BRIDGE REPORT
(6461)

東証1部

投資家向けIRセミナープレミアムブリッジサロン開催!
Nippon Piston Ring (6461)
Akira Yamamoto, President
Akira Yamamoto, President
Corporate Profile
Company
Nippon Piston Ring Co., Ltd.
Code No.
6461
Exchange
TSE First Section
Industry
Machinery (Manufacturing)
President
Akira Yamamoto
HQ Address
5-12-10, Honmachi Higashi, Chuo-ku, Saitama City, Saitama, Japan
Year-end
March
URL
Stock Information
Share Price Shares Outstanding Market cap ROE (Actual) Trading Unit
¥2,256 8,374,157shares ¥18,892 million 8.2% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥70.00 3.1% ¥255.35 8.8x ¥3,688.21 0.6x
* The share price is the closing price on May 30. The number of shares outstanding was taken from the latest brief financial report.
ROE and BPS are the values for the previous term.
 
Consolidated Earnings Trends
Fiscal Year Sales Operating Profit Current Profit Net Profit EPS (¥) DPS (¥)
2014 51,657 1,946 2,172 2,173 264.45 6.00
2015 52,199 2,549 2,442 1,605 195.28 60.00
2016 52,121 3,238 2,898 2,415 293.66 65.00
2017 Est. 52,500 3,300 3,100 2,100 255.35 70.00
* Estimates are those of the Company. The definition for net profit is net profit attributable to parent company shareholders (Hereinafter the same apply). EPS and DPS have been adjusted to reflect the reverse stock split of 1 for 10 conducted on October 1, 2015.
A commemorative dividend of ¥1.00 per share in addition to the normal dividend of ¥5.00 was conducted to commemorate the 80th year of Nippon Piston Ring's operations in FY 2014,
 
This Bridge Report provides Nippon Piston Ring Co., Ltd.'s earnings results for fiscal year March 2017, an interview with President Yamamoto and so on.
 
Key Points
 
 
 
Company Overview
 
Nippon Piston Ring manufactures and sells piston rings and valve seat inserts which are important functional parts for automobile engines. The Company boasts of a market share just under 30% of piston rings and just under 40% of valve seat inserts supplied to Japanese automobile manufacturers. It supplies its products not only to all Japanese automobile manufacturers but also to many prominent overseas automobile manufacturers.
Nippon Piston Ring boasts of strengths in metallic materials, surface quality improvement and precision processing technologies. New products are being developed to expand the range of its businesses into the metal injection molding products, medical products, and other realms not related to automobile engine parts.
 
<Corporate History>
Nippon Piston Ring was founded by Tomonori Suzuki in 1931 in Kawaguchi City, Saitama Prefecture just prior to the start of mass domestic production of automobiles by manufacturers such as Toyota and Nissan, following the Government program for "establishment of an automobile industry" adopted in August 1935. The company name Nippon Piston Ring Co., Ltd. was officially adopted along with the establishment of the factory in Kawaguchi City in 1934.
During the Second World War, the Company began mass production of chrome plated rings for airplanes. At the end of the War in 1945, the factory was temporarily closed, but the company began operations along with the listing of its shares on the Tokyo Stock Exchange in 1949.
Nippon Piston Ring's earnings expanded rapidly along with the rapid expansion in Japanese automobile exports, and the strong demand for vehicles due to economic growth in the post-war reconstruction within Japan.
Beginning to provide products to German and American motor vehicle manufacturers in the 1970s, the Company has continued organizing a global manufacturing and sales structure, establishing overseas production bases in Thailand, Indonesia, China and India since 2000.
The metal injection molding products business and dental implants business were acquired in 2014 as part of the strategy of expanding its product lineup outside of the motor vehicle engine parts realm, and the Company has started to operate the business by its own facility since 2015.
 
