Oki Electric Industry / 6703

Transcription

1 Oki Electric Industry / 673 COVERAGE INITIATED ON: LAST UPDATE: Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an owner s manual to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at sr_inquiries@sharedresearch.jp or find us on Bloomberg. Research Report by Shared Research Inc.

2 Oki Electric Industry / 673 LAST UPDATE: INDEX Executive Summary Key financial data Recent updates Highlights Trends and outlook Quarterly trends and results Full-year company forecasts Initial company forecast for FY3/18 (out May 12, 217) Medium-term strategy Business, market and value chain Business overview Strengths and weaknesses Historical results Financial statements Income statement Balance sheet Cash flow statement Other information Corporate governance, environmental, and CSR information (as of June 217) Top Management Dividend policy Major shareholders Employees News and topics Profile /94

3 Oki Electric Industry / 673 LAST UPDATE: Core business Executive Summary Involved in telecommunications for over 13 years, but changing direction to target new growth Since manufacturing the first domestic telephone in 1881, when it was founded, Oki Electric Industry Co., Ltd. (OKI) has focused on developing domestic telecommunication technology instead of relying on foreign products. OKI was one of four members of the Nippon Telegraph and Telephone (NTT) family (formerly a Japanese government-owned telecommunications monopoly, privatized in 192). Yet OKI s sales to telecom companies have shrunk to around 1% of total sales following the privatization of NTT, the opening of the domestic telecom market, and the shift of telecom networks to IP (internet protocol) technology. In light of such developments, OKI restructured its operations in April 216, and eliminated the former Info-Telecom Systems segment to focus on new growth areas. ICT segment is main earnings source: developing ATMs in emerging markets; targeting high-end domestic demand in EMS segment The company s four segments are Information and Communication Technology (ICT), Mechatronics Systems, Printers, and Electronics Manufacturing Services (EMS). Shared Research understands that ICT and EMS generate stable earnings while Mechatronics Systems and Printers are struggling. In the ICT segment the main source of earnings the company provides telecom systems and solutions to a range of industries and government agencies. The ICT segment is fueled by replacement demand from major companies. In the Mechatronics Systems segment, the company has a high domestic market share of cash-recycling ATMs (machines that use deposited cash for future withdrawals) for financial institutions and retailers. It is focusing on cash-handling machines and tapping into emerging markets overseas. In the Printers segment, around 8% of segment sales are from single and multifunction printers for the office printer market, but given the company s low market share and high fixed costs, OKI is shifting its earnings structure to focus on specialty and professional printing markets. In the EMS segment, the company offers reliable, high-end electronics manufacturing services (EMS), while maintaining segment OPM of %. It expects continued EMS growth on expanded production bases and sales channels via acquisitions. Segment composition Earnings trends The ICT and EMS segments generate stable earnings, while Mechatronics Systems and Printers tend to be more volatile. The ICT segment is driven by replacement demand, primarily from large clients in a range of industries, and the segment s earnings structure is mostly stable, excluding occasional extraordinary demand. In FY3/17, segment profitability improved partly due to organizational reform. In the Mechatronics Systems segment, profits fell significantly in FY3/17 as OKI suspended sales to a partner in China and cut back production. Sales in China are expected to bottom out in FY3/18 and the main focus going forward will be sales in emerging markets. Helped by acquisitions, the EMS segment is steadily growing in terms of scale, production capacity, and customer base, and is maintaining relatively high profit margins for an EMS business. In the Printers segment, the medium-term plan calls for major reforms, and the accompanying expenses are expected to temporarily pull down segment profits, but Shared Research anticipates positive results from this approach. Medium-term strategy The company is looking to sustain growth over the medium to long term by channeling more management resources into growth areas. Under its new medium-term business plan (released in May 217), the company is looking to increase its earning 3/94

4 Oki Electric Industry / 673 LAST UPDATE: capacity and, as key performance indicators, is targeting an operating profit margin of 6% and equity ratio of at least 3%. In terms of sales and earnings, the plan calls for sales of JPYbn and operating profit of JPY3bn; the company is also looking to get the shareholders equity on its balance sheet up to JPY12bn and pay a stable dividend. Although the ICT segment is stable primarily due to replacement demand, the market is mature, so OKI aims to use IoT to develop social infrastructure-related areas into a growth market. In Mechatronics Systems, the company expects growth through overseas expansion, particularly in emerging markets. In EMS, OKI plans to grow by increasing the number of client companies and sectors, and improving value-added (such as adding more functions to its ATMs). In Printers, as demand in the office printer market is shrinking, OKI is reviewing its product strategy and distribution (including sales locations) to reduce fixed costs and secure earnings. The company is looking to become a unique printer company and, towards this end, plans to leverage its advanced LED head technology and shift to a niche market strategy. 4/94

5 Oki Electric Industry / 673 LAST UPDATE: Key financial data Income statement FY3/3 FY3/4 FY3/ FY3/6 FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/16 FY3/17 FY3/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Sales 8,473 64, ,42 68,26 716, ,76 44,29 442, ,61 423,48 4, ,112 4,13 49,314 41,627 4, ICT ,7 222,3 191, , , Mechatronics Systems ,9 13,2 113,667 1,923 1, Printers , , , ,389 16, EMS ,111 4,38 42,34 43,16 49, Others ,69 18,67 18,471 17,76 12, YoY -3.2% 11.7%.2% -1.2%.4%.4% -24.3% -18.7% -2.3% -2.1% 7.6% 6.% 11.8% -9.2% -7.9% -7.2% ICT % -14.% -7.2% -4.3% Mechatronics Systems % -12.7% -11.2% -7.6% Printers % -3.6% -9.8% -1.% EMS %.1% 1.9% 1.7% Others % 2.2% -3.9% -3.% Gross profit 139, ,79 184,22 166,43 16, ,71 133, ,32 113,88 16,41 118, ,477 14,6 129,64 114,233 GPM 23.9% 2.9% 26.8% 24.4% 21.9% 22.9% 24.6% 27.4% 26.3% 2.2% 26.% 26.6% 26.% 26.3% 2.3% SG&A expenses 138,39 148,13 16,982 1, ,39 19,32 134,42 114,793 17,49 94,6 14,942 11,281 18,9 11, ,688 YoY -2.2% 7.1% 6.% -1.%.1% -2.% -1.6% -14.6% -6.3% -12.1% 11.% -3.% 6.7% 2.2% 1.1% SG&A-to-sales ratio 23.6% 22.6% 22.8% 22.8% 22.8% 22.1% 24.7% 2.9% 24.9% 22.3% 23.% 21.% 2.% 22.% 24.7% Operating profit 1,368 21,66 27,22 1,93-6,82, ,8 6,38 11,98 13,47 27,196 32,41 18,94 2,4 13, ICT ,7 13, 11,627 14,38 13, Mechatronics Systems ,7 12,4 6,17-11,818 1, Printers ,12 6,72 1,426 1,33 1, EMS ,66 2,27 2,284 2,8 2, Others ,844 3,467 4,18 3,431 1, Adjustments ,8 -,7-6,946-6,4-6, YoY - 1,479.4% 26.% -61.1% % 89.9% 12.% 11.8% 19.2% -42.6% -86.3% 41.8% ICT % -13.9% 23.7% -6.2% Mechatronics Systems % -1.% - - Printers % -78.8% -27.6% -3.2% EMS % 12.7% -9.9% 21.% Others % 2.7% -18.% -6.3% OPM.2% 3.3% 4.% 1.6% -.7% - 1.% 1.% 2.8% 3.%.6% 6.% 3.8%.6% 2.9% ICT % 6.1% 6.1% 8.1% 7.4% Mechatronics Systems % 9.%.3% -11.7% 1.% Printers %.2% 1.1%.9%.9% EMS %.%.4% 4.8%.1% Others % 19.2% 22.7% 19.3% 12.% Non-operating income (expenses) -9,217-9,147-6,2-3,33-7,32-1,87-6,99 -,188 -,142-2,9 6,829 9,49,13-7,228-4,911-1, Financial income (expenses) -6,41-6,39 -,42-4,334 -,321 -,4-4,827-3,81-3,363-2,98-2,33-1,623-1, Gains (losses) on foreign exchange -1,886-2, , , , ,792 11,277 7,3-6,374-4,764 Equity in earning of affiliates Other non-operating income (expenses) , ,34-2, , Recurring profit -7,849 12,49 21,168 7,24-13,934-4,72-7,228 1,32 1,166 9,7 2,34 36,6 37,928 11,366-2,366 12, YoY % -6.8% % 678.3% 123.7% 8.% 3.% -7.% - - RPM -1.3% 1.9% 3.1% 1.1% -1.9% -.7% -1.3%.3%.3% 2.1% 4.% 7.6% 7.% 2.3% -.% 2.6% Extraordinary gains 4,382-1,1-2,623 3,381-3,61 8,82-3,696-3,64-31,288-3,482-1,67-4, ,39 Implied tax rate % 38.1%.4% % % 2.6% 13.3% 14.3% 4.9% 67.% Non-controlling interests , Net income attributable to parent company shareholders -6,6 1,328 11,174,8-37, ,188-3,836-31,89 1, 13,99 27,39 33,91 6,69 4,691 8, YoY % -4.7% % 11.2% 21.% -8.% -29.% 7.% Net margin -1.1%.2% 1.6%.7% -.3% -.% -8.% -.9% -7.4%.4% 3.%.7% 6.1% 1.3% 1.% 1.8% R&D expenses 1,217 16,117 21,987 19,614 21,3 18,231 16,82 14,624 13,768 13,19 13,982 12,99 13,7 13,317 1,27 11, Capital expenditures 2,327 26,813 37,834 33, 37,714 2,432 1,883 8,6 7,98 9,333 13,91 1,164 11,461 11,66 8,7 12, Depreciation 39,927 33,77 34,24 34,691 34,97 34,814 2,81 1,1 14,9 12,68 13,21 14,249 14,464 14,382 13,991 Per share data FY3/3 FY3/4 FY3/ FY3/6 FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/16 FY3/17 FY3/18 Shares issued (year end; mn) Treasury stock Shares outstanding (ex. treasury stock) Shares outstanding (average; mn) BPS (JPY) ,116 EPS (JPY) DPS (JPY) Balance sheet (JPYmn) FY3/3 FY3/4 FY3/ FY3/6 FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/16 FY3/17 Current assets 382, ,79 37,43 379,339 49,92 378, , ,37 269, , , ,22 293, ,63 231,6 Cash and cash equivalents 29,293 8,82 49,441 38,919 49,9 49,994 64,428 7,18 8,679 79,13 36,46,91 3,632 47,829 4,164 Accounts receivable 169,94 1,313 14,92 1, , , , , ,49 112, , , ,89 13,91 11,72 Inventories 17, , , , ,38 138,44 8,714 64,88 6,491 68,226 74,961 8,284 86,4 79,468 62,81 Allowance for doubtful accounts -2,289-1,986-1,798-1,842-1,94-1,8-1,284-8,689-12,389-12,32-7,6-8,684-7,94-8,314-7,377 Other current assets 28,67 28,666 32,1 24,22 24,87 19,888 14,14 13,397 14,864 26,337 19,341 17,638 23,988 22,737 2,66 Tangible fixed assets 136,3 119, ,47 12, ,696 12,788 61,17 6,1 3,134 2,92 7,829 6,193 7,176 6,691 44,783 Intangible fixed assets 16,686 12,92 14,6 16,68 17,93 1,733 12,31 1,6 7,791 7,26 7,6 9,6 1,24 9,637 1,891 Investments and other assets 86,97 97,177 91,89 98,227 7,947 4,6 48,229 49,36 38,21 34,7 36,843 68,196 78,311 67,816 73,44 Investment securities 39,71 2,98 6,389 66,24 4,484 32,69 34,134 37,369 28,84 26,418 28,7 32,634 38,432 32,64 49,76 Others 47,16 44,219 3,6 31,73 21,463 21,96 14,9 11,937 9,36 8,139 8,273 3,62 39,879 3,212 23,968 Total assets 622,891 69,6 68,1 618,89 632,83 74, , , , ,6 349, ,14 439,38 411,776 36,724 Current liabilities 37,48 311, ,828 29,86 333,48 32,97 217,46 241,222 24, ,3 197, , ,8 199, ,9 Accounts payable 8,772 93,44 1,737 96,63 11,38 86,898 2,466 4,93 3,942 66,37 63,416 73,312 79,3 6,477 8,68 Short-term debt 121, ,761 13,29 116,78 132,89 132,734 19, ,43 118,63 76,63 7,192 14,478 63,329 72,692 6,882 Accounts payable-other, accrued expenses 3,34 42,37 43,727 44,3 47,339 46,133 23,379 23,213 26,214 29,78 31,666 34,96 36,6 33,26 29,499 Income taxes payable 2,16 1,82 2,327 1,182 1,749 1, ,797, Other current liabilities 67,394 44,28 31,742 37,62,22 8,39 32,49 3,649 42,64 41,6 26,8 26,729 27,173 27,728 31,493 Fixed liabilities 28,41 181,64 163, ,77 193,428 18, ,313 89,64 89, ,47 9,67 78,322 16,362 1,228 86,949 Long-term debt 11,61 17,1 7,36 12,729 11,3 12,646 82,6 4,36 33,987 9,843 4,332 14,26 44,241 49,391 3,129 Net assets 16, ,238 13,816 14,222 1,921 9,138 48,48 47,67 38,89 41,21 6,62 91, ,414 17,384 97,21 Shareholders' equity 17,98 19,186 12, ,983 91,72 92,23 44,873 4,991 43,6 44,47 7,366 83,4 17,9 19,46 17,77 Treasury stock Valuation and translation adjustments -6,8 1,313 4,16 11,93 7,97-8,49-3, ,697-3,422-1,293,23 12,36-2,726-1,878 Minority interests,68,739,989 6,33 6,38 6,324 6,948 6, ,14 1, Total liabilities and capital 622,891 69,6 68,1 618,89 632,83 74, , , , ,6 349, ,14 439,38 411,776 36,724 Cash flow statement (JPYmn) FY3/3 FY3/4 FY3/ FY3/6 FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/16 FY3/17 Cash flows from operating activities 22 92,269 9,323 14,96 16,1 42,43 18,941 1,29 1,88 22,791-11,619 31,868 4,999-3,73 41,967 13, Cash flows from investing activities 4,317-19,22-41,14-28, -34,9-22,876 7,47-12,992-4,423-9,392-9,214-13,977-18,83-13,762 7,88-1, Cash flows from financing activities -2,77-43,64-26, ,13-19,41-9,466-31,323 11,24-17,3-21,92-4,27-2,724 11,138-43,98-2, Financial ratios FY3/3 FY3/4 FY3/ FY3/6 FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/16 FY3/17 Interest-bearing debt 236, ,916 2,6 218,87 243,339 23,38 191, ,466 12, 136,478 12,24 119,4 17,7 122,83 87,11 Net cash -27,69-178,91-16, , ,439-18, ,338-97,38-71,371-6,96-84,118-68,13-3,938-74,24-32,847 ROA (RP-based) -1.2% 2.% 3.% 1.2% -2.2% -.8% -1.%.3%.3% 2.%.7% 9.6% 8.9% 2.7% -.6% ROE -6.2% 1.3% 9.% 3.9% -32.4% -.3% -73.8% -9.4% -8.7% 3.9% 28.% 37.8% 31.8%.8% 4.6% Equity ratio 16.3% 18.1% 2.% 21.6% 1.7% 14.6% 1.4% 1.7% 1.4% 11.2% 16.1% 21.% 27.2% 2.9% 26.9% The company conducted a 1-for-1 reverse stock split in October 216. Dividend forecasts take into account the reverse stock split. /94

6 Oki Electric Industry / 673 LAST UPDATE: Recent updates Highlights On February 1, 218, Oki Electric Industry Co., Ltd. (OKI) announced earnings results for Q3 FY3/18; see the results section for details. On November 13, 217, Shared Research updated the report following interviews with the company. For details on corporate releases and developments more than three months old, see the News and topics section. 6/94

