◼ New model conveyor, etc.
Source: Nikko

Nikko (6306) August 31, 2018

CGRA Company Report33

FY 2011

FY 2012FY 2013

FY 2014

FY 2015

FY 2016

FY 2017

24,553
13,303
4,719
2,521
4,008
541
896
(39)
530
(7)
(838)
621

27,087
15,054
5,889
2,085
4,058
1,186
1,492
317
250
59
(933)
1,108

32,073
18,258
8,577
1,944
4,292
2,249
2,125
678
166
388
(1,109)1,982

30,707
15,071
8,287
2,853
4,495
1,832
1,214
712
527
451
(1,074)
1,582

34,11017,252
10,267
2,289
4,301
1,629
1,234
878
337
277
(1,097)
1,648

32,717
16,580
9,356
2,647
4,133
1,943
1,253
1,006
369
417
(1,102)
1,993

35,114
17,180
9,522
3,932
4,481
2,104
1,348
1,015
309
463
(1,031)
2,103

Net income attributable to owners of parent

122

881

888

1,348

1,896

1,340

2,239

Cash flow from operating activities

574
299
250
4

2,457
(954)
292
9

2,641
(936)
292
1

1,001
(305)
376
2

(1,040)
2,142
418
1

5,064
(316)
426
1,006

274
41
459
246

FY 2012FY 2013

Net sales
AP-related business
BP-related business
Environment- and conveyor-related business
Other business
Operating income
AP-related business
BP-related business
Environment- and conveyor-related business
Other businessCorporate expenses
Ordinary income

Cash flow from investing activities
Total dividend
Share buyback

Full-year new orders received
AP-related business
BP-related business
Environment- and conveyor-related business

Other business
Total
End-of-term order backlog
AP-related business
BP-related business
Environment- and conveyor-related business

Other business
Total

Capital investment
Depreciation and amortization
R&D expenses

Employees (consolidated)
Average age of employees (non-consolidated)
Average years of service (non-consolidated)
Female employees (non-consolidated)
Overseas employees (consolidated)
Foreign national employees (consolidated)

Nikko (6306) August 31, 2018

FY 2014

FY 2015

FY 2016

FY 2017

14,493
6,293
2,037
3,741
26,564

18,278
8,884
2,396
4,356
33,915

17,114
10,0682,711
4,606
34,50016,743
9,541
2,796
4,202
33,284

16,718
9,965
3,202
4,247
34,134

17,182
9,066
2,947
4,420
33,615FY 2012
3,671
1,378
－
360
5,410

FY 2013
4,685
1,685
451
424
7,246

FY 2014
6,727
3,466
309
535
11,039FY 2015
6,218
2,741
815
436
10,212

FY 2016
6,356
3,350
1,390
531
11,629FY 2017
6,359
2,894
387
490
10,132

YoY change
464
(899)
(255)
173
(519)
YoY change
3(456)(1,003)(41)(1,497)FY 2011
292
432
239

FY 2012
335
389
256

FY 2013
844
395
295

FY 2014
815
422
276

FY 2015
877
487
227

FY 2016
1,261
482
271

FY 2017
550
472
291

775
44.2
21.5
10
92
92

763
44.7
21.2
11
90
90

767
43.3
20
11
91
91

796
43.1
19.3
10
95
95

803
42.2
18.2
12
92
94

797
42.3
18.5
15
91
93

807
42.2
18.3
17
101
101

FY 2018
1,200
495
300

CGRA Company Report34

<Coverage analyst>
Hidehiko Hoshino, CMA
Capital Goods Research & Advisory Company Ltd
Hidehiko joined New Japan Securities (Current Mizuho Securities) in April 1987, where
he was assigned to Corporate Research Department. He joined Jardine Flemming
Securities (Current JP Morgan Securities) in 1997 and later Deutsche Securities. He waswith UBS Securities from 2006 to 2016. He was a managing director at Deutche since2003 and later at UBS Securities. He covered the machinery sector since 1988. He wasthe vice president of the machinery disclosure group at Securities Analysts Associationof Japan over 10 years. In June 2017, he founded Capital Goods Research & Advisory
Co, Ltd where he serves as the representative director. He is a certified member of the
Securities Analysts Association of Japan.
<Analyst evaluation by third parties>-

Nikkei Veritas (formerly Nikkei Financial Newspaper):Analysts Ranking (Machinery Sector):
Ranked 1st in 1999–2001; Ranked 2nd in 2002–2012; Ranked 3rd in 2013–2015-

Institutional Investors:
Sell-side Analyst Ranking (Machinery Sector)
Ranked 1st in 2003 and 2009; Ranked 2nd in 1998–2002, 2004–2008 and 2010–2013: Ranked 3rd in 2014 and 2016; 2015: Ranked 4th in 2015-

Thomson Reuter Starmine Analyst Awards Japan:
Performance Forecast (Machinery Sector)
Ranked 1st in 2013; Ranked 2nd in 2016

This report is not intended to be used or considered as an investment solicitation, recommendation or advice. This reporthas been prepared for general information purposes based on our company’s own perspectives. Although the contents ofthis report are based on publicly disclosed information, its accuracy or completeness is not guaranteed. Capital Goods
Research & Advisory Co, Ltd (CGRA) owns the copyright of this report, citing from which without permission isprohibited. The contents of this report might be changed in the future without prior notice. CGRA or this report has noconcern with investors’ investment decisions. Accordingly, decisions concerning investment should be made bythemselves.

Nikko (6306) August 31, 2018

CGRA Company Report35