Sinfonia Technology Co., Ltd. November 21, 216 Investment Rating Buy Target Price (Yen) 37 Stock Price 219 (Closing price on November 18) TSE code 657 Market Capitalization 32,653 (Million Yen) Outstanding Shares 148,689 (Thousand shares) PBR (curr) 1.1 Dividend Yield (E)(%) 2.3 Electronics manufacturer with cutting-edge motion-control technologies Sinfonia Technology (Sinfonia) is an electronic company whose main products are Electronic Components for Aircraft, Factory Automation (FA) Equipment, and Semiconductor Transportation Equipment, to name a few. Especially, the company is superior in its high precision motion-control technologies. The company s revenues and income will increase for five consecutive FYs Capital Partners Security (CPS) estimates that, thanks to the semiconductor related equipment s sales growth, the company s robust results will continue into FY216 (ending March 217) as follows: revenue 85,4 million yen (+6.6%, YoY), and operating income 5,6 million yen (+27.%, YoY). As for the next FY (ending March 218), CPS anticipates that, due to an expected growth of electronic components for aircrafts, the company will achieve revenues and income of 89,1 million yen (+4.3%, YoY) and 6,72 million yen (+2.%, YoY), respectably, recording an increase of these figures for five years in a row. Motion-control technologies are key devises which support aircrafts of the Japan Self-Defense Forces (SDF) and rockets. The company retains advanced technologies enabling a precise and effective control of actuators and motors. These technologies are highly valued in several industries and adopted by aircrafts of the SDF, rockets, and semiconductor production equipment (SPE) where a precise control of devices is indispensable. Capital Partners Securities Research Department Naoki Tsuchiya n.tsuchiya@capital.co.jp Target Price and Investment Rating We expect the company will continue to grow steadily with no crucial issue on their financial conditions. Considering that the estimated average PER of all stocks listed on the Tokyo Stock Exchange s (TSE) First Section is about 15x, we believe it is appropriate to set Sinfonia s PER at 15x as well. Taking both such PER and this financial year s estimated EPS of 24.9 yen into consideration, we derive the target price of 37 yen. We initiate Sinfonia with a Buy rating given that the upside to the target price is about 69%. 1
Consolidated Financial Results (millions of Yen) FY Ended March 31 Revenue Operating Income Ordinary Income Net Income EPS(Yen) PER(x) 215 75,796 2,757 2,554 1,82 12.2 18. 216 8,8 4,49 4,231 2,85 19.2 11.4 217E 85,4 5,6 5,46 3,7 24.9 8.8 218E 89,1 6,72 6,61 4,55 3.6 7.2 217 Company forecast 85, 5,5 5, 3,4 22.9 9.6 Source: Securities report, Estimates by CPS, Company forecast 2
Ⅰ. Performance Overview Expecting the company s revenues and income will increase for five FYs in a row Sinfonia is an electronic company whose main products are Electronic Components for Aircraft, Factory Automation (FA) Equipment, Semiconductor Transportation Equipment, and Water and Sanitation Management System. Especially, the company is superior in high precision actuators, motors and their motion-control technologies. These technologies are highly valued in several industries and adopted by aircrafts of the SDF, rockets, and semiconductor production equipment (SPE) where a precise control of devices is indispensable. As for this FY (ending March 217), given the brisk sales of Semiconductor Transportation Equipment, the company will achieve a robust increase in both revenues and income as follows: revenue 85,4 million yen (+6.6%, YoY), operating income 5,6 million yen (+27.%, YoY), and net income 3,7million yen(+29.8%, YoY). Since CPS expects a sales growth of Electronic Components for Aircraft and Water and Sanitation Management System in the coming year, the company s next FY (ending March 218) results will be as follows: revenue 89,1 million yen (+4.3%, YoY), operating income 6,72 million yen (+2.%, YoY), and net income 4,55 million yen (+23.%, YoY). This marks an increase of revenues and profits for five FYs in a row. Trend of Revenue and Operating Income 1, 8, millions of Yen Revenue(LHS) Operating Income(RHS) millions of Yen 1, 8, 6, 6, 4, 4, 2, 2, Source: Securities report, Estimates by CPS 3
