Ai Holdings
3076 Tokyo Stock Exchange First Section
Company Research and Analysis Report
FISCO Ltd.
http://www.fisco.co.jp

18-Apr-14
Important disclosuresand disclaimers appear
at the back of thisdocument.

FISCO Ltd. Analyst
Noboru Terashima■M&A a key growth strategy supplementing
existing businesses
Ai Holdings is a pure holding company that has 16 operating company
subsidiaries, including Dodwell BMS Ltd. and Graphtec Corporation. Thesesubsidiaries are mainly developing 7 businesses, with its security equipment
and US peripheral computer equipment businesses being the growth engines.
Q2 FY6/14 results (Jul-Dec 2013) showed sales of ¥17,813mn up 10.8% y-oy, consolidated operating profit of ¥3,007mn up 29.3% y-o-y, consolidated
recurring profit of ¥3,090mn up 26.5% y-o-y, and consolidated quarterly net
profit of ¥1,923mn up 44.8% y-o-y. As a result, there was an upward revisionof FY6/14 full-year forecasts, targeting sales of ¥35,600mn (+9.9% y-o-y),consolidated operating profit of ¥6,000mn (+20.6% y-o-y), consolidated
recurring profit of ¥6,100mn (+20.1% y-o-y and consolidated net profit of¥3,750mn (+26.1% y-o-y).
Ai Holdings has announced that it will establish a new business from thenext term. Further, it has made public the fact that, in addition to existing
businesses, M&A will be a key growth strategy. While always working on anumber of deals, it appears that it is currently also in the process ofprogressing some (particular) projects. So we have to pay attention to future
developments.
Further, given that it has indicated a dividend payout ratio of 30-35%, it
appears there is the potential for increased dividends depending on thisterm’s results (profits).

■Check Points
・A clear, unwavering policy & management’s rapid decision-making are major strengths
・Strong current performance this term indicates the potential for results to exceed targets
・Continuous growth through a cycle of acquiring and nurturing new businesses

Consolidated Sales and Operating Profit, FY6/10FY6/14E
Sales (left axis)

Operating profit (right axis)（¥mn）
40,000（¥mn）
7,000
35,60032,38930,00025,85526,00628,156

6,000
6,000

4,974

4,000

20,000

3,000

3,542
10,000

5,000

2,980

2,000

2,312

1,000

0

0
FY6/10FY6/11

FY6/12

FY6/13

FY6/14E

We encourage readers to review our complete legal statements on “Disclaimer” page.

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18-Apr-14

Ai Holdings■Company outline
Rejuvenation & expansion through reforms that putting
priority on profits rather than sales（1）Company History
Ai Holdings was established as a pure holding company in 2007, and currently
encompasses 16 operating companies, of which 14 are consolidated subsidiaries,
1 is a non-consolidated subsidiary, and 1 is an equity method affiliate. Given
that Dodwell BMS Ltd. and Graphtec Corporation are the main operatingcompanies the company history for these two subsidiaries is outlined below.
Originally established in 1950 as Typewriter Service Co., Ltd., Dodwell
subsequently underwent corporate reorganization, changing its name to Dodwell
BMS Ltd. At the time, Dodwell was mainly engaged in the sale of officeequipment such as typewriters, post office franking machines and personal
computers, but its profitability languished. Subsequently, in 1994, Mr. Hideyoshi
Sasaki, the current Chairman of Ai Holdings, purchased it (acquiring 51% of its
shares) and became its paramount manager. The then President Sasaki
promoted reform at Dodwell aimed at “putting priority on profit rather thansales”, rebuilding it to the point where in 1999 its shares were listed on the
OTC market.

History of Dodwell BMS
1950

Established as Typewriter Service Co., Ltd.

1963

Reorganized as Dodwell Business Machines Service Co., Ltd.

1978

Renamed Dodwell BMS Ltd.

1994

Mr. Hideyoshi Sasaki took a 51% stake in the company and became its president

1999

Registered shares on the over-the-counter market

2000

Took a majority stake in Pro-Mech Corp., making it a subsidiary

2001

Took an equity stake in Takamisawa Cybernetics Co., Ltd.

2002

Listed shares on the Second Section of the Tokyo Stock Exchange

2003

Listed shares on the First Section of the Tokyo Stock Exchange

2005Entered a business agreement with Graphtec Corp.

2007

Merged with Graphtec Corp. to form Ai Holdings Corp.

In contrast, the predecessor to Graphtec was Watanabe Laboratories Inc.,
which was established in 1949 by a Mr. Watanabe, a former employee that had
spun out from Yokogawa Electric Corp. (6841), being a company that developed
Japan’s first X-Y plotter for the automatic production of graphs. Subsequently,
the company operated globally, with its flagship product being pen plotters forcomputer-aided design (CAD). In the early1990’s, however, as a consequenceof Hewlett-Packard Inc., of the US, introducing ink-jet printers, the demand forpen plotters rapidly declined and corporate performance continued to deteriorate.
Despite reducing offices nationwide and managing somehow to survive, theresult of restructuring was deterioration in customer service, with hope for arecovery in results coming from a business alliance with Dodwell BMS.