 
<Market Environment>
◎ Global Automobile Production Volume
According to the research company "IHS Automotive", the global production volume of vehicles of less than six tons in gross weight is expected to continue to increase from 93.00 million units in 2016 to over 100 million in 2020 and to eventually reach 109 million in 2024.
Looking at the details of these estimates, vehicles of less than six tons manufactured in Europe, North America, Japan and other developed economic regions are expected to see only slight increases. However, stronger growth in China, ASEAN countries, South America, India and other developing economic regions is expected to allow their share of vehicles of less than six tons to rise from 51% in 2016 to 58% in 2024.
 
 
At the same time, production estimates by power train (Drive system) call for a slight decline in the share of gasoline and diesel engines due to the rise of environmental awareness, and an increase in the share of hybrid (HV) systems and plug-in hybrid (PHV) systems, using both gasoline engines and electric motors. However, the share of gasoline, diesel, ethanol/compressed natural gas, PHV&HV and EV drive train vehicles of the total 109 million units of vehicle less than six tons production expected in 2024 is expected to be 52%, 15%, 6%, 24% and 3%, respectively. Even though the share of PHV&HV tends to increase, gasoline and diesel engines still have the main global market share. Consequently, demand for piston rings and valve seat inserts is expected to continue to trend strongly based upon this estimate about engines.
 
 
There are three publicly traded companies in Japan that manufacture piston rings, including Nippon Piston Ring, and these companies are operating other businesses respectively. Riken Corporation (6462) boasts of a top share of the piston ring market of close to 50%, but TPR Co., Ltd. (6463) boasts of much larger earnings than the other two companies.
Nippon Piston Ring's stock price index or its operating profit margin is the lowest among these three companies. Improvement of both market awareness and profitability needs to be tackled.
 
<Business Description>
◎ Main Products
As reflected in the Company name, piston rings are one of the main products manufactured. In addition, valve seat inserts and various other automobile parts are manufactured and sold. In fiscal year 2016, automobile related parts accounted for 87.0% of total sales.
At the same time, metal injection molding products business and the dental implant products business were acquired in 2014. New product development is being promoted as a means of expanding its business in the non-automobile engine components realm.
 
 
 
 
 
Piston rings are fitted in grooves that run around the circumference of pistons and have spring-like characteristics to act as a seal for ideal combustion within the combustion chamber of the engine cylinders and control lubrication of the piston and cylinder walls by forming precise circles. Moreover, three piston rings are normally used, to form a seal to prevent leakage of oil, allow heat to escape and reduce both friction wear and baking.
Smooth movement of pistons will be impeded and fuel consumption will be negatively impacted should the tensional force of the piston ring placed on pistons be too high. Conversely, loss of power and increased oil consumption will result if the tensional force of the piston ring placed on pistons is too low.
Consequently, optimization of the tensional forces of piston rings is crucial in ensuring the optimum performance of internal combustion piston engines.

An oil film is formed between the cylinder wall and pistons to reduce friction wear and baking, which could be caused by the high-speed movement of pistons within a high-heat condition of cylinders. However, it's not thicker the better; piston oil rings need to be designed to ensure that an optimal thickness of oil film is formed.
Piston rings are required to provide wear resistance, material strength, heat resistance, heat conductivity, and oil retention capacity to ensure the optimal performance and durability of engines.
In recent years, with the rapid rise in awareness of environment issues, a swift response is vital to adjust to a system that certifies vehicles with low output levels of nitrous oxides and hydrocarbons, and regulations to enforce reductions in a carbon dioxide emission. Consequently, the need for high-performance piston rings that respond to these developments and the need for improvements in fuel consumption are on the rise.

With regards to the characteristics required to piston rings, development of piston rings with low friction construction, thinner width, new surface treatment processes, highly durable and low-cost materials is being conducted. At the same time, development and proposal of optimal design technologies using its tuning technic are also being promoted.

Nippon Piston Ring is one of only few companies that have the ability to stably manufacture and supply piston rings, which, as you may see, require extremely advanced technological capabilities, and are able to consistently develop revolutionary technologies.
 
