Bridge Report Trust Tech Inc. (2154)

Transcription

1 Bridge Report Trust Tech Inc. (2154) Takehiko Ogawa CEO Yutaka Nishida COO Company Code No Exchange CEO COO Address Business Year-end URL Trust Tech Inc. TSE 1st Section Takehiko Ogawa Yutaka Nishida Third Floor, NBF Comodio Shiodome, Higashi-Shinbashi, Minato-ku, Tokyo Worker dispatching services, subcontracting and outsourcing business for engineering development department and manufacturing department. End of June Stock Information Share Price Number of shares issued ROE Total market cap (excluding treasury shares) (Actual) Trading Unit 2,414 9,653,895 shares 23,305 million 24.9% 100 shares DPS (Est.) Dividend yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual) % times times *Closed value on August 11. Shares outstanding as of end of most recent quarter and exclude treasury shares. Consolidated Earnings Trends (Unit: Million yen, Yen) Fiscal Year Net Sales Operating Income Ordinary Income Net Income EPS DPS June 2012 (Actual) 15, , , June 2013 (Actual) 14, , , June 2014 (Actual) 17,645 1,291 1, June 2015 (Actual) 20,819 1,597 1,623 1, June 2016 (Est.) 28,500 2,300 2,300 1, *Estimates are those of the Company. From the FY 3/16, net income is profit attributable to owners of the parent. *100 for 1 stock splits were performed in July This bridge report provides details of Trust Tech s financial results for the fiscal year ended June Company Overview 2. Fiscal Year June 2015 Earnings Results 3. Fiscal Year June 2016 Earnings Estimates 4. Conclusions 1

2 Key Points The fiscal year ended June 2015 achieved 18.0% increase of sales and 23.1% increase of ordinary income from the previous term. Sales of the Engineer dispatching, Subcontracting and Outsourcing business increased 32.6% from the previous term due to the robust demand for human resource from transport equipment-related companies including automobiles and the recovered demand for human resource from semiconductor manufacturing equipment-related companies. Although the Manufacture subcontracting, Consignment and Dispatch business was significantly affected by the fall in output of some of the customer companies during the period and expiration of contract due to the arrival of the dispatch conflict day, the loss was covered by dispatching to car-related, electronic devices and housing-related companies with increased demand for staff. The fiscal year ending June 2016 is estimated to see 36.9% increase of sales and 41.7% increase of ordinary income from the previous term. The company estimates 59.5% increase in sales of the Engineer dispatching, Subcontracting and Outsourcing business because of the great performance with automobile-related companies and the M&A effects, and 2.0% increase in full year in the Manufacture subcontracting, Consignment and Dispatch business, which experienced a difficult time in the previous term. The estimated dividend per share is 75 yen, 15 yen increase from the previous term. The company aims to strengthen the IT and embedded software sector, which accounts for only 1% of the entire sales. As part of its efforts, Trust Tech Inc. took over a division of Technology Power Corporation, a subsidiary of NTT DATA with excellent clientele, and transformed Freedom Inc. group, which has strength in the development of in-vehicle embedded software, into a subsidiary. This field has room for growth. Moreover, embedded software is expected to grow significantly for in-vehicle use, which is undergoing fusion with IT, as well as for IoT (Internet of Things). 1. Company Overview The company is characterized by providing manufacturers with comprehensive solutions. The company offers end-to-end staffing services such as dispatch, subcontracting and outsourcing throughout upstream (development department) such as development and design to downstream (manufacturing department) such as processing and assembly. The company works with four main consolidated subsidiaries: TTM Inc., HKTT LIMITED, Kyousei Sangyo Inc. and Freedom Inc. group. TTM Inc. is specialized for manufacturing department. Based in Hong Kong, HKTT was specially founded for Japanese companies in China. Kyousei Sangyo Inc. is a special subsidiary of Trust Tech Inc., which provides disabled people with employment opportunities. Finally, Freedom Inc. group became a subsidiary in July of Management Principles To Clients We always make efforts to think from the viewpoint of our customer companies and become their true partner. We make efforts to accurately understand and follow related laws and regulations, and always provide our customer companies with proper solutions. We always manage the safety and health of the workplace and prevent accidents. To Employees We offer promotion opportunities and support ability development through training and education. We evaluate our employees fairly and appropriately, and mind to treat them corresponding to their contribution to our company. We welcome energetic and progressive people with a challenger's spirit, and we actively provide them with opportunities for self-expression. To Society We put value on compliance and corporate governance, and contribute to the society by creating job opportunities. To Shareholders We make efforts to operate our company for maximization of shareholders value 2

