（3822） | Publish:Thu, Dec 21, 2017 IR「BRIDGE REPORT」

BRIDGE REPORT
（3822）

プライム

Minori Solutions Co., Ltd. (3822)

President
Yuji Morishita

Company	Minori Solutions Co., Ltd.
Code No.	3822
Exchange	TSE 1st Section
Industry	Information and communications
President	Yuji Morishita
Address	Shinjuku NS Building, 2-4-1, Nishi-Shinjuku, Shinjuku-ku, Tokyo
Year-end	March
URL	http://minori-sol.jp/en/

Share Price	Number of shares issued (excluding treasury shares)		Total market cap	ROE (Actual)	Trading Unit
¥1,361	8,789,208 shares		¥11,962 million	15.5%	100 shares
DPS (Est.)	Dividend Yield (Est.)	EPS (Est.)	PER (Est.)	BPS (Actual)	PBR (Actual)
¥33.00	0.3%	¥106.38	12.8 times	¥747.09	1.8 times

* The share price is the closing price on November 9. The number of issued shares is obtained by deducting the number of treasury stocks from the number of shares issued at the end of the latest quarter. ROE, BPS are actual results at the end of the previous term.

Fiscal Year	Net Sales	Operating Income	Ordinary Income	Net Income	EPS	DPS
March 2014 (Actual)	13,323	824	836	506	57.63	34.00
March 2015 (Actual)	13,922	1,065	1,089	692	78.80	38.00
March 2016 (Actual)	14,768	1,057	1,078	702	79.93	29.00
March 2017 (Actual)	15,541	1,338	1,356	963	109.67	33.00
March 2018 (Forecast)	15,900	1,365	1,375	935	106.38	33.00

* The forecast is from the company. *The company conducted 2-for-1 share split in August 2015.

This Bridge Report presents Minori Solutions's first half of fiscal year March 2018 earnings results and fiscal year March 2018 earnings estimates.

Key Points

Company Overview

Minori Solutions business is supported by two pillars: development of software and operation/management of systems. Minori Solutions sells hardware, general-purpose packaged software, etc. for developing software. JSC Co., Ltd., which specialized in the development and operation of resident systems mainly for financial institutions, such as banks and credit-card companies, and E-Wave Co., Ltd. fully undertook the development of systems in a broad range of fields, including manufacturing, transportation, and distribution, merged into Minori Solutions Co., Ltd. in Apr. 2010 for a new beginning. The "Minori" in the corporate name represents an ear of grains, means "bearing fruit," and was infused with the hope that all employees will join hands to improve its corporate value further and produce good results as the "Minori" for clients, stakeholders, and employees, under the new organization after the merger.

Corporate ethos and rules of conduct

Corporate ethos

Through the use of our information technology, we will contribute to the creation of an affluent and fruitful society by growing, taking on challenges and always having high ambitions.

Rules of conduct

1. Ensure trust: We will observe relevant laws and regulations, ensure fair transactions, protect the confidentiality of information on clients, follow the basic rules for the proper management of personal information, etc., and execute fair corporate activities.

2. Coexist with clients: We will make continuous efforts to maintain and improve reliable relationships with clients, and aim to create the prosperity of clients and the growth of our company.

3. Continuation of self-reform: We will always be ambitious, and try to reform ourselves by taking on challenges to grow.

Business contents

The business of Minori Solutions is classified into the following three segments: software development business, system operation/management business, and system-related device sale business. Software development business includes the developing and updating of systems and software as well as IT consultancy. The system operation/management business consists of operation, maintenance, and management of developed systems, and help desk work. The system-related device sale business handles the sale of devices related to system development. The ratios of their sales are 75.7%, 22.7%, and 1.6%, respectively (FY3/17).

The software development business is divided into two types: one is the business of undertaking the development of an entire system and the other is the business of partially developing systems while staying in client companies (dispatching about 100 workers for some clients). For banks, workers are stationed there for ensuring security, and for other businesses, system development is fully entrusted in most cases. The business of stationing workers in client companies, which is recognized by the company as recurring revenue-type business, (although the performance of short-term projects fluctuates), is stable. In this business, the company receives fees for each month and each worker like worker dispatch business. On the other hand, the business of fully undertaking system development is highly profitable, but the number of orders fluctuates, causing development risk.

