Comsys Holdings Corporation (Comsys) is a major telecommunications construction company, with over fifty years of history. The holding company structure was established in September 2003, when shares of Nippon Comsys Corporation, Sanwa Elec Co., Ltd., and Tosys Corporation were transferred to Comsys Holdings, which became the 100% parent company. In April 2010 it acquired Tsuken Corporation. In October 2018, Comsys acquired NDS Co., Ltd. (TSE1: 1956), SYSKEN Corporation (TSE2: 1933), and Hokuriku Denwa Kouji (Telephone Construction) Co., Ltd. (TSE2: 1989) making them wholly owned consolidated subsidiaries.

Core segments are related to telecommunications—namely NTT Engineering and NCC Engineering. The company also has an IT Solutions and a Social Systems and Other segment. In FY03/21, NTT Engineering accounted for the largest share of the company’s sales, at 43.0% (versus 44.7% in FY03/20), followed by NCC Engineering at 8.4% (versus 7.8% in FY03/20). While the proportion of consolidated sales accounted for by these two telecom-related businesses is on the decline, together they still accounted for 51.4% of group sales in FY03/21 (versus 52.4% in FY03/20). (See the Business section for details.)

Earnings performance

In FY03/22, orders totaled JPY557.1bn (-5.0% YoY) and sales were JPY589.0bn (+4.6% YoY). Orders carried over amounted to JPY204.2bn (-13.5% YoY). Operating profit was JPY43.0bn (+3.3% YoY), recurring profit was JPY44.0bn (+2.6% YoY), and net income attributable to owners of the parent was JPY29.2bn (-0.5% YoY).

Orders were down 11.2% YoY in the NTT Engineering segment, up 10.5% YoY in the NCC Engineering segment, down 2.0% YoY in the IT Solutions segment, and down 2.0% YoY in the Social Systems and Other segment. Sales were up 3.2% YoY in the NTT Engineering segment, up 12.3% YoY in the NCC Engineering segment, down 4.0% YoY in the IT Solutions segment, and up 9.8% YoY in the Social Systems and Other segment. The company focused on improving productivity by optimizing use of group resources and rigorous construction work management, increasing orders by strengthening groupwide sales collaboration using virtual companies, expanding the scope of its business through M&A, and improving productivity by means of area optimization.

FY03/23 company forecast: Comsys forecasts orders of JPY590.0bn (+5.9% YoY), sales of JPY590.0bn (+0.2% YoY), operating profit of JPY40.0bn (-6.9% YoY), recurring profit of JPY40.5bn (-8.0% YoY), and net income attributable to owners of the parent of JPY27.0bn (-7.6% YoY). The company plans to pay an annual dividend of JPY100 per share (up from JPY95 in FY03/22); this represents a payout ratio of 45.3% (versus 40.3% in FY03/22).

Comsys expects a YoY decline in NTT Engineering orders, while orders in the other businesses are expected to be higher than in FY03/22, with overall orders projected to increase by 5.9% YoY. The company expects 0.2% YoY sales growth overall, with sales declining for NTT Engineering orders, but increasing in other businesses.

The company is making progress with its new management plan, COMSYS VISION NEXT STAGE 2023, ending in FY03/24. Under the new plan, the company targets FY03/24 consolidated sales of at least JPY600.0bn (versus JPY563.3bn in FY03/21) and operating profit of at least JPY50.0bn (versus JPY41.6bn in FY03/21). It guides for an operating profit margin of at least 8.0% (versus 7.4% in FY03/21) and a total return ratio of 70% (versus 60.2% in FY03/21). With its move to an internal company system, Comsys looks to promote work-style reforms, move forward with new renewable energy businesses, pursue more mergers and acquisitions, and actively reallocate employees within the group.

Strengths and weaknesses

In Shared Research’s view, Comsys’ strengths lie in the stability of the core business that is positioned to benefit from the development of advanced telecommunications, a healthy financial position and stable cash flow, and a favorable cost management system. Weaknesses include a high dependence on the capex of telecoms carriers, limited top line growth potential in the core business, and a vulnerability to demand for price cuts. (See the Strengths and weaknesses section.)

Key financial data

Income statement		FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21	FY03/22	FY03/23
(JPYmn)		Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Est.
Sales		316,092	331,341	328,631	320,654	334,163	380,024	481,783	560,882	563,252	589,028	590,000
	YoY	6.8%	4.8%	-0.8%	-2.4%	4.2%	13.7%	26.8%	16.4%	0.4%	4.6%	0.2%
Gross profit		41,226	45,770	47,938	43,389	45,723	53,433	65,253	73,612	75,989	78,427	76,000
	YoY	32.5%	11.0%	4.7%	-9.5%	5.4%	16.9%	22.1%	12.8%	3.2%	3.2%	-3.1%
	Gross profit margin	13.0%	13.8%	14.6%	13.5%	13.7%	14.1%	13.5%	13.1%	13.5%	13.3%	12.9%
Operating profit		22,547	27,570	27,674	23,849	25,036	30,347	35,267	38,953	41,572	42,963	40,000
	YoY	79.1%	22.3%	0.4%	-13.8%	5.0%	21.2%	16.2%	10.5%	6.7%	3.3%	-6.9%
	Operating profit margin	7.1%	8.3%	8.4%	7.4%	7.5%	8.0%	7.3%	6.9%	7.4%	7.3%	6.8%
Recurring profit		22,914	28,078	28,121	24,223	25,341	30,706	36,071	40,064	42,941	44,036	40,500
	YoY	76.7%	22.5%	0.2%	-13.9%	4.6%	21.2%	17.5%	11.1%	7.2%	2.6%	-8.0%
	Recurring profit margin	7.2%	8.5%	8.6%	7.6%	7.6%	8.1%	7.5%	7.1%	7.6%	7.5%	6.9%
Net income attributable to owners of the parent		13,284	16,389	16,767	15,420	14,485	20,390	28,018	25,994	29,369	29,208	27,000
	YoY	85.2%	23.4%	2.3%	-8.0%	-6.1%	40.8%	37.4%	-7.2%	13.0%	-0.5%	-7.6%
	Net margin	4.2%	4.9%	5.1%	4.8%	4.3%	5.4%	5.8%	4.6%	5.2%	5.0%	4.6%
Per-share data
Shares issued (year-end; '000)		145,977.9	145,977.9	145,977.9	141,000.0	141,000.0	141,000.0	141,000.0	141,000.0	141,000.0	141,000.0
EPS		106.8	136.1	142.7	136.8	130.0	178.6	230.1	203.0	232.7	235.5	220.5
EPS (fully diluted)		106.4	135.3	141.9	136.2	129.5	177.9	229.2	202.5	232.2	235.2
Dividend per share		20.0	25.0	30.0	35.0	40.0	50.0	60.0	75.0	85.0	95.0	100.0
Book value per share		1,401.1	1,514.7	1,682.7	1,764.1	1,848.3	2,008.4	2,318.4	2,424.8	2,619.6	2,761.2
Balance sheet (JPYmn)
	Cash and cash equivalents	23,710	31,036	33,496	28,930	20,961	29,144	28,618	35,992	33,259	35,107
Total current assets		149,593	156,495	151,878	155,551	167,166	182,246	247,013	257,080	278,860	322,216
Tangible fixed assets		67,444	70,353	72,295	72,878	86,968	102,748	135,744	138,612	140,694	145,382
Investments and other assets		19,239	20,117	32,201	30,645	25,563	29,983	47,561	46,507	52,387	48,615
Intangible assets		4,324	3,594	7,643	6,990	4,669	10,063	9,606	7,842	7,477	7,848
Total assets		240,602	250,561	264,019	266,066	284,367	325,042	439,926	450,043	479,419	524,062
	Accounts payable	44,456	45,039	44,675	49,191	55,577	59,749	77,685	80,289	87,812	87,514
	Short-term debt	1,660	1,270	100	114	113	106	8,543	7,038	5,141	31,845
Total current liabilities		59,238	63,720	60,791	61,225	71,289	82,836	116,125	118,042	128,229	158,764
	Long-term debt	-	-	-	-	-	5	3,212	1,107	464	486
Total fixed liabilities		7,951	7,426	9,189	8,296	10,134	10,441	22,340	21,307	20,382	21,809
Total liabilities		67,190	71,147	69,980	69,522	81,423	93,274	138,466	139,349	148,611	180,573
Total net assets		173,411	179,414	194,038	196,543	202,943	231,767	301,459	310,694	330,807	343,489
Total interest-bearing debt		1,660	1,270	100	114	113	111	11,755	8,145	5,605	32,331
Cash flow statement(JPYmn)
Cash flows from operating activities		3,963	24,185	26,575	13,089	12,545	28,831	8,964	37,496	25,469	5,244
Cash flows from investing activities		-7,554	-6,228	-11,882	-7,303	-9,940	-13,896	-11,550	-9,919	-8,861	-11,109
Cash flows from financing activities		-6,489	-10,511	-12,199	-11,307	-12,178	-12,499	-15,382	-19,819	-20,258	6,171
Financial ratios
ROA (RP-based)		9.8%	11.4%	10.9%	9.1%	9.2%	10.1%	9.4%	9.0%	9.2%	8.8%
ROE		7.9%	9.4%	9.0%	7.9%	7.3%	9.4%	10.6%	8.6%	9.2%	8.8%
Equity ratio		71.6%	71.1%	73.0%	73.4%	70.9%	70.8%	67.8%	68.3%	68.3%	64.5%

Source: Shared Research based on company data
Figures may differ from company materials due to differences in rounding methods.

Trends and outlook

Quarterly performance

Quarterly performance		FY03/21				FY03/22
(JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Sales		104,703	129,559	136,555	192,435	120,190	133,556	136,127	199,155
	YoY	-6.4%	-1.2%	3.7%	3.4%	14.8%	3.1%	-0.3%	3.5%
Gross profit		12,084	16,826	18,572	28,507	17,178	18,081	18,491	24,677
	YoY	-11.8%	0.8%	10.2%	8.1%	42.2%	7.5%	-0.4%	-13.4%
	Gross profit margin	11.5%	13.0%	13.6%	14.8%	14.3%	13.5%	13.6%	12.4%
SG&A expenses		8,446	8,062	8,349	9,560	8,836	8,344	8,694	9,589
	YoY	-3.2%	-7.5%	-3.6%	11.6%	4.6%	3.5%	4.1%	0.3%
	SG&A ratio	8.1%	6.2%	6.1%	5.0%	7.4%	6.2%	6.4%	4.8%
Operating profit		3,637	8,765	10,222	18,948	8,342	9,737	9,796	15,088
	YoY	-26.9%	9.8%	24.7%	6.5%	129.4%	11.1%	-4.2%	-20.4%
	Operating profit margin	3.5%	6.8%	7.5%	9.8%	6.9%	7.3%	7.2%	7.6%
Recurring profit		4,182	8,752	10,898	19,109	9,003	9,708	10,155	15,170
	YoY	-24.1%	7.8%	26.9%	7.1%	115.3%	10.9%	-6.8%	-20.6%
	Recurring profit margin	4.0%	6.8%	8.0%	9.9%	7.5%	7.3%	7.5%	7.6%
Net income attributable to owners of the parent		2,891	6,043	7,852	12,583	5,926	6,449	6,671	10,162
	YoY	-17.6%	13.0%	40.1%	9.1%	105.0%	6.7%	-15.0%	-19.2%
	Net margin	2.8%	4.7%	5.8%	6.5%	4.9%	4.8%	4.9%	5.1%
Cumulative		Q1	Q1-Q2	Q1-Q3	Q1-Q4	Q1	Q1-Q2	Q1-Q3	Q1-Q4	% of Est.	FY Est.
Sales		104,703	234,262	370,817	563,252	120,190	253,746	389,873	589,028	101.6%	580,000
	YoY	-6.4%	-3.6%	-1.1%	0.4%	14.8%	8.3%	5.1%	4.6%		3.0%
Gross profit		12,084	28,910	47,482	75,989	17,178	35,259	53,750	78,427	100.5%	78,000
	YoY	-11.8%	-4.9%	0.5%	3.2%	42.2%	22.0%	13.2%	3.2%		2.6%
	Gross profit margin	11.5%	12.3%	12.8%	13.5%	14.3%	13.9%	13.8%	13.3%		13.4%
SG&A expenses		8,446	16,508	24,857	34,417	8,836	17,180	25,874	35,463	101.3%	35,000
	YoY	-3.2%	-5.3%	-4.7%	-0.7%	4.6%	4.1%	4.1%	3.0%		1.7%
	SG&A ratio	8.1%	7.0%	6.7%	6.1%	7.4%	6.8%	6.6%	6.0%		6.0%
Operating profit		3,637	12,402	22,624	41,572	8,342	18,079	27,875	42,963	99.9%	43,000
	YoY	-26.9%	-4.3%	6.9%	6.7%	129.4%	45.8%	23.2%	3.3%		3.4%
	Operating profit margin	3.5%	5.3%	6.1%	7.4%	6.9%	7.1%	7.1%	7.3%		7.4%
Recurring profit		4,182	12,934	23,832	42,941	9,003	18,711	28,866	44,036	101.2%	43,500
	YoY	-24.1%	-5.1%	7.3%	7.2%	115.3%	44.7%	21.1%	2.6%		1.3%
	Recurring profit margin	4.0%	5.5%	6.4%	7.6%	7.5%	7.4%	7.4%	7.5%		7.5%
Net income attributable to owners of the parent		2,891	8,934	16,786	29,369	5,926	12,375	19,046	29,208	100.7%	29,000
	YoY	-17.6%	0.9%	16.1%	13.0%	105.0%	38.5%	13.5%	-0.5%		-1.3%
	Net margin	2.8%	3.8%	4.5%	5.2%	4.9%	4.9%	4.9%	5.0%		5.0%

Source: Shared Research based on company data
Figures may differ from company materials due to differences in rounding methods.
Company forecast is based on the most recent figures.