3 History The company started as Kyousei Sangyo K.K. (Kyosei Sangyou Inc. today is a different company established in July 2005), which was created as a special subsidiary of Sanei Shoji Inc. in Sagamihara, Kanagawa in August 1997, based on the Act for Employment Promotion etc. of Persons with Disabilities. Sanei Shoji Inc. was manufacturing with subcontracts and dispatch then, and founded the old Kyosei Sangyo K.K.. Kyousei Sangyo K.K. changed its name to Trust Work Sanei Inc. in November In December of the same year, Trust Work Sanei Inc. took over the operations of Sanei Shoji Inc. In June 2005, Trust Work Sanei Inc. purchased all shares of Trust Tech Inc., which was offering engineer dispatch services, subcontracting and outsourcing from Amuse Capital Inc., and gained the License for General Worker Dispatching Undertakings. Trust Works Sanei Inc. changed its name to Trust Works Inc. in November In June 2007 Trust Works Inc. listed on the JASDAQ market. In October 2008, Trust Works Inc. merged with Trust Tech Inc. and the company was renamed Trust Tech Inc. Then in March 2009, Trust Tech Inc reorganized TTM Inc. (formerly PLM Inc.), which was a subsidiary of Radia Holdings Premier Inc., into a subsidiary and entered into subcontracting and outsourcing services for manufacturing. In June 2010, Trust Tech Inc. transformed a Hong Kong-based dispatch company into a subsidiary named HKTT LIMITED, and began subcontracting, dispatch service and human resource consulting in Hong Kong and China. Trust Tech Inc. moved to the Second Section of the Tokyo Stock Exchange in August 2013, and elevated to the First Section of the Tokyo Stock Exchange in December Services offered: Providing end-to-end staffing services from upstream (development and design) to downstream (manufacturing and distribution) The company has four segments: 1) Engineer dispatch, Subcontracting and Outsourcing business, which offers staffing services to a range of work such as designing, development, test evaluation and production technology, 2) Manufacture subcontracting, Consignment and Dispatch business, which offers staffing services within the subsidiary's business area to manufacturing department including processing, assembling, inspection and packaging, 3) Real estate rental business concerning a property that the company owns in Sagamihara, Kanagawa, and 4) Employment promotions for people with disabilities as part of corporate social responsibility (CSR). The company pursues a synergy between businesses by providing services all the way from upstream (development and design) to downstream (manufacturing and distribution). Composition of sales of the fiscal year June 2015 was the Engineer dispatch, Subcontracting and Outsourcing 61.1% and the Manufacture subcontracting, Consignment and Dispatch 38.6% (88.9% and 11.1% respectively before the consolidated adjustment). Engineer dispatch, Subcontracting and Outsourcing business Business entities: Trust Tech Inc., HKTT LIMITED and Freedom Inc. group The company deals with subcontracting, outsourcing, engineer staffing and employment placing dispatch, in addition to engineer dispatch (specified worker dispatching undertakings), which dominates 80% of the sales. The dispatched engineers are regularly employed workers, who have employment contracts with the company for an unlimited period of time. The company also offers staffing services to Japanese companies deploying their businesses in China through HKTT LIMITED, and the company has been expanding this service to Japanese companies in Southeast Asia including Vietnam and Indonesia. In July 2015, the company transformed Freedom Inc., the holding company of a corporate group specializing in the development of software for automobiles, into a 100% subsidiary. Engineer dispatch The engineers are dispatched to the client and they work as stationed personnel under command of a person from the customer company in charge. Their scope of work includes development and design, test evaluation, production engineering, software development, facility maintenance, etc. Subcontracting and Outsourcing In the subcontracting business, a team is composed exclusively of employees of the company. The team works until the completion of the project and delivers the finished work to the client. 3