In the system operation and management business, Minori Solutions operates and manages systems (by stationing workers at clients' data centers to operate and manage the systems of end users, stationing workers at the facilities of end users to operate and manage them, and conducting operation and management via networks), operates call centers (help desks), and more.
As for the business of selling system devices, the number of cases in which devices are delivered through development is decreasing, and enterprises are adopting cloud computing, which leads to decline in sales. However, the contribution of sale of devices has been insignificant from the beginning, so its effect on profit is minor.

Sales for each business field of end users

As for the sales for each field of end users, finance, in which resident services are dominant, accounts for 38.3%, and manufacturing with transactions with a wide categories of companies makes up 19.7%. The sales in other fields, including information, transportation, communication, public services/energy, and distribution/service, account for 6 to 10%, respectively. Although finance has a high ratio, the business fields of end users excluding it are equally diverse. The top 10 companies account for 50% of sales, and the top 30 companies occupy 75%. Although the degree of dependence on top companies is high, these are excellent enterprises and with their performance, they are expected to maintain a certain level of investment, despite some fluctuation. Their business fields are also diverse. Therefore, the amounts of orders and sales are stable.

The sales of manufacturing include the sales of computer aided engineering (CAE) solutions, which are unique among system integrators (SIer). In the case of new car development, for example, a CAE solution is to render a new car (not only its appearance, but also its internal structure) with a 3D system on PC based on the data of the new car under development (including design and materials), and conduct all kinds of simulation necessary for development, including strength, endurance, vibration, collision, and hydrodynamic and aerodynamic tests. The simulation data are analyzed to determine if the new car fulfills the design requirements, and the analysis results are summarized in reports including countermeasures, as needed, and the reports are submitted to automobile manufacturers. By utilizing these reports, the automobile manufacturers can reduce the number of prototype cars and demonstration tests, resulting in shortened development period and lower development costs. The main clients are domestic automobile manufacturers. In the domestic market, most products are produced in-house, and so competitors are few. Users are increasing in the fields of aircrafts, power generation equipment, artificial satellites, smartphones, etc.

Strengths and characteristics - stable revenue base, excellent financial standing, and achievements of unique CAE solutions

End users are distributed in a good balance among the fields of manufacturing, information, distribution, services, transportation, public services, energy, communications, and especially finance, and Minori Solutions offers comprehensive services, including development, operation, and management, in most cases. Accordingly, its revenue base is stable. All of the end users are leading or top-class companies in each field, and most of them have been using the service of Minori Solutions for many years.

Accordingly, its financial standing is excellent, as "current ratio," which indicates that short-term solvency is high when the value exceeds 100% (ideally 200%), is 393.7% (376.8% in the term ended March 2016), and "fixed ratio," which indicates that long-term solvency is high when the value is less than 100%, is 10.3% (14.4% in the term ended March 2016). ROE has been over 10% since the term ended March 2014, and it was 15.5% in the term ended March 2017. The rate of return on invested capital (ROIC), which represents the efficiency of procured funds, was 14.0% for the term ended March 2017 (10.9% in the term ended March 2016). The effective utilization of funds is a challenge and future investment for growth is expected.

In addition, the company possesses unique characteristics, including the experience of CAE solutions for structural and hydrodynamic analyses, and the business footholds in Sendai, Matsumoto, Nagoya, and Fukuoka, as well as the headquarters in Tokyo and Osaka Branch earning profits while contributing to local economies.

Mid-Term Management Plan (Term Ending March 2018 - Term Ending March 2021)

With its management goal of thoroughly pursuing the "Minori (harvest)" of three stakeholders, including the clients, shareholders, and employees, the company has drawn up the following four basic strategies for attaining the management goal: "high value-added management," "improvement of the Minori brand," "attractive and worker-friendly company (healthy management and work-style reform)," and "simple & speedy (management with expeditious decision-making)."

