Daiwabo Holdings’ main business is wholesaling IT equipment (the IT Infrastructure Distribution segment). The company also produces fibers and makes industrial machinery. In FY03/21, revenue was JPY1,043.5bn, and operating profit was JPY35.0bn. The IT Infrastructure Distribution segment accounted for 92.9% of revenue in FY03/21, the Fiber segment for 5.8%, and the Industrial Machinery segment for 1.1%. In the IT Infrastructure Distribution segment, the company wholesales IT and peripheral equipment (such as PCs, printers, and servers), as well as packaged software and cloud platforms. In the Fiber segment, it produces and sells polypropylene fiber, nonwoven fabrics for use in sanitary materials, waterproof sheeting for construction materials, and clothing. In the Industrial Machinery segment, it manufactures and sells vertical lathes, wheel lathes, and automatic packaging machines.

IT Infrastructure Distribution segment: In FY03/21, the segment produced revenue of JPY969.7bn and operating profit of JPY33.2bn. In this business, the company serves as a trading company, wholesaling IT equipment (such as PCs and servers), packaged software, and cloud services to the 19,000 sales partners—its customers—throughout Japan. These sales partners include local companies selling IT equipment, IT trading companies, system integrators, mass retailers, and online business operators. In general, the company does not sell directly to end users. To maintain close contact with sales partners, the company has a sales network spanning 93 locations (from Hokkaido in the north to Okinawa in the south).

The Daiwabo Group operates as an independent multi-vendor, handling about 2.2 million items from 1,300 companies, providing customers the IT equipment that suits them best. The company has the largest share (29.7% in FY03/21) of the Japanese wholesale market for PCs, its main product category. This share gives the company sourcing advantages, both on quantity and price. Daiwabo maintains large inventories, typically of as many as 30,000 items. As a result, to some extent the company fulfills a warehousing function for manufacturers, and this level of inventory allows it to ship expeditiously. The company’s logistic system is large in scale and centralized. The company has five logistics warehouses around Japan, focused on two large centers employing state-of-the-art picking robots. This system has been established to ensure products are delivered to end users at the designated times.

In the IT Infrastructure Distribution segment, the company seeks to stand out among rivals by leveraging its nationwide network of 93 sales bases, status as an independent multi-vendor, vast product lineup totaling around 2.2mn items, next-day delivery, and attractive prices. The company says these competitive advantages help it earn trust from sales partners and attract end users. The Daiwabo Group has no competitors that have developed the IT equipment wholesaling business in the same way. Comparable companies that compete in sales of PCs and software are Otsuka Corporation (TSE1: 4768), SoftBank Group (TSE1: 9984) subsidiary SB C&S, and TD SYNNEX (a subsidiary of US-based SYNNEX). A key difference between these companies and the Daiwabo Group is that the former focus on Japan’s major metropolitan areas (Tokyo, Nagoya, and Osaka). Also, Otsuka’s main business is system integration, and SB C&S is a subsidiary of a major telecommunications carrier group.

Fiber segment: In this business, the company manufactures and sells synthetic fiber products such as polypropylene fibers, nonwoven fabrics for sanitary materials and cosmetics products, rayon fibers, industrial materials (such as waterproof sheeting for use in construction, truck seats, event tents, and sponge rubber), textiles for apparel and household products, and clothing on an OEM basis for apparel brands. The company has six key plants in Japan, as well as factories in Indonesia and China. Sales of nonwoven fabrics are boosting performance in this segment, as the COVID-19 pandemic spurs demand for sanitary materials. Highlighting the fact that rayon is made from wood pulp, the company produces and sells biodegradable rayon fiber for use in eco-friendly products. In FY03/21, the Fiber segment produced revenue of JPY61.0bn, operating profit of JPY1.4bn, and OPM of 2.2%.

Industrial Machinery segment: The company manufactures (at two factories in Japan) and sells vertical lathes, railway wheel lathes, and automatic packaging machines. Its vertical lathes, so named because of their vertical axis of rotation, are mainly used by manufacturers of heavy equipment to produce engine parts and equipment for aircraft engines. The company has the top share of the Japanese market for medium-sized and large vertical lathes. Railway operators are the main customers for wheel lathes, which are used to maintain rolling stock. The company also has the largest share of the market in this category. The company also makes automatic packaging machines, such as carton-making machines (cartoners), intermediary packaging machines, and cardboard case-makers, which it sells to food and drug manufacturers. In recent years, this market has matured, says the company. In FY03/21, segment revenue was JPY11.6bn, operating profit was JPY537mn, and OPM was 4.6%.

FY03/21 marked the final year of Daiwabo Group’s previous three-year management plan, which was Phase III of its Innovation 21 longer-term plan, and the company set records for both revenue and operating profit. In the mainstay IT Infrastructure Distribution segment, with the pandemic encouraging teleworking and online meetings, the company cultivated demand for notebook PCs, online conferencing systems, and security. In connection with the GIGA School concept, it provided devices and services to some 1,400 of 1,800 municipalities nationwide.

At the same time, with more software moving to the cloud, the company enhanced its subscription business and promoted region-specific sales efforts that made use of sales locations around Japan. Revenue gained via iKAZUCHI (a portal website that allows for the central management of subscription service contracts and billing) grew more than twentyfold from JPY530mn in FY03/18 to JPY11.2bn in FY03/21. iKAZUCHI is the company’s proprietary platform, and the convenience of sales partners using it will improve as the number of affiliated vendors grows (there were 65 as of end-FY03/21). It is also the case that any increase in the number of sales partners will have a synergistic effect on the number of affiliated vendors.

Earnings trends

FY03/22 results: For FY03/21, the company reported consolidated revenue of JPY763.8bn (-26.8% YoY), operating profit of JPY24.1bn (-31.3% YoY), recurring profit of JPY24.6bn (-31.4% YoY), and net income attributable to parent company shareholders of JPY17.0bn (-33.9% YoY). YoY comparisons are skewed based on the application of the Accounting Standard for Revenue Recognition in FY03/22, and are given for reference only. Operating profit was up in the Fiber and Industrial Machinery segments, but down 34.8% YoY in the IT Infrastructure Distribution segment, resulting in an overall decrease in operating profit. The IT Infrastructure Distribution segment was severely affected by the reactionary decline from GIGA school concept-related demand and teleworking demand in FY03/21.

The company's FY03/23 forecast calls for revenue of JPY830.0bn (+8.7% YoY), operating profit of JPY27.4bn (+13.7% YoY), recurring profit of JPY27.5bn (+12.0% YoY), and net income attributable to owners of the parent of JPY18.6bn (+9.5% YoY). FY03/23 will be the second year of the company's medium-term management plan. The company has downwardly revised its Fy03/23 operating profit targets for the Fiber and Industrial Machinery segments by a total of JPY1.3bn. It meanwhile forecasts revenue and operating profit rising in the IT Infrastructure Distribution segment by 9.2% YoY and 9.5% YoY, respectively.

Medium-term business plan: The company unveiled its medium-term business plan for FY03/22 to FY03/24 on May 13, 2021. It views these three years as a period of transition toward long-term growth. Quantitative targets for FY03/24 are revenue of JPY875.0bn (+6.7% from FY03/22 target) and operating profit of JPY31.4bn (+10.2%) for an OPM of 3.6% (vs. FY03/22 target of 3.5% and FY03/21 result of 3.4%). The company also outlined its qualitative goals: to create next-generation growth drivers (e.g., expansion of cloud services); to help form a better society using its position as a leading company (business expansion through solving social issues); and to reform business foundation (realize better shareholder returns and effective corporate governance). For the first time in a medium-term plan, it also indicated its policy for environmental, social, and governance (ESG) initiatives. The company hopes to contribute to the resolution of social issues through the promotion of its own businesses.

Strengths and weaknesses

Strengths
1) Top share of the Japanese market for PC wholesaling, supported by a nationwide network of 93 sales bases
2) Extensive inventories and five logistics centers around Japan to deliver products quickly and in large quantities
3) As Japan’s largest independent multi-vendor, able to provide customers with optimal devices from a diverse product lineup

Weaknesses:
1) Mainstay IT Infrastructure Distribution segment focused on reselling, but profitability low
2) In the Fiber segment (legacy business), plants spread across six locations in Japan, so maintenance and management efficiencies low
3) In the Industrial Machinery segment, product lineup includes medium-sized and large vertical lathes and wheel lathes, which lack growth potential (See the “Strengths and weaknesses” section for details.)

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.
Revenue			513,469	634,687	566,194	578,506	617,811	669,596	785,554	944,053	1,043,534	763,838	830,000
	YoY		4.9%	23.6%	-10.8%	2.2%	6.8%	8.4%	17.3%	20.2%	10.5%	-26.8%	8.7%
Gross profit			45,316	52,756	48,805	49,969	55,607	57,924	67,811	81,476	81,851	64,141
	YoY		-0.8%	16.4%	-7.5%	2.4%	11.3%	4.2%	17.1%	20.2%	0.5%	-21.6%
	Gross profit margin		8.8%	8.3%	8.6%	8.6%	9.0%	8.7%	8.6%	8.6%	7.8%	8.4%
Operating profit			5,906	10,960	8,246	9,912	12,626	14,305	22,709	32,841	35,028	24,059	27,360
	YoY		-16.5%	85.6%	-24.8%	20.2%	27.4%	13.3%	58.7%	44.6%	6.7%	-31.3%	13.7%
	Operating profit margin		1.2%	1.7%	1.5%	1.7%	2.0%	2.1%	2.9%	3.5%	3.4%	3.1%	3.3%
Recurring profit			5,027	10,571	7,968	9,679	12,572	14,291	22,840	33,195	35,781	24,554	27,500
	YoY		-17.9%	110.3%	-24.6%	21.5%	29.9%	13.7%	59.8%	45.3%	7.8%	-31.4%	12.0%
	Recurring profit margin		1.0%	1.7%	1.4%	1.7%	2.0%	2.1%	2.9%	3.5%	3.4%	3.2%	3.3%
Net income			2,447	4,528	4,886	5,266	7,469	10,531	16,775	21,178	25,715	16,988	18,600
	YoY		-26.9%	85.0%	7.9%	7.8%	41.8%	41.0%	59.3%	26.2%	21.4%	-33.9%	9.5%
	Net margin		0.5%	0.7%	0.9%	0.9%	1.2%	1.6%	2.1%	2.2%	2.5%	2.2%	2.2%
Per-share data (split-adjusted; JPY)
Issued sahres at end-FY('000 shares)			96,356	96,356	96,356	96,356	96,356	96,356	96,356	96,356	96,356	96,356
EPS (JPY)			26.1	48.3	51.8	55.5	78.3	109.7	174.5	220.3	267.5	178.1	195.0
Dividend per share (JPY)			8.0	10.0	12.0	14.0	20.0	26.0	40.0	32.0	60.0	60.0	60.0
Book value per share (JPY)			469	516	574	594	662	753	899	1,080	1,334	1,422
Balance sheet (JPYmn)
		Cash and cash equivalents	12,500	9,671	14,478	16,282	14,450	20,939	24,246	31,600	32,058	46,963
Total current assets			164,516	188,333	170,097	184,451	201,104	230,057	280,347	276,285	331,461	304,134
Tangible fixed assets			44,871	45,179	44,990	44,367	43,676	41,987	42,167	39,522	39,172	38,272
Investments and other assets			11,018	10,980	11,093	9,864	9,765	11,342	10,951	9,601	10,426	11,333
Intangible assets			11,671	11,225	9,177	7,064	4,984	2,642	2,422	3,403	2,696	2,462
Total assets			232,077	255,718	235,359	245,747	259,531	286,029	335,888	328,813	383,757	356,203
		Short-term debt	24,311	24,472	19,601	21,924	20,254	20,221	15,945	12,608	15,255	12,589
Total current liabilities			145,056	162,772	138,480	152,464	163,233	183,872	217,720	192,514	230,519	191,564
		Long-term debt	29,214	29,520	27,916	21,454	19,197	16,977	18,439	19,027	12,065	14,895
Total fixed liabilities			42,744	44,007	42,044	36,251	32,394	29,009	30,976	31,558	23,916	28,465
Total liabilities			187,800	206,780	180,525	188,716	195,628	212,881	248,696	224,072	254,435	220,030
		Shareholders' equity	43,799	48,486	54,291	56,451	63,238	72,389	86,390	103,849	128,287	135,256
Total net assets			44,277	48,938	54,834	57,031	63,903	73,148	87,191	104,741	129,322	136,173
Total interest-bearing debt			53,525	53,992	47,517	43,378	39,451	37,198	34,384	31,635	27,320	27,484
Cash flow statement(JPYmn)
Cash flows from operating activities			9,592	931	13,264	9,477	5,007	10,046	10,129	18,487	9,428	-
Cash flows from investing activities			-4,054	-3,158	-647	-2,645	-1,838	713	-1,218	-4,343	-1,357	-2,926
Cash flows from financing activities			-2,212	-228	-7,459	-4,920	-5,201	-4,013	-5,433	-6,733	-7,586	-10,724
Financial ratios
ROA (RP-based)			2.2%	4.3%	3.2%	4.0%	5.0%	5.2%	7.3%	10.0%	10.0%	6.6%
ROE			5.7%	9.8%	9.5%	9.5%	12.5%	15.5%	21.1%	22.3%	22.2%	12.9%
		Equity ratio	18.9%	19.0%	23.1%	23.0%	24.4%	25.3%	25.7%	31.6%	33.4%	38.0%
		Total asset turnover	221.5%	260.2%	230.6%	240.5%	244.5%	245.5%	252.6%	284.1%	292.9%	206.5%
		Net margin	0.5%	0.7%	0.9%	0.9%	1.2%	1.6%	2.1%	2.2%	2.5%	2.2%

Note: The company began applying the Accounting Standard for Revenue Recognition (ASBJ Statement No. 29; March 31, 2020). Its FY03/22 earnings forecast reflects this standard’s application. Ratios indicating YoY change between the company’s FY03/22 forecast and actual results in FY03/21 are reference values calculated by Shared Research and do not account for impact from the company’s application of the Accounting Standard for Revenue Recognition.
Source: Shared Research based on company data