Quarterly sales and operating profit

Source: Shared Research based on company data

On seasonality: A high proportion of projects are completed and delivered in Q4 so sales tend to be higher compared to Q1–Q3.

Full-year FY03/22 results (out May 12, 2022)

Overview

In full-year FY03/22, orders totaled JPY557.1bn (-5.0% YoY) and sales were JPY589.0bn (+4.6% YoY). Orders carried over amounted to JPY204.2bn (-13.5% YoY). Operating profit was JPY43.0bn (+3.3% YoY), recurring profit was JPY44.0bn (+2.6% YoY), and net income attributable to owners of the parent was JPY29.2bn (-0.5% YoY).

Progress versus forecast: Progress rates versus full-year FY03/22 targets were 97.7% for orders, 101.6% for sales, 99.9% for operating profit, 101.2% for recurring profit, and 100.7% for net income attributable to owners of the parent.

Orders received down 5.0% YoY: Orders were down 11.2% YoY in the NTT Engineering segment, up 10.5% YoY in the NCC Engineering segment, down 2.0% YoY in the IT Solutions segment, and down 2.0% YoY in the Social Systems and Other segment.

Sales increased by 4.6% YoY: Sales were up 3.2% YoY in the NTT Engineering segment, up 12.3% YoY in the NCC Engineering segment, down 4.0% YoY in the IT Solutions segment, and up 9.8% YoY in the Social Systems and Other segment.

Operating profit up 3.3% YoY: GPM fell 0.2pp YoY to 13.3%, and the SG&A to sales ratio fell 0.1pp YoY to 6.0%. As a result, operating profit margin was down 0.1pp YoY to 7.3%.

Business environment and company initiatives

In terms of the business environment, in the information and communications infrastructure industry, the accelerating digital shift of society has seen an urgent need for high-speed, high-capacity digital services. This has led to progress with the installation of 5G wireless base stations for digital communications infrastructure and the development of optical fiber networks, including the Project on Promoting Advanced Radio Environment Improvements. In the Social Systems business, investments are underway into the development of social infrastructure to achieve carbon neutrality (with initiatives including the expansion of renewable energy sources such as solar power generation to make them into a primary power supply and environmental policies), reduce the risk of increasingly severe, large-scale, and frequent natural disasters, strengthen national resilience, and respond to the accelerating aging of infrastructure. In the IT solution field, digital transformation (DX) is progressing in medical care, education, administration, finance, and other areas, with increased ICT-related investment expected to enable digitization and data sharing, such as the construction of data platforms, AI, IoT, and Cloud services.

In this business environment, the company will work to improve productivity in the communications infrastructure field through optimizing the use of group resources and focusing on construction management to respond to accelerating demand for nationwide projects for the construction of digital communications infrastructure. In the growing fields of IT solutions and social systems, the company will work to increase orders received through enhancing sales collaboration within the group by utilizing virtual companies and expand the scope of its business through M&A (Fujiki-tekkou Corp. became a subsidiary in November 2021), and improve productivity by means of area optimization. The company will continue to strengthen its management base by building a structure that optimizes its ability to shift resources in response to the business environment, implementing structural reforms using DX, and accelerating reforms to work styles as working practices change.

Sales and orders by segment

Orders and sales by business segment are as follows.

NTT Engineering

Orders totaled JPY229.2bn (-11.2% YoY); 102.8% of the full-year target

Sales were JPY249.9bn (+3.2% YoY); 101.6% of the full-year target

NCC Engineering

Orders totaled JPY55.7bn (+10.5% YoY); 105.1% of the full-year target

Sales were JPY53.0bn (+12.3% YoY); 106.0% of the full-year target

IT Solutions

Orders totaled JPY103.2bn (-2.0% YoY); 96.4% of the full-year target

Sales were JPY101.3bn (-4.0% YoY); 94.7% of the full-year target

Social Systems

Orders totaled JPY168.8bn (-2.0% YoY); 90.3% of the full-year target)

Sales were JPY184.7bn (+9.8% YoY); 104.4% of the full-year target

Sales and orders by segment, orders carried over

Orders and sales			FY03/21				FY03/22				FY03/22
(JPYbn)			Q1	Q1-Q2	Q1-Q3	Q1-Q4	Q1	Q1-Q2	Q1-Q3	Q1-Q4	% of Est.	FY Est.
Orders
	NTT Engineering		54.6	120.1	188.2	258.2	63.0	121.1	176.4	229.2	102.8%	223.0
		YoY	-13.9%	-10.6%	-3.6%	1.1%	15.4%	0.8%	-6.3%	-11.2%		-13.6%
		% of total	42.0%	43.0%	43.8%	44.0%	45.8%	44.5%	43.7%	41.1%		39.1%
	NCC Engineering		10.6	22.9	36.2	50.4	12.1	24.8	39.2	55.7	105.1%	53.0
		YoY	17.8%	25.8%	14.6%	16.1%	14.2%	8.3%	8.3%	10.5%		5.2%
		% of total	8.2%	8.2%	8.4%	8.6%	8.8%	9.1%	9.7%	10.0%		9.3%
	IT Solutions		28.6	56.6	84.0	105.3	23.4	50.1	73.3	103.2	96.4%	107.0
		YoY	1.4%	5.6%	9.8%	4.5%	-18.2%	-11.5%	-12.7%	-2.0%		1.6%
		% of total	22.0%	20.3%	19.6%	18.0%	17.0%	18.4%	18.2%	18.5%		18.8%
	Social Systems		35.9	79.8	121.0	172.3	39.0	76.3	114.4	168.8	90.3%	187.0
		YoY	-7.5%	-29.1%	-19.0%	-9.7%	8.6%	-4.4%	-5.5%	-2.0%		8.5%
		% of total	27.6%	28.6%	28.2%	29.4%	28.3%	28.0%	28.4%	30.3%		32.8%
	Total		129.9	279.5	429.5	586.5	137.6	272.4	403.4	557.0	97.7%	570.0
		YoY	-6.9%	-12.3%	-5.2%	-0.7%	5.9%	-2.5%	-6.1%	-5.0%		-2.8%
Sales
	NTT Engineering		47.1	103.1	162.3	242.1	55.0	110.6	167.9	249.9	101.6%	246.0
		YoY	-4.3%	-2.5%	-0.9%	-3.3%	16.8%	7.3%	3.5%	3.2%		1.6%
		% of total	45.0%	44.0%	43.8%	43.0%	45.8%	43.6%	43.1%	42.4%		42.4%
	NCC Engineering		7.9	18.8	30.3	47.2	10.3	22.0	35.4	53.0	106.0%	50.0
		YoY	-14.1%	-2.6%	1.7%	8.0%	30.4%	17.0%	16.8%	12.3%		5.9%
		% of total	7.5%	8.0%	8.2%	8.4%	8.6%	8.7%	9.1%	9.0%		8.6%
	IT Solutions		17.0	39.4	63.0	105.5	17.1	40.1	62.6	101.3	94.7%	107.0
		YoY	-14.1%	-8.8%	-5.7%	7.5%	0.6%	1.8%	-0.6%	-4.0%		1.4%
		% of total	16.2%	16.8%	17.0%	18.7%	14.2%	15.8%	16.1%	17.2%		18.4%
	Social Systems		32.5	72.8	115.0	168.2	37.7	80.8	123.8	184.7	104.4%	177.0
		YoY	-3.0%	-2.4%	0.7%	-0.2%	16.0%	11.0%	7.7%	9.8%		5.2%
		% of total	31.0%	31.1%	31.0%	29.9%	31.4%	31.8%	31.8%	31.4%		30.5%
	Total		104.7	234.2	370.8	563.2	120.2	253.7	389.8	589.0	101.6%	580.0
		YoY	-6.4%	-3.6%	-1.1%	0.4%	14.8%	8.3%	5.1%	4.6%		3.0%
Balance carried forward
	NTT Engineering		82.0	91.4	100.4	90.6	98.5	101.0	99.1	69.8
		YoY	-1.9%	-6.7%	-0.6%	21.6%	20.1%	10.5%	-1.3%	-23.0%
		% of total	34.4%	35.4%	37.0%	38.4%	38.8%	39.6%	39.7%	34.2%
	NCC Engineering		13.7	15.6	16.9	14.2	16.0	17.1	18.0	17.0
		YoY	17.1%	44.4%	23.4%	23.5%	16.8%	9.6%	6.5%	19.7%
		% of total	5.8%	6.0%	6.2%	6.0%	6.3%	6.7%	7.2%	8.3%
	IT Solutions		35.2	40.9	44.6	23.4	29.8	33.4	34.2	25.4
		YoY	20.1%	31.1%	46.2%	-0.8%	-15.3%	-18.3%	-23.3%	8.5%
		% of total	14.8%	15.8%	16.4%	9.9%	11.8%	13.1%	13.7%	12.4%
	Social Systems		107.0	110.1	109.7	107.8	109.1	103.2	98.3	91.9
		YoY	24.4%	-7.2%	-5.3%	4.6%	2.0%	-6.3%	-10.4%	-14.7%
		% of total	44.9%	42.7%	40.4%	45.6%	43.0%	40.5%	39.4%	45.0%
	Total		238.1	258.1	271.6	236.2	253.6	254.9	249.8	204.2
		YoY	13.0%	-0.3%	3.9%	10.9%	6.5%	-1.2%	-8.0%	-13.5%

Source: Shared Research based on company data
Figures may differ from company materials due to differences in rounding methods.

Full-year company forecast for FY03/23

		FY03/21			FY03/22			FY03/23
(JPYmn)		1H Act.	2H Act.	FY Act.	1H Act.	2H Act.	FY Act.	FY Est.

Sales		234,262	328,990	563,252	253,746	335,282	589,028	590,000
	YoY	-3.6%	3.5%	0.4%	8.3%	1.9%	4.6%	0.2%
Cost of sales		205,352	281,911	487,263	218,487	292,114	510,601	514,000
Gross profit		28,910	47,079	75,989	35,259	43,168	78,427	76,000
	YoY	-4.9%	8.9%	3.2%	22.0%	-8.3%	3.2%	-3.1%
	Gross profit margin	12.3%	14.3%	13.5%	13.9%	12.9%	13.3%	12.9%
SG&A expenses		16,508	17,909	34,417	17,180	18,283	35,463	36,000
	SG&A ratio	7.0%	5.4%	6.1%	6.8%	5.5%	6.0%	6.1%
Operating profit		12,402	29,170	41,572	18,079	24,884	42,963	40,000
	YoY	-4.3%	12.2%	6.7%	45.8%	-14.7%	3.3%	-6.9%
	Operating profit margin	5.3%	8.9%	7.4%	7.1%	7.4%	7.3%	6.8%
Recurring profit		12,934	30,007	42,941	18,711	25,325	44,036	40,500
	YoY	-5.1%	13.5%	7.2%	44.7%	-15.6%	2.6%	-8.0%
	Recurring profit margin	5.5%	9.1%	7.6%	7.4%	7.6%	7.5%	6.9%
Net income attributable to owners of the parent		8,934	20,435	29,369	12,375	16,833	29,208	27,000
	YoY	0.9%	19.2%	13.0%	38.5%	-17.6%	-0.5%	-7.6%

Source: Shared Research based on company data
Figures may differ from company materials due to differences in rounding methods.
Net income is net income attributable to owners of the parent.

Overview

FY03/23 company forecast

For FY03/23, Comsys forecasts orders of JPY590.0bn (+5.9% YoY), sales of JPY590.0bn (+0.2% YoY), operating profit of JPY40.0bn (-6.9% YoY), recurring profit of JPY40.5bn (-8.0% YoY), and net income attributable to owners of the parent of JPY27.0bn (-7.6% YoY).

The company plans to pay an annual dividend of JPY100 per share (up from JPY95 in FY03/22); this represents a payout ratio of 45.3% (versus 40.3% in FY03/22). It expects a total return ratio of around 70%, including dividends of surplus and acquisition of treasury stock.

Comsys expects a decline in NTT Engineering orders, while orders in the other businesses are expected to be higher than in FY03/22, with overall orders projected to increase by 5.9% YoY. The company expects sales to increase 0.2% YoY overall, with a YoY decline in NTT Engineering sales, but an increase in sales of other businesses.

External environment

The company’s forecast regarding its external environment reflects expectations for socioeconomic activity returning to normal due to factors like progress in COVID-19 vaccinations, but the company remains wary of the impact of the spread of the Omicron variant, supply shortages of semiconductors and other parts and materials, rising raw material prices, and fluctuations in the financial market.

Major company initiatives

In light of the above business environment, the company plans to strengthen its management base by building a structure for optimizing resource allocation according to operating conditions, structural reforms harnessing DX, and deepening work style reforms to enable diverse ways of working.

Trends and forecasts by business

The following table shows the company’s projections for orders and sales by business.

	Orders				Sales
(JPYbn)	FY03/21	FY03/22	FY03/23	YoY	FY03/21	FY03/22	FY03/23	YoY
	Act.	Act.	Est.		Act.	Act.	Est.

NTT Engineering	258.2	229.2	213.0	-7.1%	242.1	249.9	223.0	-10.8%
NCC Engineering	50.4	55.7	58.0	4.1%	47.2	53.0	56.0	5.7%
IT Solutions	105.3	103.2	115.0	11.4%	105.5	101.3	114.0	12.5%
Social Systems	172.3	168.8	204.0	20.9%	168.2	184.7	197.0	6.7%
Cons.	586.5	557.0	590.0	5.9%	563.2	589.0	590.0	0.2%

Source: Shared Research based on company data
Figures may differ from company materials due to differences in rounding methods.

NTT Engineering

Projected orders: JPY213.0bn (-7.1% YoY)

Projected sales: JPY223.0bn (-10.8% YoY)

Comsys expects orders to fall YoY due to a gradual decline in capital expenditures by the NTT group in areas related to fixed-line and 4G-related steel tower work, as well as a decrease in reaction to orders involving advanced wireless technology.