7 Oki Electric Industry / 673 LAST UPDATE: Trends and outlook Quarterly trends and results Income statement FY3/16 FY3/17 FY3/18 FY3/16 FY3/17 FY3/18 FY3/16 FY3/17 FY3/18 (JPYmn) Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Cml. Q3 Cml. Q3 Cml. Q3 Cons. Cons. Init. Est. % of FY Sales 19,77 113, ,628 12,68 93,18 16,7 1, ,72 9,431 13,43 16, 337,629 34,92 299,979 49,314 41,627 4, 6.9% ICT 36,4 42,461 3,177 77,1 3,274 36,89 3,99 74,33 31,241 37,26 38, ,88 12,88 17, , , , 8.6% Mechatronics Systems 3,846 24,133 32,62 26,2 22,192 26,771 27,23 24,77 21,234 24,176 24,324 87,41 76,216 69, ,667 1,923 1, 66.4% Printers 28,897 3,187 32,832 32,731 27,486 26,769 27,729 3,4 24,86 26,96 28,368 91,916 81,984 8, , ,389 16, 7.6% EMS 9,39 11,263 9,17 12,26 9,314 11, 1,117 12,184 1,31 11,931 11,716 3,89 3,981 33,97 42,34 43,16 49, 69.3% Others 4,271,183 4,39 4,478 3,917 4,392 4,3 4,894 2,783 3,212 2,928 13,993 12,862 8,923 18,471 17,76 12, 74.4% YoY 1.7% -12.7% -1.% -16.7% -1.1% -6.3% -7.8% -3.9% -3.% -2.4%.3% -.4% -9.7% -1.6% -9.2% -7.9%.7% ICT % -13.8% 2.3% -3.3% 3.2% 1.8% 7.4% % 4.2% -14.% -7.2% 3.2% Mechatronics Systems % 1.9% -16.3% -.7% -4.3% -9.7% -1.7% % -8.% -12.7% -11.2% 4.% Printers -7.4% -.7% -.2% -.9% -4.9% -11.3% -1.% -7.1% -9.6%.7% 2.3% -2.7% -1.8% -2.2% -3.6% -9.8% -.7% EMS 4.2%.%.% 11.%.1% 2.% 6.3% -.7% 1.7% 3.3% 1.8% 2.8% 3.% 9.6%.1% 1.9% 13.% Others 3.6% 8.7% 1.1% -4.% -8.3% -1.3%.3% 9.3% -29.% -26.9% -3.7% 4.6% -8.1% -3.6% 2.2% -3.9% -32.4% Gross profit 29,8 28,649 3,714 4,116 24,66 24,174 2,332 4,161 21,67 24,62 27,462 88,948 74,72 73, ,64 114,233 GPM 27.% 2.3% 26.8% 26.3% 26.4% 22.8% 24.% 27.4% 23.3% 23.8% 2.9% 26.3% 24.3% 24.4% 26.3% 2.3% SG&A expenses 26,4 28,6 26,87 29,22 23,891 2,496 24,28 38,16 24,931 24,882 26,166 81,447 73,672 7,979 11, ,688 YoY 7.9%.2%.4% -3.% -8.3% -1.9% -9.4% 31.% 4.4% -2.4% 7.7% 4.4% -9.% 3.1% 2.2% 1.1% SG&A ratio 23.7% 2.3% 23.4% 19.% 2.6% 24.% 23.% 2.9% 27.6% 24.% 24.7% 24.1% 24.2% 2.3% 22.% 24.7% Operating profit 3,4 49 3,96 11, ,321 1,46 2,146-3, ,29 7, 399-2,83 18,94 2,4 13, -21.8% ICT , ,16 13, ,99 1,39 1,22 2,7 11,627 14,38 13, 2.% Mechatronics Systems 3, , , ,66-1,21-1,46-1,617, ,63 6,17-11,818 1, -46.3% Printers , , , ,38 1, ,967 1,426 1,33 1, 196.7% EMS , ,124 1,8 1,22 2,284 2,8 2, 49.% Others 948 1,286 1, , ,26 2,429 1,241 4,18 3,431 1, 82.7% Adjustments -2,46-1,22-1, ,79-1,2-1,33-2,61-1,81-1,866-1,914 -,17-4,484 -,361-6,946-6,4-6, 82.% YoY 33.3% -99.1% -.% -3.% -81.% % -8.7% % -1.1% -94.7% % -86.3% 41.8% ICT % 26.% % % 12.4% -13.9% 23.7% -6.2% Mechatronics Systems % % - -1.% - - Printers -91.4% % -46.8% 9.% % 29.% - - 1,73.% -83.7% % -27.6% -3.2% EMS % -1.% 3.2% -49.2% -3.% 12.4% -1.7% 34.% -27.% 33.9% 24.% -3.9% 13.4% 12.7% -9.9% 21.% Others 3.4% 44.2% 1.9% -6.4% -22.6% -39.9% -9.8% 7.9% -6.3% -17.9% -61.9% 31.6% -2.4% -48.9% 2.7% -18.% -6.3% OPM 3.2%.% 3.4% 7.3%.7% -1.2% 1.% 1.% -4.3% -.3% 1.2% 2.2%.1% -.9% 3.8%.6% 2.9% ICT 1.%.7% 1.3% 13.% -.6% -.3% 4.2% 17.7% -2.6% 2.% 6.7% 1.1% 1.2% 2.% 6.1% 8.1% 7.4% Mechatronics Systems 1.3% -.7% 6.9%.1% 4.1%.2% -1.3% -17.% -4.9% -3.9% -4.2%.2%.8% -4.3% 3.1% -6.7%.% Printers.% -1.6% 4.1%.6% 1.3% -3.2%.2% 2.3% -1.% 2.8% 3.6%.8% -.7% 1.8%.7%.6%.% EMS.4% 1.6%.9% 1.%.2% 1.8% 1.% 1.3%.9% 1.3% 1.3% 1.% 1.% 1.1% 1.2% 1.2% 1.4% Others 2.6% 3.% 2.9% 1.2% 2.4% 2.1% 2.6% 1.3%.8% 1.7%.9% 2.9% 2.4% 1.2% 2.2% 1.9%.8% Non-operating income (expenses) 2,384-3,32-2,823-3,487-7,77-1,222 3, ,741-4,748 1,99-7,228-4,911-1, Financial income (expenses) Gains (losses) on foreign exchange 2,124-3,191-2,366-2,941-7, , ,433-4, ,374-4,764 Others Recurring profit,929-3,23 1,83 7,67-6,43-2,43 4,97 1,983-3, ,613 3,79-4,349-1,731 11,366-2,366 12, -14.4% YoY 491.1% % -47.8% % -73.9% % -83.9% % - - RPM.4% -2.9%.9%.% -6.9% -2.4% 4.4% 1.4% -3.9%.1% 1.% 1.1% -1.4% -.6% 2.3% -.% 2.6% Extraordinary gains (losses) , , , ,38 Income taxes 3, , ,46 2,87 4, ,434 6,72, 3,922 6,412 9,23 Implied tax rate 6.9% 23.% 384.7% -3.7% 4.3% -47.4% 6.9% 2.3% -16.8% 339.1% 139.4% 177.4% -69.8% -219.% 4.9% 67.% Non-controlling interests , , Net income attributable to parent company shareholders 3,166-2,271-2,681 8,39-6,8-7,443 1,41 16,678-4, ,1-1,786-11,987 -,82 6,69 4,691 8, -69.8% YoY 3,77.8% % % % -29.% 7.% Net margin 2.9% -2.% -2.3%.% -6.% -7.% 1.% 11.4% -.3%.2% -.9% -.% -3.9% -1.9% 1.3% 1.% 1.8% EBITDA (OP before depreciation and amortization) 6,949 3,44 7,81 14,92 4,8 2,62 4,469, ,18 4,446 18,74 1,89 6,816 32,976 16,36 YoY 67.% -61.3% -39.4% -29.1% -41.6% -41.8% -41.% -6.1% -.7% -.% -3.1% -41.4% -3.6% -29.7% -49.9% EBITDA margin 6.3% 3.1% 6.6% 9.8% 4.4% 1.9% 4.2% 4.1% -.8% 3.% 4.2%.4% 3.% 2.3% 6.7% 3.7% R&D expenses 2,432 3,692 2,99 4,284 2,74 2,886 2,343 2,972 1,866 2,21-9,33 7,33-13,317 1,27 11, - Depreciation 3,44 3,49 3,67 3,88 3,384 3,383 3,423 3,81 3,126 3,369 3,11 1,74 1,19 9,646 14,382 13,991 Inventories 98,8 99,929 14,934 79,468 88,732 83,293 87,82 62,81 73,4 72,16 76,638 14,934 87,82 76,638 79,468 62,81 YoY -2.6% -3.% -11.4% -7.7% -9.9% -16.6% -16.3% -21.3% -17.7% -13.4% -12.7% -11.4% -16.3% -12.7% -7.7% -21.3% Days in inventory JPY/USD YoY 18.9% 17.8% 6.2% -3.2% -1.9% -16.3% -9.9% -1.% 2.7% 8.4% 3.2% 9.% -9.8% 1.% JPY/USD at period end JPY/EUR YoY -4.2% -1.3% -6.9% -.1% -9.1% -16.% -11.4% -4.8%.2% 14.1% 12.8% -4.4% -1.4% -3.2% JPY/EUR at period end JPY/CNY YoY 19.4% 14.8% 1.8% -7.8% -1.6% -2.6% -1.4% -.9% -1.9% 8.4% 6.8% 6.% -14.6% JPY/BRL YoY -13.7% -24.% -29.7% -29.1% -22.% -9.3% 3.7% 24.% 1.9% 8.% 7.1% -24.% -2.7% USD/EUR YoY -19.3% -16.1% -12.3% -2.% 2.%.3% -1.6% -2.% -2.% 3.7% 8.8% -12.9% -.7% Note: Quarterly data derived by subtracting cumulative results for previous quarter from relevant cumulative results (e.g. Q3 figures are 1H results subtracted from cumulative Q3 results). 7/94

8 Oki Electric Industry / 673 LAST UPDATE: Q3 FY3/18 results (out February 1, 218) Cumulative Q3: Operating loss narrowed by JPY3.2bn YoY to JPY2.8bn. Operating profits were generally in line with expectations as weak results at Mechatronics segment were offset by above-plan results elsewhere. Oki Electric Cable to be included in consolidated results from Q4 Full-year forecast: While the hurdles to achieving forecasts continue to grow taller, the company is making strives to reach targets. In Mechatronics, the company is considering revising the medium-to-long-term strategy Information and Communication Technology (ICT): Operating profit up JPY1.bn due to an increase in contracts from several government agencies and for social infrastructure. It is possible that Q4 sales will fall YoY due to a strong Q4 FY3/17 performance Mechatronics Systems: Continued weakness in China market and falling sales in other emerging markets countries lead to falling sales volumes and inventory write-downs, pushing operating profit down JPY.4bn YoY About two thirds of losses in Brazil. Improvement expected, but results even YoY. China is generally breaking even. In Q4, the company expects domestic ATM business to drive results Printers: Structural reforms expected to be nearly completed in Q4. Operating profit up JPY2.7bn on structural reforms (slightly less than JPYmn) and forex-related gains (JPY1.7bn) EMS: Sales up 9.6% on strong demand for printed circuit boards (PCB) for semiconductor-related equipment. Operating profit up JPY1mn. Aiming to generate synergies with Oki Electric Cable Recurring loss: Changes in handling of foreign currency-denominated transactions yield big pay off. Foreign exchange-related gains boost earnings by JPY4.9bn YoY, help shrink recurring loss by JPY2.6bn Versus medium-term plan: Mechatronics segment seeing slower-than-expected sales of ATMs in China's urban market, greater-than-expected competition in India. The company is considering revision of medium-to-long-term strategy Topics: Company announces tender offer for shares of Oki Electric Cable Co., Ltd. (TSE: 81) with aim of strengthening group revenue base by making Oki Electric Cable a wholly owned subsidiary. Plans to make Oki Electric Cable a consolidated subsidiary in Q4 Synergies: Close affinity between EMS business and Oki Electric Cable, with little overlap among existing customers and similar markets targeted for future development. Expenses related to Oki Electric Cable s stock exchange listing will also drop out Quarterly performance ICT Mechatronics Systems Printers EMS Others YoY (right axis) 183 2% FY3/ FY3/ FY3/ FY3/ FY3/18 1% 1% % % -% -1% -1% -2% % FY3/14 ICT Mechatronics Systems Printers EMS Others and elimination OPM (right axis) 6.7% 4.% 1.2% 9.3% 6.9% 4.4% 3.2% 3.4%.9%.% FY3/1 FY3/16 7.3%.7% 1.% -1.2% FY3/17 1.% -4.3% FY3/18 -.3% 1.2% 1% 1% % % -% -1% -1% 8/94

9 Oki Electric Industry / 673 LAST UPDATE: Sales YoY (right axis) 2% 16 Operating profit OPM (right axis) 16% % % 1.2% 6.9% 9.3% 7.3% 12% 8% % -1% 4-2.% 4.% 4.4%.9% 3.2% 3.4%.%.7% 1.% 1.% 1.2% -1.2% -.3% 4% % FY3/14 FY3/1 FY3/16 FY3/17 FY3/18-2% -4 FY3/14 FY3/1 FY3/16 FY3/17 FY3/18-4% Performance overview Cumulative Q3: Operating loss narrowed by JPY3.2bn YoY to JPY2.8bn. Operating profits were generally in line with expectations as weak results at Mechatronics segment were offset by above-plan results elsewhere. Oki Electric Cable to be included in consolidated results from Q4 For cumulative Q3 FY3/18, the company reported sales of JPY3.bn (-1.6% YoY) and operating loss of JPY2.8bn (-JPY3.2bn YoY). The operating losses are attributable in large part to the Mechatronics Systems segment, which reported a loss of JPY4.6bn (-JPY.4bn YoY). Profits rose in ICT (+1.bn YoY) and Printers (+2.7bn YoY) segments, shrinking losses. Overall results were in line with forecasts. The poor results at the Mechatronics segment reflect a number of factors including a sharp slowdown in ATM demand in China s urban market, heightened competition in India, and ongoing losses in Brazil, where clients have been slow to adopt its new cash-recycling ATMs. About two thirds of the JPY4.6bn operating loss is due to losses in Brazil, while China generally broke even. The company stated that it is necessary to revise the business strategy of the Mechatronics Systems segment based on a medium-to-long-term outlook. The company wishes to include cost structure, positioning within the company group, and handling of unexpected shifts in the business environment in this strategy. It will announce this revision at an appropriate time. Meanwhile, in the Printer segment, the company forecasted approximately JPY2.bn in structural reform-related expenses for the full-year (extraordinary losses). However, the progress was somewhat delayed because, as of cumulative Q3, the company spent around JPY1.6bn on reforms, although it expects to nearly complete this spending within the year. Operating loss shrunk by JPY2.7bn, due largely to foreign exchange-related gains (about JPY1.7bn) and the impact of structural reforms (about JPYmn). Remaining gains were from limiting investment based on the current sales conditions. The company will announce the impact of structural reforms in FY3/19 following thorough analysis. At the non-operating earnings/expense level, foreign exchange-related gains/losses showed a JPY4.9bn improvement versus a year earlier, bringing losses at the recurring profit level to JPY1.7bn (a JPY2.6bn improvement versus a year earlier). The large reduction in forex-related losses reflects concerted efforts on the part of the company to reduce the impact of exchange rate volatility, changes in the way it handles foreign currency-denominated transactions, and greater stability in the forex markets themselves. This has had the added benefit of reducing earnings volatility at the net income level as well. Factors affecting operating profit Cml. Q3 FY3/17 operating profit Change in volume and product mix -1. Price changes. Procurement cost reductions and value engineering 1. Forex impact Fixed cost reduction Cml. Q3 FY3/18 operating profit 9/94

10 Oki Electric Industry / 673 LAST UPDATE: The company executed a tender offer for Oki Electric Cable according to its plan. The company will continue to execute the remaining processes to make it a wholly-owned subsidiary in order to generate synergies with the EMS segment. The company plans to include Oki Electric Cable in consolidated results from Q4. Tender offer for shares of Oki Electric Cable Along with its 1H results announcement, the company announced that it was initiating a tender offer for the shares of subsidiary Oki Electric Cable Co., Ltd. (TSE: 81). Oki Electric currently holds 36.21% of Oki Electric Cable shares directly and 1.6% indirectly. The tender offer is aimed at making Oki Electric Cable a wholly owned subsidiary. Under the tender offer, OKI is offering JPY3,6 per share for the 2,33,9 shares of Oki Electric Cable it does not already own, and intends to acquire a minimum of 1,17,8 shares. The tender offer is expected to cost approximately JPY8.4bn and will expire on December 18, 217. By making Oki Electric Cable a wholly owned subsidiary, OKI expects to speed up its strategic decision-making process and make better use of group personnel as part of an overall effort to increase the enterprise value of Oki Electric Cable and enhance the revenue base of the OKI group as a whole. OKI and Oki Electric Cable operate in many of the same markets. OKI's EMS business is especially strong in the areas of measuring equipment and medical equipment, and is looking to move further into the aerospace and electronic components markets. Oki Electric Cable has a strong track record in the factory automation, robotics, and medical equipment. As the two companies currently have only a few clients in common at present, management believes it will be able to start with those clients they have in common and work together to expand sales by both companies. Specific synergies the company is expecting to realize include: 1) at its EMS business, joint initiatives to expand sales and promote business where the two companies are serving clients in similar business areas; 2) increasing value-added by strengthening collaboration in existing technologies and services (collaboration between OKI's printed circuit board business under EMS segment and Oki Electric Cable's flexible printed circuit board business); 3) combining underlying technologies to develop new business areas (for example, integrating OKI s optical sensor technology with Oki Electric Cable's optical cable technology to make IoT a key strength of the OKI group); 4) sharing of production facilities, manufacturing technologies, and expertise to reduce production costs and create "smart factories;" and ) make better use of resources by managing more things at the group level. Oki Electric Cable will be included under the EMS segment, where OKI is looking to realize an operating profit margin of %. Oki Electric Cable will do much to help the EMS segment reach this goal, as its forecast of JPY87mn in operating profit in FY3/18 represents an operating profit margin of 7.%. Cost savings from the dropout of expenses related to Oki Electric Cable's stock exchange listing are also expected after the merger, as are additional cost savings and efficiency gains in other areas as the two companies work more closely together going forward. Oki Electric Cable (JPYmn) (JPYmn) 1,2 Sales Operating profit (left axis) 1, , FY3/ FY3/ FY3/1 FY3/1 (JPYmn) 18, 16, 14, 12, 1, 8, 6, 4, 2, 3% 3% 2% 2% 1% 1% % % -% -1% Gross profit SG&A expenses GPM (left axis) (JPYmn) OPM (left axis) 4, -1% FY3/ FY3/ FY3/1 FY3/1 3, 3, 2, 2, 1, 1, Full-year forecast: While the hurdles to achieving forecasts continue to grow taller, the company is making strives to reach targets. In Mechatronics, the company is considering revising the medium-to-long-term strategy The release of cumulative Q3 results brought no changes to OKI's forecast for the full year. Despite the harsh conditions facing Mechatronics Systems, other segments have seen higher-than-expected achievements. As a result, the company expects consolidated results to be generally in line with forecasts. However, the company acknowledges that the hurdles for reaching targets are growing taller. Despite this, the company aims to achieve forecasts by making up for this shortfall in Q4. 1/94