Key financial data by segment

Segments			FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21	FY03/22	FY03/23
(JPYmn)			Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Est.
Revenue			513,469	634,687	566,194	578,506	617,811	669,596	785,554	944,053	1,043,534	763,838	830,000
	YoY		4.9%	23.6%	-10.8%	2.2%	6.8%	8.4%	17.3%	20.2%	10.5%	-26.8%	8.7%
	IT Infrastructure Distribution		441,869	554,685	484,945	494,939	536,073	582,700	693,957	857,008	969,784	691,281	754,820
		YoY	6.3%	25.5%	-12.6%	2.1%	8.3%	8.7%	19.1%	23.5%	13.2%	-28.7%	9.2%
		% of total	86.1%	87.4%	85.6%	85.6%	86.8%	87.0%	88.3%	90.8%	92.9%	90.5%	90.9%
	Fiber		-	-	61,993	66,016	67,438	71,021	75,088	71,670	61,033	58,289	62,060
		YoY	-	-	-	6.5%	2.2%	5.3%	5.7%	-4.6%	-14.8%	-4.5%	6.5%
		% of total	-	-	10.9%	11.4%	10.9%	10.6%	9.6%	7.6%	5.8%	7.6%	7.5%
	Industrial Machinery		-	-	14,136	12,788	11,708	11,972	13,900	12,988	11,582	11,610	12,480
		YoY	-	-	-	-9.5%	-8.4%	2.3%	16.1%	-6.6%	-10.8%	0.2%	7.5%
		% of total	-	-	2.5%	2.2%	1.9%	1.8%	1.8%	1.4%	1.1%	1.5%	1.5%
	Synthetic Fiber and Functional Materials		35,049	38,991	-	-	-	-	-	-	-	-	-
		YoY	-0.2%	11.2%	-	-	-	-	-	-	-	-	-
		% of total	6.8%	6.1%	-	-	-	-	-	-	-	-	-
	Clothing and Lifestyle Materials		20,223	22,369	-	-	-	-	-	-	-	-	-
		YoY	-3.0%	10.6%	-	-	-	-	-	-	-	-	-
		% of total	3.9%	3.5%	-	-	-	-	-	-	-	-	-
	Machine Tools and Automatic Machinery		10,879	12,826	-	-	-	-	-	-	-	-	-
		YoY	-8.1%	17.9%	-	-	-	-	-	-	-	-	-
		% of total	2.1%	2.0%	-	-	-	-	-	-	-	-	-
	Other		5,447	5,814	5,120	4,761	2,592	3,902	2,608	2,385	1,169	2,657	640
		YoY	-9.9%	6.7%	-11.9%	-7.0%	-45.6%	50.5%	-33.2%	-8.6%	-51.0%	127.3%	-75.9%
		% of total	1.1%	0.9%	0.9%	0.8%	0.4%	0.6%	0.3%	0.3%	0.1%	0.3%	0.1%
Operating profit			5,906	10,960	8,246	9,912	12,626	14,305	22,709	32,841	35,028	24,059	27,360
	YoY		-16.5%	85.6%	-24.8%	20.2%	27.4%	13.3%	58.7%	44.6%	6.7%	-31.3%	13.7%
	Operating profit margin		1.2%	1.7%	1.5%	1.7%	2.0%	2.1%	2.9%	3.5%	3.4%	3.1%	3.3%
	IT Infrastructure Distribution		4,735	9,146	5,769	6,127	8,976	9,927	17,420	28,161	33,226	21,651	23,700
		YoY	-14.1%	93.2%	-36.9%	6.2%	46.5%	10.6%	75.5%	61.7%	18.0%	-34.8%	9.5%
		Operating profit margin	1.1%	1.6%	1.2%	1.2%	1.7%	1.7%	2.5%	3.3%	3.4%	3.1%	3.1%
		% of total	80.7%	83.7%	70.0%	61.8%	71.1%	69.4%	76.7%	85.8%	94.9%	90.0%	86.6%
	Fiber		-	-	1,344	2,828	2,957	3,309	4,018	3,737	1,350	1,617	2,760
		YoY	-	-	-	110.4%	4.6%	11.9%	21.4%	-7.0%	-63.9%	19.8%	70.7%
		Operating profit margin	-	-	2.2%	4.3%	4.4%	4.7%	5.4%	5.2%	2.2%	2.8%	4.4%
		% of total	-	-	16.3%	28.5%	23.4%	23.1%	17.7%	11.4%	3.9%	6.7%	10.1%
	Industrial Machinery		-	-	1,096	820	747	931	1,066	753	537	656	890
		YoY	-	-	-	-25.2%	-8.9%	24.6%	14.5%	-29.4%	-28.7%	22.2%	35.7%
		Operating profit margin	-	-	7.8%	6.4%	6.4%	7.8%	7.7%	5.8%	4.6%	5.7%	7.1%
		% of total	-	-	13.3%	8.3%	5.9%	6.5%	4.7%	2.3%	1.5%	2.7%	3.3%
	Synthetic Fiber and Functional Materials		837	1,273	-	-	-	-	-	-	-	-	-
		YoY	-27.3%	52.1%	-	-	-	-	-	-	-	-	-
		Operating profit margin	0.2%	0.2%	-	-	-	-	-	-	-	-	-
		% of total	14.3%	11.6%	-	-	-	-	-	-	-	-	-
	Clothing and Lifestyle Materials		-143	-451	-	-	-	-	-	-	-	-	-
		YoY	-	-	-	-	-	-	-	-	-	-	-
		Operating profit margin	-	-	-	-	-	-	-	-	-	-	-
		% of total	-2.4%	-4.1%	-	-	-	-	-	-	-	-	-
	Machine Tools and Automatic Machinery		541	877	-	-	-	-	-	-	-	-	-
		YoY	-46.2%	62.1%	-	-	-	-	-	-	-	-	-
		Operating profit margin	5.0%	6.8%	-	-	-	-	-	-	-	-	-
		% of total	9.2%	8.0%	-	-	-	-	-	-	-	-	-
	Other		-104	87	35	133	-55	135	201	186	-87	130	10
		YoY	-	-	-59.8%	280.0%	-	-	48.9%	-7.5%	-	-	-92.3%
		Operating profit margin	-	1.5%	0.7%	2.8%	-	3.5%	7.7%	7.8%	-	4.9%	1.6%
		% of total	-1.8%	0.8%	0.4%	1.3%	-0.4%	0.9%	0.9%	0.6%	-0.2%	0.5%	0.0%
	Adjustments		40	27	0	1	1	1	2	3	0	4	-

Recent updates

Notice regarding share buybacks

2022-05-13

Daiwabo Holdings made an announcement regarding share buybacks.

The company has decided to execute share buybacks to improve capital efficiency and shareholder value as part of the measures related to shareholder returns in its medium-term management plan.

Shares to be acquired: Common stock of the company
Total number of shares to be acquired: 2,400,000 shares (2.52% of outstanding shares [excluding treasury stock])
Total acquisition price: JPY3.0bn (upper limit)
Acquisition period: May 13, 2022 to October 31, 2022
Acquisition method: Purchase on the Tokyo Stock Exchange

Downward revision on FY03/22 guidance

2022-04-18

On April 15, 2022, Daiwabo Holdings announced downward revision to its guidance for full-year consolidated results for FY03/22.

(See company press release here.)

Revenue: JPY763.3bn (versus JPY820.0bn previously)
Operating profit: JPY23.2bn (versus JPY28.5bn)
Recurring profit: JPY23.6bn (versus JPY28.5bn)
Net income: JPY16.2bn (versus JPY18.5bn)

Explanation of revisions

In the IT Infrastructure Distribution segment, the company had originally based its full-year projections for FY03/22 on the assumption that demand for devices (PCs, tablets, etc.), particularly those used in connection with the GIGA School concept, would be down from the elevated levels seen in FY03/21. However, it had lowered guidance on revenues and operating profit to reflect semiconductor shortages and other supply chain problems that lengthened the time required to procure all the necessary parts, materials, and other goods needed to complete some orders (forcing them to be carried over into the next period), and increases in the number of installation jobs requiring advanced proposal work.
In the Fiber segment, the company reduced guidance for revenues and operating profit, reflecting the prolonged drag on demand stemming from the coronavirus pandemic and related restrictions, and pressure on margins from the sharp increase in raw materials prices.

Trends and outlook

Quarterly trends and results

Cumulative		FY03/21				FY03/22				FY03/22
(JPYmn)		Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	% of Est.	FY Est.
Revenue		187,315	424,503	709,830	1,043,534	166,862	350,668	539,068	763,838	100.1%	763,300
	YoY	-8.8%	-10.1%	-0.1%	10.5%	-10.9%	-17.4%	-24.1%	-26.8%		-26.9%
Gross profit		15,666	33,233	55,019	81,851	14,465	29,699	44,682	64,141
	YoY	-6.0%	-16.5%	-6.9%	0.5%	-7.7%	-10.6%	-18.8%	-21.6%
	Gross profit margin	8.4%	7.8%	7.8%	7.8%	8.7%	8.5%	8.3%	8.4%
SG&A expenses		11,036	22,379	33,817	46,823	10,071	19,893	29,805	40,081
	YoY	-2.3%	-6.7%	-5.0%	-3.7%	-8.7%	-11.1%	-11.9%	-14.4%
	SG&A ratio	5.9%	5.3%	4.8%	4.5%	6.0%	5.7%	5.5%	5.2%
Operating profit		4,629	10,853	21,201	35,028	4,393	9,806	14,877	24,059	103.7%	23,200
	YoY	-13.8%	-31.4%	-9.9%	6.7%	-5.1%	-9.6%	-29.8%	-31.3%		-33.8%
	Operating profit margin	2.5%	2.6%	3.0%	3.4%	2.6%	2.8%	2.8%	3.1%		3.0%
Recurring profit		4,786	11,052	21,630	35,781	4,521	9,883	15,066	24,554	104.0%	23,600
	YoY	-11.8%	-30.3%	-8.3%	7.8%	-5.5%	-10.6%	-30.3%	-31.4%		-34.0%
	Recurring profit margin	2.6%	2.6%	3.0%	3.4%	2.7%	2.8%	2.8%	3.2%		3.1%
Net income		4,290	8,803	16,369	25,715	3,114	7,015	10,478	16,988	104.9%	16,200
	YoY	17.1%	-17.0%	7.4%	21.4%	-27.4%	-20.3%	-36.0%	-33.9%		-37.0%
	Net margin	2.3%	2.1%	2.3%	2.5%	1.9%	2.0%	1.9%	2.2%		2.1%
Quarterly		FY03/21				FY03/22
(JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Revenue		187,315	237,188	285,327	333,704	166,862	183,806	188,400	224,770
	YoY	-8.8%	-11.0%	19.6%	42.9%	-10.9%	-22.5%	-34.0%	-32.6%
Gross profit		15,666	17,567	21,786	26,832	14,465	15,234	14,983	19,459
	YoY	-6.0%	-24.1%	12.8%	20.0%	-7.7%	-13.3%	-31.2%	-27.5%
	Gross profit margin	8.4%	7.4%	7.6%	8.0%	8.7%	8.3%	8.0%	8.7%
SG&A expenses		11,036	11,343	11,438	13,006	10,071	9,822	9,912	10,276
	YoY	-2.3%	-10.6%	-1.5%	-0.3%	-8.7%	-13.4%	-13.3%	-21.0%
	SG&A ratio	5.9%	4.8%	4.0%	3.9%	6.0%	5.3%	5.3%	4.6%
Operating profit		4,629	6,224	10,348	13,827	4,393	5,413	5,071	9,182
	YoY	-13.8%	-40.4%	34.3%	48.4%	-5.1%	-13.0%	-51.0%	-33.6%
	Operating profit margin	2.5%	2.6%	3.6%	4.1%	2.6%	2.9%	2.7%	4.1%
Recurring profit		4,786	6,266	10,578	14,151	4,521	5,362	5,183	9,488
	YoY	-11.8%	-39.9%	36.9%	47.1%	-5.5%	-14.4%	-51.0%	-33.0%
	Recurring profit margin	2.6%	2.6%	3.7%	4.2%	2.7%	2.9%	2.8%	4.2%
Net income		4,290	4,513	7,566	9,346	3,114	3,901	3,463	6,510
	YoY	17.1%	-35.0%	63.3%	57.4%	-27.4%	-13.6%	-54.2%	-30.3%
	Net margin	2.3%	1.9%	2.7%	2.8%	1.9%	2.1%	1.8%	2.9%

By segment

By segment (cumulative)			FY03/21				FY03/22
(JPYmn)			Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Revenue			187,315	424,503	709,830	1,043,534	166,862	350,668	539,068	763,838
	YoY		-8.8%	-10.1%	-0.1%	10.5%	-10.9%	-17.4%	-24.1%	-26.8%
	IT Infrastructure Distribution		169,523	386,870	655,037	969,748	149,878	315,155	485,355	691,281
		YoY	-8.3%	-9.4%	1.6%	13.2%	-11.6%	-18.5%	-25.9%	-28.7%
		% of total	90.5%	91.1%	92.3%	92.9%	89.8%	89.9%	90.0%	90.5%
	Fiber		15,824	31,179	46,000	61,033	14,460	29,360	43,446	58,289
		YoY	-12.4%	-17.2%	-16.6%	-15.4%	-8.6%	-5.8%	-5.6%	-4.5%
		% of total	8.4%	7.3%	6.5%	5.8%	8.7%	8.4%	8.1%	7.6%
	Industrial Machinery		1,783	5,994	7,979	11,582	2,333	5,727	7,827	11,610
		YoY	-15.8%	-7.9%	-12.1%	-10.8%	30.8%	-4.5%	-1.9%	0.2%
		% of total	1.0%	1.4%	1.1%	1.1%	1.4%	1.6%	1.5%	1.5%
	Other		183	459	813	1,169	190	424	2,439	2,657
		YoY	-61.7%	-55.6%	-58.1%	-37.7%	3.8%	-7.6%	200.0%	127.3%
		% of total	0.1%	0.1%	0.1%	0.1%	0.1%	0.1%	0.5%	0.3%
Operating profit			4,629	10,853	21,201	35,028	4,393	9,806	14,877	24,059
	YoY		-13.8%	-31.4%	-9.9%	6.7%	-5.1%	-9.6%	-29.8%	-31.3%
	Operating profit margin		2.5%	2.6%	3.0%	3.4%	2.6%	2.8%	2.8%	3.1%
	IT Infrastructure Distribution		3,838	10,749	20,234	33,226	3,558	8,556	12,981	21,651
		YoY	-17.1%	-18.9%	1.1%	18.0%	-7.3%	-20.4%	-35.8%	-34.8%
		Operating profit margin	2.3%	2.8%	3.1%	3.4%	2.4%	2.7%	2.7%	3.1%
		% of total	82.9%	99.0%	95.4%	94.9%	81.0%	87.3%	87.3%	90.0%
	Fiber		887	-194	659	1,350	729	957	1,394	1,617
		YoY	1.1%	-	-77.1%	-65.2%	-17.8%	-	111.5%	19.8%
		Operating profit margin	5.6%	-0.6%	1.4%	2.2%	5.0%	3.3%	3.2%	2.8%
		% of total	19.2%	-1.8%	3.1%	3.9%	16.6%	9.8%	9.4%	6.7%
	Industrial Machinery		-45	375	362	537	124	302	354	656
		YoY	-	-3.8%	-22.0%	-28.7%	-	-19.5%	-2.2%	22.2%
		Operating profit margin	-2.5%	6.3%	4.5%	4.6%	5.3%	5.3%	4.5%	5.7%
		% of total	-1.0%	3.5%	1.7%	1.5%	2.8%	3.1%	2.4%	2.7%
	Other		-51	-77	-54	-87	-19	-12	144	130
		YoY	-	-	-	-	-	-	-	-
		Operating profit margin	-27.9%	-16.8%	-6.6%	-7.4%	-10.0%	-2.8%	5.9%	4.9%
		% of total	-1.1%	-0.7%	-0.3%	-0.2%	-0.4%	-0.1%	1.0%	0.5%
	Company-wide, eliminations		0	0	0	0	0	1	3	4
By segment (quarterly)			FY03/21				FY03/22
(JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Revenue			187,315	237,188	285,327	333,704	166,862	183,806	188,400	224,770
	YoY		-8.8%	-11.0%	19.6%	42.9%	-10.9%	-22.5%	-34.0%	-32.6%
	IT Infrastructure Distribution		169,523	217,347	268,167	314,711	149,878	165,277	170,200	205,926
		YoY	-8.3%	-10.2%	23.2%	48.0%	-11.6%	-24.0%	-36.5%	-34.6%
		% of total	90.5%	91.6%	94.0%	94.3%	89.8%	89.9%	90.3%	91.6%
	Fiber		15,824	15,355	14,821	15,033	14,460	14,900	14,086	14,843
		YoY	-12.4%	-21.7%	-15.2%	-11.7%	-8.6%	-3.0%	-5.0%	-1.3%
		% of total	8.4%	6.5%	5.2%	4.5%	8.7%	8.1%	7.5%	6.6%
	Industrial Machinery		1,783	4,211	1,985	3,603	2,333	3,394	2,100	3,783
		YoY	-15.8%	-4.0%	-22.8%	-7.9%	30.8%	-19.4%	5.8%	5.0%
		% of total	1.0%	1.8%	0.7%	1.1%	1.4%	1.8%	1.1%	1.7%
	Other		183	276	354	356	190	234	2,015	218
		YoY	-61.7%	-50.3%	-61.0%	-	3.8%	-15.2%	469.2%	-38.8%
		% of total	0.1%	0.1%	0.1%	0.1%	0.1%	0.1%	1.1%	0.1%
Operating profit			4,629	6,224	10,348	13,827	4,393	5,413	5,071	9,182
	YoY		-13.8%	-40.4%	34.3%	48.4%	-5.1%	-13.0%	-51.0%	-33.6%
	Operating profit margin		2.5%	2.6%	3.6%	4.1%	2.6%	2.9%	2.7%	4.1%
	IT Infrastructure Distribution		3,838	6,911	9,485	12,992	3,558	4,998	4,425	8,670
		YoY	-17.1%	-19.9%	40.6%	59.3%	-7.3%	-27.7%	-53.3%	-33.3%
		Operating profit margin	2.3%	3.2%	3.5%	4.1%	2.4%	3.0%	2.6%	4.2%
		% of total	82.9%	111.0%	91.7%	94.0%	81.0%	92.4%	87.3%	94.4%
	Fiber		887	-1,081	853	691	729	228	437	223
		YoY	1.1%	-	15.9%	-30.8%	-17.8%	-	-48.8%	-67.7%
		Operating profit margin	5.6%	-7.0%	5.8%	4.6%	5.0%	1.5%	3.1%	1.5%
		% of total	19.2%	-17.4%	8.2%	5.0%	16.6%	4.2%	8.6%	2.4%
	Industrial Machinery		-45	420	-13	175	124	178	52	302
		YoY	-	-19.7%	-	-39.4%	-	-57.6%	-	72.6%
		Operating profit margin	-2.5%	10.0%	-0.7%	4.9%	5.3%	5.2%	2.5%	8.0%
		% of total	-1.0%	6.7%	-0.1%	1.3%	2.8%	3.3%	1.0%	3.3%
	Other		-51	-26	23	-33	-19	7	156	-14
		YoY	-	-	-84.4%	-	-	-	578.3%	-
		Operating profit margin	-27.9%	-9.4%	6.5%	-9.3%	-10.0%	3.0%	7.7%	-6.4%
		% of total	-1.1%	-0.4%	0.2%	-0.2%	-0.4%	0.1%	3.1%	-0.2%
	Company-wide, eliminations		0	-	-	-0	0	1	2	1

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

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

Summary

Revenue: JPY763.8bn (-26.8% YoY). The company has adopted the Accounting Standard for Revenue Recognition starting in FY03/22. Hereinafter, YoY revenue comparisons are Shared Research estimates for reference and do not take into account the change in accounting standards.
Operating profit: JPY24.1bn (-31.3% YoY)
Recurring profit: JPY24.6bn (-31.4% YoY)
Net income*: JPY17.0bn (-33.9% YoY)
*Net income attributable to owners of the parent

Key takeaways from earnings results

Revenue was JPY763.8bn. The company adopted the Accounting Standard for Revenue Recognition starting in FY03/22. As a result, revenue was JPY64.9bn lower than it would have been under the previous accounting standard. According to the company’s estimates, revenue fell 21.6% YoY in real terms when compared against FY03/21 revenue adjusted to reflect the new accounting standard.