 
<Valve Seat Inserts>
Valve seat inserts are parts which are press-fitted into the valve seating portion of cylinder heads. Valve seat inserts are a very important part made from sintered alloys that boast of high resistance to wear and deterioration under high heat conditions and ensure that a tight seal is formed for clean and efficient combustion. Nippon Piston Ring boasts of quality valve seat inserts that meet the needs of automobile manufacturers at a high level, using a wide range of material variation, leveraging its superior materials development capabilities. Consequently, the Company boasts of a top share of slightly less than 40% of valve seat inserts provided to Japanese automobile manufacturers and it is expanding its sales to overseas motor vehicle manufacturers.
 
 
<Camshafts>
Camshafts are a part designed to open and close the valves for each cylinder in piston engines. Nippon Piston Ring has the original technology for a special camshaft called assembled sintered camshafts, which are lightweight, highly resistant to contact pressure and capable of adopting a wide variety of designs. They are used by SUBARU in all of its self-manufactured engines, as well as used by truck manufacturers, which require highly durable products. Moreover, Honda Motor Co., Ltd. has selected Nippon Piston Ring camshafts to be used in its sports car.
 
 
◎ Customers
Nippon Piston Ring supplies piston rings and valve seat inserts to all Japanese automobile manufacturers.
The products supplied by the Company are extremely important in improving the performance of engines and require high levels of technical expertise. In recent years, the need to improve fuel consumption and to seek alternative fuels due to the growing importance of environmental issues has contributed to expanded sales to Audi/VW, Ford, General Motors and other non-Japanese automobile manufacturers. In fiscal year 2016, the company started supplying piston rings to Renault and Harley Davidson, and valve seat inserts to Shanghai Automotive Industry.
 
 
<Manufacturing and Sales Facilities>
<Japan>
Nippon Piston Ring maintains four manufacturing facilities and seven sales offices (Tokyo [head office: Saitama City], Nagoya, Osaka, Hiroshima, Fukuoka, Sendai, Sapporo) within Japan.
 
 
<Overseas>
Nippon Piston Ring maintains both manufacturing and sales bases for piston rings, valve seat inserts and other products in the United States, China, ASEAN countries, and India. The company has sales bases in Germany, Singapore and Malaysia , too.
 
 
 
 
<Characteristics and Strengths>
Nippon Piston Ring's highly advanced technologies and ability to consistently supply highly reliable functional automobile parts maintained throughout its history over 80 years of operations has allowed it to become the choice of both Japanese and overseas automobile manufacturers. In recent years, development of major products, which can contribute to reductions in exhaust gases, low output levels of carbon dioxides and the achievement of "over 50% thermal efficiency rates" in internal combustion engines, is being conducted.
 
 
With regards to product development, the ability to combine the said technologies and its simulation technologies applied to engines is one of Nippon Piston Ring's strengths.
In addition, automobile manufacturers, to whose business the Company's high levels of technological expertise are critical, are what the Company calls its "client assets," which are an important part of its corporate value.
 
 
ROE rose 2.8% between fiscal year 2015 and fiscal year 2016. Total asset turnover and leverage are nearly unchanged from the previous fiscal year as net profit margin increased. This is mainly because income taxes-deferred decreased temporarily. We are expecting that ROE will grow, as profitability will be improved.
 
 
Fiscal Year 2016 Earnings Overview
 
 
Sales unchanged due to the effect of exchange rates, but profit grew by double digits thanks to the effect of increased production and cost reduction. Both sales and profit exceed the initial estimate.
Sales were 52.1 billion yen, unchanged from the previous fiscal year, mainly because the yen appreciation caused a negative effect of minus 2.9 billion yen.
Domestic sales declined 0.9 billion yen year on year to 22.4 billion yen. Overseas sales grew 0.8 billion yen year on year to 29.7 billion yen. The ratio of overseas sales rose by 1.6% from 55.4% in the previous term to 57.0%. The sales to non-Japanese automobile manufacturers remained healthy, and the ratio of sales to non-Japanese manufacturers increased from 10.3% in the previous fiscal year to 11.6%.
Operating profit was 3.2 billion yen, up 27.0% year on year. Operating profit margin rose 1.3% year on year to 6.2%, due to the effect of increased production and cost reduction, and profit grew by double digits. Net profit was 2.4 billion yen, up 50.5% year on year, due to the temporary decrease in income taxes-deferred.
Both sales and profit exceeded respective initial estimates, thanks to the effect of increased production and cost reduction.
 