11 Oki Electric Industry / 673 LAST UPDATE: ICT segment results Performance (JPYbn, %) FY3/ Operating profit Sales (right axis) OPM Q FY3/ Q FY3/ Q (JPYbn, %) Operating profit OPM Sales (right axis) FY3/14 FY3/1 FY3/16 FY3/17 FY3/18 Est Information and Communication Technology (ICT): Operating profit up JPY1.bn due to an increase in contracts from several government agencies and for social infrastructure. It is possible that Q4 sales will fall YoY due to a strong Q4 FY3/17 performance For cumulative Q3 FY3/18, the ICT segment reported sales of JPY17.2bn and an operating profit of JPY2.7bn. Sales were up JPY4.3bn YoY (+4.2% YoY) and operating profit was up JPY1.bn YoY. Increased sales are attributable to contract wins from several government agencies, social infrastructure-related projects, and construction contracts. The improvement at the operating profit level reflect changes in the sales mix and higher volumes. Outlook as of 1H: At the time the company announced 1Q results it said sales and earnings at the ICT segment were on track to meet its 1H forecast, but 1H operating profit ended up coming in JPY below plan due to delays in delivering some orders. However, 1H forecast of company s initial forecast was adjusted for the higher target to improve the business structure concentrated in 2H. The company had been expecting the segment operating profit margin to come down in 1H as a result of the heavy investment spending (mainly on R&D) needed to meet the growth targets under its medium-term business plan, but the actual spending has been slower than expected. If the same market conditions continue in 2H, this could mean higher earnings. The company also noted that most of sales in 1H came from existing customers and that it expects more business from new customers in 2H. Mechatronics Systems segment results Performance Operating profit Sales (right axis) OPM Operating profit OPM Sales (old segment; right axis) Sales (new segment; right axis) % 9.% 14.3% 12 1.% % 6-1 (JPYbn, %) FY3/16 Q3 FY3/17 Q FY3/18 Q FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/16 FY3/17 FY3/18 Est. 4 Mechatronics Systems: Continued weakness in China market and falling sales in other emerging markets countries lead to falling sales volumes and inventory write-downs, pushing operating profit down JPY.4bn YoY The Mechatronics Systems segment reported cumulative Q3 sales of JPY69.7bn and an operating loss of JPY4.6bn. Sales were down JPY6.bn YoY (-8.% YoY) and operating loss was narrowed by JPY.4bn YoY. The unification of fiscal periods for the Brazilian subsidiary (consolidated January to September results in 1H) added to sales, but the impact of fewer domestic large-scale contracts for cash handling machines was even larger and ultimately led to a YoY decrease in sales. Weak ATM sales in overseas market (China and other emerging market countries) also contributed to the decline in sales. The operating loss stemmed in large part from the drop in sales volumes. The below plan results reflect a number of different factors. By region, the company pointed specifically to 1) A sharp slowdown in replacement demand for ATMs in China's urban 11/94

12 Oki Electric Industry / 673 LAST UPDATE: market, due in part to the growing use of digital currencies; 2) heightened competition in India, which is widely viewed as a growth market but has become more and more competitive as demand for ATMs in China has slowed; and 3) in Brazil, a slower-than-expected adoption of its new cash-recycling ATMs. China is breaking even, but Brazil makes up about two thirds of the losses. The company forecasted that operating losses in Brazil would shrink by approximately JPY1.bn over the full-year. However, it is booking the same level of losses it did in FY3/17. In the domestic market, the company expects to book significant sales in Q4 and operating loss to be lower than the to Q3 level of JPY1.bn. Getting down to specific numbers, the company said that for China it had been forecasting sales of 7, ATMs for the full year and 3,3 for 1H, but sold only about 1,2 units in 1H (including units in 1Q). In cumulative Q3, the company only sold 3,3 units, well short of forecasts. The company said that 1H sales of ATMs in India were about half of what it had originally expected (to be updated for Q3 figures following interviews). In Brazil, where FY3/18 will be 1 months long versus only 12 months in FY3/17, the company's initial forecast called for operating losses to be cut roughly in half. However, with orders for its new cash-recycling ATMs still slower than expected, operations in Brazil were still in the red with (January-June), Q2 (July-September), and Q3 seeing roughly the same losses in each three-month period. Excluding China, the number of ATMs sold overseas was between 2,9 and 3, units, missing the forecast of 7, units. At Shared Research, we will be keeping an especially close eye on shipments of the ATM-Recycler G8, the new model designed by OKI specifically for emerging markets. Shared Research will update this report following interviews. Domestically, the company sold, units while the forecast was at 9, units. Printers segment results Performance (JPYbn, %) FY3/ Operating profit Sales (right axis) OPM 1.4 Q FY3/ Q3 -. FY3/18 Q3 Operating profit Sales (right axis) FY3/ FY3/7 FY3/9 FY3/11 FY3/13 FY3/1 FY3/ Factors affecting operating profit H FY3/17 operating profit -1. Change in volume and product mix -..6 Price changes Forex impact Fixed cost reduction 1H FY3/18 operating profit Printers: Structural reforms expected to be nearly completed in Q4. Operating profit up JPY2.7bn on structural reforms (around JPYmn) and forex-related gains (JPY1.7bn) The Printers segment reported cumulative Q3 sales of JPY8.2bn and an operating profit of JPY2.bn. Sales were down JPY1.8bn YoY (-2.2% YoY) and operating profit was up JPY2.7bn YoY. Sales of office printers fell as the company began shifting more business resources toward the industrial printer market. This segment is generally in line with forecasts. The segment's move back into the black reflects a combination of structural reforms (slightly less than JPYmn) and yen depreciation (about JPY1.7bn). 12/94

13 Oki Electric Industry / 673 LAST UPDATE: In order to advance structure reforms promoted in the 219 medium-term plan, in cumulative Q3 the company booked JPY1.6bn in extraordinary losses as expenses to improve its business structure as it reorganized overseas headquarters; JPY1.2bn of this was booked in 1Q, JPY1.4bn in 1H, and the company expects to book related extraordinary losses of about JPY2.bn for full year. The remaining will be booked in Q4. The company says the structural reforms are for the most part proceeding on schedule, including the reorganization of sales companies in the US and Europe and the downsizing of some product development centers in Asia, and will be completed by the end of the year. Reductions to fixed costs in 1H reflected the impact from the cutting of fixed cost. Also some of the related expenses it had originally expected to book in 1H (to cover personnel transfers, recruiting, etc.) were pushed back. In cumulative Q3, the effects of these measures were about JPY1.bn (structural reform effect was less than JPYmn). In 1H, reductions to fixed costs accounted for a JPY2.8bn YoY increase in profits. Shared Research will update this report for details and a Q4 and beyond outlook following interviews. While restructuring and downsizing its office-use printer business on the one hand, on the other the company will be actively building up its presence in niche markets, including for specialty printers for specific industries and professional-use. Sales in 1H were generally in line with sales at this time last year, and the increase in unit sales volume left sales closely in line with the company forecast. Sales in 2H are expected to benefit from large orders for printers for various specialty markets. Shared Research will update this report with Q3 details following interviews. As it is only the first half of the first year under the new medium-term business plan, it is still much too early to make any judgments about the company s progress in this regard but Shared Research will be keeping a close eye on progress going forward. EMS segment results Performance (JPYbn, %) Operating profit Sales (right axis) OPM Operating profit 4.3% 4.7% 4.8% 4.% OPM 4.8%.1% %.4% % % 4% 3% 2% FY3/16.3 Q FY3/ Q FY3/18.. Q % -.2 FY3/1 FY3/12 FY3/14 FY3/16 FY3/18 Est. 1% % -1% The EMS segment reported cumulative Q3 sales of JPY34.bn and an operating profit of JPY1.2bn. Sales were up JPY3.bn YoY (+9.6% YoY) and operating profit was up JPY1mn. Sales growth was driven by strong sales of printed circuit boards for semiconductor-related equipment. Both operating profit and OPM rose YoY. The company has a similarly favorable outlook for Q4, and appears to be on track with its efforts to build up its EMS business in the field of electronic components heading into FY3/19. In this relation, we would note that most of the company's supply agreements for electronic components have provisions covering both the sales price and cost of production, so margins will not be squeezed by rising materials prices. 13/94

14 Oki Electric Industry / 673 LAST UPDATE: Other segment results Performance (%) Sales (right axis) Operating profit (right axis) OPM (JPYbn, %) Operating profit OPM Sales (right axis) FY3/16 Q3 FY3/17 Q3 FY3/18 Q3 FY3/ FY3/7 FY3/9 FY3/11 FY3/13 FY3/1 FY3/ The Other segment reported cumulative Q3 sales of JPY8.9bn and an operating profit of JPY1.2bn. Reflecting the sale of subsidiary Oki Sensor Device at the end of FY3/17, cumulative Q3 sales were down JPY3.9bnYoY (-3.6% YoY) and operating profit was down JPY1.2bn YoY. For previous quarterly earnings, see Historical performance section. 14/94

15 Oki Electric Industry / 673 LAST UPDATE: Full-year company forecasts FY3/1 FY3/16 FY3/17 FY3/18 Est. (JPYmn) 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY Sales 228, ,362 4,13 223,1 267,313 49, ,2 22,372 41, , 27, 4, ICT ,3 78, , ,174 66,863 11,28 177,391 7, 112, 183, Mechatronics Systems ,2 4,979 8, ,667 48,963 1,96 1,923 48, 6, 1, Printers 61,613 67,68 129,271 9,84 6,63 124,647 4,2 8, ,389 1,, 16, EMS 2,192 2,116 4,38 2,72 21,782 42,34 2,864 22,31 43,16 22, 27, 49, Other 8,891 9,176 18,67 9,44 9,17 18,471 8,39 9,447 17,76 6, 6, 12, YoY 12.2% 11.6% 11.8% -2.% -14.1% -9.2% -1.6% -.6% -7.9% -.6% 1.8%.7% ICT % % -1.3% -1.% -7.2%.4% 1.8% 3.2% Mechatronics Systems % % -1.9% -11.% -11.2% -.9% 8.7% 4.% Printers 7.6%.2% 3.6% -4.1% -3.1% -3.6% -8.2% -11.3% -9.8% -6.% -.4% -.7% EMS 12.3%.2% 8.6% 1.9% 8.3%.1% 1.4% 2.4% 1.9%.4% 21.1% 13.% Other.6%.3% 2.8% 6.3% -1.7% 2.2% -12.1% 4.8% -3.9% -27.8% -36.% -32.4% Gross profit 7,869 82,637 14,6 8,234 7,83 129,64 48,74 6, ,233 - YoY 13.% 6.9% 9.4%.6% -14.3% -8.1% -16.3% -7.% -11.% - GPM 2.3% 26.% 26.% 26.1% 26.% 26.3% 24.% 26.% 2.3% - SG&A expenses 1,31 6,789 18,9 4,64,829 11,469 49,387 62,31 111,688 - YoY 6.% 7.4% 6.7% 6.% -1.7% 2.2% -9.6% 11.6% 1.1% - SG&A-to-sales ratio 22.4% 18.2% 2.% 24.% 2.9% 22.% 24.8% 24.7% 24.7% - Operating profit 6,67 2,848 32,41 3,94 1, 18, ,192 2,4 -, 18, 13, ICT - 13, 847 1,78 11, ,676 14,38 13, 13, Mechatronics Systems - 12,4 3,462 2, 6,17 1,323-13,141-11,818-2, 3, 1, Printers 3,999 2,721 6, ,918 1, ,86 1,33-1, 2, 1, EMS 7 1,42 2, ,483 2, ,341 2,8 2, 2, Other 1,92 1,87 3,467 2,234 1,91 4,18 1,7 1,924 3,431 1, 1, Adjustments -2,82-2,88 -,7-3,248-3,698-6,946-3,131-3,414-6,4-3, -3, -6, YoY 134.% 6.% 19.2% -4.3% -42.% -42.6% % -86.3% % 41.8% ICT % % % 23.7% % -6.2% Mechatronics Systems % % -61.8% Printers % 31.1% % -78.8% - -.8% -27.6% % -3.2% EMS 13.2% 26.% 22.4% 39.3% 2.1% 12.7% -1.% -9.6% -9.9% -3.3% 49.1% 21.% Other 23.% 21.% 21.9% 4.3% 4.1% 2.7% -32.% -1.4% -18.% -66.8% -48.% -6.3% OPM 2.9% 8.3% 6.% 1.6%.6% 3.8% -.3% 1.3%.6% -2.% 7.% 2.9% ICT % 1.1% 9.6% 6.1% -.4% 13.3% 8.1%.7% 11.6% 7.4% Mechatronics Systems % 6.3% 4.4%.3% 2.7% -2.3% -11.7% -4.1%.3% 1.% Printers 6.% 4.%.2% -.8% 2.9% 1.1% -1.4% 3.1%.9% -2.9% 4.%.9% EMS 2.8% 7.2%.% 3.9% 6.8%.4% 3.4% 6.% 4.8% 2.3% 7.4%.1% Other 17.9% 2.4% 19.2% 23.6% 21.6% 22.7% 18.1% 2.4% 19.3% 8.3% 16.7% 12.% Recurring profit 9,77 28,31 37,928 2,676 8,69 11,366-8,946 6,8-2,366 -, 17, 12, YoY 37.% -4.% 3.% -72.1% -69.3% -7.% % % - RPM 4.2% 9.1% 7.% 1.2% 3.3% 2.3% -4.% 2.6% -.% -2.8% 6.8% 2.6% Net income 1,27 22,834 33,91 89,714 6,69-13,28 18,219 4,691-6, 14, 8, YoY 46.4% -1.6% 21.% -91.3% -7.% -8.% % -29.% % 7.% Net margin 4.% 7.3% 6.1%.4% 2.1% 1.3% -6.8% 7.2% 1.% -3.3%.6% 1.8% EBITDA 13,326 33,3 46,879 1,493 22,483 32,976 6,12 1,416 16,36 YoY 37.2%.7% 13.1% -21.3% -33.% -29.7% -41.7% -3.7% -49.9% EBITDA margin.8% 1.8% 8.7% 4.7% 8.4% 6.7% 3.1% 4.1% 3.7% R&D expenses 6,467 7,288 13,7 6,124 7,193 13,317 4,69,8 1,27 11, Capital expenditures 11,461 11,66 8,7 12, Depreciation 6,79 7,7 14,464 6,899 7,483 14,382 6,767 7,224 13,991 JPY/USD YoY 4.2% 1.% 9.6% 18.3% 1.4% 9.% -13.6% -.8% -9.8% 4.% -1.4% 1.% JPY/USD (period end) JPY/EUR YoY 6.9% -.1% 3.3% -2.7% -6.1% -4.4% -12.6% -8.1% -1.4% -2.6% -3.7% -3.2% JPY/EUR (period end) JPY/CNY YoY 3.2% 12.8% 8.% 17.% -3.1% 6.% -18.1% -1.8% -14.6% JPY/CNY (period end) JPY/BRL YoY -.2% -1.% -.6% -18.9% -29.4% -24.% -16.% 13.4% -2.7% JPY/BRL (period end) Initial company forecast for FY3/18 (out May 12, 217) Priorities under new medium-term business plan FY3/18 is the first year under the company's new business plan and, as such, is the year when the company is looking to reinforce the base on which it will grow the business in the future. Plans call for stepping up R&D spending in growth areas at the ICT segment and, at the Printers segment, increasing forward-looking spending in preparation for future growth and also incurring additional expenses to facilitate structural reforms. If not for the dropout of the large, one-time addition of JPY1.9bn to allowances for doubtful accounts in FY3/17, this added spending would leave earnings down in FY3/18. That said, we would hasten to note that the additional spending this fiscal year is essential if the company is to meet the targets set under its new medium-term business plan, and that the forecast also reflects the dropout of the roughly JPY2.bn in operating profit generated by former subsidiary OKI Sensor Device (sold at the end of FY3/17). In this section we will deal only with the thinking behind the 1/94

16 Oki Electric Industry / 673 LAST UPDATE: company's numerical targets set under its new medium-term plan; for specifics on strategy, please see the Medium-term strategy section of this report. Numerical targets As shown in the preceding figure, the company is projecting positive top-line growth across all segments but mixed results at the operating profit level, as detailed below. Factors affecting operating profit FY3/17 Operating profit ICT segment Change in volume and product mix Price declines Procurement cost reductions and value engineering Forex Fixed cost reduction One-time loss FY3/17 Operating profit (JPYbn, %) FY3/16 Operating profit Sales (right axis) OPM Q2 Q3 Q4 FY3/ Q2 Q3 Q (JPYbn, %) Operating profit OPM Sales (right axis) FY3/14 FY3/1 FY3/16 FY3/17 FY3/18 Est For the ICT segment, the company is forecasting higher sales but lower earnings in FY3/18, with sales rising JPY.6bn YoY to JPY183.bn and operating profit declining JPY9mn YoY to JPY13.bn. After seeing its operating profit margin jump to 8.1% in FY3/17 on the back of organizational and other structural reforms that were implemented at the beginning of the fiscal year, the company is now looking for the operating profit margin at the segment to come down to 7.4% in FY3/18. The projected decline in the operating profit margin and operating profit at the segment does not reflect an expectation of a decline in efficiency but rather a planned increase (under the company's medium-term business plan) in R&D spending and other investments in new businesses that will help the company sustain growth and maintain a stable revenue and earnings stream in the years ahead. Mechatronics Systems segment Operating profit Sales (right axis) OPM Operating profit OPM Sales (old segment; right axis) Sales (new segment; right axis) % 9.% 14.3% 12 1.% % 6-1 (JPYbn, %) FY3/16 Q2 Q3 Q4 FY3/ Q2 Q3 Q FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/16 FY3/17 FY3/18 Est. 4 16/94