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18-Apr-14

Ai Holdings■Company outline

History of Graphtec
1961

Developed Japan’s first X-Y plotter

1977

Name changed to Watanabe Measurement Equipment

1983

Name changed to Graphtec Corp.

1985

Shares listed on the Second Section of the Tokyo Stock Exchange

1987

Shares listed on the First Section of the Tokyo Stock Exchange

1995

Established a subsidiary in California, USA, now called Graphtec America Inc.

2005

Established business agreement with Dodwell BMS

2007

Merged with Dodwell BMS to form Ai Holdings Corp.

Ai Holdings was established as a pure holding company in 2007, with its
shares listed on the First Section of the Tokyo Stock Exchange. Since then to
the present, the company has grown operations rapidly by setting up new
subsidiaries and proactively engaging in M&A.

History of Ai Holdings
Apr-07

Established through the merger of Dodwell BMS and Graphtec.
Listed on the First Section of the Tokyo Stock Exchange.

Jul-08Purchased Neuron Co., making it a subsidiary.

Jan-09Purchased Shiomi Sekkei Co., making it a subsidiary.

Jul-09Established subsidiary Ai Engineering Co., Ltd.

Sep-09Established Silhouette America Inc.

Jul-10

Shiomi Sekkei Co. changed its name to Ai Sekkei Co.

16 Group companies engage in 7 businesses（2）Description of businesses
As mentioned above, Ai Holdings is a pure holding company encompassing 16
operating companies, of which, 14 are consolidated subsidiaries, 1 is an nonconsolidated subsidiary, and 1 is an equity method affiliate that are mainly
engaged in the 7 businesses outlined below. Looking at sales by operating
segment for FY6/14 shows that: (a) security equipment was ¥4,218mn(representing a sales contribution of 23.7%), (b) card equipment and other officeequipment was ¥1,524mn (8.6%), (c) maintenance services were ¥879mn (4.9%),(d) peripheral computer equipment was ¥5,282mn (29.7%), (e) measuring
equipment and environmental testing devices was ¥1,001mn (5.6%), (f) designwas ¥2,284mn (12.8%), and (g) other businesses were ¥2,625 (14.7%). Sales
trends by segment for the last 4 years are as set out in the graph below.

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18-Apr-14

Ai Holdings■Company outline

Sales Contributions by Businesses in H1 FY6/13
Other
14.7%

Securityequipment
23.7%

Structural design
12.8%

Measuringequipment andenvironmental
testing devices
5.6%

Card equipment
and other officeequipment
8.6%

Peripheralcomputerequipment
29.7%

Maintenanceservice
4.9%

Sales by Businesses, FY6/10-FY6/13
Other
Structural design
Measuring equipment and environmental testing devices
Peripheral computer equipment
Maintenance service
Card equipment and other office equipment
Security equipment
6,002

（¥mn）
35,00030,00025,00020,00015,00010,000

2,694

3,537

4,636
4,618

4,296

3,896

4,315

1,878

2,161

1,984

6,552

6,816

6,916

1,901
2,478

1,819
2,405

1,698
2,717

6,056

5,371

5,887

FY6/10FY6/11

FY6/12

5,000

1,904
8,005
1,655
2,487
7,713

0
FY6/13

While there are 14 consolidated subsidiaries, there are 3 main operatingcompanies, being Dodwell BMS, Graphtec and Ai Sekkei, with their related
businesses described in the diagram below.
Dodwell BMS