Management goals

･ A company that contributes to growth of clients

･ A company that satisfies the expectations from shareholders through sustainable growth

･ A company that takes pride in itself and creates its own future

Basic strategies

･ High value-added management

･ Improvement of the Minori brand

･ Attractive and worker-friendly company (healthy management and work-style reform)

･ Simple & speedy (management with expeditious decision-making)

Priority policies

Regarding the strategy of high value-added management, the company will break new ground and boost the market value of its existing businesses using its strengths, with the aim of making a shift from the labor-intensive management to the high value-added one. It strives to achieve sales of 20 billion yen and an operating income of 2 billion yen as a goal for the term ending March 2021 and raise operating income ratio, which is currently around 8%, to 10%.
The following four items have been adopted as priority policies: creation of high value-added businesses using new technology, such as "cloud computing," "IoT," "big data analysis," "AI," and "Fin Tech," provision of a comprehensive solution service through Business Process Outsourcing (BPO) and Application Management Outsourcing (AMO), expansion of the amount of transactions with end users in both the existing businesses and new ones, and commercialization of new businesses by promoting intra-venture businesses.

In order to improve the Minori brand, the company will work on expanding its presence in the industry and enhancing its corporate brand, as an Information and Communication Technology (ICT) partner which contributes to growth of customers' businesses and development of the society.
The following three items have been adopted as priority policies: enhancement of technological capabilities, quality, organizational power, and thorough risk management (as a company which is well aware of the importance of compliance), promotion of businesses in highly-public fields or ones that lead to contributions to local community as Minori in the society (as a company which displays a positive attitude toward welfare business), and promotion of commercialization of services, tools, and packages developed originally by Minori Solutions (in order to promote the corporate image of "+ONE").

Aiming to become an attractive and worker-friendly company (healthy management and work-style reform), the company will endeavor to make an enterprise in which each employee can have a picture of their futures and work healthily with a sense of security, and to develop an organization, in which growth of each employee results in growth of the company, through diversification of human resources and work styles.
The following three items have been adopted as priority policies: healthy management, diversity management (by augmenting the number of women in administrative posts and promoting globalization), and a company where employees thrive through diverse work styles (work-style reform).

With regard to the strategy of simple & speedy (management with expeditious decision-making), the company will connect the employees and the manager together more closely so that behavior of each employee contributes to development of the company, because it believes that simplification of every business and task will result in time-saving.
The following three items have been adopted as priority policies: expeditious (speedy) decision-making (a self-reliant and strengthened organization), self-reliant behavior by each employee (establishment of working groups), and a simple relationship between the employees and the manager (promotion of the "award system").

First Half of Fiscal Year March 2018 Earnings Results

Sales and operating income increased by 1.8% and 3.8%, respectively, year on year

Sales were 7,776 million yen, up 1.8% year on year. As a result of the redesign of less profitable projects, sales of system operation and management declined by 2.3% year on year; however, sales in the software development segment, whose decrease in the financial sector was covered by sales in the manufacturing and communications sectors, increased by 1.4% year on year. Sales of system equipment, too, grew thanks to server replacement in regional banks.

Operating income was 639 million yen, up 3.8% year on year. Although a project turned out to be unprofitable in the software development business, gross margin was 15.8%, up 0.2 points, thanks to the improved profitability in the system operation and management segment as a result of the redesign of low-profit projects. The augmentation of selling, general and administrative (SG&A) expenses, consisting mainly of research and development (R&D) expenses in the fields of cloud computing and AI, was offset.

Although the company has been placed in a situation where it cannot achieve sales growth on a steady basis due to a continuing difficulty in securing human resources, profitability continues to be improved.

In the finance sector, sales were 2,842 million yen (down 8.1% from the previous term). Despite the increase in sales from non-life insurance companies, the declined sales from banks, regarding which large-scale system integration projects have come to an end, cannot be covered. As system maintenance for non-life insurance companies after organizational reforms is still in progress, a healthy sales growth is expected to continue.

Sales in the manufacturing sector were 1,550 million yen (up 4.5% from the previous term). With a steady rise in IT investment by customers in general, development of mission-critical systems chiefly for manufacturers in the Kansai region contributed largely to the increase in sales.

In the field of information, sales were 733 million yen (down 6.6% from the previous term). The decrease in sales was attributable to the redesign of projects for operating and managing human affairs-related systems for SIers. The company plans to redistribute personnel engaging in system operation and management to the software development segment by encouraging them to obtain skills necessary for software development.

Sales in the transportation sector were 639 million yen (down 1.8% from the previous term). Although the number of operation projects for trains and buses shrank, the company had anticipated such a decrease in advance. Sales remain at nearly the same level as that of the previous term thanks to the contribution by a project for renewing the mission-critical system of a major courier, which is one of the company's main customers.