17 Oki Electric Industry / 673 LAST UPDATE: For the Mechatronics Systems segment, the company is forecasting higher sales and higher earnings in FY3/18, with sales rising JPY4.1bn YoY to JPY1.bn and operating profit rising JPY12.8bn YoY to JPY1.bn. Fewer large domestic contracts and a 3% drop in shipments to China will both be substantial holdbacks to top-line growth, but the company expects to offset this with higher sales to India and other emerging markets plus some additional help from a change in the accounting period for its subsidiary in Brazil (the result of which gives it a 1-month fiscal year). Overseas sales are expected to finish basically flat as results in Brazil effectively offsets the drop in China. The company is looking to sell more cash-handling machines in Japan. While it expects to ship no more than a few hundred units of its cash-recycling ATMs in Brazil during FY3/18, their demand is expected to pick up in earnest from FY3/19. At the operating level, excluding impact of the one-time factor in FY3/17, the company forecasts a JPY1.9bn YoY increase in operating profit for FY3/18. Shared Research estimates that roughly half of this increase will come from the reduction in losses at the subsidiary in Brazil and the remaining half from increased earnings from domestic operations. Printers segment 6. Operating profit Sales (right axis) OPM (JPYbn, %) Q2 Q3 Q4 Q2 Q3 Q4 FY3/16 FY3/17 6 Operating profit Sales (right axis) FY3/ FY3/7 FY3/9 FY3/11 FY3/13 FY3/1 FY3/ For the Printers segment, the company forecasts sales to fall JPY6.4bn YoY to JPY16.bn and operating profit to remain unchanged at JPY1.bn. The plan includes roughly JPY2.bn in structural reform-related expenses, which will be booked as an extraordinary loss. The company expects to complete its revamp of overseas operations as well as reforms at the headquarters in Japan before the end of the fiscal year. It also plans to continue development work on specialty printers for different industries. The company's thinking is that, rather than chasing after sales, it should concentrate first on securing stable earnings. EMS segment (JPYbn, %) FY3/16.7 Operating profit Sales (right axis) OPM Q2 Q3 Q4 FY3/ Q2 Q3 Q % 4.7% 4.8% 4.% Operating profit OPM 4.8%.1% %.4% % -.2 FY3/1 FY3/12 FY3/14 FY3/16 FY3/18 Est. 6% % 4% 3% 2% 1% % -1% For the EMS segment, the company is forecasting higher sales and higher earnings in FY3/18, with sales rising JPY.8bn to JPY49.bn and operating profit rising JPY4mn to JPY2.bn. After seeing the segment's operating profit margin slip below % in FY3/17, the company has set its sights on getting the operating profit margin back above % in FY3/18. 17/94

18 Oki Electric Industry / 673 LAST UPDATE: Previous company forecasts and results Forecasts versus results FY3/13 Results FY3/14 Results FY3/1 Results FY3/16 Results FY3/17 Results (JPYmn) Cons. vs. Est. Cons. vs. Est. Cons. vs. Est. Cons. vs. Est. Cons. vs. Est. Sales Initial FY Est. 44, +3.6% 46, +.% 2, +2.9% 4, -1.%, -9.7% FY Est. as of 447, +2.% 46, +.% 2, +2.9% 4, -1.%, -9.7% FY Est. as of Q2 44, +2.4% 48, +.6% 3, +1.% 1, -4.8% 46, -2.9% FY Est. as of Q3 42, +.8% 484, -.2% 3, +1.% 1, -4.8% 46, -2.9% Results 4, ,112 4,13 49,314 41,627 Operating profit Initial FY Est. 18, -27.2% 22, +23.6% 28, +13.7% 3, -38.% 2, -87.3% FY Est. as of 18, -27.2% 22, +23.6% 28, +13.7% 3, -38.% 2, -87.3% FY Est. as of Q2 14, -3.8% 24, +13.3% 3, +8.1% 17, +9.4% 1, -83.% FY Est. as of Q3 1, +34.8% 26, +4.6% 3, +8.1% 17, +9.4% 1, -83.% Results 13,47 27,196 32,41 18,94 2,4 Recurring profit Initial FY Est. 1, +31.% 19, +92.9% 2, +48.7% 28, -9.4% 18, % FY Est. as of 1, +31.% 19, +92.9% 2, +48.7% 28, -9.4% 18, % FY Est. as of Q2 11, +84.6% 24, +2.7% 29, +3.8% 14, -21.6% 6, % FY Est. as of Q3 11, +76.6% 34, +7.8% 31, +22.3% 14, -21.6% 6, % Results 2,34 36,6 37,928 11,366-2,366 Net income Initial FY Est. 11, +23.6% 11, % 17, +89.1% 22, -7.% 12, -6.9% attributable to FY Est. as of 11, +23.6% 11, % 17, +89.1% 22, -7.% 12, -6.9% parent company FY Est. as of Q2 6, +19.2% 1, +82.4% 21, +7.6% 1, -33.9% 3, +6.4% shareholders FY Est. as of Q3 8, +7.% 2, +9.4% 24, +37.9% 1, -33.9% 3, +6.4% Results 13,99 27,39 33,91 6,69 4,691 18/94

19 Oki Electric Industry / 673 LAST UPDATE: Medium-term strategy Old segment performance (left: sales, right: operating profit) ICT Printers Information (old segment) Telecom (old segment) EMS Others 4 74 Semiconductors ICT Printers Information (old segment) Telecom (old segment) 1-3 EMS Others Semiconductors Adjustments -4 Operating profit FY3/1 FY3/6 FY3/11 FY3/16 FY3/1 FY3/6 FY3/11 FY3/16 New segment performance (left: sales, middle: operating profit, right: OPM) ICT Mechatronics Systems Printers EMS Others FY3/14 FY3/1 FY3/16 FY3/17 FY3/18 Est ICT Printers Others Mechatronics Systems EMS Adjustments FY3/14 FY3/1 FY3/16 FY3/17 FY3/18 Est. 1% 8% 6% 4% 2% % ICT Mechatronics Systems Printers EMS Consolidated total FY3/14 FY3/1 FY3/16 FY3/17 FY3/18 Est. Growth strategy OKI has four segments: Information and Communication Technology (ICT), Mechatronics Systems, Printers, and Electronic Manufacturing Services (EMS). Shared Research understands that ICT and EMS form a stable earnings platform while Mechatronics Systems and Printers are struggling. The company aims for medium-term growth by concentrating its management resources in growth areas. Growth strategy by segment ICT: Earnings stable primarily due to replacement demand but the market is mature, so use IoT to develop social infrastructure into a growth sector Mechatronics Systems: Grow through overseas expansion, primarily in emerging markets EMS: Grow through increasing client companies and sectors and improving value-added aspects Printers: Amid shrinking office printer demand, reviewing product strategy and distribution (including sales locations) to reduce fixed costs and secure earnings; its aim is to become a unique printer company, leveraging its LED head technology and shifting to a niche market strategy Medium-term plan FY3/18 will be the first year under the company's new medium-term business plan that will guide operations through FY3/2. Under the new plan the company is looking to increase its earning capacity and, as key performance indicators, is targeting an operating profit margin of 6% and shareholders equity ratio of at least 3%. In terms of sales and earnings, the plan calls for FY3/2 sales of JPYbn and operating profit of JPY3bn; the company is also looking to get the shareholders equity on its balance sheet up to JPY12bn and pay a stable dividend. Overview of previous medium-term business plan Under the previous medium-term business plan (which ended in FY3/17), the company set its sights on an operating profit margin of 6%, an equity ratio of 3%, and a debt-to-equity ratio of less than 1.x. For sales and earnings, the previous plan targeted FY3/17 sales of JPY6.bn (with JPY22.bn from overseas), operating profit of JPY34.bn, and stable dividend 19/94

20 Oki Electric Industry / 673 LAST UPDATE: (assuming average exchange rate of JPY9/USD and JPY12/EUR). In the end, the company met the target for its debt-to-equity ratio but finished short in other areas, despite shareholders equity ratio improving by pp and operating profit having surpassed the target at one point during the three-year period. The company's success in meeting the performance targets laid out under its previous medium-term plan was clearly mixed. Overall, the company did succeed in improving its financial position, improving the profitability of its ICT business, and planting the seeds of some new growth businesses. However, the company recognizes that its efforts to improve profitability were somewhat lacking. Put another way, the company would say that it has yet to develop its earning capacity. The company attributes its failure on this front to a number of factors, including 1) sudden changes in overseas market that it failed to respond to in a timely fashion; 2) over-optimism and a lack of objectivity with regard to the strategies and management of overseas businesses; and 3) a companywide earnings model that was overly dependent on the Chinese market. In short, the company was admittedly weak on the governance of its overseas businesses. In response to these issues, the company has made improving its earning capacity the number-one goal under its new business plan. Towards this end, the company plans to accelerate its efforts to improve the governance structure at the group level while looking to sustain growth through a combination of restructuring at existing mainstay businesses and the fostering of new growth businesses. Still, the company can be commended for maintaining an annual dividend per share of JPY (JPY before the share consolidation) for all three years. Overview of new medium-term business plan As mentioned previously, under the new medium-term business plan the company is targeting a 6% operating profit margin and equity ratio of 3% or higher. The company will be focusing on its operating profit margin as one of its key performance indicators because it is difficult to fund dividends and growth investments without stable earnings from operations. The central theme of the current business plan is to make OKI a company that can secure stable earnings and maintain an operating profit margin of 6%, by placing utmost focus on strengthening earning capacity and laying the foundation for sustained growth and evolution. A company that can secure stable earnings, in OKI s definition, is a company that can handle environmental changes. This requires not only a well-balanced portfolio of profitable businesses, but also the ability to create next growth-drivers, the strength to endure adverse environment, and a system of corporate governance that is capable of playing offense as well as defense. Whether or not the company achieves these goals during the current business plan will be key in the qualitative assessment of OKI s progress. The plans for each segment under the new business plan are as follows: ICT: to create a stable earnings base while growing new business Mechatronics Systems: to put the business back on the growth track Printers: to shift strategy with the aim of creating a more consistently profitable business EMS: to grow sales and get closer to its ultimate goal of creating a JPY1bn business Put another way, the company aims to establish a solid base for earnings with the ICT segment, work on turning around the Mechatronics Systems and Printer segments as soon as possible, then add to this by building up new growth business in areas such as social infrastructure and ATMs for emerging markets. The strategies for individual segments are outlined in the following sections. 2/94

21 Oki Electric Industry / 673 LAST UPDATE: Medium-term plan Income statement FY3/14 FY3/1 FY3/16 FY3/17 FY3/18 FY3/2 (JPYmn) Cons. Cons. Cons. Cons. Init. Est. Target Vs. FY3/17 Sales 483,112 4,13 49,314 41,627 4,, +48,373 ICT 27,7 222,3 191, , , 2, +27,69 Mechatronics Systems 9,9 13,2 113,667 1,923 1, 12, +19,77 Printers 124, , , ,389 16, 1, -7,389 EMS 37,111 4,38 42,34 43,16 49, 6, +16,83 Other 17,69 18,67 18,471 17,76 12, 1, -7,76 YoY 6.% 11.8% -9.2% -7.9%.7% 4.8% 3.4% ICT - 7.% -14.% -7.2% 3.2%.8% 4.9% Mechatronics Systems - 3.8% -12.7% -11.2% 4.% 6.9%.9% Printers - 3.6% -3.6% -9.8% -.7% -.% -2.2% EMS - 8.6%.1% 1.9% 13.% 1.7% 11.6% Other - 2.8% 2.2% -3.9% -32.4% -8.7% -17.4% Operating profit 27,196 32,41 18,94 2,4 13, 3, +27,4 ICT 12,7 13, 11,627 14,38 13, 16, +1,61 Mechatronics Systems 1,7 12,4 6,17-11,818 1, 9, +2,818 Printers,12 6,72 1,426 1,33 1, 7, +,967 EMS 1,66 2,27 2,284 2,8 2, 3, +1,442 Other 2,844 3,467 4,18 3,431 1, Adjustments -,8 -,7-6,946-6,4-6, -, -2,386 YoY 11.8% 19.2% -42.6% -86.3% 41.8% 1.9% 127.6% ICT - 6.3% -13.9% 23.7% -6.2% 8.9% 3.6% Mechatronics Systems - 1.9% -1.% % - Printers % -78.8% -27.6% -3.2% 164.6% 89.2% EMS % 12.7% -9.9% 21.% 18.3% 19.4% Other % 2.7% -18.% -6.3% - - OPM.6% 6.% 3.8%.6% 2.9% 6.% +.4pp ICT 6.1% 6.1% 6.1% 8.1% 7.4% 7.8% -.3pp Mechatronics Systems 11.2% 9.%.3% -11.7% 1.% 7.% +19.2pp Printers 4.1%.2% 1.1%.9%.9% 6.7% +.7pp EMS 4.%.%.4% 4.8%.1%.8% +1.1pp Other 16.2% 19.2% 22.7% 19.3% 12.% R&D expenditures 12,99 13,7 13,317 1,27 11, 4, in 3 years Capital expenditures 1,164 11,461 11,66 8,7 12, 4,~, in 3 years Depreciation 14,249 14,464 14,382 13,991 EBITDA 41,44 46,879 32,976 16,36 Strategy: Information and Communication Technology (ICT) Performance (left: old segments, right: new segments) (JPYbn, %) Operating profit Depreciation OPM EBITDA margin Sales (right axis) FY3/ FY3/7 FY3/9 FY3/11 FY3/13 FY3/1 Operating profit OPM Sales (right axis) FY3/14 FY3/1 FY3/16 FY3/17 FY3/18 Est. Strategic direction and numerical targets under new medium-term plan: Looking to maintain stable earnings and sustain growth by creating new businesses. Targeting sales of JPY2.bn with 8% operating profit margin Of targeted JPY28.bn increase in sales, expecting JPY12.bn from existing markets and JPY16.bn from new markets; plans call for heavy investment spending early on with rebound in profit margin in latter half Growth strategy: Maintain business scale and profitability in existing markets while developing social infrastructure (growth market) Existing markets: Domestic market is stable (mainly due to replacement demand) but mature, so sales growth is an issue. Maintain existing markets as cash cows 21/94

22 Oki Electric Industry / 673 LAST UPDATE: Aiming for JPY12.bn increase in sales: After bottoming out in FY3/17, sales expected to rise steadily through final year of medium-term plan; transportation infrastructure-related demand may come on top of this Restructuring segments: In April 216 OKI merged the financial and telecom divisions, and renamed the Info-Telecom System segment (one of its original businesses) the ICT segment Goals of restructuring: Use technology and solutions developed in each segment across all sectors, streamline use of technicians and engineers New areas: Mature domestic market overall but some growth markets drawing investment. Focusing on niche markets Social infrastructure system market: Additional ICT investment needed to help solve societal problems (rising cost of infrastructure maintenance, resource shortages); leverage sensing technology (both fiber optic and acoustic) to capture IoT demand (such as monitoring aging infrastructure) Growth strategy In the ICT segment the company primarily provides systems for the financial, telecom, and social infrastructure industries. Customers are mainly major companies and government agencies. OKI has been providing systems to handle counter, call center, and control operations for many years so the segment is mainly driven by replacement demand. The domestic market is mature but is somewhat cyclical and the frequency and timing of replacement varies by industry and customer, but overall the scale of the business is stable. Still, it is hard to expect much sales growth. The growth strategy for the ICT segment are 1) maintaining existing mature markets as cash cows, and 2) in new business areas, concentrating management resources on rising-demand areas such as social infrastructure for growth. The company does not intend to enter all fields, but will instead concentrate on areas where it can leverage strengths and will seek partnerships with others where it is weak. In this manner the company aims to reduce its investment burden, generate profits, and realize an 8% operating profit margin. Numerical targets Under the new medium-term business plan, for FY3/2, the company is targeting segment sales of JPY2.bn (+JPY27.6bn over FY3/17; average annual growth of 4.9%), operating profit of JPY16.bn (+JPY1.6bn; 3.6%), and OPM of 7.8% (-.3pp). in FY3/2. Of the projected JPY27.6bn increase in sales, the company is looking to derive JPY12.bn from existing markets and JPY16.bn from new business areas. The company has also made expanding sales in the social infrastructure market one of its top priorities and, towards this end, plans to step up related investment spending (especially on R&D). While the front-loaded investment spending will weigh heavily on the operating profit margin during the first half of the three-year period covered by the medium-term plan, the operating profit margin is expected to start moving back up again during the latter half as earnings rebound and reach 8% by the final year of the plan (FY3/2). After seeing demand in existing market bottom out in FY3/17 due to a combination of market cyclicality and other factors, the company is looking for sales in existing market get back on the growth track from FY3/18. The company stated the sales plan was very carefully put together. Promising new markets identified by the company include V2X (Vehicle-to-Everything)-related products and aging infrastructure-related products. The company is planning to roll out a new Cooperative Intelligent Transport System (ITS) service linking V2X communications with transportation infrastructure, and detection systems that will help identify the signs of aging in structures ranging from damns and traffic tunnels to high-rise buildings and condominiums. These plans are outlined below. 22/94