Graphtec

Security equipment

Peripheral computer equipment

Card equipment and other officeequipment

Measuring equipment andenvironmental testing devices

Ai Sekkei
Structural design,measurement ofresistance to earthquakes

Maintenance service
Leasing, installment sales, otherbusinesses

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18-Apr-14

Ai Holdings■Company outline（a）Security Equipment
The main products are security systems such as security cameras andrecorders. The products are mainly purchased from Korean manufacturers, withthe company heavily involved in determining the specifications for the purchased
products. The advantage of the Korean products is, among other things, thatbasic technology is developed from military technology and thus theirperformance is high relative to the cost. Accordingly, the cost performance ofthe company’s products is superior to that of its major domestic competitors.
Further, one of distinctive features of the company is that it can provide acomprehensive service including maintenance. While it has a broad customer
base, with major users being condominium buildings, financial institutions suchas banks and securities companies, government agencies commercial precincts
and retail store chains, in the last several years sales to existing condominium
buildings have grown rapidly. When the security equipment business was initiallyestablished, it was mostly general corporate sales via agents, however, in recent
years Ai Holdings has strategically expanded direct sales, particularly forexisting condominium buildings (refer below for details).
（b）Card Equipment & Other Office Equipment
The main products include ticket issuing machines and machines forregistering return patient visits for hospitals, as well as machines for on-thespot issuance of IC cards for financial institutions and retailers. Sales tohospitals is not a high growth area, but one from which we can expect steadydemand. For financial institutions and retailers, sales of on-the-spot IC issuancemachines remain minor, however, some regional banks have begun to adopt
them, and additionally some megabanks have also decided to introduce them. We
need to pay attention to this trend also going forward.
The other major type of equipment sold is CAD devices for steel structures.
As it is a niche market it is not expected to grow rapidly, however, it is an area
where steady renewal demand may be expected.
（c）Maintenance Services
This business engages in maintenance services for security, card and otherequipment. In the past, this business also contracted to maintain equipment
produced by other companies in order to optimize the efficiency of its
maintenance staff, however, in recent years, it has concentrated on maintaining
Ai Holdings equipment, so the sales weighting of maintenance services for othercompanies has been dropping.
While only small in terms of sales, it is a key business. Much of the security
and card equipment handled by the company is not purchased outright, but by
way of lease contract, requiring periodic maintenance. Usually, in respect of thisequipment, a maintenance contract is entered into separately from the lease
contract that represents the purchase price of the equipment. However, at Ai
Holdings a maintenance agreement is included in the lease contract in the formof a “Peace of Mind Package (Anshin-pack)”, structured so that product sales
are recorded in that business. Further, because maintenance services are an
accretive stock business, it leads to mid- to long-term revenue stability.
Additionally, since having a maintenance business is a strength in terms ofmarketing and providing customers with peace of mind, it also has an aspect ofcontributing to security and card equipment sales and is arguably the hidden
revenue contributor.

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5

18-Apr-14

Ai Holdings■Company outline（d）Peripheral Computer Equipment
Refers to computer peripherals such as cutting machines and scanners
handled by Graphtec. Ai Holding’s cutting machines were developed based on
the original technology created by Graphtec for plotters, with cut width ranging
from the small A4 format size to large formats that exceed 1,600 mm. It
focuses on corporate users, such as outdoor advertisers and billboard
manufacturers.
Further, in recent years, there has been significant growth in miniaturized
products of what were previously industrial cutting machines for consumers forhobbies (mainly paper craft) in Europe and North America. The basic products
are produced in China and Vietnam, with the retail price in the order of ¥10,00020,000. In addition to this, customers that purchase the basic products become
members, with there also being sales of a variety of content (designs etc.) andconsumables. The main operating entity is the American subsidiary Silhouette.
(Refer below for more details)
On the other hand, the scanners are industrial use equipment able to scanlarge displays up to A0 size, with some being supplied on an OEM basis to major
precision equipment manufacturers.
（e）Measuring Equipment and Environmental Testing Devices
Measuring equipment refers to an extensive line-up of products able to handle
a broad range of data gathering activities including voltage, temperature,humidity and pulse readings. Environmental testing devices refers to equipmentthat checks the performance of electronic components, such as printed circuitboards, under specific conditions, such as high or low temperature, and may also
be customized in line with client requests.
Given that main usage purpose for all of the products is “testing
equipment”, it will not see rapid growth but is a stable business that records
profits.
（f）Design
3 companies are involved in design operations: Ai Sekkei, the former Shiomi
Sekkei that was acquired by Ai Holdings and renamed, as well as consolidated
subsidiaries Tanabe Sekkei Co., and Chuo Sekkei Co. They possess over 200
related technical staff, with operations centered seismic capacity evaluation andearthquake resistant construction, which are highly specialized (areas) within
the architectural design industry. Additionally, it is engaged in comprehensive
construction consulting operations, leveraging its superior technologicalcapabilities in areas including architectural design, structural design, and thedesign of equipment and devices, with it being a business that is producing
stable profits.
（g）Other Businesses
The main operations within this segment are leasing and installment sales,
where leasing and installment sales relating to sales of security, card and otherequipment referred to above are undertaken. Further, as required leasing andinstallment sales of other companies’ products are undertaken.
As noted above, Ai Holdings undertakes sale and maintenance services for avariety of equipment, and while each piece of equipment and service has its own
strengths and distinctive features, as a company Ai Holdings’ real strength(distinctive characteristics) may be boiled down to “Management Capability”
and “Marketing Capability”.