Major company initiatives

Promote reforms to achieve a shift from optimizing individual group companies to optimizing the group as a whole

・ Structural reforms: Accelerate the consolidation of sales and back-office operations across Japan, and begin to examine the optimal management system for the entire Telecom Carrier Business

・ Improvement of productivity through IT platform integration: business reform, promote digital transformation (DX)

Acquire new businesses opportunities

・ Enhancement of new business initiatives: Steadily implement advanced wireless-related construction and improve the competitiveness of electric power-related business (sales and construction of systems)

・ Expand maintenance operations: Acquire design, construction, and maintenance projects in an integrated manner

NCC Engineering

Projected orders: JPY58.0bn (+4.1% YoY)

Projected sales: JPY56.0bn (+5.7% YoY)

The company expects both orders and sales to increase YoY against a backdrop of expanded deployment of 5G base stations by telecom carriers (refer to the “Medium to long-term outlook” section) and Rakuten group's nationwide rollout of 4G facilities. In terms of sales, NCC Engineering is unlikely to be affected by the shortage of parts and materials, as the carriers themselves have the buying power to purchase them directly (the same applies to NTT Engineering).

Major company initiatives

Thoroughly implement resource and construction management to help carriers achieve their targets for completing 5G base stations

The company will initiate DX measures to optimize resources and minimize costs in the carrier-related and mobile businesses and across the group. One example is the company-wide IT platform that Comsys has started using with systems for its mobile-related business activities and that they are working to further expand. The company is also implementing robotic process automation in back-office operations to improve efficiency.

IT Solutions

Projected orders: JPY115.0bn (+11.4% YoY)

Projected sales: JPY114.0bn (+12.5% YoY)

Both orders and sales are expected to increase YoY thanks to a gradual recovery in public and private IT investment, as well as large-scale urban development and event-related projects. NTT group frequently works with government agencies, municipalities, and universities, all of which need to strengthen their networks and security to further expand digitally. Comsys expects more projects on the back of investment to improve storage, expand the capacity of normal networks, and enhance security. The company is working in collaboration with the NTT Group to win these projects.

Major company initiatives

Strategies for top-line growth

Expand partnering, M&A, capital and business alliances, and launch new business areas utilizing local 5G, AI, and IoT (full layer service).

Strategies for bottom-line growth

Expand maintenance and operations, as well as recurring business like the provision of AI and IoT services, improve efficiency and consolidate the business through the use of maintenance platforms, and implement digital transformation through customer relationship management software, robotic process automation, and other innovations.

Bolster business foundation

Further integrate management of the IT Company and train highly skilled engineers

Social Systems and Other

Projected orders: JPY204.0bn (+20.9% YoY)

Projected sales: JPY197.0bn (+6.7% YoY)

In the area of infrastructure (civil engineering), the company will participate in projects related to water supply and sewage system updates, disaster mitigation, flood prevention, and the removal of above-ground utility poles. In the area of electricity and telecommunications, it will work on projects for expressways, Ministry of Defense facilities, and data center construction. The company will intensify its efforts to take on projects related to biomass, hydrogen, and wind power in the field of renewable energy, in addition to solar power, where it is already active. As a result of these activities, both orders and sales are expected to increase YoY.

Major company initiatives

Strategies for top-line growth

Initiatives in new project areas (PFI, concession, and renewable energy), area and scope expansion, seek out M&A opportunities

Strategies for bottom-line growth

Utilize i-Construction (3D surveying, construction, and management), standardize profit management methods

Bolster business foundation

Further integrate management of the Social System Company, reorganize bases and optimize allocation of personnel, acquire and train more engineers

Medium to long-term outlook: Medium-term vision COMSYS VISION NEXT STAGE 2023

Overview

The company unveiled its medium-term vision “COMSYS VISION NEXT STAGE 2023” spanning the period through FY03/24 (summary released on May 10, 2019, and numerical targets for the final year on May 17).

The company had achieved the targets of its previous plan, COMSYS VISION 2020, a year ahead of plan*, driven by the success of its efforts implementing structural reforms, expanding private sector projects, and increasing top-line gains through M&A. Accordingly, aiming for the next stage of growth, it formulated COMSYS VISION NEXT STAGE 2023, which covers the period through FY03/24.

* For the medium to long term, Comsys aims to improve the profitability of carrier-related business and expand sales of non-carrier-related business. Under COMSYS VISION 2020, it had aimed to reach JPY400bn in sales and JPY30bn in operating profit sometime during the next decade. In FY03/19, the company posted sales of JPY481.8bn and operating profit of JPY35.3bn, achieving the targets of COMSYS VISION 2020 two years ahead of plan. As a result, at its FY03/19 results presentation, management unveiled the COMSYS VISION NEXT STAGE 2023, a new medium-term plan to guide the company in its next stage of growth and development through FY03/24.

Targets for the plan’s final year (FY03/24)

Sales: JPY600.0bn or more
Operating profit: JPY50.0bn or more (OPM of 8% or higher)
Shareholder returns: Continue to a target total return ratio of 70%

At NTT Engineering and NCC Engineering, the company looks for synergies arising from the integration of the recently acquired companies to lead to higher earnings by increasing productivity and efficiency. In this area, the company is also looking to push ahead with structural reforms aimed at increasing efficiency and IT platform sharing.

At IT Solutions and Social Systems, the company looks to grow sales by expanding business in existing fields, moving into new areas, and additional mergers and acquisitions

The IT Solutions and Social Systems businesses have been designated as growth businesses, with the company looking to increase combined sales from these two areas up to at least 50% of total sales.

IT Solutions: Comsys looks to increase sales by at least 30% over its FY03/20 target of JPY82.5bn

Social Systems: Comsys aims to increase sales by at least 20% over its FY03/20 target of JPY166.5bn

COMSYS VISION NEXT STAGE 2023’s main policies

Promote internal company system

Promote work-style innovations

Move forward with the M&A strategy

Promote personnel exchange among group companies

5G opens up additional business opportunities

With companies in Japan starting to gear up for the long-awaited 5G services in 2019 and beyond, there will be a number of different ways for Comsys to meet the related needs of client companies, including network upgrades, base station upgrades/additions, edge data center construction, proposals for public testing, verification, and usage scenarios, construction, inspection, and maintenance/repair. By combining the strengths of its various business (NTT Engineering, NCC Engineering, IT Solutions, and Social Systems), the company looks to capture the growing number of business opportunities offered by the advent of 5G in the years ahead.

Not only will the Comsys group be able to build 5G networks for telecommunications companies, it will also be able to serve as a one-stop solutions provider for 5G service providers (ranging from businesses to local governments). For example, the group will be able to leverage its technology and expertise in handling the needs of telecommunications companies and the relationships built with local government through its IT Solutions and Social Systems businesses as it goes after new construction orders.

Arrival of 5G in Japan

There are three major distinguishing characteristics of 5G* (for which commercial service began in March 2020): enhanced mobile broadband, ultra-reliable and low latency communications, and massive machine-type communications. This makes 5G an essential, core technology underlying the Internet of Things (IoT), which will allow all devices to connect to the internet.

The allocation of 5G frequency bands** by the Ministry of Internal Affairs and Communications in April 2019 marked the long-awaited coming of 5G to Japan. NTT Docomo, KDDI (au)/Okinawa Cellular, and Softbank started commercial 5G service in March 2020, and Rakuten Mobile in September 2020.

* Under mobile telecommunication technology standards, 1G was analogue, 2G was digital (GSM overseas and PDC in Japan), 3G was the International Mobile Telecommunication-2000 or IMT-2000, using W-CDMA (UMTA overseas), CDMA2000 X1. 4G uses IMT-Advanced (LTE, etc.), and now we are up to 5G.
The 5G system combines high and low frequencies to realize ultra-high speed communication (over 10Gbps)—the low frequency bands providing the connectivity and the mobility; the high frequency bands providing efficient, high-speed transmission over a wide spectrum (for further details, see discussion under “Heterogeneous Networks” below). By using high frequency bands not used by existing mobile networks (for example, above 10GHz), 5G networks will be able to provide reliable connections at heretofore unattainable transmission speeds of 10Gps for tens of thousands of devices in concentrated areas.
** The April 2019 spectrum allocation broke up the frequency bands into six bands at 2.7GHz/4.5GHz (five at 3.7GHz and one at 4.5GHz, with each band 100MHz wide) and four bands at 28MHz (with each band 400Mhz wide). The 5G frequency band allocations were follows:
NTT Docomo: 3,600MHz-3,700MHz (100MHz), 4,500MHz-4,600MHz (100MHz) and 27.4GHz-27.8GHz (400MHz)
KDDI/Okinawa Cellular: 3,700MHz-3,800MHz (100MHz), 4,000MHz-4,100MHz (100MHz) and 27.8GHz-28.2GHz (400MHz)
Note that the 3,600MHz-3,700MHz (100MHz) and 27.8GHz-28.2GHz (400MHz) are likely to be the standard bands used for 5G communications and referred to as “eco bands” in Japan.
Softbank: 3,900MHz-4,000MHz (100MHz) and 29.1GHz-29.5GHz (400MHz)
Mobile: 3,800MHz-3,900MHz (100MHz) and 27.0GHz-27.4GHz (400MHz)

The Ministry of Internal Affairs and Communications approved the diversion of existing 4G frequencies (700MHz, 1.7GHz, and 3.4–3.5 GHz bands) to 5G use, and such use began at end-December 2020. The ministry added the 1.7GHz band (outside of Tokyo, Nagoya, and Osaka) as a 5G frequency at the beginning of 2021 and plans to proceed with technical verification of the 4.9GHz, 26GHz, and 40GHz bands as 5G candidates, with additional allocation sometime in 2021.

Changes that will be brought about by 5G

The key technologies for 5G systems are ultra-high speed transmission exceeding 10Gps (100 times more than the high-speed, high-capacity transmission of 4G); over-the-air latency time of one millisecond or less (or less than one-tenth the latency time of highly reliable 4G-LTE); and the ability to handle connection for 100,000 devices per square kilometer (100 times more than the high-speed, high-capacity transmission of 4G). Technologies used in 5G networks include Massive MIMO (which make use of several dozen antennas); beamforming (which is used to direct radio waves to a target); millimeter-wave frequencies; waveforms and adjustments that allow frequency sharing; and core networks with software defined networks (SDN) that create the wireless network that allows such low latency times to be achieved.

Heterogeneous networks for creating Non-Standalone (NSA) mode of 5G

These technologies provide connectivity for 5G networks using some types of existing 4G technology (LTE, LTE-Advanced) and frequency bands already in use by 4G networks (using heterogeneous networks to operate in non-standalone mode*)

Heterogeneous networks are designed to provide flexible services depending on the use case and, as such, are able to handle different wireless technologies and operate on frequency bands that are already used by 4G networks (including 700MHz, 800MHz, 900MHz, 1.5GHz, 1.7GHz, 2.1GHz, 3.4GHz, 3.5GHz, and others) as well as LTE-Advanced and Wi-Fi networks. Depending on the device, they are able to deploy the optimal base station from the low-power base stations in the area covered by small cells (micro-cells covering several hundred meters or pico-cells covering the inside of buildings) in the area covered by a high-power base station (macro-cells covering several kilometers).

Control/User plane separation

Inside of micro-cells, the control plane (or C-plane) handles the control signals for call processing for frequency bands that are already being used; the user place (U-plane) handles large amounts of data using high frequency milli-waves that can easily maintain a broadband within a small cell and thus allow users to manipulate large amount of data. By separating the control plane and the user plane, networks are able to provide mobility as well as consistent quality.

Network slicing

Network slicing technology (which allows a network operator to provide dedicated virtual networks with functionality specific to the service or customer over a common network infrastructure) gives network operators the flexibility to be able to roll out core networks, wireless access networks, and other types of networks to support the various types of services envisaged in 5G.

Mobile edge computing

Mobile edge computing refers to running services that used to be based in the cloud on servers that are closer to the user; with mobile edge computing, 5G networks further reduce the end-to-end latency.

Making use of the unique features of mobile edge computing technology, a wide variety of services can be expected to hit the market, such as the transmission of high-resolution images and VR/AR video with file sizes of only 4-8K, self-driving automobiles, telemedicine (including remote surgery with tactile interfaces), remote control of construction equipment, the Industrial Internet of Things (IIoT), and remote operation of vending machines and surveillance cameras equipment using communication devices.

5G base station maintenance

On December 25, 2020, the Ministry of Internal Affairs and Communications announced its “Master Plan 3.0 on the Regional Development of ICT Infrastructure,” which was formulated by revising Master Plan 2.0 (revised July 2020) based on the fact that several telecoms carriers have indicated that they intend to make capital investments of about JPY2tn each in the development and maintenance of 5G base stations* over 10 years starting with 2021. The steady implementation of Master Plan 3.0 will significantly accelerate the nationwide deployment of 5G and fiber optic services.

Under Master Plan 3.0, the number of 5G base stations will reach 280,000 (including stations for 4G use) by end-FY03/24, an increase of 70,000 versus the 210,000 proposed under Master Plan 2.0. This 70,000 is about 4x the number of stations that were scheduled to open by end-FY03/24 (5G use only) as of the comparative review of 5G frequency allocation (conducted in 2019).

*5G-related capital investment plans by telecoms carriers are as follows.
▷NTT Docomo: Plans to invest JPY1tn in 5G facilities in the five years through FY03/24 (source: NTT Docomo materials from March 18, 2020, presentation on 5G and new products and services)
▷KDDI (au): Plans to invest JPY1tn in 5G facilities in the five years through FY03/24; plans to cumulatively invest JPY2tn in 5G facilities (including 6G R&D expenses) through 2030 (source: March 23, 2020, press release)
▷Softbank: Plans to invest some JPY500bn in 5G facilities through March 31, 2024; plans to cumulatively invest JPY2.2tn in 5G facilities (including 6G R&D expenses) through 2030 (source: March 2020 results briefing materials)
▷Rakuten Mobile: Plans to invest about JPY200bn in 5G facilities through FY03/24 (also increasing its planned 4G investment of about JPY600bn by some 30–40%) (source: Ministry of Internal Affairs and Communications plan approval materials)

Reduction in cell size and its impact on related construction

Radio waves can be propagated in different ways depending on their frequency (wave length). Low frequency signals (long waves) are capable of going around obstacles such as buildings and are therefore able to travel long distances; low frequency signals are also relatively unaffected by weather conditions, such as rain. In contrast, the high frequency signals (short waves) that are used in 5G networks travel largely in straight lines and, because they are deflected by obstacles such as buildings, they can only travel short distances; they are also easily affected by weather conditions such as rain or fog. On the plus side, high frequency bands have very wide bandwidths and are therefore capable of transmitting large amounts of data.