23 Oki Electric Industry / 673 LAST UPDATE: ICT: Existing markets Former Info-Telecom Systems segment sales (excluding mechatronics) 2 Solutions and services Telecom systems Social systems Solutions and services Telecom systems Social systems FY3/16: end of sales for major carriers fixed line networks FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/16 2 Digitalization of disaster radio systems raised performance FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/16 Domestic market is stable (mainly from replacement demand) but mature, so sales growth an issue. Maintain as cash cow The figure above shows sales performance through FY3/16, under the previous segmentation. While there are some minor fluctuations, the solutions & services business was largely stable. Segment results are usually in line with initial forecasts (see following chart for previous forecasts versus results) because demand is mostly replacement demand, and the replacement cycle (years) can be estimated fairly accurately. Further, the segment s profitability is stable. The large sales decline in telecom systems in FY3/16 was due to sales of fixed line networks to telecom carriers coming to an end. The decline in sales and shortfall versus forecasts in the social systems business was due to the end of temporary demand for digitalizing wireless communication systems of fire departments. Excluding these factors, the telecom and social systems businesses are mainly driven by replacement demand and are therefore stable. Strengths: business from repeat customers and system integration under to each specification type The probability that other companies will steal replacement demand from OKI is low. This is because customers voice and telecom systems that OKI handles require customized reliability standards, which are a hassle to deal with; in order to boost operational efficiency, it is necessary to substantially understand customers workflows when building systems OKI s specialty; and the market is mature so few companies are trying to enter it. For example, for major air traffic control systems, OKI works with major telecom companies to assemble systems. The company is able to participate because it provides a product lineup that meets customers needs and experience with audio technology. While sales growth is a challenge, the company aims to maintain the existing business as a cash cow Roughly half of sales are to the public sector, and most private-sector business is with financial institutions and major transport companies. The company s products are mainly terminals used by client companies when interacting with their customers, so as long as these interactions continue, so should demand. However, demand could wane if social changes make the company s systems obsolete, such as operations in financial institutions and travel agency over-the-counter businesses no longer needing to staff people, the transition to a totally ticketless society, or centralization of membership point management on personal devices such as smartphones. That said, it is hard to imagine the investment amounts of customers will decline significantly, so OKI says it plans to focus management resources on new areas that are attracting investment. In businesses where it has a competitive advantage, the company intends to actively invest in growth areas and be on the lookout for good acquisition candidates. Cyclicality Replacement demand in existing markets (depending on the combination of frequency and size of replacement) tends to be somewhat cyclical. FY3/17 corresponded to the bottom of one of those cycles, and the company is looking for replacement demand to pick up again starting FY3/18. Together with the cyclical rise in replacement demand, OKI is looking to grab a larger share of public spending on infrastructure to bring in an extra JPY12.bn in sales over the next three years. 23/94

24 Oki Electric Industry / 673 LAST UPDATE: Initial forecasts vs actual results in ICT segment sales 2% Solution and service Telecom systems Social systems 2% 1% 1% 8% % 2% 3% 1% % -% -% -3% -1% -1% FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/ Solution and service Telecom systems Social systems FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/16 ICT: new growth markets In FY3/16 social infrastructure-related sales fell by 21.8% YoY as temporary demand for the digitalization of fire departments wireless communication systems wound down. OKI sees social infrastructure as a growth market. This is because roads and transport account for a large proportion of public sector demand, and the company can differentiate itself through the effective use of its sensing technologies (both fiber optic and acoustic) and network technologies such as multi-hop and DSRC (dedicated short-range communications, designed for automotive use). Multi-hop: Using two or more wireless hops intermediate connections in a string of connections linking two devices to convey information from a source to a destination. More specifically, OKI sees the aging transportation infrastructure as a growth area since many of Japan's bridges, traffic tunnels, and other transportation infrastructure is now more than years old (having been constructed during the rapid-growth years of the early 196s). Another new area of great interest to OKI is the V2X (Vehicle-to-Everything) market. Here, OKI is looking to roll out a Cooperative Intelligent Transport System (ITS) service that will connect the V2X networks that are needed to fully actualize Advanced Driver Assistance Systems and modernize existing transportation infrastructure systems. Both fields will allow OKI to leverage its strengths in related technologies and its experience as a participant in government infrastructure projects. Under the medium-term business plan, OKI is looking for a JPY16.bn rise in sales from new markets over the next three years, of which a large part will come from the social infrastructure market. Aging social infrastructure assets: bridges over 1m (left) and tunnels (right) (No. of bridges) 6,, 4, Bridges (over 1m long) over years old (% of total) 1 years later: 69, (41%) years later:, (3%) 2 years later: 13, (62%) (No. of tunnels) 3 Tunnels 2 over years old (% of total) 2 1 years later: 3,8 (38%) years later: 3,1 (31%) 2 years later:,3 (3%) 3, 2, 217: 3, (18%) : 2,4 (24%) 1, ~ Source: Shared Research based on MLIT data ~ Aging social infrastructure assets As of March 213, 18% of bridges (of a total of around 4, bridges, excluding 3, bridges with unknown construction dates) were at least years old and around 2% of tunnels (of a total of around 1, tunnels) were over. These ratios are expected to rise to around 43% and 34% respectively by 223 and 67% and % by 233. OKI is targeting profit growth by proposing solutions that incorporate IoT technologies. 24/94

25 Oki Electric Industry / 673 LAST UPDATE: Infrastructure inspection demand: In 212 ceiling plates in the Chuo Expressway s Sasago Tunnel collapsed. Following this event, the government took measures to deal with aging infrastructure and revised the Road Act in 213, promulgating ordinances and notifications requiring regular inspections in 214. From July 214, bridges, tunnels, and other road facilities were required to be inspected once every five years via close-up visual examinations. As of March 31, 216, there were 726, bridges and 11, tunnels slated to be inspected every five years. Solutions that incorporate IoT technologies OKI has begun offering pre-inspection solutions. In June 216 the company launched a support service for making inspection reports of social infrastructure, a cloud service that helps streamline monitoring at tunnel inspection sites. In January 217 the company launched a similar service for bridges. These services help increase workflow efficiency, provide a solution to the inadequate number of experienced inspectors, and help reduce costs. In October 216 OKI started selling bundled products incorporating IoT technology using multi-hop wireless networks, one of its strengths, with a variety of sensors including seismic, temperature, and CO 2 sensors. Installing these products on aged infrastructure can prevent accidents and help identify correlations. The company sees aged infrastructure solutions as a growth area, and is proactively developing related products and services. OKI expects the social infrastructure inspection report service to generate sales of JPY2mn from tunnels (from JPY1, per tunnel) in the first year and JPY1bn from bridges (from JPY1, per five bridges [service offered for units of five]) in FY3/2. Assuming that bridge and tunnel inspections are carried out as planned by the government, and all inspections use OKI s services, at JPY1,/tunnel and JPY3,/bridge, the market would be worth JPY.bn in FY3/18 and JPY.7bn in FY3/19. Social infrastructure inspection report service (left: tunnels, middle: bridges), IoT Fast Kit (right) Public network such as 3G/LTE Internet C loud serv ices Public network such as 3G/LTE Inspection sites Office Inspection sites Office IoT-GW 92MHz band Tablets Business terminals Business terminals multi-hop wireless Tablets network system Tablets Tablets Internet C loud serv ices IoT Platform (Managed Cloud EXaaS ) Internet LTE - Display graphs based on data from various sensors (visualization) - Data management at multiple sites (tenant management) - Automatic installation of applications Wi-Fi Wi-Fi Illuminance sensors CO 2, temperature, and humidity sensors Vibration sensors Source: Shared Research based on company materials Bridge and tunnel inspection plans (total for all road operators) and actual inspections (left); estimates of infrastructure inspection report service market (right) Tunnel inspection (planned) FY3/1 FY3/16 FY3/17 FY3/18 FY3/19 1% 17% 18% 19% 31% Tunnel inspection (actual) 13% 16% Bridge inspection (planned) 1% 2% 24% 24% 23% Total (*) FY3/1 FY3/16 FY3/17 FY3/18 FY3/19 Bridges 72,97 63,719 14, , , ,939 Tunnels 11,24 1,442 1,799 1,984 2,9 3,74 Bridge inspection (actual) 9% 19% % 2% 4% 6% 8% 1% Source: Shared Research based on MLIT and company materials JPY3,/bridge (JPYmn) 1,912 4,224,227,227,188 JPY1,/tunnel (JPYmn) Total (JPYmn) 2,128 4,494,24,41,744 Leveraging OKI s strengths The company is working to provide solutions for next-generation social infrastructure in three layers. At the bottom is the device layer, where OKI leverages its expertise in sensing technology for acoustic analysis, image recognition, and radio wave analysis. 2/94

26 Oki Electric Industry / 673 LAST UPDATE: The middle layer is a shared platform, which collects accurate information from the device layer and delivers this data to a service solution layer, the top layer. In the middle layer, the company offers an efficient network environment that integrates its strengths in both specialized wireless technologies and general-purpose telecom technologies. Data received from devices are sent over the 92 MHz band by multi-hop wireless or connected by DSRC (Dedicated Short Range Communications; an open-source protocol for wireless communication similar to wifi) technology the company developed in the former Info-Telecom Systems segment. These data are then streamlined and passed on to the general network using video compression or broadband data transmission technology. In the top layer, software measures the efficiency of business processes. Solutions of next-generation social infrastructure Service solution layer Business applications Analytics N ext-gen transport Social infrastructure management Prev ent & reduce disasters Security (F ire & crime prev ention) Regional rev italization Machine learning and artificial intelligence Medical 医療 / エネル and energy ギー Bridges Inclines and mountain roads Tunnels Shared platform layer Network (WAN, LAN, FAN, PAM) Networks and platforms 92MHz DSRC Specified radio 3G LTE RFID Wi-Fi Abnormal vibration, deflection, and gap in junction Collapse, slides, bumps and abnormal road temperature Bolt loosening at ancillary facilities (jet fans, traffic signs) Vibration data Infrastructure management center Request for visit Device layer Sensors and devices Riv er monitor Extinguisher Drones ITS ATM Coastal Intelligent camera MFP Sensing technologies sound, images, radio waves Env ironment sensors (temperature, humidity ) 92MHz wireless sensor network On-site inspection Source: Shared Research based on company materials V2X A good example of this is the company's Infrastructure Cooperative ITS service that will link V2X communications to existing transportation infrastructure. V2X technology is at the heart of Advanced Driver Assistance Systems and OKI is working together with government agencies and various road-related contractors to create a system on the transportation infrastructure side capable of handling it. OKI already has ITS-related core systems up and running and is planning to roll out an Infrastructure Cooperative ITS service that will provide the support infrastructure and can process all the big data needed to support Advanced Driver Assistance Systems. Transportation infrastructure-related systems and products have generated a combined total of more than JP1bn in sales for OKI over the years. OKI is also well known for its skill in utilizing probe data (traffic flow data generated by automobiles). It has been involved in related projects led by Japan's Ministry of Land, Infrastructure and Transport, and is considered one of the leaders in probe data analysis, according to the company. The usefulness of probe data goes well beyond ADRS-related applications; it is also used to predict traffic jams and for early detection of reckless driving, vehicles travelling against traffic, car fires, and accidents. With the help of DSRC connections, OKI is also planning a range of other traffic solutions services, including a payment service. Because demand is expected to continue well after the current three-year plan is over, the company is planning to invest heavily in this area in the years ahead. As the social infrastructure continues to age rapidly, reducing the burgeoning cost of maintaining it becomes a matter of urgency that calls for an early implementation of systems like the Infrastructure Cooperative ITS service. Due to such societal demands, the company plans to channel management resources to making the social infrastructure business a core business. ICT: Organizational restructuring Channel management resources to focus areas and products OKI substantially restructured its business in April 216 to support its growth strategy. The former Info-Telecom Systems segment had three businesses: solutions & services, telecommunications systems, and social systems, all with separate sales and planning departments. Under the new organization, these departments were merged in the new ICT segment, and the telecom business was eliminated. Although the telecom business was part of the company s original identity, management seems to have been able to convince employees of the importance of changing direction to enable growth. 26/94

27 Oki Electric Industry / 673 LAST UPDATE: Business related to fixed line networks for major telecom carriers finished in FY3/16. OKI redeployed resources from this business, including engineers, to other businesses, reducing previously outsourced processes and projects and solving the engineer shortage. As a result, segment efficiency increased and margins improved as shown in FY3/17 results. The company sees these gains coming from a number of sources, including the consistent use of best practices, optimized business processing making use of common back-office support functions, fusion of different technologies and enhanced business proposal capabilities, and personnel exchanges that boosted strength of the organization as a whole. Previous attempts had failed to show results and the company believes that getting rid of the telecommunications segment enabled it to successfully reallocate management resources. Having created an organization that is now working towards the same goal, OKI plans to continue allocating management resources proactively to growth areas. ICT: Overseas expansion OKI seems to be considering expanding its social infrastructure solutions overseas. However, the company does not think it is possible to turn a profit within two or three years of entering an overseas market. Even in Japan it is difficult to succeed without robust technology and strong products. If the company can succeed in building competitive systems in Japan, as it did with ATMs, it may be able to localize these systems to expand overseas. 27/94

28 Oki Electric Industry / 673 LAST UPDATE: Strategy: Mechatronics Systems Performance (left: mechatronics sales in the old Info-Telecom Systems segment, right: new segment) Japan Other overseas Domestic ratio (right axis) China China ratio (right axis) FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/16 Operating profit OPM Sales (old segment; right axis) Sales (new segment; right axis) 7% % 9.% 14 6% % % 1 4% % % % % 2 1% -1 % FY3/1 FY3/12 FY3/14 FY3/16 FY3/18 Est. Strategic direction and numerical targets under new medium-term plan: Looking to put Mechatronics segment back on growth track by expanding sales in emerging markets; targeting sales of JPY12.bn and operating profit of JPY9.bn Of projected JPY19.1bn increase in sales, expects only JPY7mn from domestic market versus JPY18.4bn from overseas, with sales in China down JPY6.bn, Brazil up JPY9.bn, India up JPY8.bn, and other regions up JPY7.bn Growth strategy: Expand domestic sales of cash-handling machines to distributors and retailers; for overseas, gain share in emerging markets and expand sales of cash-recycling ATMs Domestic market: Mitigate risk of falling ATM sales to financial institutions by increasing sales of cash-handling machines to distributors and retailers Overseas markets: Lessen dependence on specific regions, develop strategies to meet regional needs; rebuild operations in China and Brazil, expand in other emerging markets China: Establish stable earnings base. After securing a solid foothold based on replacement demand for ATMs and ATM repair/maintenance services in urban areas, move to expand sales in rural districts Brazil: Ramp up previously delayed rollout of cash-recycling ATMs, expand sales and earnings Emerging markets: Given the ample growth potential in India, aim to grow business to JPY1bn or more Product strategy: Roll out RG8 for emerging markets, use a single platform for ATMs to harness volume efficiency and drive profit growth Cash-handling machines: No more large projects expected in FY3/18, but aim to grow domestic sales by expanding sales of new coin changers and other types of cash-handling machines to distributors and retailers. Growth strategy Mechatronics Systems is one of the core businesses responsible for growth in OKI s medium-term strategy. ATMs make up roughly 7% of the sales mix. The company s domestic market share for ATMs is around 4%, but around 7% for the distribution and retail industry. In 1982 OKI launched the world s first cash-recycling ATM. Its high market share is underpinned by the reliability of the machine s bill recycling and authentication functions and stable systems that are both accurate and fast. The strategy is to grow numbers of ATMs operating overseas in emerging markets, expand sales of cash-handling machines, and maximize scale merits by focusing on sales of its new strategic model, the RG8, in emerging markets. In existing domestic markets, the main source of demand is replacements by financial institutions, but OKI expects this demand to shrink, so it aims to maintain sales levels by expanding sales to the distribution and retail industry. The company aims to tap into emerging markets and maximize volume efficiency by focusing on a single strategic model. Numerical targets Under its medium-term business plan the company is targeting segment sales in FY3/2 of JPY12.bn (+JPY19.1bn over FY3/17; annual growth of.9%), operating profit of JPY9.bn (+JPY2.8bn), and OPM of 7.%. Of the projected increase in sales, only JPY7mn is expected to come from domestic markets versus JPY18.4bn from overseas. Domestic sales are projected to drop by roughly JPY9.bn in FY3/2 due to the downsizing of large projects the company had over the past two years up to FY3/17. 28/94

29 Oki Electric Industry / 673 LAST UPDATE: The company is looking to increase sales by roughly the same amount over the next three years, with contributions coming from services (+JPY.bn) and cash-handling machines (JPY4.bn). Overseas, the company sees sales in China declining by roughly JPY6.bn over the next three years but expects this to be offset by gains in other emerging markets, with sales in Brazil rising by roughly JPY9.bn, sales in India by JPY8.bn, and sales in Southeast Asia/Russia/Eastern Europe by JPY7.bn. Even as sales in China are coming down the company will kick off business in India in FY3/18 and expects to have full-scale sales operations underway in FY3/19. As the company is also looking for operations in Brazil to get back into the black in FY3/19, the company's success in achieving medium-term plan targets for the Mechatronics segment will depend largely on what happens in FY3/19. The operating profit target represents an increase of JPY13.4bn over FY3/17 if the large, one-time addition of JPY1.9bn to allowance for doubtful accounts made in FY3/17 is excluded. Overseas, the projected increase in operating profit over the next three years reflects a number of factors including 1) production efficiency gains stemming from high-volume sales of a strategic ATM model, 2) a more profitable sales mix as customers switch to the basic strategic model and more cash-recycling ATMs are sold, and 3) the dropout of operating losses stemming from the drop in production in FY3/17. In Japan, earnings are expected to benefit from the decline in the number of large, low-margin contracts. Sales target under medium-term plan (left: domestic, right: overseas) Terminals and Terminals and others others Large contracts Large contracts Services Services Cash-handling Cash-handling ATM FY3/17 ATM FY3/2 FY3/17 Southeast Asia, Russia, East Europe 4 1% India 2 4% Brazil 16 39% China 2 47% FY3/2 Southeast Asia, Russia, East Europe 11 18% India 1 17% Brazil 2 41% China 14 24% Mechatronics: Existing markets Number of ATMs installed in domestic market (left: by industry, middle: three retailers, right: installed machine and store count for Seven-Eleven and Lawson) (' unit) Financial institutions (excl. Japan Post Bank) Japan Post Bank Convenience stores Source: Shared Research based on company and other data (' unit) 4 Seven Bank LAWSON AEON Bank FY FY FY1 FY1 12% 1% 8% 6% 4% Seven Bank ATM units Seven Eleven store count LAWSON ATM units LAWSON and Natural LAWSON store count 2% FY FY FY1 FY1 Domestic market: Mitigate risk of falling ATM sales to financial institutions by increasing sales to distribution and retail industry In the domestic ATM market, the number of machines installed at financial institutions (banks and post offices) is trending sideways, and demand is mostly replacement demand. However, the number of new ATM installments in the distribution and retail sector, primarily convenience stores, is growing. The number of ATMs installed by convenience stores such as Seven-Eleven and Lawson (stores with data available) has grown roughly in line with growth in store numbers since fiscal 21, and the number of stores is forecast to continue growing: As part of a medium-term growth plan, industry leader Seven-Eleven plans to open 1,7 stores per annum and close 8; Lawson planned for a net increase of 7 stores in FY2/17; and the core aim of the September 216 FamilyMart and UNY Group Holdings merger was to grow the scale of the convenience store business. 29/94