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18-Apr-14

Ai Holdings■Company outline

A clear, unwavering policy and rapid decision-making are
major strengths（3）Management Capability
The greatest strength of Ai Holdings is “management capability”, in otherwords the leadership and faculty for management of Chairman and CEO Sasaki.
Since assuming the top leadership position at Dodwell BMS in 1994, Mr. Sasaki
has always declared M&A to be a core policy in its growth strategy, with hispolicies (e.g. not undertaking business with low profitability and not undertaking
business in mass markets that are easy for large corporations to enter) nothaving changed at all from those 30 years ago, or in other words being
unwavering. The fact that this sort of unwavering management policy pervades
is indeed Ai Holdings’ strength, and arguably why its M&A success rate is sohigh.
Further, the fact that all types of management decisions are taken quickly
and then implemented quickly is also a strength of Ai Holdings. Perhaps an
example is that when acquiring Silhouette Inc., which forms the company’s US
operations and is discussed later, in circumstances following the Lehman shock
where the market was poor, its future promise was discerned and M&A
undertaken in an extremely short time frame. On the other hand, not all M&A
and corporate alliances proceed smoothly. There are many cases where,
contrary to expectations, actual circumstances are poor, however, in thesecases the company will without hesitation act to sell-off the underperforming
subsidiary or dissolve the business alliance. As a result, it avoids greater risk
and facilitates the next investment. The ability to make decisions and implement
them in this way is due to Mr. Sasaki’s unwavering management policies andstrong leadership.

Marketing capability nurtured through in-house training is amajor strength（4）Marketing Capability
Another strength of the company is its marketing capability, and in particular
its security equipment marketing capabilities. In recent years the sales style ofthe company has been shifting, including its female staff, towards “proposalbased sales”. Additionally, sales targets also have been focused on existing
condominiums building, from their previous corporate (financial institution,school, public facility, commercial facility etc.) focus, to best utilize thestrengths of the company’s products.
Further, we understand that ample support structures are a cornerstone insupporting the company’s marketing capabilities. The company is hasdeveloped businesses aimed at professionals, such as corporate officeequipment sales and the manufacture and sale of cutting machines. The support
capability cultivated through marketing to professionals allowed that company
to display its true strength by amongst other things garnering significant
acclaim from users in America. At present also in security, card and otherequipment sales also, a major strength is possessing a maintenance business inhouse, and carrying out maintenance services directly with customers.
Moreover, the company has put (considerable) effort into the recruitment andtraining of sales staff. In particular, in the recruitment of sales staff, centeredon new graduates, top management (Mr. Sasaki) become involved personally andhave recruited many unique human resources. The result of the company’s
original training of these human resources is the current powerful salesforce.
The increase in security equipment sales in recent years is not simply a resultof the equipment’s performance and pricing, but in many aspects is a result of
this marketing capability. The current “mind and soul sales” should be able tobe put to use not only for security equipment, but also in new businesses
acquired via M&A in the future. The strength of this sort of marketing capability
is another strength of the company.
We encourage readers to review our complete legal statements on “Disclaimer” page.

7

18-Apr-14

Ai Holdings■Business trends■Business trends
Q2 operating profit exceeds initial forecasts（1）Q2 FY6/14 Results（a）Earnings
Q2 FY6/14 results showed consolidated sales of ¥17,813mn (+10.8% y-o-y),consolidated operating profit of ¥3,007mn (+29.3% y-o-y), consolidated recurring
profit of ¥3,090mn (+26.5% y-o-y) and consolidated quarterly net profit of¥1,923mn (+44.8% y-o-y).
Initial forecasts were for operating profit of ¥2,450mn, however, actual
results were positive, significantly exceeding this target. The main factors
behind this were significant increases in security equipment (mainly for
condominium buildings) and cutting machines for the consumer market in which
US subsidiary Silhouette is engaged, which are the current growth drivers for Ai
Holdings.
Summary Income Statement
Q2 FY6/13
Amount(Unit: ¥mn, %)Q2 FY6/14

Ratio

AmountChangeRatio

Amount

Rate

Sales

16,079100.0

17,813

100.0

1,734

10.8

Gross profit

6,121

38.1

7,552

42.4

1,431

23.4

SGA cost

3,795

23.6

4,544

25.5

749

19.7

Operating profit

2,326

14.5

3,007

16.9

681

29.3

Recurring profit

2,442

15.2

3,090

17.3

648

26.5

Net profit

1,327

8.3

1,923

10.8

596

44.8

●Security Equipment
Sales were ¥4,218mn (+12.7% y-o-y), while operating profit also increased
significantly to ¥1,251mn (+16.7% y-o-y). The major factor behind this was
sound performance in sales for condominium buildings, which the company has
focused on in recent years. The total number of condominium building
installations in H1 was 2,089, with both new buildings and renewals of existingbuildings performing well. According to the company, the rate of progress
towards the full-year target has already reached 55%, and considering that thatthe normal trend is for the H2 sales ratio to be higher, these actual numbers arearguably far exceeding initial targets.
On the other hand, corporate sales declined 11.7% y-o-y to ¥1,175mn, however,given that big ticket deals, including those for the airport customs andimmigration facilities and for major securities companies, are concentrated in H2,
there appears to be no need to view full-year targets with concern.
● Card Equipment & Other Office Equipment
Segment sales were ¥1,524mn (+26.2% y-o-y), with operating profit of¥427mn (+63.0% y-o-y). A breakdown reveals that card machine sales
performed well being ¥231mn (+54.5% y-o-y), with a major regional bank and amajor retail group contributing significantly. Further, other equipment sales also
increased greatly to ¥196mn (+74.2% y-o-y).