Ⅱ. Motion Equipment business (Compositon ratio 39.2% in FY216 Projected Revenue) Growing electrical components for aircrafts of the Self-Defense Forces (SDF) The motion equipment business mainly consists of aerospace-related equipment and motion control equipment (FA equipment). Aerospace-related equipment includes products for civilian aircrafts and rockets, while many are electrical components for aircrafts used by the SDF. Sinfonia supplies electrical equipment such as actuators and generators for the SDF s fighters and surveillance aircrafts. They are presumably used as critical components for firearms and engines. The motion control device is composed of high-precision direct drive motors and electromagnetic clutches, etc. which are used in factory production lines. Further, the company is superior in such products as motors and controllers for construction machines. The orders received for this business during 1H of the current FY (ending in Sept. 216) were 2,319 million yen (up 37.7% YoY), and the order backlog recorded 23,593 million yen (up 37.7% YoY). In addition to an order related to the new type of antisubmarine surveillance aircrafts (model name: P-1), an increasing demand for maintenance of existing SDF aircrafts would have contributed to a healthy intake of orders. In accordance with a recent sharp increase of scrambles, an operational distance of SDF aircrafts has increased, which seems to have resulted in a growing demand for maintenance. For FY ending in Mar. 217, CPS estimates that, thanks to increased aerospace-related equipment, this business will show a recovery with revenue and operating income of 33,5 million yen (up 7.6% year YoY) and 78 million yen (up 2.6% YoY), respectively. For the next FY ending in Mar. 218, we anticipate that, due to expected expansion of motion control equipment business and a growing market of aerospace-related equipment, the business will show a continued growth with revenue and operating income of 36,2 million yen (up 8.1% YoY) and 1,27 million yen (up 62.8% YoY), respectively. Breakdown of Revenue from Motion Equipment business by Product Category(FY ended Mar. 216) Others, 16% Aerospacerelated equipment, 38% Motion Control equipment, 46% Source: Sinfonia s financial report 4
Motion Equipment business: Trend of Revenue and Operating Income millions of Yen Revenue(LHS) 4, Operating Income(RHS) 3, millions of Yen 1,6 1,2 2, 8 1, 4 Source: Securities report, Estimates by CPS Motion Equipment business: Trend of Order backlog 25, millions of Yen 2, 15, 1, 5, Sep.213 Mar. 214 Sep.214 Mar.215 Sep.215 Mar.216 Sep.216 Source: Securities report 5
Trend of scramble of SDF aircrafts Times 1, 8 6 4 2 Source: Ministry of Defense Chief of Staff release Antisubmarine surveillance aircraft P-1 Source: Ministry of Defense website 6
Ⅲ. Power Electronics Equipment business (Compositon ratio 43.9% in FY 216 Projected Revenue) In addition to Semiconductor Transportation Equipment, Water Supply and Sewerage Management System expected to grow. Power Electronics Equipment business mainly consists of Semiconductor Transportation Equipment, Social Infrastructure System, and Automobile Test Equipment. Sinfonia s semiconductor transportation device is a device connected to an etcher and a CVD, etc., and plays a role to deliver a silicon wafer sealed in a delivery box to etchers and CVDs without being exposed to the air. Technology utilizing a special gas is highly valued, which enables silicon wafers to be precisely positioned while preventing oxidation of silicon wafers. Sinfonia is the top manufacturer in this field of equipment. Social infrastructure