Factors contributing to lower revenue (excluding the change in accounting standard): In the IT Infrastructure Distribution segment, sales of PCs and other products for the education market fell YoY due to the falloff of GIGA School concept-related demand seen during the same period in FY03/21. Sales of PCs and peripheral equipment for the consumer market also declined compared with a year ago when the shift to teleworking fueled strong demand. In the Fiber segment, revenue suffered from a reactionary drop in demand for masks and antibacterial sheets from FY03/21, as well as temporary store closures in Japan and other factors.

Operating profit fell 31.3% YoY to JPY24.1bn. Operating profit improved by 19.8% YoY in the Fiber segment and 22.2% YoY in the Industrial Machinery segment, but fell 34.8% YoY in the IT Infrastructure Distribution segment.

Progress versus forecasts

Progress against the revised company forecast (out April 15, 2022) was 100.1% for revenue, 103.7% for operating profit, 104.0% for recurring profit, and 104.9% for net income attributable to owners of the parent.

Results by segment

IT Infrastructure Distribution segment

Revenue: JPY691.3bn (-28.7% YoY). The company has adopted the Accounting Standard for Revenue Recognition starting in FY03/22. YoY sales comparisons are Shared Research estimates for reference and do not reflect the change in accounting standards.
Operating profit: JPY21.7bn (-34.8% YoY)
OPM: 3.1% (3.4% in FY03/21)

In the corporate market, with many regions placed under emergency declarations related to the COVID-19 pandemic, the company pushed forward with sales efforts with a close focus on local communities by looking at its nationwide sales locations to identify where in-person sales were possible and being flexible with teleworking. In the business targeting companies and government agencies, contract numbers for subscription services rose as customers shifted to building cloud environments and using cloud services. Sales of PCs, and monitors to these customers were also up YoY.

Shipments of PCs and tablets for the education market declined YoY due to the concentration of GIGA School-related orders in FY03/21.

In the consumer market, sales of PCs and peripheral equipment fell YoY owing to exceptionally strong teleworking demand in FY03/21.

Company performance in the domestic PC market

Number of PCs shipped: 2,838,000 units (-44.7% YoY)
Number of servers shipped: 56,000 units (-7.6% YoY)

Company performance in the subscription business

Trading volume from subscription-based services: JPY70.8bn (+4.1% YoY)

Of which, trading volume from sales partners through the iKAZUCHI subscription management portal: JPY14.7bn (+31.8% YoY)

Fiber segment

Revenue: JPY58.3bn (-4.5% YoY)
Operating profit: JPY1.6bn (+19.8% YoY)
OPM: 2.8% (2.2% in FY03/21)

In the synthetic fibers and rayon divisions, sales of flameproof and flame-retardant rayon cotton for the US market were strong against the backdrop of growing environmental and safety awareness, but sales of synthetic nonwoven fabrics for disinfection and cosmetic uses fell due to a drop in demand versus FY03/21. In the industrial material division, orders for cartridge filters and rubber sponges increased, but orders for construction sheeting and synthetic sailcloth were sluggish. In the clothing products division, sales of clothing and inner-wear for the US market increased sharply, but the Japan market was affected by temporary store closures. The sharp rise in raw material and fuel prices across the segment's businesses put downward pressure on operating profit.

In 1H FY03/21, improper transactions negatively affected revenue by JPY640mn and operating profit by JPY2.0bn.

Industrial Machinery segment

Revenue: JPY11.6bn (+0.2% YoY)
Operating profit: JPY656mn (+22.2% YoY)
OPM: 5.7% (4.6% in FY03/21)

Orders

Machine tools division: Orders rose 59.0% YoY (The Japan Machine Tool Builders’ Association reported a 68.7% YoY increase in total orders between April 2021 and March 2022.)
Automatic machinery division: Orders rose 37.7% YoY

In the machine tools division, orders increased in the Chinese market, where capital investment has been expanding, while orders in Japan gradually recovered. However, FY03/22 revenue and profit were both down YoY due to the decline in orders in FY03/21 and impact from the soaring price of materials. In the automatic machinery division, revenue and profit increased on the capture of orders for parts replacement, renovation work, and other services.

Full-year company forecast for FY03/23

		FY03/22			FY03/23			YoY
(JPYmn)		1H Act.	2H Act.	FY Act.	1H Est.	2H Est.	FY Est.	1H Est.	2H Est.	FY Est.
Revenue		350,668	413,170	763,838	377,300	452,700	830,000	7.6%	9.6%	8.7%
Cost of revenue		320,969	378,728	699,697
Gross profit		29,699	34,442	64,141
	Gross profit margin	8.5%	8.3%	8.4%
SG&A expenses		19,893	20,188	40,081
	SG&A ratio	5.7%	4.9%	5.2%
Operating profit		9,806	14,253	24,059	11,040	16,320	27,360	12.6%	14.5%	13.7%
	Operating profit margin	2.8%	3.4%	3.1%	2.9%	3.6%	3.3%
Recurring profit		9,883	14,671	24,554	11,100	16,400	27,500	12.3%	11.8%	12.0%
	Recurring profit margin	2.8%	3.6%	3.2%	2.9%	3.6%	3.3%
Net income		7,015	9,973	16,988	7,600	11,000	18,600	8.3%	10.3%	9.5%
	Net margin	2.0%	2.4%	2.2%	2.0%	2.4%	2.2%

Source: Shared Research based on company data
Note: 2H estimates for FY03/22 are calculated by subtracting 1H figures from the full-year figures. The company began applying the new Accounting Standard for Revenue Recognition (ASBJ Statement No. 29) from April 1, 2021. The estimates for FY03/22 are based on the new standard; YoY % change is a comparison against FY03/21 figures under the previous accounting standard. Figures are Shared Research estimates based on simple comparisons without reflecting changes in accounting standards.

			FY03/22			FY03/22			YoY
(JPYmn)			1H Act.	2H Act.	FY Act.	1H Est.	2H Est.	FY Est.	1H Est.	2H Est.	FY Est.
IT Infrastructure Distribution
	Revenue		315,155	376,126	691,281	340,850	413,970	754,820	8.2%	10.1%	9.2%
	Operating profit		8,556	13,095	21,651	9,420	14,280	23,700	10.1%	9.0%	9.5%
		Operating profit margin	2.7%	3.5%	3.1%	2.8%	3.4%	3.1%
Fiber
	Revenue		29,360	28,929	58,289	30,280	31,780	62,060	3.1%	9.9%	6.5%
	Operating profit		957	660	1,617	1,200	1,560	2,760	-	136.4%	70.7%
		Operating profit margin	3.3%	2.3%	2.8%	4.0%	4.9%	4.4%
Industrial Machinery
	Revenue		5,727	5,883	11,610	6,030	6,450	12,480	5.3%	9.6%	7.5%
	Operating profit		302	354	656	415	475	890	37.4%	34.2%	35.7%
		Operating profit margin	5.3%	6.0%	5.7%	6.9%	7.4%	7.1%

Source: Company materials よりSR社作成

Overview

FY03/23 is the second year of the medium-term management plan. Versus the medium-term management plan announced in May 2021, the new plan calls for lower operating profit in Fiber segment (JPY2.8bn versus JPY4.0bn) and Industrial Machinery segment (JPY890mn versus JPY950mn). The company downgraded its outlook for the Fiber segment owing to high raw material and fuel prices and the delayed recovery in demand. It also adjusted its outlook for the Industrial Machinery segment slightly downward in light of soaring raw material prices and the state of orders for automated machinery. Profit targets for the IT Infrastructure Distribution segment remain unchanged.

By segment

IT Infrastructure Distribution

Revenue: JPY754.8bn (+9.2% YoY)
Operating profit: JPY23.7bn (+9.5% YoY)
OPM: 3.1% (3.1% in FY03/21)

Fiber

Revenue: JPY62.1bn (+6.5% YoY)
Operating profit: JPY2.8bn (+70.7% YoY)
OPM: 4.4% (2.8% in FY03/21)

Industrial Machinery

Revenue: JPY12.5bn (+7.5% YoY)
Operating profit: JPY890mn (+35.7% YoY)
OPM: 7.1% (5.7% in FY03/21)

Medium-term management plan and business strategy

Medium-term management plan (out May 13, 2021)

On May 13, 2021, Daiwabo Holdings unveiled its medium-term management plan for FY03/22 to FY03/24. It views these three years as a period of transition toward long-term growth.

Quantitative targets for FY03/24 are revenue of JPY875.0bn (+6.7% from FY03/22 target) and operating profit of JPY31.4bn (+10.2%) for an OPM of 3.6% (vs. FY03/22 target of 3.5% and FY03/21 result of 3.4%).

The company also outlined its qualitative goals: to create next-generation growth drivers (e.g., expansion of cloud services); to help form a better society using its position as a leading company (business expansion through solving social issues); and to reform business foundation (realize better shareholder returns and effective corporate governance).

Quantitative targets (companywide basis)

Daiwabo uses revenue, operating profit, OPM, return on equity (ROE), and return on invested capital (ROIC) as indicators on a companywide basis.

Earnings-related indicators

The company aims to achieve revenue of JPY875.0bn in FY03/24, meaning that the revenue level is lower than the JPY1,043.5bn achieved in FY03/21. The reasons for the decline are the negative accounting impact (less than JPY100.0bn) of application of the new Accounting Standard for Revenue Recognition from FY03/22 and the disappearance of intensive demand for PCs in the IT Infrastructure Distribution segment that had been seen through FY03/21.

Intensive demand for PCs included PC replacement demand accompanying the end of support for Windows 7 (FY03/20), increased demand for IT equipment from the government budget in relation to the GIGA School concept (FY03/21), and special demand related to teleworking in response to the COVID-19 pandemic (FY03/21).

The company estimates that revenue from demand related to the GIGA School project was at least JPY200.0bn in FY03/21.

Daiwabo says that, although its FY03/22 revenue projection is JPY820.0bn, it actually expects revenue to rise YoY if the impact of the change in accounting standard and the dropout of special demand related to the GIGA School project (at least JPY200.0bn in FY03/21) are excluded.

Companywide earnings-related indicators

		FY03/21	FY03/22	FY03/23	FY03/24
(JPYmn)		Act.	Targets	Targets	Targets
Revenue		1,043,534	820,000	830,000	875,000
	YoY	10.5%	-21.4%	1.2%	5.4%
Operating profit		35,028	28,500	28,600	31,400
	YoY	18.0%	-18.6%	0.4%	9.8%
Operating profit margin		3.4%	3.5%	3.4%	3.6%

Note: The company began applying the new Accounting Standard for Revenue Recognition (ASBJ Statement No. 29) from the start of FY03/22.
Source: Shared Research based on company data

Group management indicators

Daiwabo has proposed ROE and ROIC targets, stating that it hopes to achieve sustainable growth in corporate value through management that emphasizes capital efficiency.

ROE: Achieve 14% or higher (exceeding the shareholders’ equity cost of 8.6%)
ROIC: Maintain 11–12% over the three years of the plan (exceeding the weighted average cost of capital of 7.0%)

In regard to ROIC, the company will set KPIs suited to each operating company and monitor progress. The goal is to raise awareness of capital costs (hurdle rates) and improve capital efficiency, leading to the creation of corporate value.

In particular, in the Fiber segment, the company says ROIC will serve as an indicator in improving efficiency through focusing resources on specific business areas. As the market environment as a whole is unlikely to improve, the company’s main business strategy will be to use its unique strengths to develop eco-friendly products and functional materials (detail follows).

Capital investment, investment and lending, and R&D

Daiwabo plans three-year totals of JPY12.3bn in capital investment and other investment and lending, and JPY2.8bn in R&D spending.

Capital investment, investment and lending (three-year totals)

The company plans JPY5.9bn for IT Infrastructure Distribution, JPY5.1bn for Fiber, and JPY1.3bn for Industrial Machinery.

IT Infrastructure Distribution: Enhance internal systems and infrastructure, improve logistics efficiency, and consider business alliances and vertically integrated M&A

Fiber: Update synthetic fiber and rayon production facilities and reorganize industrial materials plants

Industrial Machinery: Update production management systems and Nagaoka plant facilities

R&D expenses (three-year totals)

The company plans JPY2.1bn in R&D expenses for Fiber and JPY700mn for Industrial Machinery.

Fiber: Develop hygiene materials (for example, materials for disposable diapers) and eco-friendly products (made with biomass, or highly biodegradable or recyclable materials)

Industrial Machinery: Respond to changes in the energy industry (decarbonization), research machinery for aerospace-related applications, and develop specialized railroad-related machinery

Cash allocation policies

Daiwabo has outlined the following five cash allocation policies.

Enhancing shareholder returns: The company’s basic dividend policy is to pay a stable JPY60 dividend per share annually (including interim dividend), but it will consider increasing this amount according to its cash situation.

Investing for growth in existing businesses: The company will conduct capital investment, marketing, R&D, and hiring to achieve sustainable growth in existing businesses.

Investing for growth in new domains: It will begin considering business alliances and M&A to develop new business pillars centered in digital transformation-related areas where market expansion is anticipated.

Repurchasing treasury shares: It will consider the flexible acquisition of treasury shares in line with the market environment.

Securing liquidity on hand: The company will secure liquidity on hand to meet demand for funds associated with strategic product procurement in the IT Infrastructure Distribution segment and to prepare for contingencies.

Qualitative goals (companywide basis)

Recognition of business environment during period covered by medium-term plan

Downward pressure on earnings due to disappearance of extraordinary demand

Daiwabo recognizes that special factors caused demand to be pushed ahead in the IT Infrastructure Distribution segment through FY03/21 and therefore believes a decline in revenue from FY03/22 is unavoidable.

Strong upgrade and digital transformation-related demand

In the IT Infrastructure Distribution segment, even excluding the aforementioned special demand factors, the company expects to see ongoing growth in demand for hardware and software (including SaaS) to meet demand for IT equipment upgrades and propel digital transformation (DX). To achieve sustainable business growth in line with this growth in demand, the company must create a new growth narrative that includes reforming its current business model.

Enhancement of management structure in the Fiber and Industrial Machinery segments

In the Fiber and Industrial Machinery segments, the company aims to review its management structure to enhance profitability. Shared Research understands that issues have arisen due to pandemic-related stagnation in demand and governance issues. The company hopes to develop its businesses from an ESG perspective and contribute to resolving social issues.

Group’s basic policy

Creation of next-generation growth drivers

Create a driving force that will support the group over the next ten years

Develop businesses in response to new trends such as digital transformation

Establish a presence as a cloud distributor

To create a driving force to support growth, Daiwabo aims to focus its resources on specific business areas without getting bogged down by its existing business domains and business models. The company also intends to identify untapped fields.