 
Despite the yen appreciation, the sales of piston rings, valve seat inserts, and assembled sintered camshafts marked a record high.
 
 
Current assets grew 1,640 million yen, due to the increase in cash and deposits and trade receivables. Non-current assets rose 1,747 million yen year on year, due to the growth of property, plant and equipment, investments and other assets. Accordingly, total assets increased 3,387 million yen year on year to 67,135 million yen.
As short-term interest-bearing debts dropped, current liabilities declined 1,210 million yen year on year. As long-term interest-bearing debts grew, non-current liabilities rose 3,073 million yen year on year to 13,633 million yen. Consequently, total liabilities augmented 1,862 million yen year on year to 36,252 million yen.
Total interest-bearing debts decreased 256 million yen year on year to 16,947 million yen.
Due to the yen appreciation, foreign currency translation adjustment dropped 826 million yen, but shareholders' equity rose 1,930 million yen due to the growth of retained earnings. Accordingly, net assets increased 1,526 million yen year on year to 30,883 million yen.
Consequently, equity ratio was 45.2%, unchanged from the end of the previous term.
Retained earnings rose from 9,862 million yen at the end of the previous term to 11,781 million yen, exceeding 10 billion yen for the first time and marking a record high.
 
 
 
The surplus of operating CF expanded due to the increase in trade payables, etc.
As the expenditure for acquiring property, plant and equipment augmented, investing CF dropped, but the surplus of free CF increased.
Because of these factors, the cash position improved.
 
(4) Topics
◎ R&I raised the rating for Nippon Piston Ring.
Rating and Investment Information, Inc. (R&I) updated its issuer rating, and announced it on May 26, 2017.
 
 
Reason for the change in rating
Nippon Piston Ring is approaching overseas clients with its surface treatment technologies and proposing skills, which could cope with the tightening of mileage and environmental regulations. Its productivity is improving, as it has reconstructed its domestic footholds, narrowed down products, and revamped its production lines, etc. As its earning capacity was boosted, it was expected that its financial base would keep improving, and so the rating has been raised.

The company's efforts so far have been highly evaluated, leading to the increase in rating.
The company plans to intensify its efforts to improve its corporate value.
 
 
Fiscal Year 2017 Earnings Estimates
 
 
Due to the effect of exchange rates, sales are forecasted to be on a plateau, but profit is projected to grow because of cost reduction, etc.
Sales are estimated to be 52.5 billion yen, up 0.7% year on year. It is assumed that exchange rates will be 108 yen/US dollar and 115 yen/euro.
Domestic sales are estimated to decline 5.4% year on year to 21.2 billion yen, while overseas sales are projected to increase 5.4% year on year to 31.3 billion yen. The ratio of overseas sales is estimated to grow 3% from 57% in the previous fiscal year to 60%.
Operating profit is forecasted to rise 1.9% year on year to 3.3 billion yen. The cost reduction for main products and the effect of increased production will cover the augmentation of costs for human resources, materials, and fuels, and price changes. It is estimated that ordinary profit will increase 6.9% year on year to 3.1 billion yen and net profit will drop 13.0% year on year to 2.1 billion yen.
The dividend amount is projected to be 70 yen/share, up 5 yen/share year on year. The payout ratio is estimated to be 27.4%.
 
 
Progress of the sixth mid-term business plan
 
① Outline of the sixth mid-term business plan
As Nippon Piston Ring commemorated the 80th anniversary of its establishment, it is "establishing the foundations for Nippon Piston Ring to prosper for 100 years," and engaging in the sixth mid-term business plan, whose final term is the fiscal year 2017, with the aim of promoting the sales of existing products and cultivating new markets.
 