system mainly handles Water supply and Sewerage management systems. It provides comprehensive services including Water Supply and Sewerage Control system, Surveillance monitor, Plant Controller, and Receiving & Transforming equipment. The orders received amounted to 18,711 million yen (up 27.7% YoY), and the order backlog was 2,48 million yen (up 27.2% YoY) for 1H of the current FY (ended in Sept. 216). Orders received for Semiconductor Transportation equipment have continued to be impressive. Orders for Water Supply and Sewerage management systems have also increased, both of which have contributed to the favorable results. Most of water supply facilities in Japan were developed in the 197s, and as a result, the demand for renewal of these facilities seems to have increased after 4 years of usage. For the current FY (ending March 217), we expect the business results of 37,5 million yen (up 1.7% YoY) in revenue and 3,9 million yen (up 5.6% YoY) in operating income, mainly due to the steady growth of highly profitable semiconductor transportation equipment. For the next FY (ending March 218), we expect 38,6 million yen (up 2.9% YoY) in revenue and 4,3 million yen (up 1.3% YoY) in operating income, given an additional business of Water Supply and Sewerage management system. Breakdown of Revenue from Power Electronics Equipment business by Product Category (FY ended Mar. 216) Others, 26% Semiconductor Transportation Device, 28% Industrial Infrastructure System, 13% Automobile Test Equipment, 13% Social Infrastructure System, 2% Source: Sinfonia s financial report 7
Trend of Revenue and Operating Income from Power Electronics Equipment business millions of Yen 4, 3, Revenue (LHS) Operating Income (RHS) millions of yen 6, 5, 4, 2, 1, 3, 2, 1, Source: Securities report, Estimates by CPS Trend of Order backlog from Power Electronics Equipment business 25, 2, 15, 1, 5, millions of Yen Sep.213 Mar.213 Sep.214 Mar.215 Sep. 215 Mar.216 Sep.216 Source: Securities report 8
Sinfonia s Semiconductor transportation devices Source: Sinfonia Technology Co., Ltd. website World Trend of Orders received of Semiconductor equipment devices Million US$ 12, 1, 8, 6, 4, 2, 1Q213 3Q213 1Q214 3Q214 1Q215 3Q215 1Q216 Source: SEMI 9
Trend of Investment amount in Domestic Water Supply 2, 1 millions of Yen 15, 1, 5, Source: Ministry of Health, Labor and Welfare Outline of Water Supply business Policy Ratio of Water utility facilities after legal durable life 15% 1% 5% % 26 27 28 29 21 211 212 213 214 Source: Ministry of Health, Labor and Welfare Outline of Water Supply business Policy 1
Ⅳ. Target Price and Investment Rating As a result of its efforts to improve operations besides favorable external environment, it is expected that Sinfonia will expand its business on a continuous basis. Based on the company s expected healthy financials, we have made a judgement that this stock could be valued at the same level as the market average. Considering the average value of projected PER for companies listed on the TSE First Section is approximately 15x (based on the Bloomberg data), we believe that 15x would be justified as Sinfonia s expected PER for the current FY. With an expected EPS of 24.9 yen, we derive our target price of 37 yen. Given the upside to the target price is approximately 69%, we initiate Sinfonia with a BUY rating. Revenue and Operating Income by Segment (millions of Yen) FY ended in March 214 215 216 217 (E) 218 (E) (Revenue) Motion Equipment 32,486 33,835 31,121 33,5 36,2 Power Electronics Equipment 26,51 28,11 33,88 37,5 38,6 Support & Engineering 22,348 21,37 22,779 22,3 22,6 Adjustment -7,2-7,519-7,7-7,9-8,3 Total 74,315 75,796 8,8 85,4 89,1 (Over previous FY) Motion Equipment 6.7% 4.2% -8.% 7.6% 8.1% Power Electronics Equipment 3.8% 6.1% 2.5% 1.7% 2.9% Support & Engineering 19.4% -4.4% 6.6% -2.1% 1.3% Adjustment 35.3% 7.1% 2.4% 2.6% 5.1% Total 6.9% 2.% 5.7% 6.6% 4.3% (Operating Income) Motion Equipment 1,185 83 647 78 1,27 Power Electronics Equipment 29 968 2,589 3,9 4,3 Support & Engineering 926 968 1,28 1,1 1,25 Adjustment 13-9 -35-9 -1 Total 2,414 2,757 4,49 5,6 6,72 (Operating Margin) Motion Equipment 3.6% 2.5% 2.1% 2.3% 3.5% Power Electronics Equipment 1.1% 3.4% 7.6% 1.4% 11.1% Support & Engineering 4.1% 4.5% 5.3% 4.5% 5.5% Adjustment -.2%.1%.5% 1.1% 1.2% Operating Margin 3.2% 3.6% 5.5% 6.6% 7.5% Source: Securities report, Estimates by CPS 11