In response to new trends, the company will work on businesses related to the following keywords: 5G, AI, IoT, online, and automation. It also intends to utilize such technologies internally.

In the IT Infrastructure Distribution segment, the company will work to further expand its subscription business. In addition, it believes the launch of the government’s Digital Agency in September 2021 will encourage municipalities to shift to cloud-based systems and sees this trend as a potential growth area.

Help form a better society using position as a leading company

Create markets by leveraging partnerships

Increase customer engagement by enhancing services and solutions

Expand businesses by resolving social issues

The first initiative pertains to all three of the group’s main businesses, all of which are B2B businesses, and the company intends to create markets by further strengthening its relationships with its customers and partners. In the IT Infrastructure Distribution segment in particular, it aims to expand markets by deepening its area strategy using its nationwide network of bases, and by developing new products and proposing new applications by product category and industry (especially in the education sector).

The second initiative also pertains to all three businesses. The company intends to improve the relationship of trust with its customers by enhancing its services and solutions for issues they face. It will provide sales support to its customers and strive to provide the best possible customer experience.

From the perspective of the UN Sustainable Development Goals (SDGs), the company will work toward the advancement of information and communication technology (ICT) in education, improvement in the medical environment, increased productivity in workplaces, disaster prevention and mitigation, and the development of eco-friendly products.

Reform business foundation

Improve capital efficiency through appropriate cash flow allocation

Reform organizational climate to support human resource development and growth

Make corporate governance more efficient

Daiwabo aims to use cash to invest in growth, enhance shareholder returns, and strengthen its financial base. This goal is in line with the aforementioned cash allocation policies.

In an effort to reform its organizational climate, the company will invest strategically in education and training, utilize human resources through group collaboration, improve the working environment, and reform operations by using digital technologies.

The company strives to make its corporate governance more efficient. To this end, it will ensure thorough compliance and strengthen internal controls for business processes.

ESG initiatives

Establishment of ESG system

In 2020, Daiwabo established an ESG Promotion Committee comprising representatives from the various offices of Daiwabo Holdings, along with the presidents of Daiwabo Information System, Daiwabo Co., and O-M. The committee will deliberate various ESG issues in cooperation with group companies.

ESG initiatives

The company intends to contribute to resolving a wide range of social issues through the promotion of its own businesses. In general, it puts its social issue resolution initiatives into two categories: measures to mitigate business risks and measures to expand business opportunities.

Business risk mitigation

Reducing CO2 emissions from business activities

Fostering occupational health and safety and creating a comfortable work environment

Developing human resources

Ensuring stable procurement

Conducting corporate governance and risk management

Business opportunity expansion

Providing products and services that resolve social issues

Developing eco-friendly products

Contributing to local communities through its operations

Plan by segment: IT Infrastructure Distribution

Quantitative targets

		FY03/21	FY03/22	FY03/23	FY03/24
(JPYmn)		Act.	Targets	Targets	Targets
Revenue		969,748	742,000	750,200	791,600
	YoY	13.2%	-23.5%	1.1%	5.5%
	% of total revenue	92.9%	90.5%	90.4%	90.5%
Operating profit		33,226	24,400	23,700	25,700
	YoY	18.0%	-26.6%	-2.9%	8.4%
	% of total revenue	94.9%	85.6%	82.9%	81.8%
Operating profit margin		3.4%	3.3%	3.2%	3.2%

Note: Figures for YoY, % of total, and OPM are estimates by Shared Research. Daiwabo Holdings began applying the new Accounting Standard for Revenue Recognition (ASBJ Statement No. 29) from the start of FY03/22.
Source: Shared Research based on company data

Daiwabo targets FY03/24 segment revenue of JPY791.6bn, 18.4% lower than the FY03/21 figure.

The company assumes PC shipments will bottom out in FY03/23, since its analysis shows that PC replacement accompanying the end of support for Windows 7 in FY03/20 and special demand related to the GIGA School project in FY03/21 resulted in shipments that might ordinarily have occurred through FY03/23 being pushed ahead, which will lead to unusually low demand through FY03/23.

It expects FY03/23 revenue to increase YoY with a boost from greater sales of cloud-based products.

It projects that OPM will be 3.2% in FY03/24, down from 3.4% in FY03/21, mainly due to limited top-line growth.

The company aims to maintain the SG&A expense ratio at the same level while securing profits through top-line growth. It explains that, if it can increase revenue from cloud-based products, which have relatively high gross margins compared to hardware, it can expect improvements in GPM and OPM to accompany this change in the sales mix.

Qualitative goals

Daiwabo plans to concentrate on the following four measures over the three years of the medium-term plan.

Capture of market share in each category of IT device distribution

Build an efficient proposal and support system using IT infrastructure

Pursue competitive advantage through partnerships in each area

Provide a wide range of proposals and support for ICT in the education sector

In FY03/21, the company booked some JPY200.0bn in revenue from sales related to the GIGA School project, and it was involved in device procurement for about 1,400 municipalities (out of about 1,800 municipalities nationwide). Daiwabo believes the GIGA School project has expanded its business opportunities as those municipalities are potential customers in the market of ICT for education.

The company expects demand to emerge for IT devices (one per student), digital textbooks, and remote learning systems in high schools. In addition, it aims to capture ongoing demand (for updates, maintenance, and configuration) related to devices delivered as part of the GIGA School project.

Implementation and enhancement of advanced support functions

Implement technical and proposal capabilities in response to diverse need related to network resilience and other matters

Create new business drivers by developing quality engineers

The Daiwabo Group has conducted organizational reform to improve its technical and proposal capabilities in response to diverse need. In April 2021, DIS Service & Support Co., Ltd. and DIS Solution Co., Ltd. (both subsidiaries of Daiwabo Information System Co., Ltd., which is itself a wholly owned subsidiary of Daiwabo Holdings) underwent an absorption-type merger with DIS Service & Support as the surviving company, which was then renamed DIS Service & Solution Co., Ltd. The new company will eliminate any duplication of operations between the merged subsidiaries, such as technical support services, call center operations, and sales operations. It will focus on strategic planning centered on the distribution business through the integration of expertise accumulated by the two companies before the merger.

Branding as cloud distributor

Enhance the functionality of iKAZUCHI and expand the user base

Expand the company’s share of the SaaS market and capture platform business through megacloud proposals

The trading volume for iKAZUCHI reached JPY11.2bn FY03/21, and the company aims to boost that figure at least 2.5x by FY03/24.

iKAZUCHI is a subscription management portal site developed by the company for its sales partners.

In the subscription business, the number of contracted licenses rises and falls month to month, and the introduction of a pay-as-you-go system means that billing amounts are not consistent, making customer management complicated for service providers (Daiwabo’s sales partners). The iKAZUCHI platform allows customers to manage multiple services and various payment cycles (including monthly, annually, and pay-as-you-go) all in one place and track the number of licenses and usage fees per month on a single screen.

As of end-March 2021, 145 subscription services from 65 vendors were using iKAZUCHI.

Service examples: Cloud infrastructure services (IaaS/PaaS) such as AWS, Microsoft Azure, and IBM Cloud; business infrastructure services such as kintone, PCA Cloud, Money Forward Cloud; the web conferencing service Zoom; and the business chat service Chatwork

The company will also provide a proxy service via iKAZUCHI to handle the collection of payments that sales partners previously had to collect on their own. With this service, Showa Leasing Co., Ltd. (unlisted), a partner of the company, will collect payment from the designated accounts of users (subscription service subscribers, the customers of Daiwabo’s sales partners) and then transfer payments to the sales partners as lump sums (for a fee equal to 2% of collected payments). This means sales partners will no longer have the work of collecting payments from individual customer accounts.

Through iKAZUCHI, Daiwabo will improve operational efficiency for both itself and its partners. Shared Research understands that iKAZUCHI produces the synergistic effect that as the number of affiliated vendors increases, so does the number of sales partners, and vice versa.

Improvement in productivity across entire supply chain

Enhance sales activities and realize greater efficiency with robotic process automation (RPA) and business intelligence (BI) tools

Expand sales by supporting the selection of prospective customers and the formulation of strategies through marketing automation (MA)

Continue to pursue low-cost operations

Daiwabo plans to be thorough in its pursuit of low-cost operations through investment in internal systems.

It has been improving the efficiency of administrative processing and sales activities through ongoing investment in its core sales management system (DIS-NET), which was first introduced in 1998.

OPM in the IT Infrastructure Distribution segment was less than 1% in FY03/10, but has steadily risen since then, reaching the 3% level in FY03/21. Over the past 10 years, segment GPM has generally been at the 7% level, while the SG&A expense ratio has declined from the 6% level to the 3% level due to promotion of low-cost operations.

Plan by segment: Fiber

Quantitative targets

		FY03/21	FY03/22	FY03/23	FY03/24
(JPYmn)		Act.	Targets	Targets	Targets
Revenue		61,033	64,700	67,000	69,200
	YoY	-14.8%	6.0%	3.6%	3.3%
	% of total revenue	5.8%	7.9%	8.1%	7.9%
Operating profit		1,350	3,400	4,000	4,400
	YoY	-63.9%	151.9%	17.6%	10.0%
	% of total revenue	3.9%	11.9%	14.0%	14.0%
Operating profit margin		2.2%	5.3%	6.0%	6.4%

Daiwabo expects segment revenue to increase YoY in each of the three years covered by the medium-term plan (FY03/22–FY03/24). That said, it targets FY03/24 segment revenue of JPY69.2bn, which still falls short of the level achieved in FY03/20 (JPY71.6bn) before the impact of the COVID-19 pandemic became apparent.

As with revenue, the company expects segment operating profit to increase YoY for the three years of the plan. It targets FY03/24 segment operating profit of JPY4.4bn, exceeding the pre-pandemic level (JPY3.7bn in FY03/20).

The company plans to generate added value by enhancing development of proprietary materials (cultivating its strategy for the Fiber segment) and review its business activities using ROIC as a key indicator (it has not disclosed an ROIC target for the segment). Initiatives include linking R&D to sales growth, consolidating production bases, reducing monthly inventory turnover, and restructuring businesses (detail follows).

In April 2020, Daiwabo Co., Ltd., an intermediary holding company in the fiber business, absorbed five of its subsidiaries and became the core operating company in the Fiber segment. This absorption-type merger allowed the company to consolidate R&D systems previously dispersed among the various companies.

Five absorbed companies: Daiwabo Polytec, Daiwabo Progress, Daiwabo Neu, Daiwabo Estate, and Daiwabo Associe

Furthermore, in September 2021, the company (subsidiary Daiwabo Co., Ltd.) established a new Technology & Development Division to consolidate R&D functions previously dispersed among the synthetic fibers and rayon, industrial material, and clothing product divisions.

Qualitative goals

Daiwabo plans to concentrate on the following three measures over the three years of the medium-term plan.

Transformation into a company worth working for, with a focus on ESG

Prevent any recurrence of impropriety by promoting compliance and enhancing internal controls

Reduce CO2 emissions and implement regular environmental audits

Develop eco-friendly products made with biomass, or highly biodegradable or recyclable materials

Make operations more efficient by improving the working environment, educating human resources, and utilizing IT

Enhanced development of proprietary materials by cultivating its strategy for the Fiber segment

Realize cross-sectional R&D structure through establishment of Technology & Development Division

Expand sales by leveraging functional and sustainable materials

Horizontally deploy materials and post-processing technologies across the group

Expand R&D scope through collaboration with industry, academia, and government

Business activities with awareness of efficiency of invested capital

Expand sales of synthetic fiber and raw cotton by leveraging R&D

Consolidate production bases at the Izumo plant with the aim of increasing sales of industrial materials

Reduce monthly inventory turnover through appropriate management

Revitalize the products business through restructuring and other efforts

Plan by segment: Industrial Machinery

Quantitative targets

		FY03/21	FY03/22	FY03/23	FY03/24
(JPYmn)		Act.	Targets	Targets	Targets
Revenue		11,582	11,100	12,300	13,400
	YoY	-10.8%	-4.2%	10.8%	8.9%
	% of total revenue	1.1%	1.4%	1.5%	1.5%
Operating profit		537	600	900	1,200
	YoY	-28.7%	11.7%	50.0%	33.3%
	% of total revenue	1.5%	2.1%	3.1%	3.8%
Operating profit margin		4.6%	5.4%	7.3%	9.0%

Daiwabo expects segment revenue to decline YoY in FY03/22, the first year of the medium-term plan, and then to turn upward in FY03/23. The plan for FY03/22 incorporates the impact of sluggish machine tool orders for the aircraft industry (with orders delayed by six months to a year).

The company expects FY03/24 segment revenue of JPY13.4bn, surpassing the pre-pandemic level (JPY13.0bn in FY03/20), as it captures increasing demand for other than aircraft-related applications. For example, it expects to capture demand for 5G-related small power generation equipment, offshore wind power generation, and clean energy. In addition, it aims to improve profitability by stepping up its services.

Unlike revenue, Daiwabo expects operating profit to increase YoY for the three years of the plan (FY03/22–FY03/24). It projects segment operating profit of JPY1.2bn in FY03/24, more than double the FY03/21 level.

The reason for the increase in operating profit is the top-line growth brought by the aforementioned business expansion. The plan also takes into account the fact that amortization of goodwill recorded through FY03/21 (coming to JPY380mn in FY03/21) will end in March 2022.

Qualitative goals

Daiwabo plans to concentrate on the following three measures over the three years of the medium-term plan.

Business expansion in potential markets for machine tools

Respond to changes in the energy industry triggered by decarbonization

Capture demand for 5G-related small power generation equipment and offshore wind power generation

Respond to demand in Japan and overseas for specialized railroad-related machinery

Expand sales proposals that improve user’s work efficiency

Capture of packaging machine automation demand in automatic machinery division

Improve quality and reduce costs by standardizing automatic feeders

Improve competitiveness in the market targeting the Chinese pharmaceutical industry

Enter new markets such as online shopping and the logistics industry

Develop new products and equipment that meet laborsaving needs

Improved profitability through enhanced services

Build an optimal service structure through service improvement projects

Respond to customer needs with retrofitting and overhauling proposals

Ensure faster initial response by improving service contact points

Expand service operations, including annual railroad inspections

Reference: Management strategy prior to announcement of medium-term management plan

Group strategy

The company is pursuing reforms to create an efficient management structure to put in place its growth strategy for the 2020s. As part of these reforms, in April 2020 the company discontinued the system of operating officers, stopped the practice of people holding concurrent positions at the company and subsidiaries, and reorganized the Fiber segment by merging subsidiaries. These moves clarified the responsibilities and authorities of group companies. Under these reforms, the role of the pure holding company is to have an overarching perspective from which to formulate group strategy, optimize the allocation of management resources, and supervise business operations. Meanwhile, operating subsidiaries (such as Daiwabo Information System, Daiwabo Co., and O-M) have the authority and responsibility to execute their respective businesses, make quick strategic decisions, and promote business execution.

IT Infrastructure Distribution segment

In the IT Infrastructure Distribution segment, concerns remain for the backlash from earlier boost in PC replacement demand (as the period of support for Windows 7 ended), as well as for the impact of COVID-19 on supply chains. Against this backdrop, the company has positioned PCs, tablets, and smartphones as key IT devices and will continue to focus its business on distributing these items.

Corporate market

As working styles change in response to the post-pandemic “new normal” environment, the company is promoting the adoption of teleworking and online meetings and cultivating demand for notebook PCs, online conferencing systems, and security. With more software moving into the cloud, the company is strengthening its services and support structure in the subscription business and working to step up adoption by engaging at its bases throughout Japan in sales efforts focused closely on local communities. In subscription business using the iKAZUCHI portal, the company is developing business to take advantage of the growing appetite for investing in corporate clouds. To this end, the company is promoting multi-cloud platforms, which bundle multiple cloud services into optimal environments.

Corporate market (education sector)

Teleworking demand is growing, due to crisis management measures and work style reforms. Also, the Japanese government has launched the GIGA School concept, aimed at getting a PC into the hands of every elementary and junior high school student. These factors are causing the education market to grow. In response, the company is stepping up its collaborative structures involving manufacturers and sales partners, accumulating expertise on the management of mobile devices, and working to capture demand. Following on from the GIGA School concept, the company anticipates the need for IT equipment after ICT environments are put in place. The company aims to capture demand for additional equipment such as electronic blackboards, as well as digital textbooks. It is also strengthening proposals to high schools.