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18-Apr-14

Ai Holdings■Business trends● Peripheral Computer Equipment
Segment sales were ¥5,282mn (+40.5% y-o-y) and operating profit ¥586mn(+59.9% y-o-y), with the core of growth coming from sales related to cutting
machines for the consumer market engaged in by Silhouette, continuing thetrend from the previous term. As noted above, in this type of business model, in
addition to basic equipment sales, customers that buy the equipment become
members, so that there are also sales of a variety of content (design etc.) tothese members. While the sale the basic equipment represents a significant
proportion of (overall) sales, from a profit perspective the contribution fromcontent is significant. Moreover, as is the case with computer game
manufacturers, it enables a business model whereby basic equipment sales⇒increased members ⇒increased content sales ⇒increased profits.
Silhouette’s Q2 FY6/14 sales of USD26.94mn (+80.9% y-o-y) and operating
profit of USD4.38mn (+95.8% y-o-y) (both) showed dramatic increases,
contributing significantly to the increase in segment profits. There were sharp
increases in sales of the basic equipment, consumables and content, centered on
direct marketing firms such as Amazon and large specialty retailers. In
particular, sales have increased significantly in line with increases in web-based
members.
● Design
Design sales were ¥2,284mn (+6.0% y-o-y), with operating profit of ¥335mn(+5.2% y-o-y). While not particularly exceptional growth, performance was sound,supported by solid seismic capacity evaluation and related orders. In line withlegislative enactments, the target for anti-earthquake measures is shifting frompublic facilities to large-scale private buildings, and we feel performance will besound for the time being.

Breakdown of Sales by Business
Q2 FY6/13
Amount(Unit: ¥mn, %)Q2 FY6/14

Ratio

AmountChangeRatio

AmountRate

Security equipment

3,742

23.3

4,218

23.7

476

12.7

Card equipment / other office equipment

1,208

7.5

1,524

8.6

316

26.2

Maintenance service
Peripheral computer equipment
Measuring equipment / environmental testing devices

868

5.4

879

4.9

11

1.3

3,760

23.4

5,282

29.7

1,522

40.5
12.3

891

5.5

1,001

5.6

110

Design

2,155

13.4

2,284

12.8

129

6.0

Other businesses

3,455

21.5

2,625

14.7

-830

-24

Breakdown of Operating Profit by Business
Q2 FY6/13
AmountSecurity equipment(Unit: ¥mn, %)Q2 FY6/14

Ratio

AmountChangeRatio

Amount

Rate

1,072

46.1

1,251

41.6

179

16.7

Card equipment / other office equipment

262

11.3

427

14.2

165

63.0

Maintenance service

90

3.9

89

3.0

-1

-1.1

Peripheral computer equipment

366

15.7

586

19.5

220

60.1
50.6

Measuring equipment / environmental testing devices

89

3.8

134

4.5

45

Design

318

13.7

335

11.1

17

5.3

Other businesses

129

5.5

185

6.2

56

43.4

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18-Apr-14

Ai Holdings■Business trends

Plan to use treasury stock for M&A in the future（b）Financial Condition
Total assets at the end of Q2 FY6/14 were ¥35,241mn (+ ¥2,208mn
compared to the previous term end). The main reasons for this were increases incurrent assets, namely a ¥457mn increase in cash and deposits, a ¥983mn
increase in bills and accounts receivable, an increase of ¥643mn in inventories
and finished product, an increase of ¥95mn in other current assets, a decline of¥83mn in goodwill within intangible fixed assets, and an increase of ¥140mn ininvestment securities within investments and others assets.
Liabilities were ¥10,099mn (an increase of ¥539mn over the previous term),with the main reasons including an increase of ¥685mn in bills and accounts
payable, and a decline of ¥223mn in accrued taxes payable within current
liabilities as well as an increase of ¥274mn in fixed liabilities.
Net assets were ¥25,141mn (a rise of ¥1,669mn over the previous term), withthe main reasons including the recording of ¥1,923mn in quarterly profit, and anincrease of ¥95mn in the valuation difference on available-for- sale securities.
As a result, the shareholders’ equity ratio was 71.3%. Further, there are¥4,689mn in treasury stock, with the company commenting that basically it
wants to use them for future M&A.

Balance Sheet(Unit: ¥mn)

FY6/13

FY6/14

ChangeQ2
Cash & deposits

12,56513,023458

Sales and promissory notes receivable

4,706

5,690

984

Lease assets

701

770

69

Marketable securities

100

100

0

Inventories

3,229

3,873

644

Other current assets

2,029

2,493

464

Current assets

23,76825,9492,181

Tangible fixed assets

6,156

6,193

37

Intangible fixed assets

768

681

-87

Investments, etc.