4 Manufacture subcontracting, Consignment and Dispatch business Business entity: TTM Inc. For subcontracting, a team of workers is usually dispatched to work on-site at the customer company. The company gives command and handles management, and the team will work on processing, assembling, inspection and packaging under related laws and regulations such as the Labor Standards Act, in the same manner as other manufacturers. About 40% of the sales in this segment is subcontracting and accepting outsourcing and about 60% of it is dispatch (general worker dispatching undertakings). Employment promotion for people with disabilities Business entity: special subsidiary company Kyosei Sangyo Inc. A special subsidiary company, Kyosei Sangyo Inc. employs mainly people with severe intellectual disabilities and performs light work such as packaging and cleaning and maintenance of the real estate that Trust Tech owns in Sagamihara City, Kanagawa Prefecture. This business is part of CSR, in which the company aims to provide work places where disabled people can work harmoniously with unimpaired people dividing roles appropriately (The company maintains the employment rate of persons with disability at over 2%, the mandatory minimum quota). Scale of the Worker Dispatch Market According to A Situation of Worker Dispatch Business in June 1, 2014 released by the Ministry of Health, Labor and Welfare in March 1, 2015, the number of dispatched workers in the country was about 1,255 thousand, down 1.4% from the previous year, of which approximately 978 thousand were under the operation of general worker dispatch undertaking, down 0.8%, and 277 thousand were under the operation of specified worker dispatching undertakings, down 3.2%. Dispatched workers under the operation of specified worker dispatching undertakings were largely professionals in system development, mechanical design, etc, while dispatched workers under the operation of general worker dispatching undertakings were mainly office workers, sales workers and skilled workers in manufacturing process. [unit: people] June 2012 June 2013 June 2014 General worker dispatching 1,055, , ,250 undertakings Specified worker dispatching 295, , ,686 undertakings Total 1,351,134 1,273,202 1,255,936 The market scale used to be huge and had more than 4 million workers at its peak. It shrunk under the DPJ (Democratic Party of Japan) administration, which tightened the regulation. However, insofar as engineers, the market keeps growing, reflecting the increased demand for development. General worker dispatching undertakings Workers are registered to dispatching companies. They are sent to work at a dispatch destination under an employment contract only when a dispatch destination is obtained. Specified worker dispatching undertakings Workers are largely employed as full-time employees and sent to dispatch destinations. They are sent to one dispatch destination after another and the employment is continued. Strength of Trust Tech Inc.: Sales, Recruitment, Education and Training, Subcontracting Records, and Global Adaptability The company s strength lies in five aspects: sales, recruitment, education and training for the engineers, subcontracting records, and international adeptness. The company's sales and recruiting capabilities rely on bases of the group companies across the country and the network between them. Nationwide coordination between the recruiters and sales personnel enables the company to flexibly employ people who can be immediately effective workers. With such new employees the company can timely respond to the customers demand. After entry into the employment, the company provides education and training programs for the new employees. In these programs, each engineer is expected to set goals for improving his or her skills, and to design a plan for achieving these goals. The trainers from the personnel department, together with dispatch destination companies, support each of these engineers. 4