As previously explained under heterogeneous networks, within the areas covered by 5G network’s high-power base stations (a macro-cell base station covering several kilometers), there are low-power base stations that cover small cells (including micro-cells that cover several hundred meters and pico-cells that cover the inside of buildings), and the choice of which base station to use to establish a connection depends on conditions of the devices in that area. Inside of a mesh (which is 10 kilometers in every direction), carriers offering 5G services are able to put up advanced designated base stations (multiple base stations, or slave stations, that have high-capacity fiber optic cable connected to the core network to provide ultra-high speed lines) along with multiple slave stations and smaller base stations that together can provide coverage of the entire mesh.

Utilizing the radio wave properties discussed above, a single base station in a macro-cell in a 4G (LTE, LTE-Advanced) network covers a radius of 2-3 kilometers; in contrast, the coverage area of small cells (the cells used to handle high-volume data send by users) in 5G networks is 100 meters or less. This means 5G networks will need to build many more base stations than 4G networks. Because Comsys and other telecommunication construction companies will likely need to complete more construction projects in a given period of time, construction efficiency will be a major challenge. In this relation, the company noted that installation sites will vary greatly, ranging from the outsides of building, to utility poles and street lamps, to traffic lights.

Locations where small base stations are expected to be installed include the rooftops and outside surfaces of medium-rise buildings, in the windows of low-rise buildings, billboards, telephone poles and street lamps, and traffic lights*. Because there is not much space left in cities to put up steel towers, installing base stations on building rooftops is the norm; indeed, there are already many in place.

*According to an article appearing in the Nikkei in June 3, 2019, local governments have agreed to free up roughly 200,000 traffic signals for use by the four domestic mobile network operators as base stations. A number of cities are expected to begin field-testing in FY03/21 ahead of a nationwide rollout planned for FY03/24.

Generating synergies from the integration of recently acquired companies

For FY03/24, the company has set a consolidated sales target of at least JPY600.0bn and an operating profit target of at least JPY50.0bn. To meet the operating profit target of JPY50.0bn or more by FY03/24, the company must generate at least JPY7.0bn in additional operating profit over its forecast of JPY43.0bn in FY03/22. It expects to achieve this by increasing sales through the optimized use of management resources and creating efficiency gains via major structural reforms and a new IT platform, which together it expects to increase the operating profit margin* by at least 0.6pp over the 7.4% margin achieved in FY03/21.

After logging a consolidated OPM of 7.3% in FY03/19, the company saw its OPM coming down to 6.9% in FY03/20 as the lower margins of its three recent acquisitions—NDS, SYSKEN, and Hokuriku Denwa Kouji—temporarily depressed, albeit slightly, the OPM for the group as a whole. The OPM in FY03/21 and OPM forecast for FY03/22 have returned to 7.4%. The company expects an OPM of 8.0% or higher in FY03/24 backed by an increase in sales resulting from optimized use of management resources and cost-savings and efficiency gains stemming from major structural reforms.

Major structural reforms

Specific initiatives under the major structural reform program include the following.

Eliminating redundant operations in the access, network, and mobile businesses of group subsidiaries operating in the same region

Consolidating back-office functions

Reorganizing and consolidating subsidiaries

Eliminating the use of multiple subcontractors

Increasing construction efficiency with more cross-training of technicians

Optimizing resources across the group and businesses

Undertaking joint IT investments across the group and promoting joint use of IT tools

By increasing efficiency through major structural reforms, the company will be able to shift some of the people involved in construction work for telecommunications companies to other businesses that are major growth drivers, such as its IT Solutions and Social Systems businesses.

In order to efficiently handle the large number of small-scale construction projects that building 5G networks will entail, Comsys is looking to take steps toward integrating the mobile businesses of its individual subsidiaries so as to be able to optimize the resource allocation across all group companies and businesses.

IT Solutions segment

Comsys plans to take the following steps with respect to the construction of a new group IT platform:

Within three years, go from its current IT system, under which each group company has its own IT system, to a single, best-practices IT system that is shared by all group companies. By virtue of that, raise productivity; enhance IT investment returns; and reallocate resources nationwide.

Core systems: Increase efficiency in the reporting process by using common document management tools, and cut costs by handling routine tasks with robotic process automation (a technology that employs using software robots to automate administrative task performed by white-collar workers).

For example, in the area of personnel management, Comsys is planning to build a comprehensive personnel data base and move to a next-generation enterprise resources planning (ERP) system.

Operating systems: Further increase the efficiency of construction project management.

For example, in addition to improving operational efficiency by using AI to handle photographic inspections, the company is also considering putting wearable devices to use at construction sites.

Growth drivers: IT Solutions and Social Systems

IT Solutions segment

Company targeting sales growth at a CAGR of 7–8%

Under its new medium-term vision (COMSYS VISION NEXT STAGE 2023), the company looks to increase sales at the IT Solutions segment by at least 30% over its FY03/20 forecast of JPY82.5bn. This is the highest projected growth rate of the company’s four business segments, representing management’s belief that sales in this area can grow at a CAGR of some 7–8%.

The company’s outlook for growth at individual business units with the IT Solutions segment are as follows.

Software development business (roughly 30% of segment sales of JPY75.0bn in FY03/19): Sales growth of 12% YoY in FY03/20; its FY03/24 sales target represents a 39% increase over its forecast for FY03/20

Server/storage business (roughly 30% of segment sales in FY03/19): Sales growth of 23% YoY in FY03/20; its FY03/24 sales target represents a 28% increase over its forecast for FY03/20.

Network/infrastructure business (roughly 30% of segment sales in FY03/19): Sales growth of 2% YoY in FY03/20; its FY03/24 sales target represents a 40% increase over its forecast for FY03/20.

Maintenance (less than 10% of sales in FY03/19): Sales growth of 19% YoY in FY03/20; its FY03/24 sales target represents a 78% increase over its forecast for FY03/20.

In addition to putting more efforts into winning new customers, the company also plans to focus on moving from existing business areas into new business areas.

With regard to new customers, the company is looking to strengthen relationships with long-standing partner companies, including overseas-affiliated hardware/software vendors and system integrators, and also increase joint projects centered on cross-layer projects going from network/infrastructure to AI, cloud systems, and the Internet of Things (IoT). By using an alliance model* across group companies, Comsys aims to develop new customers while at the same time expanding sales through alliances.

In addition to expanding its recurring revenue businesses in systems maintenance and contract operations, Comsys is also looking at developing new solutions services, primarily related to cloud services, data centers, IoT, and cybersecurity.

By using an internal company system (under which all group companies within a particular business segment are treated as though they were a single company), Comsys aims to establish a business alliance model and also optimize resource allocation

Each of the companies that has joined the Comsys group not only have relationships with NTT East and NTT West, they also have close relationships with numerous local governments and local companies. Using an internal company system, other companies in the Comsys group would be able to tap the local area knowledge and relationships built up by other group companies by getting reciprocal referrals for solutions services, thereby expanding the value offered by the Comsys group from the perspective of the client company.

Through careful examination of proposals being put together by the internal companies at the national level, Comsys is looking to muster resources at the group level in order to win orders that it would otherwise have difficulty handing using the resources of only the group companies that are located in that region.

An alliance business model in this case refers to a business model in which a Comsys group company handles the procurement of goods, sales, and the installation work for a client (such as a local company or large corporation) that was procured through the marketing efforts of the alliance partner company. This is similar in many respects to the sales agency model and, even though the orders obtained in this manner might not necessary be very profitable, the order would open the door for the Comsys group to build a relationship with the client and, after the project is finished, can lead to direct orders for support services, maintenance services, and expansions/upgrades.

Social Systems segment

Company targeting sales growth at a CAGR of 4–5%

Under its new medium-term vision (COMSYS VISION NEXT STAGE 2023), the company looks to increase sales at the Social Systems segment by at least 20% over its FY03/20 forecast of JPY166.5bn. This is the second highest projected growth rate of the company’s four business segments, reflecting its belief that sales in this area can growth at a CAGR of 4–5%.

The company’s outlook for growth at individual business units with the Social Systems segment are as follows:

Telecommunications business unit (roughly 20% of segment sales of JPY136.7bn in FY03/19): Sales growth of 56% YoY in FY03/20; its FY03/24 sales target represents a 39% increase over its forecast for FY03/20

Renewable energy business unit (roughly 30% of FY03/19 segment sales): Sales growth of 10% YoY in FY03/20; its FY03/24 sales target represents a 4% increase over its forecast for FY03/20.

Infrastructure/other business unit (more than 50% of segment sales in FY03/19): Sales growth of 13% YoY in FY03/20; its FY03/24 sales target represents a 16% increase over its forecast for FY03/20.

At each business unit within the Social Systems segment, the company looks to expand the geographical area covered and establish a nationwide presence while at the same time moving into new business areas. To accomplish this, the company will consider additional acquisitions. Detailed plans are as follows:

Electricity and telecommunications

Moving into new business areas: In addition to current business areas (telecommunications, road work, heating/air conditioning systems, and security), the company is looking to move into new areas including cleaning/sanitation services, and building and warehouse construction.

Extending existing businesses into new geographic regions: Only the electric power and telecommunications businesses have a nationwide footprint at this time; its road work, heating/air conditioning systems, and security businesses are currently confined to major metropolitan areas but plans call for expanding these businesses nationwide.

Initiatives: In addition to pursuing more new projects in conjunction with general contractors, the company also plans to acquire and expand businesses in peripheral areas

Renewable energy

Moving into new business areas: In addition to current business areas (solar, biomass, and wind power), the company is looking to move into new areas including hydropower, geothermal energy systems, and other types of renewal energy.

Extending existing businesses into new geographic regions: Only the solar power business has a nationwide footprint at this time; its biomass and wind power business are currently confined to major metropolitan areas but plans call for expanding these businesses nationwide.

Initiatives: In addition to improving competitiveness in terms of costs and time to completion, the company is also looking to expand from a simple EPC (engineering, procurement, and construction) business model to a total-business model that includes operations and maintenance services as well. In terms of new businesses, plans call for development new renewable energy businesses.

Infrastructure/other businesses

Moving into new business areas: In addition to current business areas (civil engineering, water/sewer systems, gas utility services, road paving, and river engineering services), under the company is looking to move into new areas including agricultural water supply and bridge-related engineering.

Extending existing businesses into new geographic regions: Only the civil engineering and telecommunications pipeline construction businesses have a nationwide footprint at this time; its water/sewer systems, gas utility services, road paving, and river engineering businesses are currently confined to major metropolitan areas but plans call for expanding these businesses nationwide.

Initiatives: The company plans do more in the area of public-private partnerships (PPP)/private finance initiatives (PFI) projects* and concessions, wherein a private sector company acquires the right to operate and collect fees for use of publicly owned facilities. (See boxed comment below for details on its experience with trial PFI projects.) Going forward, the company is planning to participate in PFI projects are as part of a nationwide effort to get rid of above-ground utility poles by moving lines underground, and also participate in PFI initiatives related to the operation of water/sewer systems and educational facilities. Through these efforts, the company is looking to bolster its construction track record in strategic areas in order to increase its competitiveness and also use the experience to train employees.

* Public-private partnerships (PPP)/private finance initiatives (PFI) refer to arrangements wherein private capital, management, and technological expertise is used to build, maintain, and operate publicly owned facilities. By utilizing private capital, management, and technological expertise, national and local governments are able to provide the public with services more efficiently and more effectively than they would be able to do on their own. The aim of such initiatives is to lower operating costs while providing high-quality services to the public. In Japan, the Public Private Partnership/Private Finance Initiative Promotion Act (the “PFI Act”) was enacted in July 1999. This was followed in March 2000 by the establishment of a set of basic principles that would serve as guidelines for the type of PFI projects that should be undertaken and how they should be implemented; these guiding principles were drafted by the Prime Minister following deliberations of a special committee to promote activities utilizing private sector funds.

Test-cases of PFI projects by the Comsys Group

During March 2019 Comsys received two orders that will serve a test-cases of the economic viability of PFI projects, one JPY1.4bn order for work in the city of Yasugi, Shimane Prefecture, and one order worth JPY2.0bn for work in the city of Matsuyama, Aichi Prefecture. The projects are part of a nationwide effort to get rid of above-ground utility poles by moving lines underground. Comsys will be part of a three-company consortium that handle the planning and maintenance, construction, and management, with Comsys handling the construction. The PFI projects were contracted through the Chugoku and Shikoku regional offices of the Ministry of Land, Infrastructure, Transport, and Tourism.

* Government promotion of removal of above-ground utility poles: Following the enactment of the Utility Pole Removal Act in 2016, the Ministry of Land, Infrastructure, Transport, and Tourism put together plans to promote the removal of above-ground utility poles (in favor of underground line conduits) with the goal of removing utility poles over a total of 1,400 kilometers within three years, starting in FY2018. In addition to encouraging public-private partnership arrangements, the government also provided funds to support the effort.

Returns to shareholders

Counting both dividends and share buybacks, the company aims to keep its total return ratio at 70%.

Business

Business description

Comsys Holdings Corporation (Comsys) is a major telecommunications construction company, with over fifty years of history. The holding company was established in September 2003 as Comsys Holdings Corporation, the 100% parent of Nippon Comsys Corporation, Sanwa Elec Co., Ltd., and Tosys Corporation. In April 2010 it acquired Tsuken Corporation (see Organizational structure). In October 2018, Comsys acquired NDS Co., Ltd. (TSE1: 1956), SYSKEN Corporation (TSE2: 1933), and Hokuriku Denwa Kouji (Telephone Construction) Co., Ltd. (TSE2: 1989) making them wholly owned consolidated subsidiaries.