Retail market

The company aims to meet demand for IT devices used at home, which it expects to grow as elementary schools make programming education compulsory and e-sports become more popular. The company is also working with mass retailers and online businesses to strengthen proposals involving PCs and peripherals. These proposals target teleworking demand from sole proprietors and small and medium-sized businesses.

Fiber segment

The company’s management strategy for the Fiber segment is to pursue business activities that involve ESG management (which incorporates environmental, social, and governance elements) and the UN Sustainable Development Goals (SDGs). The company plans to promote the development of products using proprietary materials and processing methods.

Synthetic fibers and rayon divisions

The company is boosting the production of raw fibers and nonwoven fabrics in the sterilization and sanitary materials sectors and raising plant utilization rates in response to demand stemming from measures to fight infectious diseases. The company plans to restructure its systems for providing high-value-added cosmetics products, such as antiperspirant sheets and facial sheet masks. In the rayon field, the company intends to expand sales of functional materials and develop new sales channels. The company aims to promote the development of eco-friendly products that highlight rayon’s biodegradability.

Industrial material division

The company will work to increase sales of cartridge filters in response to the adoption of 5G mobile communications. At the same time, for strategic materials, it will leverage overseas bases to promote local production for local consumption. The company also aims to increase sales of belt products used to transport parts and in the food products industry. It intends to consolidate production bases in order to enhance plant functionality.

Clothing products division

In the clothing products division, the company is working to effectively utilize cost-competitive overseas bases, centering on functional materials. The company aims to capture demand for clothing and bedding processed to prevent viruses, and disinfectants. Also, the company is promoting customer proposals for proprietary products that combine functional materials with reduced environmental impact. Further, it plans to boost sales of new product brands and is working to boost profitability.

Industrial Machinery segment

Machine tools division

Although the outlook for machine tool orders is unclear, the company plans to enhance production facilities and step up its ability to make technology proposals. Through these measures, the company thinks it can accelerate response to customers and concentrate on cultivating the solution business, building a highly profitable structure. By using the Harima Technical Center and expanding its service structure, the company plans to augment after-sales services, strengthening business competitiveness. Meanwhile, the company is working to improve product proposal-making capabilities and brands. It is also strengthening its business structure for the railway industry.

Automatic machinery division

In the automatic machinery division, the company plans to develop automatic supply devices that use robots. The company also plans to strengthen its service system in the Kanto region.

In the Industrial Machinery segment, the company plans to develop products that make use of artificial intelligence and the internet of things (IoT), enhance technological capabilities through the cultivation of human resources, and create new businesses through strategic alliances among group companies and through joint industry–academic research.

Business

Business model

Main business: wholesaling IT equipment (also runs Fiber and Industrial Machinery segments)

The Daiwabo Group’s main business is wholesaling IT equipment (the IT Infrastructure Distribution segment). The company also produces fibers and makes industrial machinery. In FY03/21, revenue was JPY1,043.5bn, and operating profit was JPY35.0bn.

The company has three reporting segments:

In the IT Infrastructure Distribution segment (92.9% of revenue and 94.9% of operating profit in FY03/21), the company wholesales IT and peripheral equipment (such as PCs, printers, and servers), as well as packaged software and cloud services.

In the Fiber segment (5.8% of revenue and 3.9% of operating profit in FY03/21), the company produces and sells polypropylene fiber, nonwoven fabrics for use in sanitary materials, waterproof sheeting for construction materials, and clothing.

In the Industrial Machinery segment (1.1% of revenue and 1.5% of operating profit in FY03/21), the company manufactures and sells vertical lathes, wheel lathes, and automatic packaging machines.

IT Infrastructure Distribution segment

IT trading company handling IT equipment, software, etc.

The core business of the IT Infrastructure Distribution segment consists of wholesale operations through which the company procures IT equipment and software from vendors (manufacturers) and sells these products to sales outlets (which the company refers to as “partners”). Daiwabo procures goods (approximately 2.2 million items) from about 1,300 vendors, and it sells these goods to about 19,000 sales outlets (with whom it has concluded partner agreements) throughout Japan. As a distributor (IT trading company), the company facilitates efficient business dealings (physical distribution, inventory management, order placement and acceptance, etc.) between sales outlets and vendors of IT equipment and software.

The company handled 29.7% of all domestic PC shipments in Japan in FY03/21 (5,136,000 units). According to the company, it has the largest market share in terms of shipment units by PC manufacturers in Japan.

The company has about 19,000 partner companies (customers). According to an economic census report released by Japan’s Ministry of Internal Affairs and Communication, about 50,000 companies in Japan sell IT equipment and software to consumers*. Based on this statistic, Shared Research concludes that the company maintains business relationships with about 40% of these companies.

*According to an economic census report released by Japan’s Ministry of Internal Affairs and Communications, companies in the “electrical machinery and equipment wholesalers” category amounted to 11,684, while companies in the “machinery and equipment retailers” category came to 35,032 (combined total of 46,716).

Value the company provides as a distributor

Value provided to partners: More efficient allocation of operating resources

Daiwabo enables its partners to direct their operating resources into areas of business in which they are strong. First and foremost, the company provides its partners a centralized procurement channel that connects them with the approximately 1,300 vendors (manufacturers) with whom the company maintains business relationships, as well as with the roughly 2.2 million items these vendors offer, eliminating the need for these partners to conduct business with vendors on an individual basis. This allows partners to reduce costs associated with procurement and delivery (stemming from operations such as the formulation of sales quotes for products, inventory checks, and shipping). Partners can also take advantage of the company’s comprehensive range of technical services, including kitting, operation, maintenance, and extended warranty services.

Daiwabo’s services and support operations include setup and installation services for equipment delivered to end users (rendered with assistance from its partners as liaisons). In addition to providing its own maintenance services, the company also conducts repairs, and operates a call center.

Value provided to vendors (suppliers): Product development, sales channel expansion, and streamlining of sales operations

For vendors (manufacturers), the Daiwabo Group provides an efficient method for expanding their sales routes. Its long involvement in supply chain management gives the company access to information about nationwide demand volumes and needs, so the group can provide vendors with feedback on their production plans and promotional activities.

For vendors, the Daiwabo Group’s logistics centers serve as warehouses, helping them to save time and money in logistics. Daiwabo can also handle kitting and bundle products with other manufacturers’ offerings for shipment, increasing logistical efficiency.

Furthermore, overseas manufacturers who are entering the Japanese market can gain access to Daiwabo’s nationwide sales and distribution networks by forming a business relationship with the company.

As an independent multi-vendor, the Daiwabo Group sources products from a wide range of manufacturers that target the Japanese market.

Among the key PC manufacturers are Lenovo NEC, HP, Dell, Fujitsu, Apple, Panasonic, Dynabook, VAIO, and Acer. Manufacturers of PC peripherals include Elecom (TSE1: 6750), I-O Data Device (TSE1: 6916), Philips, Oki Electric Industry (TSE1: 6703), and Schneider Electric.

Major manufacturers of network equipment are Cisco Systems, Buffalo (a subsidiary of Melco Holdings [TSE1: 6676]), Yamaha, and Allied Telesis (a subsidiary of Allied Telesis Holdings [TSE1: 6835]).

Daiwabo sources its core software from Microsoft, Adobe, Trend Micro, and other developers.

Earnings and cost structures

Daiwabo records proceeds from sales of IT equipment and software and compensation received in exchange for technical services as revenue.

In principle, the company records proceeds from the sale of most products (IT equipment, packaged software, etc.) as revenue upon shipment.

Some products are shipped directly to users by vendors, without passing through the company’s distribution facilities. These direct product shipments are particularly numerous in the category of products sold to corporations. Meanwhile, about 90% of products sold to consumers are shipped from the company’s distribution facilities.

Along with packaged software, the company’s handling of cloud-based software products (software as a service), which do not immediately generate recorded revenue upon shipment, has been on the rise. Proceeds generated by the sale of cloud-based software products are recorded as revenue using a variety of different methods, one of which entails recording revenue once licenses are issued to the purchasing vendors.

Over the past three years (FY03/19 to FY03/21), PCs have accounted for 46.0% of revenue in the IT Infrastructure Distribution segment, with peripheral equipment and maintenance services making up 38.4% and software generating 15.6%.

Benefiting from increased demand for PCs in recent years (and extraordinary demand from the GIGA School project in FY03/21), the company’s share of this market has grown (see the section entitled, “Market and value chain”). In addition, the Daiwabo Group has taken advantage of its extensive product range to expand revenue in categories other than PCs. Within software sales, cloud services are an area of particular growth.

Over the past 10 years, the company’s cost ratio has maintained a range of 90–93%. SG&A expenses have been around 5–8% of revenue. Personnel costs account for around 30% of SG&A expenses. The remainder is mostly logistics and selling expenses. Assuming that personnel costs account for around half of fixed costs, the fixed cost ratio is approximately 2–3% of revenue.

Revenue, cost ratio, and SG&A expenses (consolidated)

		FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
(JPYmn)		Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Revenue		489,543	513,469	634,687	566,194	578,506	617,811	669,596	785,554	944,053	1,043,534
Cost of revenue		443,845	468,152	581,930	517,389	528,537	562,204	611,671	717,742	862,577	961,683
	Cost ratio	90.7%	91.2%	91.7%	91.4%	91.4%	91.0%	91.3%	91.4%	91.4%	92.2%
Gross profit		45,698	45,317	52,757	48,805	49,969	55,607	57,925	67,812	81,476	81,851
SG&A expenses		38,628	39,410	41,796	40,558	40,056	42,980	43,618	45,101	48,634	46,823
	Transportation and warehousing	5,506	5,549	5,978	5,682	5,329	5,657	6,027	6,400	6,547	6,928
	Salaries and bonuses	11,442	11,444	11,673	11,619	11,617	11,991	12,112	12,733	13,527	12,944
	Provision for bonuses	1,815	1,648	1,989	1,682	1,688	1,990	1,952	2,239	2,511	2,492
	Provision for directors' bonuses	73	64	85	74	65	79	105	68	145	276
	Retirement benefit expenses	1,005	882	900	848	650	790	793	661	743	829
	Provision for doubtful accounts	16	16	11	161	-	24	-	5	-	-
	Depreciation	545	635	1,271	1,330	1,310	1,298	1,257	704	873	1,200
	Sales promotion expenses	-	-	-	-	-	-	-	4,227	5,343	4,282
	SG&A ratio	7.9%	7.7%	6.6%	7.2%	6.9%	7.0%	6.5%	5.7%	5.2%	4.5%
Fixed cost ratio		3.0%	2.9%	2.5%	2.7%	2.6%	2.6%	2.4%	2.1%	1.9%	1.7%
Operating profit		7,070	5,907	10,961	8,247	9,913	12,627	14,307	22,711	32,842	35,028

Source: Shared Research based on company data

Core system upgrades

The SG&A expense ratio has fallen from 7.0% in FY03/17 to 4.5% in FY03/21, reaching its lowest level in a decade. One reason for this decrease has been the company’s aggressive investment in internal systems to lower the cost of operations. In 1998, the company introduced a core system (DIS-NET), which it upgraded in 2005 and again in 2013. According to the company, this system has improved the productivity of its staff, notably the people in charge of sales, and lowered the SG&A expense ratio. In 2020, the company deployed DIS-NETⅣ, which is expected to improve sales productivity further.

Fiber segment

The Fiber segment comprises the clothing and textiles, synthetic fibers, and industrial materials businesses. In this segment, the company operates six main plants throughout Japan: the Harima, Mikawa, Masuda, Izumo, Fukui, and Akashi plants. The plants are equipped with various types of textile machinery.

In the clothing and textiles business, the company produces and sells clothing. Clothing is produced mainly at factories in Indonesia and China (Suzhou), which handle all production processes, from raw thread to finished products.

In the synthetic fibers business, the company mainly produces polypropylene fibers at the Harima plant (owned by Daiwabo Co., a subsidiary), by purchasing polypropylene chips and selling the fibers to manufacturers of nonwoven fabrics. Nonwoven fabrics are produced at the Mikawa plant (owned by Daiwabo Co., a subsidiary) and a plant in Indonesia. These plants source raw materials from the Harima plant and sell nonwoven fabrics to companies that make sanitary and skincare products, including disposable diapers, baby wipes, sanitary napkins, masks, facial sheet masks, and wet wipes (antibacterial sheets). The Masuda plant (owned by Daiwabo Rayon, a subsidiary) produces rayon fibers, which it makes from wood pulp.

In the industrial materials business, the Izumo plant (owned by Daiwabo Co., a subsidiary) produces cartridge filters (filter materials), which are used in the fields of electronics, food, chemicals, paint, and water treatment. The plant also makes conveyor belts and mesh belts. The Fukui plant (owned by Kanbo Pras, a subsidiary) produces and sells plastic sheeting used in construction, waterproof sheeting, soundproofing sheets, shatterproof sheeting, and truck seats.

In the rubber products business, the Akashi plant (owned by Daiwabo Co., a subsidiary) manufactures rubber sponge products. These products feature airtightness and low resilience and are used as packing materials for vehicles, home electronics, and construction materials.

Industrial Machinery segment

In the Industrial Machinery segment, the company manufactures and sells vertical lathes, wheel lathes, and automatic packaging machines. Vertical lathes are mainly sold to manufacturers of heavy equipment to produce engine parts and equipment for aircraft engines. Railway operators are the main customers for wheel lathes, which are used to maintain rolling stock. The company sells automatic packaging machines mainly to food product manufacturers. The Nagaoka plant (owned by O-M, a subsidiary) makes vertical lathes and railway wheel lathes; automatic packaging machines are made at the Shinji plant (owned by O-M Machinery, a subsidiary).

Business locations

Sales locations (IT Infrastructure Distribution segment)

The company has a nationwide sales network spanning 93 locations, larger than the networks run by competitors (Otsuka Corporation and SB C&S).

Major sales locations: Sapporo, Asahikawa, Hakodate, Obihiro, Aomori, Morioka, Sendai, Akita, Yamagata, Koriyama, Tsuchiura, Utsunomiya, Takasaki, Omiya, Yokohama, Atsugi, Tokyo, Tachikawa, Niigata, Nagaoka, Toyama, Kanazawa, Fukui, Kofu, Matsumoto, Nagano, Gifu, Shizuoka, Numazu, Hamamatsu, Nagoya, Kariya, Yokkaichi, Osaka, Kyoto, Kobe, Himeji, Otsu, Wakayama, Tottori, Matsue, Shimane, Okayama, Hiroshima, Yamaguchi, Tokushima, Takamatsu, Matsuyama, Kochi, Fukuoka, Kitakyushu, Saga, Kumamoto, Oita, Miyazaki, Kagoshima, Naha

Logistics locations (IT Infrastructure Distribution segment)

Logistics system

Daiwabo has five logistics warehouses across Japan to deliver, ship, store, and accept shipments of products. The company has created this logistics system to deliver products to end users swiftly once orders are received. Many logistics functions are consolidated into two mega-centers in eastern and western Japan, the Kanto Central Center and the Kansai Center. These centers use state-of-the-art robot storage systems to achieve efficiency and save space. The logistics facilities also have kitting centers to set up PCs according to user specifications prior to shipping, such as upgrading memory and installing software. The company says it kit approximately 870,000 PCs and tablets in FY03/21. The logistics facilities use a truck booking system to share receiving and shipping information to avoid congestion.

The Daiwabo Group’s logistics centers have a combined 93,000sqm in warehouse space, where the company can maintain a stock of around 30,000 items, providing a warehousing function for manufacturers. The company says it stores products efficiently in automated warehouses, allowing for speedy picking, inspection, packaging, and shipping. The company explains that it can store this many products due to three-dimensional storage and systematized warehouse management. Linking logistics management and inspection systems allows for high precision; the company keeps mis-shipments down as low as 1/200,000 (source: DIS Service & Solution). If requested by manufacturers, the company obtains serial numbers on PCs and other products. The company offers various delivery options such as ensuring that products arrive at the floors of electronics retail stores or are delivered to government agencies based on specified terms. The logistics system is also capable of filling large orders.

The Daiwabo Group stores manufacturers’ promotional items (catalogs, leaflets, and other items) for shipment to stores and display locations along with products. The company notifies manufacturers when product details on the promotional items are getting out of date.

Five distribution bases

Kanto Central Center

This center is located in Yoshimi-machi, Saitama Prefecture, inside Prologis Park Yoshimi, which is owned by PROLOGIS (NYSE: PLD). The company leases the space in this park for JPY664mn per year (FY03/21). The center has 44,753sqm of warehouse space and uses 45 robot storage systems.