 
 
As for the forecast for fiscal year 2017, which is the last term of the mid-term plan, sales and operating profit margin are estimated to be less than the respective target values, as the yen become stronger than the time of the setting of the mid-term business plan.
However, since the global production volume of automobiles is increasing and the global measures for coping with environmental issues have been tightened, it is expected that the needs for good mileage and emissions control will grow, and so there is plenty of room for promoting sales toward Japanese and overseas automobile manufacturers.
Revolutionary manufacturing pursuing rationalization is progressing, so it can be said that the company is reducing cost further to achieve goals.
 
 
The sales of piston rings and valve seat inserts are estimated to grow considerably, marking a record high. Especially, the ratio of sales to non-Japanese automobile manufacturers is forecasted to rise to 12.5%, exceeding the target ratio of 11.9%.
 
 
The amount of equipment investment for fiscal year 2016 was lower than the initial estimate of 6.9 billion yen, due to the change in production schedules by the automobile manufacturers, but the company carried out necessary investment such as the revolutionary production line for piston rings, etc.
The amount of equipment investment for fiscal year 2017 is projected to be 6.7 billion yen. The amount is considerable, but this is indispensable for securing the future position of the company.

In fiscal year 2017, the production capacity of piston rings inside Japan is equal to that outside Japan, while the production capacity of valve seat inserts outside Japan accounts for 70%.
 
 
 
 
The company's technological roadmap and business strategies
 
① Technological roadmap
Their research and development activities are expanding for motorization and improvement of thermal efficiency of engines in order to tackle environmental and energy issues.
The industry leaders of mass-produced gasoline engines have already reached a thermal efficiency of 41% and research institutions, automobile manufacturers and parts manufacturers are pushing forward with their research and development to realize a thermal efficiency of over 50% by 2020.

While understanding these new trends and technological advancements, they are working hard on their strategic and effective development activities so that they can maintain their raisons d'étre as the "NPR of high technologies" in the future. Therefore they have laid down the roadmap to ensure that their technologies - the source of their value positioning - are synchronized with the customers' engine developments and are ready to be supplied when required.

In this roadmap, considering the trends of engine technologies, they are developing various technologies for "fuel consumption/emission control", "comfort/reliability" and "price competitiveness" with the aim of completing them by 2030.
This roadmap was laid down with the advanced technologies for engines employed mainly in developed countries. In developing countries however, the same technologies aimed for developed countries may not be suitable due to a multitude of differences such as fuels, legal regulations, value criteria, and operating environments.
To counter this, they will further collaborate with their customers in the research and development of advanced technologies as well as focusing their investments more into the development activities within various regions and markets that are rooted in the future production/consumption markets mainly of developing countries.
Additionally, they are committed to offering "technologies and products" to adapt to the future legal regulations concerning CO2 and emissions, etc. and to propose the sustainable, recycling-oriented society of the future.
 
② Strategies for existing businesses
<Sales promotion to non-Japanese automobile manufacturers>
They supply their products to all Japanese automobile manufacturers and they are working on sales promotion to non-Japanese automobile manufacturers. There remains significant room for expansion.
The piston rings for non-Japanese automobile manufacturers can be at times developed and supplied through Tier-one suppliers (piston manufacturers). To respond to the requests from non-Japanese automobile manufacturers appropriately, one-on-one type contracts are too limiting. Therefore the company responds to their requests flexibly by constructing a collaborative relationship with multiple piston manufacturers on a project-by-project basis without being tied to specific contracts.
 