Consolidated Statement of Income (millions of Yen) FY ended in March 214 215 216 217(E) 218(E) Revenue 74,315 75,796 8,8 85,4 89,1 Growth, YoY 6.9% 2.% 5.7% 6.6% 4.3% COGS 58,316 59,464 62,575 66,12 68,31 Gross Profit 15,999 16,332 17,55 19,28 2,79 Gross Profit Margin 21.5% 21.5% 21.9% 22.6% 23.3% SGA 13,585 13,575 13,96 13,68 14,7 Operating Income 2,414 2,757 4,49 5,6 6,72 Operating Margin 3.2% 3.6% 5.5% 6.6% 7.5% Non-Operating Revenue 215 291 324 33 32 Non-Operating Expense 536 494 52 47 43 Current Profit 2,93 2,554 4,231 5,46 6,61 Extraordinary Profit 39 Extraordinary Loss 62 239 8 Pretax Income 2,93 2,81 3,992 5,38 6,61 Corporate tax, etc. 711 981 1,142 1,68 2,6 Net Income 1,382 1,82 2,85 3,7 4,55 EPS(Yen) 9.3 12.2 19.2 24.9 3.6 BPS(Yen) 172. 21.8 21.8 221.9 247.2 Number of Outstanding Shares 148,726 148,78 148,696 148,69 148,69 (thousands) Source: Securities report, Estimates by CPS 12
Consolidated Balance Sheet (millions of Yen) FY ended in March 214 215 216 217(E) 218(E) Current Assets 5,843 51,692 49,872 52,79 55,49 Cash 8,174 8,18 6,996 7,69 8,84 Account receivables 24,59 25,64 26,52 27,9 28,8 Inventory 15,683 15,56 14,68 14,9 15,5 Other current assets 2,396 2,564 2,36 2,3 2,35 Fixed Assets 38,181 39,72 4,276 4,26 4,31 Tangible Assets 29,45 29,368 29,237 29,22 29,26 Intangible Assets 219 521 855 86 86 Other assets 8,917 9,813 1,184 1,18 1,19 Total Assets 89,24 91,394 9,148 93,5 95,8 Current Liabilities 42,15 41,748 39,68 39,55 39,2 Accounts payable 16,321 15,572 15,89 16,25 17,5 Short-term Borrowings 17,776 16,673 14,247 13,5 12,3 Others 8,8 9,53 9,732 9,8 9,85 Fixed Liabilities 21,334 19,643 21,8 2,5 19,85 Long-term Borrowings 13,72 13,169 12,692 12,1 11,4 Others 7,632 6,474 8,388 8,4 8,45 Total Equity 25,585 3,3 3, 33, 36,75 Capital 1,156 1,156 1,156 1,156 1,156 Others 15,429 19,847 19,844 22,844 26,594 Total Liabilities and Eequity 89,24 91,394 9,148 93,5 95,8 CAPEX 2,715 2,214 1,964 2, 2,1 Depreciation expenditure 2,131 2,84 2,9 2,1 2,5 R&D expenditure 1,92 2,32 2,94 2,1 2,2 Source: Securities report, Estimates by CPS 13
Disclosure Explanation of Valuation Grade BUY: Target price is expected to be greater than 2% the current stock price NEUTRAL: Difference between target price and current stock price is ±2% SELL: Target price is expected to be less than 2% of the current stock price Definition and Risks in Achieving the Target Price The target price is a stock price level that the analyst is expecting to reach over the next six months based on the business operations and financial forecasts of the company. There are also risks for achieving the target price such as changes in the business environment and its competitive state, changes in domestic and foreign economic conditions and financial market, stock market volatility and exchange rate fluctuations, changes in regulatory requirements, occurrence of accidents and large-scale disasters. In addition to these factors, unforeseeable events might also make it difficult to achieve the target price. Other Considerations This analyst report is written based on data Capital Partners Securities believes reliable, but we do not guarantee accuracy or completeness of its contents. The contents of this report are made based on data and information available at the time of reporting and are subject to change without notice. Capital Partners disclaims any and all liability for any consequence caused by Please use this report based on your own judgment and at your own risk. 14
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