Main businesses

In addition to the communications-related businesses of NTT Engineering and NCC Engineering*, main business segments also include IT Solutions and Social Systems and Other.

* NCC stands for New Common Carrier, and refers to the new Type I telecommunications operators to enter the market upon liberalization in 1985. KDDI (TSE1: 9433) and Softbank (TSE1: 9984) are examples of NCCs.

In FY03/21, NTT Engineering accounted for the largest share of the company’s sales, at 43.0% (versus 44.7% in FY03/20), followed by NCC Engineering at 8.4% (versus 7.8%). Despite the declining trend, these two communications-related businesses still accounted for 51.4% (52.4%) of all sales. IT Solutions accounted for 18.7% (versus 17.5%) of sales and Social Systems and Other accounted for 29.9% (versus 30.0%).

Segment details

segment	Business description	Main clients
NTT Engineering	Telecoms infrastructure engineering	NTT group (NTT East, NTT West, NT Communications, NTT Docomo, etc.)
NCC Engineering	Telecoms infrastructure engineering	KDDI group, Softbank group, Rakuten Mobile
IT Solutions	Total IT solutions	Private companies, government agencies, local municipalities, other
Social Systems and Other	Construction of electricity and civil engineering related to public infrastructure	Private companies, government agencies, local municipalities, other

Source: Shared Research based on company data

NTT Engineering (43.0% of sales in FY03/21 versus 44.7% in FY03/20)

The segment is the core of Comsys’s business and includes a wide range of telecommunications infrastructure construction services to the Nippon Telegraph and Telephone Corporation group (TSE1: 9432, NTT hereafter): laying telephone lines and building switching facilities, wireless relay base stations and so on. Customers are NTT’s subsidiaries such as NTT East Corporation and NTT West Corporation (NTT East and West), NTT Communications Corporation (NTT Communications), and NTT Docomo Inc. (TSE1: 9437, NTT Docomo). NTT Engineering is Comsys Holdings’ core business, accounting for a high ratio of consolidated sales.

The Nippon Comsys group is the main company responsible for NTT Engineering work, with the Tosys group carrying out work in the Shin-Etsu region (Nagano, Niigata and Yamanashi prefectures), the Tsuken group in Hokkaido, the NDS group in the Tokai region, and SYSKEN group in Kyushu, and the Hokuriku Denwa Kouji group in the Hokuriku region.

NTT Engineering is divided into access work (including urban civil engineering, conduit work, and connecting customer premises to the optical fiber network); network engineering, which covers the transmission system; and mobile engineering, mainly for NTT Docomo. For NTT East and West, telecommunications infrastructure engineering is divided up on a region-by-region basis, with specific companies assigned to handle particular territories; the contractors change from time to time, but not frequently (see Competition).

The buildings (also known as station buildings) that house telecommunications infrastructure for NTT East and West and other telecoms operators, contains switching equipment, storage battery facilities, in-house power generating equipment, and wireless equipment. Cables for telephone lines pass through underground cable tunnels to conduits and via manholes and telephone poles to subscriber premises. As shown in the chart below, the work related to external equipment and customer premises equipment is referred to as access work; the work that takes place in the station premises is referred to as network engineering.

NTT’s Telephone Network (Internal, External, Customer Premises

Source: Shared Research based on NTT data

NTT Engineering’s revenue composition ratios for FY03/21 were: 66% access work (versus 65% in FY03/20), 8% network engineering (versus 10%), and 26% mobile engineering (versus 25%) (figures based on number of orders individually received by the eight group companies).

The eight companies are Nippon Comsys Corporation, Sanwa Comsys Engineering Corporation, Tosys Corporation, Tsuken Corporation, NDS Co., Ltd., SYSKEN Corporation, Hokuriku Denwa Kouji Co., Ltd., and Comsys Joho System Corporation. The above figures are based on the number of orders individually received by these companies.

Access work

Access work involves engineering for NTT East and West conducted outside the carrier’s buildings or stations. Specifically, this entails the laying, connecting and comprehensive testing of telecommunications cables and connecting fiber optic cables to customer premises through tunnels, manholes and shared phone line trenches (which carry utilities including electricity, telephone lines, water and gas) under roads.

Optical fiber cable installation

Source: Shared Research based on company data

Access work is either integrated services construction or general planned construction, depending on how sales are accounted for. Integrated services construction comprises work whereby NTT specifies a unit price per telephone pole, or per B FLET’S (FTTH services) installation in a household, for example, so the volume of work multiplied by unit price equals revenue. General planned construction involves work where NTT develops an urban plan (large-scale projects such as replacing all the telephone poles in a certain area); these are generally comparatively long-term projects done for a lump sum, which becomes sales for the company.

Replacing the subscriber lines that connect telephone circuits (the access network) from NTT East and West’s premises to the customer premises with optical cable comprised approximately half of the access business for the company in FY03/21. Apart from this, the bulk of work in the sub-segment was classified as general planned construction—mainly existing facility and equipment maintenance and constructions to expand the optical fiber network.

Network engineering

Network engineering refers to work done setting up infrastructure facilities within NTT East and West’s premises. Examples of such work include power supply wiring; installation and maintenance of exchange and transmission equipment; design, installation, and maintenance of power and IP network equipment inside NTT East and NTT West facilities.

Sales are dependent on NTT group’s capital investments. As of May 2014, the company was primarily working on projects related to NTT’s transition to an IP-based telephone system from the conventional switchboard system. These projects involve the installation of smaller equipment at NTT East and NTT West offices to reduce power consumption. Such work began in the Tokyo metropolitan area and is now expanding nationwide.

Although NGN*-related work contributed to sales through FY03/13, Shared Research anticipates that in the network engineering business there is unlikely to be any more NGN-related orders of the large scale seen in 2020.

As fixed telephone revenue shrinks, there has been a worldwide trend since the early 2000s to replace the switching equipment used in telephone networks (which is costly and requires installation by qualified personnel, and is complex to maintain) by low-cost routers and other devices using Internet Protocol (IP) technology. Following this trend, the NTT group announced in November 2005 plans to build a Next Generation Network (NGN) as part of the migration of its core network to IP technology. NTT East and West began offering commercial NGN services from March 2008.

* NGN stands for Next Generation Network. By rebuilding a telephone network using IP technology it is possible to create a comprehensive IP network that can provide flexible telephone or videoconferencing, streaming, and various other services while maintaining the security and handiness of the telephone network.

According to NTT, the integration of the NGN and regional IP networks (networks NTT East and West built on a prefecture-by-prefecture basis) was completed in FY03/13. Remaining NGN-related work includes the integration of the NGN and the public switched telephone network (PSTN), which connects each home to telephone poles that carry copper wires. This work is planned to be carried out from 2021 to 2025 (changeover ends January 2025).

Work to expand FLET’S equipment

Source: Shared Research based on company material

Mobile engineering

This business provides services to NTT Docomo relating to base station design through construction and testing, consulting services and negotiations to secure the use of necessary land, and post-construction maintenance. For example, the company constructs mobile phone base stations, installs antennas and equipment, and lays cables inside subway stations.

Base station: mobile operators have established base stations (equipment for relaying radio waves) across the nation. Radio waves from a mobile phone are delivered to the nearest base station to the user, and are transmitted to the receiver. The communication signal from the caller is transmitted to the mobile phone terminal on the receiver side by radio waves from the nearest base station.

LTE base station construction
FOMA base station maintenance work

Source: Shared Research based on company materials

Revenues for this business are not only affected by NTT Docomo’s capital expenditure size but also the type of spending. In FY03/20, the bulk of Comsys’ mobile engineering revenues were LTE (LTE-Advanced)-related, but work related to 5G base stations increased in FY03/21 (see Wireless telecommunications infrastructure).

NCC Engineering (8.4% of sales in FY03/21 versus 7.8% in FY03/20)

The segment includes a wide range of activities, such as design, construction, coordination, testing and maintenance, for telecoms carriers outside the NTT group. The bulk of the company’s work in this area is done by Sanwa Comsys Engineering group. The main customers (in order of sales levels) are KDDI Corporation, Softbank Corp. (subsidiary of SoftBank Group Corp.), and Rakuten Mobile, Inc. Sales in this segment are heavily influenced by capex trends at telecoms carriers.

IT Solutions (18.7% of sales in FY03/21 versus 17.5% in FY03/20)

In it the company caters to private-sector companies other than telecoms carriers. Main services include solutions business (includes network integration such as setting up LANs and WANs, and system integration such as setting up servers and embedded systems), software development business, and maintenance business.

IT Solutions represented around 10% of revenue for the Nippon Comsys group; 10% for the Sanwa Comsys Engineering group, and around 20% for the Tsuken group in FY03/14. The Comsys Joho Systems group primarily develops software on a contract basis.

According to Comsys, its strength in this area lies in the combination of technical capabilities in installation work—cultivated as a nationwide telecoms network construction specialist—and its ability to integrate software. This segment’s sales are primarily driven by corporate capex.In FY03/21, solutions business accounted for roughly 70% of the segment’s sales. In particular, construction projects undertaken in alliance with partner companies are increasing.

Social Systems and Other (29.9% of sales in FY03/21 versus 30.0% in FY03/20)

The segment’s main operations are civil engineering, water supply and sewerage works, solar power photovoltaic (PV) generating system construction, electrical and telecommunication systems-related construction for expressways and airports. Although the Nippon Comsys group is the main actor in the segment, other groups are also involved. The segment’s sales are driven by the volume of public works investment and capex from the private sector. Over the medium- to long-term, the company is looking to grow sales from work on electric power facilities and other infrastructure projects. Shared Research also sees additional contributions to sales coming from maintenance work on the aging Tokyo Metropolitan Expressway and the government’s initiative to eliminate utility poles and move electric power lines underground.

Solar Power (Photovoltaic) Generating System Construction

The Act on Special Measures Concerning Procurement of Renewable Electric Energy by Operators of Electric Utilities (often abbreviated as “FIT Act”) was passed in Japan in April 2012, and from July 2012 electric power companies were obliged to purchase all of the output of industrial solar-power generators with capacity of 10kW or greater. Thanks to this new feed-in tariff system, a large number of sellers entered the solar-generated electricity business. Comsys also fully entered the solar power generation business in FY03/12 with private-sector businesses as its main customers. As of FY03/19, the company was involved in the solar power generation business in two ways. First, it operates a large-scale solar power generating business as an independent power producer (IPP; in Japan solar parks are often referred to as “mega-solar”). Here Comsys leases land, invests in plant and equipment, and sells electricity itself. Second, Comsys started providing engineering services (as engineering, procurement, and construction (EPC) business) to third parties involved in solar power generation during FY03/13.

Comsys had expected solar power projects to peak in FY03/18 and orders to wind down in FY03/19 but, contrary to expectations, it continued to receive orders for solar power projects, including large orders (that take roughly two years to complete). Solar power project demand peaked in FY03/20.

Source: Shared Research based on company data

Organizational structure

Comsys Holdings adopts a holding company structure and operates eight business groups, each given the autonomy to formulate and execute their own business strategy.

The eight business groups operating in different segments are led by the Nippon Comsys group, Sanwa Comsys Engineering group, Tosys group, Tsuken group, NDS group, SYSKEN group, Hokuriku Denwa Kouji group, and the Comsys Joho System group. Comsys Shared Service Corporation was established in October 2003 as a strategic component aimed at increasing efficiency and is responsible for the group’s personnel, finance and general affairs.

Nippon Comsys group (FY03/21: 49.8% of sales and 52.4% of operating profit)
(These figures are based on the total for the groups as reported in the company’s securities report. Composition ratios below were also obtained in the same way.)

Nippon Comsys group is involved in telecommunications infrastructure engineering, mainly for the NTT group, and is led by Nippon Comsys Corp., which has 18 consolidated subsidiaries in the Kansai, Kyushu, Shikoku and Tohoku regions.

Sanwa Comsys Engineering group (FY03/21: 10.5% of sales and 15.0% of operating profit)

Sanwa Comsys is mainly involved in telecommunications infrastructure engineering for the NCCs. Spearheaded by Sanwa Comsys Engineering Corp., (known as Sanwa Elec. until April 2005), with four consolidated subsidiaries.

Tosys group (FY03/21: 5.3% of sales and 4.0% of operating profit)

Tosys is involved in telecommunications infrastructure engineering in the Shin-Etsu region (Nagano, Niigata and Yamanashi prefectures), with headquarters in Nagano Prefecture, and led by Tosys Corp. (East Japan System Construction until October 2012). The group has five consolidated subsidiaries, including an automobile maintenance company.

Tsuken group (FY03/21: 9.3% of sales and 10.6% of operating profit)

Tsuken is mainly involved in telecommunications infrastructure engineering in the Hokkaido region, with headquarters in Sapporo and led by Tsuken Corporation. The group has nine consolidated subsidiaries, including systems and leasing businesses. Tsuken became a subsidiary of Comsys Holdings in October 2010 through an exchange of shares.

NDS group (FY03/21: 14.1% of sales and 9.3% of operating profit)

Engaged in telecommunications infrastructure engineering in the Tokai region (Achi, Gifu, Mie, and Shizuoka Prefecture). With its head office in Nagoya (Aichi Prefecture), group leader NDS Co., Ltd. has a total of 21 subsidiaries and four affiliates. The NDS group was acquired by Comsys in October 2018 via a share exchange and are now subsidiaries.

SYSKEN group (FY03/21: 6.0% of sales and 4.9% of operating profit)

Engaged in telecommunications infrastructure engineering in the Kyushu area. With its head office in Nagoya (Kumamoto Prefecture), group leader SYSKEN Corporation has eight subsidiaries and four affiliates. The SYSKEN group was acquired by Comsys in October 2018 via a share exchange and are now subsidiaries.