<Piston rings>
Automobile manufacturers are pressed to improve their gasoline engines for "thermal efficiency enhancement" and "weight reduction", and adapt their diesel engines for the "tightened fuel consumption regulations" and "tightened emission regulations". So the needs for piston rings are growing.
There are many issues such as reducing friction and improving combustion for thermal efficiency enhancement, reducing the distance between cylinders and swapping materials for weight reduction, reducing friction loss for tightened fuel consumption regulations, and oil consumption reduction for tightened emission regulations; however, the company is responding to these with combinations of various original technologies and this is paying off as a growing number of both Japanese and non-Japanese automobile manufacturers are choosing their products.
 
<Valve seat inserts>
In response to the tightened emission regulations, low emission, low fuel consumption and high output engines are being developed. The company has responded to this trend by increasing the outer diameters of the valve seat inserts, thinning them, etc. and these measures won wide acclaim leading to increased orders.
Due to the environmental issues of CO2 arising from gasoline combustion, in recent years they are witnessing an increase in the number of FFVs (flexible fuel vehicles) that are able to run on alternative fuels such as bioethanol fuel, CNG (natural gas) and LPG (liquefied petroleum gas), as well as blended fuel of gasoline and alternative fuels.
However, using alternative fuels causes an increase in the internal temperature of cylinders and reduced fuel lubricity compared to gasoline, therefore the increased abrasion.
To remedy this problem, they have developed valve seat inserts that do not suffer from increased abrasion even with alternative fuels and these are being employed increasingly.
 
<Cylinder liner for diesel engines>
Fuel consumption regulations of commercial vehicles are gradually being tightened in both developed and developing countries, such as China (2014 onwards), Japan (2015), USA (2017), and Europe (2018).
The company developed the dimple liners (cylinder liners with internal dimples) and asked for the customer evaluations on them. The result was that for engines of all sizes, a significant fuel efficiency improvement was observed. This result encouraged Japanese manufacturers to start adopting them.
 
③ Strategies for new product businesses
They are developing businesses of the new, non-automobile engine products utilizing their unique technologies through numerous hypothesis testing, based on underlying technologies consisting of their own technologies backed by M&A and newly developed technologies.
Currently, they are looking into the areas including metal injection molding, dental implants and components of medical devices.
 
<Metal injection molding products business>
In May 2014, they acquired the metal injection molding products business from Sumitomo Metal Mining Co., Ltd. and commenced production and sales.
The company was mass producing ferrous materials for automobile engines, but this acquisition helped them supplement their product lineup as well as expanding into non-automobile engine parts areas and increasing new customers.
Tangible products are also being developed steadily. The markets for sensor components that have to be minute and having complicated shapes, and ball screws for electric power steering are expected to grow in the future and these are the products the merits of metal molds are harnessed fully. Therefore they are going to invest in these fields even more strongly.
 
<Dental implant business>
In October 2014, they acquired the dental implant business from ISHIFUKU Metal Industry Co., Ltd.
This IAT* implant system boasts high biocompatibility due to its surface quality derived from electric discharge machining, and in November 2014, the authorization under Law on Securing Quality, Efficacy and Safety of Products including Pharmaceuticals and Medical Devices (formerly Pharmaceutical Affairs Law) was obtained and shipping commenced.
To fulfill the high quality control required for dental implants that are classified as Specially Controlled Medical Devices (medical devices that are classified into various categories under Pharmaceutical Affairs Law as needing appropriate management due to their potentially grave implications on life and health in the case of side effects and apparatus malfunctions), the company obtained the certificate ISO13485 and established the Medical Device Center (MDC) in their Tochigi Plant which has already commenced operations.

To date, they have developed products such as the drills for guide operations, aesthetical abutments (bridge abutments to fix the upper structure (dental crown portion) to the implant body (dental root portion) by connecting the upper structure to the implant) and free-design abutments, and they went on sale in February 2017. At the scientific congress of the Kanto-Koshin'etsu branch of the Japanese Society of Oral Implantology in the same month, they gave a presentation of the new products and they are planning to hold about ten seminars before the end of the current financial year.

*IAT: Intelligent Artificial Teeth
 
<Components of medical devices>
Utilizing their know-hows such as the metal material technologies and precision machining accumulated through their main business of automobile engine components manufacturing, they are expanding into the production of components for medical devices in addition to dental implants.