Kansai Center

The Kansai Center is in Suma-ku, Kobe, sited within the Seishin Delivery Center of Mitsubishi Logistics (TSE1: 9301). Daiwabo leases the space for JPY435mn per year (FY03/21). The center has 36,342sqm of warehouse space and uses 30 robot storage systems.

Sendai Center

This logistics warehouse, owned by Daiwabo Information System (DIS), is located in Tomiya, Miyagi Prefecture. The center has 3,599sqm of warehouse space.

Chubu Center

This logistics warehouse, owned by DIS, is located in Komaki, Aichi Prefecture. The center has 3,769sqm of warehouse space.

Kyushu Center (DIS warehouse)

This logistics warehouse, owned by DIS, is located in Chikushino, Fukuoka Prefecture. The center has 3,875sqm of warehouse space.

Main manufacturing bases (Fiber segment, Industrial Machinery segment)

Daiwabo Co. Harima plant

This plant, in Harima, Hyogo Prefecture, makes synthetic fiber, such as polypropylene raw fiber.

Daiwabo Co. Mikawa plant

This plant, in Hakusan, Ishikawa Prefecture, makes products from synthetic fibers: nonwoven fabrics and other sanitary materials, as well as cosmetics and skincare products (masks, antibacterial sheets, and facial sheet masks).

P.T. Daiwabo Nonwoven Indonesia (D.N.I.)

Located in West Java, Indonesia, this plant performs the integrated production of nonwoven fabrics.

Daiwabo Rayon Masuda plant

This factory, in Masuda, Shimane Prefecture, produces rayon.

Daiwabo Co. Izumo plant

Located in Izumo, Shimane Prefecture, this plant produces cartridge filters, mesh belts, heavy cloth, canvas, and other industrial materials.

Kanbo Pras Fukui plant

Located in Sabae, Fukui Prefecture, this plant applies resin treatment to the sheeting produced at the Izumo plant. The plant produces waterproof sheeting used in the construction industry, shatterproof sheeting, soundproofing sheets, event tents, advertising signs, and canvas.

P.T. Daiwabo Sheetec Indonesia (D.S.I.)

This company, which is located in West Java, Indonesia, produces and sells industrial materials.

P.T. Daiwabo Industrial Fabrics Indonesia (D.I.I)　

This company is located in West Java, Indonesia. It manufactures and sells canvas (dryer fabrics) for papermaking.

Daiwabo Co. Akashi plant

Located in Akashi, Hyogo Prefecture, this factory mainly produces industrial rubber sponge products.

P.T. Daiwabo Garment Indonesia (D.A.I)

This company, located in Central Java, Indonesia, manufactures clothing.

Suzhou Daiwa Knitting and Garment Co., Ltd.

This company, located in Suzhou, in China’s Jiangsu Province, produces and sells items used to sew clothing.

Daiwabo Industrial (Suzhou) Co., Ltd.

Located in Suzhou, in China’s Jiangsu Province, this company manufactures molded textile products.

O-M Nagaoka plant

This plant, located in Nagaoka, Niigata Prefecture, produces vertical lathes and wheel lathes.

O-M Machinery Shinji plant

Located in Matsue, Shimane Prefecture, this plant manufactures automatic packaging machines.

Capital investment

In FY03/21, the company made capital investments totaling JPY3.7bn, centered on the IT Infrastructure Distribution segment. The company invested JPY639mn in this segment, including JPY513mn directed into Daiwabo Information System Co., Ltd. for the purposes of acquiring software to increase the capacity of internal systems and updating office facilities and equipment.

The company conducted capital investment of JPY2.3bn in the Fiber business, spending JPY1.3bn primarily for the purpose of improving business structures associated with Daiwabo Co., Ltd. through the reorganization of production bases.

The company’s capital expenditure in the Industrial Machinery segment totaled JPY660mn. This amount included JPY609mn spent by O-M, a subsidiary, to update machinery and thereby boost production at its Nagaoka plant.

The company’s capital expenditure in the Others segment amounted to JPY47mn.

R&D

The Daiwabo Group engages in R&D initiatives to uncover and expand unique technology areas where it can utilize its expertise in integrated production to convert raw materials into finished products. The company also conducts R&D activities linked with its business and intellectual property strategies. Total R&D expenses for the Daiwa Group in FY03/21 amounted to JPY853mn.

R&D expenses

R&D expenses		FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
(JPYmn)		Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.
R&D expenses		915	1,052	973	998	1,016	1,056	1,020	1,033	1,001	853
	YoY	17.9%	15.0%	-7.5%	2.6%	1.8%	3.9%	-3.4%	1.3%	-3.1%	-14.8%
	Fiber	-	-	-	-	744	781	849	871	814	679
	Industrial Machinery	-	-	-	-	-	-	170	162	186	173
	Synthetic Fiber and Functional Materials	582	654	628	617	-	-	-	-	-	-
	Clothing and Lifestyle Materials	65	94	96	87	-	-	-	-	-	-
	Machine Tools and Automatic Machinery	223	258	202	249	239	240	-	-	-	-
	Other	44	44	45	43	32	33	-	-	-	-

Source: Shared Research based on company data

Fiber segment

R&D expenses in the Fiber segment came to JPY679mn in FY03/21, spent on the activities outlined below by division.

Synthetic fibers division

The company’s R&D in the field of cosmetics focused on developing materials that are easy on the skin. Accordingly, related efforts were concentrated primarily on producing fibers and non-woven fabrics that are flexible and just slightly acidic. The company also worked proactively to develop and offer base materials to meet growing demand for antibacterial products. It made an effort to develop and offer recycled materials that use natural materials such as cotton and the group’s functional rayon (which is bio-based and biodegradable) along with new processing technologies.

Rayon division

Daiwabo is strengthening collaboration within its corporate group as it continues to target differentiation, and enhancement in the functionality, of all items. Moving forward, the company will promote proposals related to sustainability both in Japan and abroad.

Industrial materials division

The company works toward the Sustainable Development Goals (SDGs) by developing lightweight and insulative materials that take advantage of the polyolefin’s characteristics. The company also develops environmental materials designed to help save energy and purify air and water. The company continues to develop cartridge filters to meet domestic and overseas market demand.

Clothing products division

The company develops products according to the group’s “fiber strategy” and using materials provided by the group. The company has produced a series of materials using hydrophilic polypropylene and is working to develop uses for these materials. In addition to polypropylene, the company actively utilized a variety of fibers, including rayon containing recycled cotton and marine-biodegradable rayon, as it proceeded with efforts aimed at developing environmentally friendly materials. Daiwabo is targeting market expansion in the category of processed materials with antiviral properties, which is characterized by rising demand. To this end, the company is developing processing technologies that are optimized according to the applications of their target materials, which include use in sanitary masks and clothing.

Industrial Machinery segment

R&D expenses in the Industrial Machinery segment amounted to JPY173mn in FY03/21. In this segment, the company focuses on developing products and services that meet specific user needs. To this end, it conducts joint research with universities to connect equipment and facilities via IoT and performs R&D tailored to user needs.

Machine tools division

In response to customer demand, Daiwabo undertook efforts aimed at generating commercially viable CAPTO automatic tool changers capable of facilitating the processing of difficult-to-cut materials. At the same time, the company strove to improve control functions that prevent erroneous mounting through the use of image detection and improve maintainability. In addition, the company is working to commercialize a new model of wheel lathe, the U2000-400, for the railway industry.

Automatic machinery division

The company is working on an OEM basis in the logistics market to commercialize an automated carton packager.

Overview of business by segment

IT Infrastructure Distribution segment

Daiwabo Information System (DIS), a wholly owned subsidiary, handles business in the IT Infrastructure Distribution segment. DIS provides IT-related products and services that break down into such categories as PCs, servers, SIM-free mobile handsets, peripherals (mice, headsets, etc.), network equipment (e.g., routers), communications and cloud services, and software. As a multi-vendor, DIS is positioned to offer customers optimal products selected from a range of manufacturers.

The company handles around 2.2 million items. The product range is broad, covering PCs, servers, mobile devices (SIM-free smartphones, tablets), printers, monitors, network equipment, home information appliances, peripheral equipment, software, and supplies.

The company leverages its standing as an independent multi-vendor to provide customers with products from around 1,300 manufacturers from around the world.

Key manufacturers handled: Dell Technologies, Dynabook, HP, Lenovo, NEC, Google, Microsoft, VAIO, Amazon Web Services, Apple, VMware, Brother Industries, Buffalo, Canon, Cisco Systems, EIZO, Elecom, Epson, Fuji Xerox, Fujifilm, Fujitsu, Hitachi, Huawei, IBM Japan, Intel, I-O Data Device, JustSystems, McAfee, Mitsubishi Electric, Oki Data, Omron, Oracle, Panasonic, PCA, Philips, Ricoh, Sharp, Sony, Toshiba, Trend Micro, Yamaha

Collaboration with manufacturers

The company collaborates with various manufacturers on products (PCs and servers) and services designed to DIS’s specifications*.

*Examples include NEC Mate Special Model (desktop PC), NEC VersaPro Special Model (notebook PC), Panasonic Let’s note SV7/LV7 DIS-exclusive models (notebook PCs), DIS original VAIO models Pro PG/Pro PJ, and NEC Express5800/T110i (PC server).

Collaboration on services

Smart Work Research Institute: This is an information site operated by DIS to support work style reforms using IT.

Windows Mobile Business Center: This organization, a collaboration with Microsoft Japan, is dedicated to supporting the deployment of Windows mobile devices. The center serves as a dedicated helpdesk for sales partners, providing deployment support, consultation based on project details and needs, as well as seminar and event information.

DIS x Cisco Designed Portal (solution for small and medium-sized companies): This website introduces the Cisco Designed series of network equipment.

DIS x Corporate Security (UTM solution): This website introduces corporate network security measures.

D&L Site Navi: This website contains information about Lenovo Japan’s server business.

Cisco Meraki x iPad Raku Raku Telework Package (for small and medium-sized companies): This is an outsourced service for configuring a stable teleworking environment and managing operations with Cisco Systems.

The company has sales locations and logistics bases around Japan, facilitating a detailed response to customer needs. Operating via 19,000 sales partners nationwide, the company sells IT products to a wide range of customers: private companies, government agencies and municipalities, schools, medical institutions, and general consumers.

Sales partners

The company has around 19,000 sales partners around Japan. Centered on local companies selling IT equipment, sales partners also include IT trading companies, system integrators, and mass retailers.

Sales locations

The company has a nationwide sales network spanning 93 locations, larger than the networks run by competitors.

Major sales locations: Sapporo, Asahikawa, Hakodate, Obihiro, Aomori, Morioka, Sendai, Akita, Yamagata, Koriyama, Tsuchiura, Utsunomiya, Takasaki, Omiya, Yokohama, Atsugi, Tokyo, Tachikawa, Niigata, Nagaoka, Toyama, Kanazawa, Fukui, Kofu, Matsumoto, Nagano, Gifu, Shizuoka, Numazu, Hamamatsu, Nagoya, Kariya, Yokkaichi, Osaka, Kyoto, Kobe, Himeji, Otsu, Wakayama, Tottori, Matsue, Okayama, Hiroshima, Yamaguchi, Tokushima, Takamatsu, Matsuyama, Kochi, Fukuoka, Kitakyushu, Saga, Kumamoto, Oita, Miyazaki, Kagoshima, Naha

iDATEN

iDATEN, a website for sales partners that supports corporate sales, is one of the IT sector’s largest sites for accepting orders 24 hours a day. The site supports searches and order placement from a database of 2.2mn items. The site also helps sales partners by providing promotional and support information.

Promotional activities

The Daiwabo Group works to create strong relationships with manufacturers so that it can steadily communicate new product information to customers. The Daiwabo Group’s purchasing and nationwide sales departments liaise with manufacturers, working to stay at the forefront of new trends. For example, the company holds nationwide DIS World events that are co-sponsored by major PC manufacturers and software vendors. The Daiwabo Group also publishes PC-Webzine, which takes advantage of the group’s information-gathering capabilities and contains new-product information and analyses of market trends. The group holds events, such as the DIS ICT EXPO and DIS Webinar. The company also holds lectures and has a support structure in place to provide after-sales services.

Initiatives targeting the education market

The company collaborates with prominent sales partners covering the education market in regions throughout Japan. The company also helps new sales partners enter the market. Daiwabo is conducting promotional activities to encourage computerization at educational institutions as part of the GIGA School concept being promoted by Japan’s Ministry of Education, Culture, Sports, Science and Technology.

The company provides a DIS education ICT website, as well as an education (K-12) sales support site within iDATEN. Daiwabo also uses social media to boost market share by appealing to boards of education, schools and other educational institutions, sales partners in the education field, and manufacturers.

DIS-specific solutions

The Daiwabo Group offers its own solutions targeting schoolteachers.

Otegaru Sensei Pack: These packages are designed to facilitate the process of getting a tablet in the hands of every teacher for easy and quick use the equipment in classes. The package contains a notebook PC (tablet), a storage bag, and an AP-equipped image transmission device.

Teacher training services: DIS offers training to help teachers make effective use of ICT in their lessons, helping them gain skills they can use for better lesson design.

Programming educational package: This package, which supports HR development, is designed to use robotics technologies to make the effects of education visible.

Otegaru Remote Learning Pack: This package, which comes with a video manual, provides an easy introduction to online classes.

Services and support for schools: In addition to encouraging the adoption of ICT in schools, the company provides a menu of post-deployment support services. The company handles initial settings, installation, and IP settings on multi-vendor product offerings prior to delivery. The company offers two- to five-year extended warranty services that cover property damage due to failure or flooding, as well as spontaneous failure.

The Daiwabo Group emphasizes three priorities in realizing “21st century education” through the computerization of schools: the planned setup of ICT environments, operational support based on-site needs, and better instruction on using ICT in education. Progress on these priorities raises a variety of issues, such as budgets, standards for evaluating learning effects, and teacher training. Rather than rushing to allocate a PC to each person, the company advocates gradual deployment, taking into consideration the current status at schools and municipal organizations.

DIS School Innovation Project

The company conducted this empirical study, on the use of ICT in ordinary classrooms, using tablet PCs. The study ran from FY03/14 to FY03/15 at 32 schools in 21 local government areas across Japan. The data accumulated in this project was used to support the introduction of ICT at schools throughout Japan.

SI seminars

The company holds seminars across Japan involving trial classes where attendees can experience classroom environments utilizing ICT. It presents various methods, from applications of existing hardware to ICT applications customized for individual schools.

Educational ICT consulting

In addition to hardware, the company provides training to facilitate the effective use of ICT once it is installed. It offers training to enhance lesson design and a menu of post-introduction support services.

Communication services, mobile business

The company provides SIM cards for SIM-free devices, as well as WiMAX and other mobile connections. It sells SIM-free products, as well as other tablets and smartphones from various manufacturers. It also offers implementation support services and provides a consultation desk to handle initial product failures and repairs. At the Windows Mobile Business Center, the company offers support and consulting on the deployment of Windows-equipped mobile devices and provides information on seminars and events. In addition, it provides an MVNO support function, acting as a delivery agent.

The company provides various router-based communication services, centered on DIS mobile WiMAX. These services allow customers to begin using the internet on the day they buy the service. The services require no wiring work and can be used in combination with various mobile devices. The company also offers SIM-based communication services that can be provided with SIM-free smartphones and routers.

Cloud services

The company sells cloud services (provided by other companies) that can be used from anywhere and at any time, without owning software. The Daiwabo Group has a service lineup of multiple cloud platforms; from these, it selects and suggests services that best suit customer needs. As the cloud market has grown, the company has focused on the subscription business. The company considers cloud services to be strategically important, so has set up a call center staffed by a dedicated team. This team works with the company’s sales locations around Japan and provides support for sales partners, responding to service-related inquiries and assisting with campaign rollouts.

The Daiwabo Group has systems in place to provide on-premises services or services via cloud platforms, according to end-users’ requirements. The company says demand for hybrid (on-premises and cloud) services has grown in recent years. The Daiwabo Group helps customers decide which to use based on data confidentiality, offers customized functionality and security, and suggests ways to optimize operations and costs. It also provides solutions that combine hardware and other services. Sales partners can use the iKAZUCHI system for the centralized management of complex contracts and billing.

iKAZUCHI

iKAZUCHI is a subscription management portal site developed by the company for its sales partners.