30 Oki Electric Industry / 673 LAST UPDATE: OKI is in an advantageous position for selling ATMs to retailers, with a market share of roughly 7%, but it is not optimistic regarding the domestic market overall. The company sees declining sales to financial institutions as a risk, and aims to maintain segment sales by increasing sales to retailers. Retailers are looking to buy ATMs with functions in addition to just financial transactions, so OKI plans to increase the value-added aspects of its products. The company is working to expand its share in mature markets. In FY3/17, OKI won new retailer customers from competitors, and plans to gradually replace competitors ATMs with its own models to grow market share. Breakdown by product and services: Looking to grow sales of cash-handling machines and contract services As discussed previously, under the current medium-term business plan the company is looking to maintain the current size of its ATM business while bolstering the top-line with additional revenues from services. One particular service OKI will be actively pushing is its one-stop "Full Outsourcing Service" (FOS) that handles everything for the ATM buyer from initial installation, to daily operation and security. Encouraged by the strong demand from users for its new FOS service, OKI is looking to differentiate itself and plans to develop this market in conjunction with partner companies in security business. OKI is also looking to introduce a new type of coin changing machine (cash-handling machine) to distributors and retailers, strengthen its alliances with POS system vendors, and work to boost sales by creating solutions for efficient cash register operations. This does not mean that OKI was behind competitors in its cash-handling machine technology, but rather that it has not conducted aggressive sales on this front thus far. Under the medium-term plan the company is looking to change this by finding partners to help it drum up new business, especially in the convenience store market. Domestic sales Japan Overseas Domestic ratio (right axis) % 6% % 4% 3% FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/16 FY3/17 2% 1% % Mechatronics: Overseas markets Overseas sales FY3/17 China Other overseas China ratio (right axis) ATM unit shipments in China (') 1 % % 3 Other overseas % % % China % Japan % % % FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/16 FY3/17 FY3/ FY3/7 FY3/9 FY3/11 FY3/13 FY3/1 FY3/17 3/94

31 Oki Electric Industry / 673 LAST UPDATE: Overseas markets: Lessen dependence on certain regions, develop strategies to meet regional needs; rebuild operations in China and Brazil, expand in other emerging markets In the Mechatronics Systems segment, the company expects rapid market growth in emerging economies. After OKI entered China in 21, it has expanded mainly to Russia, Southeast Asia, India, and Brazil, and further stepped up expansion efforts from 212. That said, the company's overseas expansion efforts have been struggling since FY3/1. In China, OKI s late response to the changing market conditions and overdependence on a local partner together led to a significant decline in earnings. In Brazil, a severe downturn in the economy forced financial institutions to put off ATM upgrades, delaying sales of OKI's new cash-recycling ATMs. Reflecting the company's resolve to not make the same mistake twice, the medium-term business plan calls for: Regional strategy: Restructuring of operations to prevent overdependence on any one particular region; implementing measures designed to better fit the unique characteristics of individual regions Product strategy: Rollout of the RG8, the company's new strategic ATM model for emerging markets Sales strategy: A multi-channel distribution strategy that will facilitate sales growth while reducing the risks that comes from depending on a single distributor New business: Creation of new businesses including solution services to help retailers process and recycle paper money In China, OKI has made establishing a stable earnings base its top priority; in Brazil, it is looking to get the long-delayed sales of cash-recycling ATMs back on track; in India and other emerging markets, OKI is looking to start growing sales. Overseas expansion: ATM business 212: Starts delivery of ATMs to Alpha Bank, a large private bank Russia 214: Starts delivery of ATMs to a large bank 21: Establishes ATM manufacturing base in Shenzhen 2: Starts selling ATMs via local partners India China Malaysia 212: Establishes representative office 213: Starts delivery of ATMs to PT Bank Central Asia Tbk, the largest private bank Indonesia Brazil 214: Starts delivery of ATMs to State Bank of India, the largest bank in the country; Establishes an ATM sales subsidiary 214: Acquires a local company and establishes an ATM business company Chinese market Looking to establish stable earnings base The medium-term business plan assumes that sales in China will continue coming down and will decline by a total of JPY6.bn over the next three years. The company has set its sights on establishing a stable earnings base in China and, towards this end, is looking to secure a profitable foothold in urban areas based on replacement demand for ATMs and ATM repair/maintenance services, then move to expand sales in rural districts. Earnings are not expected to be as high as they were in the past, and the company is looking to get operations in China back into the black and establish a stable earnings base. After peaking in FY3/1, sales still coming down In the Chinese market, profits have been sluggish since peaking in FY3/1 due to a combination of company-specific and market factors: In June 21 OKI halted sales to its former major distributor, Shenzhen Yihua Computer Industrial, and is now rebuilding its China operations, primarily through a strategic alliance with the Digital China Group entered in October 21. In addition, Chinese financial institutions are restraining capex. Company-specific: OKI stopped selling to its major distributor Shenzhen Yihua Computer, and the situation seems likely to continue. The company initially thought it could make up the shortfall by selling to a new partner, Digital China, but shipments were slower than expected due to a market slowdown. Then in FY3/17 OKI provisioned for the possibility that credit extended 31/94

32 Oki Electric Industry / 673 LAST UPDATE: to a major buyer would be uncollectable, making a one-time addition of JPY1.9bn to allowances for doubtful accounts and pushing the Mechatronics segment deeply into the red. Market-specific: The number of ATMs in operation in China keeps growing and has already outstripped Japan with over 7, ATMs in operation. Still, while penetration has progressed, the rapid spread of machines and capex restraint by financial institutions is shrinking annual demand for machines. A research company forecasts the market will reach 1.2mn units by 22, but growth is slowing as ATMs spread in urban areas and as electronic money becomes more widespread, so OKI is slightly skeptical. Indeed, OKI believes the ATM market in China's urban districts have matured to nearly the same extent as those in developed countries and, based on this assessment, is looking to derive the bulk of future revenues in China from replacement demand and repair/maintenance services for ATMs in operation. ATMs in operation for four major Chinese banks (left); cash dispensing machines and ATMs in operation in China (right) (') Bank of China Industrial and Commercial Bank of China China Construction Bank Agricultural Bank of China Sum of the four banks (YoY change) (') (') ATM CD YoY % 2% 1% % ATM market share (left), money in circulation vs. GDP (right) Diebold OKI 4% % Eastcom 6% Yihua 11% King Teller 11% Cashway 11% GRG Banking 28% Hitachi Omron 13% Source: Shared Research based on each bank s data (top left), OKI 21 annual report (top right), GRG Banking news release (bottom left), and The People s Bank of China data (bottom right) (CNYtn) Money supply (year end) YoY Real GDP % 14% 12% 1% 8% 6% 4% 2% % In China, the number of ATMs installed per capita is roughly half of the number for advanced countries where ATMs have taken hold. In addition, in rural areas penetration is lagging behind more urban areas. As such, the company thinks that it can win market share. OKI s market share (including as an OEM or original equipment manufacturer) is only 1% by ATMs in operation, but around % for cash-recycling ATMs. Local companies purchase key parts such as authentication and bill recycling components from Japanese companies, but their progress on in-house development could intensify the competitive environment, including price competition. OKI aims to aggressively expand in the Chinese ATM market with Digital China, its partner since October 21. Investors should focus on whether the two companies can grow sales. Number of ATMs in operation in China: In the urban districts of China (directly controlled municipalities plus 24 "Tier 1" cities), there are approximately 43, ATMs versus a population of 3mn, or 1,43 ATMs for every 1.mn people. In contrast, in China's rural districts, there are only about 29, ATMs for a population of 1.bn, or about 27 ATMs for every 1.mn people (based on company data). The amount of money in circulation is accelerating, and more cash in the market means that demand for cash-handling machines is likely to grow. In 21 the company started shipping a model designed for the Chinese market leveraging its strength in bill-recycling technology. It was primarily targeting financial institutions, but in the future OKI aims to supply backyard cash-handling machines and tap into the retail industry. 32/94

33 Oki Electric Industry / 673 LAST UPDATE: Competitive environment: In cash-recycling ATMs, the reliability of the cash-recycling component is key. Previously, the company s only competitors were Japanese companies (Hitachi-Omron Terminal Solutions and Fujitsu Frontech) or non-japanese companies that used components manufactured by Japanese companies. According to OKI, this is because Japanese companies manufacture faster and more durable products with higher levels of reliability such as authentication, accurate banknote counting regardless of condition, identification of banknotes unable to be recycled, and continuous operation with minimal errors. However, Korean companies are producing lower-priced versions (albeit with inferior functionality, according to the company) and Chinese products using these Korean components are starting to appear on the market. Further, China s largest ATM company, GRG Banking, is starting to develop its own model, so the competitive climate is intensifying. Brazil Subsidiary s operating loss shrinking; receiving orders for cash-recycling ATMs (previously sluggish); aiming for profit in FY3/19 OKI sees the long-delayed sales of the new cash-recycling ATMS to finally pick up in earnest in FY3/19. Based on this assumption, its medium-term business plan is looking for sales in Brazil to increase by a total of JPY9.bn over the next three years and operations moving back into the black in FY3/19. The full-scale entry into the Brazilian market took place with the establishment in January 214 of a new company called OKI Brasil S.A., which incorporated the automated machinery and maintenance businesses spun out from Itaútec, a company under the umbrella of the major Brazilian conglomerate ITAÚ Group (banking, chemicals, electronics, etc.). This resulted from a strategic partnership agreement entered with the conglomerate in May 213. Unlike for other regions, OKI entered Brazil through an acquisition, as setting up a new entity was assessed to be difficult. In Brazil there are already 16, ATMs in operation (OKI survey), almost all standard ATMs rather than the cash-recycling type. Itaútec s share in the Brazilian market for CDs (cash dispensers) and ATMs is around 2%, giving it the number two position. However, the top company Diebold (around %) and the number three player, a local company, do not have their own cash-recycling ATM technology. OKI thus saw an opportunity to capture market share and decided to enter the market. However, due to the slowdown in the Brazilian economy, banks ATM investment has cooled off and profits were not growing. In FY3/1, the first year the company entered the market, the operating loss was more than JPY3.bn. The operating loss further widened to JPY4.bn in FY3/16, so the company wrote down its production equipment. In FY3/17, OKI's Brazilian operations lost between JPY1.bn and JPY2.bn. The company said it miscalculated cash-recycling ATM shipments, but the bottom was in sight. Under the medium-term business plan, OKI is looking to narrow losses in FY3/18 and get its Brazilian subsidiary back into the black in FY3/19. Sales of cash-recycling ATMs had been sluggish due to a stale economy, but in FY3/17 OKI won orders from the largest state-owned bank, Banco do Brasil, and started to ship a recycling cash-handling machine, TCR, to the second largest state-owned bank (Caixa Econômica Federal) and a major private bank (Banco Bradesco SA). Conditions are gradually improving and the company believes that once demand starts picking up it could quickly see a rush of new orders. As things stand now, however, the company is looking for demand of cash-recycling ATMs to pick up in earnest from FY3/19. Operating losses at Brazilian subsidiary, Brazilian GDP - Operating profit (loss) FY3/1 FY3/16 FY3/17 FY3/18 Est. FY3/19 Est. FY3/2 Est. 1% 8% 6% 4% 2% % -2% -4% -6% -8% CY1 CY11 CY12 GDP YoY CY13 CY14 CY1 and IBGE (Instituto Brasileiro de Geografia e Estatística) data CY16 3% 2% 1% % -1% -2% -3% CY1 CY11 CY12 GDP QoQ CY13 CY14 CY1 CY16 33/94

34 Oki Electric Industry / 673 LAST UPDATE: Brazilian ATMs (share for 214) Share by installed units NCR 17% Perto 9% OKI 23% Wincor 6% Diebold 4% Source: Shared Research based on each bank s data Units held by bank Santander 9% Other 9% TecBan 1% Itaú 14% Bradesco 17% BDB 23% CAIXA 18% (') Banco do Brasil Bradesco Itaú Unibanco Banco3Horas Other emerging economies The company has stepped up expansion into emerging markets outside China since 212. While the investment phase will persist for some time, these markets are potential earnings drivers in the medium term. In India, Southeast Asia, and Russia/Eastern Europe, there were roughly 2, 3, CDs and ATMs in operation in the market, and in FY3/16, the number of units shipped to these three regions combined was just slightly over 1% of shipments to China. However, there is ample potential to grow the number of ATMs installed per capita and number of withdrawals per ATM (see following figure). Further, OKI s overseas ATM business is well structured to benefit from mass production, as sales growth in any region should contribute to profits. In particular, the company s sales in India continue to grow rapidly at around 2% per annum. Under its medium-term business plan, OKI is looking for India to become a major sales and earnings driver starting in FY3/19. India The company thinks that its business in India could grow to be on par with its business in China. OKI established a local sales subsidiary in India in 214 and started supplying ATMs to the State Bank of India, the largest bank in the country. The number of units in operation has grown steadily. OKI s market share is still low at around 1%, but there is ample room for expansion. Leveraging the experience in China, OKI is using multiple channels to sell ATMs in India and, on the maintenance service side, is establishing a hybrid structure that has it partnering with a local company. However, given the timeline seen when entering the Chinese market (presence from 2, full-fledged entry from 2, and peak in 214), penetrating the Indian market is likely to take some time, as OKI only entered in 214. Although OKI will continue upfront spending in line with sales growth for the time being, it expects to see contributions to earnings from India starting in FY3/19. 34/94

35 Oki Electric Industry / 673 LAST UPDATE: Number of ATMs in operation by country (' unit) Est. 1 China US India Japan Brazil Russia South Korea Indonesia UK Canada Markets OKI has entered Monthly withdrawal count per ATM India 23, China 72, Indonesia 1, UK 7, Russia Brazil 14, 16, USA 43, Japan 2, Canada 6, South Korea 13, ATM installed units per million people CD/ATM markets in emerging economies (left: India, middle: Southeast Asia, right: Russia/Eastern Europe) (') 3 Units in operation (OKI) Units in operation (total) (') (') 3 6 Units in operation (OKI) Units in operation (total) (') 3 (') Units in operation (OKI) Units in operation (total) (') /94

36 Oki Electric Industry / 673 LAST UPDATE: Strategy: Printers Performance Operating profit Sales (right axis) OPM USD/EUR (right axis) % % % 2% % 12-2% % % -8% % FY3/ FY3/7 FY3/9 FY3/11 FY3/13 FY3/1 FY3/17 FY3/ FY3/7 FY3/9 FY3/11 FY3/13 FY3/1 FY3/ Strategic direction and numerical targets under new medium-term plan: Stabilize earnings with a strategy shift; look for breakeven point based on product type, market, and competitors, aiming for 7% OPM Numerical targets: Sales of JPY1.bn, a JPY7.4bn decline versus FY3/17 with office printer sales down JPY16.bn; Operating profit of JPY7.bn, an increase of JPY6.bn versus FY3/17 Shifting management resources from the office printer market to industry printer market (specialty and professional printing) Office printer market accounts for over 8% of sales. OKI aims for specialty and professional printer markets to account for over % of operating profit in the medium term Office printer market will remain a valuable source of earnings in near term; also investing heavily in new industrial applications to grow the business into a new revenue source Considering further restructuring in FY3/18, which should lead to growth from FY3/19 Structural reforms: In the office printer market, streamline structure (heavy fixed costs) by reviewing product lineup and sales organization (offices and distribution channels) At overseas sales company, looking to streamline operations (including downsizing to better match sales potential) and strengthen oversight; at the head office, looking to improve operational efficiency and expand product development Reform is urgent due to low 2 3% global market share. OKI is considering how to balance fixed factory costs Strategic market: Aiming to increase sales of printers for specialty industrial applications and professional use; targets niche markets of small-lot production of a wide variety of printers for specialty use Growth strategy Office printer market: will remain value source of earnings in near term; also investing heavily in new industrial applications to grow the business into a new revenue source The medium-term business plan calls for a strategic shift with the aim of creating a more stable earnings base. Under the new strategy, the company is redefining its target markets as specialty (industry-use) printers and office printers. The company will still depend on the office printer market as a valuable source of revenues in the near term, but wants to shift the orientation of its printer business toward specialty printers (industry-use) as quickly as possible. In the office printer market, the company only has a 2 3% global market share, and it carries a large fixed cost burden to maintain its product lineup and sales force. By ripping up this old structure, the company hopes to make this segment into a steady earnings generator. OKI remains highly dependent on the office printer market (84% of segment sales in FY3/17). In previous medium-term plans, the company aimed to distinguish itself with LED technology and focused on a shift from single-function printer to the growing multifunction printer market. However, it was unable to achieve significant market share in multifunction printers and still had to pay the costs of its production setup and sales and service network. 36/94