In the field of public services and energy, sales were 493 million yen (up 2.0% from the previous term). The sales increase is attributed to the healthily rising sales from public offices and local governments through infrastructure building projects. The company received a large number of orders for electric power-related projects in the Tohoku, Kansai, and Kyusyu regions, where the company has established a strong presence.

Sales in the communications sector were 744 million yen (up 64.4% from the previous term). In addition to the contributions by in-house system development for information and communication user companies, sales from major carriers, whose industry had been in a changeover period, recovered through infrastructure development.

In the distribution and services sector, sales were 776 million yen (up 11.9% from the previous term). The expansion in the number of projects for rebuilding mission-critical systems led the sales growth.

The total assets in the first half were 10,280 million yen, up 961 million yen from the end of the previous term, with equity ratio being 67.0% and net cash ratio being 62.1%. The company's financial status is highly liquid and stable; however, the company needs to determine how to use plenty of its funds effectively for corporate growth.

(4) CSR and ESG activities

The company sponsored "OXFAM Trailwalker Tohoku 2017" (June 3 - 5, 2017), and its employees participated in the event. OXFAM Trailwalker is an event of walking a trail in which teams of four people took part. Participants not only push themselves to the limit of their physical strength and overcome the difficulty in working as a team, but also collect donations by participating in the event in order to make contributions to international cooperation. Participants call on their family members, friends, coworkers, and any other people to become a sponsor (donor) of their teams and raise funds for supporting international cooperation. The company's team was ranked 8th in the company/group ranking (1st place: BlackRock Japan Co., Ltd., 2nd place: Morgan Stanley, 3rd place: Citigroup).

Fiscal Year March 2018 Earnings Estimates

Both sales and operating income are expected to mark a record high for 4 consecutive terms and 2 consecutive terms, respectively.

It is predicted that sales of software development show a healthy growth in the distribution and services sector, maintenance projects for regional banks, and other fields. In addition, the company will start offering solution services in earnest in new fields, such as cloud computing, AI, and Robotic Process Automation (RPA: automation of businesses using robots).

The term-end dividend for the second half is estimated to be 17 yen/share, which, together with the term-end dividend for the first half of 16 yen/share, results in the annual dividend of 33 yen/share (estimated payout ratio is 31.0%). The company's basic policy is to distribute profit on a stable and sustainable basis.

Outlook for each business field of end users

In the finance field, overseas projects for major banks will be in full progress, and the number of projects for regional banks will increase. In addition, the amount of integration projects in credit card and non-life insurance companies will expand on a healthy basis. Regarding the manufacturing sector, not only is a steady rise expected in mission-critical business development projects and the engineering business, but also IoT-related projects will grow in number mainly in Matsumoto, where the company has established its base and a number of manufacturing companies related to precision equipment and optical instruments have gathered. The quantity of orders for renewing transportation-related systems will increase in the transportation field, whereas, in the communications sector which has rebounded, the number of projects for rebuilding business systems in television stations will expand under the circumstances where a healthy growth in infrastructure development, such as communication infrastructure, is expected. In the field of public services and energy, electric power-related projects, for which the company received a multitude of orders in the first half, will start making contributions to profit. Meanwhile, regarding the distribution and services sector, the amount of projects for rebuilding mission-critical system will increase.

(2) Plans for each segment

Software development

The company will not only engage in adding high value to its existing businesses but also make full progress in development of a new business. It will focus on partnership with a major system integrator with the aim of stabilizing profit.
In the existing businesses, the company will propel a shift of its business model in order to add high value to its services, such as the upstream process and system integration. In addition to putting forth efforts to secure and educate human resources in order to improve business quality and boost productivity which are essential for adding high value, it will encourage its employees to gain skills required in other segments as part of its human resources development activities. In the new business, the company will offer cloud-, AI-, and RPA-based solutions mainly by a newly formed project team. Furthermore, it will strengthen the partnership with a major system integrator aiming to stabilize profit, as well as augment the amount of transactions with end users.