5 Some of the customer companies shift the type of service that they receive from dispatch to subcontracting. Staffing companies equipped only with know-how of dispatch, however, face difficulties with handling subcontracting, which requires responsibilities for all the outcomes including volume of production, quality of products, and cost. Trust Tech Inc., on the other hand, has a proven track record in subcontracting, and can accept outsourcing at its in-house development center. Moreover, HKTT LIMITED, the company s subsidiary in Hong Kong, has accumulated extensive experience in providing support such as recruitment services to Japanese companies advancing into China, as well as local Chinese companies. Many of its customer companies that have little experience overseas highly value the company's attentive personnel service, which leads to the increase of domestic orders. Based on such experience, the company is expanding its business into Southeast Asia. ROE Analysis FY 11/6 FY 12/6 FY 13/6 FY 14/6 FY 15/6 ROE 13.89% 10.92% 13.60% 21.81% 24.88% Net income to sales ratio 3.15% 2.29% 3.09% 4.52% 4.92% Total asset turnover ratio Leverage The company s ROE is much higher than the average of all the listed companies. (According to a major US general information service firm, the average of listed companies on the 1 st Section of the Tokyo Stock Exchange was 8.15% in the fiscal year 2014 (at the end of March 2015), down 0.41% from the previous year, which recorded 8.56%.) This high ROE is achieved by the hybrid management combining highly profitable segment of Engineer dispatch, Subcontracting and Outsourcing by regularly employed workers, and another segment of Manufacture subcontracting, Consignment and Dispatch business featured by mobility of employees under terminable employment contracts and high asset efficiency. This achieves high profitability and high asset efficiency, as well as sound finance. Trends of Business Performance 5

6 2. Fiscal Year June 2015 Earnings Results Consolidated Business Results FY 14/6 Composition Composition Compared with FY 15/6 Initial forecast ratio ratio the forecast Sales 17, % 20, % +18.0% 22, % Gross margin 4, % 4, % +13.5% - - SG&A expenses 2, % 3, % +9.2% - - Operating income 1, % 1, % +23.7% 1, % Ordinary income 1, % 1, % +23.1% 1, % Net income % 1, % +28.5% 1, % The figures include those calculated by Investment Bridge Inc. for reference purposes, and may differ from the actual values (which also applies to the rest of the report). Sales up 18.0% and the ordinary income up 23.1% from the previous term The sales for the fiscal year ended June 2015 were 20,819 million yen, up 18.0% from the previous term. Sales of the Engineer dispatch, Subcontracting and Outsourcing increased 32.6% from the previous term due to the robust demand for human resource from transport equipment-related companies including automobiles and the recovered demand for human resources from semiconductor production apparatus-related companies. Although the Manufacture subcontracting, Consignment and Dispatch business were affected by the fall in output of some of the customer companies during the period and expiration of contracts due to the arrival of the dispatch conflict day, the loss was covered by dispatching to car-related, electronic devices and housing-related companies with increased demand for staff. For profitability, the operating income increased 23.7% to 1,597 million yen despite many difficulties. The difficulties were, for example, increased cost of sales because of wage increase for the technicians and engineers, as well as increased expenses for paying vacations resulting from decreased production by the customer companies for manufacture subcontracting, consignment and dispatch business and miscellaneous expenses incurred upon employees retirement. SG&A expenses increased too because of the increased number of sales bases and recruitment bases. (2) Trends by segment FY 14/6 Compared Composition Composition Initial FY 15/6 with ratio ratio forecast the forecast Engineer dispatch, Subcontracting and Outsourcing 9, % 12, % % 13, % Manufacture subcontracting, Consignment and dispatch 7, % 8, % +0.6% 8, % Employment promotions for people with disabilities 9 0.1% 9 0.0% -0.2% % Real estate rental business % % +0.0% 54 - Consolidated sales 17, % 20, % % 22, % Engineer dispatch, Subcontracting and Outsourcing 1, % 1, % % 1, % Manufacture subcontracting, Consignment and Dispatch % % -33.0% % Employment promotions for people with disabilities 4 0.3% % Real estate rental business % % -1.3% 15 - Ordinary income (Composition ratio is ordinary , % 1, % income ratio) % 1, % 6

7 Engineer dispatch, Subcontracting and Outsourcing business: Trust Tech Inc. and HKTT LIMITED The sales were 12,716 million yen, up 32.6% from the previous term and the segment income was 1,443 million yen, up 40.1% from the previous term. Staffing services for design, production engineering and testing increased because of the continued increase in demand for engineers from transport equipment-related companies, including automobiles, and the sector of production facilities increased, too, because of the recovery of the demand for human resources from semiconductor manufacturing apparatus-related companies. In order to respond to the robust demand for human resources, the company conducted nationwide recruitment campaigns to match mid-career