Hokuriku Denwa Kouji group (FY03/21: 2.9% of sales and 1.3% of operating profit)

Engaged in telecommunications infrastructure engineering in the Hokuriku area (Ishikawa, Fukuyama, and Fukui Prefecture). With its head office in Kanazawa (Ishikawa Prefecture), group leader Hokuriku Denwa Kouji has five subsidiaries and two affiliates. The SYSKEN group was acquired by Comsys in October 2018 via a share exchange and are now subsidiaries.

Comsys Joho System group (FY03/21: 2.1% of sales and 3.8% of operating profit)

Comsys Joho System offers services spanning all aspects of information systems, from consulting, planning and design to development, construction, testing, maintenance and operation. The group has two consolidated subsidiaries: Comsys Joho System Corp., which is involved in systems development; and Comsys Techno Co., Ltd., which offers IT services and temporary staffing solutions.

Sales and operating profits by group

(JPYmn)		FY03/18	FY03/19	FY03/20	FY03/21	FY03/18	FY03/19	FY03/20	FY03/21
(JPYmn)		Act.	Act.	Act.	Act.	% of total	% of total	% of total	% of total
Cons.	Orders	400,632	503,964	589,050	584,624	100.0%	100.0%	100.0%	100.0%
	Sales	378,430	480,189	559,213	561,362	100.0%	100.0%	100.0%	100.0%
	Operating profit	29,953	35,234	38,397	40,973	100.0%	100.0%	100.0%	100.0%
	Operating profit margin	7.9%	7.3%	6.9%	7.3%	-	-	-	-
Nippon Comsys Group
	Orders	262,661	270,033	306,317	291,945	65.6%	53.6%	52.0%	49.9%
	Sales	245,302	272,780	281,132	279,431	64.8%	56.8%	50.3%	49.8%
	Operating profit	20,621	21,384	20,549	21,171	68.8%	60.7%	53.5%	51.7%
	Operating profit margin	8.4%	7.8%	7.3%	7.6%	-	-	-	-
Sanwa Comsys Engineering Group
	Orders	58,150	58,081	57,604	60,235	14.5%	11.5%	9.8%	10.3%
	Sales	53,084	55,605	57,855	58,722	14.0%	11.6%	10.3%	10.5%
	Operating profit	4,201	4,929	5,688	6,057	14.0%	14.0%	14.8%	14.8%
	Operating profit margin	7.9%	8.9%	9.8%	10.3%	-	-	-	-
Tosys Group
	Orders	22,300	23,386	29,372	32,743	5.6%	4.6%	5.0%	5.6%
	Sales	23,195	23,839	28,895	29,890	6.1%	5.0%	5.2%	5.3%
	Operating profit	1,390	1,425	1,501	1,615	4.6%	4.0%	3.9%	3.9%
	Operating profit margin	6.0%	6.0%	5.2%	5.4%	-	-	-	-
Tsuken Group
	Orders	48,263	49,269	52,072	56,170	12.0%	9.8%	8.8%	9.6%
	Sales	47,873	50,133	50,799	52,395	12.7%	10.4%	9.1%	9.3%
	Operating profit	2,801	3,168	3,548	4,281	9.4%	9.0%	9.2%	10.4%
	Operating profit margin	5.9%	6.3%	7.0%	8.2%	-	-	-	-
NDS Group
	Orders	-	58,677	83,636	80,745	-	11.6%	14.2%	13.8%
	Sales	-	43,536	83,522	79,213	-	9.1%	14.9%	14.1%
	Operating profit	-	2,028	4,141	3,824	-	5.8%	10.8%	9.3%
	Operating profit margin	-	4.7%	5.0%	4.8%	-	-	-	-
SYSKEN Group
	Orders	-	25,444	34,334	33,897	-	5.0%	5.8%	5.8%
	Sales	-	16,723	31,832	33,473	-	3.5%	5.7%	6.0%
	Operating profit	-	604	1,283	1,982	-	1.7%	3.3%	4.8%
	Operating profit margin	-	3.6%	4.0%	5.9%	-	-	-	-
Hokuriku Denwa Kouji Group
	Orders	-	8,493	14,277	16,758	-	1.7%	2.4%	2.9%
	Sales	-	7,076	13,633	16,186	-	1.5%	2.4%	2.9%
	Operating profit	-	424	349	511	-	1.2%	0.9%	1.2%
	Operating profit margin	-	6.0%	2.6%	3.2%	-	-	-	-
Comsys Joho System group
	Orders	9,258	10,581	11,438	12,131	2.3%	2.1%	1.9%	2.1%
	Sales	8,976	10,497	11,545	12,052	2.4%	2.2%	2.1%	2.1%
	Operating profit	940	1,272	1,338	1,532	3.1%	3.6%	3.5%	3.7%
	Operating profit margin	10.5%	12.1%	11.6%	12.7%	-	-	-	-

Source: Shared Research based on company data
Note: Ratios are based on simple totals for the five groups

Group company details

Group name, segment name	NTT Engineering	NCC Engineering	IT Solutions	Social Systems and Other
Nippon Comsys Group	Yes		Yes	Yes
Sanwa Comsys Engineering Group		Yes	Yes	Yes
Tosys Group	Yes		Yes	Yes
Tsuken Group	Yes		Yes	Yes
NDS Group	Yes	Yes	Yes	Yes
SYSKEN Group	Yes	Yes	Yes	Yes
Hokuriku Denwa Kouji Group	Yes	Yes	Yes	Yes
Comsys Joho System group			Yes
Comsys Shared Services Corp.				Yes

Source: Shared Research based on company data
Note: Comsys Shared Service Corp. conducts common operations for the group (general affairs, human resources, finances, salaries, insurance, etc.) and dispatching business.

(For reference) Earnings improvement after move to holding company structure

With the three-way merger between Nippon Comsys, Sanwa Electric (now Sanwa-Comsys Engineering) and East Japan Systems Construction Co. (now TOSYS), a pure holding company was established in the form of Comsys Holdings, which then quickly moved forward with a slate of initiatives aimed at bringing about synergies as it maintained the management organization and authority of each core group company to speed up integration. The company then worked to achieve benefits from this seemingly loose integration. The initiatives are described below. While the gradual pace of the reforms despite their obviousness may surprise non-Japanese readers, the company was dealing with an old, complex, and entrenched system, built to deal with a similarly complex organization and demands of the early-days NTT. NTT was a government-owned telecommunication monopoly. Everything, from labor contracts, to supplier relationships, to subcontractor chains of command, needed to be untangled without compromising operations. The company thinks that the pace of change was fast and results dramatic given the existing culture and traditional ways of doing the “NTT business.”

The effects of the business integration can be easily understood by dividing them into the initial period of the integration (FY03/03–FY03/07), the deepening of the integration effects through Group Innovation 2010 (FY03/09–FY03/11), and the pursuit of efficiency through Comsys Way (FY03/12–FY03/13).

Initial merger benefits (FY03/04-FY03/07)

From FY03/04 through FY03/07, the company implemented organizational changes, integrated common activities, reduced outsourcing costs, and centralized procurement. In January 2005, Nippon Comsys took over the NTT Engineering work being done by Sanwa Comsys; and in April of that year, the NCC Engineering segment of Nippon Comsys was integrated with that of Sanwa Comsys. Nippon Comsys became responsible for NTT Engineering work; Sanwa Comsys was responsible for NCC Engineering work; and Tosys became responsible for the Shin-Etsu area. In this way the business was restructured so that each of the core operating companies had a particular area of responsibility. In addition to integrating internal company systems, Comsys Shared Service Corporation was set up to handle common services within the group.

According to the company, over the four years from FY03/04 through FY03/07, cost savings from integration totaled 5.4 billion yen: personnel costs 700 million yen; business expenses 1.4 billion yen; outsourcing 700 million yen; and materials 2.6 billion yen. Overall savings were 2.3 billion yen in FY03/04-FY03/05, 2.4 billion yen in FY03/06, and 800 million yen in FY03/07.

Group Innovation 2010 (FY03/10–FY03/11)

The second wave of reforms included further integration of common activities, group-wide bulk purchasing of materials, review of regional businesses’ operations management (some regional subsidiaries were merged into parent entities or otherwise restructured), and the introduction of a new management system comstar for cost reduction efforts.

Comsys also took a second look at multilayered relationships with contractors. The traditional way of doing business for Comsys and its peers was very similar to that of the Japanese construction industry. The prime contractor would get a project and then immediately subcontract the entire work to a primary subcontractor who would then place orders with secondary subcontractors (who would often give individual pieces of work to their subcontractors). The roles of the prime contractor and primary subcontractor were unclear, with duplicated activities and inefficiency.
In April 2010, the company changed the subcontracting system in its Tokyo metropolitan operations (Nippon Comsys group). The core operating subsidiary (Nippon Comsys) placed orders with an outside subcontractor directly, creating a simpler two-tiered structure. By FY03/14 all other group companies also switched to this structure.

The cost reductions from these initiatives over the two years from FY03/10 through FY03/11 totaled 5.0 billion yen—mainly through one-off amortization of software, sales of idle assets, and headcount reductions.

In FY03/11, the company also implemented measures to strengthen its management base with the aim of reducing the burden of expenses in subsequent years. Specifically, as a measure to streamline assets, the company wrote off all software assets and sold off idle assets. As a measure to optimize the personnel cost structure, the company implemented a system to assist full-time employees in transferring to new positions and reduced the number of non-regular employees, resulting in a reduction of approximately 500 employees across the group. These measures to strengthen the management base have contributed to a significant reduction in depreciation and personnel costs since FY03/12.

Comsys Way (FY03/12-FY03/13)

The next step was Comsys Way, a plan to extend and enhance structural reform. The Comsys Way provided additional cost savings in FY03/12 and FY03/13 and was a starting point for new business developments.

Comsys reduced its employees and assets in FY03/11. These measures helped the company raise its operating profit by JPY2.1bn in FY03/12. During that year, Comsys also improved productivity and efficiency by introducing an IT tool, an effort that raised operating profit by another JPY500mn. At the same time, a reduction in SG&A expenses led to an additional operating profit increase of JPY200mn. In FY03/13, structural reform and other efforts to improve productively raised the company’s operating profit by JPY6.4bn.

The 10 years of the reforms have boosted the company’s operating profit margins from 4.7% in FY03/05 to 8.3% in FY03/14. Over the same period, gross profit margin rose from 12.2% to 13.8% and the SG&A-to-sales ratio fell from 7.3% to 5.5%.

Progress of Structural Reform

Source: Shared Research based on company data

In FY03/14 and thereafter the company is focusing on the implementation of “Comsys Wayα”, a new plan aimed at growing the top line as well as further boosting profitability. (See the outlook section for detail.) In FY03/14, the merger of Tsuken group subsidiaries, as well as other structural reform and productivity efforts, helped raise the company’s operating profit by JPY2.8bn. The company continues to adopt reforms, which contributed JPY1.8bn to profits in FY03/15 and JPY2.3bn to profits in FY03/16.

Profitability snapshot: Comparison with main competitors

Profitability comparison		Comsys Holdings			Kyowa Exeo			Mirait Holdings
(JPYmn)		FY03/19	FY03/20	FY03/21	FY03/19	FY03/20	FY03/21	FY03/19	FY03/20	FY03/21
Sales		481,783	560,882	563,252	423,727	524,574	573,339	375,911	441,166	463,744
	YoY	26.8%	16.4%	0.4%	35.5%	23.8%	9.3%	20.1%	17.4%	5.1%
Gross profit		65,253	73,612	75,989	58,337	68,327	75,865	46,988	52,174	60,790
	Gross profit margin	13.5%	13.1%	13.5%	13.8%	13.0%	13.2%	12.5%	11.8%	13.1%
SG&A expenses		29,985	34,658	34,417	26,620	37,226	39,241	26,289	30,181	30,661
	SG&A ratio	6.2%	6.2%	6.1%	6.3%	7.1%	6.8%	7.0%	6.8%	6.6%
Operating profit		35,267	38,953	41,572	31,716	31,100	36,623	20,699	21,993	30,129
	Operating profit margin	7.3%	6.9%	7.4%	7.5%	5.9%	6.4%	5.5%	5.0%	6.5%
Recurring profit		36,071	40,064	42,941	33,431	30,669	38,186	21,992	23,207	31,739
	Recurring profit margin	7.5%	7.1%	7.6%	7.9%	5.8%	6.7%	5.9%	5.3%	6.8%
Net income attributable to owners of the parent		28,018	25,994	29,369	40,219	15,603	24,192	25,711	15,220	24,205
	Net margin	5.8%	4.6%	5.2%	9.5%	3.0%	4.2%	6.8%	3.4%	5.2%
Total assets		439,926	450,043	479,419	416,483	444,905	491,574	331,462	352,134	358,751
Shareholders' equity		298,374	307,555	327,554	263,897	266,453	285,654	196,436	215,423	226,389
Equity ratio		67.8%	68.3%	68.3%	63.4%	59.9%	58.1%	59.3%	61.2%	63.1%
ROA (RP-based)		9.4%	9.0%	9.2%	9.9%	7.1%	8.2%	7.8%	6.8%	8.9%
ROE		10.6%	8.6%	9.2%	18.3%	5.9%	7.1%	15.4%	7.4%	11.0%

Source: Shared Research based on company data
Net income refers to net income attributable to owners of the parent

Comsys has one of the highest operating profit margins of the three major telecommunications construction companies. Comsys Holdings was formed by the merger of three companies in 2003; Kyowa Exeo Corporation (TSE1: 1951) took over Wako Engineering Corp. and Daiwa Densetsu Corporation in 2004; Mirait Holdings (TSE1: 1417) started in 2010.

Comsys had a better OPM than Kyowa Exeo until FY03/17 due to a higher gross profit margin. The gap began to emerge in FY03/12 as Comsys proved more successful at adopting a two-tier contractor relationship instead of the traditional multi-tier system, and also made its construction work more efficient with the use of information technology. The high gross margin notwithstanding, the SG&A expense ratio of Comsys was a bit on the high side.