Progress with the new business Example cases regarding cloud computing, AI, and RPA

With respect to cloud-related projects, the company was entrusted with customization and system establishment when Suntory Holdings Limited introduced a cloud application, "FitSAP," which is an app that supports and facilitates health management for employees and has been established by SAP on "SAP Cloud Platform." Suntory Holdings has given priority to managing health of its employees, which is proven by the fact that it has been certified by the Ministry of Economy, Trade and Industry (METI) as one of the health and productivity management organizations, and introduced "FitSAP" by customizing it to suit its needs.
"SAP Cloud Platform" is a cloud-based platform for application development provided by SAP, the partner of Minori Solutions. It was originally named "SAPHANA Cloud Platform" and later renamed "SAP Cloud Platform" in March 2017. Amid the current trend toward a shift of information systems from on-premise ones (systems owned by companies) to cloud-based ones (lease of systems), Minori Solutions has engaged strongly in services for establishing (developing) a variety of systems and apps which use the platform, as well as in sales of the license of ERP (mission-critical integration information system) "SAP Business ByDesign" established on "SAP Cloud Platform."

Regarding AI-related projects, in Johoku Shinkin Bank (Arakawa-ku, Tokyo), operation of "AI help-desk support system," which deals with questions and troubles inquired by offices while employees use computers, was started in August. "AI help-desk support system" has achieved low cost and quick delivery by adopting Cognitive Service and Bot Service (the AI chat technology of Microsoft) provided on Microsoft Azure of Microsoft Japan. Questions and troubles inquired by offices which arise when employees use computers will be handled in a more effective and simpler manner in the format of chat with AI. As Johoku Shinkin Bank considers using the system for dealing with inquiries about clerical work within its bank, further demand for software development is expected.
In RPA-related projects, the company exhibited at AI/Business Automation Exhibition (http://www.ai-auto.jp/aki/) in "Japan IT Week" (November 8 - 10, 2017) held in Makuhari Messe, and presented "MinoRobo," an RPA application which reduces costs by automating computer operation which is currently done manually, and "AI help-desk support system," which supports help desk services using the existing chatbot technology. "MinoRobo" automatically produces material and other items necessary for processing task based on various kinds of information contained in Win apps and Excel files according to the execution scenario which obtains and edits such information in Win apps, online screens, and Excel files. The company plans to fuel demand for software development, starting with customer inquiries for RPA- and AI-related projects.

System operation and management

The company will not only make sustained efforts to propose a comprehensive outsourcing service, ranging from development to maintenance to operation, but also focus on making a proposal for a help desk-oriented service of supporting business operations using AI.

Meanwhile, regarding sales in the system equipment segment, where various kinds of equipment are sold in conjunction with system development and infrastructure building based on client needs, demand is declining due to PaaS, such as cloud computing and data centers. Although the sluggish demand is projected to continue, little impact is expected because the profitability of the segment is low. In the second half of this term, however, it is predicted that sales will rise on a healthy basis thanks to server replacement in regional banks.

Conclusions

Business performance of the company for the first half was healthy thanks to its advantage of having a loyal client portfolio although the degree of loyalty varies by client. Sales from major banks weakened because large-scale integration projects reached their peak; however, active IT investment continues in the manufacturing field, and sales in the distribution sector remain healthy mainly for companies which succeeded in the online shopping business. The communications sector, in which sales were stagnant due to the changeover period regarding capital investment, recovered. It is expected that a favorable trend of order placement will continue in the second half of this term and subsequent terms as major banks will accelerate their expansion overseas, etc., however, like many other companies, Minori Solutions is struggling to secure human resources. It is, therefore, difficult for the company to expand the amount of orders all at once from the perspective of quality. In parallel with recruitment of new graduates and mid-career workers, the company will redouble its efforts to educate and train employees through a well-developed educational structure in which techniques and knowhow are passed on from experienced employees to younger ones, and employees engaging in system operation and management are encouraged to attend seminars for acquiring skills necessary for other segments and work in the software development segment (skill change).

<Reference: Regarding corporate governance>

◎ Corporate Governance Report (Updated on June 26, 2017)
Basic Policy

The company considers that the basic policy for corporate governance is to secure the transparency, swiftness, and fairness of business administration and execution, clarify responsibilities, enlarge business scale, and comply with laws and regulations thoroughly, in order to improve and maximize its corporate value.

Disclaimer

This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However, we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or 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.
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