"Ti-Ta alloy," which they are currently developing, is a highly biocompatible component for medical devices and it is also nonmagnetic making it suitable for MRI (magnetic resonance imaging), as it does not interfere with the image quality during the tests. Additionally, it does not damage the inside of blood vessels and is characterized by a mild original-form restoring force; therefore they are considering it for uses as lead wires for pacemakers, electrodes, embolus coils, stents, etc. that remain inside the body long-term.
 
 
Interview with President Yamamoto
 
We asked the President Yamamoto to review the sixth mid-term business plan (FY 2015 - FY 2017) and about the future plans.
 
Q: "Now two of the three years of the sixth mid-term business plan elapsed, how do you think you have done yourself?"
A: "We have certainly felt the influence of a strong yen, but the actual situation is not bad at all and I am feeling sufficiently positive."
The sales in fiscal year 2016 were affected strongly by 2.9 billion yen caused by the strong yen and remained almost the same as the previous year at 52.1 billion yen.
However, the overseas sales expanded steadily in both amount and quantity bases such as the strong growth of sales to non-Japanese automobile manufacturers, and the sales was 55 billion yen after deducting the influence of the exchange rates. We are well-placed to make the final fiscal-year target of the sixth mid-term business plan.
We regard operating profit margin as their target index and it is also in the realm of higher end of 6% if the influence of the exchange rates is deducted, so the final fiscal-year target of 7%+ is easily within reach, and I think their continuous cost reduction effort is paying off.
Although the capital investments were lower than planned due to various causes such as changes in production schedules by the automobiles manufacturers, the crucial investments into elements such as the revolutionary production line for piston rings were made without fail. This financial year, we will continue to make capital investments above depreciation as planned, as these are indispensable steps to establish our positioning.
I would say that fiscal year 2016 was a year in which I felt a substantial prospect to meet the targets of the sixth mid-term business plan.
 
Q: "Tell us about the progress of each business. Firstly how is the existing business going?"
A: "The revolutionary production line for our main products is finally in operation."
"The revolutionary production line" of piston rings, which we have been working on for a while to realize standardized designs, lowered costs by shortening the lead-times and reducing man-hours, and flexible manpower production line and automatization is finally in operation.
At our company, we have been working hard to realize the concepts of "concurrent engineering" - shortening the development periods and reducing the costs by running multiple product development processes simultaneously - and "smart factories" - achieving a high productivity and producing high-quality products steadily. These efforts did not go unnoticed, and to start with the piston rings produced through the "revolutionary production line" were employed by one of the main Japanese automobile manufacturers. Mass-production was begun at our Ichinoseki factory. Such production lines are planned to be expanded overseas. Firstly, we are planning to introduce it in our US factory in 2018.
Our "revolutionary production line" at our domestic factories for valve seat inserts is also close to completion. A streamlined production line for assembled sintered camshafts is also under construction. At the moment, we have only a few delivery destinations for assembled sintered camshafts but we fully expect the products that come out of the "revolutionary production line" to boost demands from other automobile manufacturers in the future.
We work towards constructing the production lines with the possible products specifications of each product in 5 and 10 years' time in the future in mind.
Automobile manufactures, which have to respond quickly to the changes in the order receiving environments and the environmental problems, always demand high-quality products quickly delivered. Manufacturing capability that can adapt to such customer needs and respond to the changes rapidly, and development activities that can come up with new specifications constantly are essential for the parts manufacturers and our competitive advantage is being ever sharpened by improving on these aspects.
Additionally, at the production sites, we are building the optimized production system.
Optimizing the production at each factory goes without saying but we are going ahead with the overall optimization by coordinating between each factory.
 