37 Oki Electric Industry / 673 LAST UPDATE: The company's first step under the current medium-term business plan will be to extensively restructure its printer business with the aim of boosting profitability (earning capacity). More specifically, the company is looking to: Restructure its manufacturing operations and its overseas sales companies, including major changes in its overseas sales network and the downsizing of sales operations to bring them more in line with their sales capacity Restructure head office operations, moving quickly to beef up product development while increasing operational efficiency (reduce work volume by 2%) The budget for FY3/18 includes roughly JPY2.bn in restructuring-related expenses. The company s thinking is to offset the drop in sales and profits of office printers by reducing fixed costs and other expenses and, after creating a leaner and more efficient organization, OKI aims to get back on the growth track by expanding sales of specialty printers for industry. A more detailed overview of the planned restructuring is provided below. Restructuring of overseas sales companies and head office operations By geographic region, in FY3/17 OKI's printer business derived roughly 3% of sales from Japan, 4% from Europe, 2% from the Americas, and slightly below 1% from Asia (ex-japan). Under the new medium-term business plan the company is looking to: Japan: Use Japan as a cash cow Europe: Increase the efficiency of sales operations in Europe by consolidating regional sales companies and strengthening oversight of the regional sales headquarter Americas: In North America, after relocating the head office and restructuring operations, expand lineup of industry-use products and strengthen sales channels with the aim of becoming profitable within the next three years; in Central and South America, revamp regional sales operations Asia: Make changes to its distribution network in small-market countries and restructure operations in China In all overseas market OKI is looking to make changes in sales territories, personnel, sales channels, and organizational structures in order to create leaner and more efficient operations and strengthen oversight. At its head office in Japan, OKI is also looking to strengthen product development and operational efficiency. The company's goal is to decrease work volume by 2%, and shift the management resources freed up from these tasks to core businesses. Numerical targets Under its medium-term business plan, OKI is targeting segment sales of JPY1. (-JPY7.4bn over FY3/17), operating profit of JPY7.bn (+JPY6.bn), and OPM of 6.7% (+.7pp). The projected decline in sales reflects the company's expectation that sales of office printers will decline by roughly JPY16.bn while sales of industry-use printers increase by JPY8.bn. The projected increase in operating profit assumes the decline in sales of office printers will reduce operating profit by JPY4.bn to JPY.bn but that this will be offset by the savings generated by the downsizing of related operations. Further, the operating profit growth at the segment is expected to come from a combination of expanded sales of specialty printers for industry and reductions in the cost of LED heads. The increase in operating profit will be capped by the heavy investment spending the company needs to grow its industry-use printer business. 37/94

38 Oki Electric Industry / 673 LAST UPDATE: Building blocks for improving operating profit FY3/16 Operating profit Sales declines in office-use Sales increase in industry-use Cost reductions in LED heads and wide format IJP Optimization of business size FY3/2 operating profit Printer market Earnings model Office printing market Office solution market Professional printing market MFP High speed, industry-use models Color labels Special color toners Approx. 1, Approx. 8, Approx., Approx. 4, (Unit: sheets) Approx. 2, Low end models Direction of business domain Designing and printing Logistics, retail, services Offices Medical institutions Others Source: Shared Research based on company materials Office Provide optimal printing solutions globally, to meet customer needs Industry vertical Industry Corporations and administration Medical and logistics Manufacturing and logistics Designing and printing Designing and construction Office documents Medical images and records Packages, POP materials, and T shirts Signboards, wallpapers, cloths Design drawings LED color multifunction printers LED color printers A3 LED specialty printers Large format color inkjet printers A1 A LED multifunction printers LED black and white printer 14-inch wide Copy slips 64-inch wide A1 A LED printers Dot impact printers 4-inch wide Source: Shared Research based on company materials Printers: Targeting new markets OKI sees specialty printing and professional printing as target markets. These target markets require that OKI adopt a niche market strategy, which means smaller lot production of a wide variety of printers designed for specialty use. For example, the company targets specialized industries with large print runs, where the strength of its LED heads can come to the fore. For professional printing, it targets design and signage (including billboards) markets. In FY3/17, only 16% of sales were from outside the office printer market, and around half of these sales were through OKI Data Infotech. The main products of OKI Data Infotech include wide format multifunction printers for computer-aided design and wide format inkjet printers for printing signs. These products designed for professional printing are expected to play a major role in the company s growth under the current medium-term business plan. Printing volumes in the wide format printing market are in an uptrend and environmentally friendly inks are showing particularly rapid growth, so the company plans to strengthen its lineup of relevant products and distinguish itself versus its competitors. In specialty printing, the company aims to focus on design printing, retail, and medical markets. These are all industries with large printing volumes, and the company is proactively developing related products. 38/94

39 Oki Electric Industry / 673 LAST UPDATE: Global wide format printer shipment value, market share (IDC) (left); growth forecasts for wide format printing market by ink type (OKI, Infotrends) (right) Vendors (USDmn) Q4 216 Shipment value Q4 216 Market share Q4 21 Shipment value Q4 21 Market share Q4 216 Shipment YoY Ink CAGR 1. HP Inc % 237 2% 4% Toner -4% 2. Canon + Océ 12 12% 14 1% -1% UV 11% 3. Epson 7 8% 62 7% 2% Solvent -% 4. Mimaki 6 6% 1 6% 1% Latex 12%. Roland % 1 % -1% Aqueous 4% Others 441 4% % 11% Sublimation 19% Total 989 1% 938 1% % Total 1% Source: Shared Research based on IDC press release, company data, and Infotrends data Strategy: Electronics Manufacturing Services (EMS) Performance Operating profit Sales (right axis) Operating profit OPM 4.3% 4.7% 4.8%.%.4% 4.8%.1% 4.% % % 4% 3% %. 1. 1%.. % FY3/1FY3/11FY3/12FY3/13FY3/14FY3/1FY3/16FY3/17FY3/18 Est % FY3/1FY3/11FY3/12FY3/13FY3/14FY3/1FY3/16FY3/17FY3/18 Est. -1% Strategic direction under medium-term business plan: Looking to continue expanding business targeting JPY1.bn annual sales in the future Numerical targets: Sales of JPY6.bn, a JPY16.8bn increase over FY3/17 with roughly JPY.bn from new acquisitions and JPY6.bn from new markets/new customers; operating profit of JPY3.bn, a JPY1.4bn increase over FY3/17 Continuing stable growth, high-end EMS strategy. Focusing on high-mix, low-volume manufacturing, and demand from customers who are closing factories. Considering acquisitions. High-end EMS: Specialist in high-mix, low-volume manufacturing, not mass production. Aiming to boost profitability through high quality, investments in inspection equipment and license acquisition. Customer breakdown: Around 2% of customers are from the former Info-Telecom Systems segment. Building a structure not dependent on particular industries or customers. New markets/new customers: In addition to full-scale push into aerospace market following recent acquisition, OKI plans to begin handling production of electronic parts for cars starting in FY3/18 (for a new client OKI won on its own) M&A: Acquired customers and technology through takeovers of printed circuit board (PCB) businesses of Tanaka Kikinzoku Kogyo (212), Yokogawa Electric (21), and Nippon Avionics (216). Targeting continuous growth The company is targeting continuous growth through steady efforts in further tapping into high-mix, low-volume production demand adding upstream processes such as design/planning to build a one-stop contract manufacturing business (including proposing plans) stepping in when customers close factories (including through M&A). The company has recently begun marketing proposals from the planning stage. Although sales are still non-material, the company may be able to set margins higher than normal. 39/94

40 Oki Electric Industry / 673 LAST UPDATE: M&A Growth in the EMS segment requires capacity growth in PCBs (printed circuit boards) and PCB mountings. OKI has worked to grow production capacity and strengthen its customer base through a series of M&A: the PCB business and Tsuruoka plant of Tanaka Kikinzoku Kogyo (October 212, currently OKI Circuit Technology head plant); the PCB business and Ome plant of Yokogawa Electric (April 21, currently OKI Printed Circuit s Ome plant); and the PCB business of Nippon Avionics (July 216, targeting complete business transfer by March 31, 218). The Tsuruoka plant has contributed to growth in production capacity and customer base (supplies large and multilayered PCBs to the aerospace industry), while the Ome plant has also boosted production capacity (+2%) and the customer base (including Yokogawa Electric). The business transfer from Japan Avionics (sales of the transferred business: JPY2.7bn) was started in 2H FY3/17. Starting with PCBs, Japan Avionics is transferring production sequentially to OKI s EMS manufacturing subsidiaries. The company said it was acquiring production line certification for its aerospace and defense PCBs sequentially and planned to complete the business transfer once it had acquired certification for all the lines. Reasons for transferring PCB businesses: According to the company, Tanaka Kikinzoku Kogyo cited the changing industry environment, namely shrinking domestic PCB market, as well as business restructuring. Further, it rated OKI s CMS business highly for its future growth potential. Yokogawa Electric said that PCB production and mountings required ongoing capital expenditures. Also, it was positive toward OKI s EMS business potential and technological capabilities that ensure high reliability as well as its track record in multi-product manufacturing. Japan Avionics had numerous products including ultra-multilayer printed circuit boards for industrial use and high-reliability PCBs for the aerospace and defense industries, which demand top-notch environmental resistance performance. It judged that OKI was the ideal company for the business transfer in light of its track record in relevant areas, sufficient business scale, and PCB manufacturing history in terms of technology and quality control capabilities. Japan Avionics said it was working to ensure the transfer of technology and expertise proceeded smoothly. Numerical targets Under its medium-term business plan, the company targets segment sales of JPY6.bn (+JPY16.8bn over FY3/17; annual growth of 11.6%), operating profit of JPY3.bn (+JPY1.4bn), and OPM of.8% (+1.1pp). Of the projected JPY16.8bn increase in sales, the company is looking for JPY.8bn to come from existing customers, JPY6.bn from new markets/new customers, and JPY. from new acquisitions. The projected increase in sales to new customers reflects the company's expectations that ongoing efforts to increase customer satisfaction levels under existing contracts will lead to continued orders in the future as well as new orders for other processing work as capital spending adds to capacity and gives OKI the ability to handle ultra-high precision circuit boards, in some cases leading to a complete transfer of production operations from the client company to OKI. On the new market/new customer front, at this time OKI is specifically target the aerospace industry and the electronic car parts industry. OKI plans to differentiate itself from competitors by getting the necessary certification as it makes new capital investments. Having won a direct order from a new client, OKI expects to book earnings from electronic car parts manufacturing from FY3/18. In the aerospace industry, the company will start with the client base of recently acquired Nippon Avionics but intends to step up efforts to win new business after getting fully certified by JAXA before the end of FY3/18. EMS sales by type (left), market (middle) and client industry (right) FY3/ Designing and manufacturing 3.2 PCB 13. FY3/2 6. Designing and manufacturing 43. PCB 17. Infrastructure 3. Others 3.2 Medical. Industrial 12. FY3/17 ICT 8. Measurement 12. Infrastructure. Medical 8. Industrial 14. FY3/2 Others 6. ICT 12. Measurement Existing contracts New markets new customers 43 FY3/17 Existing customers, existing contracts New M&A FY3/2 4/94

41 Oki Electric Industry / 673 LAST UPDATE: Financial strategy (company-wide) OKI has maintained operating cash flow on the order of several tens of billions of yen. The exceptions were in FY3/13, due to the accounting improprieties at a Spanish subsidiary, and in FY3/16, due to uncollected accounts receivable from a major distributor in China. The company has focused on improving its debt/equity ratio and reducing interest-bearing debt. It currently targets an equity ratio of 3%, while maintaining a certain level of borrowings to strike a balance with growth investments. OKI aims to keep cash on hand capped at around JPY4bn bn and to invest the excess in growth. Regarding operating cash flow, by collecting accounts receivable and reducing inventories, the company hopes to improve its cash conversion cycle (CCC). In FY3/17, the effects of reductions in factory and sales inventories are flowing through following a review of inventory (refer to balance sheet section). Shared Research understands that the company will continue working to strengthen its balance sheet and generate funds for investment in growth. Interest-bearing debt, shareholders equity ratio, debt/equity ratio Short-term debt and CPs Long-term debt Bonds Cash and cash equivalents Net debt FY3/ FY3/3 FY3/6 FY3/9 FY3/12 FY3/1 Debt/Equity ratio Net D/E ratio Equity ratio (right axis) 4. 4% 4. 4% 3. 3% 3. 3% 2. 2% 2. 2% 1. 1% 1. 1%. %. % FY3/ FY3/3 FY3/6 FY3/9 FY3/12 FY3/1 41/94

42 Oki Electric Industry / 673 LAST UPDATE: Business, market and value chain Business overview Over 13 years manufacturing telecom equipment in Japan. Building a sustainable growth platform via multiple restructurings. With ICT segment as the main earnings source, developing ATM markets in emerging markets overseas, capturing high-end EMS demand in Japan, and rebuilding the Printers segment. Information and Communication Technology (ICT): Provides telecom systems and solutions to major companies and government agencies. Stable earnings underpinned by replacement demand from large client companies. Mechatronics Systems: ATMs are the main product. OKI has 4% domestic share in a three-company oligopoly. Aims to grow by tapping into ATM demand in emerging markets. Electronics Manufacturing Services (EMS): High-end EMS maintains OPM of around %. Winning new customers and new orders from existing customers; actively pursuing M&A. Printers: Challenges are low market share in office printer market but high fixed costs. Shifting to specialty and professional printing markets. Segment performance (upper, sales; lower: operating profit) ICT Printers Information (old segment) Telecom (old segment) EMS Others Semiconductors FY3/1 FY3/3 FY3/ FY3/7 FY3/9 FY3/11 FY3/13 FY3/1 FY3/17 ICT Printers Information (old segment) Telecom (old segment) EMS Others Semiconductors Adjustments Operating profit Over 13 years manufacturing telecommunication equipment in Japan Since producing the first made-in-japan telephone in 1881, the company has been an integral part of Japan s telecommunications industry, focusing on developing technology domestically despite an influx of imported products. The company s accumulation of technology and expertise has led to a stable earnings platform in the ICT segment, although relying on domestic development is one reason the company was not able to keep up with rapid changes in the telecom industry. OKI is one of the four original members of the old Nippon Telegraph and Telephone (NTT) family (formerly a Japanese government-owned telecommunications monopoly, privatized in 192). However, sales to the telecom sector have shrunk to around 1% of company sales following the privatization of NTT, opening of the domestic telecom market, and telecom networks shifting to IP (internet protocol) technology FY3/1 FY3/3 FY3/ FY3/7 FY3/9 FY3/11 FY3/13 FY3/1 FY3/17 42/94

43 Oki Electric Industry / 673 LAST UPDATE: Performance (top) and sales by region (bottom) Sales Operating profit OPM (right axis) FY3/92 FY3/96 FY3/ FY3/4 FY3/8 FY3/12 FY3/16 8% 7% 6% % 4% 3% 2% 1% % -1% Japan North America Europe China Latin America Others FY3/ FY3/2 FY3/4 FY3/6 FY3/8 FY3/1 FY3/12 FY3/14 FY3/16 ICT segment is main earnings source; developing ATM markets in emerging economies; targeting high-end EMS demand in Japan The company has four segments: ICT, Mechatronics Systems, Printers, and EMS. In ICT, the main source of earnings, the company provides a variety of telecom systems and solutions using its core audio-based technologies to companies in various industries and to government agencies. In Mechatronics Systems, with a solid domestic market base, the company aims to develop the market for cash-recycling ATMs in emerging markets. In the Printers segment, the company is aiming to transform its earnings structure (currently with heavy fixed costs) through a gradual shift to the professional printing market. In the EMS segment, the company maintains an OPM of % by bundling design services with manufacturing of high-end (high quality and reliability) products. The ICT segment is supported by replacement demand from large companies in various industries. The earnings structure is stable overall, with the exception of occasional spikes in demand. In the Mechatronics Systems, the company ceased sales to a distribution partner in China, but the effect of this is winding down, and it aims to grow via direct sales and a new partner (Digital China). It also plans to spread the use of ATMs and develop the ATM markets in India and other emerging economies. Bolstered by M&A, the EMS segment is seeing steady growth in terms of scale, production capacity, and customer base. The segment has maintained high profit margins for an EMS business, and the company is targeting high-end EMS demand in the domestic market. FY3/17 segment composition Sales Others % Printers % EMS % Mechatronics Systems % ICT % Operating profit Printers 1. 3% EMS 2.1 6% Others % Mechatronics Systems % ICT % EBITDA margin EMS 3. 8% Printers.1 13% Others % Mechatronics Systems % ICT % 43/94

44 Oki Electric Industry / 673 LAST UPDATE: Performance 6 Operating profit Non-operating income (expenses) Extraordinary gains (losses) Taxes Minority interests Net income FY3/92 FY3/96 FY3/ FY3/4 FY3/8 FY3/12 FY3/16 44/94

45 Oki Electric Industry / 673 LAST UPDATE: Information and Communication Technology (ICT) segment overview Performance (left: old segments; right: new segments) (JPYbn, %) Operating profit Depreciation OPM EBITDA margin Sales (right axis) FY3/ FY3/7 FY3/9 FY3/11 FY3/13 FY3/1 Operating profit OPM Sales (right axis) FY3/14 FY3/1 FY3/16 FY3/17 FY3/18 Est. Segment overview: Provides financial, telecom, and social infrastructure systems. Sales are mainly from replacement demand Integrated financial, telecom, and social systems businesses in April 216, boosting ability to propose solutions and increasing efficiency Customers: Mainly large companies and government agencies. Stable earnings structure underpinned by replacement demand from large client companies Temporary demand: Demand for digitalization of fire departments wireless networks finished in FY3/16 Growth: Focusing on areas where ICT-use has been lagging, such as IoT-based solutions to handle aging infrastructure and new fields spawned from the evolution of ICT New segment classifications In FY3/17 the former Info-Telecom Systems segment was split into the ICT segment and the Mechatronics Systems segment. Of the four old subsegments (finance, telecom, social systems, and mechatronics systems), the mechatronics systems subsegment was made an independent segment, and the three remaining subsegments formed the new ICT segment. These three subsegments were also merged structurally from April 216. The integration was necessary to move from the legacy industry-based approach to one where the company can offer all customers the technology and solutions developed in the finance, telecom, and social infrastructure divisions. For example, settlement operations are being developed not just for financial institutions but for a variety of industries including distribution and retail. Below is an overview of the new sub-segments. Note: Historical data use figures based on the previous segments and subsegments. ICT segment overview Segment s earnings stability protected by large client companies The ICT (Information and Communication Technology) segment offers a variety of information and communication systems* 1 and solutions to a wide range of industries, leveraging its telecom network and sensing technologies. The segment can be broadly divided into social infrastructure solutions (April 217 reorganization), financial and corporate solutions (April 217 reorganization), network systems (April 217 reorganization), and IoT platform (newly established). Social infrastructure solutions serve government agencies and major telecom carriers, while financial and corporate solutions target large private companies. Both have a stable earnings structure due to the following: The majority of client companies are repeat customers, ensuring a steady customer base Business is mainly replacement demand in mature markets Sales enjoy industry diversification, as replacement demand periods are staggered There is little danger of losing customers because most projects are for systems where multiple companies are responsible for their respective specialty areas, not generic systems* 2. Competitors include Fujitsu, NEC, and Hitachi, but in many cases OKI works with these companies on major projects such as air traffic control systems 4/94