engineers with customer companies, while the company expanded and improved its CAD training facilities and training system so that the new graduate engineers can make an early and good start in April, when they start working. As a result, the number of the engineers increased by 607 to 2,219 compared with the previous term, and the operating rate was as high as 94.9 to 96.1%. Manufacture subcontracting, Consignment and Dispatch business: TTM Inc. The sales were 8,040 million yen, up 0.6% from the previous term and the segment income was 180 million yen, down 33.0% from the previous term. Although the manufacture subcontracting, consignment and dispatch business was affected by the fall in output of some of the customer companies during the period and expiration of contract due to the arrival of the dispatch conflict day, the loss was covered by dispatching to car-related, electronic devices and housing-related companies with increased demand for staff. The sales slightly increased compared with that of the previous term. However, increased cost resulting from the wages increase for skilled employees and improvement of recruitment and exceeding expenses for paying vacations resulting from decreased production of the customer companies and the employees retirement, together with the stagnant sales, caused the decrease of the segment income. The number of the skilled workers was 2,221 (147 less than the previous term). Although the number bottomed out and turned upward in the third quarter, but stopped short of the level at the term beginning. * Third quarters tend to have a low operating rate because companies with fiscal year ending in March often have contracts expiring around this time. Also, 260 new graduate employees joined the company in April 2015 as a result of the intentional attempt, and which lowered the operating rate of the fourth quarter of the FY 6/15. 7

8 (3) Financial condition and cash flow Summary balance sheet June 2014 June 2015 June 2014 June 2015 Cash and deposits 2,429 3,038 Trade payables 1,447 1,754 Trade receivables 2,388 2,954 Income taxes payable and consumption tax payable 712 1,107 Current assets 5,283 6,551 Provision for bonuses Property, plant and equipment Liabilities 2,622 3,319 Intangible assets Net assets 3,832 4,406 Investments and other assets Total liabilities and net assets 6,455 7,725 Noncurrent assets 1,172 1,174 Total amount of interest-bearing debts - - Total assets were 7,725 million yen, 1,270 million yen increase compared with the previous term, due to the business expansion. The company has strength in excellent finance with high fluidity and long-term stability, and the share of cash and deposits is nearly 40% of total assets. Current ratio was 199.3% (204.4% in the previous term), fixed ratio was 26.6% (30.6%) and equity ratio was 57.0% (59.4%). Return on investment (ROI), an indicator of the profitability compared to the amount of capital financed, was as high as 24.4% (21.6%). Summary statement of cash flows FY 6/14 FY 6/15 Operating CF 861 1, % Investing CF Free CF 706 1, % Financing CF Cash and equivalents 2,429 3, % Operating cash flows increased 861 million yen in the previous term to 1,209 million yen due to the increased profit. Investing cash flows was slightly negative because of the acquisition of tangible and intangible assets but secured free cash flows of 1,061 million yen. Dividend payment caused financing cash flows negative. Cash and equivalents at the term end were 3,038 million yen, 609 million yen up from the end of previous term. 8

9 3. Fiscal Year June 2016 Earnings Estimates (1) Strengthening of services to the IT and embedded software sector The company has been expanding the business of engineer dispatch, subcontracting and outsourcing by quickly responding to demand for engineers from transport equipment-related and electric devices-related companies. However, the company has been unable to provide solutions to IT and software sector even though the market scale of the industry is huge. In order to catch up with leading companies in the industry and go ahead of them, it is vital not only to capture further demand for engineers in this industry under the existing business segments but also to develop human resources in the IT and embedded software sector. For such purposes, the company transformed Freedom Inc. group into its wholly owned subsidiary, in July 1, 2015, as well as took over the technical solution division of Technology Power Corporation Inc. The company is going to develop the IT and embedded software sector in terms of both engineering sales and technology by leveraging M&A, and pursue synergy with know-how for sales and recruitment, the two areas where the company excels. In the fiscal year 