2,339

2,416

77

Fixed assets

9,263

9,291

28

Total assets

33,03235,2412,209

Trade accounts and promissory notes payable

3,658

4,343

685

976

753

-223

Other current liabilities

1,879

2,002

123

Current liabilities

6,832

7,098

266

Fixed liabilities

2,727

3,001

274

Total liabilities

9,560

10,099539

Shareholders’ equity

23,62525,074

1,449

Treasury stock-4,688-4,689

-1

-153

67

220

Total equity

23,47225,141

1,669

Total liabilities and equity

33,03235,241

2,209

Taxes due

Other comprehensive cumulative profit

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10

18-Apr-14

Ai Holdings■Business trends（c）Cashflow
As per the table below, Q2 FY6/14 quarterly cashflow showed an increase in
cashflow from operating activities of ¥1,171mn, a decrease of ¥307mn incashflow from investment activities, and a decrease of ¥534mn in cashflowfrom financial activities. As a result, cash and equivalents rose ¥383mn, withperiod-end cash and equivalents reaching ¥12,293mn.

Summary Cash Flow Statement(Unit: ¥mn)

FY6/13

FY6/14

Q2

Q2

Cash flow from operations

889

1,171

Cash flow from investments

475

-307

Cash flow from financing

-427

-534

Change in cash & cash equivalents

1,020

383

Year-end balance of cash & cash equivalents

9,804

12,923

Sound underlying progress this term provides the potential
also for outperformance（2）FY6/14 Forecasts
In the FY6/14 term currently underway, the forecast calls for consolidated
sales of ¥35,600mn (+9.9% y-o-y), consolidated operating profit of ¥6,000mn(+20.6% y-o-y), consolidated recurring profit of ¥6,100mn (+20.1% y-o-y), andconsolidated net profit of ¥3,750mn (+26.1% y-o-y). This forecast has beenrevised up from the forecast at the beginning of the term (consolidated sales of¥35,200mn, consolidated operating profit of ¥5,500mn), however, given that thecompany always announces forecasts where the degree of attaining the target
numbers is high, and further taking into consideration also the sound state ofunderlying (Q2 actual results) performance, the likelihood of achieving theserevised forecasts is high, and we may expect a further upward revision.
Detailed forecasts for sales and operating profit by segment are not disclosed,
however, the status of the major businesses is as set out below.

Forecast for FY6/14
FY6/13
Amount(Unit: ¥mn)

Forecast FY6/14

Ratio

AmountRatio

ChangeAmount

Ratio

Sales

32,389100.0

35,600

100.0

3,211

9.9

Operating profit

4,974

15.4

6,000

16.9

1,026

20.6

Recurring profit

5,080

15.7

6,100

17.1

1,020

20.1

Net profit

2,974

9.2

3,750

10.5

776

26.1

● Security Equipment
Security equipment for condominium buildings remains sound. Full-year
installation numbers are forecast to reach 3,800 (a rise of 300 y-o-y), with the
breakdown showing the number of new buildings acquired being 2,600 (a y-o-ydecline of 43 buildings) and renewals of existing buildings of 1,200 (up 343
buildings y-o-y). However, as noted above, there were already 621 existingbuilding renewal installations in H1, and 1,468 new building installations, reachinga total number of 2,089 installations. Considering that normally the proportionof sales is higher in H2, there is a high degree of certainty in achieving the initial
term forecast. Accordingly, the likelihood of sales and operating profit from thissegment exceeding forecasts is high.
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11

18-Apr-14

Ai Holdings■Business trends

Contracts Secured for Security Equipment for
Existing Condominium Buildings(Number）

Total contract

New contracts

Contract renewals

4,500

4,100
3,800
3,500
2,546

3,000

2,643

2,600

2,600

2,105

1,500

(Lease contract period）

1,500
1,200

441
857
0

FY6/06 FY6/07 FY6/08 FY6/09 FY6/10 FY6/11 FY6/12 FY6/13 FY6/14E FY6/15E● Card Equipment & Other Office Equipment
This has been a business from which it has been hard to expect significant
growth to date, however, recently regional banks and other firms have started
to install automatic cashcard dispensing machines, and in H1 already Ai Holdings
has had large-scale projects to supply them to major regional banks andretailers. Additionally, even at the megabanks, which have lagged in the
introduction of automatic dispensing machines, moves have emerged for theirintroduction, with a decision to install them in one megabank made in January
2014 (525 units, approximately ¥300mn). The actual recording of the sales will
be in the next period (after July 2014), however, the fact that the megabanks
have begun to move is a tailwind for the company.
● Peripheral Computer Equipment
The growth core will continue to be Silhouette’s cutting machines for the
consumer market. Given that content and membership numbers are growing
steadily and, in line with increases in basic equipment sales, the results forincome from consumables and content is also growing steadily, there is a strong
probability of significant growth in Silhouette’s sales and operating profit.
However, on the other hand, it is expected that operating profit at Graphtec(Japan) will decline significantly for the full-year also (H1 actual results of¥26mn, -83.2% y-o-y). The main reasons for this are increased research anddevelopment costs and investment in dies for Graphtec’s new business thatwill be seen to take shape from next term. The result of this is that the profits
from Silhouette will be partially offset, however, strong profit growth isexpected from the business overall.