Comsys had the highest operating profit margin in the industry until FY03/18, when its 8.0% operating profit margin was surpassed by the 8.2% margin reported by Kyowa Exeo. This was largely due to its acquisition of Kando Co., Ltd., and the operating profit margin of 8.4% excluding the impact of acquiring Kando still shows Comsys coming out on top.

In FY03/19 and FY03/20, GPM temporarily fell following the addition to the group in October 2018 of three companies with lower margins than the existing group (NDS Co., Ltd., SYSKEN Corporation, and Hokuriku Denwa Kouji Co., Ltd.), but GPM steadily recovered in FY03/21 as the effects of remedial measures began to make themselves known. The SG&A ratio has been stable at 6.1–6.2% since FY03/15. Comsys aims to achieve OPM of 8% or higher by FY03/24 through the effect of increased sales from the optimal use of management resources and cost reductions enabled by fundamental restructuring and efficiency improvements.

Strengths and weaknesses

Strengths

Can benefit from the development in advanced telecommunications: The telecommunications industry is in a state of continuous technological change driven by rising data transmission capacity demand. As such, accompanying installation and construction can be expected. The barriers to entry are high, and the industry is oligopolistic. Comsys, which has expanded nationwide as one of the largest industry players, is in an ideal place to benefit from such developments.

Healthy balance sheet and stable cash flow: The company’s business model entails upfront expenditures so it requires a certain amount of working capital, but its equity ratio is high, and it has very little interest-bearing debt. In addition, the company’s NTT Engineering segment provides relatively steady cash flow. Although the environment surrounding this segment is harsh, it is highly unlikely that segment sales will drop, and it should continue to generate cash flow. The company has a stable customer base of telecom providers, which it has built up over many years. As transactions with this customer base are expected to continue, the company has relatively low risk. The company’s clean balance sheet and steady cash flow smooth the way for any new investments or businesses, and enable it to withstand deterioration in the external environment.

Adept at controlling costs: Comsys has shown itself adept in continuous cost reductions. It was ahead of its industry peers in terms of industry consolidation and the first to implement sweeping organizational changes and centralize buying. It identified inefficiencies in systems, processes, and costs, and continued to cut costs. As a result, the company had the highest OPM among the three largest telecommunications construction companies in Japan in FY03/21, at 7.4%. The company was seeking to streamline its construction work with the use of IT systems as of March 2018. Shared Research thinks that the company will continue to make efforts to reduce costs and further improve earnings.

Weaknesses

High dependence on telecom capex: The NTT group accounted for over 60% of the company’s sales in FY03/13 and other telecoms carriers accounted for the remainder. In FY03/21, sales to the NTT group accounted for 43% of the company’s overall sales. NTT’s overall capital spending is on a long-term downtrend. Further, while the telecom construction market is oligopolistic, it is not monopolistic and therefore firms like Comsys and MIRAIT are price takers and not price makers and have to yield to pricing pressures. The company has a window of opportunity for the next several years, while the mobile carrier capex offsets declines in the fixed-line infrastructure. It needs to identify and grow future earners before that window closes.

Limited top line growth potential in core business and lack of experience in other areas: Comsys is captive to the slowing telecom construction market. The company had the largest market share in FY03/21. Share gains are unlikely due to antitrust issues and business practices where NTT determines what the share will be. The company is keen to expand in new areas such as IT solutions and social infrastructure business. One problem is that it has little experience in building sizeable business outside its traditional core.

Vulnerable to demands for price cuts: According to Comsys, as all the major telecommunications construction companies are certified by NTT, there is little to differentiate them in terms of technology. As Comsys is reliant on certain customers for a large proportion of its sales, the company does not have much pricing power when it comes to negotiating with them. As a result, Comsys is vulnerable to demands for price cuts, in Shared Research’s view. The company concedes that prices for engineering work are on a downward trend under pressure for cost cuts from NTT group companies.

Market and value chain

Market overview

Telecom markets

As telecom technology is rapidly evolving, uses are enjoying benefits such as high speed, broadband, and low unit transmission prices. For these benefits, it is indispensable to update and upgrade communication facilities and software in addition to their daily operation. For example, in the field of fixed communication, migration of the land-line PSTN (Public Switched Telephone Network) to an IP network is process of migration to IP networks and is expected to be completed in January 2025.

* NTT East and NTT West are planning to fully migrate their landline-based Public Switched Telephone Network (PSTN) to an internet protocol-based network by 2025; the changeover is due in large part to the expected life of their current switching equipment, which is only expected to last until about 2025. In conjunction with this, call dialing from landlines is scheduled to be switched over to an IP-based network starting in January 2024, and the entire landline-based network is scheduled to be completely switched over to an IP-based network by January 2025. After fully migrating to the new IP-based network, NTT East and West are thinking that they will be able to continue using existing metal cables and equipment that accommodates those metal cables (current subscriber switching equipment) and will be able to charge the same base rate for phone service as they do for their current landline-based phone service, assuming the operating environment does not change dramatically for the worse. After switching to the IP-based network, NTT East and West are looking to take advantage of the unique properties of new network and set a uniform price of JPY8.5 per three minutes for domestic phone calls between any two points, regardless of the distance. The switch to the IP-based network will not require any installation work inside of homes and will not require any change in household telephone equipment.

In the field of mobile communication, LTE-Advanced (4G), which is characterized by carrier aggregation for using multiple frequencies in one bundle and by MIMO (Multiple Input Multiple Output) for using multiple transceiving antennas, became widespread. The four mobile network operators received their spectrum allotments for 5G in April 2019, started pre-service in 2019, and launched full-scale commercial services in March 2020. The 5G mobile communication system, which comes next to LTE-Advanced, is under research and development toward practical use in 2020. The 5G system combines high and low frequencies to realize drastically high-speed communication (over 10Gbps). This technology is directed toward allowing users to comfortably enjoy ultrahigh-definition (4k/8k) streaming videos even in a crowded event site or in urban areas. This technology is also to realize at low cost and with low power consumption large-capacity communication resistant to an explosive increase in traffic that is expected in the IoT age.

(For further details on 5G, see discussion under “COMSYS VISION NEXT STAGE 2023 (FY03/20–FY03/24)” in Outlook section.)

Fiber optic services

Fiber optics use light signals to transmit data. Their key advantages versus traditional copper wires are higher data-transmission speeds and less signal loss over long distances, making them suitable for video transmission over the Internet. The uptake of fiber optic services continues to increase, although the rate of growth has slowed in recent years. Demand is falling for fixed line services as users of mobile devices and high-speed mobile data increase.

The main companies providing fixed optical lines are NTT East and West, KDDI, K-Opticom Corp. (subsidiary of Kansai Electric Power Co. [9503]), and UCOM. However, NTT East and West are the biggest players, accounting for a combined market share of roughly 70%.

NTT East and West had promoted the sales of optical fiber access line services, particularly its own brands. Then in 2014 it announced the start of optical fiber access services offered at wholesale with the aim of promoting the spread of optical fiber services. In light of this since spring 2015, various companies have been participating in new services that combine their own services with the wholesale optic fiber access service of NTT East and West (so-called “Hikari Collaboration Model”). For example, even mobile carriers such as NTT Docomo and Softbank began providing services packaging their mobile lines with this wholesale optic fiber access service (Hikari Collaboration) starting in spring 2015.
NTT East and West had a total of 20,053,000 optic fiber access service subscribers in FY03/17, 20,533,000 in FY03/19, 21,079,000 in FY03/19, 21,658,000 in FY03/20, and 22,564,000 in FY03/21; of these, Hikari Collaboration made up 43.6% (8,744,000) in FY03/17, and that share steadily rose to 54.1% (11,117,000) in FY03/18, 60.2% (12,690,000) in FY03/19, 64.1% (13,888,000) in FY03/20, and 67.6% (15,245,000) in FY03/21.

NTT subscribers			FY03/11	FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
('000 contracts)			Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.
	Total		45,330	44,085	42,342	41,050	40,002	39,202	38,850	38,071	37,441	36,802	36,666
		YoY	-2.5%	-2.7%	-4.0%	-3.1%	-2.6%	-2.0%	-0.9%	-2.0%	-1.7%	-1.7%	-0.4%
	Telephone subscribers		30,271	27,521	25,042	23,000	21,286	19,943	18,797	17,538	16,363	15,144	14,102
		YoY	-8.9%	-9.1%	-9.0%	-8.2%	-7.5%	-6.3%	-5.7%	-6.7%	-6.7%	-7.4%	-6.9%
	Fiber-optic subscribers		15,059	16,564	17,300	18,050	18,716	19,259	20,053	20,533	21,078	21,658	22,564
		YoY	13.6%	10.0%	4.4%	4.3%	3.7%	2.9%	4.1%	2.4%	2.7%	2.8%	4.2%

Source: Shared Research based on various data

NTT East, NTT West: capex			FY03/11	FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21	FY03/22
(JPYbn)			Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Est.
	Investment		779.6	784.1	754.9	690.7	626.6	583.4	547.9	549.6	541.0	522.5	527.4	510.0
		YoY	-7.8%	0.6%	-3.7%	-8.5%	-9.3%	-6.9%	-6.1%	0.3%	-1.6%	-3.4%	0.9%	-3.3%
	Fixed line services		484.6	480.1	463.9	427.7	402.6	406.4	391.9	395.6	380.0	372.5	371.4	356.0
		YoY	-7.5%	-0.9%	-3.4%	-7.8%	-5.9%	0.9%	-3.6%	0.9%	-3.9%	-2.0%	-0.3%	-4.1%
	Fiber-optic services		295.0	304.0	291.0	263.0	224.0	177.0	156.0	154.0	161.0	150.0	156.0	154.0
		YoY	-8.4%	3.1%	-4.3%	-9.6%	-14.8%	-21.0%	-11.9%	-1.3%	4.5%	-6.8%	4.0%	-1.3%

Source: Shared Research based on various data

Overall traffic on Japan’s fixed-line broadband services (FTTH, DSL, CATV, FWA) has risen sharply in recent years as the traffic per average user has soared. As of the end of November 2019, overall download traffic was 12.7 terabytes per second (+15.2% YoY). The daily average was 137 petabytes. The average download traffic per user was roughly 309.5 kilobytes per second (+12.5%), which works out to an average of roughly 3.3 gigabytes per day, according to calculations by Japan’s Ministry of Internal Affairs and Communications.

Wireless telecommunications infrastructure

Smartphones and tablets have revolutionized the wireless telecommunications market. Smartphones generate 10 to 20 times as much data traffic as traditional mobile phones. As the use of bandwidth-hungry content accelerates, data volumes swell. How to deal with the surge in traffic is a pressing issue, creating demand for network infrastructure that can handle higher data volumes and speeds.

Telecom companies are focusing on developing and diffusing high-speed large-capacity communication services using LTE-advanced or a new frequency band as one means used to cope with the traffic surge. 5G pre-service kicked off in 2019, and was followed by the launch of regular 5G commercial services in March 2020. (For further details on 5G, see discussion under “COMSYS VISION NEXT STAGE 2023 (FY03/20–FY03/24)” in Outlook section.)

In Japan, mobile traffic has increased rapidly due to the popularity of smartphones. The Cisco Visual Networking Index from US-based Cisco Systems, Inc., forecasts that this trend will continue, such that the 676 petabytes (1015 bytes) of mobile data traffic per month in 2017 will swell some 3.6x to 2.4 exabytes (1018 bytes) per month in 2022.

According to statistics from the Ministry of Internal Affairs and Communications on telecommunications traffic in Japan, as of June 2020 download traffic at Japan’s telecommunications carriers was roughly 3.53 terabytes per second (+20% YoY). The combined download and upload traffic was 3.97 terabytes per second (+19% YoY), the average traffic per user was roughly 21.235 kilobytes per second (+9% YoY), which works out to an average of 222 megabytes in cumulative traffic per day per user (+6% YoY).

Mobile carrier capex trends

Looking at the actual mobile carrier investment trends, each company has been investing more in new technologies and new frequency bands in order to increase capacity and expand services. After cutting back on capital spending through the end of FY03/17, mobile phone service providers, except NTT Docomo, began slowly stepping up capital spending starting in FY03/18.

Capex by company		FY03/11	FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21	FY03/22
(JPYbn)		Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Est.
NTT Docomo		668.5	726.8	753.7	703.1	661.8	595.2	597.1	577.0	593.7	572.8	569.1	550.0
	YoY	-2.6%	8.7%	3.7%	-6.7%	-5.9%	-10.1%	0.3%	-3.4%	2.9%	-3.5%	-0.6%	-3.4%
KDDI		441.8	421.6	467.0	571.8	667.7	531.4	519.4	560.8	601.7	615.0	627.9	630.0
	YoY	-14.7%	-4.6%	10.8%	22.4%	16.8%	-20.4%	-2.3%	8.0%	7.3%	2.2%	2.1%	0.3%
SoftBank		392.6	474.1	631.6	712.5	583.7	412.6	320.6	350.1	381.6	369.7	421.9	Undisclosed
	YoY	76.1%	20.8%	33.2%	12.8%	-18.1%	-29.3%	-22.3%	9.2%	9.0%	-3.1%	14.1%	-
Rakuten		-	-	-	-	-	-	-	3.3	8.3	187.1	353.9	Undisclosed
	YoY	-	-	-	-	-	-	-	-	151.5%	2,154.2%	89.2%	-

Source: Shared Research based on various data
The KDDI capex figures for FY03/15 and later include amounts related to the consolidation of UQ Communications.
Domestic telecoms carriers only.

Network maintenance and management

Telecommunication network maintenance and management currently comprise a small proportion of the company’s sales, but the business can be expected to grow and become a steady source of earnings in the medium to long term as sales grow.

NTT East and West have large numbers of baby boomers in their workforces. As these baby boomers retire over the next few years, the number of employees engaged in network maintenance and management is likely to fall dramatically. Therefore, there is a strong possibility that NTT East and West will outsource network maintenance and management to telecommunications construction firms such as Comsys. The margin on work for SoftBank Mobile is expected to improve as, with certain exceptions, SoftBank Mobile is moving away from using reverse auctions to award orders.