Q: "How about the new businesses?"
A: "We need time, but each business is expanding steadily."
For our future corporate configuration, I would like to raise the ratio of sales of non-automobile engine components to 30%. Currently, these only comprise a few per cents, but they are growing constantly.
Firstly, the metal injection molding business: with its good reputation for miniaturization and the complicated shapes being easily attainable at a low cost, the demand for this business is definitely increasing.
Its usages are expanding from sensor components to electronic components, keys, hobby goods, parts for industrial machines and medical devices. Pioneering the new needs is also well underway and we are poised to make the tangible suggestions.
Secondly the dental implants business: in consulting numerous dentists, we started to realize that there were needs for surgical instruments in addition to the dental implants themselves. In the future, we expect the development of surgical instruments utilizing the metal molding will be part of our business.
"Ti-Ta alloy" which we are currently developing is a highly biocompatible component for medical devices and it is also nonmagnetic making it suitable for MRI (magnetic resonance imaging) as it does not interfere with the image quality during the tests, therefore we are planning to employ it as lead wires for pacemakers, electrodes, embolus coils, stents, etc. that remain inside the body long-term.

With our unique technologies as the basis, we believe we can create synergies between the new businesses and we would hope to keep creating original and competitive products.
 
Q: "Can you tell us about cultivating human resources, which you place as one of the most important strategies?"
A: "We are actively increasing the platforms for our employees to experience working overseas."
We have been running projects such as the in-house operation of "Manufacturing School" - to train the select employees whom we think will become the future key persons in the company various practical skills over a half year period - as well as the advising activities by the cross-department project teams consisting of members of different ages, job categories, etc.
Also from the point of view to create the platforms for our young employees to experience working overseas, we dispatched them to establish various overseas bases in India, etc.
For a lot of them, this was their first assignment overseas and it looks like there were lots of confusions, not to mention the difficulties with the languages, but having asked their reactions, I have received overwhelmingly positive responses.
I believe that having these experiences help employees to look again at their current work and also make them think about how to build their career at our company.
From the motivational points of view, we would like to continue sending the willing applicants, and not limiting to the factories, to overseas bases to cultivate global human resources.
 
Q: "Finally, do you have any messages to stockholders and investors?"
A: "We will continue developing the overseas markets and we would like you to keep supporting our company in our quest to grow continuously from the medium- and long-term point of view."
The development of overseas markets which we are keenly pursuing is moving solidly. Our overseas sales ratio has risen about 2% to 57% in fiscal year 2016, not least because of the increased sales to non-Japanese automobile manufacturers, and we are not far off achieving the final fiscal-year target of 59% set in the sixth mid-term business plan already.
Therefore we have already felt a very positive outcome on the real base after deducting the influences from the exchange rates, but we will try even harder to reach the nominal base of "Sales of ¥55.0 billion or more, operating profit margin of 7% or more".

We believe it is of utmost importance that return to shareholders is performed in a stable manner while considering the balance with investments; therefore we are planning a 5-yen dividend increase at 70 yen/share in fiscal year 2017 as well.
With the completion of the "revolutionary production line", we believe a further cost reduction is possible and the relationship of trust with our customers - automobile manufacturers both inside and outside Japan - will be strengthened even further.
We will continue developing the overseas markets and we would like you to keep supporting our company in our quest to grow sustainably from the medium- and long-term point of view.
 
 
Conclusions
 
The sales for fiscal year 2016 were the second highest in corporate history, after those for the previous year, despite the effect of exchange rates. Since operating profit margin rose significantly, it can be said that the fiscal year 2016 was meaningful, as recognized by the company. Its share price has been recently stagnant, but in the one-year span, it exceeds TOPIX and the share prices of two competitors.
However, shareholders and investors would be unsatisfied with PER being lower than 10 and PBR being lower than 1. We hope that the company will advance further to improve share price valuation.
 
 
 
 
<Reference: Corporate Governance>
 
 
◎ Corporate Governance Report
Last modified: June 29, 2017.
 
The company appreciates the need for foreign investors to understand the business models better and continues to plan to proceed with more active publishing in English.
 
 
 
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.
Copyright(C) 2017, All Rights Reserved by Investment Bridge Co., Ltd.
 
 
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