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12

18-Apr-14

Ai Holdings■Business trends● Design
Operating profit from the design business is forecast to be ¥765mn (+7.0% yo-y). Demand is expected to shift from anti-earthquake measures for public
facilities to anti-earthquake construction for large-scale private buildings in linewith legislative enactments. However, because there is a limited number oftechnical staff rapid growth is not anticipated.
The forecast for the major businesses are as set out above, however, in eachsegment they are relatively modest, and we feel that they are forecasts(assumptions) with some leeway in them. As forecasts announced by thecompany always carry a high degree of certainty, there is a string possibility
that the current forecasts will be exceeded and it is essential to pay attention to
future trends.

■Growth Prospects over the Medium- to Long-Term
Further room for growth with security equipment focusing on
condominium buildings
Ai Holdings, as noted above, is engaged mainly in 7 businesses, however,currently security equipment and peripheral computer equipment for consumers
in the US (cutting machines), that Silhouette engages in, are supporting profit
growth. The reason why these businesses are growing is examined below.
（1）Security Equipment● The Environment for the Overall Security Equipment Market
According to a survey by the Fuji Keizai Group, it is forecast that the
security-related market (equipment, systems, and services) will go from anestimated ¥581.9bn in 2013 to ¥623.9bn (7.2% per annum) in 2016. Further, themarket for security cameras (such as those) provided by Ai Holdings is forecast
to go from an estimated ¥71.5bn in 2013 to ¥85.3bn (19.3% growth per annum)in 2016. Going forward the security camera market is forecast to continue
higher growth than the overall security market for the reasons set our below.
▲ Public Facilities
The majority of crimes against the person such as robberies and ride-by
attacks are resolved by analyzing security camera footage, and it is expectedthat going forward also, most train stations, airports, function facilities andother public facilities and locations will be equipped with security cameras.
Further, it is expected there will be a trend for semi-public facilities such ascommercial precincts, downtown areas, parking lots, and condominium buildings
to install security cameras for the same reasons.
▲ Corporate Facilities
In addition to those retailers (supermarkets, convenience stores etc.) thathave hitherto installed security cameras, recently, due to the impact fromoccurrences such as incidents at financial institutions and poisonings at foodprocessing plants, the trend is growing for security cameras to be installed incompanies (offices, factories etc.).
Previously, there were many groups and companies that hesitated in installingsecurity cameras from a protection of privacy point of view, however, in recent
years the imperative for crime prevention has become stronger, which isundoubtedly a tailwind for the company’s security equipment business.

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13

18-Apr-14

Ai Holdings■Growth Prospects over
the Medium- to Long-Term● Focus on Condominium Buildings
For the very reason that this security equipment market is expected to
expand in this fashion, competition is fierce. One reason that the company has
been able to increase sales in a market where in particular, Panasonic
Corporation (6752) and Mitsubishi Electric Corporation (6503) and others are
dominant, is that rather than a “shotgun sales approach”, it has engaged inmarketing focusing on condominium buildings. (Of the 3,291 actual installationsin the 6 months from Jul-Dec 2013, 65% were for condominium buildings.)
The reason for focusing on condominium buildings is because it was a more
efficient to have a focus and utilize a salesforce that is limited relative to themajor players. As noted below, given that there is considerable room to expand
even within the condominium building market, Ai Holdings has succeeded byhaving as a core strategy the tackling of this market for the time being, rather
than engaging in “shotgun marketing” in multiple markets.
● Potential Market
Is there still room for the condominium building security camera market, which
is a key strategy for the company to expand. In a survey by Ai Holdings there
were 5.9 million condominium buildings in Japan as of the end of 2012, of which
3.18 million (54%) were managed by the 14 major building managementcompanies. Additionally, the number of body corporates managed by these 14
major management companies (with an average of 55.1 apartments), however,of these the company’s security cameras were only installed by 7,303 body
corporates (14.3%). In other words, even among the body corporates managed by
the 14 major management companies, there is still ample room to increase its
share by taking replacement demand from competitors.
Further, it seems that there are even some body corporates managed by the
14 major management companies that have yet to install security camera
systems. Also, there are many body corporates nationwide that are not managed
by the 14 major management companies. Accordingly, in addition to increasing
the share within the major players, by making inroads into undeveloped markets,for the next several years even the condominium building market alone will offer
ample potential to increase security equipment sales, with the room for growtharguably substantial.