6/16, with the M&A effects, the sales are estimated at 4 to 5 billion yen and the ordinary income is estimated at 0.2 to 0.3 billion yen after the goodwill is amortized. Transformation of Freedom Inc. group into a subsidiary with strength in control software (embedded software) Freedom Inc., based in Kariya City, Aichi Prefecture, is a holding company of Freedom Inc. group and it is specialized in development of software for automobiles, including car navigation systems, hybrid systems, automatic transmissions and control systems such as an ECU. The company expects Freedom to be a core for the growth strategy of the embedded software sector. The company intends to expand the business, by combining technology owned by Freedom Inc. group with Trust Tech Group s nationwide recruitment capabilities and education and training systems. Meanwhile, Freedom Inc. group is composed of Freedom Inc., the holding company, as well as those subsidiaries which conduct actual operations. Such subsidiaries include ECS Inc., System One Inc. and several other subsidiaries, all of which are Freedom Inc. 's wholly-owned subsidiaries. The services of these subsidiaries range from development of control systems, designing support, to testing and inspections. The cost of the M&A (acquisition price) was 3,490 million yen, including approximately 130 million yen for advisory expense, etc. The company borrowed 2.3 billion in total from Mizuho Bank and Sumitomo Mitsui Banking Corporation (SMBC) as acquisition loans. Consolidated performance of Freedom Inc. group FY 9/12 FY 9/13 FY 9/14 Sales 3,954 million yen 4,090 million yen 3,873 million yen Operating income 200 million yen 158 million yen 52 million yen Ordinary income 297 million yen 214 million yen 101 million yen Net income 165 million yen 112 million yen 48 million yen Net assets 1,142 million yen 1,282 million yen 1,261 million yen Total assets 2,262 million yen 2,164 million yen 2,174 million yen (2) Consolidated performance FY 6/15 Composition FY 6/16 Composition Actual ratio Forecast ratio Sales 20, % 28, % +36.9% Operating income 1, % 2, % +44.0% Ordinary income 1, % 2, % +41.7% Net income 1, % 1, % +41.5% 9

10 Taking over of the engineering solution division of Technology Power Corporation, which offers staffing services to IT industry Technology Power Corporation, based in Koto-ku, Tokyo, is a subsidiary of NTT DATA Group. Its clients include not only NTT group companies but also many other system integrators (SIers). Technology Power Corporation provides total support of construction, operation and maintenance of IT systems through accepting outsourcing, subcontracting and dispatch. The Technical Solution Division, which was transferred from Technology Power Corporation to Trust Tech Inc., conducts outsourcing, subcontracting and dispatch. The Division's sales for the fiscal year March 2014 was 1,276 million yen. With this business transfer, the company expects the division not only to contribute to the profitability of Trust Tech Group but also to help the company in the establishment of business bases and improvement of its engineering capabilities (The division is integrated into Trust Tech Inc. as the Technical Solution Division). Transformation of KANAMOTO Engineering Inc., which offers engineer staffing services, into a subsidiary Moreover, the company announced that on October 1, 2015 the company was going to acquire all the stocks from the engineer staffing company, KANAMOTO Engineering Inc. KANAMOTO s sales reaches 500 to 600 million yen in the most recent term, and the company expects positive results from the combination of KANAMOTO Engineering and Trust Tech, in areas such as automobile-related design and development, as well as design, analysis, etc. of nuclear power plants. Estimate: Sales up 36.9% and ordinary income up 41.7% from the previous term Business inquiries from automobile-related companies are in increase trend. This trend, together with the expansion of the IT and embedded software sector resulting from the M&A effect, is expected to significantly increase the sales of Engineer dispatch, Subcontracting and Outsourcing business to 20,279 million yen, up 59.5% from the previous term. The sales from Manufacture subcontracting, Consignment and Dispatch business, despite the negative influence from the previous term, is also expected to increase to 8.2 billion yen, up 2.0% from the previous term. As for profits, although operating expenses are expected to increase due to the temporary expense for M&A, increasing the number of sales and recruiting personnel and opening and moving of bases, increased sales is expected to cover the expense and the operating income is expected at 2.3 billion yen, up 44.0% from the previous