46 Oki Electric Industry / 673 LAST UPDATE: OKI was formerly one of the three original members of the Nippon Telegraph and Telephone Public Corporation (currently NTT) family. The other two were Fujitsu (TSE 672) and NEC (TSE 671). Hitachi (TSE 61) was later added to the group. In 198 NTT was split and privatized, and foreign products entered the market under telecom market deregulation, so the company s business gradually declined. In particular, telecom networks replaced telephone switchboards with routers, switches, and other equipment in line with the shift to IP (internet protocol) technology, accompanied by a shift to products made by overseas companies that met global standards. As a result, the company s sales to the telecom sector shrunk to JPY68.bn in FY3/16 compared to the JPY16bn in FY3/1. Sales to NTT withered to less than one-third (around JPY2bn) of total sales. * 1 The company offers a wide variety of systems. Examples: a) Financial institutions: Systems for branch teller counters and centralized operations systems behind the counter for foreign exchange and transfers; b) Transportation: Ticket issuing systems for train stations and automated check-in machines for airports; c) Manufacturing: ERP (enterprise resource planning) and IoT solutions that use multi-hop wireless; d) All companies: PBX (private branch exchange, a multi-line telephone system) and corporate phones, conference systems, call-center systems; e) Telecom: Telecommunications network infrastructure; f) Social infrastructure: Public-sector admin solutions including air traffic control systems, ETC/VICS (Electronic Toll Collection/Vehicle Information and Communication) systems, firefighting systems, wireless disaster management administration systems, and salary and accounting systems. * 2 Non-generic systems: Larger companies such as NEC, Fujitsu, and IBM (NYSE: IBM) tend to build systems based on general-purpose platforms, but OKI has limited management resources, so it concentrates on particular areas and industries. For air traffic control systems, for example, communications systems may be handled by a major company, while systems for the control tower and pilot voice communication may be built by a company that can provide specialized technology, such as OKI. OKI s specialization is audio, and using knowledge built up over 13 years of handling telephones, it provides systems that leverage its core technologies such as multi-hop wireless network technology. Characteristics Strengths: Repeat customers and systems tailored to specifications The probability that other companies will steal replacement demand from OKI is low. This is because in the voice and telecommunications systems market where OKI operates, each system has particular reliability standards that are cumbersome for most other companies; in order to boost operational efficiency, a thorough understanding of customers workflows is necessary when building systems, and this is where OKI s expertise lies; and the market is mature so few companies are trying to enter. OKI works with large ICT companies to build air traffic control systems, participating in business alliances to boost operational efficiency, and providing a product lineup and audio technology that meet customer demand. OKI also leverages its sensing technologies and short-range wireless networks to develop new products and services. ICT segment earnings For reference, the following shows subsegment sales under the previous classifications. For telecom systems, in FY3/16 sales declined because telecom carriers investments in existing network equipment finished in. For the social systems business, in FY3/1 demand for digitalizing fire departments wireless communication systems peaked (demand continued in FY3/16). Subsegment sales (former segment classifications) Solutions and services Social systems Telecom systems Mechatronics Systems Solutions and services Social systems Telecom systems Mechatronics Systems FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/ Digitalization of disaster prevention radio raises business performance FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/16 46/94

47 Oki Electric Industry / 673 LAST UPDATE: Temporary demand Digitizing fire departments wireless communication system Occasionally, technical innovations or policy developments cause a spike in demand. Sales in the social systems business were high for four years starting in FY3/13 due to demand for digitalizing fire departments wireless systems. The cost of digitalizing one fire department was JPY39mn (initial Ministry of Internal Affairs and Communications [MIC] estimate), for a project cost totaling JPY3bn (initial MIC estimate). In February 21, MIC announced an action plan for frequency reallocation to promote smooth reallocation of certain frequencies. The aim was to move fire departments wireless frequency from the 1MHz band to the 26MHz band by May 216. The national government provided fiscal measures, starting with subsidies in the Fiscal 211 supplementary budget, and other measures from Fiscal 212. Under partial amendments of the Radio Law that took effect in June 213, the scope to which radio wave usage fees apply was broadened and subsidies expanded, meaning the transition was completed as expected. The 8MHz band used by local governments wireless disaster management administration systems completed the shift to digital in May 211. MIC is urging that the 4MHz, 1MHz, and 6MHz bands be digitized and shifted to the 26MHz band as soon as possible, given the lifespan of wireless equipment. Digitization of wireless communication networks for firefighting and disaster management No. of firefighting departments with digitalized systems (a) (a) / 7(right axis) 1% 7% 4 3 % No. of firefighting departments with digitalized systems (YoY increase) Social system sales (right axis) 6% 8 % 7 4% 6 3% Digitalization ratio for disaster radio systems % 2 1 2% 4 1% % Mar Mar Mar Mar Mar Mar Mar Mar Mar FY3/11 FY3/13 FY3/ Source: Shared Research based on Ministry of Internal Affairs and Communications data 3 % Mar Mar Mar Mar Mar Mar Mar Mar Mar Profitability expected to climb from FY3/17 The OPM has been 6.1% since FY3/14. In the ICT segment, the company works to achieve a set profit margin on each project instead of using mass production, as it does in the Mechatronics Systems segment. However, ICT profitability has been maintained through diligent cost control, fixed-cost ratios have improved by sharing management resources within the ICT segment, and the company aims to boost margins by providing high value-added solutions. Seasonality Due to the structure of the ICT segment, earnings tend to be concentrated in Q4 the fiscal year-end for government agencies and many companies. In Q4, sales are typically double those of Q3, and profits are concentrated in Q4 due to fixed costs. Also, CoGS are booked as inventories on the balance sheet in Q3, eliminated in Q4, and in the subsequent, accounts receivable are collected. The ICT segment is unique in that can closely estimate sales during a specific period based on a combination of factors, including a) the fact that sales at the segment come from work under long-term contracts usually last years and are replaced with new contracts every year, b) its ability to confirm the general schedule for system upgrades at client companies, and c) bidding and order trends. 47/94

48 Oki Electric Industry / 673 LAST UPDATE: Quarterly performance (left: segment profit; right: consolidated balance sheet) Operating profit Sales (right axis) FY3/ Q FY3/ Q FY3/1 FY3/11 FY3/12 Accounts receivable FY3/13 FY3/14 Inventories FY3/1 FY3/16 FY3/17 Source: Shared Research based on company materials Mechatronics Systems segment overview Performance (left: old segment; right: new segment) Operating profit Sales (old segment; right axis) % 9.% OPM % Sales (new segment; right axis) % 1. 1.% 1. FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/16 FY3/17 FY3/18 Est FY3/11 Operating profit Sales (new segment; right axis) FY3/12 FY3/13 FY3/14 FY3/1 Sales (old segment; right axis) FY3/ FY3/ Segment overview: One medium-term strategy is to grow the segment by tapping into emerging markets Sales breakdown: Roughly 8% of sales are ATM-related and 2% for cash-handling equipment. Domestic sales are about 6%; remainder is mostly from China and Brazil Market share: 4% in Japan (around 7% for retail sector). Around 1% share in China (% for cash-recycling ATMs) and 2% in Brazil Domestic: In retail sector, OKI expects growth in sales volume and demand for additional functions, but financial institution sales shrinking; company recognizes the domestic market as mature Overseas: Earnings structure based on single platform so sales growth flows through to bottom line. In FY3/17, profits deteriorated more than sales due to production adjustments Mechatronics Systems segment overview Medium-term strategy is to grow by tapping into emerging markets Starting in FY3/17, the Mechatronics Systems segment was spun off from a subsegment of the old Info-Telecom Systems segment. It is one of the segments responsible for growth in the company s medium-term strategy. The Mechatronics Systems sales team is in charge of overseas sales operations, but the ICT sales team runs domestic sales (costs allocated between segments). ATMs account for most of sales (around 8% in FY3/1, and 6% in FY3/16), and ATM services are roughly 1%. The rest is mostly cash-handling equipment and terminals. Overseas sales (mostly of ATMs) account for roughly 4% of segment sales. 48/94

49 Oki Electric Industry / 673 LAST UPDATE: Sales breakdown and domestic ATM market share FY3/16 FY3/16 OKI's share of ATMs in Japan Cash-handling machines 2 22% ATM-related services 1 9% ATM 79 69% Brazil 2 18% China 17 1% Other overseas 7 6% Japan 7 61% Others 6% OKI 4% Competition Competitors in the ATM and CD (cash dispenser) business include Hitachi-Omron Terminal Solutions (ownership: % Hitachi, 4% Omron) and Fujitsu Frontech (TSE 694) in the domestic market, and Diebold (US, NYSE: DBD), NCR (US, NYSE: NCR), and Wincor Nixdorf AG (Germany, FWB: WIN) overseas. The domestic market is essentially an oligopoly of three companies, with OKI holding a roughly 4% share. For the domestic retail industry (such as supermarkets and convenience stores), the company is the market leader with a share of around 7%. Overseas, three companies (Diebold, NCR, and Wincor Nixdorf) together hold a global market share of around 6%. Still, circumstances vary in emerging markets where the machines are not yet widespread. In Brazil, Diebold (market leader) has around %, OKI is the second-largest with around 2%, and a local company ranks third. In China, OKI has a market share of around % for ATMs (roughly 1% when including CDs). In India, where ATMs have low penetration rates, Hitachi Omron is the market leader. Market share OKI's share of ATMs for logistics industry and convenience stores Others 3% OKI's share of cash recycling ATMs in China OKI's share of ATMs and CDs in China OKI 1% Others % OKI % OKI 7% Others 8% Mechatronics Systems segment earnings In the domestic market, financial institution demand for ATMs and maintenance services is generally steady. Segment earnings are impacted by temporary spikes in demand for cash-handling machines (such as in FY3/16 and FY3/17) and fluctuations in demand from the retail industry. Overseas, segment growth continued until FY3/1, driven by robust China operations, but segment operating profit has dropped since FY3/16, when sales declined as the company stopped sales to a major partner in China and cut production, and as a Brazilian subsidiary posted operating losses (refer to following figure). 49/94

50 Oki Electric Industry / 673 LAST UPDATE: Mechatronics Systems: sales by region (left), overseas sales (middle) and Brazilian subsidiary s operating losses (right) China Other overseas Japan Overseas OP (right axis) Operating profit (loss) China ratio (right axis) % % % % % % FY3/1 FY3/16 FY3/17 FY3/18 FY3/19 FY3/11 FY3/13 FY3/1 FY3/17 FY3/11 FY3/13 FY3/1 FY3/17 Est. Est. FY3/2 Est. Profitability Domestic and overseas markets have differing business models. Overseas sales are mostly from ATMs, and production is concentrated in China, enabling the company to reap economies of scale. In the domestic market, OKI profits from services such as maintenance and monitoring rather than product sales. The domestic market (excluding temporary demand) is steady, but overseas, profits fluctuate based on sales and production volumes. Because China operations had seen continuous growth, the company had been expanding while holding some inventory, but sales volume dropped when the company stopped selling to a major partner, and in FY3/17 it cut production. As a result, lower production weighed on profits more than the fall in sales volume. Production adjustment was expected to finish during FY3/17, so FY3/18 is likely to see benefits from production growth. Mechatronics Systems: ATMs ATMs accounted for roughly 7% of segment sales (FY3/16), with around half of sales from overseas. The company developed AT-1, the world s first cash-recycling ATM (reuses deposited cash for withdrawals) in Prior to this product, when a machine ran out of cash, operations had to be paused until the machine was reloaded. The development of this machine substantially reduced operating costs for financial institutions. In Japan, cash-recycling ATMs are widely used, but their spread has lagged overseas, particularly due to cultural differences in emerging economies (including the penetration of credit cards, counterfeiting problems, and security concerns), as well as high initial costs. However, the substantial potential demand is a source of medium-term growth for the company. One of the company s strengths is sophisticated cash-recycling technology. In 23, targeting the Chinese market, OKI launched machines that were tailored to handle CNY banknotes (different-sized bills that are difficult to reuse due to soft paper) and deal with counterfeits and dust, starting mass production and delivery in 2. In 29, targeting the global market, the company was successful in developing ATMs that could deal with the various sizes, designs, and security information of the currencies of various countries around the world. In 211 OKI expanded the number of bill varieties that could be handled by the same machine from 32 to 128, and launched sales of models with coin dispensing and contactless functions. ATMs vs cash-recycling ATMs Depositor + dispenser OKI cash-recycling ATM 入金出金入金出金 AD CD ATM CD ADT Collection Deposit stacker Dispense stacker Deposited cash is used for dispensing via collection and refill Refill Recycle stacker Deposited cash is used directly for dispensing Depositor + Dispenser Cash recycling /94

51 Oki Electric Industry / 673 LAST UPDATE: The growth strategy for ATMs includes maintaining existing markets, growing the number of ATMs in operation in emerging markets, expanding sales of cash-handling machines, and maximizing volume effects. Domestic ATM market Domestic sales Japan Overseas Domestic ratio (right axis) % 6% % 4% 3% FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/16 FY3/17 2% 1% % ATMs usually account for around 8% of domestic sales (including maintenance services, which accounted for 1% of sales in FY3/1), and the rest is sales of cash-handling machines (such as machines used for deposits and banknote handling by tellers in financial institutions). There was a temporary spike in demand for cash-handling machines at major financial institutions in FY3/16 and FY3/17, so the ATM sales mix declined to roughly 6% in FY3/16. ATM market trends In the domestic ATM market, the number of machines installed at financial institutions (banks and post offices) is trending sideways, so demand is mostly replacement demand. However, the number of new ATM installments in the distribution and retail sector, primarily convenience stores, is growing. The number of ATMs installed by Seven-Eleven and Lawson (stores with data available) has grown roughly in line with growth in store numbers since fiscal 21. The number of convenience stores is forecast to continue growing: In its medium-term growth plan, industry leader Seven-Eleven has flagged the opening of 1,7 stores per annum and the closure of 8; Lawson planned for a net increase of 7 stores in FY2/17; and the core strategy in the September 216 FamilyMart and UNY Group Holdings merger was to grow the scale of the convenience store business. With a market share of roughly 7%, OKI is in an advantageous position for selling to the distribution and retail industry, but is not optimistic regarding the overall domestic market. The company sees declining sales to financial institutions as a risk, and aims to maintain sales by increasing sales to the retail industry. Retailers are looking for ATMs with other functions in addition to financial transactions, so OKI plans to increase the value-added aspects of its products. Number of ATMs installed in domestic market (left: by industry, middle: three retailers, right: installed machine and store count for Seven-Eleven and Lawson) (' unit) Financial institutions (excl. Japan Post Bank) Japan Post Bank Convenience stores Source: Shared Research based on each company s data (' unit) 4 Seven Bank LAWSON AEON Bank FY FY FY1 FY1 12% 1% 8% 6% 4% Seven Bank ATM units Seven Eleven store count LAWSON ATM units LAWSON and Natural LAWSON store count 2% FY FY FY1 FY1 1/94

52 Oki Electric Industry / 673 LAST UPDATE: Overseas markets Overseas sales FY3/17 1 China Other overseas China ratio (right axis) % Other overseas 22% % 3% China 19% Japan 9% FY3/11 FY3/12 FY3/13 FY3/14 FY3/1 FY3/16 FY3/17 2% 1% % Overseas, the company is concentrating management resources on developing emerging markets with prospects for future growth. China accounted for 6 7% of the company s overseas sales of JPY8.2bn in FY3/16. Brazil accounted for 7 8% of the remainder, with 1 2% from Russia, India, and Indonesia. The company said it mainly sells ATMs and maintenance services, but it plans to also grow sales of cash-handling machines. When OKI developed AT21S, an ATM for the Chinese market in 23, NCR, IBM, and Diebold held the majority of the CD (cash dispenser) machine market. OKI worked to secure orders for its cash-recycling ATM to gain a foothold and in April 2 made its first mass-produced delivery. It steadily grew its share from 8% (4 units in operation) in FY3/6 the year the product was launched to 11% (8 units) the next year, and % as of FY3/16. The number of units sold annually has also grown significantly, reaching 36, in FY3/1 (although this number was halved in FY3/16, see later in the report for details). OKI started supplying ATMs to a major Russian private bank (Alfa Bank) in 212, Indonesia s largest private bank (PT Bank Central Asia Tbk) in 213, and India s largest bank (State Bank of India) and major banks in Malaysia in 214. In 214 OKI also bought a local company in Brazil and launched an ATM business there. Overseas expansion: ATMs 212: Starts delivery of ATMs to Alpha Bank, a large private bank Russia 214: Starts delivery of ATMs to a large bank 21: Establishes ATM manufacturing base in Shenzhen 2: Starts selling ATMs via local partners India China Malaysia 212: Establishes representative office 213: Starts delivery of ATMs to PT Bank Central Asia Tbk, the largest private bank Indonesia Brazil 214: Starts delivery of ATMs to State Bank of India, the largest bank in the country; Establishes an ATM sales subsidiary 214: Acquires a local company and establishes an ATM business company Mass production benefits from products based on a single platform OKI operates globally, but the hardware for banknote sorting and conveying is the same no matter the region. Banknote sorting modules are produced in Japan, while assembly and other work is concentrated in the Shenzhen China plant. The company can reap mass production benefits regardless of the delivery location. In Brazil, OKI acquired a company that had its own factory, so CD machines are produced locally. 2/94