The graph below shows why NTT East and West were expected to increase outsourced network maintenance and management since FY03/13. The companies had large numbers of employees nearing 60, which was the mandatory retirement age. However, NTT East and West changed their mandatory retirement policy, and from October 2013, those who wish may continue working until the age of 65. However, Shared Research understands outsourcing of maintenance and management projects from NTT East and West to Comsys Holdings and other telecommunications construction companies only began expanding in about 2018.

Employee numbers at NTT East and West and their subcontractors

Source: Shared Research based on NTT materials
Note; Employee numbers for East Outsourcing Companies include the consolidated prefectural outsourcing companies (incl. NTT EAST-TOKYO), NTT-ME and NTT EAST SOLUTIONS, while figures for West Outsourcing Companies include the consolidated regional outsourcing companies (incl. NTT WEST-KANSAI), NTT MARKETING ACT (outsourcing company in management and marketing), NTT NEOMEIT (outsourcing company in facilities and equipment) and NTT WEST-HOMETECHNO. Figures for the outsourcing companies include the number of employees who retired or will retire at the end of a fiscal year and who were rehired or will be rehired at the beginning of the next fiscal year (at the age of 50 and 60 – on annually renewable fixed-term contracts).

Barriers to entry

In NTT Engineering, barriers to entry are high as technical certification by the procurer (bidding credentials) is necessary. Barriers to entry in the NCC business are not as high as for NTT, but contractors need to be able to offer services nationwide, a substantial hurdle for aspiring entrants.

Competition in the NTT Engineering Business

NTT East and West assign contracts to specific companies to carry out construction work in specific territories. The contractors rarely change. For civil engineering projects such as manhole installation, qualified bidders join the process, which determines who carries out the work. Because NTT certifies all the firms, there are almost no differences in technology. Their strength in particular regions wins the business.

Competition in the NCC Engineering Business

Shared Research understands that different mobile carriers have different priorities when ordering project works. Therefore, competitive conditions for the main contractor differ according to which mobile carrier is doing the procurement.

A mobile telecoms operator such as Softbank, which has concentrated on installing base stations in certain spots in high population density urban areas, places importance on cost rather than the presence of an office network. It is likely that competition will become fierce. Further, it is Shared Research’s understanding that Softbank Mobile uses a reverse auction system to select telecoms construction contractors, and consequently profit margins on work done for Softbank Mobile are lower compared with work done for other telecoms carriers.

Strategy

Strategy centers on expanding revenues in the NTT Engineering segment in the face of a long-term decline in the NTT group’s capex. Comsys is trying to address this issue in two ways. First, it has been improving margins in the existing businesses through better operational efficiencies—an ongoing theme since the three-way merger in 2003 that gave birth to today’s Comsys. Second, the company is looking to grow non-NTT revenues by pursuing any opportunity to apply its core competence of managing electric and telecommunications engineering projects of any size, profitably and nationwide.

The company’s efforts to streamline operations and reduce costs have significantly improved its profitability in the medium term, with operating profit margin increasing to 8.4% in FY03/15 from 5.1% in FY03/05. Thereafter, changes in the business portfolio and the addition of NDS, SYSKEN, and Hokuriku Denwa Kouji in October 2018 caused the margin to fall temporarily, dropping to 6.9% in FY03/20. However, subsequent measures to improve business efficiency and reduce costs helped the margin rise back to 7.4% in FY03/21. The company plans to continue restructuring its offices and consolidating group businesses. Comsys is working to make its management of construction processes and construction work more efficient with the use of information technology, and is also promoting an internal company system (see the Outlook section for detail). It is targeting OPM of 8.0% in FY03/24.

On the other hand, the company is seeking to increase sales composition ratios of non-NTT projects by expanding into new business fields. Although Comsys acquired Tsuken in April 2010, the company generated 44% of its sales from businesses other than NTT installation projects in FY03/15, almost unchanged from 43% for FY03/05. Shared Research thinks that Comsys should increase sales of IT Solutions and Social Systems operations. Excluding NTT Engineering, the proportion of sales rose to 57% in FY3/21.

According to the company, it is keen to buy growth in new areas using its treasury shares but needs to see synergies with the existing businesses and expertise. That narrows potential acquisition targets to firms or businesses involved in some way in engineering and construction. As mentioned, further consolidation in the existing business is likely limited as any significant combination would spark antitrust issues.

Historical performance

Q3 FY03/22 results (out February 9, 2022)

Overview

In Q3 FY03/22, orders totaled JPY403.5bn (-6.1% YoY) and sales were JPY389.9bn (+5.1% YoY). Orders carried over amounted to JPY249.8bn (-8.0% YoY). Operating profit was JPY27.9bn (+23.2% YoY), recurring profit was JPY28.9bn (+21.1% YoY), and net income attributable to owners of the parent was JPY19.0bn (+13.5% YoY).

Progress versus forecast: Progress rates versus full-year FY03/22 targets were 70.8% for orders (versus 73.2% of full-year results in Q3 FY03/21), 67.2% for sales (versus 65.8%), 64.8% for operating profit (versus 54.4%), 66.4% for recurring profit (versus 55.5%), and 65.7% for net income attributable to owners of the parent (versus 57.2%).

Orders received down 6.1% YoY: Orders were down 6.3% YoY in the NTT Engineering segment, up 8.3% YoY in the NCC Engineering segment, down 12.7% YoY in the IT Solutions segment, and down 5.5% YoY in the Social Systems and Other segment.

Sales increased by 5.1% YoY: Sales were up 3.5% YoY in the NTT Engineering segment, up 16.8% YoY in the NCC Engineering segment, down 0.6% YoY in the IT Solutions segment, and up 7.7% YoY in the Social Systems and Other segment.

Operating profit up 23.2% YoY: GPM increased 1.0pp YoY to 13.8%, and the SG&A to sales ratio fell 0.1pp YoY to 6.6%. As a result, operating profit margin increased 1.0pp YoY to 7.1%.
The company's efforts to improve productivity and reduce costs appear to be bearing fruit.

Business environment and company initiatives

Concerning the business environment, in the information and communications industry, the installation of 5G wireless base stations for digital communications infrastructure and the development of optical fiber networks, including the Project on Promoting Advanced Radio Environment Improvements, are all part of a drive to realize high-speed, high-capacity digital services. In the public and private sectors, investments are underway into the development of social infrastructure to achieve carbon neutrality (with initiatives including the expansion of renewable energy sources such as solar power generation), reduce the risk of increasingly severe and frequent natural disasters, strengthen national resilience, and respond to the accelerating aging of infrastructure. In the IT solution field, in medical care, education, administration, finance, and other areas, investment related to ICT such as the construction of data platforms, AI, IoT, and Cloud services will increase as DX conversion initiatives, such as digitization and data sharing.

In this business environment, the company will work to improve productivity in the communications infrastructure field through optimizing the use of group resources and focusing on construction management to respond to accelerating demand for nationwide projects for the construction of digital communications infrastructure. In the growing fields of IT solutions and social systems, the company will work to increase orders received through enhancing sales collaboration within the group by utilizing virtual companies and expand the scope of its business through M&A. The company will continue to strengthen its management base by building a structure that optimizes its ability to shift resources in response to the business environment, implementing structural reforms using DX, and accelerating reforms to work styles as working practices change.

Sales and orders by segment

Orders and sales by business segment are as follows.

NTT Engineering

Orders totaled JPY176.4bn (-6.3% YoY); 79.1% of the full-year target (72.9% of full-year FY03/21 results in Q3 FY03/21)

Sales were JPY167.9bn (+3.5% YoY); 68.3% of the full-year target (67.0%)

NTT group's capital expenditure for fixed-line and mobile systems is expected to remain in line with expectations, although that for 4G steel tower maintenance is on a downward trend. Capital investment related to 5G also continues to be in line with plans.

NCC Engineering

Orders totaled JPY39.2bn (+8.3% YoY); 74.0% of the full-year target (71.8% of full-year FY03/21 results in Q3 FY03/21)

Sales were JPY35.4bn (+16.8% YoY); 70.8% of the full-year target (64.2%)

Capital investment by telecom carriers for the deployment of 5G base stations and Rakuten Group for its nationwide 4G deployment continues.

IT Solutions

Orders totaled JPY73.3bn (-12.7% YoY); 68.5% of the full-year target (79.8% of full-year FY03/21 results in Q3 FY03/21)

Sales were JPY62.6bn (-0.6% YoY); 58.5% of the full-year target (59.7%)

Orders decreased YoY, largely as a result of orders for the expansive GIGA School Project. In general, orders for projects tied to facilities affected by the COVID-19 pandemic like hotels, airports, and transportation are declining. The shortage of materials is expected to have some impact on sales as related to progress with construction.

Social Systems

Orders totaled JPY114.4bn (-5.5% YoY); 61.2% of the full-year target (70.2% of full-year FY03/21 results in Q3 FY03/21)

Sales were JPY123.8bn (+7.7% YoY); 69.9% of the full-year target (68.4%)

By sector, the business environment for infrastructure (civil engineering) and electricity and telecommunications seems to be in line with expectations. On the other hand, renewable energy has apparently plateaued with the transition from FIT to FIP. The shortage of materials is expected to have some impact on sales as related to progress with construction.

Sales and orders by segment, orders carried over

Orders and sales			FY03/20				FY03/21				FY03/22			FY03/22
(JPYbn)			Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	% of Est.	FY Est.
Orders
	NTT Engineering		63.4	134.3	195.3	255.4	54.6	120.1	188.2	258.2	63.0	121.1	176.4	79.1%	223.0
		YoY	41.5%	51.1%	18.7%	14.6%	-13.9%	-10.6%	-3.6%	1.1%	15.4%	0.8%	-6.3%		-13.6%
		% of total	45.4%	42.1%	43.1%	43.2%	42.0%	43.0%	43.8%	44.0%	45.8%	44.5%	43.7%		39.1%
	NCC Engineering		9.0	18.2	31.6	43.4	10.6	22.9	36.2	50.4	12.1	24.8	39.2	74.0%	53.0
		YoY	7.1%	5.2%	-5.7%	-6.7%	17.8%	25.8%	14.6%	16.1%	14.2%	8.3%	8.3%		5.2%
		% of total	6.4%	5.7%	7.0%	7.3%	8.2%	8.2%	8.4%	8.6%	8.8%	9.1%	9.7%		9.3%
	IT Solutions		28.2	53.6	76.5	100.8	28.6	56.6	84.0	105.3	23.4	50.1	73.3	68.5%	107.0
		YoY	59.3%	60.0%	30.8%	24.6%

Comsys Holdings 1721

Executive summary

One of the largest telecom construction companies. Also expanding into other areas

Earnings performance

Strengths and weaknesses

Key financial data

Trends and outlook

Quarterly performance

Full-year FY03/22 results (out May 12, 2022)

Overview

Business environment and company initiatives

Sales and orders by segment

NTT Engineering

NCC Engineering

IT Solutions

Social Systems

Full-year company forecast for FY03/23

Overview

FY03/23 company forecast

External environment

Major company initiatives

Trends and forecasts by business

NTT Engineering

Major company initiatives

NCC Engineering

Major company initiatives

IT Solutions

Major company initiatives

Social Systems and Other

Major company initiatives

Medium to long-term outlook: Medium-term vision COMSYS VISION NEXT STAGE 2023

Overview

Targets for the plan’s final year (FY03/24)

COMSYS VISION NEXT STAGE 2023’s main policies

5G opens up additional business opportunities

Arrival of 5G in Japan

Changes that will be brought about by 5G

Heterogeneous networks for creating Non-Standalone (NSA) mode of 5G

Control/User plane separation

Network slicing

Mobile edge computing

5G base station maintenance

Reduction in cell size and its impact on related construction

Generating synergies from the integration of recently acquired companies

Major structural reforms

IT Solutions segment

Growth drivers: IT Solutions and Social Systems

IT Solutions segment

Company targeting sales growth at a CAGR of 7–8%

Social Systems segment

Company targeting sales growth at a CAGR of 4–5%

Electricity and telecommunications

Renewable energy

Infrastructure/other businesses

Returns to shareholders

Business

Business description

Main businesses

NTT Engineering (43.0% of sales in FY03/21 versus 44.7% in FY03/20)

Access work

Network engineering

Mobile engineering

NCC Engineering (8.4% of sales in FY03/21 versus 7.8% in FY03/20)

IT Solutions (18.7% of sales in FY03/21 versus 17.5% in FY03/20)

Social Systems and Other (29.9% of sales in FY03/21 versus 30.0% in FY03/20)

Solar Power (Photovoltaic) Generating System Construction

Organizational structure

Nippon Comsys group (FY03/21: 49.8% of sales and 52.4% of operating profit)(These figures are based on the total for the groups as reported in the company’s securities report. Composition ratios below were also obtained in the same way.)

Sanwa Comsys Engineering group (FY03/21: 10.5% of sales and 15.0% of operating profit)

Tosys group (FY03/21: 5.3% of sales and 4.0% of operating profit)

Tsuken group (FY03/21: 9.3% of sales and 10.6% of operating profit)

NDS group (FY03/21: 14.1% of sales and 9.3% of operating profit)

SYSKEN group (FY03/21: 6.0% of sales and 4.9% of operating profit)

Hokuriku Denwa Kouji group (FY03/21: 2.9% of sales and 1.3% of operating profit)

Comsys Joho System group (FY03/21: 2.1% of sales and 3.8% of operating profit)

(For reference) Earnings improvement after move to holding company structure

Initial merger benefits (FY03/04-FY03/07)

Group Innovation 2010 (FY03/10–FY03/11)

Comsys Way (FY03/12-FY03/13)

Profitability snapshot: Comparison with main competitors

Nippon Comsys group (FY03/21: 49.8% of sales and 52.4% of operating profit)
(These figures are based on the total for the groups as reported in the company’s securities report. Composition ratios below were also obtained in the same way.)