As of end-March 2021, 145 subscription services from 65 vendors were using iKAZUCHI.

iKAZUCHI itself is a tool that can be used free of charge by contracted sales partners, and the company's only revenue is generated by wholesale sales of subscription products such as cloud services. Shared Research believes, however, that in addition to improving operational efficiency through centralized management, enhancing the competitiveness (number of functions and services) of iKAZUCHI will help differentiate it from the competition and build a stable customer and revenue base. Shared Research understands that iKAZUCHI produces the synergistic effect that as the number of affiliated vendors increases, so does the number of sales partners, and vice versa.

Logistics bases

The company has five logistics centers throughout Japan that typically keep around 30,000 items in stock. Orders can be dispatched directly to the end users. The company uses an inventory control system to ensure each product is shipped from the most suitable warehouse.

Technological services

Kitting services

The company’s logistics centers have kitting centers to install optional equipment in IoT devices according to customers’ wishes prior to shipping. The centers also check operations, set up operating systems, and install applications.

Maintenance services

The company provides maintenance services to customers via its service and support network.

DIS Service & Solution Co., Ltd. (DSAS)

Logistics, kitting, and maintenance services

This company handles service and support for DIS. DSAS centrally manages support services, including logistics (delivery and shipping), support on ICT products prior to purchase, and post-installation maintenance. DSAS uses the company’s nationwide logistics network to deliver a wide variety of items from precision devices (mainly ICT equipment) to office supplies. It offers various value-added logistics services in addition to receiving/shipping and warehouse operation. DSAS handles a range of activities, including initial, pre-installation settings and installation according to end-user requirements, kitting, post-installation helpdesk operation, extended warranties, repairs, data recovery, data erasure, and reuse.

DSAS also creates various content, using leading-edge technologies to develop customized websites and produce movies and digital signage. It offers a desktop publishing service for printed materials and produces novelty items and event displays.

Solution services

DSAS provides ICT-centered solution services, conducting maintenance and operational support to meet customer requirements.

Collaboration

By providing advanced information technologies, the company aims to increase productivity, reduce costs, accelerate decision-making, and strengthen relations between the end users and their customers. The company helps create an environment conducive to collaborative business activities regardless of location, time, and type of device. Examples in this area include support for videoconferencing, online conferencing, unified communications*, and teleworking.

*Unified communications is a system for integrating diverse communication methods (telephone, email, business chat, online conferencing, and videoconferencing) based on contact details, selecting the best method for communication, and using these methods in combination.

Data center / cloud services

DSAS has system engineers on site full time at data centers to provide one-stop services, such as monitoring, maintenance, and operations. It also offers software as a service (SaaS) to enhance security and improve operating efficiency. SaaS offerings include housing, management of IT assets to prevent information leaks, file sharing, one-time password authentication, and antivirus measures.

Network configuration

DSAS handles network settings and configuration, maintenance, and operational monitoring to keep network environments optimized and up to date. It configures internet, LAN and WAN environments, monitors operations at data centers, and sets up and configures virtual and cloud environments.

Infrastructure setting and installation

DSAS analyzes issues in network environments and supports corporate networks by optimizing infrastructure settings and installations. The company provides one-stop services, setting up telecommunication services (communication servers and PBXs), setting and installing wireless LANs, and proposing and carrying out office layouts.

Key companies in this segment

Daiwabo Information System Co., Ltd. (DIS; wholly owned subsidiary of Daiwabo Holdings)

DIS Service & Solution Co., Ltd. (DSAS; DIS’s wholly owned subsidiary that handles logistics and solutions)

Fiber segment

The company focuses on R&D to develop, manufacture, and sell sustainable materials and high-value-added products that are functional and unique. The Fiber segment comprises the clothing and textiles, synthetic fibers, and industrial materials businesses. The company has six main plants around Japan (the Harima, Mikawa, Masuda, Izumo, Fukui, and Akashi plants) that are equipped with various types of textile machinery. In addition to clothing, the plants manufacture a broad range of items from materials for disposable diapers and other lifestyle items to industrial materials, such as the waterproof sheeting used at construction sites. They manufacture items in various forms, from raw fiber and nonwoven fabrics to finished products.

Clothing and textiles business

The company produces and sells clothing. Clothing is made mainly at factories in Indonesia and China (Suzhou), which handle all production processes, from raw thread to finished products. The company develops clothing, lifestyle materials, and products, including functional innerwear, high-density fabric, and comfortable outer garments. It manufactures and sells licensed brand clothing (FILA, T&C, Prince, and NCAA).

Synthetic fibers business

In this business, the company mainly produces polypropylene fibers at the Harima plant. Polypropylene fiber is resistant to chemicals and offers high heat workability. The company sources polypropylene chips, which it processes into polypropylene fibers and sells to manufacturers of disposable diapers, feminine hygiene products, and other sanitary materials.

Nonwoven fabrics are produced at the Mikawa plant and a plant in Indonesia. These plants source raw materials from the Harima plant and sell nonwoven fabrics to companies that make sanitary, cosmetics, and skincare products, including baby wipes, sanitary napkins, masks, facial sheet masks, and wet wipes (antibacterial sheets). Additionally, the company manufactures and sells synthetic fibers with the ability to absorb moisture and generate heat or absorb water and dry quickly.

*Nonwoven fabric: A sheet made by intertwining fibers using a special process such as water or needles without weaving.

The company also manufactures and sells short-cut fibers for building materials. These fibers can be used as asbestos substitutes or for self-healing cracks in mortar.

In the area of rayon and other natural fibers, the company manufactures original fibers (adding functionality to cotton from the US, India, and Egypt); functional rayon fibers (made of wood pulp); and paper threads at its Masuda plant. The company offers a lineup of rayon products that repel insects, retard or prevent flame, generate heat and light, or are anti-allergenic or water-repellent. Rayon is highly biodegradable and can be used as a biomass environmental material. Taking advantage of this property, the company also manufactures and sells nonwoven fabrics that are comfortable on the skin and marine-biodegradable, as well as biodegradable composite fibers made from 75% plant-based materials.

Industrial materials business

The Izumo plant produces materials for cartridge filters, which filter out impurities in such fields as electronics, food products, chemicals, paints, and water treatment. Cartridge filters are made from nonwoven fabrics. The company also uses proprietary weaving technology to produce filter cloth, conveyor belts, and mesh belts. Kanbo Pras, a subsidiary, makes and sells sheeting used on construction sites and in disaster prevention applications, waterproof sheeting, greening nets, soundproofing sheets, shatterproof sheeting, curing meshes, truck seats, heavy cloth for storehouse and event tents, synthetic sailcloth, container bags, soil bags, cooler bags, and composite signboards.

In the rubber products business, the Akashi plant manufactures rubber sponge products. These products feature airtightness and low resilience and are used as packing materials for vehicles, home electronics, and construction materials. The products are also used in sporting applications, such as SOYO (which the company says is a top brand of bicycle racing tires). The company also manufactures and sells rubber baseballs.

In the Fiber segment, Daiwabo collaborates extensively with companies from other sectors, as well as universities and research institutions, to accelerate next-generation technologies. By working with development and production bases in Japan and overseas, the company seeks to use its expertise in logistics to optimize supply chains. The company says it forms international alliances that go beyond product boundaries to optimize the flow of trade.

Key companies in this segment

Daiwabo Co., Ltd. (Daiwabo Co.; wholly owned subsidiary of Daiwabo Holdings) produces and sells polypropylene fibers, high-performance fabrics, nonwoven fabrics used in sanitary materials, and other cloth products.

Kanbo Pras Corporation (wholly owned subsidiary of Daiwabo Co.) produces waterproof sheeting for the construction sector, truck seats, event tents and other heavy industrial cloth, and sailcloth.

Daiwabo Rayon Co., Ltd. (wholly owned subsidiary of Daiwabo Co.) manufactures and sells rayon fibers and nonwoven fabrics.

Daiwabo Advance Co., Ltd. (wholly owned subsidiary of Daiwabo Co.) produces and sells licensed brand clothing.

Industrial Machinery segment

O-M, a subsidiary, handles the Industrial Machinery segment. In this segment, the company produces vertical lathes, which are crucial to the aerospace and other industries. The company says it provides high-quality, high-value-added products based on the technologies and expertise it has built up over many years. The company also manufactures and sells wheel lathes (used on rolling stock) and other machine tools. O-M also produces and sells automatic packaging machines, which are widely used in such fields as food products and pharmaceuticals.

Vertical lathes

Vertical lathes are machine tools that cut metal parts mounted on a horizontally rotating table. The company explains that O-M’s vertical lathes offer high rigidity, high precision, and superior operability, and they are mainly used in processing large parts in fields that include aircraft engines, rockets, power generation equipment, and construction machinery. The company says O-M has the top market share in Japan for medium-sized and large vertical lathes, with roughly 7,400 units shipped as of end-FY03/21. O-M produces vertical lathes in a variety of sizes, with tables ranging in diameter from 800mm to 6,000mm. In addition, the company has a lineup of multifunctional turning centers. The company has a sales base in Houston, Texas, in the US.

Source: Company materials

Wheel lathes

These specialty machine tools are used in maintaining rolling stock. The company obtained the initial technology to manufacture wheel lathes from Hegenscheidt, a German company that produced the world’s first wheel lathes and has delivered them around the world. However, the settings, parts, and software for these lathes come from the Daiwabo Group. As travel distance accumulates, the wheels on rolling stock begin to slip during braking, causing distortions. During maintenance, wheel lathes are used to cut away these distortions and true the wheels. Wheel lathes are thus essential to railway safety and riding comfort. The company says it has the largest share of the Japanese market for railway wheel lathes, which are used by Shinkansen and other railway operators.

Source: Company materials

Automatic machinery

O-M Machinery manufactures and sells carton-making machines (cartoners) for packaging food and drugs. The company also makes intermediary packaging machines (for collecting individually packed products and wrapping them with film), cardboard case-makers, and other automatic machinery. The company explains that the food products industry is characterized by shortening product life cycles and increasing diversity. Meanwhile, manufacturing standards are growing increasingly stringent in the pharmaceutical sector. The company works to provide automatic packaging machines that meet such changing needs. The company uses AI and IoT in collaboration with academia and other companies in the Daiwabo Group to deliver production equipment and technical services that satisfy diverse needs, such as for saving energy, space, and labor.

Source: Company materials

Key companies in this segment

O-M Ltd. (O-M; wholly owned subsidiary of Daiwabo Holdings) manufactures and sells vertical lathes and wheel lathes.

O-M Machinery Ltd. (wholly owned subsidiary of O-M) produces and sells automatic packaging machines.

OMK Ltd. (wholly owned subsidiary of O-M) manufactures and sells castings.

Market and value chain

Japanese PC market

Domestic PC shipments: Approx. JPY1.4tn

According to MM Research Institute, domestic PC shipments numbered 17,283,000 units in FY2020 (+12.9% YoY; April 2020–March 2021), the highest level since the study began in 1995 (previous high recorded in FY2013). The value of PC shipments fell 1.2% YoY to JPY1.4tn. The average shipping price per unit in 2020 was JPY81,057, down JPY11,606 from JPY92,663 in FY2019. Shipments of low-priced notebook PCs rose.

Domestic PC shipment

		FY2011	FY2012	FY2013	FY2014	FY2015	FY2016	FY2017	FY2018	FY2019	FY2020	FY2021F
PC shipments in Japan (JPYmn)		1,105,300	1,000,400	1,212,800	1,015,700	873,600	870,400	914,100	1,085,000	1,418,100	1,400,900	-
	YoY	-13.2%	-9.5%	21.2%	-16.3%	-14.0%	-0.4%	5.0%	18.7%	30.7%	-1.2%
Unit shipments ('0000)		15,294	15,057	16,513	12,609	9,906	10,112	10,339	11,835	15,304	17,283	11,980
	YoY	5.0%	-1.5%	9.7%	-23.6%	-21.4%	2.1%	2.2%	14.5%	29.3%	12.9%	-30.7%
Average price (JPY)		72,270	66,441	73,445	80,554	88,189	86,076	88,413	91,677	92,663	81,057	-
	YoY	-17.4%	-8.1%	10.5%	9.7%	9.5%	-2.4%	2.7%	3.7%	1.1%	-12.5%

Note: Average prices per unit were calculated by Shared Research using the following formula: total shipment value ÷ units shipped
Source: Shared Research based on data obtained from MM Research Institute, Ltd.

NEC Lenovo Japan Group shipped 6,328,000 units in FY2020, thereby securing the highest share of overall shipments at 36.6% (+9.5pp YoY). A major reason for the increase was shipments of Chromebooks in line with the GIGA School objective of getting a PC into the hands of every Japanese elementary and junior high school student. According to MM Research Institute, about 4,810,000 units were shipped in connection with the GIGA School Program in FY2020, accounting for 27.8% market-wide shipments during the same year. About 4,060,000 of these units were Chromebooks.

The Japanese government provided subsidies for devices associated with the GIGA School Program (up to JPY45,000 per device; limit increased by 2% for schools in remote locations, etc.).

About 4,300,000 Chromebooks were shipped, accounting for 24.8% of shipments market-wide.

Domestic PC shipment shares by manufacturer

CY2010		FY2016		FY2017		FY2018		FY2019		FY2020
NEC	19.5%	NEC Lenovo	25.6%	NEC Lenovo	26.0%	NEC Lenovo	27.1%	NEC Lenovo	27.1%	NEC Lenovo	36.6%
Fujitsu	19.4%	Fujitsu	18.1%	Fujitsu	17.8%	Fujitsu	16.4%	HP Japan	18.5%	HP Japan	15.3%
Toshiba	11.7%	HP Japan	13.0%	HP Japan	14.0%	DELL	16.2%	DELL	16.3%	DELL	13.2%
DELL	10.2%	DELL	12.9%	DELL	13.7%	HP Japan	15.5%	Fujitsu	16.1%	Fujitsu	10.9%
HP Japan	9.7%	Toshiba	11.9%	Toshiba	9.8%	Dynabook	8.4%	Dynabook	7.3%	Dynabook	5.7%
Sony	6.1%	Apple	5.4%	Apple	5.5%	Apple	4.7%	Apple	3.5%	Apple	3.7%
Other	23.4%	Other	13.1%	Other	13.2%	Other	11.7%	Other	11.3%	Other	14.6%

Source: Shared Research based on data obtained from MM Research Institute, Ltd.

Forecast for PC shipments

MM Research Institute projects that 11,980,000 PCs will be shipped in FY2021 (-30.7% YoY). The institute estimates that 7,177,000 of these PCs (-42.4% YoY) will be shipped in response to demand from corporate bodies (associated with the GIGA School Project, etc.) and that 4,803,000 (-0.4% YoY) will be shipped in response to demand from individual consumers.

Daiwabo Group share of PC sales

One in three corporate PCs via the Daiwabo Group

In FY03/19, the Daiwabo Group’s share of PC sales in Japan was 22.0%. This figure rose to 26.1% in FY03/20 and 29.7% in FY03/21. The company’s share of PC sales for the corporate market grew from 28.2% in FY03/19 to 33.6% in FY03/20 and 38.1% in FY03/21.

Daiwabo believes that its market share has expanded over the past 10 years largely because an increasingly high number of vendors have recognized the value it provides (sales channels providing connections to its 19,000 partners and heightened efficiency of sales operations) amid a period of restructuring in the PC industry. Particularly high was the number of foreign vendors that, instead of relying on direct sales, adopted sales strategies utilizing the company’s sales channels in Japan as the share of domestic PC sales attributable to PCs marketed under foreign brands expanded. The company’s market share expanded as growth in the number of vendors with whom it maintains a business relationship led to an increase in partner companies.

PC shipments and domestic PC market share attributable to Daiwabo

		FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
		Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.
Unit shipments ('0000)		2,020	2,251	2,928	2,076	1,789	1,889	1,986	2,604	3,995	5,136
	YoY		11.4%	30.1%	-29.1%	-13.8%	5.6%	5.1%	31.1%	53.4%	28.6%
Market share in Japan (total)		13.2%	15.0%	17.7%	16.5%	18.1%	18.7%	19.2%	22.0%	26.1%	29.7%
Market share in Japan (corporate use)		19.6%	22.2%	23.2%	21.3%	25.1%	26.0%	26.6%	28.3%	33.6%	38.1%

Source: Shared Research based on company data

Japanese server market

Domestic shipments of servers: Approx. JPY277.8bn

According to MM Research Institute, shipments in Japan of PC servers* totaled 406,515 units in FY2020 (April 2020–March 2021), down 8.6% YoY. The value of these shipments was JPY277.8bn, down 2.1% YoY, while average shipment price rose JPY45,000, to JPY683,000. Shipments were firm in 1H but fell off in 2H.