Still significant room for Silhouette to expand（2）Silhouette (US Peripheral Computer Equipment Business)● Outline of Silhouette & Its Business Model
Currently, the main products sold by Silhouette are small-scale hobby cutting
machines used in craft (priced at around ¥10,000-20,000), consumables for
those products (blades, mats, pens etc.), and digital content for crafts, with
Silhouette currently developing one of the largest scale digital contents businesswithin the craft industry. The main customers are the craft market (refer below),
education, and retailers.
By producing the basic equipment in China and Vietnam the retail price can be
kept low. Additionally, a business model has be developed whereby customers
that buy the basic equipment become members, and, in addition to a variety of
consumables, a specialist website provides over 48,000 specialist cutting designs(as of March 2014), with a fee being charged corresponding to the unit price andnumber of downloads whenever the user buys a specialist design.

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14

18-Apr-14

Ai Holdings■Growth Prospects over
the Medium- to Long-Term

According to the company, compared with basic equipment sales, sales ofconsumables and content (downloads) carry a higher gross margin, with content
services becoming the greatest source of income. Moreover, with nocompatibility in formatting of the download data with the manufacturer, itcreates a positive cycle whereby users that purchase the company’s basic
equipment (cutting machines) continue to purchase content from the company.
● Market Size & Future Outlook
According to the US Craft & Hobby Association (CHA) the craft and hobby
market in 2011 was USD30.3bn (¥3.3trillion), however, Silhouette’s target
paper craft and artisanal craft market is estimated to be approximately
USD6.5bn (¥650bn) in total. It is hard in Japan to imagine that paper craft
market could be such an enormous hobby market, however, in the US it is anextremely popular hobby, being firmly established in the housewife bracket withcraft named among travel, sports and craft as one of the three biggest hobbies.
Even now most people use scissors and cutters when cutting out paper toengage in paper craft, however, in line with the proliferation in computers, thenumber of people that use design content and cutting machines to undertake ahigher level of paper craft is increasing year-by-year, with Silhouette being aprovider of this content. Further, to date sales channels also have mainly been
large direct marketing companies (mainly Amazon), however, with a specialty
craft retail store chain that has more than 1,000 stores throughout the US andothers commencing sales in earnest from December last year, future sales
growth is expected.
It is unclear how many people within the massive USD6.5bn market as noted
above will shift from the manual to the Silhouette method and how much it will
grow, however, competitors have already posted actual sale of more than ¥20bn
and, from reading the daily appraisals by people that have actually purchased
Silhouette’s products via Amazon, there is arguably still significant room forthis business to expand. The company plans for Silhouette’s FY6/16 sales to
be USD109mn (approximately ¥10.9bn), with gross profit of USD52mn(approximately ¥5.2bn), which ought be a readily achievable target.

Examples of Craft and Hobby Activity

Source: Company

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15

18-Apr-14

Ai Holdings■Growth Prospects over
the Medium- to Long-Term

The company to start a new business from next term, with RPof ¥10bn within their sights（3）New Business and M&A
As with the Silhouette example above, the company is constantly exploringnew businesses, including M&A, however, in this instance it has announced it will
be commencing a new business from next term. A detailed briefing(announcement) regarding the particulars of the new business will be madearound May 2014, however, sales forecasts for the new business have not been
included at all in the current term (FY6/14). On the other hand, R&D costs forthe new business of ¥160mn have already been recorded in H1, with ¥300mn fordies budgeted to be recorded in H2. While the nature of the new business is
uncertain, it will bring a fresh outlook for the next term.
Another crucial factor in the company’s mid- to long-term outlook is its
M&A strategy. As mentioned several times already, M&A has been positioned asa key growth strategy for the company, with a policy going forward also of
proactively undertaking deals which have merit. Currently there have not been
any specific deals announced, and it is impossible to predict future profits from
M&A, however, given that in any event it is unlikely for them to provide anegative impact on the company’s income, we may look forward to what sortof deals present themselves.
The company has to date not announced numerical targets in a mid-term
management plan, however, this time there has been a comment from the CEO
Mr. Sasaki that “recurring profit of ¥10bn is within our sights”. It was notclarified as to which fiscal term this would occur, however, if conditions such as:(1) existing businesses do not decline significantly, (2) the current growthengines, security equipment and Silhouette’s operations expand steadily, and(3) a new business is added from next term, are met then there is the potential
to clear this target as early as FY6/17.

■Shareholder Return Policy
A 35% dividend payout ratio provides the potential for higher
dividends with outperformance in profits
Basically Ai Holdings has declared it will have a dividend payout ratio of 3035%. Thus the annual dividend increased from ¥16 in FY6/12 to ¥20 in FY6/13,
with it planned to increase again to ¥24 in FY6/14. Given the dividend payout
policy, if profits exceed forecasts, there appears to be the potential for a further
increase in the dividend.

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16

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