term. (3) Earnings estimates by segment FY 6/15 Composition FY 16/6 Composition Actual ratio Forecast ratio Engineer dispatch, Subcontracting and Outsourcing 12, % 20, % +59.5% Manufacture subcontracting, Consignment and Dispatch 8, % 8, % +2.0% Employment promotions for people with disabilities 9 0.0% Real estate rental business % Consolidated sales 20, % 28, % +36.9% Engineer dispatch, Subcontracting and Outsourcing 1, % 2, % +46.1% Manufacture subcontracting, Consignment and Dispatch % % +49.8% Employment promotions for people with disabilities % Real estate rental business % Ordinary income(composition ratio is ordinary income ratio) 1, % 2, % +41.7% Engineer dispatch, Subcontracting and Outsourcing The sales are estimated at 20,279 million yen, up 59.5% from the previous term and the segment income is estimated at 2,108 million yen, up 46.1% from the previous term. 5 billion yen in the estimated sales and 200 to 300 million yen in the estimated ordinary income is due to the M&A effects. However, even without the M&A effects, sales are estimated to increase more than 20% and the ordinary income is estimated to increase more than 25%, both of which are estimated to be high. The number of the engineers will be approximately 500 more in the beginning of the fiscal year June 2016 because of the taking over of the Technical Solution Division and its transformation into a subsidiary of Freedom Inc. group. The company is going to focus on the expansion of the IT and embedded software sector mainly through engineer dispatch to transport equipment-related companies, especially automobile-related companies, for which demand for human resources is robust. Also, the company aims at earlier and better start of the new 10

11 graduate engineers, approximately 300 of them, employed in April 2016 with the improved training system, such as the CAD training. For the profits, ordinary income margin is estimated to decrease for the first half of the year despite the profits increase because of the temporal expense for the M&A, the increased expense for strengthening sales and recruitment and the precedent expense for opening and moving of the bases. The second half of the year, on the other hand, will not be affected by temporal expenses, and expected increase of sales should directly lead to the increase in profits. However, the ordinary income margin for the full year is estimated to decrease from 11.3% in the previous term to 10.4% (-0.9 points) because of the amortization of the goodwill. Half-yearly performance 1H 2H FY 6/15 FY 6/16 FY 6/15 FY 6/16 Actual Forecast Actual Forecast Sales 5,790 9, % 6,925 10, % Ordinary income % 882 1, % Ordinary income margin 9.7% 7.9% % 12.6% - Manufacture subcontracting, Consignment and Dispatch The sales are estimated at 8.2 billion yen, up 2.0% from the previous term, and the segment income is estimated at 270 million yen, up 49.8% from the previous term. Although the demand for dispatched engineers especially from automobiles-related companies is expected to continue in the first half year, the sales are estimated to be almost the same as the previous term because the number of the engineers will be less than the same period of the previous term. The company aims to strengthen dispatch and subcontracting sales, targeting other factories of existing clients and related companies mainly in housing industry and electric device industry towards the second half of the year. Earnings for the second half of the year is estimated to increase with new clients gained in the first half of the year while automobile-related companies are expected to deliver steady performance. As for profits, the ordinary income for the first half of the year is estimated to decrease from the previous term due to strengthening of sales persons for sales and recruitment while the sales are estimated to slightly decrease. However, for the second half of the year, the ordinary income margin is estimated to greatly recover because of increased sales, compression of fixed cost and close examination of cost-effectiveness. Another factor for the recovery is that the profitability of new contracts have been recovering, reflecting the labor shortage. Half-yearly performance 1H 2H FY 6/15 FY 6/16 FY 6/15 FY 6/16 Actual Forecast Actual Forecast Sales 4,096 4, % 3,944 4, % Ordinary income % % Ordinary income margin 2.6% 2.3% - 1.8% 4.3% - (4) Strategies for the fiscal year June 2016 The company plans to accelerate the expansion of engineering territory by strengthening sales activities and recruitment in the engineering sector. The company especially focuses on the expansion of the IT and embedded software sector by M&A and the pursuit of synergy between businesses. Acceleration of the expansion of