*Here, MM Research Institute cites the number of 32-bit PC servers (corporate servers combining general-purpose CPUs and operating systems). Formerly, these servers were at the heart of corporate information systems, where they were used for in-house file and printer sharing. The institute explains that these servers are now being used in core systems, due to increases in CPU functionality and overall product reliability. These servers account for more than 50% of all servers on a monetary basis and 95% on a unit basis. MM Research Institute’s statistics do not include PC servers that megacloud operators are building to their own specifications.

Forecast for domestic shipments of servers
MM Research Institute forecasts a 0.8% YoY decline in server shipments in FY2021, to 403,450 units, and expects the value of these shipments to drop 2.1% YoY, to JPY272.0bn.

Domestic PC server shipments

			FY2010	FY2011	FY2012	FY2013	FY2014	FY2015	FY2016	FY2017	FY2018	FY2019	FY2020	FY2021F
Total			510,330	535,439	512,854	533,012	506,182	478,446	465,688	433,777	461,756	444,985	406,515	403,450
	YoY			4.9%	-4.2%	3.9%	-5.0%	-5.5%	-2.7%	-6.9%	6.5%	-3.6%	-8.6%	-0.8%
	1H		251,360	266,513	256,674	249,844	236,350	230,802	223,094	198,314	214,615	216,685	193,860	185,850
		YoY		6.0%	-3.7%	-2.7%	-5.4%	-2.3%	-3.3%	-11.1%	8.2%	1.0%	-10.5%	-4.1%
	2H		258,970	268,926	256,180	283,168	269,832	247,644	242,594	235,463	247,141	228,300	212,655	217,600
		YoY		3.8%	-4.7%	10.5%	-4.7%	-8.2%	-2.0%	-2.9%	5.0%	-7.6%	-6.9%	2.3%

Source: Shared Research based on data obtained from MM Research Institute, Ltd.

Japanese market for network equipment

Market value: Approx. JPY250bn

According to IDC Japan, shipments of network equipment to Japanese companies rose 10.1% YoY in 2020, giving the market a value of JPY270.4bn. Network construction associated with the GIGA School Program pressed onward despite stagnating economic activity caused by the COVID-19 pandemic. Meanwhile, the market scale of network construction related to wireless LAN devices reached JPY46.8bn (+54.2% YoY). IDC indicates that about 40% of network construction related to wireless LAN devices was performed in connection with the GIGA School Program.

IDC Japan projects that the market attributable to network equipment for Japanese companies in terms of sales value will decline 2.3% on a compounded annual basis, over the five years spanning from 2020 through 2025. The organization indicates that the market has essentially matured, although it does project that new wireless LAN-related demand will accompany development in corporate networks.

Product shipments in the textile industry

Shipments of products made from synthetic fiber: Approx. JPY350bn

According to the Ministry of Economy, Trade and Industry’s statistical charts on industry, in 2020 companies in the textile industry shipped products worth JPY3.7tn. Of this figure, shipments in spinning and silk were worth JPY537.1bn, JPY319.5bn in synthetic fiber, JPY314.0bn in textiles, JPY312.9bn in felt and nonwoven fabrics, and JPY48.8bn in top-coated and waterproofed fabrics.

Main competitors

Major competitors

No other companies have developed their businesses using the same model as the Daiwabo Group’s mainstay IT Infrastructure Distribution segment (the wholesaling of IT equipment). Comparable companies that compete in sales of PCs and software are Otsuka Corporation, SB C&S, TD SYNNEX, and Canon Marketing Japan (TSE1: 8060).

Otsuka Corporation (TSE1: 4768)

Otsuka is a multi-vendor (not tied to any specific manufacturer) that handles a wide range of items, from office furnishings to IT equipment. In the system integration business, the company sells computers, multifunctional copier-printers, communications equipment, and software. Otsuka also handles outsourced software development. In short, Otsuka handles all aspects of system deployment (system design/development, installation work, and network configuration). Otsuka also has a services and support business. In this segment, the company provides supplies, has a mail-order service for office supplies, maintains IT equipment and software, provides telephone and various types of web support, and supports training. Otsuka has 78 sales locations around Japan, mostly in major cities.

SB C&S (subsidiary of SoftBank Group [TSE1: 9984])

SB C&S Corp. handles the IT distribution business, which is the foundation of the SoftBank Group, providing ICT-related products and services (PCs, servers, virtualization, security, and network solutions). SB C&S uses SoftBank’s networks and telecommunications infrastructure to develop cloud platforms and other cloud services. The company provides companies with drones, robots, AI, and IoT-equipped products and services. In its aim to become one of Japan’s leading providers of IT and ICT products, SB C&S handles items on behalf of both manufacturers and distributors. Centering on smartphone-related business, SB C&S offers mobile peripheral equipment, audio equipment, and software, as well as selling products it designs and develops in-house. The company utilizes sales partners and has eight sales locations around Japan.

TD SYNNEX (unlisted)

This SYNNEX Group subsidiary wholesales PCs, peripheral equipment, packaged software, and cloud services. SYNNEX Japan is the country’s largest provider of SIM-free devices. Revenue amounted to JPY118.7bn in FY11/20. Aiming for operational efficiency, the company has three sales locations (Tokyo, Nagoya, and Osaka) and two logistics facilities (Tokyo and Osaka). Concentrating on comprehensive IoT solutions, SYNNEX Japan promotes its IoT market offerings: cloud, corporate mobile telephony, big data, and consumer technology.

Canon Marketing Japan (TSE1: 8060)

This company handles sales in Japan for Canon Inc. (TSE1: 7751) and is involved in the IT solution business. In the consumer segment, Canon Marketing Japan (CMJ) sells general consumer products, such as digital cameras with interchangeable lenses (single-lens reflex cameras, mirrorless cameras), interchangeable lenses, compact cameras, and ink-jet printers, mainly through mass retailers. In the enterprise segment, CMJ provides large Japanese companies with multifunctional copier-printers and other equipment, maintains equipment, operates data centers, and offers IT solutions. In its “area” segment, CMJ targets small and medium-sized Japanese companies, providing multifunctional copier-printers, and maintenance, as well as business devices such as PCs made by companies other than Canon, and peripheral software. CMJ is working to expand the IT solution business and aims to increase sales of non-Canon products.

Profitability of three listed companies

Shared Research has compared the financial indicators of Daiwabo Holdings, Otsuka Corporation, and Canon Marketing Japan. Average OPM over the latest three fiscal years was 3.2% at Daiwabo Holdings, 6.7% at Otsuka Corporation, and 5.2% at CMJ. Shared Research understands that Daiwabo Holdings’ relatively low profitability is because the company specializes in the wholesaling of IT equipment (mainly to corporate customers in the IT Infrastructure Distribution segment). By contrast, Otsuka has a highly profitable system integration business, and CMJ has a highly profitable consumer channel, selling digital cameras and household printers.

Profitability of three listed companies (consolidated basis)

		Operating profit margin	ROIC	Operating profit	Debt-to-equity ratio
		3-year average	3-year average	CAGR	3-year average
3107	Daiwabo Holdings	3.2%	15.4%	34.8%	0.29
4768	Otsuka Corporation	6.7%	14.6%	8.3%	0.03
8060	Canon Marketing Japan	5.2%	6.5%	1.0%	0.00

Source: Shared Research based on annual securities report of each company

Strengths and weaknesses

Strengths

Top share of the Japanese market for PC wholesaling, supported by a nationwide network of 93 sales bases:

The Daiwabo Group provides support and services to its customers (19,000 sales partners) and end users via 93 sales locations scattered across Japan, from Hokkaido in the north to Okinawa in the south. The company has used this network (the largest network in Japan for supplying IT equipment) to earn the largest share of the domestic market for supplying PCs to corporate customers (according to the company, a 38.1% share in FY03/21). Competitors have smaller networks: Otsuka Corporation has 78 sales locations, SB C&S has eight, and TD SYNNEX has three. This large network allows the Daiwabo Group to respond to robust demand from educational institutions stemming from the government-led GIGA School concept.

Extensive inventories and five logistics centers around Japan to deliver products quickly and in large quantities:

The Daiwabo Group maintains large inventories at five nationwide locations and logistics centers (warehouses) occupying 93,000sqm, which to a certain extent provide a warehousing function for manufacturers. This stock spanning 30,000 items allows the company to deliver products to end users on specified dates, whether in small or large lots. The logistics centers also handle kitting, including such tasks as upgrading memory and installing software, which accelerates inventory turnover and speeds delivery. Major logistics facilities are the Kanto Central Center (operational since June 2016) and the Kansai Center (May 2020). These facilities have large warehouses equipped with state-of-the-art robot storage systems to facilitate efficient and swift deliveries, and competitiveness on the logistics front helps the company in terms of costs and service levels. The ability to offer inventory and kitting functions also gives the company negotiating power with manufacturers.

As Japan’s largest independent multi-vendor, able to provide customers with optimal devices from a diverse product lineup:

The Daiwabo Group has no affiliations with any specific manufacturing group, leaving it free to handle 2.2mn items of IT equipment from 1,200 manufacturers from around the world. Being one of the largest wholesalers in Japan by number of items handled also gives the company an advantage with procurement, as it can negotiate volume discounts. The company takes advantage of its position as one of Japan’s largest wholesalers to collaborate with manufacturers and differentiate its product lineup. By offering optimal combinations of products suited to meet end users’ needs, the company is working to gain trust from customers and boost sales competitiveness.

Weaknesses

Mainstay IT Infrastructure Distribution segment focused on reselling, but profitability low:

Over the three years to FY03/21, OPM has averaged 3.2% in the Daiwabo Group’s IT Infrastructure Distribution segment, undershooting competitors Otsuka Corporation (6.7%) and Canon Marketing Japan (5.2%). This lower profitability is due to the Daiwabo Group’s strategic focus on operating as a trading company providing IT equipment to corporate customers. Otsuka Corporation derives 63.0% of revenue from system integration (FY12/20), which is more profitable than trading. The Daiwabo Group has not pursued system integration, preferring not to compete with customers (some of which are system integrators). Shared Research understands the company’s medium-term plan calls for higher profitability, and to achieve this, Daiwabo will need to increase added value by developing services that do not compete with customers, as well as through M&A and business acquisitions.

In the Fiber segment (legacy business), plants spread across six locations in Japan, so maintenance and management efficiencies low:

The Fiber segment is relatively small, producing JPY61.0bn in revenue in FY03/21. Nevertheless, the segment has six bases, in Harima (Hyogo Prefecture), Mikawa (Ishikawa Prefecture), Izumo (Shimane Prefecture), Masuda (Shimane Prefecture), Fukui (Fukui Prefecture), and Akashi (Hyogo Prefecture). This arrangement harks back to the Daiwabo Group’s roots. (The company was established in 1941 through a merger of four cotton spinners.) However, given the relatively small scale of business in this category today the company’s production facilities are widely dispersed, resulting in a supply structure with low plant maintenance and management efficiency. Looking at other textile manufacturers with their roots in cotton spinning, Toyobo (TSE1: 3101) has five key plants in Japan, and its Lifestyle and Environmental segment generated revenue of JPY109.1bn. Unitika (TSE1: 3103), which has four plants in Japan, generated revenue of JPY110.4bn. Kurabo Industries (TSE1: 3106), which has seven plants in Japan, generated JPY90.7bn in its textiles and chemical products businesses.

In the Industrial Machinery segment, product lineup includes medium-sized and large vertical lathes and wheel lathes, which lack growth potential:

Looking at the business environment before the impact of the COVID-19 outbreak became apparent, in FY03/20 the Industrial Machinery segment produced revenue of JPY13.0bn, operating profit of JPY753mn, and OPM of 5.8%. Business is small in scale and segment profitability is low compared with other lathe manufacturers: Okuma (TSE1: 6103) had revenue of JPY172.1bn and OPM of 8.7%, Shibaura Machine (TSE1: 6104) had revenue of JPY116.8bn and OPM of 3.0%, Star Micronics (TSE1: 7718) had revenue of JPY60.7bn and OPM of 9.6%, and Takisawa Machine Tool (TSE1: 6121) had revenue of JPY25.4bn and OPM of 7.5%. .

Revenue in the Daiwabo Group’s Industrial Machinery segment has been falling since its peak at JPY14.1bn in FY03/15. Shared Research understands that this decline is due to the segment’s limited product range (medium-sized and large vertical lathes for heavy equipment manufacturers, railway wheel lathes for railway operators, and automatic packaging machines for food and drug manufacturers) and the fact that those markets are maturing

Historical performance and financial statements

Income statement

Income statement			FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
(JPYmn)			Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Revenue			489,543	513,469	634,687	566,194	578,506	617,811	669,596	785,554	944,053	1,043,534
	YoY		8.2%	4.9%	23.6%	-10.8%	2.2%	6.8%	8.4%	17.3%	20.2%	10.5%
Cost of revenue			443,845	468,152	581,930	517,389	528,537	562,204	611,671	717,742	862,577	961,683
Gross profit			45,697	45,316	52,756	48,805	49,969	55,607	57,924	67,811	81,476	81,851
	Gross profit margin		9.3%	8.8%	8.3%	8.6%	8.6%	9.0%	8.7%	8.6%	8.6%	7.8%
SG&A expenses			38,628	39,410	41,796	40,558	40,056	42,980	43,618	45,101	48,634	46,823
	SG&A ratio		7.9%	7.7%	6.6%	7.2%	6.9%	7.0%	6.5%	5.7%	5.2%	4.5%
Operating profit			7,069	5,906	10,960	8,246	9,912	12,626	14,305	22,709	32,841	35,028
	YoY		15.1%	-16.5%	85.6%	-24.8%	20.2%	27.4%	13.3%	58.7%	44.6%	6.7%
	Operating profit margin		1.4%	1.2%	1.7%	1.5%	1.7%	2.0%	2.1%	2.9%	3.5%	3.4%
Non-operating income			787	678	977	881	919	1,001	1,006	951	1,158	1,464
		Interest income	54	32	39	44	41	31	19	17	19	22
		Dividend income	128	117	122	162	158	156	142	155	196	142
		Sales commissions	162	167	200	209	320	323	405	393	459	716
		Gains on foreign exchange	-	-	-	-	2	137	-	-	-	-
		Equity in earnings of affiliates	77	79	158	157	129	98	144	81	75	13
		Other	365	282	456	307	266	253	294	303	406	330
Non-operating expenses			1,733	1,558	1,367	1,160	1,152	1,055	1,021	821	804	710
		Interest expenses	902	840	838	653	525	448	310	277	247	277
		Group business restructuring expenses	-	-	-	-	-	-	-	-	-
		Other	830	717	528	506	626	607	711	544	557	433
Recurring profit			6,124	5,027	10,571	7,968	9,679	12,572	14,291	22,840	33,195	35,781
		YoY	12.7%	-17.9%	110.3%	-24.6%	21.5%	29.9%	13.7%	59.8%	45.3%	7.8%
		Recurring profit margin	1.3%	1.0%	1.7%	1.4%	1.7%	2.0%	2.1%	2.9%	3.5%	3.4%
Extraordinary gains			565	61	296	412	169	455	1,326	1,571	137	1,468
		Gain on sale of fixed assets	50	4	3	94	1	105	1,228	1,566	123	754
		Gain on sale of investment securities	-	-	185	305	168	350	-	-	-	-
		Gain on liquidation of investment securities	-	-	33	-	-	-	-	-	-	-
		Gain on sale of share of subsidiaries and associates	-	-	73	-	-	-	-	-	-	-
		Gain on step acquisition	-	-	-	-	-	-	-	-	-	-
		Reversal of provision for doubtful accounts	-	-	-	-	-	-	-	-	-	-
		Subsidy income	-	56	-	-	-	-	-	-	-	-
		Insurance claim income	506	-	-	-	-	-	-	-	-	-
		Other	9	-	-	11			98	5	13	50
Extraordinary losses			615	212	1,472	643	767	2,537	980	297	2,308	996
		Loss on retirement and disposal of fixed assets	51	29	82	115	-	-	116	70	292	-
		Loss on sale of shares of subsidiaries and associates	-	-	-	-	-	-	-	53	-	-
		Effects of adopting accounting standards on asset retirement obligations	-	-	-	-	-	-	-	-	-	-
		Loss on sale of investment securities	5	-	-	68