engineering territory by strengthening sales activities and recruitment in the engineering sector The fiscal year June 2016 started with 2,719 engineers, 500 more from the Technical Solution Division that the company acquired and from the new subsidiary, Freedom Inc. group. The company plans to employ mid-career engineers and new graduates during this term too. The company is going to open new recruitment centers in Tokyo, Nagoya and Osaka as key areas. Aiming at employing more than 300 new graduates joining the company in April 2016, the company is going to continuously strengthen the organizations for recruitment. Regarding education and training, the company is going to strengthen the CAD training systems for new graduates who have received provisional job offers, let alone continuing support for engineers to improve their skills and to cope with the Revised Worker Dispatch Act and 11

12 related laws and regulations. As for sales activities, on the other hand, the company will concentrate distribution of its management resources to the strategic areas. Also, the company plans to strengthen its development center towards the expansion of the subcontracting and consignment business. As part of this plan, the company separated the post of head of the development center from the sales office manager and gave the newly chosen head the same authority as that of the sales office manager (Previously, one person held the two posts: sales office manager and head of the development center. Therefore, their sales activities tended to place more emphasis on dispatch). This decision was based on the belief in the necessity of further invigorating subcontracting and consignment, even though the company still place value on engineer dispatch as a key to lead the expansion of the dispatch, subcontracting and outsourcing business. Expansion of the IT and embedded software sector by M&A and a synergy between businesses The company intends to transform IT and embedded software sector into the group s key pillars for growth in the future. With M&A and pursuit of synergy between businesses, the company aims to increase market share. Although the Technical Solution Division and Freedom Inc. group had a technological edge and excellent clientele, their performances were sluggish due to their poor recruiting and sales capabilities. The company will pursue synergy with the Technical Solution Division and Freedom Inc. group by leveraging Trust Tech s strength in recruitment and sales activities. It s not a mere addition but a multiplication of the different bodies that is intended to achieve accelerated growth of the group as a whole. Composition of the engineers by sector in the term ended June 2015 (Source: Trust Tech Inc.) (5) Basic policy for profit sharing The company makes it a principle to distribute dividends linked with performance, while placing emphasis on stability of payment. The interim dividend for the fiscal year 6/16 is estimated to be 30 yen per share, 5 yen up, and the year-end dividend of the same fiscal year is estimated to be 45 yen per share, 10 yen up. The total dividend of the fiscal year is estimated to be 75 yen per share, 15 yen up (The dividend is estimated to increase for four consecutive terms). 12

13 4. Conclusions IT and embedded software sector has a room for growth since its share in the entire sales has thus far remained low at about 1% (with composition ratio of engineers by sector being 2.2%). In addition, software development is expected to have a high growth rate for automobiles, which has been fused with IT, and IoT (Internet of Things). Therefore, we focus our attention to the acquisition of Technical Solution Division of Technology Power Corporation Inc., which is a subsidiary of NTT DATA Group and has an engineering edge and excellent customer assets, and its transformation into a subsidiary of Freedom Inc. group, whose primary clients is Toyota and who has strength in development of in-vehicle embedded software. We will continue to pay attention to the company s growth strategies by M&A, as was seen in the case of the transformation of KANAMOTO Engineering Inc. into its subsidiary. This report is intended solely for information purposes, and is not intended as a solicitation for investment. The information and opinions contained within this report are made by our company based on data made publicly available, and the information within this report comes from sources that we judge to be reliable. However we cannot wholly guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration. Copyright(C) 2015 Investment Bridge Co., Ltd. All Rights Reserved. You can read back issues of Bridge Report (Trust Tech::2154) and the contents of Bridge Saloon (IR seminar) at 13